10KSB 1 sec10ksb.txt MIDSOUTH BANCORP, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 2-91000-FW MIDSOUTH BANCORP, INC. (Exact name of registrant as specified in its charter) Louisiana 72-1020809 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 102 Versailles Blvd., Lafayette, LA 70501 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including (337) 237-8343 area code Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which Common Stock, $.10 par value registered ____________________________ American Stock Exchange, Inc. _____________________________ Securities registered pursuant to Section 12(g) of the Act: none Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB __X__ Total revenues for the year ended December 31, 2001 were $21,447,960. As of February 28, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant, calculated by reference to the closing sale price of MidSouth's common stock on the AMEX was $19,691,510. As of February 28, 2002 there were outstanding 2,901,142 shares of MidSouth Bancorp, Inc. common stock, $.10 par value, which stock is the only class of the Registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for Annual Meeting of Shareholders to be held May 21, 2002 - (Part III) PART I ITEM 1 - Business. The Company MidSouth Bancorp, Inc. ("MidSouth") is a Louisiana corporation registered as a bank holding company under the Bank Holding Company Act of 1956. Its operations are conducted through, and its primary asset is, MidSouth Bank, N.A. (the "Bank"), a wholly-owned subsidiary. MidSouth is currently liquidating a second subsidiary, Financial Services of the South, Inc. (the "Finance Company"). MidSouth, the Bank and the Finance Company are referred to collectively herein as "the Company." The Bank The Bank is a national banking association domiciled in Lafayette, Louisiana. The Bank provides a complete range of commercial and retail banking services primarily to professional, commercial and industrial customers in its market area. These services include, but are not limited to, interest bearing and non- interest bearing checking accounts, investment accounts, credit card services and issuance of cashier's checks, United States Savings Bonds and travelers checks. The Bank is an U.S. government depository. The Bank is also a member of the Electronic Data Services ("EDS") network through Comerica Bank, Dallas, Texas which provides its customers with automatic teller machine services through the GulfNet, Cirrus and Plus networks. Membership in the Community Cash Network provides MidSouth's customers with additional access throughout the Greater New Orleans area with no surcharge. The Bank serves most types of lending demands including short-term business loans, other commercial, industrial and agricultural loans, real estate construction and mortgage loans and installment loans. The Bank operates at the eighteen locations described below under "Item 2 - Properties." Employees As of December 31, 2001, the Bank employed 205 full-time equivalent employees and the Finance Company had no employees. MidSouth has no employees who are not also employees of the Bank. Through the Bank, employees receive employee benefits, which include an employee stock ownership plan, a 401-K plan and life, health and disability insurance plans. MidSouth considers the relationships of the Bank with their employees to be very good. Competition The Bank faces keen competition in its market area not only with other commercial banks, but also with savings and loan associations, credit unions, finance companies, mortgage companies, leasing companies, insurance companies, money market mutual funds and brokerage houses. In the Lafayette Parish area there are twenty-one state chartered or national banks and savings banks. Several of the banks in Lafayette are subsidiaries of holding companies or branches of banks having far greater resources than the Company. In addition, the Company expects increased competition as a result of the Gramm-Leach-Bliley Act signed into law on November 12, 1999. As discussed below, under "Recent Legislation - Gramm-Leach-Bliley Act," banks will be able to offer their customers a wider range of financial products and services. The legislation provides the ability to banks, securities firms, insurance companies, and financial technology companies to more readily combine. Louisiana state banks may establish branch offices statewide, and national banks domiciled in Louisiana have the power to establish branches to the full extent that Louisiana banks may establish branches. Since 1989, Louisiana has allowed bank holding companies domiciled in any state of the United States to acquire Louisiana banks and bank holding companies, if the state in which the bank holding company is domiciled allows Louisiana banks and bank holding companies the same opportunities. In 1994, the Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was enacted. Among other things, the Interstate Act (i) allows bank holding companies to acquire a bank located in any state, subject to certain limitations that may be imposed by the state, (ii) allows banks to merge across state lines, and (iii) permits banks to establish branches outside their state of domicile if expressly permitted by the law of the state in which the branch is to be located. In 1995, the Louisiana legislature enacted legislation permitting out of state bank holding companies after June 1, 1997 to convert any banks owned in Louisiana into branches of out of state banks owned by such holding companies, subject to certain limitations. Supervision and Regulation - Bank Holding Companies General. As a bank holding company, MidSouth is subject to the Bank Holding Company Act of 1956 (the "Act") and is supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Act requires MidSouth to file periodic reports with the Federal Reserve Board and subjects MidSouth to examination by the Federal Reserve Board. The Act also requires MidSouth to obtain the prior approval of the Federal Reserve Board for acquisitions of substantially all of the assets of any bank or bank holding company or more than 5% of the voting shares of any bank or bank holding company. The Act prohibits MidSouth from engaging in any business other than banking or bank-related activities specifically allowed by the Federal Reserve Board and from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services. Recent Legislation - Gramm-Leach-Bliley Act. This financial services reform legislation proves for three basic changes: 1) repeal of certain provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks, 2) modification of the Bank Holding Company Act of 1956 to permit companies that own commercial banks to engage in any type of financial activity, and 3) allows subsidiaries of banks to engage in a broad range of financial activities beyond those permitted for banks themselves. As a result, banks, securities firms, and insurance companies will be able to combine much more readily. The legislation also includes important provisions regarding privacy of customer information; increased access to the Federal Home Loan Bank System by community banks; and significant changes to the requirements of the Community Reinvestment Act. Under provisions of the legislation, two new types of regulated entities are authorized to engage in a broad range of financial activities much more extensive that those of standard holding companies. A "financial holding company" can engage in all newly- authorized activities and is simply a bank holding company whose depository institutions are well-capitalized, well-managed, and has a CRA rating of "satisfactory" or better. A "financial subsidiary" is a direct subsidiary of a bank that satisfies the same conditions as a `financial holding company"plus several more. The "financial subsidiary" can engage in most of the newly-authorized activities, which are defined as securities, insurance, merchant banking/equity investment, "financial in nature," and "complementary" activities. The legislation also defines the concept of "functional supervision", meaning similar activities should be regulated by the same regulator, with the Federal Reserve Board serving as an "umbrella" supervisory authority over bank and financial holding companies. This legislation creates new opportunities for the Company to offer expanded services to its customer base in the future, however the Company has not yet determined the nature of the expanded services or when the services will be offered. Capital Adequacy Requirements. The Federal Reserve Board monitors the capital adequacy of bank holding companies through the use of a combination of risk-based capital guidelines and leverage ratios. Risk-based capital requirements are intended to make regulatory capital more sensitive to the risk profile of a company's assets. Certain off-balance sheet items, such as letters of credit and unused lines of credit, are also assigned risk-weights and included in the risk-based capital calculations. The guidelines require a minimum ratio of total qualifying capital to total risk- weighted assets of 8.0%, of which 4.0% must be in the form of Tier 1 capital. At December 31, 2001, the Company's ratios of Tier 1 and total capital to risk-weighted assets were 12.06% and 13.20%, respectively. MidSouth's leverage ratio (Tier 1 capital to total average adjusted assets) was 8.02% at December 31, 2001. All three regulatory capital ratios for the Company exceeded regulatory minimums at December 31, 2001. Supervision and Regulation - National Banks General. As a national banking association, the Bank is supervised and regulated by the U. S. Comptroller of the Currency (its primary regulatory authority), the Federal Reserve Board and the Federal Insurance Deposit Corporation. Under Section 23A of the Federal Reserve Act, the Bank is restricted in extending credit to or making investments in MidSouth and other affiliates defined in that act. National banks are required by the National Bank Act to adhere to branch banking laws applicable to state banks in the states in which they are located and are limited as to powers, locations and other matters of applicable federal law. Capital Adequacy Requirements. A national bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on a bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, a bank must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. As of December 31, 2001, the most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain a minimum of total risk-based capital and Tier 1 capital to risk-weighted assets of 10% and 6%, respectively, and a minimum leverage ratio of 5%. All three regulatory capital ratios for the Bank exceeded these minimums at December 31, 2001. Governmental Policies The operations of financial institutions may be affected by legislative changes and by the policies of various regulatory authorities. In particular, bank holding companies and their subsidiaries are affected by the credit policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are open market operations in United States Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. These policies have significant effects on the overall growth and profitability of the loan, investment and deposit portfolios. The general effects of such policies upon future operations cannot be accurately predicted. ITEM 2 - Properties. The Bank leases its principal executive and administrative offices and principal banking facility in Lafayette, Louisiana under a ten year lease expiring November 30, 2004. The Bank has six other banking offices in Lafayette, Louisiana, three in New Iberia and one banking office in each of Breaux Bridge, Cecilia, Jeanerette, Opelousas, Morgan City, Jennings, Lake Charles, and Sulphur Louisiana. Thirteen of these offices are owned and five are leased. MidSouth also leases space for a loan production office opened in Thibodaux, Louisiana during the fourth quarter of 1999. ITEM 3 - 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 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 operation, or cash flows. ITEM 4 - Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of MidSouth's security holders in the fourth quarter of 2001. Executive Officers of the Registrant C. R. Cloutier, 54 - President, Chief Executive Officer and Director of MidSouth and the Bank Karen L. Hail, 48 - Executive Vice President of the Bank and Chief Financial Officer, and Secretary and Treasurer of MidSouth and the Bank Donald R. Landry, 45 - Senior Vice President and Senior Loan Officer of the Bank Jennifer S. Fontenot, 47 - Senior Vice President of the Bank Dwight Utz, 48 - Senior Vice President of the Bank since 2001; prior to his employment at the Bank, Mr. Utz was a Corporate Vice President for PNC Bank Corporation in Pittsburgh, Pennsylvania. Teri S. Stelly, 42 - Senior Vice President and Controller of MidSouth and the Bank since 1997; Vice President and Controller of MidSouth and the Bank since 1992. David L. Majkowski, 51 - Vice President and Loan review officer of the Bank since 1997; Loan review officer of the Bank since 1995; prior to his employment at the Bank, Mr. Majkowski was Compliance Officer for St. Martin Bank and Trust, St. Martinville, Louisiana for 15 years. All executive officers of the Company are appointed for one year terms expiring at the first meeting of the Board of Directors after the annual shareholders meeting next succeeding his or her election and until his or her successor is elected and qualified. PART II ITEM 5 - Market for Registrant's Common Stock and Related Stockholder Matters. On April 19, 1993 MidSouth's common stock was accepted for listing on the American Stock Exchange, Inc./Emerging Company Marketplace. Effective August 1, 1995, the Company's common stock and its preferred stock has been listed on the regular American Stock Exchange, Inc. ("AMEX") under the symbols MSL and MSL.pr, respectively. On August 1, 2001, MidSouth completed the redemption of its Series A Preferred Stock. Only 3,527 shares had not been converted as of July 26, 2001, the final day for converting. The remaining 3,527 preferred shares were redeemed at a Redemption Price of $14.33 per share. As of December 31, 2001, there were 632 common shareholders of record. The high and low sales prices for the past eight quarters are provided in the Selected Quarterly Financial Data tables included with this filing under Item 7 and is incorporated herein by reference. MidSouth's first common stock dividend was paid at a rate of $.06 per share on October 2, 1995 to shareholders of record on September 18, 1995, and quarterly cash dividends of $.06 per common share were paid through the second quarter of 1998. Following a three for two stock split paid on August 31, 1998, MidSouth began paying quarterly cash dividends of $.05 per common share. It is the intention of the Board of Directors of MidSouth to continue paying quarterly dividends on the common stock at a rate of $.05 per share. The Company's ability to pay dividends is described in Item 7 below under the heading "Liquidity - Dividends" and in Note 12 of notes to the Company's consolidated financial statements. On August 31, 1998, MidSouth effected a three for two stock split by way of a stock dividend to its common shareholders of record on July 31, 1998. The stock split increased the common shares outstanding at the time from 1,611,377 to 2,417,195. The conversion rate of the preferred stock was adjusted to 2.998 due to the stock split. On August 6, 1997, MidSouth declared a 12 1/2% stock dividend payable to shareholders of record on August 27, 1997. The conversion rate on the Preferred Stock was adjusted to 1.999 shares of MidSouth Common Stock for each share of Preferred Stock converted.
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA Year Ended December 31, ___________________________________________________________________________ 2001 2000 1999 1998 1997 ___________ ___________ ___________ ___________ ___________ Gross interest income $26,424,027 $24,449,115 $21,072,733 $18,755,764 $15,776,416 Interest expense (10,408,926) (9,787,165) (7,888,351) (6,931,556) (5,894,193) ___________ ___________ ___________ ___________ ___________ Net interest income 16,015,101 14,661,950 13,184,382 11,824,208 9,882,223 Provision for loan losses (2,176,224) (897,038) (906,950) (999,950) (854,400) Other operating income 5,432,859 4,582,995 3,980,496 3,486,937 2,899,461 Other expenses (15,462,472) (14,501,566) (12,740,307) (11,023,245) (9,585,788) ___________ ___________ ___________ ___________ ___________ Income before income taxes 3,809,264 3,846,341 3,517,621 3,287,950 2,341,496 Provision for income taxes (866,105) (951,204) (867,417) (842,167) (586,804) ___________ ___________ ___________ ___________ ___________ Net Income 2,943,159 2,895,137 2,650,204 2,445,783 1,754,692 Preferred stock dividend requirement (FN1) (52,751) (246,024) (131,582) (148,971) (154,475) ___________ ___________ ___________ ___________ ___________ Net income available to common stockholders $2,890,408 $2,649,113 $2,518,622 $2,296,812 $1,600,217 =========== =========== =========== =========== =========== Basic earnings per share $1.08 $1.07 $1.03 $0.95 $0.69 Diluted earnings per share $1.00 $0.95 $0.90 $0.83 $0.61 Total loans $214,390,121 $204,584,860 $170,468,733 $155,477,263 $130,888,144 Total assets 363,779,863 346,373,433 276,723,841 249,818,268 217,112,415 Total deposits 330,577,458 319,547,205 251,690,206 229,924,302 200,067,751 Cash dividends on common stock 547,966 501,443 492,415 434,334 354,336 Long-term obligations (FN2) 8,431,000 4,650,968 3,459,097 3,503,668 3,198,794 Selected ratios: Loans to assets 58.93% 59.06% 61.60% 62.24% 60.29% Loans to deposits 64.85% 64.02% 67.73% 67.62% 65.42% Deposits to assets 90.87% 92.26% 90.95% 92.04% 92.15% Return on average assets 0.85% 0.98% 0.97% 1.04% 0.78% Return on average common equity 14.04% 17.70% 17.45% 19.16% 16.44% A $107,250 charge resulting from the retirement of 11,000 shares of MidSouth Bancorp, Inc. Series A Preferred Stock is included in the amount recorded as preferred dividends for the year ended December 31, 2000. On August 1, 2001, MidSouth completed the redemption of its Series A Preferred Stock. Only 3,527 shares had not been converted to MidSouth Common Stock as of July 26, 2001, the final day for converting. The remaining 3,527 Preferred Shares were redeemed at a Redemption Price of $14.33 per share. On February 21, 2001, MidSouth completed the issuance of $7,000,000 of junior subordinated debentures. For regulatory puposes, these funds qualify as Tier 1 Capital. For financial reporting purposes, these funds are included as a liability under generally accepted accounting principles. Return on average common equity is calculated before the effect of the $107,250 charge related to the retirement of 11,000 shares of preferred stock for the year ended December 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Item 6. MidSouth Bancorp, Inc. ("MidSouth") is a one-bank holding company that conducts substantially all of its business through its wholly-owned subsidiaries, MidSouth Bank, N. A. (the "Bank") and Financial Services of the South, Inc. (the "Finance Company"). Following is management's discussion of factors that management believes are among those necessary for an understanding of MidSouth's financial statements. The discussion should be read in conjunction with MidSouth's consolidated financial statements and the notes thereto presented herein. OVERVIEW Net income for the year ended December 31, 2001 was $2,943,159 compared to $2,895,137 for the year ended December 31, 2000. Income available to common shareholders for the year ended December 31, 2001 was $2,890,408 compared to $2,649,113 for the year ended December 31, 2000. Income available to common shareholders for the year 2000 was impacted by the repurchase of 11,000 shares of preferred stock. A reduction to earnings of $107,250 was included in the preferred dividend requirement for that year and resulted from the excess of the purchase price over the book value of the preferred stock. In year-to-date comparison, an increase of $1,353,151 or 9% in net interest income and $849,864 or 19% in non-interest income for the year 2001 were offset by an increase in provisions for loan losses of $1,279,186 and a $960,906 increase in non-interest expenses. The increase in provisions for loan losses resulted primarily from a $700,000 default and charge-off of one commercial loan in June 2001 and additional provisions taken at the Finance Company. In the third quarter of 2001, MidSouth began the process of closing the subsidiary, accepting payments on existing loans with no new loans being made. Additional provisions of $274,186 over provisions taken in the year 2000 were approved by management to adequately reserve for future expected losses in the Finance Company portfolio. The increase in non-interest expenses occurred primarily in salaries and benefits, occupancy and data processing expenses. MidSouth's total consolidated assets increased 5% from $346,373,433 at December 31, 2000 to $363,779,863 at December 31, 2001. Excluding a short-term deposit of approximately $24.6 million included in year-end 2000 total deposits, MidSouth recorded a 13% increase in assets over the year ended December 31, 2001. Deposits, exclusive of the $24.6 million, increased $35.6 million or 12% to $330.6 million at December 31, 2001. Loans, net of Allowance for Loan Losses ("ALL"), increased $9.4 million or 5%, from $202.3 million at December 31, 2000 to $211.7 million at December 31, 2001. Competition for loans increased due to falling rates in 2001. However, continued cuts in prime lending rates failed to stimulate loan demand as businesses and consumers exercised caution with a slowing economy. Nonperforming loans as a percentage of total loans increased from .08% or $159,726 in December of 2000 to .36% or $768,753 in December of 2001 primarily due to three commercial loans added in 2001. Specific allocations have been made in the ALL for possible losses on these three loans. Loans past due 90 days and over increased slightly from $967,721 at December 31, 2000 to $999,538 at December 31, 2001. Although the dollar amount of loans past due 90 days or more increased, the percentage of these past due loans to total loans remained at .47%. MidSouth's leverage ratio was 8.02% for the year ended December 31, 2001, compared to 6.05% for the year ended December 31, 2000. The increased leverage ratio resulted primarily from the issuance of $7,000,000 of Junior Subordinated Debentures by MidSouth in February 2001. For regulatory purposes, these funds qualify as Tier 1 Capital. For financial reporting purposes, these funds are included as a liability under generally accepted accounting principles. Annualized return on average common equity was 14.04% at December 31, 2001 compared to 17.70% at December 31, 2000. EARNINGS ANALYSIS Net Interest Income The primary source of earnings for MidSouth is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other 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. Tables 1 and 2 analyze the changes in net interest income for each of the three years in the period ended December 31, 2001. Net interest income increased $1,353,151 for 2001 over 2000 and $1,477,568 for 2000 over 1999. The increase in net interest income for 2001 resulted primarily from comparable volume increases in both the loan and investment portfolios. The effect of the increased volume of earning assets on total interest income was substantially offset by declining yields on loans and investments. The increase in 2000 resulted primarily from growth in MidSouth's loan portfolio combined with rising rates. Average loans as a percentage of average earnings assets increased from 65% in 1999 and to 69% in 2000 and back down to 66% in 2001. Interest income from loans, including loan fees, increased $3,158,068 from 1999 to 2000 and $1,098,157 from 2000 to 2001. The increased interest income resulted from increases in average loan volume of $24.5 million or 13% in 2001 and $22.4 million or 14% in 2000. Average yield on total loans decreased 71 basis points, from 10.55% in 2000 to 9.84% in 2001. An increase of 49 basis points was recorded in 2000, from 10.06% in 1999 to 10.55%. For the higher volume commercial loan portfolio, average yields increased from 9.58% in 1999 to 9.97% in 2000 and then decreased to 8.87% in 2001. Changes in the New York prime lending rate combined with market competition for quality credits impacted MidSouth's loan yields over the past three years. After increasing 75 basis points in 1999 and an additional 100 basis points in 2000, the New York prime fell 475 basis points to 4.75% at December 31, 2001. Average yields in the installment loan portfolio rose from 11.60% in 1999 to 12.45% in 2000 and to 13.53% in 2001. The installment portfolio yield benefited from the Finance Company's loans, which averaged $2.1 million and yielded an average rate of 19% in 2001. Credit card loans averaging $1.7 million with an average yield of 19% within the installment portfolio also contributed to the increased average yield. In addition, insurance premium financing loans acquired with the purchase of TMC Financial Services, Inc. ("TMC") in May 1999, boosted the installment loan portfolio yield for the year ended December 31, 2001 with an average rate of 24% earned on an average portfolio of $4.6 million. Following strong loan growth in 2000, loan demand declined in 2001 as businesses and consumers exercised caution with the slowing economy. Accordingly, MidSouth experienced increased activity in the investment securities portfolio during 2001. The average volume of investment securities increased $17.2 million to $96.0 million in 2001 compared to $78.8 million in 2000. Average taxable equivalent yields on investment securities decreased 37 basis points, from 6.61% in 2000 to 6.24% in 2001. The increase in volume, partially offset by a decrease in rate during 2001, resulted in increased interest income from investment securities of $643,202 for the year. The volume of federal funds sold increased $8.5 million and added $233,553 to total interest income in 2001. MidSouth's deposit mix remained stable over the past three years ended December 31, ,2001, with non-interest bearing deposits representing 24% of average total deposits. Additionally, the mix of average total interest-bearing deposits remained stable with only a slight increase in the volume of NOW, money market and savings deposits (39% of average total deposits) compared to certificates of deposit (37% of average total deposits). These two categories of interest- bearing deposits were evenly matched at 38% of average total deposits as of December 31, 2000. For year-ended December 31, 1999, NOW, money market and savings deposits represented 37% of average total deposits, while 39% consisted of CD's. Volume increases in interest-bearing deposits, partially offset by rate decreases for the year ended December 31, 2001 resulted in increased interest expense of $349,744 in 2001 compared to an increase of $1,809,805 in 2000. Average interest-bearing deposits increased $35.6 million in 2001 and $17.5 million in 2000. The average rate paid on these deposits fell 52 basis points to 3.98% in 2001 after rising 55 basis points to 4.50% in 2000. The rate increase in 2000 resulted from the Federal Reserve Bank's decisions to raise rates throughout the year and from very competitive market rates in MidSouth's markets. In 2001, FHLB advances averaged only $172,000 at an average rate of 5.23%, down from $2.9 million at an average rate of 6.72% during 2000 and $4.0 million at an average rate of 5.45% in 1999. In February 2001, MidSouth issued $7,000,000 of junior subordinated debentures. The debentures carry a fixed interest rate of 10.20% and mature on February 22, 2031. MidSouth paid off its line of credit with proceeds from the issuance of the debentures. Accordingly, the average volume of notes payable decreased from $3.9 million at December 31, 2000 to $1.9 million at December 31, 2001. During 2000, an increase in borrowings on lines of credit for MidSouth and the Finance Company resulted in an increase in the average volume of notes payable. With rates on both lines of credit tied to the New York prime, the average rate paid increased from 7.75% in 1999 to 8.90% in 2000. The volume increases in MidSouth's earning assets and interest-bearing liabilities combined with falling interest rates resulted in net taxable- equivalent net yields on average earning assets of 5.24% in 2001 as compared to 5.66% for 2000 and 5.52% for 1999.
Table 1 Consolidated Average Balances, Interest and Rates Taxable-equivalent basis Year Ended December 31, (in thousands) 2001 2000 1999 ____________________________________________________________________________________________________ Average Average Average Average Average Average Volume Interest Yield/Rate Volume Interest Yield/Rate Volume Interest Yield/Rate ____________________________________________________________________________________________________ ASSETS Interest Bearing Deposits $217 $13 5.99% $258 $20 7.75% $104 $1 0.96% Investment Securities Taxable 65,481 3,795 5.80% 54,295 3,426 6.31% 54,894 3,277 5.97% Tax Exempt 30,259 2,179 7.20% 24,295 1,766 7.27% 21,850 1,593 7.29% ________________ ________________ ________________ Total Investments 95,957 5,987 6.24% 78,848 5,212 6.61% 76,848 4,871 6.34% Federal Funds Sold and Securities Purchased Under Agreements to Resell 13,845 565 4.08% 5,352 331 6.18% 8,797 406 4.62% Loans Commercial and Real Estate 165,420 14,668 8.87% 141,340 14,092 9.97% 123,836 11,868 9.58% Installment 43,378 5,871 13.53% 42,961 5,349 12.45% 38,058 4,415 11.60% ________________ ________________ ________________ Total Loans 208,798 20,539 9.84% 184,301 19,441 10.55% 161,894 16,283 10.06% Total Earning Assets 318,600 27,091 8.50% 268,501 24,984 9.30% 247,539 21,560 8.71% Allowance for Loan Losses (2,404) (2,022) (1,857) Nonearning Assets 31,618 28,315 27,035 ________ ________ ________ Total Assets $347,814 $294,794 $272,717 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY NOW, Money Market, and Savings $122,562 $2,992 2.44% $102,709 $3,510 3.42% $91,559 $2,632 2.87% Certificates of Deposits 117,163 6,539 5.58% 101,446 5,671 5.59% 95,109 4,739 4.98% ________________ ________________ ________________ Total Interest Bearing Deposits 239,725 9,531 3.98% 204,155 9,181 4.50% 186,668 7,371 3.95% Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 1,601 71 4.43% 1,155 63 5.45% 683 35 5.12% FHLB Advances 172 9 5.23% 2,915 196 6.72% 4,021 219 5.45% Notes Payable 1,860 177 9.52% 3,898 347 8.90% 3,393 263 7.75% Junior Subordinated Debentures 6,073 621 10.20% - - - - - - Total Interest ________________ ________________ ________________ Bearing Liabilities 249,431 10,409 4.17% 212,123 9,787 4.61% 194,765 7,888 4.05% Demand Deposits 74,733 63,713 60,192 Other Liabilities 1,983 1,369 1,127 Stockholders' Equity 21,667 17,589 16,633 ________ ________ ________ Total Liabilites and Stockholders' Equity $347,814 $294,794 $272,717 ======== ======== ======== NET INTEREST INCOME AND NET INTEREST SPREAD $16,682 4.33% $15,197 4.69% $13,672 4.66% ======= ======= ======= NET YIELD ON EARNING ASSETS 5.24% 5.66% 5.52% Securities classified as available-for-sale are included in average balances and interest income figures reflect interest earned on such securities. Interest income of $667,000 for 2001, $535,000 for 2000, and $488,000 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a 34% tax rate. Interest income includes loan fees of $1,406,000 for 2001, $1,276,000 for 2000, and $1,144,000 for 1999. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
Table 2 Changes in Taxable-Equivalent Net Interest Income (in thousands) 2001 Compared to 2000 2000 Compared to 1999 ________________________________________ ________________________________________ Total Total Increase Change Attributable To Increase Change Attributable To (Decrease) Volume Rates (Decrease) Volume Rates ________________________________________ ________________________________________ Taxable-equivalent interest earned on: Interest Bearing Deposits ($7) ($3) ($4) $19 $3 $16 Investment Securities Taxable 369 611 (242) 149 (35) 184 Tax Exempt 413 429 (16) 173 178 (5) Federal Funds Sold and Securities Purchased Under Agreement to Resell 234 298 (64) (75) (158) 83 Loans, including fees 1,098 2,230 (1,132) 3,158 2,335 823 ________ ________________ ________ ________________ TOTAL 2,107 3,565 (1,458) 3,424 2,323 1,101 ________ ________________ ________ ________________ Interest Paid On: Interest Bearing Deposits 350 1,046 (696) 1,810 729 1,081 Federal Funds Purchased and Securities Sold Under Agreement to Repurchase 8 16 (8) 28 26 2 FHLB Advances (187) (151) (36) (23) (53) 30 Notes Payable (170) (196) 26 84 42 42 Junior Subordinated Debentures 621 621 - - - - ________ ________________ ________ ________________ TOTAL 622 1,336 (714) 1,899 744 1,155 ________ ________________ ________ ________________ Taxable-equivalent net interest income $1,485 $2,229 ($744) $1,525 $1,579 ($54) ======== ================ ======== ================ NOTE: 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 Excluding Securities Transactions. Service charges and fees on _________________________________ deposit accounts represent the primary source of non-interest income for MidSouth. Income from service charges and fees on deposit accounts and insufficient funds fees increased $299,159 in 2001 and $262,930 in 2000, primarily due to an increase in the number of transaction accounts and the volume of insufficient funds checks processed by MidSouth. Fees earned through the sale of credit life insurance decreased $25,829 in 2001, following an increase of $112,861 in 2000 that resulted from internal training, tracking, and incentives on the product. Non-interest income resulting from other charges and fees increased $403,777 in 2001 as compared to $210,582 in 2000. An increase of $192,025 and $76,315 in income from a third party mortgage program contributed to the increase in other non-interest income for 2001 and 2000, respectively. An increase in income on Visa debit cards and merchant programs is included in the increase in other charges and fees, however, increased expenses on these programs partially offset the benefit. Securities Transactions. MidSouth captured net gains on sales of _______________________ securities totaling $188,883 in 2001. Sales of $8.6 million in U. S. Treasury and Agency securities allowed MidSouth to improve the overall yield on these securities as they neared maturity. A Ford Motor Credit corporate bond was also sold due to credit quality concerns. In 2000, net gains on the sales of two securities totaled $16,126. Non-interest Expense Total non-interest expense increased 6.6% from 2000 to 2001 and 13.8% from 1999 to 2000. MidSouth's growth and expansion over the past three years resulted in significant increases in salaries and employee benefits, occupancy expenses, marketing expenses, data processing expenses, and the cost of printing and supplies. These increases reflect MidSouth's long-term investment in staff development, system upgrades, and market penetration. In 2001, the increase in expenses leveled off as MidSouth focused on improving facilities, operations and risk management. A new Jennings office building was completed and improvements were made on the Cecilia office building. Two internal staff auditors, a loan documentation officer and an electronic banking associate were added during 2001 to strengthen MidSouth's operations and risk management functions. These new positions contributed to the $470,188, or 7%, increase in salaries and employee benefits for 2001. Salaries and employee benefits increased 13% from 1999 to 2000. New hires in 2000 included five employees for the third New Iberia banking office, an internet banking associate and two call center operators. Occupancy expenses increased $162,565 or 5% from 2000 to 2001 and $410,592 or 14% from 1999 to 2000 as a result of increases in lease expense, property taxes, depreciation, and maintenance expenses. Premises and equipment totaling approximately $1,500,000 were added in 2001 and $1,700,000 were added during 2000. Additions in 2001 included the new Jennings facility and renovations on the Cecilia office. MidSouth also began construction on a storage facility in 2001. Additions in 2000 included the Admiral Doyle office in New Iberia, renovation of additional leased space at the main office in Lafayette, and additional drive through lanes at the Opelousas location. The Sulphur office opened in January 2000 to expand MidSouth's presence in Calcasieu Parish. Total other non-interest expenses increased $328,153 or 7%, from 2000 to 2001 and $558,540 or 15% from 1999 to 2000. Included in the increase for 2001 is a $80,728 increase in professional fees, which include consulting costs, and $60,154 in the VISA debit and credit card programs and ATM processing. Additional increases were realized in agent commission expense (associated with the insurance premium financing loan program), directors fees, travel expenses and postage. Included in the increase for 2000 is $175,214 in increased expenses on Other Real Estate Owned that resulted primarily from the loss on valuation of one piece of commercial property. Other increases were recorded in professional fees, agent commission expense, and credit reporting expenses. Income Taxes MidSouth's tax expense decreased by $85,099 and approximated 23% of income before income taxes. Increased interest income on non- taxable municipal securities further reduced 2001 taxes from the expected statutory rate of 34%. Interest income on non-taxable municipal securities also lowered the effective tax rate for 2000 to approximately 25%. Notes 1 and 9 to MidSouth's Consolidated Financial Statements provide additional information regarding MidSouth's income tax considerations. BALANCE SHEET ANALYSIS Securities Total investment securities increased $21.8 million, from $77.6 million in 2000 to $99.4 million in 2001. Average duration of the portfolio was 3.1 years as of December 31, 2001 and the average taxable-equivalent yield was 6.24%. Cash flows from maturities and paydowns within the portfolio were reinvested primarily in government agency securities and municipal securities. Slow demand for loans necessitated placement of excess funds in securities and federal funds sold. A favorable change in the market value of securities available-for-sale is included in the net change in 2001. Unrealized net gains in the securities available-for-sale portfolio were $727,462 at December 31, 2001, compared to unrealized net gains of $148,100 at December 31, 2000. These amounts result from interest rate fluctuations and do not represent permanent adjustments of value. Moreover, classification of securities as available-for-sale does not necessarily indicate that the securities will be sold prior to maturity. At December 31, 2001, approximately 28% of MidSouth's securities available-for-sale portfolio represented mortgage-backed securities and 27% represented collateralized mortgage obligations ("CMO's"). MidSouth monitors the risks due to changes in interest rates on mortgage-backed pools by monthly reviews of prepayment speeds, duration, and purchase yields as compared to current market yields on each security. The majority of the CMO's represent FNMA and FHLMC REMIC pools which each had a book value of less than 10% of stockholders' equity at December 31, 2001. All CMO's held by MidSouth are Aaa rated and not considered "high-risk" securities under the Federal Financial Institutions Examination Council ("FFIEC") tests. MidSouth does not own any "high-risk" securities as defined by the FFIEC. An additional 20% of the available-for-sale portfolio consisted of U. S. Treasury and agency securities, while municipal and other securities represented 25% of the portfolio. A detailed credit analysis was performed on each municipal offering by an investment advisory firm prior to purchase. In addition, MidSouth limits the amount of securities of any one municipality purchased and the amount purchased within specific geographic regions to reduce the risk of loss within the non-taxable municipal securities portfolio. The held-to-maturity portfolio remained constant with $22.5 million in non-taxable and $1.1 million in taxable municipal securities. Municipals purchased during 2001 were placed in the available-for-sale portfolio. Loan Portfolio Loan growth slowed in 2001, with $9.8 million added to the portfolio compared to $34.9 million added during 2000. MidSouth's loan portfolio totaled $214.4 million at December 31, 2001 compared to $204.6 million at December 31, 2000. Weak loan demand compounded by a competitive rate environment and payouts caused MidSouth to fall short of budgeted loan growth in 2001. The majority of the $9.8 million growth in 2001 was in the real estate portfolio, while the commercial portfolio decreased slightly and the installment portfolio remained constant. In 2000, MidSouth lenders met budget projections by growing commercial loans $12.8 million and the real estate portfolio by $16.3 million. Installment loans to individuals increased $3.2 million or 12% during the twelve months ended December 31, 2000. The real estate loan growth in 2001 and 2000 consisted of both commercial and consumer credits that call for ten to fifteen year amortization terms with rates fixed for three to five years. The short-term structure of these credits allows management greater flexibility in controlling interest rate risk. MidSouth has maintained its credit policy and underwriting procedures and has not relaxed these procedures to stimulate loan growth. 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 insure thorough and consistent procedures. Asset Quality Credit Risk Management. MidSouth manages its credit risk by ______________________ diversifying its loan portfolio, determining that borrowers have adequate cash flows for loan repayment, obtaining and monitoring collateral and continuously reviewing outstanding loans. The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and recommend credit gradings on each loan. The senior loan officer and loan review officer review the gradings. In addition, the loan review officer performs an independent evaluation annually of each commercial loan officer's portfolio and a random sampling of credits in MidSouth's installment loan portfolio. Nonperforming Assets. Table 3 contains information about ____________________ MidSouth's nonperforming assets and loans past due 90 days or more and still accruing.
TABLE 3 Nonperforming Assets and Loans Past Due 90 Days ___________________________________________________________________________ December 31, December 31, December 31, 2001 2000 1999 ___________________________________________________________________________ Nonperforming loans $768,753 $159,726 $234,962 Other real estate owned, net 359,336 446,046 569,963 Other assets repossessed - - 31,755 __________ ________ ________ Total nonperforming assets $1,128,089 $605,772 $836,680 ========== ======== ======== Loans past due 90 days or more and still accruing $999,538 $967,721 $793,823 Nonperforming loans as a % of total loans .36% .08% 0.14% Nonperforming assets as a % of total loans, other real estate owned and other assets repossessed .53% .30% 0.49% Allowance for loan losses as a % of nonperforming assets 243.68% 375.75% 235.13% ___________________________________________________________________________
Nonperforming assets totaled $1,128,089 at December 31, 2001, $605,772 at December 31, 2000 compared to $836,680 at December 31, 1999. The increase in nonperforming assets in 2001 is primarily due to the addition of three large commercial credits. Specific allocations have been made within the ALL for possible losses on these credits. Loans past due 90 days and still accruing totaled $999,538 at December 31, 2001 compared to $967,721 at December 31, 2000 and $793,823 at December 31, 1999. Although the dollar amount of loans past due 90 days or more and still accruing increased, the percentage of these past due loans to total loans remained constant at .47% for the past three years. Of the $999,538 in 90 days past due loans still accruing for December 31, 2001, $128,200 was reported past due by the Finance Company. Loans to commercial borrowers are placed on nonaccrual when principal or interest is 90 days past due, or sooner if the full collectability of principal or interest is doubtful, except if the underlying collateral supports both the principal and accrued interest and the loan is in the process of collection. Retail loans that are not placed on nonaccrual but that become 120 days past due are routinely charged off. Loans classified for regulatory purposes but not included in Table 3 do not represent material credits about which management has serious doubts as to the ability of the borrower to comply with the loan repayment terms. Allowance for Loan Losses. Provisions totaling $2,176,224, _________________________ $897,038, and $906,950 for the years 2001, 2000 and 1999, respectively, were necessary to bring the allowance to a level considered by management to be sufficient to cover probable losses in the loan portfolio. Table 4 analyzes activity in the allowance for 2001 and 2000.
TABLE 4 - Summary of Loan Loss Experience (in thousands) 2001 2000 ________ ________ BALANCE AT BEGINNING OF YEAR $2,276 $1,967 CHARGE-OFFS Commercial, Financial and Agricultural 1,032 73 Real Estate - Construction - - Real Estate - Mortgage 62 12 Installment Loans to Individuals 760 565 Lease Financing Receivables 6 14 Other 53 44 ________ ________ Total Charge-offs 1,913 708 ________ ________ RECOVERIES Commercial, Financial and Agricultural 19 3 Real Estate - Construction - - Real Estate - Mortgage - - Installment Loans to Individuals 143 107 Lease Financing Receivables - 1 Other 4 9 ________ ________ Total Recoveries 166 120 ________ ________ Net Charge-offs 1,747 588 Additions to allowance charged to operating expenses 2,176 897 ________ ________ BALANCE AT END OF YEAR $2,705 $2,276 ======== ======== Net charge-offs to average loans 0.84% 0.32% Year-end allowance to year-end loans 1.26% 1.11%
Refer to "Balance Sheet Analysis - Asset Quality - Allowance for Loan Losses" for a description of the factors which influence management's judgement in determining the amount of the provisions to the allowance.
% of category % of category Allowance for Loan Losses 2001 to total 2000 to total loans ____________________________________________________________________________________________ Commercial, Financial and Agricultural 385 32.05% 10 33.91% Real Estate - Construction 3.30% 2.32% Real Estate - Mortgage 185 45.55% 44.46% Installment Loans to Individuals 15 16.76% 16.73% Lease Financing Receivables 2.20% 2.46% Other 0.14% 0.12% Unallocated 2,120 2,266 ________________________________________________ $2,705 100.00% $2,276 100.00% ================================================
The allowance is comprised of specific reserves (assigned to each loan that is impaired or for which probable loss has been identified) and an unallocated reserve. Specific reserves within the allowance are allocated to loans on a nonaccrual status for which the underlying collateral value is insufficient to cover the principal remaining on the loan. Factors contributing to the assignment of specific reserves include the financial condition of the borrower, changes in the value of collateral and economic conditions. A portion of the unallocated reserve is assigned to accruing loans that are classified for regulatory purposes. The remainder of the allowance represents a percentage of all other credits based on gradings assigned in the loan review process. Quarterly evaluations of the allowance are performed in accordance with accounting principles generally accepted in the Unites States of America and Section 217 of the OCC's manual and Banking Circular 201. 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 process by which management determines the appropriate level of the allowance, and the corresponding provision for possible credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates. Sources of Funds Deposits. As of December 31, 2001, total deposits increased $11 ________ million to $330.6 million, up from $319.6 million at December 31, 2000. Included in total deposits at year-end 2000 was a significant short-term deposit of approximately $24.6 million, most of which was withdrawn within the month of January 2001. Excluding this short-term deposit, MidSouth realized a $35.6 million increase, or 12% in 2001 and a 17% increase in deposits in 2000. Deposit growth in 2001 was primarily in non-interest bearing and NOW account deposits. The growth in 2000 was primarily in money market indexed deposits and certificates of deposit. Non-interest bearing deposits represented 26% of total deposits at December 31, 2001 and 24% at December 31, 2000. Core deposits, defined as all deposits other than certificates of deposit ("CD's") of $100,000 or more, remained constant at 86% of total deposits at year- end 2001 and 2000. CD's of $100,000 or more totaled $47.5 million at December 31, 2001, an increase of $1.4 million from the $46.1 million reported at year-end 2000. MidSouth's deposit rates are competitive within its market and MidSouth has no brokered deposits. Although time deposits of $100,000 can exhibit greater volatility due to changes in interest rates and other factors than do core deposits, management believes that any volatility experienced could be adequately met with current levels of asset liquidity or access to alternate funding sources. Additional information on MidSouth's deposits appears in Note 6 to MidSouth's Consolidated Financial Statements. Borrowed Funds. At December 31, 2001, the note payables to ______________ financial institutions consisted of advances against a Line of Credit established by Financial Services of the South, Inc. The Line of Credit is in the amount of $2,000,000 and is dated April 30, 2001. Advances under the Line of Credit bear interest at a variable rate equal to the commercial prime rate as quoted in the "Money Rates" section of the Wall Street Journal plus twenty-five basis points (0.25%). At December 31, 2001 and 2000, the effective rate was 5.00% and 9.75%, respectively. Interest on this note is payable monthly, with principal due at maturity on April 30, 2002. Advances under this note totaled $1,431,000 at December 31, 2001 and $1,975,000 at December 31, 2000. A Line of Credit for MidSouth with a principal balance of $2,500,000 at December 31, 2000 was paid in full in February 2001 with proceeds received from the MidSouth's issuance of junior subordinated debentures. Two long-term FHLB borrowings totaling $175,968 at December 31, 2000 matured during 2001. On February 22, 2001, MidSouth issued $7,000,000 in junior subordinated debentures. These debentures qualify as Tier 1 capital and are presented in the Consolidated Statements of Condition as "Junior Subordinated Debentures." These debentures bear interest at a rate of 10.20% and mature on February 22, 2031. Additional information regarding long-term debt is provided in Note 7 to MidSouth's Consolidated Financial Statements. The ESOP note held by the Bank was refinanced in the amount of $150,000 on March 11, 1997 at a fixed rate of 7.00% payable in monthly installments of $2,264 with payment in full due on March 10, 2004. A second note was financed on May 11, 2000 in the amount of $130,656 at a fixed rate of 8.00% payable in monthly installments of $1,701 with payment in full due on May 10, 2009. The ESOP obligation constitutes a reduction of MidSouth's stockholders' equity because the primary source of loan repayment is contributions by the Bank to the ESOP; however, the loan is not guaranteed by MidSouth Bank or MidSouth. The ESOP note is eliminated from total loans and long-term debt as an intercompany balance in MidSouth's December 31, 2001 and 2000 consolidated financial statements. Capital. MidSouth 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 December 31, 2001, MidSouth and the Bank were in compliance with statutory minimum capital requirements. Minimum capital requirements include a total risk-based capital ratio of 8.0%, with Tier 1 capital not less than 4.0%, and a leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution. As of December 31, 2001, MidSouth's Tier 1 capital to average adjusted assets (the "leverage ratio") was 8.02% as compared to 6.05% at December 31, 2000. Tier 1 capital to risk weighted assets was 12.06% and 8.54% for 2001 and 2000, respectively. Total capital to risk weighted assets was 13.20% and 9.55%, respectively, for the same periods. The increased capital ratios resulted primarily from the issuance of $7,000,000 of junior subordinated debentures by MidSouth in February 2001. For regulatory purposes, these funds qualify as Tier 1 Capital. For financial reporting purposes, these funds are included as a liability under generally accepted accounting principles. The Bank's leverage ratio was 7.41% at December 31, 2001 compared to 6.74% at December 31, 2000. The Federal Deposit Insurance Corporation Improvement Act of 1991 established a capital-based supervisory system for all insured depository institutions that imposes increasing restrictions on the institution as its capital deteriorates. The Bank continued to be classified as "well capitalized" throughout the three years ended December 31, 2001. No significant restrictions are placed on the Bank as a result of this classification. As discussed under the heading "Balance Sheet Analysis - Securities," $727,462 in unrealized gains on securities available-for-sale, less a deferred tax liability of $257,500, was recorded as an addition to stockholders' equity as of December 31, 2001. As of December 31, 2000, $148,100 in unrealized gains on securities available-for-sale, less a deferred tax liability of $62,900, was recorded as an addition to stockholders' equity. While the net unrealized gain or loss on securities available for sale is required to be reported as a separate component of stockholders' equity, it does not affect operating results or regulatory capital ratios. The net unrealized gains reported for December 31, 2001 and 2000 did, however, effect MidSouth's equity to assets ratio for financial reporting purposes. The ratio of equity to assets was 6.22% at December 31, 2001 and 5.73% at December 31, 2000. Interest Rate Sensitivity. Interest rate sensitivity is the sensitivity of _________________________ net interest income and economic value of equity to changes in market rates of interest. The initial step in the process of monitoring MidSouth's interest rate sensitivity involves the preparation of a basic gap analysis of earning assets and interest-bearing liabilities. The analysis presents differences in the repricing and maturity characteristics of earning assets and interest-bearing liabilities for selected time periods. During 2001, MidSouth utilized the Sendero model of asset and liability management. The Sendero model uses basic gap data and additional information regarding rates and prepayment characteristics to construct a gap analysis that factors in repricing characteristics and cash flows from payments received on loans and mortgage-backed securities. The resulting Sendero gap analysis is presented in Table 5. With the exception of NOW, money market and savings deposits, the table presents interest-bearing liabilities on a contractual basis. While NOW, money market and savings deposits are contractually due on demand, historically, MidSouth has experienced stability in these deposits despite changes in market rates. Presentation of these deposits in the table, therefore, reflects delayed repricing throughout the time horizon. The resulting cumulative gap at one year is approximately $50,843,000, or 13.98% of total assets at December 31, 2001. The 13.98% ratio is within internal policy guidelines of + or - 15% of total assets. The Sendero model also uses the gap analysis data in Table 5 and additional information regarding rates and payment characteristics to perform three simulation tests. The tests use market data to perform rate shock, rate cycle and rate forecast simulations to measure the impact of changes in interest rates, the yield curve and interest rate forecasts on MidSouth's net interest income and economic value of equity. Results of the simulations at December 31, 2001 were within policy guidelines. The results of the simulations are reviewed quarterly and discussed at MidSouth's Funds Management committee meetings. MidSouth does not invest in derivatives and has none in its securities portfolio.
Table 5 Interest Rate Sensitivity and Gap Analysis Table December 31, 2001 (in thousands) Non-interest 0-3 MOS 4-6 MOS 7-12 MOS 1-5 YRS > 5YRS Bearing Total ______________________________________________________________ ASSETS Interest Bearing Deposits $109 $ - $ - $ - $ - $ - $109 Fed Funds Sold 17,300 17,300 Investments Mutual Funds 970 970 Investment Securities 1,007 70 1,436 22,020 32,541 57,074 Mortgage-backed Securitie 9,209 12,568 8,272 11,029 244 41,322 Loans Fixed Rate 45,614 23,853 35,533 57,017 842 162,859 Variable Rate 51,531 51,531 Other Assets 35,320 35,320 Allowance for Loan Losses (2,705) (2,705) ______________________________________________________________ Total Assets $125,740 $36,491 $45,241 $90,066 $33,627 $32,615 $363,780 ============================================================== LIABILITIES NOW $3,763 $3,405 $5,867 $21,131 $5,333 $39,499 MMDA 9,000 9,597 14,855 33,621 2,241 69,314 Savings 1,415 1,281 2,207 7,950 2,007 14,860 CD'S 34,202 29,802 39,141 12,614 115,759 Demand Deposits 91,146 91,146 Other Liabilities 663 1,431 7,000 1,481 10,575 Stockholders' Equity 22,627 22,627 ______________________________________________________________ Total Liabilities $49,043 $45,516 $62,070 $75,316 $16,581 $115,254 $363,780 ============================================================== Repricing/maturity gap: Period $76,697 ($9,025)($16,829) $14,750 $17,046 ($82,639) Cumulative $76,697 $67,672 $50,843 $65,593 $82,639 $ - ==================================================== Cumualtive Gap/Total Assets 21.08% 18.60% 13.98% 18.03% 22.72% ___________________________________________
Liquidity Bank Liquidity. Liquidity is the availability of funds to meet ______________ contractual obligations as they become due and to fund operations. The Bank's primary liquidity needs involve its ability to accommodate customers' demands for deposit withdrawals as well as their 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. MidSouth's core deposits are its most stable and important source of funding. Further, the low variability of the core deposit base lessens the need for liquidity. Cash deposits at other banks, federal funds sold and principal payments received on loans and mortgage-backed securities provide additional primary sources of asset liquidity for the Bank. Approximately $20.8 million in projected cash flows from securities during 2002 provides an additional source of liquidity. MidSouth also has borrowing lines with three correspondent banks, including significant borrowing capacity with the FHLB of Dallas, Texas. Parent Company Liquidity. At the parent company level, cash is ________________________ needed primarily to meet interest payments on the junior subordinated debentures and pay dividends on common stock. The parent company issued $7,000,000 in junior subordinated debentures in February 2001, the terms of which are described in Note 7 to MidSouth's Consolidated Financial Statements. As of December 31, 2001, MidSouth had $2.4 million in interest-bearing balances remaining of proceeds from the issuance of the debentures. Dividends from the Bank totaling $200,000 and $925,000 provided additional liquidity for the parent company in 2001 and 2000, respectively. As of January 1, 2002, the Bank had the ability to pay dividends to the parent company of approximately $5.3 million without prior approval from its primary regulator. As a publicly traded company, MidSouth also has the ability to issue trust preferred and other securities instruments to provide additional funds as needed for operations and future growth of the company. Dividends. The primary source of cash dividends on MidSouth's _________ common stock is cash on hand remaining from the issuance of junior subordinated debentures and dividends from the Bank. The Bank has the ability to declare dividends to the parent company without prior approval of its primary regulator. However, the Bank's ability to pay dividends would be prohibited if the result would cause the Bank's regulatory capital to fall below minimum requirements. Cash dividends totaling $547,966 and $501,443 were declared to common stockholders during 2001 and 2000, respectively. It is the intention of the Board of Directors of MidSouth to continue to pay quarterly dividends on the common stock at the rate of $.05 per share. On August 1, 2001, MidSouth completed the redemption of its Series A Preferred Stock. Only 3,527 shares had not been converted to MidSouth Common Stock as of the final day for converting. The remaining 3,527 Preferred Shares were redeemed at a Redemption Price of $14.33 per share. Additional information regarding MidSouth's Preferred Stock is included in Note 12 to MidSouth's Consolidated Financial Statements. 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, MidSouth's performance and financial results. A number of factors and uncertainties could cause actual results to differ from the anticipated results and expectations expressed in the discussion.
MIDSOUTH BANCORP, INC. LOAN PORTFOLIO LOAN MATURITIES AND SENSITIVITY TO INTEREST RATES for the Year Ended December 31, 2001 (dollars in thousands) Fixed and Variable Rate Loans at Stated Maturities Amounts Over One Year With _______________________________________________ __________________________________________ 1 Year 1 Year - Over Predetermined Floating or Less 5 Years 5 Years Total Rates Rates Total _______________________________________________ __________________________________________ Commercial, Financial Industrial, Commercial Real Estate Mortgage and Commercial Real Estate - Constr $43,556 $76,764 $35,716 $156,036 $76,901 $35,579 $112,480 Installment Loans to Individuals and Real Estate Mortgage 16,809 35,808 716 $53,333 33,161 3,363 $36,524 Lease Financing Receivables 269 4,461 - $4,730 4,461 - $4,461 Other 291 - - $291 - - - _______________________________________________ __________________________________________ TOTAL $60,925 $117,033 $36,432 $214,390 $114,523 $38,942 $153,465 =============================================== ==========================================
MIDSOUTH BANCORP, INC. SECURITIES PORTFOLIO MATURITIES AND AVERAGE YIELDS for the Year Ended December 31, 2001 (dollars in thousands) After 1 but After 5 but Within 1 Year Within 5 Years Within 10 Years After 10 Years SECURITIES AVAILABLE FOR SALE Amount Yield Amount Yield Amount Yield Amount Yield Total ___________________________________________________________________________________________ U.S. Treasury and U.S. Government Agency securities $1,007 6.50% $10,333 4.87% $3,408 2.47% $106 4.24% $14,854 Obligations of State and Political Subdivisions 452 2.80% 5,331 2.94% 4,107 4.29% 3,757 4.94% 13,647 Mortgage Backs and CMOs - - 2,326 4.65% 8,754 4.94% 30,243 5.97% 41,323 Corporates and other securities 1,024 5.64% 2,627 5.96% - - 1,335 4.30% 4,986 Mutual funds 970 5.41% - - - - - - 970 ___________________________________________________________________________________________ Total Fair Value $3,453 $20,617 $16,269 $35,441 $75,780 ===========================================================================================
After 1 but After 5 but Within 1 Year Within 5 Years Within 10 Years After 10 Years HELD TO MATURITY Amont Yield Amount Yield Amount Yield Amount Yield Total ___________________________________________________________________________________________ Obligations of State and Political Subdivisions $30 5.74% $3,728 5.31% $15,374 5.10% $4,453 5.11% $23,585 ___________________________________________________________________________________________ Total Amortized Cost $30 $3,728 $15,374 $4,453 $23,585 ===========================================================================================
MIDSOUTH BANCORP, INC. SUMMARY OF AVERAGE DEPOSITS (in thousands) 2001 2000 AVERAGE AVERAGE AVERAGE AVERAGE AMOUNT YIELD AMOUNT YIELD ________ _______ _______ _______ Non-interest bearing $74,732 0.00% $63,713 0.00% Demand Deposits Interest bearing Deposits Savings, NOW, MMKT 122,562 2.44% 102,709 3.42% Time Deposits 117,163 5.58% 101,446 5.59% ________ ________ Total $314,457 3.98% $267,868 3.43% ======== ========
MATURITY SCHEDULE TIME DEPOSITS OF $100,000 OR MORE (in thousands) 2001 2000 _______ _______ 3 months or less $18,083 $13,059 3 months through 6 months 9,140 9,956 7 months through 12 months 14,872 13,283 over 12 months 3,983 9,774 _______ _______ Total $46,078 $46,072 ======== =======
SUMMARY OF RETURN ON EQUITY AND ASSETS 2001 2000 ________ _______ Return on Average Assets 0.85% 0.98% Return on Average Common Equity 14.04% 17.70% Dividend Payout Ratio on Common Stock 18.96% 18.93% Average Equity to Average Assets 6.23% 5.97%
Selected Quarterly Financial Data (unaudited) 2001 ___________________________________________________________ (Dollars in thousands, except per share IV III II I _______ _______ _______ _______ Interest income $6,138 $6,596 $6,922 $6,768 Interest expense 2,119 2,563 2,843 2,885 _______ _______ _______ _______ Net interest income 4,019 4,033 4,079 3,883 Provision for possible credit losses 380 439 1,034 323 _______ _______ _______ _______ Net interest income after provision for possible credit losses 3,639 3,594 3,045 3,560 Noninterest income, excluding securities gains 1,499 1,241 1,298 1,183 Net securities gains 142 - 68 - Noninterest expense 4,101 3,835 3,822 3,704 _______ _______ _______ _______ Income before income tax expense 1,179 1,000 589 1,039 Income tax expense 284 217 120 244 _______ _______ _______ _______ Net income 895 783 469 795 Preferred stock dividend requirement - - (22) (30) _______ _______ _______ _______ Income applicable to common shareholders $895 $783 $447 $765 ======= ======= ======= ======= Earnings per common share Basic $0.31 $0.29 $0.18 $0.31 Diluted $0.31 $0.27 $0.16 $0.27 Market price of common stock High $11.60 $11.05 $11.90 $10.40 Low $10.70 $10.27 $10.35 $9.90 Close $11.60 $10.85 $11.10 $9.99 Average shares outstanding Basic 2,877,891 2,734,556 2,514,972 2,492,196 Diluted 2,931,866 2,947,085 2,920,454 2,924,741
2000 ___________________________________________________________ (Dollars in thousands, except per share IV III II I _______ _______ _______ _______ Interest income $6,733 $6,238 $5,885 $5,592 Interest expense 2,886 2,528 2,254 2,119 _______ _______ _______ _______ Net interest income 3,847 3,710 3,631 3,473 Provision for possible credit losses 302 201 177 217 _______ _______ _______ _______ Net interest income after provision for possible credit losses 3,545 3,509 3,454 3,256 Noninterest income, excluding securities gains 1,243 1,131 1,158 1,035 Net securities gains - 14 - 2 Noninterest expense 3,819 3,582 3,511 3,589 _______ _______ _______ _______ Income before income tax expense 969 1,072 1,101 704 Income tax expense 209 276 310 156 _______ _______ _______ _______ Net income 760 796 791 548 Preferred stock dividend requirement (33) (140) (35) (38) _______ _______ _______ _______ Income applicable to common shareholders $727 $656 $756 $510 ======= ======= ======= ======= Earnings per common share Basic $0.29 $0.26 $0.30 $0.21 Diluted $0.26 $0.24 $0.27 $0.18 Market price of common stock High $8.69 $8.38 $8.81 $9.44 Low $8.13 $7.75 $8.00 $8.63 Close $8.63 $8.25 $8.06 $8.75 Average shares outstanding Basic 2,489,829 2,489,829 2,500,019 2,470,551 Diluted 2,910,494 2,901,198 2,968,851 2,964,655
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES Item 7. Consolidated Financial Statements for the Years Ended December 31, 2001, 2000 and 1999 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of MidSouth Bancorp, Inc. Lafayette, Louisiana We have audited the accompanying consolidated statements of condition of MidSouth Bancorp, Inc. and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MidSouth Bancorp, Inc. and subsidiaries at December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP New Orleans, Louisiana February 1, 2002
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION DECEMBER 31, 2001 AND 2000 _______________________________________________________________________________________________ ASSETS 2001 2000 Cash and due from banks $ 18,547,278 $ 15,698,538 Federal funds sold 17,300,000 34,100,000 ____________ ____________ Total cash and cash equivalents 35,847,278 49,798,538 Interest-bearing deposits in banks 109,206 68,682 Securities available-for-sale at fair value (amortized cost of $75,052,952 in 2001 and $53,821,526 in 2000) 75,780,414 53,969,626 Securities held-to-maturity (estimated fair value of $24,735,122 in 2001 and $24,474,077 in 2000) 23,584,850 23,611,057 Loans, net of allowance for loan losses of $2,705,058 in 2001 and $2,276,187 in 2000 211,685,063 202,308,673 Accrued interest receivable 2,197,794 2,365,350 Premises and equipment, net 11,950,701 11,739,575 Other real estate owned, net 359,336 446,046 Goodwill, net 431,987 493,071 Other assets 1,833,234 1,572,815 ____________ ____________ $363,779,863 $346,373,433 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 91,145,842 $ 75,151,653 Interest bearing 239,431,616 244,395,552 ____________ ____________ Total deposits 330,577,458 319,547,205 Securities sold under repurchase agreements 663,079 997,616 Accrued interest payable 1,057,065 1,007,302 Notes payable 1,431,000 4,650,968 Junior subordinated debentures 7,000,000 - Other liabilities 423,700 307,964 ____________ ____________ Total liabilities 341,152,302 326,511,055 ____________ ____________ Commitments and Contingencies - - Stockholders' equity: Convertible preferred stock, $14.25 par value, 5,000,000 shares authorized, -0- and 130,620 issued and outstanding at December 31, 2001 and 2000, respectively - 1,861,335 Common stock, $.10 par value, 5,000,000 shares authorized; 2,901,142 and 2,515,166 issued and outstanding at December 31, 2001 and 2000, respectively 290,114 251,517 Additional paid in capital 12,972,762 11,147,534 Unearned ESOP shares (149,638) (185,127) Unrealized gains on securities available-for-sale, net of deferred taxes 469,962 85,200 Retained earnings 9,044,361 6,701,919 ____________ ____________ Total stockholders' equity 22,627,561 19,862,378 ____________ ____________ $363,779,863 $346,373,433 ============ ============ See notes to consolidated financial statements.
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 __________________________________________________________________________________________________ 2001 2000 1999 INTEREST INCOME: Loans, including fees $ 20,539,148 $ 19,440,991 $ 16,282,923 Securities: Taxable 3,807,820 3,445,594 3,277,619 Nontaxable 1,512,050 1,231,074 1,105,320 Federal funds sold 565,009 331,456 406,871 ____________ ____________ ____________ Total interest income 26,424,027 24,449,115 21,072,733 ____________ ____________ ____________ INTEREST EXPENSE: Deposits 9,530,743 9,180,999 7,371,194 Securities sold under repurchase agreements, federal funds purchased and advances 73,703 259,399 253,869 Long-term debt 804,480 346,767 263,288 ____________ ____________ ____________ Total interest expense 10,408,926 9,787,165 7,888,351 ____________ ____________ ____________ NET INTEREST INCOME 16,015,101 14,661,950 13,184,382 PROVISION FOR LOAN LOSSES 2,176,224 897,038 906,950 ____________ ____________ ____________ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,838,877 13,764,912 12,277,432 ____________ ____________ ____________ NONINTEREST INCOME: Service charges on deposit accounts 3,534,113 3,234,954 2,972,024 Gains on sale of securities, net 188,883 16,126 - Credit life insurance 246,046 271,875 159,014 Other charges and fees 1,463,817 1,060,040 849,458 ____________ ____________ ____________ 5,432,859 4,582,995 3,980,496 ____________ ____________ ____________ NONINTEREST EXPENSES: Salaries and employee benefits 7,300,250 6,830,062 6,037,935 Occupancy expense 3,423,585 3,261,020 2,850,428 Other 4,738,637 4,410,484 3,851,944 ____________ ____________ ____________ 15,462,472 14,501,566 12,740,307 ____________ ____________ ____________ INCOME BEFORE INCOME TAXES 3,809,264 3,846,341 3,517,621 PROVISION FOR INCOME TAXES 866,105 951,204 867,417 ____________ ____________ ____________ NET INCOME 2,943,159 2,895,137 2,650,204 PREFERRED DIVIDENDS AND OTHER 52,751 246,024 131,582 ____________ ____________ ____________ NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 2,890,408 2,649,113 2,518,622 ============ ============ ============ EARNINGS PER COMMON SHARE: BASIC $1.08 $1.07 $1.03 ===== ===== ===== DILUTED $1.00 $ .95 $. 90 ===== ===== ===== See notes to consolidated financial statements.
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 _________________________________________________________________________________________________ 2001 2000 1999 Net income $2,943,159 $2,895,137 $ 2,650,204 Other comprehensive income (loss): Unrealized gain (loss) on securities available-for-sale, net: Unrealized holding gains (losses) arising during the year 509,425 1,044,273 (1,225,130) Less reclassification adjustment for gains included in net income (124,663) (10,643) - ___________ ___________ ___________ Total other comprehensive income (loss) 384,762 1,033,630 (1,225,130) ___________ ___________ ___________ TOTAL COMPREHENSIVE INCOME $3,327,921 $3,928,767 $ 1,425,074 =========== =========== =========== See notes to consolidated financial statements.
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 _______________________________________________________________________________________________________________________________ Unrealized Gains (Losses) on Preferred Stock Common Stock Additional Securities __________________ __________________ Paid in ESOP Available Retained Shares Amount Shares Amount Capital Obligation for Sale Earnings Total BALANCE, JANUARY 1, 1999 156,927 $2,236,210 2,432,016 $243,201 $10,521,020 $(119,051) $276,700 $2,528,042 $15,686,122 Issuance of common stock - - 37,267 3,727 386,728 - - - 390,455 Dividends on common stock - $.20 per share - - - - - - - (492,415) (492,415) Dividends on preferred stock - - - - - - - (131,582) (131,582) Preferred stock conversion (4,191) (59,722) 12,560 1,256 58,466 - - - - Excess of market value over book value of ESOP shares released - - - - 17,500 - - - 17,500 Net income - - - - - - - 2,650,204 2,650,204 ESOP obligation repayments - - - - - 30,007 - - 30,007 Net change in unrealized gains (losses) on securities available-for-sale, net of tax - - - - - - (1,225,130) - (1,225,130) _________ _________ _________ _______ __________ ________ ________ _________ __________ BALANCE, DECEMBER 31, 1999 152,736 2,176,488 2,481,843 248,184 10,983,714 (89,044) (948,430) 4,554,249 16,925,161 Dividends on common stock - $.20 per share - - - - - - - (501,443) (501,443) Dividends on preferred stock - - - - - - - (138,774) (138,774) Preferred stock conversion (11,116) (158,403) 33,323 3,333 155,070 - - - - Redemption of preferred stock (11,000) (156,750) - - - - - (107,250) (264,000) Excess of market value over book value of ESOP shares released - - - - 8,750 - - - 8,750 Net income - - - - - - - 2,895,137 2,895,137 ESOP new obligations, net - - - - - (96,083) - - (96,083) Net change in unrealized gains (losses) on securities available-for-sale, net of tax - - - - - - 1,033,630 - 1,033,630 _________ _________ _________ _______ __________ ________ ________ _________ __________ BALANCE, DECEMBER 31, 2000 130,620 1,861,335 2,515,166 251,517 11,147,534 (185,127) 85,200 6,701,919 19,862,378 Issuance of common stock - - 5,062 506 33,258 - - - 33,764 Dividends on common stock - $.20 per share - - - - - - - (547,966) (547,966) Dividends on preferred stock - - - - - - - (52,751) (52,751) Preferred stock conversion (127,092)(1,811,061) 380,914 38,091 1,772,970 - - - - Redemption of preferred stock (3,528) (50,274) - - - - - - (50,274) Excess of market value over book value of ESOP shares released - - - - 19,000 - - - 19,000 Net income - - - - - - - 2,943,159 2,943,159 ESOP obligation, repayments - - - - - 35,489 - - 35,489 Net change in unrealized gains (losses) on securities available-for-sale, net of tax - - - - - - 384,762 - 384,762 _________ _________ _________ _______ __________ ________ ________ _________ __________ BALANCE, DECEMBER 31, 2001 - - 2,901,142 $290,114 $12,972,762 $(149,638) $469,962 $9,044,361 $22,627,561 ========= ========= ========= ======= ========== ======== ======== ========= ========== See notes to consolidated financial statements.
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ___________________________________________________________________________________________ 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,943,159 $ 2,895,137 $ 2,650,204 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,310,180 1,371,272 1,199,447 Provision for loan losses 2,176,224 897,038 906,950 Provision for and losses on other real estate owned 92,687 104,226 5,100 Deferred income taxes (benefit) (70,000) (17,000) 20,500 Amortization of premiums on securities, net 204,538 80,327 62,577 Gain on sales of securities (188,883) (16,126) - Change in accrued interest receivable 167,556 (446,168) (178,668) Change in accrued interest payable 49,763 292,131 149,275 Other, net 61,530 (205,911) (75,268) Net cash provided by operating __________ _________ _________ activities 6,746,754 4,954,926 4,740,117 __________ _________ _________ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in interest- bearing deposits in banks (40,524) 287,442 (339,999) Proceeds from sales of securities available-for-sale 9,794,538 2,064,519 0 Proceeds from maturities and calls of securities available-for-sale 28,736,270 14,949,666 13,596,064 Proceeds from maturities of securities held-to-maturity 25,000 50,000 50,000 Purchases of securities available-for-sale (59,776,682) (13,790,321) (27,260,358) Purchases of securities held-to-maturity - (2,376,258) (2,030,269) Loan originations, net of repayments (11,675,897) (34,881,779) (13,207,947) Purchases of premises and equipment (1,506,020) (1,681,950) (3,488,024) Proceeds from sales of other real estate owned 117,306 197,186 51,374 Purchase of insurance premium financing company - - (3,503,497) Other, net 8,533 - 25,636 __________ _________ _________ Net cash used investing activities (34,317,476) (35,181,495) (36,107,020) ______________ ___________ ___________ (Continued)
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 _________________________________________________________________________________________ 2001 2000 1999 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 11,030,253 67,856,999 21,765,904 Net increase (decrease) in repurchase agreements (334,537) 391,015 606,601 Proceeds from (repayments of) FHLB advances, net (175,968) (3,000,000) 3,000,000 Issuance of notes payable 20,000 1,525,000 190,000 Proceeds from junior subordinated debentures, net 6,774,297 - - Repayments of notes payable (3,064,000) (333,129) (234,571) Proceeds from issuance of common stock 33,764 - 390,455 Payment of dividends on common and preferred stock (614,073) (638,468) (467,332) Redemption of preferred stock (50,274) (264,000) - ____________ ____________ ____________ Net cash provided by financing activities 13,619,462 65,537,417 25,251,057 ____________ ____________ ____________ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,951,260) 35,310,848 (6,115,846) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 49,798,538 14,487,690 20,603,536 ____________ ____________ ____________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 35,847,278 $ 49,798,538 $ 14,487,690 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 10,359,163 $ 9,495,034 $ 7,739,076 ============ ============ ============ Income taxes paid $ 800,155 $ 985,408 $ 845,488 ============ ============ ============ See notes to consolidated financial statements. (Concluded)
MIDSOUTH BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 _______________________________________________________________________ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of MidSouth Bancorp, Inc. (the Company) and its wholly owned subsidiaries MidSouth Bank, N.A. (the Bank) and Financial Services of the South, Inc. (the Finance Company), have been prepared in accordance with accounting principles generally accepted in the United States of America and conform with general practices within the banking industry. A summary of significant accounting policies follows: Description of Business - The Company is a bank holding company headquartered in Lafayette, Louisiana operating principally in the community banking business segment by providing banking services to commercial and retail customers through its wholly owned subsidiary, the Bank. The Bank is community oriented and focuses primarily on offering competitive commercial and consumer loan and deposit services to individuals and small to middle market business. The Company also provides consumer loan services to individuals through the Finance Company. Comprehensive Income - Comprehensive income includes net income and other comprehensive income which, in the case of the Company, includes only unrealized gains and losses on securities available-for-sale. Consolidation - The consolidated financial statements of the Company include the accounts of the Company, the Bank and the Finance Company. All significant intercompany transactions and balances have been eliminated. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities - Securities are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115 requires the classification of securities into one of three categories: trading, available-for-sale, or held-to-maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates this classification periodically. Trading account securities are held for resale in anticipation of short-term market movements. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities not classified as held-to-maturity or trading are classified as available-for-sale. The Company had no trading account securities during the three years ended December 31, 2001. Held-to-maturity securities are stated at amortized cost. Available-for-sale securities are stated at fair value, with unrealized gains and losses, net of deferred taxes, reported as a separate component of stockholders' equity until realized. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Amortization, accretion and accrued interest are included in interest income on securities. Realized gains and losses, and declines in value judged to be other than temporary, are included in net securities gains. Gains and losses on the sale of securities available-for-sale are determined using the specific-identification method. Derivative Instruments - The Company recognizes all derivatives as either assets or liabilities in the Company's balance sheet and measures those instruments at fair value. If certain conditions are met, a derivative may be specially designated as a hedge. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company is not currently engaged in any significant activities with derivatives. Loans - Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment to yield over the life of the related loan. Interest on commercial and real estate mortgage loans is recorded as income based upon the principal amount outstanding. Unearned income on installment loans is credited to operations based on a method which approximates the interest method. Where doubt exists as to collectibility of a loan, the accrual of interest is discontinued and subsequent payments received are applied first to principal. Upon such discontinuances all unpaid accrued interest is reversed. Interest income is recorded after principal has been satisfied and as payments are received. The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's impaired loans include troubled debt restructurings, and performing and non-performing major loans in which full payment of principal or interest is not expected. Non-major homogenous loans, which are evaluated on an overall basis, generally include all loans under $50,000. The Company calculates the allowance required for impaired loans 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 its collateral. Generally, loans of all types which become 90 days delinquent are either in the process of collection through repossession or foreclosure or alternatively, are deemed currently uncollectible. Loans deemed currently uncollectible are charged-off against the allowance account. As a matter of policy, loans are placed on a non-accrual status where doubt exists as to collectibility. 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. Periodically during the year, management estimates the probable level of losses in the existing portfolio based on the Company's past loan loss experience, known inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral and current economic conditions. Based on these estimates, the allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets which generally range from 3 to 30 years. Leasehold improvements are amortized over the estimated useful lives of the improvements or the term of the lease, whichever is shorter. Other Real Estate Owned - Real estate properties acquired through, or in lieu of, loan foreclosures are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. Income Taxes - Deferred income taxes are provided for temporary differences between items of income or expense reported in the consolidated financial statements and those reported for income tax purposes. The Company computes deferred income taxes based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Goodwill - Goodwill is amortized on the straight-line basis over a fifteen year period. Amortization expense amounted to approximately $60,584 in 2001, $60,584 in 2000 and $47,917 in 1999. Accumulated amortization at December 31, 2001 and 2000 was $421,705 and $361,121, respectively. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles." These Statements provide that, among other things, (1) all business combinations on or after July 1, 2001 be accounted for as purchases, (2) any related goodwill on those acquisitions does not require amortization, but is subject to a periodic impairment test and that (3) goodwill on any of the Company's acquisitions prior to July 1, 2001 not be amortized after January 1, 2002, but is subject to a periodic impairment test. The Company has performed a transitional fair value based impairment test on its goodwill and determined that the fair value exceeded the recorded value at December 31, 2001. No impairment loss, therefore, will be recorded on January 1, 2002. Stock-Based Compensation - The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Since all options are exercisable at the estimated fair value at the date of grant, no compensation cost has been recognized. The pro forma disclosures required by SFAS 123 are included in Note 11. Basic and Diluted Earnings Per Common Share - Basic earnings per common share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. Diluted EPS is computed by dividing net income by the total of the weighted- average number of shares outstanding plus the effect of outstanding options and convertible preferred stock. Statements of Cash Flows - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. 2. CASH AND DUE FROM BANKS The Company is required to maintain average balances relating to its deposit liabilities. This requirement is ordinarily satisfied by cash on hand. 3. INVESTMENT SECURITIES The portfolio of securities consisted of the following:
December 31, 2001 ____________________________________________________________ Gross Gross Amortized Unrealized Unrealized Available-for-Sale Cost Gains Losses Fair Value U.S. Government agencies $ 14,710,956 $ 185,389 $ 42,379 $ 14,853,966 Obligations of states and political subdivisions 13,477,575 192,205 22,214 13,647,566 Mortgage-backed securities 20,775,671 383,355 61,746 21,097,280 Collateralized mortgage obligations 20,184,344 73,305 32,177 20,225,472 Corporate securities 3,569,50 82,423 700 3,651,230 Mutual funds 1,000,00 - 30,000 970,000 Other 1,334,90 - - 1,334,900 _______________ ___________ ________ ____________ $ 75,052,953 $ 916,677 $189,216 $ 75,780,414 =============== =========== ========= ============
December 31, 2000 ____________________________________________________ Gross Gross Amortized Unrealized Unrealized Available-for-Sale Cost Gains Losses Fair Value U.S. Treasury securities $ 5,610,508 $ 42,980 $ - $ 5,653,488 U.S. Government agencies 9,125,358 84,558 - 9,209,916 Obligations of states and political subdivisions 5,385,799 94,933 - 5,480,732 Mortgage-backed securities 22,067,196 - 47,964 22,019,232 Collateralized mortgage obligations 6,866,052 - 11,659 6,854,393 Corporate securities 2,519,313 22,252 2,541,565 Mutual funds 1,000,000 - 37,000 963,000 Other 1,247,300 - - 1,247,300 ____________ _________ ________ ____________ $ 53,821,526 $ 244,723 $ 96,623 $ 53,969,626 ============ ========= ======== ============
December 31, 2001 ________________________________________________________ Gross Gross Amortized Unrealized Unrealized Held-to-Maturity Cost Gains Losses Fair Value Obligations of states and political subdivisions $ 23,584,850 $ 1,183,889 $ 33,617 $ 24,735,122 ============= ============ =========== =============
December 31, 2000 _______________________________________________________ Gross Gross Amortized Unrealized Unrealized Held-to-Maturity Cost Gains Losses Fair Value Obligations of states and political subdivisions $ 23,611,057 $ 871,464 $ 8,444 $ 24,474,077 ============= =========== ========= =============
The amortized cost and fair value of securities at December 31, 2001 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Available-for-Sale Cost Fair Value Due in one year or less $ 2,461,936 $ 2,483,517 Due after one year through five years 18,030,113 18,291,193 Due after five years through ten years 7,506,506 7,515,442 Due after ten years 3,759,483 3,862,610 Mortgage-backed securities and collaterized mortgage obligations 40,960,015 41,322,752 Mutual funds 1,000,000 970,000 Other securities 1,334,900 1,334,900 ____________ ____________ $ 75,052,953 $ 75,780,414 ============ ============
Amortized Held-to-Maturity Cost Fair Value Due in one year or less $ 30,000 $ 30,087 Due after one year through five years 3,728,353 3,983,494 Due after five years through ten years 15,373,441 16,114,395 Due after ten years 4,453,056 4,607,146 _____________ _____________ $ 23,584,850 $ 24,735,122 ============= =============
Proceeds from sales of securities available-for-sale during 2001 and 2000 were $9,794,538 and $2,064,519, respectively. There were no sales of securities available-for-sale during 1999. A gross gain of $188,883 and $16,126 was recognized on sales in 2001 and 2000, respectively. Securities with an aggregate carrying value of approximately $33,000,000 and $20,000,000 at December 31, 2001 and 2000 were pledged to secure public funds on deposit and for other purposes required or permitted by law. The Company's collateralized mortgage obligations (CMO's) consist primarily of first and second tranche sequential pay and/or planned amortization class (PAC) instruments. 4. LOANS The loan portfolio consisted of the following:
December 31, _____________________________ 2001 2000 Commercial, financial and agricultural $ 68,710,853 $ 69,383,791 Lease financing receivable 4,729,558 5,025,722 Real estate - mortgage 97,647,501 90,952,647 Real estate - construction 7,090,105 4,740,917 Installment loans to individuals 35,920,805 34,243,331 Other 291,299 238,452 _____________ _____________ 214,390,121 204,584,860 Less allowance for loan losses (2,705,058) (2,276,187) _____________ _____________ $ 211,685,063 $ 202,308,673 ============= =============
Loans are stated net of unearned income and loan origination fees in the above table. The amount of such items is not significant. An analysis of the activity in the allowance for loan losses is as follows:
Year Ended December 31, _________________________________________ 2001 2000 1999 Balance at beginning of year $ 2,276,187 $ 1,967,326 $ 1,860,490 Provision for loan losses 2,176,224 897,038 906,950 Recoveries 165,980 120,250 141,299 Loans charged off (1,913,333) (708,427) (941,413) ___________ ___________ ___________ Balance at end of year $ 2,705,058 $ 2,276,187 $ 1,967,326 =========== =========== ===========
During the years ended December 31, 2001, 2000 and 1999, there were approximately $123,000, $177,000 and $581,000, respectively, of net transfers from loans to other real estate owned. As of December 31, 2001 and 2000, loans outstanding to directors, executives officers, and their affiliates were $1,916,721 and $1,240,383, respectively. In the opinion of management, all transactions entered into between the Company and such related parties have been and are made in the ordinary course of business, on substantially the same terms and conditions, including interest rates and collateral, as similar transactions with unaffiliated persons and do not involve more than the normal risk of collection. An analysis of the 2001 activity with respect to these related party loans is as follows:
Balance, January 1, 2001 $1,240,383 New loans 890,030 Repayments (213,692) __________ Balance, December 31, 2001 $1,916,721 ==========
Non-accrual and renegotiated loans amounted to approximately $769,000 and $160,000 at December 31, 2001 and 2000, respectively. The Company's other individually evaluated impaired loans were not significant at December 31, 2001 and 2000. The related allowance amounts on impaired loans were not significant and there was no significant change in these amounts during the years ended December 31, 2001, 2000 or 1999. The amount of interest not accrued on these loans did not have a significant effect on net income in 2001, 2000 or 1999. 5. BANK PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
December 31, ______________________________ 2001 2000 Buildings and improvements $ 9,262,747 $ 9,302,432 Furniture, fixtures, and equipment 7,813,027 7,621,387 Automobiles 259,655 276,151 Leasehold improvements 652,274 685,568 Construction-in-process 1,147,540 2,978 ____________ ____________ 19,135,243 17,888,516 Less accumulated depreciation and amortization (7,184,542) (6,148,941) ____________ ____________ $ 11,950,701 $ 11,739,575 ============ ============
6. DEPOSITS Deposits consisted of the following:
December 31, _______________________________ 2001 2000 Non-interest bearing $ 91,145,842 $ 75,151,653 Savings and money market 84,174,077 100,306,058 NOW accounts 39,498,633 31,317,013 Time deposits under $100,000 69,681,325 66,700,305 Time deposits over $100,000 46,077,581 46,072,176 _____________ _____________ $ 330,577,458 $ 319,547,205 ============= =============
Approximately $103,145,000 of time deposits mature in 2002 and the balance of $12,614,000 principally in 2003. 7. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following:
December 31, ___________________________ 2001 2000 Notes payable to financial institutions $ 1,431,000 $ 4,475,000 FHLB advances - long term - 175,968 Junior subordinated debentures 7,000,000 - ___________ ___________ $ 8,431,000 $ 4,650,968 =========== ===========
At December 31, 2001, the notes payable to financial institutions consisted of advances against a line of credit established by Financial Services of the South, Inc. The line of credit is in the amount of $2,000,000 and is dated April 30, 2001. Advances under the line of credit bear interest at a variable rate equal to the commercial prime rate as quoted in the "Money Rates" section of the Wall Street Journal plus twenty-five basis points (0.25%). At December 31, 2001 and 2000, the effective rate was 5.00% and 9.75%, respectively. Interest on this note is payable monthly, with principal due at maturity on April 30, 2002. Advances under this note totaled $1,431,000 at December 31, 2001 and $1,975,000 at December 31, 2000. FSS has pledged (1) all its promissory notes, credit sales agreements, installments sales contracts, chattel paper, negotiable paper or other written evidence of indebtedness to FSS; (2) all of its accounts receivable; and (3) all of its common stock as collateral on this note. A line of credit for the Company with a principal balance of $2,500,000 at December 31, 2000 was paid in full in February 2001 with proceeds received from the Company's issuance of junior subordinated debentures. Two long-term FHLB borrowings totaling $175,968 at December 31, 2000 matured during 2001. On February 22, 2001, the Company, issued $7,000,000 of junior subordinated debentures. The $7,000,000 qualifies as Tier 1 capital for regulatory capital purposes, but is classified as a liability under accounting principles generally accepted in the United States of America. These debentures are presented in the Consolidated Statements of Condition as "Junior Subordinated Debentures." These junior subordinated debentures carry an interest rate of 10.20% with interest paid semi-annually in arrears and mature on February 22, 2031. Under certain circumstances, these debentures are subject to repayment on February 11, 2011 or thereafter. 8. COMMITMENTS AND CONTINGENCIES At December 31, 2001, future annual minimum rental payments due under noncancellable operating leases, primarily for land, are as follows:
2002 $ 440,571 2003 426,410 2004 382,397 2005 169,634 2006 157,604 Thereafter 459,082 ____________ $ 2,035,698 ============
Minimum rental payments have not been reduced by minimum sublease rentals of approximately $60,000 due in the future under noncancellable subleases. Rental expense under operating leases for 2001, 2000 and 1999 was approximately $540,000, $520,000, and $447,000, respectively. Sublease income for 2001, 2000 and 1999 amounted to $31,800 each year. The Company and its subsidiaries are parties to various legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these legal proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 9. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows:
2001 2000 Deferred tax assets: Allowance for loan losses $ 620,000 $ 557,000 Other 116,000 89,000 _________ _________ Total deferred tax assets 736,000 646,000 _________ _________ Deferred tax liabilities: FHLB stock dividends (88,000) (78,000) Depreciation (276,000) (260,000) Unrealized gain on securities (258,000) (63,000) Other (119,000) (125,000) _________ _________ Total deferred tax liabilities (741,000) (526,000) ========= ========= Net deferred tax asset (liability) $ (5,000) $ 120,000 ========= =========
Components of income tax expense are as follows:
2001 2000 1999 Current $936,105 $968,204 $846,917 Deferred expense (benefit) (70,000) (17,000) 20,500 ________ ________ ________ $866,105 $951,204 $867,417 ======== ======== ========
The provision for federal income taxes differs from the amount computed by applying the U.S. Federal income tax statutory rate of 34% on income as follows:
Year Ended December 31, _____________________________________ 2001 2000 1999 Taxes calculated at statutory rate $1,295,150 $1,307,756 $1,195,991 Increase (decrease) resulting from: Tax-exempt interest (450,711) (370,894) (334,386) Other 21,666 14,342 5,812 __________ __________ __________ $ 866,105 $ 951,204 $ 867,417 ========== ========== ==========
The deferred income tax expense (credit) relating to unrealized gains (losses) on securities available-for-sale included in other comprehensive income amounted to $258,820 in 2001, $531,500 in 2000 and, $(627,500) in 1999. Income taxes relating to gains on sales of securities amounted to $64,220 in 2001 and $5,483 in 2000. 10. EMPLOYEE BENEFITS The Company sponsors a leveraged employee stock ownership plan (ESOP) that covers all employees who meet minimum age and service requirements. The Company makes annual contributions to the ESOP in amounts as determined by the Board of Directors. These contributions are used to pay debt service and purchase additional shares. Certain ESOP shares are pledged as collateral for this debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. The note is payable to the Bank. Because the source of the loan payments are contributions received by the ESOP from the Company, the related note receivable is shown as a reduction of stockholders' equity. The balance of the note receivable from the ESOP was $149,638 and $185,127 at December 31, 2001 and 2000, respectively. In accordance with the American Institute of Certified Public Accountants' Statement of Position 93-6 (SOP), compensation costs relating to shares purchased are based on the market price of the shares on the date released for allocation and the related unreleased shares are not considered outstanding in the computation of earnings per common share. ESOP compensation expense was $175,000, $156,750 and $145,500 for the years ended December 31, 2001, 2000 and 1999, respectively. The ESOP shares as of December 31, 2001 and 2000 were as follows:
2001 2000 Allocated shares 263,590 245,516 Shares released for allocation 5,049 5,211 Unreleased shares 18,202 23,251 _________ _________ Total ESOP shares 286,841 273,978 ========= ========= Fair value of unreleased shares at December 31, $ 211,143 $ 200,540 ========= =========
During 1996 the Company adopted a deferred compensation plan for certain officers which qualifies as a defined contribution plan. Contributions to the plan are required only if "excess earnings", as defined, are achieved. The participants accrue benefits based only on the contributions made. During 2001, 2000 and 1999, no contributions were required. 11. EMPLOYEE STOCK PLANS In May 1997 the stockholders of the Company approved the 1997 Stock Incentive Plan to provide incentives and awards for employees of the Company and its subsidiaries. "Awards" as defined in the Plan includes, with limitations, stock options (including restricted stock options), stock appreciation rights, performance shares, stock awards and cash awards, all on a stand-alone, combination or tandem basis. A total of 8% of the Company's common shares outstanding can be granted under the Plan. The exercise price of options is equal to the market price on the date of grant. The Company is applying APB Opinion No. 25 and related interpretations in accounting for stock options. Since all options are exercisable at the estimated fair market value at the date of grant, no compensation expense has been recognized. During 1998, options to purchase 23,155 shares were granted which are exercisable at $15.42 per share. During 1997, options to purchase 139,223 shares were granted which are exercisable at $6.67 per share. These options are exercisable in 20% increments beginning one year from the date of grant. The options expire ten years after the date of grant. Options to purchase 5,062 shares at $6.67 per share were exercised in the year ended December 31, 2001. None of the other options have been exercised and all of them are outstanding at December 31, 2001. Options on 106,316 shares at $6.67 per share and on 13,893 shares at $15.42 per share were exercisable at December 31, 2001. Options on 83,533 shares at $6.67 per share and on 9,262 shares at $15.42 per share were exercisable at December 31, 2000. The weighted average remaining contractual life of options outstanding at December 31, 2001 was 5.1 years. The Company has adopted the disclosure-only option under SFAS No. 123, "Accounting for Stock Based Compensation." Had compensation cost for the Company's stock options been determined based on the fair value at the grant date consistent with the method under SFAS No. 123, the Company's net income available to common stockholders and income per common share would have been as indicated below:
Year Ended ______________________________________ 2001 2000 1999 Net income available to common stockholders: As reported $ 2,890,408 $ 2,649,113 $ 2,518,622 Pro forma 2,855,539 2,601,041 2,434,668 Basic income per common share: As reported $ 1.08 $ 1.07 $ 1.03 Pro forma 1.07 1.05 1.00 Diluted income per common share: As reported $ 1.00 $ .95 $ .90 Pro forma .99 .94 .87
12. STOCKHOLDERS' EQUITY On July 31, 1995, the Company issued 187,286 shares of Series A Cumulative Convertible Preferred Shares with a stated value of $14.25. The Convertible Preferred Shares were convertible at any time at the option of the holder into common stock, at the rate of 2.998 shares of Common Stock for each Convertible Preferred Share. During the year ended December 31, 2001, the Company called for redemption of all outstanding shares and upon that notice, substantially all of the remaining outstanding preferred stock of 130,620 shares was converted into common stock by their holders. The Convertible Preferred Shares were redeemable, in whole or in part, at the option of the Company at the stated value of $14.25. Dividends on the Convertible Preferred Shares was determined each year on an annual rate, fixed on December 31 of each year for the ensuing calendar year and was 6.51% at December 31, 2000. The dividends were cumulative and payable quarterly in arrears. Holders of Convertible Preferred Shares were not entitled to normal voting rights unless certain conditions existed. During the year ended December 31, 2000, the Company redeemed 11,000 shares for $107,250 in excess of their carrying amount. The $107,250 was included in the amount recorded as preferred stock dividends in order to compute net income available to common stockholders. The payment of dividends by the Bank to the Company is restricted by various regulatory and statutory limitations. At December 31, 2001, the Bank has approximately $5,300,000 available to pay dividends to the Parent Company without regulatory approval. 13. NET INCOME PER COMMON SHARE Following is a summary of the information used in the computation of earnings per common share.
Year Ended December 31, ___________________________________________ 2001 2000 1999 Net income $ 2,943,159 $ 2,895,137 $ 2,650,204 Preferred dividend requirement on shares redeemed - 107,250 - ____________ ____________ ____________ Net income, as adjusted - used in computation of diluted earnings per common share 2,943,159 2,787,887 2,650,204 Preferred dividend requirement on shares excluding shares redeemed 52,751 138,774 131,582 ____________ ____________ ____________ Net income available to common stockholders - used in computation of basic earnings per common share $ 2,890,408 $ 2,649,113 $ 2,518,622 ============ ============ ============ Weighted average number of common shares outstanding - used in computation of basic earnings per common share 2,679,348 2,487,187 2,441,461 Effect of dilutive securities: Stock options 49,579 29,196 51,616 Convertible preferred stock 220,617 406,428 463,185 _____________ ___________ ____________ Weighted average number of common shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per common share 2,949,544 2,922,811 2,956,262 ============= =========== ============
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the involvement the Bank has in particular classes of financial instruments. The Bank's exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees is represented by the contractual amount of those instruments. The Bank uses the same credit policies, including considerations of collateral requirements, in making these commitments and conditional obligations as it does for on-balance sheet instruments.
Contract or Notional Amount ____________________________ 2001 2000 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $78,000,000 $52,700,000 Standby letters of credit 1,200,000 1,200,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. Substantially all of these commitments are at variable rates. Standby letters of credit and financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers. Approximately 75% of these letters of credit were secured by marketable securities, cash on deposits or other assets at December 31, 2001 and 2000. 15. REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2001 and 2000, the most recent notifications from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since those notifications that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are presented in the table.
To Be Well Required For Capitalized Under Minimum Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ___________________________ _______________________ ____________________ Amount Ratio Amount Ratio Amount Ratio As of December 31, 2001: Total capital to risk weighted assets: Company $ 31,400,670 13.20 % $ 19,035,031 8.00 % N/A N/A Bank 28,881,917 12.23 % 18,891,533 8.00 % 23,614,416 10.00 % Tier I capital to risk weighted assets: Company 28,695,612 12.06 % 9,517,515 4.00 % N/A N/A Bank 26,379,246 11.17 % 9,445,767 4.00 % 14,168,650 6.00 % Tier I capital to average assets: Company 28,695,612 8.02 % 14,314,377 4.00 % N/A N/A Bank 26,379,246 7.41 % 14,239,231 4.00 % 17,799,038 5.00 %
To Be Well Required For Capitalized Under Minimum Capital Prompt Corrective Actual Adequacy Purposes Action Provisions _______________________ _______________________ _____________________ Amount Ratio Amount Ratio Amount Ratio As of December 31, 2000: Total capital to risk weighted assets: Company $ 21,523,294 9.55 % $ 18,023,954 8.00 % N/A N/A Bank 23,506,666 10.54 % 17,842,682 8.00 % 22,303,352 10.00 Tier I capital to risk weighted assets: Company 19,247,294 8.54 % 9,011,977 4.00 % N/A N/A Bank 21,313,084 9.56 % 8,921,341 4.00 % 13,382,011 6.00 % Tier I capital to average assets: Company 19,247,107 6.05 % 12,734,767 4.00 % N/A N/A Bank 21,313,084 6.74 % 12,654,316 4.00 % 15,817,895 5.00 %
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash, Due From Banks and Federal Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities - For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans, Net - The fair value of 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 and for the same remaining maturities. Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Notes Payable and Debentures - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Commitments - The fair value of commitments to extend credit was not significant. The estimated fair values of the Company's financial instruments are as follows at December 31, 2001 and 2000 (in thousands):
2001 2000 ______________________ _____________________ Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Cash, due from banks and federal fund sold $ 35,956 $ 35,956 $ 49,867 $ 49,867 Securities available-for-sale 75,780 75,780 53,970 53,970 Securities held-to-maturity 23,585 24,735 23,611 24,474 Loans, net 211,685 212,900 202,309 202,200 Financial liabilities: Non-interest bearing deposits 91,146 91,146 75,152 75,152 Interest bearing deposits 239,432 241,000 244,396 244,800 Long-term notes payable 1,431 1,431 4,651 4,651 Junior subordinated debentures 7,000 7,300 - -
17. OTHER NON-INTEREST EXPENSE Other non-interest expense consisted of the following for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 Professional fees $ 455,740 $ 375,012 $ 369,672 FDIC assessments 56,367 50,612 27,470 Marketing expenses 749,808 748,261 789,666 Data processing 184,371 193,796 192,360 Postage 285,066 249,950 249,836 Education and travel 180,331 156,851 172,559 Printing and supplies 377,538 366,652 341,452 Telephone 275,277 281,890 267,325 Other 2,174,139 1,987,460 1,441,604 __________ __________ __________ $4,738,637 $4,410,484 $3,851,944 ========== ========== ==========
18. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Summarized financial information for MidSouth Bancorp, Inc. (parent company only) follows:
STATEMENTS OF CONDITION December 31, ____________________________ ASSETS 2001 2000 Cash and interest-bearing deposits in banks $ 2,485,457 $ 226,744 Other assets 505,837 87,840 Investment in and advances to subsidiaries 27,393,727 22,391,334 ____________ _____________ $ 30,385,021 $ 22,705,918 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Dividends payable $ 145,057 $ 158,413 Notes payable to financial institutions - 2,500,000 Junior subordinated debentures 7,000,000 - Note payable to Bank 149,638 185,127 Other 462,765 - ____________ _____________ Total liabilities 7,757,460 2,843,540 ____________ _____________ Total stockholders' equity 22,627,561 19,862,378 ____________ _____________ $ 30,385,021 $ 22,705,918 ============ =============
STATEMENTS OF INCOME Years Ended December 31, _______________________________________ 2001 2000 1999 Revenue: Dividends from Bank $ 200,000 $ 925,000 $ 375,000 Equity in undistributed income of subsidiaries 3,165,996 2,169,325 2,469,831 Rental and other income 190,314 50,682 42,998 ___________ ___________ ___________ 3,556,310 3,145,007 2,887,829 Expenses: Interest on short and long-term debt 652,656 192,131 157,000 Professional fees 73,925 75,073 99,741 Other expenses 103,837 84,820 79,636 ___________ ___________ ___________ 830,418 352,024 336,377 ___________ ___________ ___________ Income before income taxes 2,725,892 2,792,983 2,551,452 Income tax benefit 217,267 102,154 98,752 ___________ ___________ ___________ Net income $ 2,943,159 $ 2,895,137 $ 2,650,204 =========== =========== ============
STATEMENTS OF CASH FLOWS Years Ended December 31, ____________________________________ 2001 2000 1999 Cash flows from operating activities: Dividends from bank $ 200,000 $ 925,000 $ 375,000 Other, net (85,001) (184,584) (131,448) ___________ _________ _________ Net cash provided by (used in) operating activities 114,999 740,416 243,552 ___________ _________ _________ Cash flows from investing activities: Investment in and advances to subsidiaries (1,500,000) (225,000) - ___________ _________ _________ Net cash used in investing activities (1,500,000) (225,000) - ___________ _________ _________ Cash flows from financing activities: Capital stock transactions 33,764 (96,083) 372,955 Redemption of Preferred Stock (50,274) (264,000) - Payment of dividends (614,073) (638,468) (467,332) (Repayments) proceeds of notes payable, net (2,500,000) 507,097 34,706 Proceeds from junior subordinated debentures, net 6,774,297 - - ___________ _________ _________ Net cash provided by financing activities 3,643,714 (491,454) (59,671) ___________ _________ _________ Net increase in cash 2,258,713 23,962 183,881 Cash, beginning of year 226,744 202,782 18,901 ___________ _________ _________ Cash, end of year $ 2,485,457 $ 226,744 $ 202,782 =========== ========= =========
ITEM 8 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III ITEM 9 - Directors, Executive Officers, Promotors and Control Persons; Compliance with Section 16(a) of the Exchange Act The information contained in Registrant's definitive proxy statement for its 2002 annual meeting of shareholders, is incorporated herein by reference in response to this Item. Information concerning executive officers is provided following Item 4. ITEM 10 - Executive Compensation The information contained in Registrant's definitive proxy statement for its 2002 annual meeting of shareholders is incorporated herein by reference in response to this Item. ITEM 11 - Security Ownership of Certain Beneficial Owners and Management The information contained in Registrant's definitive proxy statement for its 2002 annual meeting of shareholders is incorporated herein by reference in response to this Item. ITEM 12 - Certain Relationships and Related Transactions The information contained in Registrant's definitive proxy statement for its 2002 annual meeting of shareholders is incorporated herein by reference in response to this Item. ITEM 13 - Exhibits and Reports on Form 8-K. Exhibits Exhibit No. Description 3.1 Amended and Restated Articles of Incorporation of MidSouth Bancorp, Inc. are included as Exhibit 3.1 to MidSouth's Annual Report on Form 10-K for the Year Ended December 31, 1993, and is incorporated herein by reference. 3.2 Articles of Amendment to Amended and Restated Articles of Incorporation dated July 19,1995 are included as Exhibit 4.2 to MidSouth's Registration Statement on Form S-8 filed September 20, 1995 and is incorporated herein by reference. 3.3 Amended and Restated By-laws of MidSouth are included as Exhibit 3.2 to Amendment No. 1 to MidSouth's Registration Statement on Form S-4 (Reg. No. 33-58499) filed on June 1, 1995, and is incorporated herein by reference. 4.1 MidSouth agrees to furnish to the Commission on request a copy of the instruments defining the rights of the holder of its long- term debt, which debt does not exceed 10% of the total consolidated assets of MidSouth. 10.1 MidSouth National Bank Lease Agreement with Southwest Bank Building Limited Partnership is included as Exhibit 10.7 to the Company's annual report on Form 10-K for the Year Ended December 31, 1992, and is incorporated herein by reference. 10.2 First Amendment to Lease between MBL Life Assurance Corporation, successor in interest to Southwest Bank Building Limited Partnership in Commendam, and MidSouth National Bank is included as Exhibit 10.1 to the Company's annual report on Form 10-KSB for the year ended December 31, 1994, and is incorporated herein by reference. 10.3 Amended and Restated Deferred Compensation Plan and Trust is included as Exhibit 10.3 to MidSouth's Annual Report on Form 10-K for the year ended December 31, 1992 and is incorporated herein by reference. 10.5 Employment Agreements with C. R. Cloutier and Karen L. Hail are included as Exhibit 5c to MidSouth's Form 1-A and are incorporated herein by reference. 10.6 The MidSouth Bancorp, Inc. 1997 Stock Incentive Plan is included as a form of option agreement in Exhibit 4.5 to MidSouth's definitive proxy statement filed April 11, 1997 and is incorporated herein by reference. 10.7 The MidSouth Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan is included as Exhibit 4.6 to MidSouth Bancorp, Inc.'s Form S-3D filed on July 25, 1997 and is incorporated herein by reference. 10.8 Loan Agreements and Master Notes for lines of credit established for MidSouth Bancorp, Inc. and Financial Services of the South, Inc. are included as Exhibit 10.7 to MidSouth Bancorp, Inc.'s Form 10-QSB filed on August 14, 1997 and is incorporated herein by reference. 10.9 Modification Agreement to the Loan Agreement and Master Note for the Line of Credit established for MidSouth Bancorp, Inc. is included as Exhibit 10.9 to MidSouth Bancorp, Inc.'s Form 10- QSB filed on August 13, 1999 and is incorporated herein by reference. 10.10 Junior Subordinated Debentures Interest Debenture issued on February 22, 2001 by MidSouth Bancorp, Inc. is included as Exhibit 99 to MidSouth Bancorp, Inc.'s Form 10-QSB filed on May 15, 2001, and is incorporated herein by reference. 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDSOUTH BANCORP,INC. By: ___________________________ C. R. Cloutier President and Chief Executive Officer Dated: March 27, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ C. R. Cloutier President, Chief Executive March 27, 2002 C. R. Cloutier Officer and Director /s/ Karen L. Hail Chief Financial Officer, March 27, 2002 Karen L. Hail Executive Vice President, Secretary/Treasurer and Director /s/ Teri S. Stelly Chief Accounting Officer March 27, 2002 Teri S. Stelly /s/ J. B. Hargroder, M.D. Director March 27, 2002 J. B. Hargroder, M.D. /s/ William M. Simmons Director March 27, 2002 William M. Simmons /s/ Will G. Charbonnet, Sr. Director March 27, 2002 Will G. Charbonnet, Sr. /s/ Clayton Paul Hilliard Director March 27, 2002 Clayton Paul Hilliard /s/ James R. Davis Director March 27, 2002 James R. Davis, Jr. /s/ Milton B. Kidd, III Director March 27, 2002 Milton B. Kidd, III., O.D.