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MSL > SEC Filings for MSL > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MIDSOUTH BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MIDSOUTH BANCORP INC


9-Nov-2012

Quarterly Report


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

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"). We offer complete banking services to commercial and retail customers in south Louisiana and south and central Texas with 40 locations and are connected to a worldwide ATM network that provides customers with access to more than 43,000 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, 2011.

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 2011 Annual Report on form 10-K and under the caption "Management's Discussion and Analysis of Financial Condition and Resul ts 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 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;


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? legislative and regulatory changes, including the changes in the regulatory capital framework proposed by the Federal Reserve Board under its 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 bank 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 4 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.


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Results of Operations

Earnings Analysis

We reported net earnings available to common shareholders of $2.2 million for the third quarter of 2012, compared to net earnings available to common shareholders of $0.3 million reported for the third quarter of 2011. Diluted earnings for the third quarter of 2012 were $0.21 per common share, compared to $0.03 per common share reported for the third quarter of 2011. The third quarter of 2012 included $223,000, or $.02 per share, of merger related expenses compared to $876,000, or $.06 per share, of merger related charges for the third quarter of 2011. Additionally, repayment of the Series A Preferred Stock under the Capital Purchase Plan resulted in accelerated accretion of discount on the preferred stock of approximately $444,000 in the third quarter of 2011, or approximately $0.05 per share.

Net earnings increased in quarterly comparison as a $2.2 million increase in net interest income, a $350,000 decrease in the provision for loan losses and a $356,000 increase in noninterest income were partially offset by a $455,000 increase in noninterest expense and a $931,000 increase in income tax expense. Of the $2.2 million increase in net interest income, a total of $1.3 million was earned from acquisitions in the third and fourth quarters of 2011. An increase in purchase accounting adjustments totaling $255,000 also contributed to the increase in net interest income. Interest income on investments and other interest-bearing accounts increased $498,000 in quarterly comparison and included interest earned on excess cash invested from the 2011 acquisitions.

Increases in noninterest income consisted primarily of $117,000 in service charges on deposit accounts, $159,000 in ATM/debit card income, and $69,000 in net gains on sale of securities. Increases in noninterest expenses were primarily related to the 2011 acquisitions and included $495,000 in salaries and benefits costs, $478,000 in occupancy expense, $90,000 in ATM and debit card expense, and $81,000 in marketing costs. The increased costs were partially offset by decreases of $301,000 in data processing expenses, $277,000 in expenses on ORE and repossessed assets, and $214,000 in legal and professional fees.

For the nine months ended September 30, 2012, net income available to common shareholders totaled $6.8 million, compared to $1.8 million for the nine months ended September 30, 2011. Diluted earnings per share were $0.65 for 2012, compared to $0.18 for 2011. The $5.0 million increase in net earnings available to common shareholders resulted from a $9.4 million improvement in net interest income, a $1.6 million decrease in provision for loan loss and a $1.6 million increase in noninterest income which offset a $5.0 million increase in noninterest expense and a $2.8 million increase in income tax expense. Of the $9.4 million increase in net interest income, a total of $4.0 million was earned from the 2011 acquisitions. An increase in purchase accounting adjustments totaling $1.9 million also contributed to the increase in net interest income. Interest income on investments and other interest-bearing accounts increased $2.3 in prior year-to-date comparison and included interest earned on excess cash invested from the 2011 acquisitions.

Increases in noninterest income consisted primarily of $524,000 in service charges on deposit accounts, $601,000 in ATM and debit card income and $105,000 in gain on sale of securities. Increases in non-interest expense included primarily $2.5 million in salary and benefits costs, $1.6 million in occupancy expense, and $225,000 in ATM/debit card expense.


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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 4.46% and 4.57% for the three months ended September 30, 2012 and 2011, 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, 2012 and 2011 and the nine months ended September 30, 2012 and 2011, respectively.

Fully taxable-equivalent ("FTE") net interest income totaled $14.2 million and $12.0 million for the quarters ended September 30, 2012 and 2011, respectively. The FTE net interest income increased $2.2 million in prior year comparison primarily due to a $224.2 million increase in the volume of average earning assets as a result of the three acquisitions completed in the second half of 2011. The average volume of loans increased $130.2 million in quarterly comparison and the average yield on loans decreased 21 basis points, from 6.67% to 6.46%. Purchase accounting adjustments on acquired loans added 23 basis points to the average yield on loans for the third quarter of 2012 and 9 basis points for the third quarter of 2011. Net of the impact of the purchase accounting adjustments, average loan yields declined 35 basis points in prior year quarterly comparison to 6.23%. Loan yields have declined primarily as the result of a sustained low market interest rate environment.

The average volume of investment securities increased $148.5 million in quarterly comparison as portions of excess cash flow from the 2011 acquisitions were placed primarily in agency mortgage-backed securities. The average tax equivalent yield on investment securities decreased 62 basis points, from 3.25% to 2.63% primarily due to lower reinvestment rates. The average volume of overnight interest bearing deposits earning 0.25% decreased $54.2 million due primarily to the purchase of investment securities. The average yield on all earning assets decreased 21 basis points in prior year quarterly comparison, from 5.13% for the third quarter of 2011 to 4.92% for the third quarter of 2012. Net of the impact of purchase accounting adjustments, the average yield on total earning assets declined 28 basis points, from 5.07% to 4.79% for the three month periods ended September 30, 2011 and 2012, respectively.

The impact to interest expense of a $176.2 million increase in the average volume of interest bearing liabilities was mostly offset by a 13 basis point decrease in the average rate paid on interest-bearing liabilities, from 0.75% at September 30, 2011 to 0.62% at September 30, 2012. Net of purchase accounting adjustments on acquired certificates of deposit, the average rate paid on interest bearing liabilities was 0.71% for the third quarter of 2012 compared to 0.87% for the third quarter of 2011.

The average rate paid on the Company's junior subordinated debentures decreased 2 basis points from third quarter of 2011 to third quarter of 2012 due to the rate change on the $8.2 million of variable rate 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, 2012 was 2.88%. The debentures mature on September 20, 2034 but 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%.

As a result of these changes in volume and yield on earning assets and interest bearing liabilities, the FTE net interest margin decreased 11 basis points, from 4.57% for the third quarter of 2011 to 4.46% for the third quarter of 2012. Net of purchase accounting adjustments on loans and deposits, the FTE margin decreased 17 basis points, from 4.43% for the third quarter of 2011 to 4.26% for the third quarter of 2012.

In year-to-date comparison, FTE net interest income increased $9.3 million primarily due to a $9.4 million increase in FTE interest income. The increase resulted primarily from a $290.4 million increase in the average volume of earning assets which offset a 21 basis point reduction in the average yield on earning assets, from 5.16% at September 30, 2011 to 4.95% at September 30, 2012. Net of a 16 basis point effect of discount accretion on acquired loans, the average yield on earning assets was 4.79% at September 30, 2012.


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Interest expense increased minimally in year-over-year comparison as the impact of the increase in average volume of interest-bearing liabilities on interest expense was mostly offset by the impact of lower rates paid on interest-bearing liabilities. The average volume of interest-bearing liabilities increased $249.4 million in year-over year comparison, from $702.4 million at September 30, 2011 to $951.8 million at September 30, 2012. The average rate paid decreased 19 basis points, from 0.82% at September 30, 2011 to 0.63% at September 30, 2012. Net of a 12 basis point effect of premium amortization on acquired certificates of deposit, the average rate paid on interest-bearing liabilities was 0.75% at September 30, 2012. The FTE net interest margin declined 8 basis points, from 4.56% for the nine months ended September 30, 2011 to 4.48% for the nine months ended September 30, 2012. Net of purchase accounting adjustments, the FTE net interest margin declined 28 basis points, from 4.51% to 4.23% for the nine months ended September 30, 2011 and 2012, respectively.


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Table 1
Consolidated Average Balances, Interest and Rates
(in thousands)



                                                     Three Months Ended September 30,
                                            2012                                           2011
                           Average                        Average         Average                        Average
                           Volume         Interest      Yield/Rate        Volume         Interest      Yield/Rate
Assets
Investment securities1
Taxable                  $   384,958     $    2,048            2.13 %   $   223,933     $    1,407            2.51 %
Tax exempt2                   78,115            997            5.11 %        90,677          1,150            5.07 %
Total investment
securities                   463,073          3,045            2.63 %       314,610          2,557            3.25 %
Federal funds sold             3,570              2            0.22 %         4,647              2            0.17 %
Time and interest
bearing deposits in
other banks                   20,253             13            0.25 %        74,438             49            0.26 %
Other investments              5,816             55            3.78 %         5,058             43            3.40 %
Loans
Commercial and real
estate                       665,028         10,590            6.34 %       567,274          9,177            6.42 %
Installment                  107,810          1,950            7.20 %        75,327          1,626            8.56 %
Total loans3                 772,838         12,540            6.46 %       642,601         10,803            6.67 %
Total earning assets       1,265,550         15,655            4.92 %     1,041,354         13,454            5.13 %
Allowance for loan
losses                        (7,235 )                                       (7,051 )
Nonearning assets            140,040                                        114,213
Total assets             $ 1,398,355                                    $ 1,148,516

Liabilities and
shareholders' equity
NOW, money market, and
savings                  $   610,274     $      465            0.30 %   $   505,013     $      530            0.42 %
Time deposits                262,854            565            0.86 %       198,101            483            0.97 %
Total interest bearing
deposits                     873,128          1,030            0.47 %       703,114          1,013            0.57 %
Securities sold under
repurchase agreements         55,953            197            1.40 %        49,819            207            1.65 %
Federal funds
purchased                         64              -               -
Junior subordinated
debentures                    15,465            241            6.10 %        15,465            242            6.12 %
Total interest bearing
liabilities                  944,610          1,468            0.62 %       768,398          1,462            0.75 %

Demand deposits              276,764                                        224,437
Other liabilities              9,926                                         10,924
Shareholders' equity         167,055                                        144,757
Total liabilities and
shareholders' equity     $ 1,398,355                                    $ 1,148,516

Net interest income
and net interest
spread                                   $   14,187            4.30 %                   $   11,992            4.38 %
Net yield on interest
earning assets                                                 4.46 %                                         4.57 %


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 $300,000 for 2012 and $334,000 for 2011 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 35% and 34% for 2012 and 2011, respectively.

3 Interest income includes loan fees of $996,000 for 2012 and $804,000 for 2011. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.


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Table 2
Consolidated Average Balances, Interest and Rates
(in thousands)



                                                      Nine Months Ended September 30,
                                            2012                                           2011
                           Average                        Average         Average                        Average
                           Volume         Interest      Yield/Rate        Volume         Interest      Yield/Rate
Assets
Investment securities1
Taxable                  $   380,154     $    6,265            2.20 %   $   200,559     $    3,538            2.35 %
Tax exempt2                   81,774          3,152            5.14 %        95,546          3,664            5.11 %
Total investment
securities                   461,928          9,417            2.72 %       296,105          7,202            3.24 %
Federal funds sold             3,657              6            0.22 %         4,758              7            0.19 %
Time and interest
bearing deposits in
other banks                   36,720             73            0.26 %        68,217            170            0.33 %
Other investments              5,737            142            3.30 %         5,059            116            3.06 %
Loans
Commercial and real
estate                       649,901         31,547            6.47 %       520,736         25,102            6.44 %
Installment                  104,937          5,751            7.30 %        77,630          4,913            8.46 %
Total loans3                 754,838         37,298            6.58 %       598,366         30,015            6.71 %
Total earning assets       1,262,880         46,936            4.95 %       972,505         37,510            5.16 %
Allowance for loan
losses                        (7,139 )                                       (7,301 )
Nonearning assets            139,308                                        100,033
Total assets             $ 1,395,049                                    $ 1,065,237

Liabilities and
shareholders' equity
NOW, money market, and
savings                  $   600,995     $    1,390            0.31 %   $   497,725     $    1,794            0.48 %
Time deposits                285,038          1,799            0.84 %       141,985          1,191            1.12 %
Total interest bearing
deposits                     886,033          3,189            0.48 %       639,710          2,985            0.62 %
Securities sold under
. . .
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