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| MSL > SEC Filings for MSL > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
MidSouth Bancorp, Inc. ("the Company") is a bank 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"). MidSouth Bank, N.A. offers complete banking services to commercial and retail customers in south Louisiana and southeast Texas with 35 locations and more than 170 ATMs. The Company is community oriented and focuses primarily on offering commercial and consumer loan and deposit services to individuals, small businesses, and middle market businesses.
Forward Looking Statements
The Private Securities Litigation Act of 1995 provides a safe harbor for
disclosure of information about a company's anticipated future financial
performance. This act protects a company from unwarranted litigation if actual
results differ from management expectations. This management's discussion and
analysis reflects management's current views and estimates of future economic
circumstances, industry conditions, the Company's performance, and financial
results based on reasonable assumptions. A number of factors and uncertainties
could cause actual results to differ materially from the anticipated results and
expectations expressed in the discussion. These factors and uncertainties
include, but are not limited to:
· 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 that could adversely affect customers and their ability to repay borrowings under agreed upon terms and/or adversely affect the value of the underlying collateral related to the borrowings;
· increased competition for deposits and loans that could affect 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 the Allowance for Loan Losses ("ALL");
· changes in the availability of funds resulting from reduced liquidity or increased costs;
· the timing and impact of future acquisitions, the success or failure of integrating operations, and the ability to capitalize on growth opportunities upon entering new markets;
· 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;
· changes in government regulations and accounting principles, policies, and guidelines applicable to financial holding companies and banking; and
· acts of terrorism, weather, or other events beyond the Company's control.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company's significant accounting policies are described in the notes to the consolidated financial statements included in Form 10-K for the year ended December 31, 2007. The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America ("GAAP") and general banking practices. The Company's most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If the financial condition of its borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Company's estimates would be updated and additional provisions for loan losses may be required (see Asset Quality).
Another of the Company's critical accounting policies relates to its goodwill and intangible assets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but evaluated for impairment annually. 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.
A third critical accounting policy relates to stock-based compensation. SFAS No. 123R requires that stock based compensation transactions be recognized as compensation expense in the statement of earnings based on the fair market value on the date of the grant. SFAS No. 123R further requires that management make assumptions including stock price volatility and employee turnover that are utilized to measure compensation expense. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions. The Company recognized stock option expense of $51,575, for the grant-date fair value of stock options vested in the nine months ended September 30, 2008. The Company has not granted any new stock options during 2008.
Results of Operations
The Company reported earnings of $1,857,000 for the third quarter ended September 30, 2008, a decrease of 23.9% over earnings of $2,441,000 reported for the third quarter of 2007. Diluted earnings per share for the third quarter of 2008 were $0.28 per share, a decrease of 24.3% over the $0.37 per share for the third quarter of 2007.
For the nine months ended September 30, 2008, earnings totaled $4,473,000, a 35.0% decrease from earnings of $6,882,000 for the first nine months of 2007. Diluted earnings per share were $0.67 for the first nine months of 2008, compared to $1.04 for the first nine months of 2007.
The decrease in earnings for the third quarter of 2008 compared to the third quarter of 2007 is primarily attributable to a $1,493,000 increase in non-interest expenses related to franchise growth and a $200,000 increase in provisions for loan losses, partially offset by an increase in revenues. The decrease in earnings in year-to-date comparison is primarily attributable to a $4,557,000 increase in non-interest expenses related to franchise growth and a $1,905,000 increase in provisions for loan losses. A $1.0 million decrease in provisions for income taxes and improvement in revenues reduced the impact of the increased expenses in year-to-date comparisons.
During the third quarter of 2008, a different type of challenge was presented in the form of Hurricanes Gustav and Ike. In response, the Company successfully implemented business continuity plans in preparation for and response to these storms. Minimal damages were incurred at impacted facilities and total costs to be incurred from the hurricanes are estimated to total $200,000. Approximately half of the costs were incurred in the third quarter. The damages were below the Company's insurance deductible applicable for a named storm.
Third quarter 2008 earnings were impacted by a $500,000 provision for loan losses, compared to $300,000 in the third quarter of 2007. The increase in the provision for loan loss was due primarily to a $26.4 million increase in total loans and $516,000 in net-charge offs reported for the third quarter of 2008. Nonperforming loans for the third quarter of 2008 increased $7.7 million compared to the third quarter of 2007 and $6.4 million compared to the second quarter of 2008. The increase was primarily due to one large loan relationship in the Baton Rouge market placed on nonaccrual status during the third quarter that had been recognized as a potential problem loan relationship in the second quarter of 2008. The lost revenue on this loan also had a negative impact on the quarterly net interest margin. Total nonperforming assets to total assets were 1.13% for the third quarter of 2008, compared to 0.22% for the third quarter of 2007.
Quarterly revenues for the Company, defined as net interest income and non-interest income, increased $1.0 million, or 8.1%, for the third quarter of 2008 compared to the third quarter of 2007. The improvement in revenues resulted in part from an increase of $639,000 in net interest income, driven by a lower cost of interest-bearing liabilities. Interest expense decreased $1,655,000 for the three months ended September 30, 2008, as compared to the same period ended September 30, 2007, as the Company adjusted deposit rates in response to the 225 basis point drop in interest rates by the Federal Open Market Committee ("FOMC") over the first nine months of 2008. Non-interest income increased $407,000 due to an increase in service charges on deposit accounts, including non-sufficient funds fees. The improvement in revenues was offset by a $1,493,000 increase in non-interest expense attributed primarily to increased occupancy, marketing, salaries and benefits, regulatory and consulting costs.
Net Interest Income
The primary source of earnings for the Company is the difference between interest earned on loans and investments (earning assets) and interest paid on deposits and other liabilities (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.
Net interest income totaled $10,056,000 for the third quarter of 2008, an increase of 6.8%, or $639,000, from the $9,417,000 reported for the third quarter of 2007. The improvement in net interest income was due primarily to a lower cost of average interest-bearing liabilities. The cost of average interest-bearing liabilities decreased 135 basis points, from 3.54% for the third quarter of 2007, to 2.19% for the third quarter of 2008. The rate decrease was primarily attributable to a 125 basis point decrease in the cost of interest-bearing deposits, from 3.29% to 2.04%, as rates were lowered in response to FOMC rate cuts.
Interest income on earning assets decreased $1.0 million in quarterly comparison as the average earning asset yield dropped 118 basis points, from 7.90% at September 30, 2007 to 6.72% at September 30, 2008. Interest income on loans decreased $1.4 million in quarterly comparison, as loan yields dropped 126 basis points to 7.71% at September 30, 2008, offsetting the impact of a $21.3 million increase in the average loan volume. Due to the single loan relationship in the Baton Rouge market placed on nonaccrual status during the third quarter 2008, interest income on loans was negatively impacted by approximately $100,000, which resulted in a 7 basis point decrease in average loan yield for the third quarter of 2008 and a 2 basis point decrease for the first nine months of 2008. The lost revenue related to the loan relationship drove down the net interest margin 5 basis points for the third quarter 2008 and 2 basis points for the first nine months of 2008. Interest income on investments and other interest-earning assets increased $345,000 as a result of a $26.5 million increase in the average volume of investments and a $22.8 million increase in average other interest-earning assets with yields of 4.85% and 2.93%, respectively.
Interest expense for the third quarter of 2008 decreased $1,655,000 in comparison to the third quarter of 2007. Lower average rates paid on interest-bearing liabilities lessened the impact of a $63.0 million increase in the average volume of interest-bearing liabilities in quarterly comparison. The increase in interest-bearing liabilities was primarily in commercial Platinum money market deposits, certificates of deposit, securities sold under agreements to repurchase, and federal funds purchased. The combination of the higher volume of overnight and short-term earning assets, combined with the decreased loan yields and increased volume of interest-bearing liabilities, resulted in a 15 basis point decline in the taxable equivalent net interest margin. The margin fell to 5.01% for the third quarter of 2008, from 5.16% for the third quarter of 2007.
The average rate paid on the Company's junior subordinated debentures decreased 135 basis points from third quarter of 2007 to third quarter of 2008, primarily due to the adjustable rate on the $8.2 million of such debentures issued in the fourth quarter of 2004. The debentures carry a floating rate equal to the 3-month LIBOR plus 2.50%, adjustable and payable quarterly. The rate was 5.70% and 8.09% at September 30, 2008 and 2007, respectively. The debentures mature on September 20, 2034 and, under certain circumstances, are subject to repayment on September 20, 2009 or thereafter. In February 2001, the Company issued $7.2 million of junior subordinated debentures. The debentures carry a fixed interest rate of 10.20% and mature on February 22, 2031.
Net interest income increased $2,177,000, or 8.1%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Despite the increase in net interest income, the Company's taxable equivalent net interest margin declined 19 basis points, from 5.08% at September 30, 2007 to 4.89% at September 30, 2008 in nine month comparison. The average rate paid on interest-bearing liabilities decreased 103 basis points, from 3.59% at September 30, 2007 to 2.56% at September 30, 2008, and lowered interest expense by $2,798,000 in nine month comparison. A 94 basis point reduction in the average yield on loans offset a $42.2 million increase in the average volume of loans to reduce interest income by $1,129,000. The decrease in interest income from loans was partially offset by a $508,000 increase in interest income from investment securities and other earning assets.
Table 1
Consolidated Average Balances, Interest and Rates
(in thousands)
Three Months Ended September 30,
2008 2007
Average Average Average Average
Volume Interest Yield/Rate Volume Interest Yield/Rate
Assets
Investment
securities 1
Taxable $ 108,346 $ 1,182 4.36 % $ 86,972 $ 1,044 4.80 %
Tax exempt 2 115,660 1,551 5.36 % 110,262 1,467 5.32 %
Other investments 4,403 39 3.54 % 4,667 59 5.06 %
Total investments 228,409 2,772 4.85 % 201,901 2,570 5.09 %
Federal funds sold 9,882 49 1.94 % 3,705 47 4.96 %
Loans
Commercial and real
estate 457,841 8,557 7.44 % 439,089 10,079 9.11 %
Installment 114,834 2,544 8.81 % 112,251 2,382 8.42 %
Total loans 3 572,675 11,101 7.71 % 551,340 12,461 8.97 %
Other earning assets 22,844 168 2.93 % 91 2 8.72 %
Total earning assets 833,810 14,090 6.72 % 757,037 15,080 7.90 %
Allowance for loan
losses (6,220 ) (5,138 )
Nonearning assets 89,038 79,479
Total assets $ 916,628 $ 831,378
Liabilities and
stockholders' equity
NOW, money market,
and savings $ 445,431 $ 1,580 1.41 % $ 417,022 $ 3,169 3.01 %
Certificates of
deposits 141,622 1,436 4.03 % 117,588 1,262 4.26 %
Total
interest-bearing
deposits 587,053 3,016 2.04 % 534,610 4,431 3.29 %
Securities sold under
repurchase agreements 38,712 210 2.12 % 13,403 149 4.35 %
Federal funds
purchased 5,738 40 2.73 % 501 7 5.47 %
Federal Home Loan
Bank advances 4 5 - 2.52 % 22,720 297 5.12 %
Federal Reserve
Discount window 2,753 16 2.27 % - - -
Total borrowings 47,208 266 2.20 % 36,624 453 4.84 %
Junior subordinated
debentures 15,465 297 7.51 % 15,465 350 8.86 %
Total
interest-bearing
liabilities 649,726 3,579 2.19 % 586,699 5,234 3.54 %
Demand deposits 189,904 176,893
Other liabilities 5,231 4,023
Stockholders' equity 71,767 63,763
Total liabilities and
stockholders' equity $ 916,628 $ 831,378
Net interest income
and net interest
spread $ 10,511 4.53 % $ 9,846 4.36 %
Net yield on interest
earning assets 5.01 % 5.16 %
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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 $455,000 for 2008 and $430,000 for 2007 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a 34% tax rate.
3 Interest income includes loan fees of $961,000 for 2008 and $794,000 for 2007. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
4 The amount of interest accrued on this liability was immaterial for the purpose of this table. The zero interest reflected is the result of rounding.
Table 2
Consolidated Average Balances, Interest and Rates
(in thousands)
Nine Months Ended September 30,
2008 2007
Average Average Average Average
Volume Interest Yield/Rate Volume Interest Yield/Rate
Assets
Investment
securities 5
Taxable $ 94,162 $ 3,182 4.51 % $ 86,910 $ 3,079 4.72 %
Tax exempt 6 110,480 4,482 5.41 % 110,577 4,379 5.28 %
Other investments 4,128 105 3.39 % 3,249 103 4.23 %
Total investments 208,770 7,769 4.96 % 200,736 7,561 5.02 %
Federal funds sold 37,709 657 2.29 % 17,338 672 5.11 %
Loans
Commercial and real
estate 455,165 26,729 7.84 % 418,046 28,280 9.04 %
Installment 113,345 7,581 8.93 % 108,283 7,159 8.84 %
Total loans 7 568,510 34,310 8.06 % 526,329 35,439 9.00 %
Other earning assets 17,489 355 2.71 % 70 4 7.64 %
Total earning assets 832,478 43,091 6.91 % 744,473 43,676 7.84 %
Allowance for loan
losses (5,841 ) (4,999 )
Nonearning assets 89,723 77,754
Total assets $ 916,360 $ 817,228
Liabilities and
stockholders' equity
NOW, money market,
and savings $ 462,974 $ 6,535 1.89 % $ 420,962 $ 10,008 3.18 %
Certificates of
deposits 142,178 4,489 4.22 % 119,512 3,705 4.14 %
Total
interest-bearing
deposits 605,152 11,024 2.43 % 540,474 13,713 3.39 %
Securities sold under
repurchase agreements 32,896 587 2.34 % 7,690 257 4.41 %
Federal funds
purchased 1,941 41 2.78 % 1,086 46 5.59 %
Federal Home Loan
Bank advances 604 18 3.92 % 8,637 342 5.22 %
Federal Reserve
Discount Window 924 16 2.28 % - - -
Total borrowings 36,365 662 2.39 % 17,413 645 4.88 %
Junior subordinated
debentures 15,465 919 7.81 % 15,465 1,045 8.91 %
Total
interest-bearing
liabilities 656,982 12,605 2.56 % 573,352 15,403 3.59 %
Demand deposits 182,546 177,635
Other liabilities 5,304 4,038
Stockholders' equity 71,528 62,203
Total liabilities and
stockholders' equity $ 916,360 $ 817,228
Net interest income
and net interest
spread $ 30,486 4.35 % $ 28,273 4.25 %
Net yield on interest
earning assets 4.89 % 5.08 %
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5 Securities classified as available-for-sale are included in average balances. Interest income figures reflect interest earned on such securities.
6 Interest income of $1,317,000 for 2008 and $1,282,000 for 2007 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a 34% tax rate.
7 Interest income includes loan fees of $2,865,000 for 2008 and $2,513,000 for 2007. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
Table 3
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
Three Months Ended
September 30, 2008 Compared to September 30, 2007
Total Change
Increase Attributable To
(Decrease) Volume Rates
Taxable-equivalent earned on:
Investment securities
Taxable $ 138 $ 239 $ (101 )
Tax exempt 84 72 12
Other investments (20 ) (3 ) (17 )
Federal funds sold 2 44 (42 )
Loans, including fees (1,360 ) 467 (1,827 )
Other earning assets 166 167 (1 )
Total $ (990 ) $ 986 $ (1,976 )
Interest paid on:
Interest-bearing deposits $ (1,415 ) $ 400 $ (1,815 )
Borrowings (187 ) 25 (212 )
Junior subordinated debentures (53 ) - (53 )
Total $ (1,655 ) $ 425 $ (2,080 )
Taxable-equivalent net interest income $ 665 $ 561 $ 104
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Table 4
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
Nine Months Ended
September 30, 2008 Compared to September 30, 2007
Total Change
Increase Attributable To
(Decrease) Volume Rates
Taxable-equivalent earned on:
Investment securities
Taxable $ 103 $ 249 $ (146 )
Tax exempt 103 (4 ) 107
Other investments 2 25 (23 )
Federal funds sold (15 ) 497 (512 )
Loans, including fees (1,129 ) 2,712 (3,841 )
Other earning assets 351 354 (3 )
Total $ (585 ) $ 3,833 $ (4,418 )
Interest paid on:
Interest-bearing deposits $ (2,689 ) $ 1,503 $ (4,192 )
Borrowings 17 282 (265 )
Junior subordinated debentures (126 ) - (126 )
Total $ (2,798 ) $ 1,785 $ (4,583 )
Taxable-equivalent net interest income $ 2,213 $ 2,048 $ 165
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Non-Interest Income
Non-interest income for the third quarter of 2008 totaled $4.0 million, 11.4% above the $3.6 million earned in the third quarter of 2007. The increase in quarterly comparison resulted primarily from a $193,000 increase in debit card and ATM transaction fee income and a $311,000 increase in service charges on deposit accounts, primarily insufficient funds ("NSF") income. These increases were partially offset by a $46,000 decrease in mortgage processing fee income and a $69,000 decrease in letter of credit income.
For the nine months ended September 30, 2008, non-interest income increased $846,000, or 8.0%, above non-interest income earned for the nine months ended September 30, 2007, primarily due to increases of $448,000 in service charge income on deposit accounts, $424,000 in debit card and ATM transaction fee income, and a $131,000 one-time payment recorded in other non-interest income in the first quarter of 2008 related to VISA's mandatory redemption of a portion of its Class B shares outstanding in connection with an initial public offering. These increases were partially offset by a decrease of $112,000 in mortgage processing fee income.
Non-Interest Expenses
Non-interest expense increased $1.5 million in prior-year quarterly comparison . . .
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