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| MSL > SEC Filings for MSL > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
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.
Following is management's discussion of factors that management believes are among those necessary for an understanding of the Company's financial statements. The discussion should be read in conjunction with the Company's 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 the Financial Condition and Result of Operation in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
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 intends to protect a company from unwarranted litigation
if actual results differ from management expectations. This Management's
Discussion and Analysis of the Financial Condition and Result of
Operation 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, those described in our Form 10-K for the year
ended December 31, 2008 under Item 1A-Risk Factors 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 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 which 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.
The Company 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 the Company's results of operations and financial condition. The Company disclaims 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. The Company's significant accounting policies are described in the notes to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2008. 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. 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. The Company annually evaluates its goodwill for impairment as of December 31st of each year or more often if circumstances indicate an impairment may have occurred. Given the current instability of the economic environment, the Company's common stock traded below its stated book value during the first quarter of 2009, which was deemed a triggering event for interim analysis. Accordingly, the Company engaged a third party to assist management in assessing the current fair value of its common stock and performed a goodwill impairment analysis as of March 31, 2009. Upon review and analysis of the factors influencing value and utilizing the market value and investment value approaches, the Company determined the fair value of the common stock to be greater than stated and tangible book value, and therefore no impairment of the goodwill was recorded at the Company. During the second and third quarters of 2009, the Company's goodwill was not evaluated for impairment due to no triggering events having occurred during these quarters.
Compliance with accounting for stock-based compensation 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 $19,339 for the grant-date fair value of stock options vested in the nine months ended September 30, 2009. The Company did not grant any new stock options in the first nine months of 2009.
If the economic environment causes further instability in the market, it is reasonably possible that the methodology of the assessment of potential loan losses, goodwill impairment, and other fair value measurements could change in the near-term or could result in impairment going forward.
Results of Operations
Earnings Analysis
The Company reported net income available to common shareholders of $1,132,000 for the third quarter ended September 30, 2009, a decrease of 39.0% below net income available to common shareholders of $1,857,000 reported for the third quarter of 2008. Diluted earnings per common share for the third quarter of 2009 were $0.17 per share, a decrease of 39.3% from the $0.28 per common share for the third quarter of 2008. Beginning the first quarter of 2009, the Company recorded dividends on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock") issued to the U. S. Department of the Treasury on January 9, 2009 under the Capital Purchase Plan. Dividends recorded on the Series A Preferred Stock reduced net income available to common shareholders by $299,000 for the third and second quarters of 2009 and $277,000 for the first quarter of 2009.
For the nine months ended September 30, 2009, net income available to common shareholders totaled $2,534,000, a 43.3% decrease from net income available to common shareholders of $4,473,000 for the first nine months of 2008. Dividends recorded on the Series A Preferred Stock reduced net income available to common shareholders by $875,000 for the nine months ended September 30, 2009. Diluted earnings per common share were $0.38 for the first nine months of 2009, compared to $0.67 for the first nine months of 2008.
In prior-year quarterly comparison, third quarter 2009 net earnings before dividends on Series A Preferred Stock totaled $1,431,000, a decrease of $426,000 below the $1,857,000 earned in the third quarter of 2008. Third quarter 2009 earnings were impacted by a $1.0 million provision for loan losses compared to $500,000 in the third quarter of 2008. Quarterly revenues for the Company, defined as net interest income and non-interest income, decreased $133,000 primarily due to margin compression as earning asset yields continued to decline. Non-interest expenses increased $91,000, as increased salaries and benefit costs and FDIC premiums were partially offset by decreases in other non-interest expense categories. Third quarter 2009 earnings were positively impacted by a $298,000 reduction in tax expense due to the effect of lower pre-tax profits combined with sustained tax exempt income levels and certain federal tax credits.
In year-to-date comparison, net earnings before dividends on Series A Preferred Stock decreased $1,064,000 primarily due to a $1,545,000 increase in provisions for loan losses and a $1,101,000 increase in non-interest expense in 2009. The increases in provisions for loan losses and non-interest expense were partially offset by an $811,000 improvement in net interest income and a $784,000 reduction in income tax expense. Included in the $1,101,000 increase in non-interest expense is a $1,017,000 increase in FDIC premiums, a $485,000 increase in salaries and benefits costs, and a $635,000 increase in occupancy expense. Significant decreases in other non-interest expense categories, including a decrease of $737,000 in marketing costs and $223,000 in data processing expenses, reduced the impact of the increased FDIC premiums in year-
to-date comparison. Income tax expense decreased $784,000 due to the effect of certain federal tax credits combined with lower pre-tax profits and sustained tax exempt income levels.
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 $9,932,000 for the third quarter of 2009, a decrease of 1.2%, or $124,000, from the $10,056,000 reported for the third quarter of 2008. The decrease in net interest income resulted primarily from a decrease of $1.1 million in interest income which exceeded a decrease of $1.0 million in interest expense. The impact to interest income of a $21.4 million increase in the average volume of loans, from $572.7 million at September 30, 2008 to $594.1 million at September 30, 2009, was offset by a 75 basis point reduction in the average yield on loans in quarterly comparison. The average yields on loans declined from 7.71% in the third quarter of 2008 to 6.96% in the third quarter of 2009 as New York Prime Rate ("Prime") fell 175 basis points, from 5.00% to 3.25% during the same period. A decrease in the volume of investment securities combined with decreases in yields on investment securities, federal funds sold and time deposits in other banks further reduced interest income in the third quarter of 2009 compared to 2008.
The decrease in interest expense in quarterly comparison resulted from a 63 basis point decrease in the average rate paid on interest-bearing liabilities, from 2.19% at September 30, 2008 to 1.56% at September 30, 2009. The average volume of interest-bearing deposits remained relatively flat, while the average volume of retail repurchase agreements, included in securities sold under agreements to repurchase, increased $11.6 million in quarterly comparison. The impact of decreased yields on average earning assets exceeded the decrease in yields on average interest-bearing liabilities and resulted in a 19 basis point decline in the taxable-equivalent net interest margin, from 5.01% for the third quarter of 2008 to 4.82% for the third quarter of 2009.
In year-to-date comparison, net interest income increased $811,000 as interest expense decreased $4,797,000, offsetting a $3,986,000 decline in interest income. Interest expense decreased primarily due to a 93 basis point reduction in the average rate paid on interest-bearing liabilities, from 2.56% at September 30, 2008 to 1.63% at September 30, 2009. Additionally, the average volume of interest-bearing liabilities decreased $18.1 million in year-to-date comparison. The decrease in interest income on average earning assets resulted primarily from a 109 basis point decline in the average yield earned on loans, from 8.06% at September 30, 2008 to 6.97% at September 30, 2009. An average volume increase of $28.4 million in loans partially offset the impact of lower yields. As a result, the taxable-equivalent net interest margin improved 7 basis points, from 4.89% for the nine months ended September 30, 2008 to 4.96% for the nine months ended September 30, 2009.
The average rate paid on the Company's junior subordinated debentures decreased 121 basis points from third quarter of 2008 to third quarter of 2009 on the $8.2 million of outstanding debentures. The debentures carry a floating rate equal to the 3-month LIBOR plus 2.50%, adjustable and payable quarterly. The rate at September 30, 2009 was 2.79%. The debentures mature on September 20, 2034 oyt may be repaid sooner under certain circumstances. The Company also has outstanding $7.2 million of junior subordinated debentures due 2031 that carry a fixed interest rate of 10.20% .
Table 1
Consolidated Average Balances, Interest and Rates
(in thousands)
Three Months Ended September 30,
2009 2008
Average Average Average Average
Volume Interest Yield/Rate Volume Interest Yield/Rate
Assets
Investment
securities1
Taxable $ 99,178 $ 898 3.62 % $ 108,346 $ 1,182 4.36 %
Tax exempt2 112,670 1,511 5.36 % 115,660 1,551 5.36 %
Other investments 7,562 40 2.12 % 5,607 45 3.21 %
Total investments 219,410 2,449 4.46 % 229,613 2,778 4.84 %
Time deposits in
other banks 16,458 56 1.35 % 21,640 162 2.98 %
Federal funds 24,587 10 0.16 % 9,882 49 1.94 %
Loans
Commercial and real
estate 483,993 8,070 6.62 % 457,841 8,557 7.44 %
Installment 110,057 2,356 8.49 % 114,834 2,544 8.81 %
Total loans3 594,050 10,426 6.96 % 572,675 11,101 7.71 %
Total earning assets 854,505 12,941 6.01 % 833,810 14,090 6.72 %
Allowance for loan
losses (7,867 ) (6,220 )
Nonearning assets 87,881 89,038
Total assets $ 934,519 $ 916,628
Liabilities and
stockholders' equity
NOW, money market,
and savings $ 444,378 $ 1,216 1.09 % $ 445,431 $ 1,580 1.41 %
Time deposits 140,555 798 2.25 % 141,622 1,436 4.03 %
Total interest
bearing deposits 584,933 2,014 1.37 % 587,053 3,016 2.04 %
Securities sold under
repurchase agreements 50,359 303 2.39 % 38,712 210 2.15 %
Federal funds
purchased - - - 5,738 40 2.73 %
Other borrowings - - - 2,758 16 2.31 %
Junior subordinated
debentures 15,465 249 6.30 % 15,465 297 7.51 %
Total interest
bearing liabilities 650,757 2,566 1.56 % 649,726 3,579 2.19 %
Demand deposits 180,843 189,904
Other liabilities 6,181 5,231
Stockholders' equity 96,738 71,767
Total liabilities and
stockholders' equity $ 934,519 $ 916,628
Net interest income
and net interest
spread $ 10,375 4.45 % $ 10,511 4.53 %
Net yield on interest
earning assets 4.82 % 5.01 %
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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 $443,000 for 2009 and $455,000 for 2008 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 $792,000 for 2009 and $961,000 for 2008. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
Table 2
Consolidated Average Balances, Interest and Rates
(in thousands)
Nine Months Ended September 30,
2009 2008
Average Average Average Average
Volume Interest Yield/Rate Volume Interest Yield/Rate
Assets
Investment
securities4
Taxable $ 97,979 $ 3,046 4.15 % $ 94,162 $ 3,182 4.51 %
Tax exempt5 116,116 4,678 5.37 % 110,480 4,482 5.41 %
Other investments 5,539 102 2.46 % 6,320 138 2.91. %
Total investments 219,634 7,826 4.75 % 210,962 7,802 4.93 %
Time deposits in
other banks 11,895 187 2.10 % 15,297 322 2.81 %
Federal funds 17,418 29 0.22 % 37,709 657 2.29 %
Loans
Commercial and real
estate 486,154 24,044 6.61 % 455,165 26,729 7.84 %
Installment 110,749 7,075 8.54 % 113,345 7,581 8.93 %
Total loans6 596,903 31,119 6.97 % 568,510 34,310 8.06 %
Total earning assets 845,850 39,161 6.19 % 832,478 43,091 6.91 %
Allowance for loan
losses (7,627 ) (5,841 )
Nonearning assets 89,599 89,723
Total assets $ 927,822 $ 916,360
Liabilities and
stockholders' equity
NOW, money market,
and savings $ 434,076 $ 3,483 1.07 % $ 462,974 $ 6,535 1.89 %
Time deposits 141,342 2,745 2.60 % 142,178 4,489 4.22 %
Total interest
bearing deposits 575,418 6,228 1.45 % 605,152 11,024 2.43 %
Securities sold under
repurchase agreements 41,085 775 2.52 % 32,896 587 2.38 %
Federal funds
purchased 770 5 0.86 % 1,941 41 2.78 %
Other borrowings 6,183 23 0.50 % 1,528 34 2.97. %
Junior subordinated
debentures 15,465 777 6.63 % 15,465 919 7.81 %
Total interest
bearing liabilities 638,921 7,808 1.63 % 656,982 12,605 2.56 %
Demand deposits 187,710 182,546
Other liabilities 5,574 5,304
Stockholders' equity 95,617 71,528
Total liabilities and
stockholders' equity $ 927,822 $ 916,360
Net interest income
and net interest
spread $ 31,353 4.56 % $ 30,486 4.35 %
Net yield on interest
earning assets 4.96 % 4.89 %
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4 Securities classified as available-for-sale are included in average balances. Interest income figures reflect interest earned on such securities.
5 Interest income of $1,372,000 for 2009 and $1,317,000 for 2008 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a 34% tax rate.
6 Interest income includes loan fees of $2,334,000 for 2009 and $2,865,000 for 2008. 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, 2009 compared to September 30, 2008
Total Change
Increase Attributable To
(Decrease) Volume Rates
Taxable-equivalent earned on:
Investment securities
Taxable $ (284 ) $ (94 ) $ (190 )
Tax exempt (40 ) (40 ) -
Other investments (5 ) 13 (18 )
Federal funds sold (39 ) 31 (70 )
Time deposits in other banks (106 ) (32 ) (74 )
Loans, including fees (675 ) 404 (1,079 )
Total (1,149 ) 282 (1,431 )
Interest paid on:
Interest bearing deposits (1,002 ) (11 ) (991 )
Securities sold under repurchase agreements 93 68 25
Federal funds purchased (40 ) (40 ) -
Other borrowings (16 ) (16 ) -
Junior subordinated debentures (48 ) - (48 )
Total (1,013 ) 1 (1,014 )
Taxable-equivalent net interest income $ (136 ) $ 281 $ (417 )
Table 4
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
Nine Months Ended
September 30, 2009 compared to September 30, 2008
Total Change
Increase Attributable To
(Decrease) Volume Rates
Taxable-equivalent earned on:
Investment securities
Taxable $ (136 ) $ 126 $ (262 )
Tax exempt 196 227 (31 )
Other investments (36 ) (16 ) (20 )
Federal funds sold (628 ) (234 ) (394 )
Time deposits in other banks (135 ) (63 ) (72 )
Loans, including fees (3,191 ) 1,649 (4,840 )
Total (3,930 ) 1,689 (5,619 )
Interest paid on:
Interest bearing deposits (4,796 ) (517 ) (4,279 )
Securities sold under repurchase agreements 188 152 36
Federal funds purchased (36 ) (17 ) (19 )
Other borrowings (11 ) 35 (46 )
Junior subordinated debentures (142 ) - (142 )
Total (4,797 ) (347 ) (4,450 )
Taxable-equivalent net interest income $ 867 $ 2,036 $ (1,169 )
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Note: In Tables 3 and 4, changes due to both volume and rate has generally been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts to the changes in each.
Non-interest Income
Non-interest income for the third quarter of 2009 totaled $3,972,000, or 0.2% below the $3,981,000 earned in the third quarter of 2008 and 3.0% above the $3,858,000 earned in the second quarter of 2009. In prior-year quarterly comparison, a $43,000 increase in ATM and debit card fee income offset a $25,000 decrease in service charges on deposit accounts, including NSF fee income, and decreases in other non-interest income categories.
In year-to-date comparison, non-interest income decreased $13,000, from . . .
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