UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Small reporting company ¨

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

As of November 7, 2014, there were 11,337,891 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 


Part I – Financial Information
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3
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4
5
6
7
8
27
27
28
29
35
36
38
40
40
Part II – Other Information
41
41
41
41
41
41
41
41

Part I – Financial Information
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
   
September 30, 2014
(unaudited)
   
December 31, 2013*
(audited)
 
Assets
       
Cash and due from banks, including required reserves of $9,922 and $9,542, respectively
 
$
41,191
   
$
43,488
 
Interest-bearing deposits in banks
   
10,999
     
13,993
 
Federal funds sold
   
2,025
     
2,250
 
Securities available-for-sale, at fair value (cost of $284,572 at September 30, 2014 and $341,828 at December 31, 2013)
   
288,397
     
341,665
 
Securities held-to-maturity (fair value of $144,597 at September 30, 2014 and $151,168 at December 31, 2013)
   
145,030
     
155,523
 
Other investments
   
12,091
     
11,526
 
Loans
   
1,248,373
     
1,137,554
 
Allowance for loan losses
   
(9,425
)
   
(8,779
)
Loans, net
   
1,238,948
     
1,128,775
 
Bank premises and equipment, net
   
71,115
     
72,343
 
Accrued interest receivable
   
6,647
     
6,692
 
Goodwill
   
42,171
     
42,171
 
Intangibles
   
7,111
     
7,941
 
Cash surrender value of life insurance
   
13,565
     
13,450
 
Other real estate
   
4,663
     
6,687
 
Other assets
   
7,807
     
4,656
 
Total assets
 
$
1,891,760
   
$
1,851,160
 
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Deposits:
               
Non-interest-bearing
 
$
396,263
   
$
383,257
 
Interest-bearing
   
1,124,581
     
1,135,546
 
Total deposits
   
1,520,844
     
1,518,803
 
Securities sold under agreements to repurchase
   
70,964
     
53,916
 
Short-term Federal Home Loan Bank advances
   
35,000
     
25,000
 
Notes payable
   
26,384
     
27,703
 
Junior subordinated debentures
   
22,167
     
29,384
 
Other liabilities
   
10,387
     
5,605
 
Total liabilities
   
1,685,746
     
1,660,411
 
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, 2014 and December 31, 2013
   
32,000
     
32,000
 
Series C Preferred stock, no par value; 100,000 shares authorized, 94,046 and 99,971 issued and 93,959 and 99,971 outstanding at September 30, 2014 and December 31, 2013, respectively; 87 shares in treasury at September 30, 2014 and none at December 31, 2013
   
9,405
     
9,997
 
Common stock, $0.10 par value; 30,000,000 shares authorized, 11,487,078 and 11,407,196 issued and 11,336,594 and 11,256,712 outstanding at September 30, 2014 and December 31, 2013, respectively; 150,484 shares in treasury at September 30, 2014 and December 31, 2013
   
1,149
     
1,141
 
Additional paid-in capital
   
112,567
     
111,017
 
Unearned ESOP shares
   
(267
)
   
-
 
Accumulated other comprehensive income (loss)
   
2,486
     
(106
)
Treasury stock, at cost
   
(3,295
)
   
(3,286
)
Retained earnings
   
51,969
     
39,986
 
Total shareholders’ equity
   
206,014
     
190,749
 
Total liabilities and shareholders’ equity
 
$
1,891,760
   
$
1,851,160
 
See notes to unaudited consolidated financial statements.
* Derived from audited financial statements.
 
3

MidSouth Bancorp, Inc. and Subsidiaries
     
Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
     
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income:
               
Loans, including fees
 
$
18,273
   
$
17,652
   
$
53,525
   
$
52,966
 
Securities and other investments:
                               
Taxable
   
1,965
     
2,171
     
6,164
     
6,481
 
Nontaxable
   
652
     
785
     
2,007
     
2,436
 
Federal funds sold
   
2
     
1
     
4
     
6
 
Time and interest bearing deposits in other banks
   
15
     
15
     
42
     
70
 
Other investments
   
109
     
80
     
268
     
230
 
Total interest income
   
21,016
     
20,704
     
62,010
     
62,189
 
                                 
Interest expense:
                               
Deposits
   
859
     
976
     
2,588
     
3,044
 
Federal funds purchased
   
-
     
-
     
2
     
3
 
Securities sold under agreements to repurchase
   
210
     
204
     
588
     
565
 
Other borrowings and payables
   
108
     
118
     
318
     
345
 
Junior subordinated debentures
   
327
     
335
     
994
     
1,007
 
Total interest expense
   
1,504
     
1,633
     
4,490
     
4,964
 
                                 
Net interest income
   
19,512
     
19,071
     
57,520
     
57,225
 
Provision for loan losses
   
1,175
     
450
     
2,925
     
2,250
 
Net interest income after provision for loan losses
   
18,337
     
18,621
     
54,595
     
54,975
 
                                 
Non-interest income:
                               
Service charges on deposits
   
2,556
     
2,352
     
7,385
     
6,794
 
Gain on securities, net
   
-
     
25
     
128
     
229
 
ATM and debit card income
   
1,808
     
1,719
     
5,375
     
4,713
 
Executive officer life insurance proceeds
   
-
     
-
     
3,000
     
-
 
Other charges and fees
   
1,830
     
892
     
3,484
     
2,687
 
Total non-interest income
   
6,194
     
4,988
     
19,372
     
14,423
 
                                 
Non-interest expenses:
                               
Salaries and employee benefits
   
8,287
     
8,640
     
25,588
     
25,401
 
Occupancy expense
   
3,834
     
3,874
     
11,314
     
11,196
 
FDIC insurance
   
269
     
265
     
783
     
854
 
Other
   
5,467
     
5,702
     
14,997
     
16,728
 
Total non-interest expenses
   
17,857
     
18,481
     
52,682
     
54,179
 
                                 
Income before income taxes
   
6,674
     
5,128
     
21,285
     
15,219
 
Income tax expense
   
2,202
     
1,588
     
5,839
     
4,588
 
                                 
Net earnings
   
4,472
     
3,540
     
15,446
     
10,631
 
Dividends on preferred stock
   
174
     
468
     
524
     
1,152
 
Net earnings available to common shareholders
 
$
4,298
   
$
3,072
   
$
14,922
   
$
9,479
 
                                 
Earnings per share:
                               
Basic
 
$
0.38
   
$
0.27
   
$
1.32
   
$
0.84
 
Diluted
 
$
0.37
   
$
0.27
   
$
1.28
   
$
0.83
 
Weighted average number of shares outstanding:
                               
Basic
   
11,314
     
11,253
     
11,283
     
11,243
 
Diluted
   
11,955
     
11,869
     
11,904
     
11,853
 
Dividends declared per common share
 
$
0.09
   
$
0.08
   
$
0.26
   
$
0.23
 
 
See notes to unaudited consolidated financial statements.
 
4

MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Comprehensive Income (unaudited)
 
(in thousands)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net earnings
 
$
4,472
   
$
3,540
   
$
15,446
   
$
10,631
 
Other comprehensive income (loss), net of tax:
                               
Unrealized gains (losses) on securities available-for-sale:
                               
Unrealized holding gains (losses) arising during the year
   
(405
)
   
(95
)
   
4,116
     
(10,203
)
Less: reclassification adjustment for gains on sales of securities available-for-sale
   
-
     
(25
)
   
(128
)
   
(229
)
Total other comprehensive income (loss), before tax
   
(405
)
   
(120
)
   
3,988
     
(10,432
)
Income tax effect related to items of other comprehensive income (loss)
   
(142
)
   
(42
)
   
1,396
     
(3,651
)
Total other comprehensive income (loss), net of tax
   
(263
)
   
(78
)
   
2,592
     
(6,781
)
Total comprehensive income
 
$
4,209
   
$
3,462
   
$
18,038
   
$
3,850
 
 
See notes to unaudited consolidated financial statements.
 
5

MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Statement of Shareholders’ Equity (unaudited)
 
For the Nine Months Ended September 30, 2014
(in thousands, except share and per share data)
 
   
Preferred
Stock
   
Common
Stock
   
Additional Paid-in
   
Unearned ESOP
   
Accumulated Other Comprehensive
   
Treasury
   
Retained
     
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Shares
   
Income (Loss)
   
Stock
   
Earnings
   
Total
 
Balance - December 31, 2013
   
131,971
   
$
41,997
     
11,407,196
   
$
1,141
   
$
111,017
   
$
-
   
$
(106
)
 
$
(3,286
)
 
$
39,986
   
$
190,749
 
Net earnings
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
15,446
     
15,446
 
Dividends on Series B and Series C preferred stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(524
)
   
(524
)
Dividends on common stock, $0.26 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(2,939
)
   
(2,939
)
Conversion of Series C preferred stock to common stock
   
(5,925
)
   
(592
)
   
32,917
     
3
     
589
     
-
     
-
     
-
     
-
     
-
 
Repurchase of preferred stock, 87 shares
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(9
)
   
-
     
(9
)
Increase in ESOP obligation
   
-
     
-
     
-
     
-
     
-
     
(267
)
   
-
     
-
     
-
     
(267
)
Exercise of stock options
   
-
     
-
     
46,965
     
5
     
605
     
-
     
-
     
-
     
-
     
610
 
Tax benefit resulting from issuance of stock options, net adjustment
   
-
     
-
     
-
     
-
     
1
     
-
     
-
     
-
     
-
     
1
 
Stock option expense
   
-
     
-
     
-
     
-
     
355
     
-
     
-
     
-
     
-
     
355
 
Change in accumulated other comprehensive income (loss)
   
-
     
-
     
-
     
-
     
-
     
-
     
2,592
     
-
     
-
     
2,592
 
Balance – September 30, 2014
   
126,046
   
$
41,405
     
11,487,078
   
$
1,149
   
$
112,567
   
(267
)
 
$
2,486
   
(3,295
)
 
$
51,969
   
$
206,014
 

See notes to unaudited consolidated financial statements.
 
6

MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
   
For the Nine Months Ended September 30,
 
   
2014
   
2013
 
Cash flows from operating activities:
       
Net earnings
 
$
15,446
   
$
10,631
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
   
4,518
     
4,106
 
Accretion of purchase accounting adjustments
   
(1,924
)
   
(4,631
)
Provision for loan losses
   
2,925
     
2,250
 
Provision for deferred tax expense
   
2,034
     
2,181
 
Amortization of premiums on securities, net
   
2,432
     
3,432
 
Amortization of other investments
   
4
     
11
 
Stock option expense
   
355
     
212
 
Restricted stock expense
   
-
     
21
 
Net gain on sale of investment securities
   
(128
)
   
(229
)
Net (gain) loss on sale of other real estate owned
   
(1,081
)
   
205
 
Net write down of other real estate owned
   
31
     
380
 
Net (gain) loss on sale/disposal of premises and equipment
   
232
     
118
 
Change in accrued interest receivable
   
45
     
(174
)
Change in accrued interest payable
   
(240
)
   
(348
)
Change in other assets & other liabilities, net
   
(2,006
)
   
189
 
Net cash provided by operating activities
   
22,643
     
18,354
 
                 
Cash flows from investing activities:
               
Net decrease in time deposits in other banks
   
-
     
881
 
Proceeds from maturities and calls of securities available-for-sale
   
33,466
     
59,430
 
Proceeds from maturities and calls of securities held-to-maturity
   
10,778
     
19,617
 
Proceeds from sale of securities available-for-sale
   
22,153
     
55,808
 
Purchases of securities available-for-sale
   
-
     
(68,043
)
Purchases of securities held-to-maturity
   
(1,104
)
   
(26,382
)
Proceeds from redemptions of other investments
   
150
     
1,000
 
Redemption of Capital Securities related to MidSouth Statutory Trust I
   
217
     
-
 
Purchases of other investments
   
(567
)
   
(2,653
)
Net change in loans
   
(111,329
)
   
(90,091
)
Purchases of premises and equipment
   
(4,265
)
   
(10,955
)
Proceeds from sale of premises and equipment
   
743
     
45
 
Proceeds from sale of other real estate owned
   
3,315
     
940
 
Net cash used in investing activities
   
(46,443
)
   
(60,403
)
                 
Cash flows from financing activities:
               
Change in deposits
   
2,244
     
(45,232
)
Change in securities sold under agreements to repurchase
   
17,048
     
32,462
 
Change in federal funds purchased
   
-
     
3,900
 
Borrowings on Federal Home Loan Bank advances
   
10,000
     
25,000
 
Repayments of FHLB advance
   
(45
)
   
(43
)
Redemption of  MidSouth Statutory Trust I
   
(7,217
)
   
-
 
Repayments of notes payable
   
(1,000
)
   
(750
)
Purchase of treasury stock
   
(9
)
   
-
 
Proceeds and tax benefit from exercise of stock options
   
611
     
30
 
Tax benefit from issuance of restricted stock
   
-
     
14
 
Payment of dividends on preferred stock
   
(530
)
   
(1,052
)
Payment of dividends on common stock
   
(2,818
)
   
(2,419
)
Net cash provided by financing activities
   
18,284
     
11,910
 
                 
Net increase (decrease) in cash and cash equivalents
   
(5,516
)
   
(30,139
)
Cash and cash equivalents, beginning of period
   
59,731
     
73,573
 
Cash and cash equivalents, end of period
 
$
54,215
   
$
43,434
 
                 
Supplemental cash flow information:
               
Interest paid
 
$
4,730
   
$
5,106
 
Income taxes paid
   
5,815
     
3,500
 
Noncash investing and financing activities:
               
Transfer of loans to other real estate
   
317
     
701
 
Change in accrued common stock dividends
   
121
     
167
 
Change in accrued preferred stock dividends
   
(6
)
   
100
 
Financed sales of other real estate
   
84
     
-
 
Net change in loan to ESOP
   
(267
)
   
-
 
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
September 30, 2014

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, 2014 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 2013 Annual Report on Form 10-K.
 
The results of operations for the nine-month period ended September 30, 2014 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 2013 Annual Report on Form 10-K.
 
Recently Adopted Accounting Pronouncements — ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) provides guidance on when an in-substance repossession or foreclosure occurs, which requires the mortgage loan to be derecognized and the related real estate be recognized.  Creditors must disclose the amount of foreclosed residential real estate held as well as the amount of collateralized loans for which foreclosure is in process.  The effective date of this Update is for fiscal years beginning on or after December 15, 2014 and interim periods within those annual periods.  Adoption of this Update is not expected to have a material effect on the Company’s consolidated financial statements or the interim notes to the consolidated financial statements.
 
2.  Investment Securities
 
The portfolio of investment securities consisted of the following (in thousands):

   
September 30, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
               
U.S. Government sponsored enterprises
 
$
10,418
   
$
-
   
$
126
   
$
10,292
 
Obligations of state and political subdivisions
   
48,053
     
1,820
     
26
     
49,847
 
GSE mortgage-backed securities
   
110,482
     
2,787
     
623
     
112,646
 
Collateralized mortgage obligations: residential
   
64,946
     
299
     
1,872
     
63,373
 
Collateralized mortgage obligations: commercial
   
25,803
     
308
     
117
     
25,994
 
Other asset-backed securities
   
24,406
     
411
     
-
     
24,817
 
Collateralized debt obligation
   
464
     
964
     
-
     
1,428
 
   
$
284,572
   
$
6,589
   
$
2,764
   
$
288,397
 
 
8

   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
               
U.S. Government sponsored enterprises
 
$
11,455
   
$
1
   
$
191
   
$
11,265
 
Obligations of state and political subdivisions
   
57,925
     
2,296
     
243
     
59,978
 
GSE mortgage-backed securities
   
146,129
     
2,029
     
2,193
     
145,965
 
Collateralized mortgage obligations: residential
   
73,569
     
212
     
2,894
     
70,887
 
Collateralized mortgage obligations: commercial
   
27,082
     
416
     
152
     
27,346
 
Other asset-backed securities
   
25,204
     
351
     
66
     
25,489
 
Collateralized debt obligation
   
464
     
271
     
-
     
735
 
   
$
341,828
   
$
5,576
   
$
5,739
   
$
341,665
 
 
   
September 30, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
               
Obligations of state and political subdivisions
 
$
46,608
   
$
203
   
$
324
   
$
46,487
 
GSE mortgage-backed securities
   
69,886
     
715
     
412
     
70,189
 
Collateralized mortgage obligations: residential
   
13,106
     
-
     
547
     
12,559
 
Collateralized mortgage obligations: commercial
   
15,430
     
49
     
117
     
15,362
 
   
$
145,030
   
$
967
   
$
1,400
   
$
144,597
 
 
   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
               
Obligations of state and political subdivisions
 
$
47,377
   
$
38
   
$
2,586
   
$
44,829
 
GSE mortgage-backed securities
   
78,272
     
148
     
1,079
     
77,341
 
Collateralized mortgage obligations: residential
   
14,189
     
-
     
979
     
13,210
 
Collateralized mortgage obligations: commercial
   
15,685
     
103
     
-
     
15,788
 
   
$
155,523
   
$
289
   
$
4,644
   
$
151,168
 

With the exception of three private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $47,000 at September 30, 2014, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The amortized cost and fair value of debt securities at September 30, 2014 by contractual maturity are shown in the following table (in thousands) with the exception of other asset-backed securities, mortgage-backed securities, CMOs, and the collateralized debt obligation.   Expected maturities may differ from contractual maturities for mortgage-backed securities and CMOs because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
9

   
Amortized
Cost
   
Fair
Value
 
Available-for-sale:
       
Due in one year or less
 
$
8,533
   
$
8,625
 
Due after one year through five years
   
32,867
     
33,763
 
Due after five years through ten years
   
13,969
     
14,631
 
Due after ten years
   
3,102
     
3,120
 
Other asset-backed securities
   
24,406
     
24,817
 
Mortgage-backed securities and collateralized mortgage obligations:
               
Residential
   
175,428
     
176,019
 
Commercial
   
25,803
     
25,994
 
Collateralized debt obligation
   
464
     
1,428
 
   
$
284,572
   
$
288,397
 

   
Amortized
Cost
   
Fair
Value
 
Held-to-maturity:
       
Due in one year or less
 
$
106
   
$
105
 
Due after one year through five years
   
3,105
     
3,130
 
Due after five years through ten years
   
7,829
     
7,787
 
Due after ten years
   
35,568
     
35,465
 
Mortgage-backed securities and collateralized mortgage obligations:
               
Residential
   
82,992
     
82,748
 
Commercial
   
15,430
     
15,362
 
   
$
145,030
   
$
144,597
 
Details concerning investment securities with unrealized losses are as follows (in thousands):

   
September 30, 2014
 
   
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:
                       
U.S. Government sponsored enterprises
 
$
-
   
$
-
   
$
10,292
   
$
126
   
$
10,292
   
$
126
 
Obligations of state and  political subdivisions
   
-
     
-
     
3,739
     
26
     
3,739
     
26
 
GSE mortgage-backed  securities
   
10,873
     
68
     
32,344
     
555
     
43,217
     
623
 
Collateralized mortgage  obligations: residential
   
4,483
     
16
     
43,689
     
1,856
     
48,172
     
1,872
 
Collateralized mortgage  obligations: commercial
   
-
     
-
     
3,952
     
117
     
3,952
     
117
 
   
$
15,356
   
$
84
   
$
94,016
   
$
2,680
   
$
109,372
   
$
2,764
 
 
10

   
December 31, 2013
 
   
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:
                       
U.S. Government sponsored enterprises
 
$
10,463
   
$
191
   
$
-
   
$
-
   
$
10,463
   
$
191
 
Obligations of state and  political subdivisions
   
4,256
     
243
     
-
     
-
     
4,256
     
243
 
GSE mortgage-backed  securities
   
68,028
     
2,193
     
-
     
-
     
68,028
     
2,193
 
Collateralized mortgage  obligations: residential
   
56,975
     
2,563
     
4,371
     
331
     
61,346
     
2,894
 
Collateralized mortgage  obligations: commercial
   
4,282
     
152
     
-
     
-
     
4,282
     
152
 
Other asset-backed securities
   
13,099
     
66
     
-
     
-
     
13,099
     
66
 
   
$
157,103
   
$
5,408
   
$
4,371
   
$
331
   
$
161,474
   
$
5,739
 

   
September 30, 2014
 
   
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
 
$
7,808
   
$
43
   
$
21,085
   
$
281
   
$
28,893
   
$
324
 
GSE mortgage-backed securities
   
-
     
-
     
28,591
     
412
     
28,591
     
412
 
Collateralized mortgage obligations: residential
   
-
     
-
     
12,559
     
547
     
12,559
     
547
 
Collateralized mortgage obligations: commercial
   
7,772
     
117
     
-
     
-
     
7,772
     
117
 
   
$
15,580
   
$
160
   
$
62,235
   
$
1,240
   
$
77,815
   
$
1,400
 

   
December 31, 2013
 
   
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
 
$
42,246
   
$
2,569
   
$
685
   
$
17
   
$
42,931
   
$
2,586
 
GSE mortgage-backed securities
   
31,042
     
1,079
     
-
     
-
     
31,042
     
1,079
 
Collateralized mortgage obligations: residential
   
13,210
     
979
     
-
     
-
     
13,210
     
979
 
   
$
86,498
   
$
4,627
   
$
685
   
$
17
   
$
87,183
   
$
4,644
 
 
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
 
11

As of September 30, 2014, 74 securities had unrealized losses totaling 2.18% of the individual securities’ amortized cost basis and 0.97% of the Company’s total amortized cost basis.  Of the 74 securities, 62 had been in an unrealized loss position for over twelve months at September 30, 2014.  These 62 securities had an amortized cost basis and unrealized loss of $160.1 million and $3.9 million, respectively.  The unrealized losses on debt securities at September 30, 2014 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, 2014, 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 nine months ended September 30, 2014.
 
During the nine months ended September 30, 2014, the Company sold four securities classified as available-for-sale at a net gain of $128,000.  All of the securities were sold at a gain.  During the nine months ended September 30, 2013, the Company sold 33 securities classified as available-for-sale at a net gain of $229,000.  Of the 33 securities sold, 29 securities were sold with gains totaling $242,000 and four securities were sold at a loss of $13,000.
 
Securities with an aggregate carrying value of approximately $276.7 million and $259.9 million at September 30, 2014 and December 31, 2013, 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, 2014
   
December 31, 2013
 
Commercial, financial and agricultural
 
$
452,065
   
$
403,976
 
Real estate - construction
   
86,315
     
82,691
 
Real estate – commercial
   
430,930
     
397,135
 
Real estate – residential
   
153,915
     
146,841
 
Installment loans to individuals
   
116,340
     
97,459
 
Lease financing receivable
   
5,285
     
5,542
 
Other
   
3,523
     
3,910
 
     
1,248,373
     
1,137,554
 
Less allowance for loan losses
   
(9,425
)
   
(8,779
)
   
$
1,238,948
   
$
1,128,775
 
 
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, 2014, 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 $255.6 million, or 20.5% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At September 30, 2014, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $491.3 million.  Of the $491.3 million, $395.1 million represent CRE loans, 63.2% of which are secured by owner-occupied commercial properties.  Of the $395.1 million in loans secured by commercial real estate, $3.4 million, or 0.9%, were on nonaccrual status at September 30, 2014.
 
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.
 
12

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.
 
The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses.
 
A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the nine months ended September 30, 2014 and 2013 is as follows (in thousands):

   
September 30, 2014
 
       
Real Estate
                 
   
Coml, Fin, and Agric
   
Construction
   
Commercial
   
Residential
   
Consumer
   
Finance Leases Coml
   
Other
   
Total
 
Allowance for loan losses:
                               
Beginning balance
 
$
3,906
   
$
1,046
   
$
1,389
   
$
1,141
   
$
1,273
   
$
21
   
$
3
   
$
8,779
 
Charge-offs
   
2,084
     
1
     
93
     
188
     
566
     
-
     
-
     
2,932
 
Recoveries
   
101
     
-
     
398
     
44
     
110
     
-
     
-
     
653
 
Provision
   
2,731
     
103
     
(345
)
   
(8
)
   
450
     
(6
)
   
-
     
2,925
 
Ending balance
 
$
4,654
   
$
1,148
   
$
1,349
   
$
989
   
$
1,267
   
$
15
   
$
3
   
$
9,425
 
Ending balance: individually evaluated for impairment
 
$
853
   
$
3
   
$
55
   
$
87
   
$
140
   
$
-
   
$
-
   
$
1,138
 
Ending balance: collectively evaluated for impairment
 
$
3,801
   
$
1,145
   
$
1,294
   
$
902
   
$
1,127
   
$
15
   
$
3
   
$
8,287
 
                                                                 
Loans:
                                                               
Ending balance
 
$
452,065
   
$
86,315
   
$
430,930
   
$
153,915
   
$
116,340
   
$
5,285
   
$
3,523
   
$
1,248,373
 
Ending balance: individually evaluated for impairment
 
$
2,662
   
$
106
   
$
3,312
   
$
1,073
   
$
426
   
$
-
   
$
-
   
$
7,579
 
Ending balance: collectively evaluated for impairment
 
$
449,403
   
$
86,209
   
$
426,942
   
$
152,742
   
$
115,914
   
$
5,285
   
$
3,523
   
$
1,240,018
 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
676
   
$
100
   
$
-
   
$
-
   
$
-
   
$
776
 
 
13

   
September 30, 2013
 
       
Real Estate
                 
   
Coml, Fin, and Agric
   
Construction
   
Commercial
   
Residential
   
Consumer
   
Finance Leases Coml
   
Other
   
Total
 
Allowance for loan losses:
                               
Beginning balance
 
$
1,535
   
$
2,147
   
$
2,166
   
$
936
   
$
543
   
$
41
   
$
2
   
$
7,370
 
Charge-offs
   
(461
)
   
-
     
(18
)
   
(129
)
   
(558
)
   
-
     
-
     
(1,166
)
Recoveries
   
61
     
5
     
21
     
34
     
92
     
-
     
-
     
213
 
Provision
   
3,090
     
(1,081
)
   
(661
)
   
(46
)
   
962
     
(16
)
   
2
     
2,250
 
Ending balance
 
$
4,225
   
$
1,071
   
$
1,508
   
$
795
   
$
1,039
   
$
25
   
$
4
   
$
8,667
 
Ending balance: individually evaluated for impairment
 
$
419
   
$
36
   
$
54
   
$
55
   
$
134
   
$
-
   
$
-
   
$
698
 
Ending balance: collectively evaluated for impairment
 
$
3,806
   
$
1,035
   
$
1,454
   
$
740
   
$
905
   
$
25
   
$
4
   
$
7,969
 
                                                                 
Loans:
                                                               
Ending balance
 
$
423,073
   
$
76,213
   
$
401,080
   
$
142,431
   
$
94,722
   
$
5,340
   
$
2,164
   
$
1,145,023
 
Ending balance: individually evaluated for impairment
 
$
1,450
   
$
164
   
$
2,285
   
$
994
   
$
322
   
$
-
   
$
-
   
$
5,215
 
Ending balance: collectively evaluated for impairment
 
$
421,623
   
$
76,049
   
$
398,080
   
$
141,136
   
$
94,400
   
$
5,340
   
$
2,164
   
$
1,138,792
 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
715
   
$
301
   
$
-
   
$
-
   
$
-
   
$
1,016
 

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.
 
14

An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):
 
   
September 30, 2014
 
                             
   
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
 
$
1,692
   
$
1,435
   
$
2,443
   
$
5,570
   
$
446,495
   
$
452,065
   
$
11
 
Commercial real estate - construction
   
548
     
651
     
73
     
1,272
     
59,078
     
60,350
     
-
 
Commercial real estate - other
   
913
     
200
     
2,513
     
3,626
     
427,304
     
430,930
     
-
 
Residential - construction
   
-
     
-
     
-
     
-
     
25,965
     
25,965
     
-
 
Residential - prime
   
973
     
1,030
     
712
     
2,715
     
151,200
     
153,915
     
-
 
Consumer - credit card
   
34
     
9
     
12
     
55
     
5,763
     
5,818
     
12
 
Consumer - other
   
644
     
101
     
413
     
1,158
     
109,364
     
110,522
     
-
 
Lease financing receivable
   
-
     
-
     
-
     
-
     
5,285
     
5,285
     
-
 
Other loans
   
106
     
-
     
-
     
106
     
3,417
     
3,523
     
-
 
   
$
4,910
   
$
3,426
   
$
6,166
   
$
14,502
   
$
1,233,871
   
$
1,248,373
   
$
23
 

   
December 31, 2013
 
   
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
 
$
4,350
   
$
208
   
$
1,256
   
$
5,814
   
$
398,162
   
$
403,976
   
$
26
 
Commercial real estate - construction
   
36
     
-
     
63
     
99
     
64,794
     
64,893
     
-
 
Commercial real estate - other
   
1,230
     
1,447
     
2,395
     
5,072
     
392,063
     
397,135
     
141
 
Residential - construction
   
149
     
-
     
-
     
149
     
17,649
     
17,798
     
-
 
Residential - prime
   
2,984
     
870
     
307
     
4,161
     
142,680
     
146,841
     
-
 
Consumer - credit card
   
36
     
-
     
7
     
43
     
6,163
     
6,206
     
7
 
Consumer - other
   
767
     
102
     
269
     
1,138
     
90,115
     
91,253
     
4
 
Lease financing receivable
   
-
     
-
     
-
     
-
     
5,542
     
5,542
     
-
 
Other loans
   
125
     
-
     
-
     
125
     
3,785
     
3,910
     
-
 
   
$
9,677
   
$
2,627
   
$
4,297
   
$
16,601
   
$
1,120,953
   
$
1,137,554
   
$
178
 
  
Non-accrual loans are as follows (in thousands):
   
September 30, 2014
   
December 31, 2013
 
Commercial, financial, and agricultural
 
$
2,649
   
$
1,272
 
Commercial real estate – construction
   
106
     
100
 
Commercial real estate - other
   
3,358
     
2,290
 
Residential - construction
   
-
     
-
 
Residential - prime
   
1,206
     
1,153
 
Consumer - credit card
   
-
     
-
 
Consumer - other
   
431
     
284
 
Lease financing receivable
   
-
     
-
 
Other
   
-
     
-
 
   
$
7,750
   
$
5,099
 
 
15

The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $392,000 and $431,000 for the nine months ended September 30, 2014 and 2013, respectively.  Interest actually received on non-accrual loans at September 30, 2014 and 2013 was $93,000 and $246,000, respectively.
 
Impaired Loans
 
Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, and are reviewed for impairment.  An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collaterally dependent.  All impaired loans are reviewed, at a minimum, on a quarterly basis.  Existing valuations are reviewed to determine if additional discounts or new appraisals are required.  After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance no specific allocation is reserved.  Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment.
Loans that are individually evaluated for impairment are as follows (in thousands):
 
   
September 30, 2014
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                   
Commercial, financial, and agricultural
 
$
441
   
$
524
   
$
-
   
$
474
   
$
-
 
Commercial real estate – construction
   
67
     
67
     
-
     
69
     
-
 
Commercial real estate – other
   
2,947
     
2,947
     
-
     
2,908
     
19
 
Residential – prime
   
554
     
554
     
-
     
511
     
4
 
Residential – construction
   
-
     
-
     
-
     
22
     
-
 
Consumer – other
   
184
     
184
     
-
     
124
     
-
 
Subtotal:
   
4,193
     
4,276
     
-
     
4,108
     
23
 
With an allowance recorded:
                                       
Commercial, financial, and agricultural
   
2,221
     
2,336
     
853
     
1,753
     
32
 
Commercial real estate – construction
   
39
     
39
     
3
     
39
     
1
 
Commercial real estate – other
   
365
     
365
     
55
     
365
     
-
 
Residential – prime
   
519
     
539
     
87
     
632
     
10
 
Consumer – other
   
242
     
257
     
140
     
260
     
1
 
Subtotal:
   
3,386
     
3,536
     
1,138
     
3,049
     
44
 
Totals:
                                       
Commercial
   
5,974
     
6,172
     
908
     
5,500
     
51
 
Residential
   
1,073
     
1,093
     
87
     
1,143
     
14
 
Construction
   
106
     
106
     
3
     
130
     
1
 
Consumer
   
426
     
441
     
140
     
384
     
1
 
Grand total:
 
$
7,579
   
$
7,812
   
$
1,138
   
$
7,157
   
$
67
 
 
16

   
December 31, 2013
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                   
Commercial, financial, and agricultural
 
$
671
   
$
1,107
   
$
-
   
$
617
   
$
3
 
Commercial real estate – construction
   
61
     
61
     
-
     
416
     
-
 
Commercial real estate – other
   
1,850
     
2,324
     
-
     
2,190
     
8
 
Residential – prime
   
525
     
525
     
-
     
1,050
     
14
 
Consumer – other
   
66
     
66
     
-
     
90
     
1
 
Subtotal:
   
3,173
     
4,083
     
-
     
4,363
     
26
 
With an allowance recorded:
                                       
Commercial, financial, and agricultural
   
570
     
570
     
168
     
821
     
3
 
Commercial real estate – construction
   
39
     
39
     
3
     
102
     
1
 
Commercial real estate – other
   
363
     
363
     
54
     
372
     
11
 
Residential – prime
   
375
     
395
     
60
     
214
     
4
 
Consumer – other
   
205
     
205
     
120
     
211
     
2
 
Subtotal:
   
1,552
     
1,572
     
405
     
1,720
     
21
 
Totals:
                                       
Commercial
   
3,454
     
4,364
     
222
     
4,000
     
25
 
Residential
   
900
     
920
     
60
     
1,264
     
18
 
Construction
   
100
     
100
     
3
     
518
     
1
 
Consumer
   
271
     
271
     
120
     
301
     
3
 
Grand total:
 
$
4,725
   
$
5,655
   
$
405
   
$
6,083
   
$
47
 
 
Credit Quality
 
The Company manages credit risk by observing written underwriting standards and lending policy established by the Board of Directors and management to govern all lending activities.  The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan.  These efforts are supplemented by independent reviews performed by a loan review officer and other validations performed by the internal audit department.  The results of the reviews are reported directly to the Audit Committee of the Board of Directors.
 
Loans can be classified into the following three risk rating grades: pass, special mention, and substandard/doubtful.  Factors considered in determining a risk rating grade include debt service capacity, capital structure/liquidity, management, collateral quality, industry risk, company trends/operating performance, repayment source, revenue diversification/customer concentration, quality of financial information, and financing alternatives.  Pass grade signifies the highest quality of loans to loans with reasonable credit risk, which may include borrowers with marginally adequate financial performance, but have the ability to repay the debt.  Special mention loans have potential weaknesses that warrant extra attention from the loan officer and other management personnel, but still have the ability to repay the debt.  Substandard classification includes loans with well-defined weaknesses with risk of potential loss.  Loans classified as doubtful are considered to have little recovery value and are charged off.
 
17

The following tables present the classes of loans by risk rating (in thousands):
 
   
September 30, 2014
 
Commercial Credit Exposure
                   
Credit Risk Profile by Creditworthiness Category
                   
   
Commercial, financial, and agricultural
   
Commercial real estate - construction
   
Commercial real estate -other
   
Total
   
% of Total
 
Pass
 
$
439,626
   
$
60,087
   
$
406,546
   
$
906,259
     
96.07
%
Special mention
   
6,130
     
151
     
4,839
     
11,120
     
1.18
%
Substandard
   
5,777
     
112
     
19,545
     
25,434
     
2.69
%
Doubtful
   
532
     
-
     
-
     
532
     
.06
%
   
$
452,065
   
$
60,350
   
$
430,930
   
$
943,345
     
100.00
%
                                         
Residential Credit Exposure
                                       
Credit Risk Profile by Creditworthiness Category
                                       
           
Residential -construction
   
Residential - prime
   
Total
   
% of Total
 
Pass
         
$
25,965
   
$
149,167
   
$
175,132
     
97.36
%
Special mention
           
-
     
1,504
     
1,504
     
.84
%
Substandard
           
-
     
3,244
     
3,244
     
1.80
%
           
$
25,965
   
$
153,915
   
$
179,880
     
100.00
%
 
Consumer and Commercial Credit Exposure
                       
Credit Risk Profile Based on Payment Activity
                       
   
Consumer - credit card
   
Consumer -other
   
Lease financing receivable
   
Other
   
Total
   
% of Total
 
Performing
 
$
5,806
   
$
110,096
   
$
5,285
   
$
3,523
   
$
124,710
     
99.65
%
Nonperforming
   
12
     
426
     
-
     
-
     
438
     
.35
%
   
$
5,818
   
$
110,522
   
$
5,285
   
$
3,523
   
$
125,148
     
100.00
%
 
18

   
December 31, 2013
 
Commercial Credit Exposure
                   
Credit Risk Profile by Creditworthiness Category
                   
   
Commercial, financial, and agricultural
   
Commercial real estate - construction
   
Commercial real estate -other
   
Total
   
% of Total
 
Pass
 
$
397,513
   
$
63,577
   
$
371,618
   
$
832,708
     
96.15
%
Special mention
   
2,962
     
49
     
8,781
     
11,792
     
1.36
%
Substandard
   
3,272
     
1,267
     
16,736
     
21,275
     
2.46
%
Doubtful
   
229
     
-
     
-
     
229
     
0.03
%
   
$
403,976
   
$
64,893
   
$
397,135
   
$
866,004
     
100.00
%
                                         
Residential Credit Exposure
                                       
Credit Risk Profile by Creditworthiness Category
                                       
           
Residential -construction
   
Residential - prime
   
Total
   
% of Total
 
Pass
         
$
17,798
   
$
143,790
   
$
161,588
     
98.15
%
Special mention
           
-
     
548
     
548
     
0.33
%
Substandard
           
-
     
2,503
     
2,503
     
1.52
%
           
$
17,798
   
$
146,841
   
$
164,639
     
100.00
%
 
Consumer and Commercial Credit Exposure
                       
Credit Risk Profile Based on Payment Activity
                       
   
Consumer - credit card
   
Consumer -other
   
Lease financing receivable
   
Other
   
Total
   
% of Total
 
Performing
 
$
6,196
   
$
90,978
   
$
5,542
   
$
3,910
   
$
106,626
     
99.73
%
Nonperforming
   
10
     
275
     
-
     
-
     
285
     
0.27
%
   
$
6,206
   
$
91,253
   
$
5,542
   
$
3,910
   
$
106,911
     
100.00
%
 
Troubled Debt Restructurings
 
A troubled debt restructuring (“TDR”) is a restructuring of a debt made by the Company to a debtor for economic or legal reasons related to the debtor’s financial difficulties that it would not otherwise consider.  The Company grants the concession in an attempt to protect as much of its investment as possible.
 
Information about the Company’s TDRs is as follows (in thousands):
 
   
September 30, 2014
 
   
Current
   
Past Due Greater Than 30 Days
   
Nonaccrual TDRs
   
Total TDRs
 
Commercial, financial and agricultural
 
$
22
   
$
-
   
$
236
   
$
258
 
Real estate - commercial
   
158
     
-
     
-
     
158
 
   
$
180
   
$
-
   
$
236
   
$
416
 
 
19

   
December 31, 2013
 
   
Current
   
Past Due Greater Than 30 Days
   
Nonaccrual TDRs
   
Total TDRs
 
Commercial, financial and agricultural
 
$
-
   
$
23
   
$
233
   
$
256
 
Real estate - commercial
   
156
     
-
     
-
     
156
 
   
$
156
   
$
23
   
$
233
   
$
412
 
 
During the three months ended September 30, 2014, there were no loans identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months.  During the three months ended September 30, 2013, there were no loans identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months.  During the nine months ended September 30, 2014, there was one loan relationship with a pre-modification balance of $1.2 million identified as a TDR through a modification of the original loan terms.  The loan was paid off during the second quarter of 2014 and, therefore, is not reflected in the balance of TDRs at September 30, 2014.  During the nine months ended September 30, 2014, there were no defaults on any loans that were modified as TDRs during the preceding twelve months.  During the nine months ended September 30, 2013, one loan with a pre-modification balance of $27,000 was identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months.  For purposes of the determination of an allowance for loan losses on these TDRs, as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology.  If it is determined losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans.  As of September 30, 2014, there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs.

4.  Other Comprehensive Income (Loss)
 
The following is a summary of the tax effects allocated to each component of other comprehensive income (loss) (in thousands):
 
   
Three Months Ended September 30,
 
   
2014
   
2013
 
   
Before Tax Amount
   
Tax Effect
   
Net of Tax Amount
   
Before Tax Amount
   
Tax Effect
   
Net of Tax Amount
 
Other comprehensive income (loss):
                       
Securities available-for-sale:
                       
Change in unrealized gain during period
 
$
(405
)
 
$
142
   
$
(263
)
 
$
(95
)
 
$
33
   
$
(62
)
Reclassification adjustment for gains included in net income
   
-
     
-
     
-
     
(25
)
   
9
     
(16
)
Total other comprehensive income (loss)
 
$
(405
)
 
$
142
   
$
(263
)
 
$
(120
)
 
$
42
   
$
(78
)

   
Nine Months Ended September 30,
 
   
2014
   
2013
 
   
Before Tax Amount
   
Tax Effect
   
Net of Tax Amount
   
Before Tax Amount
   
Tax Effect
   
Net of Tax Amount
 
Other comprehensive income (loss):
                       
Securities available-for-sale:
                       
Change in unrealized gain during period
 
$
4,116
   
$
(1,441
)
 
$
2,675
   
$
(10,203
)
 
$
3,571
   
$
(6,632
)
Reclassification adjustment for gains included in net income
   
(128
)
   
45
     
(83
)
   
(229
)
   
80
     
(149
)
Total other comprehensive income (loss)
 
$
3,988
   
$
(1,396
 
$
2,592
   
$
(10,432
)
 
$
3,651
   
$
(6,781
)
 
20

The reclassifications out of accumulated other comprehensive income into net income are presented below (in thousands):
 
   
Three Months Ended September 30,
   
2014
 
2013
Details about Accumulated Other Comprehensive Income Components
 
Reclassifications Out of Accumulated Other Comprehensive Income
 
Income Statement Line Item
 
Reclassifications Out of Accumulated Other Comprehensive Income
 
Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
              
   
$
-
 
Gain on securities, net
 
$
(25
)
Gain on securities, net
     
-
 
Tax expense
   
9
 
Tax expense
   
$
-
 
Net of tax
 
$
(16
)
Net of tax

   
Nine Months Ended September 30,
   
2014
 
2013
Details about Accumulated Other Comprehensive Income Components
 
Reclassifications Out of Accumulated Other Comprehensive Income
 
Income Statement Line Item
 
Reclassifications Out of Accumulated Other Comprehensive Income
 
Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
              
   
$
(128
)
Gain on securities, net
 
$
(229
)
Gain on securities, net
     
45
 
Tax expense
   
80
 
Tax expense
   
$
(83
)
Net of tax
 
$
(149
)
Net of tax

5.  Earnings Per Common Share

Following is a summary of the information used in the computation of earnings per common share (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net earnings available to common shareholders
 
$
4,298
   
$
3,072
   
$
14,922
   
$
9,479
 
Dividends on Series C preferred stock
   
94
     
100
     
284
     
300
 
Adjusted net earnings available to common shareholders
 
$
4,392
   
$
3,172
   
$
15,206
   
$
9,779
 
Weighted average number of common shares outstanding used in computation of basic earnings per common share
   
11,314
     
11,253
     
11,283
     
11,243
 
Effect of dilutive securities:
                               
Stock options
   
92
     
51
     
77
     
47
 
Convertible preferred stock
   
549
     
565
     
544
     
563
 
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted earnings per share
   
11,955
     
11,869
     
11,904
     
11,853
 

Options to acquire 7,355 and 134,611 shares of common stock were not included in computing diluted earnings per share for the quarters ended September 30, 2014 and 2013, respectively, because the effects of these shares were anti-dilutive as a result of the exercise price of such options.  Options to acquire 24,855 and 134,611 shares of common stock were not included in computing diluted earnings per share for the nine months ended September 30, 2014 and 2013, respectively, because the effects of these shares were anti-dilutive as a result of the exercise price of such options.
 
21

6.  Declaration of Dividends
 
A first quarter dividend of $0.08 per share for holders of common stock of record on March 14, 2014 was declared on January 15, 2014, and was paid on April 1, 2014.  On January 15, 2014, the Company also declared a 1.00% dividend for holders of its Series C preferred stock of record on April 1, 2014, which was paid on April 15, 2014.  On May 21, 2014, the Company declared a second quarter dividend of $0.09 per share for holders of common stock of record on June 13, 2014, and was paid on July 1, 2014.  On May 21, 2014, the Company also declared a 1.00% dividend for holders of its Series C preferred stock of record on July 1, 2014, which was paid on July 15, 2014.  On July 16, 2014, the Company declared a third quarter dividend of $0.09 per share for holders of common stock of record on September 15, 2014 to be paid on October 1, 2014.  On July 16, 2014, the Company also declared a 1.00% dividend for holders of its Series C preferred stock of record on October 1, 2014 to be paid on October 15, 2014.
 
7. Intangibles
 
A summary of core deposit intangible assets as of September 30, 2014 and December 31, 2013 is as follows (in thousands):

   
September 30, 2014
   
December 31, 2013
 
Gross carrying amount
 
$
11,674
   
$
11,674
 
Less accumulated amortization
   
(4,563
)
   
(3,733
)
Net carrying amount
 
$
7,111
   
$
7,941
 
 
8.  Fair Value Measurement
 
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:
 
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
 
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
 
Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.
 
Cash and Cash Equivalents—The carrying value of cash and cash equivalents is a reasonable estimate of fair value.
 
Securities Available-for-Sale—Securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U.S. Agency securities, mortgage-backed securities, asset-backed securities, municipal securities, single issue trust preferred securities, certain pooled trust preferred securities, collateralized debt obligations and certain equity securities that are not actively traded.
 
Securities Held-to-Maturity—The fair value of securities held-to-maturity is estimated using the same measurement techniques as securities available-for-sale.
 
22

Other Investments—The carrying value of other investments is a reasonable estimate of fair value.
 
Loans—For disclosure purposes, the fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.  For variable rate loans, the carrying amount is a reasonable estimate of fair value.  The Company does not record loans at fair value on a recurring basis.  No adjustment to fair value is taken related to illiquidity discounts.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management uses one of three methods to measure impairment, which, include collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  Impaired loans where an allowance is established based on the fair value of collateral or where the loan balance has been charged down to fair value require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
 
For non-performing loans, collateral valuations currently in file are reviewed for acceptability in terms of timeliness and applicability.  Although each determination is made based on the facts and circumstances of each credit, generally valuations are no longer considered acceptable when there has been physical deterioration of the property from when it was last appraised, or there has been a significant change in the underlying assumptions of the appraisal.  If the valuation is deemed to be unacceptable, a new appraisal is ordered.  New appraisals are typically received within 4-6 weeks.  While awaiting new appraisals, the valuation in the file is utilized, net of discounts.  Discounts are derived from available relevant market data, selling costs, taxes, and insurance.  Any perceived collateral deficiency utilizing the discounted value is specifically reserved (as required by ASC Topic 310) until the new appraisal is received or charged off.  Thus, provisions or charge-offs are recognized in the period the credit is identified as non-performing.
 
The following sources are utilized to set appropriate discounts: in-market real estate agents, current local sales data, bank history for devaluation of similar property, Sheriff’s valuations and buy/sell contracts.  If a real estate agent is used to market and sell the property, values are discounted 10% for selling costs.  Additional discounts may be applied if research from the above sources indicates a discount is appropriate given devaluation of similar property from the time of the initial valuation.
 
Other Real Estate—Other real estate (“ORE”) properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value.  Exceptions to obtaining initial appraisals are properties where a buy/sell agreement exists for the loan value or greater, or where a Sheriff’s valuation has been received for properties liquidated through a Sheriff sale.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the ORE as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the ORE asset as nonrecurring Level 3.
 
Cash Surrender Value of Life Insurance Policies—Fair value for life insurance cash surrender value is based on cash surrender values indicated by the insurance companies.
 
Deposits—The fair value of demand deposits, savings accounts, NOW accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.  The estimated fair value does not include customer related intangibles.
 
Securities Sold Under Agreements to Repurchase—The fair value approximates the carrying value of securities sold under agreements to repurchase due to their short-term nature.
 
Short-term Federal Home Loan Bank Advances—The fair value approximates the carrying value of short-term FHLB advances due to their short-term nature.
 
23

Notes Payable—The fair value approximates the carrying value of short-term notes payable due to their short-term nature.  The fair value of long-term notes payable is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings with similar terms.
 
Junior Subordinated Debentures—For junior subordinated debentures that bear interest on a floating basis, the carrying amount approximates fair value.  For junior subordinated debentures that bear interest on a fixed rate basis, the fair value is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings.
 
Commitments to Extend Credit, Standby Letters of Credit and Credit Card Guarantees—Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.

Assets Recorded at Fair Value
 
The table below presents information about certain assets and liabilities measured at fair value on a recurring basis (in thousands):
 
 
Assets / Liabilities
   
Fair Value Measurements
 
 
Measured at Fair Value
   
at September 30, 2014
 
Description
 
at September 30, 2014
   
Level 1
   
Level 2
   
Level 3
 
Available-for-sale securities:
               
U.S. Government sponsored enterprises
 
$
10,292
   
$
-
   
$
10,292
   
$
-
 
Obligations of state and political subdivisions
   
49,847
     
-
     
49,847
     
-
 
GSE mortgage-backed securities
   
112,646
     
-
     
112,646
     
-
 
Collateralized mortgage obligations: residential
   
63,373
     
-
     
63,373
     
-
 
Collateralized mortgage obligations: commercial
   
25,994
     
-
     
25,994
     
-
 
Other asset-backed securities
   
24,817
     
-
     
24,817
     
-
 
Collateralized debt obligation
   
1,428
     
-
     
1,428
     
-
 

 
Assets / Liabilities
   
Fair Value Measurements
 
 
Measured at Fair Value
   
at December 31, 2013
 
Description
 
at December 31, 2013
   
Level 1
   
Level 2
   
Level 3
 
Available-for-sale securities:
               
U.S. Government sponsored enterprises
 
$
11,265
   
$
-
   
$
11,265
   
$
-
 
Obligations of state and political subdivisions
   
59,978
     
-
     
59,978
     
-
 
GSE mortgage-backed securities
   
145,965
     
-
     
145,965
     
-
 
Collateralized mortgage obligations: residential
   
70,887
     
-
     
70,887
     
-
 
Collateralized mortgage obligations: commercial
   
27,346
     
-
     
27,346
     
-
 
Other asset-backed securities
   
25,489
     
-
     
25,489
     
-
 
Collateralized debt obligation
   
735
     
-
     
735
     
-
 
 
Certain assets and liabilities are measured at fair value on a nonrecurring basis and are included in the table below (in thousands).  Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens.  Other real estate properties are also Level 2 assets measured using appraisals from external parties.
 
24

     
Fair Value Measurements
at September 30, 2014
 
Description
 
Assets / Liabilities Measured at Fair Value
at September 30, 2014
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
 
$
2,529
   
$
-
   
$
2,529
   
$
-
 
Other real estate
   
4,663
     
-
     
4,663
     
-
 

     
Fair Value Measurements
at December 31, 2013
 
Description
 
Assets / Liabilities Measured at Fair Value
at December 31, 2013
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
 
$
1,973
   
$
-
   
$
1,973
   
$
-
 
Other real estate
   
6,687
     
-
     
6,687
     
-
 
 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The carrying amounts and estimated fair values of the Company’s financial instruments are as follows at September 30, 2014 and December 31, 2013 (in thousands):

       
Fair Value Measurements at September 30, 2014 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
               
Cash and cash equivalents
 
$
54,215
   
$
54,215
   
$
-
   
$
-
 
Securities available-for-sale
   
288,397
     
-
     
288,397
     
-
 
Securities held-to-maturity
   
145,030
     
-
     
144,597
     
-
 
Other investments
   
12,091
     
12,091
     
-
     
-
 
Loans, net
   
1,238,948
     
-
     
-
     
1,247,751
 
Cash surrender value of life insurance policies
   
13,565
     
-
     
13,565
     
-
 
Financial liabilities:
                               
Non-interest-bearing deposits
   
396,263
     
-
     
396,263
     
-
 
Interest-bearing deposits
   
1,124,581
     
-
     
909,014
     
215,623
 
Securities sold under agreements to repurchase
   
70,964
     
70,964
     
-
     
-
 
Short-term Federal Home Loan Bank advances
   
35,000
     
-
     
35,000
     
-
 
Notes payable
   
26,384
     
-
     
-
     
27,297
 
Junior subordinated debentures
   
22,167
     
-
     
22,167
     
-
 
 
25

       
Fair Value Measurements at December 31, 2013 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
               
Cash and cash equivalents
 
$
59,731
   
$
59,731
   
$
-
   
$
-
 
Securities available-for-sale
   
341,665
     
-
     
341,665
     
-
 
Securities held-to-maturity
   
155,523
     
-
     
151,168
     
-
 
Other investments
   
11,526
     
11,526
     
-
     
-
 
Loans, net
   
1,128,775
     
-
     
-
     
1,139,740
 
Cash surrender value of life insurance policies
   
13,450
     
-
     
13,450
     
-
 
Financial liabilities:
                               
Non-interest-bearing deposits
   
383,257
     
-
     
383,257
     
-
 
Interest-bearing deposits
   
1,135,546
     
-
     
895,346
     
241,359
 
Securities sold under agreements to repurchase
   
53,916
     
53,916
     
-
     
-
 
Short-term Federal Home Loan Bank advances
   
25,000
     
-
     
25,000
     
-
 
Notes payable
   
27,703
     
-
     
-
     
28,813
 
Junior subordinated debentures
   
29,384
     
-
     
22,167
     
7,776
 
 
26

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

MidSouth Bancorp, Inc. (the “Company”) is a financial holding company headquartered in Lafayette, Louisiana that conducts substantially all of its business through its wholly owned subsidiary bank, MidSouth Bank, N.A. (the “Bank”).  We offer complete banking services to commercial and retail customers in Louisiana and south and central Texas with 58 locations and are connected to a worldwide ATM network that provides customers with access to more than 55,000 surcharge-free ATMs.  We are community oriented and focus primarily on offering commercial and consumer loan and deposit services to individuals, small businesses, and middle market businesses.
 
The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the financial statements accompanying this report.  We encourage you to read this discussion in conjunction with our consolidated financial statements and the notes thereto presented herein and with the financial statements, the notes thereto, and related Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
Forward-Looking Statements
 
Certain statements included in this Report, other than statements of historical fact, are forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, but are not limited to certain statements under the captions “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “could,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements.  These statements are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.  Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements.  Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the factors discussed under the caption “Risk Factors” in our 2013 Annual Report on form 10-K and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and the following:

· changes in interest rates and market prices that could affect the net interest margin, asset valuation, and expense levels;
· changes in local economic and business conditions, including, without limitation, changes related to the oil and gas industries, that could adversely affect customers and their ability to repay borrowings under agreed upon terms, adversely affect the value of the underlying collateral related to their borrowings, and reduce demand for loans;
· increased competition for deposits and loans which could affect compositions, rates and terms;
· changes in the levels of prepayments received on loans and investment securities that adversely affect the yield and value of the earning assets;
· a deviation in actual experience from the underlying assumptions used to determine and establish our allowance for loan losses (“ALL”), which could result in greater than expected loan losses;
· changes in the availability of funds resulting from reduced liquidity or increased costs;
· the timing, ability to complete and the impact of proposed and/or future acquisitions, the success or failure of integrating acquired operations, and the ability to capitalize on growth opportunities upon entering new markets;
· the timing, ability to complete and the impact of proposed and/or future efficiency initiatives;
· the ability to acquire, operate, and maintain effective and efficient operating systems;
· increased asset levels and changes in the composition of assets that would impact capital levels and regulatory capital ratios;
· loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
 
27

· legislative and regulatory changes, including the changes in the regulatory capital framework under the Federal Reserve Board’s Basel III regulatory capital reforms, the impact of regulations under the Dodd-Frank  Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), including the implementation of the Consumer Financial Protection Bureau, and other changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage;
· regulations and restrictions resulting from our participation in government sponsored programs such as the U.S. Treasury’s Small Business Lending Fund, including potential retroactive changes in such programs;
· changes in accounting principles, policies, and guidelines applicable to financial holding companies and banking;
· acts of war, terrorism, cyber intrusion, weather, or other catastrophic events beyond our control; and
· the ability to manage the risks involved in the foregoing.
 
We can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition.  We disclaim any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise.
 
Critical Accounting Policies
 
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.  Our significant accounting policies are described in the notes to the consolidated financial statements included in this report. The accounting principles we follow and the methods of applying these principles conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking practices.  Our most critical accounting policy relates to the determination of the allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments.  The determination of the adequacy of the allowance involves significant judgment and complexity and is based on many factors.  If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for loan losses may be required.  See Asset Quality – Nonperforming Assets and Allowance for Loan Losses and Note 1 and Note 3 of the footnotes to the consolidated financial statements.
 
Another of our critical accounting policies relates to the valuation of goodwill, intangible assets and other purchase accounting adjustments.  We account for acquisitions in accordance with ASC Topic No. 805, which requires the use of the purchase method of accounting.  Under this method, we are required to record assets acquired and liabilities assumed at their fair value, including intangible assets.  Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions.  Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective.  Resulting goodwill from an acquisition under the purchase method of accounting represents the excess of the purchase price over the fair value of net assets acquired.  Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary.  If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made.  If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings.  Given the instability of the economic environment, it is reasonably possible that the methodology of the assessment of potential loan losses and goodwill impairment could change in the near-term or could result in impairment going forward.
 
A third critical accounting policy relates to deferred tax assets and liabilities.  We record deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Future tax benefits, such as net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.  In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required.  A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized.  In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.  A deferred tax liability is not recognized for portions of the allowance for loan losses for income tax purposes in excess of the financial statement balance.  Such a deferred tax liability will only be recognized when it becomes apparent that those temporary differences will reverse in the foreseeable future.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% more likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
 
28

Results of Operations
 
Earnings Analysis
 
We reported net earnings available to common shareholders of $4.3 million for the third quarter of 2014, compared to net earnings available to common shareholders of $3.1 million reported for the third quarter of 2013.  Diluted earnings for the third quarter of 2014 were $0.37 per common share, compared to $0.27 per common share reported for the third quarter of 2013.
 
Revenues from consolidated operations increased $1.6 million in quarterly comparison.  Net interest income increased $441,000 in quarterly comparison, from $19.1 million for the third quarter of 2013 to $19.5 million for the third quarter of 2014.  Decreases of $342,000 in loan valuation income and $339,000 in interest income on investment securities were offset primarily by a $963,000 increase in interest income earned on a higher volume of loans.  Noninterest income increased $1.2 million in quarterly comparison, from $5.0 million for the three months ended September 30, 2013 to $6.2 million for the three months ended September 30, 2014.  The increase in noninterest income resulted primarily from a $1.1 million gain on the sale of a commercial property held as ORE.  Additionally, increases of $204,000 in service charges on deposit accounts, $89,000 in ATM/debit card income, and $52,000 in mortgage lending fees were partially offset by decreases in other noninterest income, including a $159,000 decrease in third party investment advisory income.
 
Noninterest expenses decreased $624,000 for the third quarter 2014 compared to third quarter 2013 despite non-operating charges which included a $258,000 charge on the TRUPS redemption, $394,000 of losses on disposal of fixed assets, and $200,000 of efficiency consultant expenses.  Excluding these non-operating expenses, third quarter 2014 noninterest expenses decreased $1.5 million compared to third quarter 2013 and primarily consisted of decreases of $353,000 in salaries and benefits costs, $343,000 in marketing expenses, $166,000 in expenses on ORE and other repossessed assets, and $119,000 in courier expense, combined with decreases in several other noninterest expense categories.  The provision for loan losses increased $725,000, primarily due to an increase in charged-off loans, net of recoveries for the third quarter of 2014.  Income tax expense increased $614,000 in quarterly comparison as a result of the improvement in earnings.
 
Dividends paid on the Series B Preferred Stock issued to the Treasury as a result of our participation in the Small Business Lending Fund (“SBLF”) totaled $80,000 for the third quarter of 2014 based on a dividend rate of 1.00%.  The dividend rate is set at 1.00% through February 25, 2016.  The Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation (“PSB”) paid dividends totaling $94,000 for the three months ended September 30, 2014.
 
In year-over-year comparison, net earnings available to common shareholders totaled $14.9 million at September 30, 2014, an increase of $5.4 million compared to $9.5 million at September 30, 2013.  The $5.4 million included the $1.1 million gain on sale of ORE and $3.0 million of executive life insurance proceeds following the unexpected passing of former Vice Chairman and Chief Operating Officer Jerry Reaux in February 2014.  Excluding these non-operating income items, increases in noninterest income consisted primarily of $591,000 in service charges on deposit accounts and $662,000 in ATM and debit card income.  Net interest income remained relatively flat year-over-year due to a $2.7 million decrease in purchase accounting adjustments. Noninterest expense decreased $1.5 million primarily due to decreases of $678,000 in marketing expenses, $356,000 in the cost of printing and supplies, $278,000 in courier expense, $259,000 in corporate development, travel and training costs, and $159,000 in check fraud losses.  The decreased expenses were partially offset by a $498,000 increase in ATM/debit card expense and an increase of $187,000 in salaries and benefit costs, primarily due to an increase in group health insurance expense.
 
A reduction in the dividend rate paid on the Series B preferred stock issued in connection with SBLF resulted in a $628,000 decrease in dividends on preferred stock in year-over-year comparison, resulting in a positive impact on net earnings available to common shareholders.
 
29

Although there were a number of non-operating income and expense items during the three and nine months ended September 30, 2014, our underlying operating earnings per share continued to show significant progress, with growth in core revenues, stable core margins and good expense control.  Our focus on efficiency improvements is transitioning from internally generated projects to a second phase of working with experienced industry consultants to further enhance our productivity.  Implementation of recommendations resulting from the process will be on-going throughout 2014 and 2015.
 
Other Events
 
On October 31, 2014, we closed two banking centers, bringing the total to three centers closed during 2014.  Customers will continue to have access to an ATM at the two locations and full service access at our 58 MidSouth banking centers.
 
Net Interest Income
 
Our primary source of earnings is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other interest-bearing liabilities.  Changes in the volume and mix of earning assets and interest-bearing liabilities combined with changes in market rates of interest greatly affect net interest income.  Our net interest margin on a taxable equivalent basis, which is net interest income as a percentage of average earning assets, was 4.61% and 4.60% for the three months ended September 30, 2014 and 2013, respectively.   Tables 1 and 3 and tables 2 and 4 below analyze the changes in net interest income in the three months ended September 30, 2014 and 2013 and the nine months ended September 30, 2014 and 2013, respectively.
 
Fully taxable-equivalent (“FTE”) net interest income totaled $19.9 million and $19.5 million for the quarters ended September 30, 2014 and 2013, respectively.  The FTE net interest income increased $370,000 in prior year quarterly comparison primarily due to a $621,000 increase in interest income on loans despite a $342,000 reduction in purchase accounting adjustments on acquired loans.  The increased interest income on loans resulted from a $109.1 million increase in the average volume of loans in quarterly comparison. The average yield on loans decreased 36 basis points, from 6.24% to 5.88%.  The purchase accounting adjustments added 22 basis points to the average yield on loans for the third quarter of 2014 and 39 basis points to the average yield on loans for the third quarter of 2013.  Net of the impact of the purchase accounting adjustments, average loan yields declined 19 basis points in prior year quarterly comparison, from 5.85% to 5.66%.  Loan yields have declined primarily as the result of a sustained low interest rate environment.
 
Investment securities totaled $433.4 million, or 22.9% of total assets at September 30, 2014, versus $517.8 million, or 27.8% of total assets at September 30, 2013.  The investment portfolio had an effective duration of 2.9 years and a net unrealized gain of $3.8 million at September 30, 2014.  The average volume of investment securities decreased $82.0 million in prior year quarterly comparison.  The average tax equivalent yield on investment securities increased 11 basis points, from 2.59% to 2.70%.  The $82.0 million decrease in the average volume of investment securities was used to fund loan growth during the same period.
 
The average yield on all earning assets decreased 3 basis points in prior year quarterly comparison, from 4.99% for the third quarter of 2013 to 4.96% for the third quarter of 2014.  Net of the impact of purchase accounting adjustments, the average yield on total earning assets increased 6 basis points, from 4.74% to 4.80% for the three month periods ended September 30, 2013 and 2014, respectively, due to a favorable shift in earning assets from investment securities to loans.
 
The impact to interest expense of a $4.2 million increase in the average volume of interest- bearing liabilities was offset by a 5 basis point decrease in the average rate paid on interest- bearing liabilities, from 0.51% at September 30, 2013 to 0.46% at September 30, 2014.  Net of purchase accounting adjustments on acquired certificates of deposit and FHLB borrowings, the average rate paid on interest-bearing liabilities was 0.58% for the third quarter of 2013 and declined to 0.51% for the third quarter of 2014.
 
The notes payable average volume of $26.6 million consists of FHLB advances and a note payable with First National Bankers Bank.  The FHLB advances are fixed rate advances with rates ranging from 1.99% to 5.06% and have a range of maturities from October 2014 to January 2019.  The FHLB advances are collateralized by a blanket lien on first mortgages and other qualifying loans.  The remaining balance on the note payable with First National Bankers Bank in the amount of $500,000 was paid off in the third quarter of 2014.  The interest rate on the note was equal to New York Prime.  Short-term FHLB advances totaled $35.0 million at September 30, 2014.  The rate on these short-term advances range from 0.15% to 0.17%, and they mature in November 2014 and December 2014.  The short-term advances partially funded the loan growth we experienced in the nine months ended September 30, 2014.
 
30

We redeemed in full the $7.2 million fixed rate junior subordinated debentures carrying a 10.20% interest rate on August 22, 2014.  In the fourth quarter of 2014, the average yield on the junior subordinated debentures will reflect a full quarter’s impact of the payoff of the higher yield fixed rate debenture.  The variable rate debentures carry a floating rate tied to the 3-month LIBOR with added rate variances ranging from plus 170 basis points to plus 330 basis points, adjustable and payable quarterly.
 
As a result of these changes in volume and yield on earning assets and interest bearing liabilities, the FTE net interest margin increased 1 basis point, from 4.60% for the third quarter of 2013 to 4.61% for the third quarter of 2014.  Net of purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin increased 12 basis points, from 4.30% for the third quarter of 2013 to 4.42% for the third quarter of 2014.
 
In year-to-date comparison, FTE net interest income remained relatively flat due to a $2.7 million decrease in purchase accounting adjustments.  Of the $2.7 million, a $2.4 million decrease impacted interest income on loans for the nine months ended September 30, 2014 and resulted in a decrease in the average yield on loans, from 6.54% at September 30, 2013 to 5.99% at September 30, 2014.  The average yield on earning assets decreased in year-to-date comparison, from 5.11% at September 30, 2013 to 4.97% at September 30, 2014.  The purchase accounting adjustments added 64 basis points to the average yield on loans for the first nine months of 2013 and 29 basis points for the first nine months of 2014.  Net of purchase accounting adjustments, the average yield on earning assets increased 7 basis points, from 4.70% at September 30, 2013 to 4.77% at September 30, 2014.
 
Interest expense decreased $474,000 in year-over-year comparison primarily due to a decrease in the average rate paid on interest-bearing liabilities.  The average rate paid on interest-bearing liabilities decreased 6 basis points, from 0.53% at September 30, 2013 to 0.47% at September 30, 2014.  Net of purchase accounting adjustments, the average rate paid on interest-bearing liabilities decreased 10 basis points, from 0.62% at September 30, 2013 to 0.52% at September 30, 2014.  The FTE net interest margin decreased 9 basis points, from 4.71% for the nine months ended September 30, 2013 to 4.62% for the nine months ended September 30, 2014.  Net of purchase accounting adjustments, the FTE net interest margin increased 14 basis points, from 4.24% to 4.38% for the nine months ended September 30, 2013 and 2014, respectively, due to a favorable shift in earning assets from investment securities to loans.
 
31

Table 1
 
Consolidated Average Balances, Interest and Rates
(in thousands)
 
   
Three Months Ended September 30,
 
   
2014
   
2013
 
   
Average
Volume
   
Interest
   
Average
Yield/Rate
   
Average
Volume
   
Interest
   
Average
Yield/Rate
 
Assets
                       
Investment securities1
                       
Taxable
 
$
351,645
   
$
1,965
     
2.24
%
 
$
418,964
   
$
2,171
     
2.07
%
Tax exempt2
   
86,528
     
996
     
4.60
%
   
101,226
     
1,200
     
4.74
%
Total investment securities
   
438,173
     
2,961
     
2.70
%
   
520,190
     
3,371
     
2.59
%
Federal funds sold
   
3,143
     
2
     
0.25
%
   
2,180
     
1
     
0.18
%
Time and interest bearing deposits in other banks
   
22,922
     
15
     
0.26
%
   
22,519
     
15
     
0.26
%
Other investments
   
12,090
     
109
     
3.61
%
   
10,948
     
80
     
2.92
%
Total loans3
   
1,232,196
     
18,273
     
5.88
%
   
1,123,086
     
17,652
     
6.24
%
Total earning assets
   
1,708,524
     
21,360
     
4.96
%
   
1,678,923
     
21,119
     
4.99
%
Allowance for loan losses
   
(8,978
)
                   
(8,479
)
               
Nonearning assets
   
193,063
                     
192,646
                 
Total assets
 
$
1,892,609
                   
$
1,863,090
                 
                                                 
Liabilities and shareholders’ equity
                                               
Total interest bearing deposits
 
$
1,132,132
   
$
859
     
0.30
%
 
$
1,133,126
   
$
976
     
0.34
%
Securities sold under repurchase agreements
   
70,587
     
210
     
1.18
%
   
64,274
     
204
     
1.26
%
Federal funds purchased
   
70
     
-
     
-
     
354
     
-
     
-
 
Short-term FHLB advances
   
28,913
     
13
     
0.18
%
   
25,000
     
11
     
0.17
%
Notes payable
   
26,640
     
95
     
1.40
%
   
28,301
     
107
     
1.48
%
Junior subordinated debentures
   
26,247
     
327
     
4.88
%
   
29,384
     
335
     
4.46
%
Total interest bearing liabilities
   
1,284,589
     
1,504
     
0.46
%
   
1,280,439
     
1,633
     
0.51
%
                                                 
Demand deposits
   
392,927
                     
388,020
                 
Other liabilities
   
9,802
                     
6,452
                 
Shareholders’ equity
   
205,291
                     
188,179
                 
Total liabilities and shareholders’ equity
 
$
1,892,609
                   
$
1,863,090
                 
                                                 
Net interest income and net interest spread
         
$
19,856
     
4.50
%
         
$
19,486
     
4.48
%
Net yield on interest earning assets
                   
4.61
%
                   
4.60
%
 

1 Securities classified as available-for-sale are included in average balances.  Interest income figures reflect interest earned on such securities.
2 Interest income of $344,000 for 2014 and $415,000 for 2013 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 35%.
3 Interest income includes loan fees of $1,580,000 for 2014 and $1,532,000 for 2013.  Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
 
32

Table 2
 
Consolidated Average Balances, Interest and Rates
(in thousands)
 
   
Nine Months Ended September 30,
 
   
2014
   
2013
 
   
Average
Volume
   
Interest
   
Average
Yield/Rate
   
Average
Volume
   
Interest
   
Average
Yield/Rate
 
Assets
                       
Investment securities1
                       
Taxable
 
$
375,969
   
$
6,164
     
2.19
%
 
$
426,544
   
$
6,481
     
2.03
%
Tax exempt2
   
88,742
     
3,062
     
4.60
%
   
104,297
     
3,763
     
4.81
%
Total investment securities
   
464,711
     
9,226
     
2.65
%
   
530,841
     
10,244
     
2.57
%
Federal funds sold
   
2,775
     
4
     
0.19
%
   
3,910
     
6
     
0.20
%
Time and interest bearing deposits in other banks
   
21,857
     
42
     
0.25
%
   
34,435
     
70
     
0.27
%
Other investments
   
11,767
     
268
     
3.04
%
   
10,113
     
230
     
3.03
%
Total loans3
   
1,195,357
     
53,525
     
5.99
%
   
1,082,679
     
52,966
     
6.54
%
Total earning assets
   
1,696,467
     
63,065
     
4.97
%
   
1,661,978
     
63,516
     
5.11
%
Allowance for loan losses
   
(8,734
)
                   
(7,691
)
               
Nonearning assets
   
192,087
                     
199,655
                 
Total assets
 
$
1,879,820
                   
$
1,853,942
                 
                                                 
Liabilities and shareholders’ equity
                                               
Total interest bearing deposits
 
$
1,147,843
   
$
2,588
     
0.30
%
 
$
1,138,506
   
$
3,044
     
0.36
%
Securities sold under repurchase agreements
   
60,522
     
588
     
1.30
%
   
52,597
     
565
     
1.44
%
Federal funds purchased
   
305
     
2
     
0.86
%
   
607
     
3
     
0.65
%
Short-term FHLB advances
   
26,356
     
31
     
0.16
%
   
8,799
     
11
     
0.16
%
Notes payable
   
26,540
     
272
     
1.35
%
   
28,708
     
316
     
1.46
%
Other borrowings/payables
   
602
     
15
     
3.29
%
   
740
     
18
     
3.21
%
Junior subordinated debentures
   
28,327
     
994
     
4.63
%
   
29,384
     
1,007
     
4.52
%
Total interest bearing liabilities
   
1,290,495
     
4,490
     
0.47
%
   
1,259,341
     
4,964
     
0.53
%
                                                 
Demand deposits
   
380,590
                     
395,482
                 
Other liabilities
   
8,188
                     
8,785
                 
Shareholders’ equity
   
200,547
                     
190,334
                 
Total liabilities and shareholders’ equity
 
$
1,879,820
                   
$
1,853,942
                 
                                                 
Net interest income and net interest spread
         
$
58,575
     
4.50
%
         
$
58,552
     
4.58
%
Net yield on interest earning assets
                   
4.62
%
                   
4.71
%
 

1 Securities classified as available-for-sale are included in average balances.  Interest income figures reflect interest earned on such securities.
2 Interest income of $1,055,000 for 2014 and $1,327,000 for 2013 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 35%.
3 Interest income includes loan fees of $4,322,000 for 2014 and $4,130,000 for 2013.  Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
 
33

Table 3
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
 
   
Three Months Ended
September 30, 2014 compared to September 30, 2013
 
   
Total
Increase
   
Change
Attributable To
 
   
(Decrease)
   
Volume
   
Rates
 
Taxable-equivalent earned on:
           
Investment securities
           
Taxable
 
$
(206
)
 
$
(367
)
 
$
161
 
Tax exempt
   
(204
)
   
(170
)
   
(34
)
Federal funds sold
   
1
     
1
     
-
 
Other investments
   
29
     
9
     
20
 
Loans, including fees
   
621
     
1,654
     
(1,033
)
Total
   
241
     
1,127
     
(886
)
                         
Interest paid on:
                       
Interest bearing deposits
   
(117
)
   
(1
)
   
(116
)
Securities sold under repurchase agreements
   
6
     
19
     
(13
)
Short-term FHLB advances
   
2
     
2
     
-
 
Notes payable
   
(12
)
   
(6
)
   
(6
)
Junior subordinated debentures
   
(8
)
   
(37
)
   
29
 
Total
   
(129
)
   
(23
)
   
(106
)
                         
Taxable-equivalent net interest income
 
$
370
   
$
1,150
   
$
(780
)

Note: In Table 3, changes due to volume and rate have generally been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts to the changes in each.

Table 4
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
 
   
Nine Months Ended
September 30, 2014 compared to September 30, 2013
 
   
Total
Increase
   
Change
Attributable To
 
   
(Decrease)
   
Volume
   
Rates
 
Taxable-equivalent earned on:
           
Investment securities
           
Taxable
 
$
(317
)
 
$
(69
)
 
$
(248
)
Tax exempt
   
(701
)
   
(146
)
   
(555
)
Federal funds sold
   
(2
)
   
(1
)
   
(1
)
Time and interest bearing deposits in other banks
   
(28
)
   
(11
)
   
(17
)
Other investments
   
38
     
47
     
(9
)
Loans, including fees
   
559
     
6,314
     
(5,755
)
Total
   
(451
)
   
6,134
     
(6,585
)
                         
Interest paid on:
                       
Interest bearing deposits
   
(456
)
   
26
     
(482
)
Securities sold under repurchase agreements
   
23
     
95
     
(72
)
Federal funds purchased
   
(1
)
   
(1
)
   
-
 
Short-term FHLB advances
   
20
     
22
     
(2
)
Notes payable
   
(44
)
   
(5
)
   
(39
)
Other borrowings/payable
   
(3
)
   
(3
)
   
-
 
Junior subordinated debentures
   
(13
)
   
-
     
(13
)
Total
   
(474
)
   
134
     
(608
)
                         
Taxable-equivalent net interest income
 
$
23
   
$
6,000
   
$
(5,977
)

Note: In Table 4, changes due to volume and rate have generally been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts to the changes in each.
 
34

Non-interest Income
 
Non-interest income increased $1.2 million in quarterly comparison, from $5.0 million for the three months ended September 30, 2013 to $6.2 million for the three months ended September 30, 2014. The increase in noninterest income resulted primarily from a $1.1 million gain on the sale of a commercial property held as ORE.  Other increases in non-interest income consisted primarily of $204,000 in service charges on deposit accounts, $89,000 in ATM/debit card income, and $52,000 in mortgage banking fees, which were partially offset by decreases in other noninterest income, including a $159,000 decrease in third party investment advisory income.
 
For the nine-month period ended September 30, 2014, non-interest income totaled $19.4 million compared to $14.4 million, a net increase of $5.0 million year-over-year.  The first nine months of 2014 included non-operating income of $3.0 million of executive life insurance proceeds and a $1.1 million gain on sale of ORE.  Excluding the non-operating income, increases in non-interest income consisted primarily of $591,000 in service charges on deposit accounts and $662,000 in ATM and debit card income due to higher transaction volume.
 
Non-interest Expense
 
Non-interest expenses decreased $624,000 for the third quarter 2014 compared to third quarter 2013 and included approximately $852,000 of non-operating efficiency consultant expenses, including $394,000 in losses on disposal of fixed assets and $200,000 in efficiency consultant expenses.  The $394,000 in losses on disposal of fixed assets includes costs associated with the demolition and rebuilding of a banking center in Sulphur, Louisiana.  A new banking center will be constructed to service expected growth in that market from multiple oilfield related expansion projects slated in the area. The $200,000 in efficiency consultant expenses is related to a process improvement initiative which will be on-going through year-end.  Additionally, third quarter 2014 non-operating expenses included a $258,000 loss on redemption of TRUPS.  Excluding these non-operating expenses, non-interest expenses decreased $1.5 million for the third quarter 2014 compared to third quarter 2013 and consisted primarily of decreases of $353,000 in salaries and benefits costs, $343,000 in marketing expenses, $166,000 in expenses on ORE and other assets repossessed, and $119,000 in courier expense, combined with decreases in several other noninterest expense categories.
 
Non-interest expenses decreased $1.5 million in year-to-date comparison, from $54.2 million for the nine months ended September 30, 2013 to $52.7 million for the nine months ended September 30, 2014.  The first nine months of 2014 included $1.2 million of non-operating expenses.  In addition to the $852,000 of non-operating expenses recorded in the third quarter of 2014 as described above, 2014 non-operating costs included $160,000 in additional efficiency consultant expenses and $189,000 in expenses associated with incentive compensation plans for Mr. Reaux.  The first nine months of 2013 included $214,000 of net merger and conversion related expenses associated with the PSB acquisition.  Excluding the non-operating expenses in 2014 and 2013, decreases in noninterest expense primarily included $678,000 in marketing expenses, $356,000 in the cost of printing and supplies, $278,000 in courier expense, $259,000 in corporate development, travel and training costs and $159,000 in check fraud losses. The decreases were partially offset by an $187,000 increase in salaries and benefits costs (primarily increased group health insurance costs) and a $498,000 increase in ATM/debit card expense.
 
The expense reductions noted in our quarterly and year-to-date comparisons resulted from a profitability initiative that included reducing overhead expenses through cost reduction and containment measures and through process re-engineering.  To further bolster our efficiency efforts, we signed an engagement letter in the first quarter of 2014 with FIS, a consulting firm specializing in helping banks improve their processes.  With a thorough review of many of the major functions within the bank, FIS will identify processes for improvement and will assist us in implementing those process improvements we choose to make.
 
Analysis of Balance Sheet
 
Total consolidated assets at September 30, 2014 and December 31, 2013 were $1.9 billion.   Deposits totaled $1.5 billion at September 30, 2014 and December 31, 2013.  Our stable core deposit base, which excludes time deposits, grew $25.5 million and accounted for 85.5% of deposits at September 30, 2014 compared to 84.2% of deposits at year end 2013.
 
Securities available-for-sale totaled $288.4 million at September 30, 2014, a decrease of $53.3 million from $341.7 million at December 31, 2013.  The securities available-for-sale portfolio declined primarily due to $33.5 million in calls, maturities and pay-downs and $22.2 million in sales of securities.  Securities held-to-maturity decreased $10.5 million, from $155.5 million at December 31, 2013 to $145.0 million at September 30, 2014, primarily due to $10.8 million in calls, maturities and pay-downs for the held-to-maturity portfolio that offset $1.1 million in purchases.  The investment securities portfolio had an effective duration of 2.9 years and an unrealized gain of $3.8 million at September 30, 2014.
 
35

Net loans totaled $1.2 billion at September 30, 2014, compared to $1.1 billion at December 31, 2013.  Total loans grew $110.8 million, or 9.7%, from year end 2013.  Increases of $48.1 million in the C&I portfolio and $33.8 million in the CRE portfolio accounted for the majority of the increase in total loans, along with solid growth of $18.9 million in the consumer loan portfolio.  The composition of the Company’s loan portfolio is reflected in Table 5 below.

Table 5
Composition of Loans
(in thousands)
       
   
September 30, 2014
   
December 31, 2013
 
Commercial, financial, and agricultural (C&I)
 
$
452,065
   
$
403,976
 
Real estate – construction
   
86,315
     
82,691
 
Real estate – commercial (CRE)
   
430,930
     
397,135
 
Real estate – residential
   
153,915
     
146,841
 
Installment loans to individuals
   
116,340
     
97,459
 
Lease financing receivable
   
5,285
     
5,542
 
Other
   
3,523
     
3,910
 
   
$
1,248,373
   
$
1,137,554
 
Less allowance for loan losses
   
(9,425
)
   
(8,779
)
Net loans
 
$
1,238,948
   
$
1,128,775
 

Within the $430.9 million commercial real estate portfolio, $395.0 million is secured by commercial property, $15.0 million is secured by multi-family property, and $20.9 million is secured by farmland.  Of the $395.0 million secured by commercial property, $249.6 million, or 63.2%, is owner-occupied.  Of the $153.9 million residential real estate portfolio, 86.5% represented loans secured by first liens.  We believe our risk within the real estate and construction portfolios is diversified throughout our markets and that current exposure within the two portfolios is sufficiently provided for within the ALL at September 30, 2014.
 
Off-Balance Sheet Arrangements
 
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit.  For the period ended September 30, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material impact on our financial condition, results of operations, or cash flows.
 
Liquidity and Capital
 
Bank Liquidity
 
Liquidity is the availability of funds to meet maturing contractual obligations and to fund operations.  The Bank’s primary liquidity needs involve its ability to accommodate customers’ demands for deposit withdrawals as well as customers’ requests for credit.  Liquidity is deemed adequate when sufficient cash to meet these needs can be promptly raised at a reasonable cost to the Bank.
 
Liquidity is provided primarily by three sources: a stable base of funding sources, an adequate level of assets that can be readily converted into cash, and borrowing lines with correspondent banks.  Although the Bank historically has not utilized brokered deposits, this is a fourth potential source of liquidity, albeit one that is more costly and volatile.  Our core deposits are our most stable and important source of funding.  Cash deposits at other banks, federal funds sold, and principal payments received on loans and mortgage-backed securities provide additional primary sources of liquidity.  Approximately $19.8 million in projected cash flows from securities repayments for the remainder of 2014 provides an additional source of liquidity.
 
36

The Bank also has significant borrowing capacity with the FRB-Atlanta and with the FHLB–Dallas.  As of September 30, 2014, we had no borrowings with the FRB-Atlanta.  Long-term FHLB-Dallas advances totaled $26.4 million at September 30, 2014 and are fixed rate advances with rates ranging from 1.99% to 5.06% and have a range of maturities from October 2014 to January 2019.  Short-term FHLB-Dallas advances totaled $35.0 million at September 30, 2014.  The rate on these advances at September 30, 2014 range from 0.15% to 0.17%, and they mature in November 2014 and December 2014.  Under existing agreements with the FHLB-Dallas, our borrowing capacity totaled $294.1 million at September 30, 2014.  The Bank has the ability to post additional collateral of approximately $155.3 million if necessary to meet liquidity needs.  Additionally, $237.0 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta.  Unsecured borrowing lines totaling $33.5 million are available through correspondent banks.  We utilize these contingency funding alternatives to meet deposit volatility, which is more likely in the current environment, given unusual competitive offerings within our markets.
 
Company Liquidity
 
At the Company level, cash is needed primarily to meet interest payments on the junior subordinated debentures, dividends on our common stock and dividend payments on the Series B and Series C Preferred Stocks.  The dividend rate on the Series B Preferred Stock issued to the U.S. Treasury for participation in the Small Business Lending Fund (“SBLF”) was 1.00% for the three months ended September 30, 2014 and December 31, 2013.  The dividend rate was set at 1.00% for the fourth quarter of 2013 due to attaining the target 10% growth rate in qualified small business loans during the second quarter of 2013.  Beginning February 2016, the dividend rate will increase to 9% per annum.
 
On December 28, 2012, the Company issued 756,511 shares of common stock and 99,971 shares of Series C Preferred Stock in connection with the PSB acquisition.  During the first nine months of 2014, 5,925 shares of Series C Preferred Stock were converted into 32,917 shares of the Company’s common stock.  The Series C Preferred Stock is entitled to the payment of noncumulative dividends, if and when declared by the Company’s Board of Directors, at the rate of 4.00% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year.  The Series C Preferred Stock paid dividends totaling $94,000 for the three months ended September 30, 2014.
 
Dividends from the Bank totaling $12.0 million provided additional liquidity for the Company during the nine months ended September 30, 2014.  As of September 30, 2014, the Bank had the ability to pay dividends to the Company of approximately $20.7 million without prior approval from its primary regulator.  As a publicly traded company, the Company also has the ability, subject to market conditions, to issue additional shares of common stock and other securities to provide funds as needed for operations and future growth of the Company.
 
Capital
 
The Company and the Bank are required to maintain certain minimum capital levels.  Risk-based capital requirements are intended to make regulatory capital more sensitive to the risk profile of an institution's assets.  At September 30, 2014, the Company and the Bank were in compliance with statutory minimum capital requirements and were classified as “well capitalized.”  Minimum capital requirements include a total risk-based capital ratio of 8.0%, with Tier 1 capital not less than 4.0%, and a Tier 1 leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution.  As of September 30, 2014, the Company’s Tier 1 leverage ratio was 9.56%, Tier 1 capital to risk-weighted assets was 12.93% and total capital to risk-weighted assets was 13.63%.  All three capital ratios decreased in sequential quarter comparison due to the payoff of the Statutory Trust I in August 2014.  The Company’s Tier 1 leverage ratio decreased 18 basis points, from 9.74% to 9.56%, which is well above regulatory minimums.  The Bank had a Tier 1 leverage capital ratio of 9.09% at September 30, 2014.
 
In July 2013, the federal bank regulatory agencies adopted rules to implement the Basel III capital framework and for calculating risk-weighted assets, as modified by the U.S. federal bank regulators.  These rules, known as “Basel III”, create a new regulatory capital standard based on Tier 1 common equity and increase the minimum leverage and risk-based capital ratios applicable to all banking organization.
 
The Basel III rules include new minimum risk-based and leverage ratios, and modify capital and asset definitions for purposes of calculating these ratios.  Among other things, the Basel III rules will impact regulatory capital ratios of banking organizations in the following manner, when fully phased in: create a new requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%; increase the minimum leverage capital ratio to 4.0% for all banking organizations (currently 3.0% for certain banking organizations); increase the minimum   Tier 1 risk-based capital ratio from 4.0% to 6.0%; and maintain the minimum total risk-based capital ratio at 8.0%.  In addition, the Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of 2.5% above the new regulatory minimum capital ratios.  The effect of the capital conservation buffer will be to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%, for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.
 
37

The new minimum capital requirements are effective on January 1, 2015 for community banking organizations, such as MidSouth, whereas other requirements of the Basel III rules phase in over time.  While we believe our current capital levels would be adequate under the new rules, the ultimate impact of these rules on the Company and the Bank is unknown at this time.
 
Asset Quality
 
Credit Risk Management
 
We manage credit risk primarily by observing written, board approved policies that govern all credit underwriting and approval activities.  Our Chief Credit Officer (“CCO”) is responsible for credit underwriting and loan operations for the Bank.  The role of the CCO includes on-going review and development of lending policies, commercial credit analysis, centralized consumer underwriting, loan operations documentation and funding, and overall credit risk management procedures.  The current risk management process requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan.  These efforts are supplemented by independent reviews performed by the loan review officer and other validations performed by the internal audit department.  The results of the reviews are reported directly to the Audit Committee of the Board of Directors.  We believe the conservative nature of our underwriting practices has resulted in strong credit quality in our loan portfolio.  Completed loan applications, credit bureau reports, financial statements, and a committee approval process remain a part of credit decisions.  Documentation of the loan decision process is required on each credit application, whether approved or denied, to ensure thorough and consistent procedures.  Additionally, we have historically recognized and disclosed significant problem loans quickly and taken prompt action to address material weaknesses in those credits.
 
Credit concentrations are monitored and reported quarterly whereby individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity are evaluated for each major standard industry classification segment.  At September 30, 2014, one industry segment concentration, the oil and gas industry, aggregated more than 10% of our loan portfolio.  Our exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $255.6 million, or 20.5% of total loans.  Additionally, we monitor our exposure to loans secured by commercial real estate.  At September 30, 2014, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $491.3 million, with $3.4 million, or 0.7% on nonaccrual status.  Of the $491.3 million, $395.1 million represent CRE loans, 63.2% of which are secured by owner-occupied commercial properties.  Additional information regarding credit quality by loan classification is provided in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.
 
Nonperforming Assets and Allowance for Loan Loss
 
Table 6 summarizes the Company's nonperforming assets for the quarters ending September 30, 2014 and 2013, and December 31, 2013.
 
38

Table 6
Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing
(in thousands)
 
   
September 30, 2014
   
December 31,
2013
   
September 30, 2013
 
Nonaccrual loans
 
$
7,750
   
$
5,099
   
$
5,760
 
Loans past due 90 days and over and still accruing
   
23
     
178
     
744
 
Total nonperforming loans
   
7,773
     
5,277
     
6,504
 
Other real estate
   
4,663
     
6,687
     
6,672
 
Other foreclosed assets
   
19
     
20
     
18
 
Total nonperforming assets
 
$
12,455
   
$
11,984
   
$
13,194
 
                         
Troubled debt restructurings
 
$
416
   
$
412
   
$
533
 
                         
Nonperforming assets to total assets
   
0.66
%
   
0.65
%
   
0.71
%
Nonperforming assets to total loans + ORE + other assets repossessed
   
0.99
%
   
1.05
%
   
1.15
%
ALL to nonperforming loans
   
121.25
%
   
166.36
%
   
133.26
%
ALL to total loans
   
0.75
%
   
0.77
%
   
0.76
%
                         
QTD charge-offs
 
$
1,253
   
$
740
   
$
375
 
QTD recoveries
   
428
     
53
     
61
 
QTD net charge-offs
 
$
825
   
$
687
   
$
314
 
Annualized net charge-offs to total loans
   
0.26
%
   
0.24
%
   
0.11
%
 
Nonperforming assets totaled $12.5 million at September 30, 2014, an increase of $0.5 million from the $12.0 million reported at year-end 2013 and a decrease of $739,000 from the $13.2 million reported at September 30, 2013.  The increase in the first nine months of 2014 resulted from a $2.5 million increase in nonperforming loans that offset a $2.0 million reduction in ORE.  Allowance coverage for nonperforming loans was 121.25% at September 30, 2014 compared to 166.36% at December 31, 2013 and 133.26% at September 30, 2013.  The ALL/total loans ratio remained relatively constant at 0.75% compared to 0.77% at year-end 2013 and 0.76% at September 30, 2013.  Including valuation accounting adjustments on acquired loans, the total adjustments and ALL was 1.25% of loans at September 30, 2014.  The ratio of annualized net charge-offs to total loans was 0.26% for the three months ended September 30, 2014, compared to 0.24% for the three months ended December 31, 2013, and 0.11% for the three months ended September 30, 2013.
 
Total nonperforming assets to total loans plus ORE and other assets repossessed decreased to 0.99% at September 30, 2014 from 1.05% at December 31, 2013 and 1.15% at September 30, 2013.  Loans classified as troubled debt restructurings (“TDRs”) totaled $416,000 at September 30, 2014 compared to $412,000 at December 31, 2013 and $533,000 at September 30, 2013.  Classified assets, including ORE, increased $3.5 million, or 11.3%, to $34.4 million compared to $30.9 million at December 31, 2013.  The increase resulted primarily from the addition of approximately $5.5 million in classified assets over the nine months ended September 30, 2014, which was partially offset by a $2.0 million reduction in ORE.  Included in the $5.5 million increase is a $3.1 million commercial real estate loan on accrual status added during the third quarter of 2014.  Additional information regarding impaired loans is included in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.
 
Quarterly evaluations of the allowance for loan losses are performed in accordance with GAAP and regulatory guidelines.  The ALL is comprised of specific reserves assigned to each impaired loan for which a probable loss has been identified as well as general reserves to maintain the allowance at an acceptable level for other loans in the portfolio where historical loss experience is available that indicates certain probable losses may exist.  Factors considered in determining provisions include estimated losses in significant credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off-balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management; and the results of examinations of the loan portfolio by regulatory agencies and others.  The processes by which we determine the appropriate level of the ALL, and the corresponding provision for probable credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates. We believe the $9.4 million in the ALL as of September 30, 2014 is sufficient to cover probable losses in the loan portfolio.
 
39

Impact of Inflation and Changing Prices
 
The consolidated financial statements and notes thereto, presented herein, have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations.  Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial.  As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
There have been no significant changes from the information regarding market risk disclosed under the heading “Funding Sources - Interest Rate Sensitivity” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
Item 4. Controls and Procedures.
 
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it submits under the Exchange
 
Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
 
During the third quarter of 2014, there was no change in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
40

Part II – Other Information
 
Item 1. Legal Proceedings.
 
The Bank has been named as a defendant in various legal actions arising from normal business activities in which damages of various amounts are claimed.  While the amount, if any, of ultimate liability with respect to such matters cannot be currently determined, management believes, after consulting with legal counsel, that any such liability will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.  However, in the event of unexpected future developments in these matters, if the ultimate resolution of any such matter is unfavorable, the result may be material to the Company’s consolidated financial position, consolidated results of operations or consolidated cash flows.
 
Item 1A. Risk Factors.
 
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2013.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
The Company did not sell any unregistered equity securities or repurchase any equity securities during the quarter ended September 30, 2014.
 
Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. Mine Safety Disclosures.
 
None.
 
Item 5. Other Information.
 
None.
 
Item 6. Exhibits.
 
Exhibit Number Document Description

3.1
Amended and Restated Articles of Incorporation of MidSouth Bancorp, Inc. (restated solely for purposes of Item 601(b)(3) of Regulation S-K) (filed as Exhibit 3.1 to MidSouth's Annual Report on Form 10-K filed on March 18, 2013 and incorporated herein by reference).
   
3.2
Amended and Restated By-laws of MidSouth Bancorp, Inc. effective as of September 12, 2012 (restated solely for purposes of Item 601(b)(3) of Regulation S-K (filed as Exhibit 3.3 to MidSouth’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference).
   
Certification pursuant to Exchange Act Rules 13(a) – 14(a)
   
Certification pursuant to Exchange Act Rules 13(a) – 14(a)
   
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101
The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*

*  Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under these sections.
 
41

Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
MidSouth Bancorp, Inc.
(Registrant)
   
Date: November 7, 2014
 
 
/s/ C. R. Cloutier
 
 
C. R. Cloutier, President and CEO
 
(Principal Executive Officer)
 
 
/s/ James R. McLemore
 
 
James R. McLemore, CFO
 
(Principal Financial Officer)
 
 
/s/ Teri S. Stelly
 
 
Teri S. Stelly, Controller
(Principal Accounting Officer)

 
42