UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2016~~2017



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

COMMISSION FILE NUMBER 1-11826

MIDSOUTH BANCORP, INC.

(Exact name of registrant as specified in its charter)



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

102 Versailles Boulevard, Lafayette, Louisiana 70501

(Address of principal executive offices, including zip code)

(337) 237-8343

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 orof 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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or ~~a small~~an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting ~~company.~~ company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



☐Large accelerated filer ☐	☒Accelerated filer ☒	☐Non-accelerated filer ☐	~~Small~~☐Smaller reporting company	☐Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

YES ☐ NO ☒

As of November 9, ~~2016,~~2017, there were ~~11,362,716~~16,548,829 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.



Part I – Financial Information		34
	Item 1. Financial Statements	34
	Consolidated Balance Sheets	34
	Consolidated Statements of ~~Earnings~~Operations (unaudited)	45
	Consolidated Statements of Comprehensive Income (unaudited)	56
	Consolidated Statement of Shareholders’ Equity (unaudited)	67
	Consolidated Statements of Cash Flows (unaudited)	78
	Notes to Interim Consolidated Financial Statements	89
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.	2832
	Forward-Looking Statements	2933
	Critical Accounting Policies	3034
	Results of Operations	3034
	Analysis of Balance Sheet	3842
	Liquidity and Capital	3943
	Asset Quality	4044
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	4448
	Item 4. Controls and Procedures.	4448
Part II – Other Information		4549
	Item 1. Legal Proceedings.	4549
	Item 1A. Risk Factors.	4549
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	4549
	Item 3. Defaults Upon Senior Securities.	4549
	Item 4. Mine Safety Disclosures.	4550
	Item 5. Other Information.	4550
	Item 6. Exhibits.	4650

Table of Contents

Part I – Financial Information

Item 1. Financial Statements.


MidSouth Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except share data)	MidSouth Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except share data)							MidSouth Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except share data)
		September 30, 2016 (unaudited)			December 31, 2015 (audited)				September 30, 2017 (unaudited)			December 31, 2016 (audited)
Assets
Cash and due from banks, including required reserves of $5,702 and $8,522, respectively		$	31,883		$	37,170
Cash and due from banks, including required reserves of $6,545 and $6,669, respectively									$	32,199		$	31,687
Interest-bearing deposits in banks		93,850			48,331				124,591			47,091
Federal funds sold		934			3,700				6,333			3,450
Securities available-for-sale, at fair value (cost of $311,164 at September 30, 2016 and $317,375 at December 31, 2015)		316,145			318,159
Securities held-to-maturity (fair value of $106,009 at September 30, 2016 and $117,698 at December 31, 2015)		103,412			116,792
Securities available-for-sale, at fair value (cost of $325,888 at September 30, 2017 and $344,416 at December 31, 2016)									326,222			341,873
Securities held-to-maturity (fair value of $84,639 at September 30, 2017 and $98,261 at December 31, 2016)									83,739			98,211
Other investments		11,339			11,188				12,200			11,355
Loans		1,272,800			1,263,645				1,235,969			1,284,082
Allowance for loan losses		(23,268		)	(19,011		)		(25,053		)	(24,372		)
Loans, net		1,249,532			1,244,634				1,210,916			1,259,710
Bank premises and equipment, net		69,778			69,105				64,969			68,954
Accrued interest receivable		7,162			6,594				7,697			7,576
Goodwill		42,171			42,171				42,171			42,171
Intangibles		4,898			5,728				3,792			4,621
Cash surrender value of life insurance		14,272			13,622				14,834			14,335
Other real estate		2,317			4,187				1,931			2,175
Assets held for sale									1,100			—
Other assets		6,227			6,352				14,372			10,131
Total assets		$	1,953,920		$	1,927,733			$	1,947,066		$	1,943,340

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing		$	403,301		$	374,261			$	428,183		$	414,921
Interest-bearing		1,181,906			1,176,589				1,127,752			1,164,509
Total deposits		1,585,207			1,550,850				1,555,935			1,579,430
Securities sold under agreements to repurchase		95,210			85,957				54,875			94,461
Short-term Federal Home Loan Bank advances		—			25,000				12,500			—
Long-term Federal Home Loan Bank advances		25,531			25,851				25,110			25,424
Junior subordinated debentures		22,167			22,167				22,167			22,167
Other liabilities		7,679			4,771				8,836			7,482
Total liabilities		1,735,794			1,714,596				1,679,423			1,728,964
Commitments and contingencies
Shareholders’ equity:
Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at September 30, 2016 and December 31, 2015		32,000			32,000
Series C Preferred stock, no par value; 100,000 shares authorized, 91,098 and 91,200 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		9,110			9,120
Common stock, $0.10 par value; 30,000,000 shares authorized, 11,362,716 and 11,362,150 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		1,136			1,136
Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at September 30, 2017 and December 31, 2016									32,000			32,000
Series C Preferred stock, no par value; 100,000 shares authorized, 89,875 and 91,098 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively									8,987			9,110
Common stock, $0.10 par value; 30,000,000 shares authorized, 16,548,829 and 11,362,716 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively									1,655			1,136
Additional paid-in capital		111,116			110,771				168,322			111,166
Unearned ESOP shares		(1,342		)	(1,093		)		(967		)	(1,233		)
Accumulated other comprehensive income		3,273			509
Accumulated other comprehensive income (loss)									773			(1,010		)
Retained earnings		62,833			60,694				56,873			63,207
Total shareholders’ equity		218,126			213,137				267,643			214,376
Total liabilities and shareholders’ equity		$	1,953,920		$	1,927,733			$	1,947,066		$	1,943,340

See notes to unaudited consolidated financial statements.


MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Earnings (unaudited) (in thousands, except per share data)
MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (in thousands, except share and per share data)									MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (in thousands, except share and per share data)
	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015			2017		2016		2017			2016
Interest income:
Loans, including fees	$	17,373	$	17,992	$	51,334	$	54,314		$	17,329	$	17,087	$	50,682		$	50,525
Securities and other investments:
Taxable	1,983		1,850		5,959		5,642			2,276		1,983		7,019			5,959
Nontaxable	416		536		1,294		1,679			363		416		1,144			1,294
Federal funds sold	3		1		11		5			13		3		28			11
Time and interest bearing deposits in other banks	83		40		274		112			305		83		540			274
Other investments	95		113		273		259			93		95		255			273
Total interest income	19,953		20,532		59,145		62,011			20,379		19,667		59,668			58,336

Interest expense:
Deposits	915		883		2,725		2,751			1,094		915		3,002			2,725
Securities sold under agreements to repurchase	236		249		702		721			149		236		619			702
Other borrowings and payables	93		109		297		309			111		93		290			297
Junior subordinated debentures	170		150		507		451			212		170		632			507
Total interest expense	1,414		1,391		4,231		4,232			1,566		1,414		4,543			4,231

Net interest income	18,539		19,141		54,914		57,779			18,813		18,253		55,125			54,105
Provision for loan losses	2,900		3,800		8,000		10,900			4,300		2,900		19,600			8,000
Net interest income after provision for loan losses	15,639		15,341		46,914		46,879			14,513		15,353		35,525			46,105

Non-interest income:
Service charges on deposits	2,509		2,491		7,213		7,170			2,463		2,584		7,339			7,404
Gain on sale of securities, net	—		—		20		1,243			338		—		347			20
ATM and debit card income	1,620		1,563		4,897		4,847			1,687		1,620		5,156			4,897
Income from death benefit on BOLI	—		—		—		160
Other charges and fees	737		714		2,096		2,326			998		948		2,911			2,714
Total non-interest income	4,866		4,768		14,226		15,746			5,486		5,152		15,753			15,035

Non-interest expenses:
Salaries and employee benefits	8,034		7,653		24,206		23,792			7,849		8,034		25,989			24,206
Occupancy expense	3,635		3,815		10,899		11,365			3,711		3,635		11,524			10,899
ATM and debit card expense	833		770		2,410		2,126			654		833		2,088			2,410
Data processing	527		476		1,463		1,400			640		527		1,928			1,463
FDIC insurance	365		391		1,214		1,003			448		365		1,275			1,214
Legal and professional fees	516		385		1,335		1,112			1,404		516		2,983			1,335
Other	3,204		3,002		9,387		8,831			3,053		3,204		8,806			9,387
Total non-interest expenses	17,114		16,492		50,914		49,629			17,759		17,114		54,593			50,914
Income before income taxes	3,391		3,617		10,226		12,996
Income tax expense	993		1,028		2,986		3,817
Income (loss) before income tax expense (benefit)										2,240		3,391		(3,315		)	10,226
Income tax expense (benefit)										574		993		(2,058		)	2,986

Net earnings	2,398		2,589		7,240		9,179
Net earnings (loss)										1,666		2,398		(1,257		)	7,240
Dividends on preferred stock	811		172		2,049		517			810		811		2,432			2,049
Net earnings available to common shareholders	$	1,587	$	2,417	$	5,191	$	8,662
Earnings per share:
Net earnings (loss) available to common shareholders										$	856	$	1,587	$	(3,689	)	$	5,191
Earnings (loss) per share:
Basic	$	0.14	$	0.21	$	0.46	$	0.76		$	0.05	$	0.14	$	(0.28	)	$	0.46
Diluted	$	0.14	$	0.21	$	0.46	$	0.75		$	0.05	$	0.14	$	(0.28	)	$	0.46
Weighted average number of shares outstanding:
Basic	11,262		11,312		11,260		11,321			16,395		11,262		13,314			11,260
Diluted	11,263		11,831		11,260		11,848			16,396		11,263		13,318			11,260
Dividends declared per common share	$	0.09	$	0.09	$	0.27	$	0.27		$	0.01	$	0.09	$	0.19		$	0.27

See notes to unaudited consolidated financial statements.


MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) (in thousands)	MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) (in thousands)													MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) (in thousands)
		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015				2017			2016			2017			2016
Net earnings		$	2,398		$	2,589		$	7,240		$	9,179
Net earnings (loss)															$	1,666		$	2,398		$	(1,257	)	$	7,240
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities available-for-sale:
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding (losses) gains arising during the year		(645		)	1,717			4,217			447				(335		)	(645		)	3,224			4,217
Less: reclassification adjustment for gains on sales of securities available-for-sale		—			—			(20		)	(1,243		)		(338		)	—			(347		)	(20		)
Unrealized (losses) gains on securities available-for-sale		(645		)	1,717			4,197			(796		)
Fair value of derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges during the period		55			—			55			—
Net change in unrealized gains (losses) on securities available-for-sale															(673		)	(645		)	2,877			4,197
Unrealized gain on derivative instruments designated as cash flow hedges:
Unrealized holding (losses) gains on derivatives arising during the period															(7		)	55			(130		)	55
Less: reclassification adjustment for gains on derivative instruments															(4		)	—			(4		)	—
Net change in unrealized gain on derivative instruments															(11		)	55			(134		)	55
Total other comprehensive (loss) income, before tax		(590		)	1,717			4,252			(796		)		(684		)	(590		)	2,743			4,252
Income tax effect related to items of other comprehensive (loss) income		206			(601		)	(1,488		)	279				240			206			(960		)	(1,488		)
Total other comprehensive (loss) income, net of tax		(384		)	1,116			2,764			(517		)		(444		)	(384		)	1,783			2,764
Total comprehensive income		$	2,014		$	3,705		$	10,004		$	8,662			$	1,222		$	2,014		$	526		$	10,004

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Nine Months Ended September 30, 2016
(in thousands, except share and per share data)

Preferred
Stock

Common
Stock

Additional
Paid-in Capital

Unearned
ESOP Shares

Accumulated
Other Comprehensive Income
Retained Earnings
Shares Amount Shares Amount Total
Balance - December 31, 2015 123,200
$ 41,120
11,362,150
$ 1,136
$ 110,771
$ (1,093 ) $ 509
$ 60,694
$ 213,137
Net earnings —
—
—
—
—
—
—
7,240
7,240
Dividends on Series B and Series C preferred stock —
—
—
—
—
—
—
(2,049 ) (2,049 )
Dividends on common stock, $0.27 per share —
—
—
—
—
—
—
(3,052 ) (3,052 )
Conversion of Series C preferred stock to common stock (102 ) (10 ) 566
—
10
—
—
—
—
Increase in ESOP obligation, net of repayments —
—
—
—
—
(249 ) —
—
(249 )
Tax benefit resulting from distribution from Directors Deferred Compensation Plan —
—
—
—
127
—
—
—
127
Stock option and restricted stock compensation expense —
—
—
—
165
—
—
—
165
ESOP compensation expense —
—
—
—
(88 ) —
—
—
(88 )
Tax benefit for dividends paid to the ESOP —
—
—
—
131
—
—
—
131
Change in accumulated other comprehensive income —
—
—
—
—
—
2,764
—
2,764
Balance – September 30, 2016 123,098
$ 41,110
11,362,716
$ 1,136
$ 111,116
$ (1,342 ) $ 3,273
$ 62,833
$ 218,126



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity (unaudited) For the Nine Months Ended September 30, 2017 (in thousands, except share and per share data)
	Preferred Stock					Common Stock			Additional Paid-in Capital			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings
	Shares		Amount			Shares	Amount		Additional Paid-in Capital			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balance - December 31, 2016	123,098		$	41,110		11,362,716	$	1,136	$	111,166		$	(1,233	)	$	(1,010	)	$	63,207		$	214,376
Net loss	—		—			—	—		—			—			—			(1,257		)	(1,257		)
Dividends on Series B and Series C preferred stock	—		—			—	—		—			—			—			(2,432		)	(2,432		)
Dividends on common stock, $0.19 per share	—		—			—	—		—			—			—			(2,645		)	(2,645		)
Issuance of common stock, net of offering expenses of $683	—		—			5,100,034	510		56,641			—			—			—			57,151
Restricted stock grant	—		—			58,090	6		(6		)	—			—			—			—
Conversion of Series C preferred stock to common stock	(1,223	)	(123		)	6,791	1		122			—			—			—			—
ESOP shares released for allocation	—		—			—	—		50			266			—			—			316
Exercise of stock options	—		—			20,498	2		264			—			—			—			266
Vested restricted stock	—		—			700	—		—			—			—			—			—
Stock option and restricted stock compensation expense	—		—			—	—		85			—			—			—			85
Change in accumulated other comprehensive income (loss)	—		—			—	—		—			—			1,783			—			1,783
Balance – September 30, 2017	121,875		$	40,987		16,548,829	$	1,655	$	168,322		$	(967	)	$	773		$	56,873		$	267,643

See notes to unaudited consolidated financial statements.


MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (in thousands)	MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (in thousands)							MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (in thousands)
		For the Nine Months Ended September 30,							For the Nine Months Ended September 30,
		2016			2015				2017			2016
Cash flows from operating activities:
Net earnings		$	7,240		$	9,179
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net (loss) earnings									$	(1,257	)	$	7,240
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation		4,431			4,652				4,345			4,431
Accretion of purchase accounting adjustments		(569		)	(1,003		)		(180		)	(569		)
Provision for loan losses		8,000			10,900				19,600			8,000
Deferred tax benefit		(781		)	(1,633		)		(704		)	(781		)
Amortization of premiums on securities, net		2,170			2,141				2,128			2,170
Accretion of other investments		—			(1		)
Stock option expense		126			253
Restricted stock expense		39			6
Excess of book value over market value of ESOP shares released		(88		)	—
Stock-based compensation expense									85			165
Net excess tax benefit from stock-based compensation									379			258
ESOP compensation expense									50			(88		)
Net gain on sale of investment securities		(20		)	(1,243		)		(347		)	(20		)
Net loss (gain) on sale of other real estate owned		56			(13		)
Net (gain) loss on sale of other real estate owned									(15		)	56
Net write down of other real estate owned		130			111				83			130
Net gain on sale/disposal of premises and equipment		(6		)	(8		)
Income recognized from death benefit on bank owned life insurance		—			(160		)
Write down of assets held for sale									570			—
Net loss (gain) on sale/disposal of premises and equipment									648			(6		)
Change in accrued interest receivable		(568		)	(20		)		(121		)	(568		)
Change in accrued interest payable		(42		)	(48		)		(12		)	(42		)
Change in other assets & other liabilities, net		1,152			481				(3,236		)	1,152
Net cash provided by operating activities		21,270			23,594				22,016			21,528

Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale		47,547			55,874				42,585			47,547
Proceeds from maturities and calls of securities held-to-maturity		12,629			19,299				12,940			12,629
Proceeds from sale of securities available-for-sale		6,803			40,277				16,979			6,803
Proceeds from sale of security held-to-maturity									887			—
Purchases of securities available-for-sale		(49,538		)	(105,486		)		(42,172		)	(49,538		)
Proceeds from sale of other investments		600			898				57			600
Purchases of other investments		(751		)	(2,970		)		(902		)	(751		)
Net change in loans		(12,736		)	(20,669		)		28,649			(12,736		)
Proceeds from bank owned life insurance death benefit		—			498
Purchases of premises and equipment		(5,152		)	(3,439		)		(2,940		)	(5,152		)
Proceeds from sale of premises and equipment		54			35				249			54
Proceeds from sale of other real estate owned		2,374			857				1,728			2,374
Purchase of other real estate owned		—			(351		)
Net cash provided by (used in) investing activities		1,830			(15,177		)
Net cash provided by investing activities									58,060			1,830

Cash flows from financing activities:
Change in deposits		34,385			(41,728		)		(23,495		)	34,385
Change in securities sold under agreements to repurchase		9,253			29,987				(39,586		)	9,253
Borrowings on Federal Home Loan Bank advances		25,000			150,000				25,000			25,000
Repayments of Federal Home Loan Bank advances		(50,050		)	(105,047		)		(12,546		)	(50,050		)
Proceeds and tax benefit from exercise of stock options		—			99
Tax benefit resulting from distribution from Directors Deferred Compensation Plan		127			420
Tax benefit for dividends paid to ESOP		131			—
Proceeds from exercise of stock options									266			—
Proceeds from issuance of common stock									57,834			—
Stock offering expenses									(683		)	—
Payment of dividends on preferred stock		(1,409		)	(519		)		(2,433		)	(1,409		)
Payment of dividends on common stock		(3,071		)	(3,064		)		(3,538		)	(3,071		)
Net cash provided by financing activities		14,366			30,148				819			14,108

Net increase in cash and cash equivalents		37,466			38,565				80,895			37,466
Cash and cash equivalents, beginning of period		89,201			86,872				82,228			89,201
Cash and cash equivalents, end of period		$	126,667		$	125,437			$	163,123		$	126,667

Supplemental cash flow information:
Interest paid		$	4,274		$	4,280			$	4,555		$	4,274
Income taxes paid		2,853			5,180				2,500			2,853
Noncash investing and financing activities:
Transfer of loans to other real estate		690			1,031				1,552			690
Change in accrued common stock dividends		—			3				(859		)	—
Change in accrued preferred stock dividends		640			(2		)		(1		)	640
Net change in loan to ESOP		(249		)	(905		)		266			(249		)

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements

September 30, ~~2016~~2017

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of MidSouth Bancorp, Inc. (the “Company”) and its subsidiaries as of September 30, ~~2016~~2017 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s ~~2015~~2016 Annual Report on Form 10-K.

The results of operations for the nine-month period ended September 30, ~~2016~~2017 are not necessarily indicative of the results to be expected for the entire year.

Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Summary of Significant Accounting Policies — The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry. There have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our ~~2015~~2016 Annual Report on Form 10-K.

Recent Accounting Pronouncements — ASU ~~2016-01,~~2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 addresses and codifies the practical considerations and application of the required disclosures under SAB Topic 11.M for the implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); and ASU 2016-13, Financial ~~Instruments - Overall (Subtopic 825-10): Recognition and~~Instruments-Credit Losses (Topic 326); Measurement of Credit Losses on Financial ~~Assets~~Instruments. The SEC Staff has emphasized on a number of occasions, including the December 2016 AICPA National Conference on Current SEC and ~~Financial Liabilities~~ isPCAOB Developments, the ~~first ASU~~requirements to disclose the potential material effects of newly issued ~~under the FASB's financial instruments project. ASU 2016-01 primarily affects the accounting for equity investments, financial liabilities under the fair value option,~~standards and the ~~presentation~~importance of providing investors with this information. Such disclosures should explain the impact the new standard is expected to have on the financial statements and ~~disclosure requirements~~how the adoption of the new standard will affect comparability. Entities should discuss both quantitative and qualitative information as available when assessing implementation of a new standard. This ASU was effective immediately for ~~financial instruments. The guidance~~public business entities.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment was issued in order to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, requires all equity securities with readily determinable fair values to be measured at fair value on the balance sheet, with changes in fair value recorded through earnings. For financial liabilities that are measured at fair value in accordance with the fair value option, the guidance requires changes inan entity should perform its annual or interim goodwill impairment test by comparing the fair value of a ~~financial liabilities attributable~~reporting unit with its carrying amount. An entity will then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to a change in instrument-specific credit risk to be recorded separately in other comprehensive income. This ASU eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value. It does require public entities to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes In addition, the new guidance requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset.that reporting unit. The effective date of this Update is for fiscal years beginning on or after December 15, ~~2017.~~2020. The Company ~~is evaluating the~~does not expect ASU 2017-04 to have an impact ~~if any, that ASU 2016-01 will have~~ on its ~~financial position, results of operations, and its financial statement disclosures.~~goodwill impairment tests.

ASU ~~2016-02, Leases (Topic 842)~~2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities was issued ~~with~~in response to diversity in practice in the ~~intention~~amortization period for premiums of ~~improving financial reporting about leasing transactions. Under~~callable debt securities and in how the ~~new guidance,~~potential for exercise of a ~~lessee will be required to recognize assets~~call is factored into current impairment assessments. As such, these amendments reduce the amortization period for certain callable debt securities carried at a premium and ~~liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP,~~require the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP - which requires only capital leasespremium to be ~~recognized on~~amortized over the ~~balance sheet -~~period not to exceed the ~~guidance in the ASU will require both types of leases~~earliest call date. These amendments do not apply to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.securities carried at a discount. The effective date of this Update is for fiscal years beginning on or after December 15, 2018. The Company is ~~evaluating~~currently amortizing premiums of callable debt securities over a period through the ~~impact that~~earliest call date. As a result, it does not expect ASU ~~2016-02 will~~2017-08 to have an impact on its financial position, results of operations ~~and~~or its financial statement disclosures.

ASU ~~2016-09,~~2017-09, Compensation - Stock Compensation (Topic ~~718)~~350): Scope of Modification Accounting was issued ~~as part~~in response to diversity in practice when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The update provides guidance about which changes to the terms or conditions of a share-based payment

award require an entity to apply modification accounting under Topic 718. The amendments require an entity to account for the effects of a modification unless all of the ~~FASB's simplification initiative. Under the new guidance, several aspects~~following conditions are met:

The fair value (or intrinsic or calculated value if elected) of the ~~accounting for share-based payment~~modified award ~~transactions~~is the same as the value of the original award immediately before the original award was modified.

The vesting conditions of the modified award are ~~simplified, including: (a) income tax consequences; (b)~~the same as the vesting conditions of the original award immediately before the original award is modified.

The classification of ~~awards~~the modified award as ~~either~~an equity instrument or ~~liabilities; and (c)~~a liability instrument is the same as the classification onof the ~~statement of cash flows.~~ original award immediately before the original award is modified.

The effective date of this Update is for fiscal years beginning on or after December 15, ~~2016.~~2017. The ~~Company~~amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. Adoption of this Update is ~~evaluating~~not expected to have a material effect on the ~~impact that ASU 2016-09 will have on its~~Company's financial position, results of operations ~~and~~or its financial statement disclosures.

ASU ~~2016-13, Financial Instruments - Credit Losses~~2017-12, Derivatives and Hedging (Topic ~~326)~~815): ~~Measurement of Credit Losses on Financial Instruments~~ ~~was issued with the intention of improving financial reporting by requiring timely recording of credit losses on loans and other financial instruments~~

~~held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses~~Targeted Improvements to Accounting for financial assets not recorded at fair value based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will be required to be implemented through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the amendments are effective. The effective date of this Update is for fiscal years beginning on or after December 15, 2019. The Company is evaluating the impact that ASU 2016-13 will have on its financial position, results of operations, and its financial statement disclosures. We expect the new accounting guidance to increase the allowance for loan losses with a resulting negative adjustment to retained earnings, and we are planning on implementing a new software program during 2017 to enable us to determine the extent of the impact, which could be material.

~~ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~Hedging Activities was issued to ~~address diversity in practice~~better align a company's financial reporting for hedging activities with the economic objectives of how certain cash receipts and cash payments are currently presented and classified in the statement of cash flows. The amendments in the ASU provide guidance on the following issues: debit prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. Further, the ASU addresses the topic of separately identifiable cash flows and application of the predominance principle.those activities. The effective date of this Update is for fiscal years beginning after December 15, ~~2017 and~~2018, with early adoption, including adoption in an interim ~~periods within those fiscal years.~~period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption. While the Company continues to assess all potential impacts of the standard, adoption of this Update is ~~evaluating~~not expected to have a material impact on the ~~impact~~Company's consolidated financial statements.

Accounting Changes, Reclassifications and Restatements —Certain items in prior financial statements have been reclassified to conform to the current presentation.

On January 1, 2017, the Company adopted the provisions of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 requires that all income tax effects associated with share-based payment awards be reported in earnings as an adjustment to income tax expense. Previously, excess tax benefits associated with share-based payments awards were recorded in additional paid-in-capital when the excess tax benefits were realized. The requirement to report those income tax effects in earnings has been applied to settlements occurring on or after January 1, 2017. ASU ~~2016-15 will have, if any,~~2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. The Company has elected to apply that change in cash flow classification on ~~its financial statement disclosures.~~ a retrospective basis, which resulted in a $258,000 increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statements of cash flows for 2016, as compared to the amounts previously reported.

2. Investment Securities

The portfolio of investment securities consisted of the following (in thousands):


	September 30, 2016								September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Obligations of state and political subdivisions	$	31,104	$	446	$	29	$	31,521	$	23,929	$	233	$	352	$	23,810
GSE mortgage-backed securities	65,916		3,229		—		69,145		61,578		1,304		22		62,860
Collateralized mortgage obligations: residential	195,047		1,289		331		196,005		211,808		359		1,958		210,209
Collateralized mortgage obligations: commercial	3,497		—		32		3,465		2,499		—		27		2,472
Mutual funds	2,100		25		—		2,125		2,100		—		21		2,079
Corporate debt securities	13,500		384		—		13,884		23,974		822		4		24,792
	$	311,164	$	5,373	$	392	$	316,145	$	325,888	$	2,718	$	2,384	$	326,222

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Obligations of state and political subdivisions	$	30,750	$	770	$	27	$	31,493
GSE mortgage-backed securities	84,946		2,321		229		87,038
Collateralized mortgage obligations: residential	194,067		297		2,276		192,088
Collateralized mortgage obligations: commercial	5,512		1		65		5,448
Mutual funds	2,100		—		8		2,092
	$	317,375	$	3,389	$	2,605	$	318,159


	September 30, 2016								December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Available-for-sale:
Obligations of state and political subdivisions	$	40,695	$	1,151	$	—	$	41,846	$	29,935	$	226	$	1,020	$	29,141
GSE mortgage-backed securities	47,451		1,496		—		48,947		72,144		1,736		302		73,578
Collateralized mortgage obligations: residential	9,414		—		76		9,338		223,602		206		3,606		220,202
Collateralized mortgage obligations: commercial	5,852		26		—		5,878		3,135		—		53		3,082
Mutual funds									2,100		—		41		2,059
Corporate debt securities									13,500		311		—		13,811
	$	103,412	$	2,673	$	76	$	106,009	$	344,416	$	2,479	$	5,022	$	341,873

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Obligations of state and political subdivisions	$	43,737	$	697	$	6	$	44,428
GSE mortgage-backed securities	55,696		705		131		56,270
Collateralized mortgage obligations: residential	10,803		—		361		10,442
Collateralized mortgage obligations: commercial	6,556		2		—		6,558
	$	116,792	$	1,404	$	498	$	117,698



	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Obligations of state and political subdivisions	$	36,080	$	658	$	—	$	36,738
GSE mortgage-backed securities	37,729		524		59		38,194
Collateralized mortgage obligations: residential	7,819		—		223		7,596
Collateralized mortgage obligations: commercial	2,111		—		—		2,111
	$	83,739	$	1,182	$	282	$	84,639

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Obligations of state and political subdivisions	$	40,515	$	309	$	39	$	40,785
GSE mortgage-backed securities	44,375		426		311		44,490
Collateralized mortgage obligations: residential	8,969		—		323		8,646
Collateralized mortgage obligations: commercial	4,352		—		12		4,340
	$	98,211	$	735	$	685	$	98,261

With the exception of ~~two~~one private-label collateralized mortgage obligations (“CMOs”) with a ~~combined~~ balance remaining of ~~$19,000~~$8,000 at September 30, ~~2016,~~2017, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.

The following table presents the amortized cost and fair value of debt securities at September 30, ~~2016~~2017 by contractual maturity (in thousands). Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and collateralized mortgage obligations.


	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale:
Due in one year or less	$	2,812	$	2,843	$	1,136	$	1,139
Due after one year through five years	15,374		15,608		10,315		10,513
Due after five years through ten years	41,740		43,819		43,777		45,080
Due after ten years	249,138		251,750		268,560		267,411
	$	309,064	$	314,020	$	323,788	$	324,143

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Held-to-maturity:
Due in one year or less	$	348	$	349	$	1,204	$	1,206
Due after one year through five years	4,909		5,005		5,413		5,465
Due after five years through ten years	20,222		20,948		43,555		44,335
Due after ten years	77,933		79,707		33,567		33,633
	$	103,412	$	106,009	$	83,739	$	84,639

Details concerning investment securities with unrealized losses are as follows (in thousands):


	September 30, 2016												September 30, 2017
	Securities with losses under 12 months				Securities with losses over 12 months				Total				Securities with losses under 12 months				Securities with losses over 12 months				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Available-for-sale:
Obligations of state and political subdivisions	$	5,517	$	29	$	—	$	—	$	5,517	$	29	$	8,092	$	141	$	5,324	$	211	$	13,416	$	352
GSE mortgage-backed securities													6,168		22		—		—		6,168		22
Collateralized mortgage obligations: residential	49,802		182		12,111		149		61,913		331		118,195		1,153		45,344		805		163,539		1,958
Collateralized mortgage obligations: commercial	989		3		2,475		29		3,464		32		—		—		2,472		27		2,472		27
Mutual funds													2,079		21		—		—		2,079		21
Corporate debt securities													2,995		4		—		—		2,995		4
	$	56,308	$	214	$	14,586	$	178	$	70,894	$	392	$	137,529	$	1,341	$	53,140	$	1,043	$	190,669	$	2,384

	December 31, 2015												December 31, 2016
	Securities with losses under 12 months				Securities with losses over 12 months				Total				Securities with losses under 12 months				Securities with losses over 12 months				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Available-for-sale:
Obligations of state and political subdivisions	$	1,192	$	27	$	—	$	—	$	1,192	$	27	$	13,402	$	1,020	$	—	$	—	$	13,402	$	1,020
GSE mortgage-backed securities	21,607		229		—		—		21,607		229		29,119		302		—		—		29,119		302
Collateralized mortgage obligations: residential	140,999		1,207		30,029		1,069		171,028		2,276		187,235		3,099		14,194		507		201,429		3,606
Collateralized mortgage obligations: commercial	—		—		2,946		65		2,946		65		961		4		2,121		49		3,082		53
Mutual funds	2,092		8		—		—		2,092		8		2,059		41		—		—		2,059		41
	$	165,890	$	1,471	$	32,975	$	1,134	$	198,865	$	2,605	$	232,776	$	4,466	$	16,315	$	556	$	249,091	$	5,022


	September 30, 2016												September 30, 2017
	Securities with losses under 12 months				Securities with losses over 12 months				Total				Securities with losses under 12 months				Securities with losses over 12 months					Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value			Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Held-to-maturity:
GSE mortgage-backed securities													$	5,287	$	59	$	—		$	—	$	5,287	$	59
Collateralized mortgage obligations: residential	$	—	$	—	$	9,338	$	76	$	9,338	$	76	—		—		7,596		—	223		7,596		223
													$	5,287	$	59	$	7,596		$	223	$	12,883	$	282

	December 31, 2015												December 31, 2016
	Securities with losses under 12 months				Securities with losses over 12 months				Total				Securities with losses under 12 months				Securities with losses over 12 months					Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value			Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Held-to-maturity:
Obligations of state and political subdivisions	$	541	$	1	$	505	$	5	$	1,046	$	6	$	8,054	$	39	$	—		$	—	$	8,054	$	39
GSE mortgage-backed securities	—		—		7,021		131		7,021		131		19,408		311		—			—		19,408		311
Collateralized mortgage obligations: residential	—		—		10,442		361		10,442		361		—		—		8,645			323		8,645		323
Collateralized mortgage obligations: commercial													4,340		12		—			—		4,340		12
	$	541	$	1	$	17,968	$	497	$	18,509	$	498	$	31,802	$	362	$	8,645		$	323	$	40,447	$	685

Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality. If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. For equity securities, management reviews the near term prospects of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors when determining if an unrealized loss is other than temporary. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.

As of September 30, ~~2016, 23~~2017, 51 securities had unrealized losses totaling ~~0.58%~~1.29% of the individual securities’ amortized cost basis and ~~0.11%~~0.65% of the Company’s total amortized cost basis. Of the 2351 securities, 918 had been in an unrealized loss position for over twelve months at September 30, ~~2016.~~2017. These 918 securities had an amortized cost basis and unrealized loss of ~~$24.2~~$59.0 million and ~~$254,000,~~$1.2 million, respectively. The unrealized losses on debt securities at September 30, ~~2016~~2017 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Management identified no impairment related to credit quality. At September 30, ~~2016,~~2017, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized during the three months ended September 30, ~~2016.~~2017.

During the nine months ended September 30, 2017, the Company sold 16 securities classified as available-for-sale and 1 security classified as held-to-maturity. Of the available-for-sale securities, 13 securities were sold with gains totaling $449,000 and 3 securities were sold at a loss of $109,000 for a net gain of $340,000. The decision to sell the 1 held-to-maturity security, which was sold at a gain of $7,000, was based on the pre-refunding of the bond which would accelerate the maturity of the bond by 15 years with an anticipated call date within six months. During the nine months ended September 30, 2016, the Company sold 2 securities classified as available-for-sale at a gross gain of $20,000. During the nine months ended September 30, 2015, the Company sold 21 securities classified as available-for-sale at a net gain of $1.2 million. Of the 21 securities sold, 11 were sold with gains totaling $1.4 million and 10 securities were sold at a loss of $135,000.

Securities with an aggregate carrying value of approximately ~~$309.9~~$236.3 million and ~~$285.4~~$293.4 million at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, were pledged to secure public funds on deposit and for other purposes required or permitted by law.

3. Credit Quality of Loans and Allowance for Loan Losses

The loan portfolio consisted of the following (in thousands):


	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
Commercial, financial and agricultural	$	463,031		$	454,028		$	447,482		$	459,574
Real estate – construction	96,365			74,952			90,088			100,959
Real estate – commercial	464,853			471,141			473,046			481,155
Real estate – residential	155,653			149,064			155,676			157,872
Installment loans to individuals	88,537			111,009			63,148			82,660
Lease financing receivable	1,449			1,968			760			1,095
Other	2,912			1,483			5,769			767
	1,272,800			1,263,645			1,235,969			1,284,082
Less allowance for loan losses	(23,268		)	(19,011		)	(25,053		)	(24,372		)
	$	1,249,532		$	1,244,634		$	1,210,916		$	1,259,710

The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment. At September 30, ~~2016,~~2017, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio. The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately ~~$243.3~~$197.8 million, or ~~19.1%~~16.0% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At September 30, ~~2016,~~2017, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately ~~$542.2 million. Of the $542.2~~$537.9 million, ~~$464.9 million represent CRE loans, 54%~~56% of which are secured by owner-occupied commercial properties. Of the ~~$542.2~~$537.9 million in loans secured by commercial real estate, ~~$28.3~~$20.5 million, or ~~5.2%~~3.8%, were on nonaccrual status at September 30, ~~2016.~~2017.

Allowance for Loan Losses

The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance for loan losses at the time of recovery. Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various factors. Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries).

The allowance is composed of general reserves and specific reserves. General reserves are determined by applying loss percentages to segments of the portfolio. The loss percentages are based on each segment’s historical loss experience, generally over the past ~~twelve~~three to ~~eighteen months,~~five years, and adjustment factors derived from conditions in the Company’s internal and external environment. All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with GAAP. Loans for which specific reserves are provided are excluded from the calculation of general reserves.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.

The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses. Additionally, the Company utilizes the services of a third party to supplement its loan review efforts.

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 is as follows (in thousands):


	September 30, 2016																							September 30, 2017
				Real Estate																							Real Estate
	Coml, Fin, and Agric			Constru-ction			Commercial			Residential			Installment loans to individuals			Lease financing receivable			Other		Total			Coml, Fin, and Agric			Construction			Commercial			Residential			Installment loans to individuals			Lease financing receivable			Other		Total
Allowance for loan losses:
Beginning balance	$	11,268		$	819		$	4,614		$	816		$	1,468		$	14		$	12	$	19,011		$	16,057		$	585		$	5,384		$	940		$	1,395		$	5		$	6	$	24,372
Charge-offs	(2,957		)	—			(208		)	(24		)	(991		)	—			—		(4,180		)	(15,106		)	(70		)	(3,618		)	(293		)	(860		)	—			—		(19,947		)
Recoveries	193			—			115			4			125			—			—		437			537			—			158			97			235			—			—		1,027
Provision	6,747			(478		)	1,042			(97		)	781			(5		)	10		8,000			17,413			28			2,024			(40		)	159			(1		)	18		19,601
Ending balance	$	15,251		$	341		$	5,563		$	699		$	1,383		$	9		$	22	$	23,268		$	18,901		$	543		$	3,948		$	704		$	929		$	4		$	24	$	25,053
Ending balance: individually evaluated for impairment	$	1,105		$	—		$	2,270		$	194		$	268		$	—		$	—	$	3,837		$	3,254		$	17		$	904		$	7		$	69		$	1		$	—	$	4,252
Ending balance: collectively evaluated for impairment	$	14,146		$	341		$	3,293		$	505		$	1,115		$	9		$	22	$	19,431		$	15,647		$	526		$	3,044		$	697		$	860		$	3		$	24	$	20,801

Loans:
Ending balance	$	463,031		$	96,365		$	464,853		$	155,653		$	88,537		$	1,449		$	2,912	$	1,272,800		$	447,482		$	90,088		$	473,046		$	155,676		$	63,148		$	760		$	5,769	$	1,235,969
Ending balance: individually evaluated for impairment	$	29,887		$	10		$	28,285		$	1,831		$	464		$	—		$	—	$	60,477		$	30,892		$	2,416		$	18,132		$	1,031		$	338		$	34		$	—	$	52,843
Ending balance: collectively evaluated for impairment	$	433,144		$	96,355		$	435,985		$	153,747		$	88,073		$	1,449		$	2,912	$	1,211,665		$	416,590		$	87,672		$	454,488		$	154,582		$	62,810		$	726		$	5,769	$	1,182,637
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	583		$	75		$	—		$	—		$	—	$	658		$	—		$	—		$	426		$	63		$	—		$	—		$	—	$	489


	September 30, 2015																						September 30, 2016
				Real Estate																						Real Estate
	Coml, Fin, and Agric			Constr-uction			Commercial			Residential			Installment loans to individuals			Lease financing receivable		Other		Total			Coml, Fin, and Agric			Construction			Commercial			Residential			Installment loans to individuals			Lease financing receivable			Other		Total
Allowance for loan losses:
Beginning balance	$	5,729		$	954		$	2,402		$	810		$	1,311		$	16	$	4	$	11,226		$	11,268		$	819		$	4,614		$	816		$	1,468		$	14		$	12	$	19,011
Charge-offs	(2,310		)	(76		)	(169		)	(45		)	(883		)	—		—		(3,483		)	(2,957		)	—			(208		)	(24		)	(991		)	—			—		(4,180		)
Recoveries	185			1			20			10			80			—		—		296			193			—			115			4			125			—			—		437
Provision	8,016			(62		)	2,107			(104		)	923			13		7		10,900			6,747			(478		)	1,042			(97		)	781			(5		)	10		8,000
Ending balance	$	11,620		$	817		$	4,360		$	671		$	1,431		$	29	$	11	$	18,939		$	15,251		$	341		$	5,563		$	699		$	1,383		$	9		$	22	$	23,268
Ending balance: individually evaluated for impairment	$	2,569		$	26		$	1,739		$	147		$	216		$	—	$	—	$	4,697		$	1,105		$	—		$	2,270		$	194		$	268		$	—		$	—	$	3,837
Ending balance: collectively evaluated for impairment	$	9,051		$	791		$	2,621		$	524		$	1,215		$	29	$	11	$	14,242		$	14,146		$	341		$	3,293		$	505		$	1,115		$	9		$	22	$	19,431

Loans:
Ending balance	$	482,452		$	74,279		$	473,319		$	151,667		$	113,199		$	4,790	$	1,746	$	1,301,452		$	463,031		$	96,365		$	464,853		$	155,653		$	88,537		$	1,449		$	2,912	$	1,272,800
Ending balance: individually evaluated for impairment	$	29,185		$	212		$	19,928		$	1,796		$	386		$	—	$	—	$	51,507		$	29,887		$	10		$	28,285		$	1,831		$	464		$	—		$	—	$	60,477
Ending balance: collectively evaluated for impairment	$	453,267		$	74,067		$	452,758		$	149,788		$	112,813		$	4,790	$	1,746	$	1,249,229		$	433,144		$	96,355		$	435,985		$	153,747		$	88,073		$	1,449		$	2,912	$	1,211,665
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	633		$	83		$	—		$	—	$	—	$	716		$	—		$	—		$	583		$	75		$	—		$	—		$	—	$	658

Non-Accrual and Past Due Loans

Loans are considered past due if the required principal and interest ~~payment~~payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the probability of collection of interest is deemed insufficient to warrant further accrual. For loans placed on non-accrual status, the accrual of interest is discontinued and subsequent payments received are applied to the principal balance. Interest income is recorded after principal has been satisfied and as payments are received. Non-accrual loans may be returned to accrual status if all principal and interest amounts contractually owed are reasonably assured of repayment within a reasonable period and there is a period of at least six months to one year of repayment performance by the borrower depending on the contractual payment terms.

An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):


	September 30, 2016														September 30, 2017
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
Commercial, financial, and agricultural	$	3,213	$	1,255	$	29,710	$	34,178	$	428,853	$	463,031	$	42	$	2,144	$	512	$	27,161	$	29,817	$	417,665	$	447,482	$	384
Real estate - construction	206		—		829		1,035		95,330		96,365		819		335		350		2,416		3,101		86,987		90,088		—
Real estate - commercial	3,539		—		26,219		29,758		435,095		464,853		—		1,804		—		9,749		11,553		461,493		473,046		—
Real estate - residential	853		457		1,587		2,897		152,756		155,653		82		2,467		28		898		3,393		152,283		155,676		—
Installment loans to individuals	397		370		489		1,256		87,281		88,537		25		408		173		215		796		62,352		63,148		18
Lease financing receivable	—		—		—		—		1,449		1,449		—		33		—		—		33		727		760		—
Other loans	83		11		—		94		2,818		2,912		—		79		12		—		91		5,678		5,769		—
	$	8,291	$	2,093	$	58,834	$	69,218	$	1,203,582	$	1,272,800	$	968	$	7,270	$	1,075	$	40,439	$	48,784	$	1,187,185	$	1,235,969	$	402

	December 31, 2015														December 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
Commercial, financial, and agricultural	$	1,362	$	2,317	$	25,696	$	29,375	$	424,653	$	454,028	$	59	$	2,297	$	902	$	31,425	$	34,624	$	424,950	$	459,574	$	96
Real estate - construction	1,047		—		12		1,059		73,893		74,952		—		2,613		399		9		3,021		97,938		100,959		—
Real estate - commercial	1,164		514		19,512		21,190		449,951		471,141		—		5,159		1,931		25,408		32,498		448,657		481,155		140
Real estate - residential	1,703		367		1,563		3,633		145,431		149,064		19		1,956		207		1,553		3,716		154,156		157,872		16
Installment loans to individuals	1,022		244		409		1,675		109,334		111,009		69		756		36		538		1,330		81,330		82,660		16
Lease financing receivable	—		—		—		—		1,968		1,968		—		—		—		—		—		1,095		1,095		—
Other loans	101		4		—		105		1,378		1,483		—		89		5		—		94		673		767		—
	$	6,399	$	3,446	$	47,192	$	57,037	$	1,206,608	$	1,263,645	$	147	$	12,870	$	3,480	$	58,933	$	75,283	$	1,208,799	$	1,284,082	$	268

Non-accrual loans are as follows (in thousands):


	September 30, 2016		December 31, 2015		September 30, 2017		December 31, 2016
Commercial, financial, and agricultural	$	29,874	$	27,705	$	29,337	$	31,461
Real estate - construction	10		37		2,416		9
Real estate - commercial	28,285		19,907		18,132		28,688
Real estate - residential	1,889		1,998		1,032		1,881
Installment loans to individuals	464		404		339		541
Lease financing receivable	—		—		33		—
Other	—		—		—		—
	$	60,522	$	50,051	$	51,289	$	62,580

The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately ~~$2.5~~$2.6 million and ~~$1.3~~$2.5 million for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Interest actually received on non-accrual loans subsequent to their transfer to non-accrual status totaled at$201,000 and $128,000 for the nine months ended September 30, ~~2016~~2017 and ~~2015 was $128,000 and $19,000,~~2016, respectively.

Impaired Loans

Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, are reviewed to determine whether impairment testing is appropriate. All loan relationships with an outstanding commitment balance above a specified threshold are evaluated for potential impairment. All loan relationships with an outstanding commitment balance below the specified threshold are assigned an allowance allocation percentage that is determined by management and adjusted periodically based on certain factors. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collaterally dependent. All impaired loans are reviewed, at a minimum, on a quarterly basis. Existing valuations are reviewed to determine if additional discounts or new appraisals are required. After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance no specific allocation is reserved. Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment.

~~Loans~~The following table presents loans that are individually evaluated for impairment ~~are as follows~~ (in thousands):. Interest income recognized represents interest on accruing loans modified in a TDR.


	September 30, 2016										September 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	26,802	$	27,383	$	—	$	13,401	$	131	$	19,853	$	22,105	$	—	$	17,477	$	61
Real estate - construction	10		10		—		23		—		2,366		2,366		—		1,188		—
Real estate - commercial	13,254		13,254		—		9,341		56		15,371		17,820		—		14,040		—
Real estate - residential	1,062		1,062		—		1,115		3		587		587		—		745		—
Installment loans to individuals	20		20		—		10		—		91		91		—		82		—
Finance leases											—		—		—		—		—
Subtotal:	41,148		41,729		—		23,890		190		38,268		42,969		—		33,532		61
With an allowance recorded:
Commercial, financial, and agricultural	3,085		3,182		1,105		4,137		25		11,039		12,071		3,254		13,706		1
Real estate - construction											50		120		17		25		—
Real estate - commercial	15,031		15,031		2,270		14,518		28		2,761		2,761		904		9,370		—
Real estate - residential	769		769		194		653		—		445		445		7		684		—
Installment loans to individuals	444		469		268		407		8		247		278		69		357		—
Finance leases											33		33		1		17		—
Subtotal:	19,329		19,451		3,837		19,715		61		14,575		15,708		4,252		24,159		1
Totals:
Commercial	58,172		58,850		3,375		41,397		240		49,057		54,790		4,159		54,610		62
Construction	10		10		—		23		—		2,416		2,486		17		1,213		—
Residential	1,831		1,831		194		1,768		3		1,032		1,032		7		1,429		—
Consumer	464		489		268		417		8		338		369		69		439		—
Grand total:	$	60,477	$	61,180	$	3,837	$	43,605	$	251	$	52,843	$	58,677	$	4,252	$	57,691	$	62

	December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	22,529	$	22,793	$	—	$	11,484	$	745
Real estate - construction	37		37		—		45		—
Real estate - commercial	5,886		5,886		—		3,903		97
Real estate - residential	1,365		1,385		—		954		17
Installment loans to individuals	34		34		—		56		—
Subtotal:	29,851		30,135		—		16,442		859
With an allowance recorded:
Commercial, financial, and agricultural	5,189		6,373		961		3,704		138
Real estate - commercial	14,004		14,004		1,585		9,236		161
Real estate - residential	538		538		160		533		7
Installment loans to individuals	370		384		221		334		8
Subtotal:	20,101		21,299		2,927		13,807		314
Totals:
Commercial	47,608		49,056		2,546		28,327		1,141
Construction	37		37		—		45		—
Residential	1,903		1,923		160		1,487		24
Consumer	404		418		221		390		8
Grand total:	$	49,952	$	51,434	$	2,927	$	30,249	$	1,173



	December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	15,101	$	15,428	$	—	$	18,815	$	90
Real estate - construction	9		9		—		23		—
Real estate - commercial	12,710		12,710		—		9,297		14
Real estate - residential	903		903		—		1,134		—
Installment loans to individuals	73		87		—		54		—
Subtotal:	28,796		29,137		—		29,323		104
With an allowance recorded:
Commercial, financial, and agricultural	16,372		16,470		4,369		10,781		1
Real estate - commercial	15,979		15,979		2,216		14,992		—
Real estate - residential	923		923		260		730		—
Installment loans to individuals	468		478		308		419		—
Subtotal:	33,742		33,850		7,153		26,922		1
Totals:
Commercial	60,162		60,587		6,585		53,885		105
Construction	9		9		—		23		—
Residential	1,826		1,826		260		1,864		—
Consumer	541		565		308		473		—
Grand total:	$	62,538	$	62,987	$	7,153	$	56,245	$	105

Credit Quality

The Company manages credit risk by observing written underwriting standards and lending policy established by the Board of Directors and management to govern all lending activities. The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent reviews performed by a loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Audit Committee of the Board of Directors.

Loans ~~can be~~are categorized into risk categories based on relevant information about the ability of borrowers to serve their debt, such as: current financial information, historical payment experience, credit documentation, public information, current economic trends, and other factors. Loans are analyzed individually and classified ~~into~~according to their credit risk. This analysis is performed on a continuous basis. The following definitions are used for risk ratings:

Special Mention: Weakness exists that could cause future impairment, including the following three risk rating grades: pass, special mention, and substandard/doubtful. Factors considered in determining a risk rating grade include debt service capacity, capital structure/liquidity, management, collateral quality, industry risk, company trends/operating performance, repayment source, revenue diversification/customer concentration, qualitydeterioration of financial ~~information,~~ratios, past due status, and ~~financing alternatives. Pass grade signifies the highest quality of loans to loans with reasonable credit risk, which~~questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable.

Substandard: Specific and well-defined weaknesses exist that may include ~~borrowers with marginally adequate~~poor liquidity and deterioration of financial ~~performance, but have~~ratios. Currently the ~~ability~~borrower maintains the capacity to ~~repay~~service the debt. ~~Special mention loans have potential~~The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

Doubtful: Specific weaknesses characterized as Substandard exist that ~~warrant extra attention from the loan officer and other management personnel, but still have the ability~~are severe enough to ~~repay the debt. Substandard classification includes loans with well-defined weaknesses with risk~~make collection in full unlikely. There is no reliable secondary source of ~~potential loss.~~full repayment. Loans classified as ~~doubtful~~Doubtful will usually be placed on non-accrual status. The probability of some loss is extremely high but because of certain important and reasonably specific factors, the amount of loss cannot be determined.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to ~~have little recovery value and are charged off.~~be Pass rated loans.

The following tables present the classes of loans by risk rating (in thousands):


	September 30, 2016										September 30, 2017
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
			Commercial, financial, and agricultural		Real estate - commercial		Total		% of Total				Commercial, financial, and agricultural		Real estate - commercial		Total		% of Total
Pass			$	358,670	$	403,961	$	762,631	82.20	%			$	345,629	$	421,071	$	766,700	83.29	%
Special mention			28,270		25,173		53,443		5.76	%			15,321		8,654		23,975		2.60	%
Substandard			75,923		35,719		111,642		12.03	%			86,523		43,321		129,844		14.11	%
Doubtful			168		—		168		0.02	%			9		—		9		—	%
			$	463,031	$	464,853	$	927,884	100.00	%			$	447,482	$	473,046	$	920,528	100.00	%

Construction Credit Exposure
Credit Risk Profile by Creditworthiness Category
							Real estate - construction		% of Total								Real estate - construction		% of Total
Pass							$	96,178	99.81	%							$	85,295	94.68	%
Special mention							—		—	%							1,834		2.04	%
Substandard							187		0.19	%							2,959		3.28	%
							$	96,365	100.00	%							$	90,088	100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
							Real estate - residential		% of Total								Real estate - residential		% of Total
Pass							$	151,053	97.04	%							$	149,548	96.06	%
Special mention							1,227		0.79	%							1,839		1.18	%
Substandard							3,373		2.17	%							4,289		2.76	%
							$	155,653	100.00	%							$	155,676	100.00	%

Consumer and Commercial Credit Exposure
Consumer and Other Credit Exposure
Credit Risk Profile Based on Payment Activity
	Installment loans to individuals		Lease financing receivable		Other		Total		% of Total		Installment loans to individuals		Lease financing receivable		Other		Total		% of Total
Performing	$	88,048	$	1,449	$	2,912	$	92,409	99.47	%	$	62,791	$	727	$	5,769	$	69,287	99.44	%
Nonperforming	489		—		—		489		0.53	%	357		33		—		390		0.56	%
	$	88,537	$	1,449	$	2,912	$	92,898	100.00	%	$	63,148	$	760	$	5,769	$	69,677	100.00	%


	December 31, 2015											December 31, 2016
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
				Commercial, financial, and agricultural		Real estate - commercial		Total		% of Total					Commercial, financial, and agricultural		Real estate - commercial		Total		% of Total
Pass				$	383,897	$	412,141	$	796,038	86.04	%				$	346,246	$	420,970	$	767,216	81.56	%
Special mention				32,506		28,217		60,723		6.55	%				22,611		23,085		45,696		4.86	%
Substandard				37,353		30,783		68,136		7.36	%				90,300		37,100		127,400		13.54	%
Doubtful				272		—		272		0.03	%				417		—		417		0.04	%
				$	454,028	$	471,141	$	925,169	100.00	%				$	459,574	$	481,155	$	940,729	100.00	%

Construction Credit Exposure
Credit Risk Profile by Creditworthiness Category
								Real estate - construction		% of Total									Real estate - construction		% of Total
Pass								$	74,794	99.79	%								$	100,775	99.82	%
Special mention								34		0.04	%								—		—	%
Substandard								124		0.17	%								184		0.18	%
								$	74,952	100.00	%								$	100,959	100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
								Real estate - residential		% of Total									Real estate - residential		% of Total
Pass								$	144,704	97.08	%								$	153,403	97.17	%
Special mention								1,225		0.82	%								1,181		0.75	%
Substandard								3,135		2.10	%								3,288		2.08	%
								$	149,064	100.00	%								$	157,872	100.00	%

Consumer and Commercial Credit Exposure
Consumer and Other Credit Exposure
Credit Risk Profile Based on Payment Activity
		Installment loans to individuals		Lease financing receivable		Other		Total		% of Total			Installment loans to individuals		Lease financing receivable		Other		Total		% of Total
Performing		$	110,536	$	1,968	$	1,483	$	113,987	99.59	%		$	82,103	$	1,095	$	767	$	83,965	99.34	%
Nonperforming		473		—		—		473		0.41	%		557		—		—		557		0.66	%
		$	111,009	$	1,968	$	1,483	$	114,460	100.00	%		$	82,660	$	1,095	$	767	$	84,522	100.00	%

Troubled Debt Restructurings

A troubled debt restructuring (“TDR”) is a restructuring of a debt made by the Company to a debtor for economic or legal reasons related to the debtor’s financial difficulties that it would not otherwise consider. The Company grants the concession in an attempt to protect as much of its investment as possible.

~~Information~~The following tables present information about TDRs that were modified during the ~~Company’s TDRs is as follows (in thousands):~~periods presented by portfolio segment:


									Three months ended
									September 30, 2017			September 30, 2016
									Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural									1	$	18	—	$	—

									Nine months ended
	September 30, 2016								September 30, 2017			September 30, 2016
	Current		Past Due Greater Than 30 Days		Nonaccrual TDRs		Total TDRs		Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural	$	13	$	—	$	24,568	$	24,581	6	$	2,002	2	$	3,943
Real estate – commercial	—		140		1,573		1,713		—	—		2	1,572
	$	13	$	140	$	26,141	$	26,294	6	$	2,002	4	$	5,515

	December 31, 2015
	Current		Past Due Greater Than 30 Days		Nonaccrual TDRs		Total TDRs
Commercial, financial and agricultural	$	16	$	—	$	20,865	$	20,881
Real estate – commercial	—		148		—		148
	$	16	$	148	$	20,865	$	21,029

The following table presents TDRs that had a payment default during the three and nine-month periods ending September 30, 2017 and 2016, and that were modified within the previous 12 months. The Company defines a payment default as any loan that is greater than 30 days past due or was past due greater than 30 days at any point during the reporting period, or since the date of modification, whichever is shorter.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	Recorded Investment		Recorded Investment		Recorded Investment		Recorded Investment
Commercial, financial and agricultural	$	18	$	—	$	18	$	3,943
Real estate – commercial	—		—		—		1,572
	$	18	$	—	$	18	$	5,515

During the three months ended September 30, 2016, there were no loans identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months. During the three months ended September 30, 2015, there were no loans identified as a TDR. There was one TDR totaling $21.1 million that defaulted on the modified terms of its agreement during the three months ended September 30, 2015. During the nine months ended September 30, 2016, there was one loan relationship with a pre-modification balance of $5.5 million identified as a TDR after conversion of the loans to interest only for a limited amount of time. Subsequent to its conversion to TDR status, this one TDR totaling $5.5 million defaulted on the modified terms during the nine months ended September 30, 2016. During the nine months ended September 30, 2015, there was one loan relationship with a pre-modification balance of $21.4 million identified as a TDR after conversion of the loans to interest only for a limited amount of time. This one TDR subsequently defaulted on the modified terms and totaled $21.1 million at September 30, 2015. For purposes of the determination of an allowance for loan losses on these TDRs, as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans. As of September 30, ~~2016,~~2017, there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs.

4. Intangibles

A summary of core deposit intangible assets as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 is as follows (in thousands):


	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
Gross carrying amount	$	11,674		$	11,674		$	11,674		$	11,674
Less accumulated amortization	(6,776		)	(5,946		)	(7,882		)	(7,053		)
Net carrying amount	$	4,898		$	5,728		$	3,792		$	4,621

5. Derivatives

On July 6, 2016, the Company entered into two forward interest rate swap contracts on ~~junior subordinated debentures~~a reverse repurchase agreement and long-term FHLB advances. The interest rate swap contracts were designated as derivative instruments in a cash flow hedge under ASC Topic 815, Derivatives and Hedging to convert forecasted variable interest payment to a fixed rate and the Company has concluded that the forecasted transactions are probable of occurring. For cash flow hedges, the effective portion of the gain or loss related to the derivative instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. The ineffective portion of the gain or loss is reported in earnings immediately.

No ineffectiveness related to the interest rate swaps designated as cash flow hedges was recognized in the consolidated statements of income for the nine months ended September 30, ~~2016.~~2017. The accumulated net after-tax income related to the effective cash flow hedge included in accumulated other comprehensive income is reflected in Note 6 - Other Comprehensive Income.

The following table discloses the notional amounts and fair value of derivative instruments in the Company's balance sheet as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):



		Notional Amounts				Fair Value
	Type of Hedge	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Derivatives designated as hedging instruments:
Interest rate swaps included in other assets	Cash Flow	$	27,500	$	27,500	$	855	$	989

The following tables present the pre-tax effect of hedging derivative instruments on the Company's consolidated statements of operations:

Notional Amounts Fair Value
Type of Hedge September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
Derivatives designated as hedging instruments:
Interest rate swaps included in other assets Cash Flow $ 27,500
$ —
$ 55
$ —



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	Three months ended September 30,				Three months ended September 30,
	2017		2016		2017	2016
Interest rate swaps	(11	)	55	Interest Expense	4	—



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	Nine months ended September 30,				Nine months ended September 30,
	2017		2016		2017	2016
Interest rate swaps	(134	)	55	Interest Expense	4	—

6. Other Comprehensive Income (Loss)

The following is a summary of the tax effects allocated to each component of other comprehensive income (loss) ~~income~~ (in thousands):

Three Months Ended September 30,
2016 2015

Before Tax
Amount
Tax Effect
Net of Tax
Amount

Before Tax
Amount
Tax Effect
Net of Tax
Amount
Other comprehensive (loss) income:
Securities available-for-sale:
Change in unrealized (losses) gains during period $ (645 ) $ 225
$ (420 ) $ 1,717
$ (601 ) $ 1,116
Reclassification adjustment for gains included in net income —
—
—
—
—
—
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges 55
(19 ) 36
—
—
—
Total other comprehensive (loss) income $ (590 ) $ 206
$ (384 ) $ 1,717
$ (601 ) $ 1,116

Nine Months Ended September 30,
2016 2015
Before Tax
Amount Tax Effect Net of Tax
Amount Before Tax
Amount Tax Effect Net of Tax
Amount
Other comprehensive income (loss):
Securities available-for-sale:
Change in unrealized gains during period $ 4,217
$ (1,476 ) $ 2,741
$ 447
$ (156 ) $ 291
Reclassification adjustment for gains included in net income (20 ) 7
(13 ) (1,243 ) 435
(808 )
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges 55
(19 ) 36
—
—
—
Total other comprehensive income (loss) $ 4,252
$ (1,488 ) $ 2,764
$ (796 ) $ 279
$ (517 )



	Three Months Ended September 30,
	2017								2016
	Before Tax Amount			Tax Effect		Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income (loss):
Securities available-for-sale:
Change in unrealized gains during period	$	(335	)	$	118	$	(217	)	$	(645	)	$	225		$	(420	)
Reclassification adjustment for gains included in net income	(338		)	119		(219		)	—			—			—
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges	(7		)	2		(5		)	55			(19		)	36
Reclassification adjustment for gains included in net income	(4		)	1		(3		)	(4		)	1			(3		)
Total other comprehensive income (loss)	$	(684	)	$	240	$	(444	)	$	(594	)	$	207		$	(387	)



	Nine Months Ended September 30,
	2017									2016
	Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income:
Securities available-for-sale:
Change in unrealized gains during period	$	3,224		$	(1,128	)	$	2,096		$	4,217		$	(1,476	)	$	2,741
Reclassification adjustment for gains included in net income	(347		)	121			(226		)	(20		)	7			(13		)
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges	(130		)	46			(84		)	55			(19		)	36
Reclassification adjustment for gains included in net income	(4		)	1			(3		)	—			—			—
Total other comprehensive income	$	2,743		$	(960	)	$	1,783		$	4,252		$	(1,488	)	$	2,764

The reclassifications out of accumulated other comprehensive income (loss) into net income are presented below (in thousands):


	Three Months Ended September 30,						Three Months Ended September 30,
	2016			2015			2017				2016
Details about Accumulated Other Comprehensive Income Components	Reclassifications Out of Accumulated Other Comprehensive Income		Income Statement Line Item	Reclassifications Out of Accumulated Other Comprehensive Income		Income Statement Line Item
Details about Accumulated Other Comprehensive Income (Loss) Components							Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			Income Statement Line Item	Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
	$	—	Gain on sale of securities, net	$	—	Gain on sale of securities, net	$	(338	)	Gain on sale of securities, net	$	—	Gain on sale of securities, net
	—		Tax expense	—		Tax expense	119			Tax expense	—		Tax expense
	$	—	Net of tax	$	—	Net of tax	$	(219	)	Net of tax	$	—	Net of tax

Gains on derivative instruments:
							$	(4	)	Interest expense	$	—	Interest expense
							1			Tax expense	—		Tax expense
							$	(3	)	Net of tax	$	—	Net of tax



	Nine Months Ended September 30,
	2017				2016
Details about Accumulated Other Comprehensive Income (Loss) Components	Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			Income Statement Line Item	Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
	$	(347	)	Gain on sale of securities, net	$	(20	)	Gain on sale of securities, net
	121			Tax expense	7			Tax expense
	$	(226	)	Net of tax	$	(13	)	Net of tax

Gains on derivative instruments:
	$	(4	)	Interest expense	$	—		Interest expense
	1			Tax expense	—			Tax expense
	$	(3	)	Net of tax	$	—		Net of tax

Nine Months Ended September 30,
2016 2015
Details about
Accumulated Other
Comprehensive Income
Components

Reclassifications Out of
Accumulated Other
Comprehensive Income

Income Statement
Line Item

Reclassifications Out of
Accumulated Other
Comprehensive Income

Income Statement
Line Item
Unrealized gains and losses on securities available-for-sale:
$ (20 ) Gain on sale of securities, net $ (1,243 ) Gain on sale of securities, net
7
Tax expense 435
Tax expense
$ (13 ) Net of tax $ (808 ) Net of tax

7. Earnings Per Common Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015		2017		2016		2017			2016
Net earnings available to common shareholders	$	1,587	$	2,417	$	5,191	$	8,662	$	856	$	1,587	$	(3,689	)	$	5,191
Dividends on Series C preferred stock	—		92		—		277		—		—		—			—
Adjusted net earnings available to common shareholders	$	1,587	$	2,509	$	5,191	$	8,939	$	856	$	1,587	$	(3,689	)	$	5,191
Weighted average number of common shares outstanding used in computation of basic earnings per common share	11,262		11,312		11,260		11,321		16,395		11,262		13,314			11,260
Effect of dilutive securities:
Stock options	1		12		—		20		1		1		4			—
Convertible preferred stock and warrants	—		507		—		507
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted earnings per share	11,263		11,831		11,260		11,848		16,396		11,263		13,318			11,260

On July 11, 2017, the Company completed the sale of an additional 516,700 shares of its common stock, pursuant to the partial exercise of the option to purchase additional shares granted to the underwriter in connection with the Company’s recently completed public offering of 4,583,334 shares at $12.00 per share. The partial exercise of the underwriter’s option to purchase additional shares resulted in additional gross proceeds of approximately $6.2 million bringing the total gross proceeds to approximately $61.2 million and total net proceeds to approximately $57.2 million.

Following is a summary of the securities that were excluded from the computation of diluted earnings per share because the effects of the shares were anti-dilutive (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015	2017	2016	2017	2016
Stock options	304	130	309	130	236	304	84	309
Restricted stock	11	11	11	11	—	11	—	11
Shares subject to the outstanding warrant issued in connection with the CPP transaction	104	104	104	104	104	104	104	104
Convertible preferred stock	507	—	507	—	500	507	500	507

8. Fair Value Measurement

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.

Cash and Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold—The carrying value of these short-term instruments is a reasonable estimate of fair value.

Securities Available-for-Sale—Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent

pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U.S. Agency securities, mortgage-backed securities, asset-backed securities, municipal securities, single issue trust preferred securities, certain pooled trust preferred securities, collateralized debt obligations and certain equity securities that are not actively traded.

Securities Held-to-Maturity—The fair value of securities held-to-maturity is estimated using the same measurement techniques as securities available-for-sale.

Other Investments—The carrying value of other investments is a reasonable estimate of fair value.

Loans—For disclosure purposes, the fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The Company does not record loans at fair value on a recurring basis. No adjustment to fair value is taken related to illiquidity discounts. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management uses one of three methods to measure impairment, which, include collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral or where the loan balance has been charged down to fair value require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts

the appraisal value by taking an additional discount for market conditions and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

For non-performing loans, collateral valuations currently in file are reviewed for acceptability in terms of timeliness and applicability. Although each determination is made based on the facts and circumstances of each credit, generally valuations are no longer considered acceptable when there has been physical deterioration of the property from when it was last appraised, or there has been a significant change in the underlying assumptions of the appraisal. If the valuation is deemed to be unacceptable, a new appraisal is ordered. New appraisals are typically received within 4-6 weeks. While awaiting new appraisals, the valuation in the file is utilized, net of discounts. Discounts are derived from available relevant market data, selling costs, taxes, and insurance. Any perceived collateral deficiency utilizing the discounted value is specifically reserved (as required by ASC Topic 310) until the new appraisal is received or charged off. Thus, provisions or charge-offs are recognized in the period the credit is identified as non-performing.

The following sources are utilized to set appropriate discounts: in-market real estate agents, current local sales data, bank history for devaluation of similar property, Sheriff’s valuations and buy/sell contracts. If a real estate agent is used to market and sell the property, values are discounted 10% for selling costs. Additional discounts may be applied if research from the above sources indicates a discount is appropriate given devaluation of similar property from the time of the initial valuation.

Other Real Estate—Other real estate (“ORE”) properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value. Exceptions to obtaining initial appraisals are properties where a buy/sell agreement exists for the loan value or greater, or where a Sheriff’s valuation has been received for properties liquidated through a Sheriff sale. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the ORE as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the ORE asset as nonrecurring Level 3.

Assets Held For Sale—Assets held for sale are carried at the lower of carrying value or fair value. Fair value is based upon appraised values.

Cash Surrender Value of Life Insurance Policies—Fair value for life insurance cash surrender value is based on cash surrender values indicated by the insurance companies.

Derivative Financial Instruments—The fair value of ~~interest rate swaps~~derivatives are determined by an independent valuation firm and are estimated using prices of financial instruments with similar ~~characteristics and thus~~characteristics. As a result, they are classified within Level 2 of the fair value hierarchy.

Deposits—The fair value of demand deposits, savings accounts, NOW accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. The estimated fair value does not include customer related intangibles.

Securities Sold Under Agreements to Repurchase—The fair value approximates the carrying value of securities sold under agreements to repurchase due to their short-term nature.

Short-term Federal Home Loan Bank Advances—The fair value approximates the carrying value of short-term FHLB advances due to their short-term nature.

Long-term Federal Home Loan Bank Advances—The fair value of long-term FHLB advances is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings with similar terms.

Junior Subordinated Debentures—For junior subordinated debentures that bear interest on a floating basis, the carrying amount approximates fair value. For junior subordinated debentures that bear interest on a fixed rate basis, the fair value is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings.

Commitments to Extend Credit, Standby Letters of Credit and Credit Card Guarantees—Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.

Assets Recorded at Fair Value

The table below presents information about certain assets and liabilities measured at fair value on a recurring basis (in thousands):



	Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at September 30, 2017
Description	September 30, 2017		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of state and political subdivisions	$	23,810	$	—	$	23,810	$	—
GSE mortgage-backed securities	62,860		—		62,860		—
Collateralized mortgage obligations: residential	210,209		—		210,209		—
Collateralized mortgage obligations: commercial	2,472		—		2,472		—
Mutual funds	2,079		2,079		—		—
Corporate debt securities	24,792		—		24,792		—
Total available-for-sale securities	$	326,222	$	2,079	$	324,143	$	—

Derivative assets	$	855	$	—	$	855	$	—


	Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at September 30, 2016						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2016
Description	September 30, 2016		Level 1		Level 2		Level 3		December 31, 2016		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of state and political subdivisions	$	31,521	$	—	$	31,521	$	—	$	29,141	$	—	$	29,141	$	—
GSE mortgage-backed securities	69,145		—		69,145		—		73,578		—		73,578		—
Collateralized mortgage obligations: residential	196,005		—		196,005		—		220,202		—		220,202		—
Collateralized mortgage obligations: commercial	3,465		—		3,465		—		3,082		—		3,082		—
Mutual funds	2,125		2,125		—		—		2,059		2,059		—		—
Corporate debt securities	13,884		—		13,884		—		13,811		—		13,811		—
Total available-for-sale securities	$	316,145	$	2,125	$	314,020	$	—	$	341,873	$	2,059	$	339,814	$	—

Derivative assets	$	55	$	—	$	55	$	—	$	989	$	—	$	989	$	—

Assets / Liabilities
Measured at Fair Value at

Fair Value Measurements
at December 31, 2015
Description December 31, 2015 Level 1 Level 2 Level 3
Available-for-sale securities:
Obligations of state and political subdivisions $ 31,493
$ —
$ 31,493
$ —
GSE mortgage-backed securities 87,038
—
87,038
—
Collateralized mortgage obligations: residential 192,088
—
192,088
—
Collateralized mortgage obligations: commercial 5,448
—
5,448
—
Mutual funds 2,092
2,092
—
—
Total available-for-sale securities $ 318,159
$ 2,092
$ 316,067
$ —

~~Certain assets and liabilities are measured~~The Company records impaired loans at fair value, ~~on a nonrecurring basis and are included in~~measured at the ~~table below (in thousands).~~fair value of the collateral for collateral-dependent loans. Impaired loans are ~~Level 2~~considered level 3 assets when measured using appraisals from ~~external~~third parties, ~~of the collateral less any prior liens.~~discounted for selling costs and other collateral-based discounts. Other real estate properties are ~~also Level 2~~considered level 3 assets when measured using appraisals from ~~external~~third parties, discounted for selling costs, information from comparable sales and marketability of the property. Assets held for sale are considered level 2 assets when measured using appraisals from third parties. The following tables present the Company's financial assets that are measured at fair values on a nonrecurring basis (in thousands):


	Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at September 30, 2016						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at September 30, 2017
Description	September 30, 2016		Level 1		Level 2		Level 3		September 30, 2017		Level 1		Level 2		Level 3
Impaired loans	$	16,033	$	—	$	16,033	$	—	$	19,561	$	—	$	—	$	19,561
Other real estate	2,317		—		2,317		—		1,931		—		—		1,931
Assets held for sale									1,100		—		1,100		—

	Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2015						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2016
Description	December 31, 2015		Level 1		Level 2		Level 3		December 31, 2016		Level 1		Level 2		Level 3
Impaired loans	$	17,487	$	—	$	17,487	$	—	$	26,956	$	—	$	—	$	26,956
Other real estate	4,187		—		4,187		—		2,175		—		—		2,175

The following table shows the significant unobservable inputs used in the fair value measurement of Level 3 assets:



	Fair Value at
Description	September 30, 2017		Technique	Unobservable Inputs
Impaired loans	$	19,561	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	1,931		Third party appraisals	Collateral discounts and estimated costs to sell

	Fair Value at
Description	December 31, 2016		Technique	Unobservable Inputs
Impaired loans	$	26,956	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	2,175		Third party appraisals	Collateral discounts and estimated costs to sell

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and

liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):


			Fair Value Measurements at September 30, 2016 Using:								Fair Value Measurements at September 30, 2017 Using:
	Carrying Value		Level 1		Level 2		Level 3		Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks, interest-bearing deposits in banks and federal funds sold	$	126,667	$	126,667	$	—	$	—	$	163,123	$	163,123	$	—	$	—
Securities available-for-sale	316,145		2,125		314,020		—		326,222		2,079		324,143		—
Securities held-to-maturity	103,412		—		106,009		—		83,739		—		84,639		—
Other investments	11,339		11,339		—		—		12,200		12,200		—		—
Loans, net	1,249,532		—		16,033		1,239,663		1,210,916		—		—		1,212,881
Cash surrender value of life insurance policies	14,272		—		14,272		—		14,834		—		14,834		—
Derivative asset									855		—		855		—
Financial liabilities:
Non-interest-bearing deposits	403,301		—		403,301		—		428,183		—		428,183		—
Interest-bearing deposits	1,181,906		—		1,024,381		157,207		1,127,752		—		936,173		190,407
Securities sold under agreements to repurchase	95,210		95,210		—		—		54,875		54,875		—		—
Short-term Federal Home Loan Bank advances									12,500		12,500		—		—
Long-term Federal Home Loan Bank advances	25,531		—		—		26,153		25,110		—		25,215		—
Junior subordinated debentures	22,167		—		22,167		—		22,167		—		22,167		—


			Fair Value Measurements at December 31, 2015 Using:								Fair Value Measurements at December 31, 2016 Using:
	Carrying Value		Level 1		Level 2		Level 3		Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks, interest-bearing deposits in banks and federal funds sold	$	89,201	$	89,201	$	—	$	—	$	82,228	$	82,228	$	—	$	—
Securities available-for-sale	318,159		2,092		316,067		—		341,873		2,059		339,814		—
Securities held-to-maturity	116,792		—		117,698		—		98,211		—		98,261		—
Other investments	11,188		11,188		—		—		11,355		11,355		—		—
Loans, net	1,244,634		—		17,487		1,232,497		1,259,710		—		—		1,263,089
Cash surrender value of life insurance policies	13,622		—		13,622		—		14,335		—		14,335		—
Derivative asset									989		—		989		—
Financial liabilities:
Non-interest-bearing deposits	374,261		—		374,261		—		414,921		—		414,921		—
Interest-bearing deposits	1,176,589		—		1,007,137		168,633		1,164,509		—		1,012,633		150,879
Securities sold under agreements to repurchase	85,957		85,957		—		—		94,461		94,461		—		—
Short-term Federal Home Loan Bank advances	25,000		—		25,000		—
Long-term Federal Home Loan Bank advances	25,851		—		—		26,508		25,424		—		25,808		—
Junior subordinated debentures	22,167		—		22,167		—		22,167		—		22,167		—

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

MidSouth Bancorp, Inc. (the “Company”) is a ~~financial~~bank holding company headquartered in Lafayette, Louisiana that conducts substantially all of its business through its wholly owned subsidiary bank, MidSouth Bank, N.A. (the “Bank”). We offer complete banking services to commercial and retail customers in Louisiana and south and central Texas with 5750 locations and are connected to a worldwide ATM

network that provides customers with access to more than 55,000 surcharge-free ATMs. We are community oriented and focus primarily on offering commercial and consumer loan and deposit services to individuals, small businesses, and middle market businesses.

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the financial statements accompanying this report. We encourage you to read this discussion in conjunction with our consolidated financial statements and the notes thereto presented herein and with the financial statements, the notes thereto, and

related Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Forward-Looking Statements

Certain statements included in this Report, other than statements of historical fact, are forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, but are not limited to certain statements under the captions “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “could,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements. These statements are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the factors discussed under the caption “Risk Factors” in this Report and in our ~~2015~~2016 Annual Report on form 10-K and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and the following:

changes in interest rates and market prices that could affect the net interest margin, asset valuation, and expense levels;

changes in local economic and business conditions in the markets we serve, including, without limitation, changes related to the oil and gas industries that could adversely affect customers and their ability to repay borrowings under agreed upon terms, adversely affect the value of the underlying collateral related to their borrowings, and reduce demand for loans;

increases in competitive pressure in the banking and financial services industries;

increased competition for deposits and loans which could affect compositions, rates and terms;

changes in the levels of prepayments received on loans and investment securities that adversely affect the yield and value of the earning assets;

our ability to successfully implement and manage our recently announced strategic initiatives;

costs and expenses associated with our strategic initiatives and possible changes in the size and components of the expected costs and charges associated with our strategic initiatives;

our ability to realize the anticipated benefits and cost savings from our strategic initiatives within the anticipated time frame, if at all;

the ability of the Company to comply with the terms of the formal agreement with the OCC;

credit losses due to loan concentration, particularly our energy lending and commercial real estate portfolios;

a deviation in actual experience from the underlying assumptions used to determine and establish our allowance for loan losses (“ALL”), which could result in greater than expected loan losses;

the adequacy of the level of our ALL and the amount of loan loss provisions required in future periods including the impact of implementation of the new CECL (current expected credit loss) methodology;

future examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, impose conditions on our operations or require us to increase our allowance for loan losses or write-down assets;

changes in the availability of funds resulting from reduced liquidity or increased costs;

the timing ~~ability to complete~~ and ~~the~~ impact of ~~proposed and/or~~ future acquisitions or divestitures, the success or failure of integrating acquired operations, and the ability to capitalize on growth opportunities upon entering new markets;

~~the timing, ability to complete and the impact of proposed and/or future efficiency initiatives;~~

the ability to acquire, operate, and maintain effective and efficient operating systems;

increased asset levels and changes in the composition of assets that would impact capital levels and regulatory capital ratios;

loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;

legislative and regulatory changes, including the ~~changes in the regulatory capital framework under the Federal Reserve Board’s Basel III regulatory capital reforms, the~~ impact of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ~~(the “Dodd-Frank Act”), including the implementation of the Consumer Financial Protection Bureau,~~ and other changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of ~~Federal Deposit Insurance Corporation (“FDIC”)~~FDIC insurance and other coverage;

regulations and restrictions resulting from our participation in ~~government sponsored~~government-sponsored programs such as the U.S. Treasury’s Small Business Lending Fund, including potential retroactive changes in such programs;

changes in accounting principles, policies, and guidelines applicable to financial holding companies and banking;

increases in cybersecurity risk, including potential business disruptions or financial losses;

acts of war, terrorism, cyber intrusion, weather, or other catastrophic events beyond our control; and

the ability to manage the risks involved in the ~~foregoing.~~

foregoing

We can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. We disclaim any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements included in this report. The accounting principles we follow and the methods of applying these principles conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking practices. Our most critical accounting policy relates to the determination of the allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The determination of the adequacy of the allowance involves significant judgment and complexity and is based on many factors. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for loan losses may be required. See Asset Quality – Nonperforming Assets and Allowance for Loan Losses and Note 1 and Note 3 of the footnotes to the consolidated financial statements.

Another of our critical accounting policies relates to the valuation of goodwill, intangible assets and other purchase accounting adjustments. We account for acquisitions in accordance with ASC Topic No. 805, which requires the use of the purchase method of accounting. Under this method, we are required to record assets acquired and liabilities assumed at their fair value, including intangible assets. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from an acquisition under the purchase method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings. Given the instability of the economic environment, it is reasonably possible that the methodology of the assessment of potential loan losses and goodwill impairment could change in the near-term or could result in impairment going forward.

A third critical accounting policy relates to deferred tax assets and liabilities. We record deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Future tax benefits, such as net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized. In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. A deferred tax liability is not recognized for portions of the allowance for loan losses for income tax purposes in excess of the financial statement balance. Such a deferred tax liability will only be recognized when it becomes apparent that those temporary differences will reverse in the foreseeable future. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% more likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Results of Operations

For the Three Months Ended September 30, ~~2016~~2017 and ~~2015~~2016

Net earnings available to common shareholders totaled ~~$1.6 million~~$856,000 for the ~~third quarter of 2016,~~three months ended September 30, 2017, compared to net earnings available to common shareholders of ~~$2.4~~$1.6 million ~~reported~~ for the three months ended September 30, 2016. The third quarter of ~~2015. Diluted~~2017 included an after-tax gain on sales of securities of $220,000 and a non-recurring after-tax expense of $587,000 related to the branch closures during the quarter. Excluding these non-operating income and expenses, diluted earnings for the third quarter of ~~2016~~2017 were ~~$0.14~~$0.07 per common share, compared to ~~$0.21~~earnings of $0.14 per ~~common~~diluted share ~~reported~~ for the third quarter of ~~2015.~~ 2016.

Fully taxable-equivalent ("FTE") net interest income was ~~$18.8~~$19.0 million for the third quarter of ~~2016,~~2017, a ~~$665,000 decrease~~$531,000 increase compared to ~~$19.4~~$18.5 million for the third quarter of ~~2015.~~2016. Our annualized net interest margin, on a FTE basis, ~~was 4.24%~~increased 3 basis points in prior year quarterly comparison, from 4.17% for the ~~three months ended September 30,~~third quarter of 2016 ~~compared~~ to ~~4.34%~~4.20% for the ~~same period in 2015.~~third quarter of 2017. Excluding the impact of purchase accounting adjustments, the FTE margin ~~decreased 5~~increased 7 basis points, from ~~4.17%~~4.05% to 4.12% for the three months ended September 30, ~~2015~~2016 and ~~2016,~~2017, respectively.

~~Noninterest~~Excluding gain on sales of securities of $338,000 in the third quarter of 2017, noninterest income ~~increased $98,000~~decreased $4,000 in quarterly comparison.

The third quarter of 2017 included a $903,000 one-time charge related to the closure of 7 branches. Excluding this non-operating expense, noninterest expenses decreased $258,000 in quarterly comparison and consisted primarily of ~~a $57,000 increase~~decreases of $192,000 in ~~ATM/debit card income and a $28,000 increase~~occupancy expense, $206,000 in ~~the income earned from the cash surrender value of life insurance.~~

~~Noninterest expenses increased $622,000 in quarterly comparison and consisted primarily of a $381,000 increase~~corporate development, $185,000 in salaries and ~~employee~~ benefits costs, ~~a $131,000~~$140,000 in marketing costs and $110,000 in printing and supplies, which were partially offset by an $888,000 increase in legal and professional fees and a ~~$63,000~~$113,000 increase in ~~ATM and debit card~~data processing ~~fees and a $78,000 increase~~costs. Several other smaller decreases in ~~losses on wire fraud, which were partially offset by a $180,000~~other non-interest expense categories contributed to the overall decrease ~~in occupancy expense.~~from the third quarter of 2016. The provision for loan losses ~~decreased $900,000~~increased $1.4 million in quarterly comparison, from ~~$3.8 million for the three months ended September 30, 2015 to~~ $2.9 million for the three months ended September 30, ~~2016.~~2016 to $4.3 million for the three months ended September 30, 2017. Income tax expense decreased ~~$35,000~~$419,000 in quarterly comparison.

Dividends on preferred stock totaled $810,000 for the three months ended September 30, 2017 and $811,000 for the three months ended September 30, 2016. Dividends on the Series B Preferred Stock ~~issued to the Treasury as a result of our participation in the Small Business Lending Fund (“SBLF”) totaled~~were $720,000 for the third quarter of ~~2016 based on a dividend rate~~2017, unchanged from $720,000 for the third quarter of ~~9%.~~2016. Dividends on the Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation (“PSB”) totaled $90,000 for the three months ended September 30, 2017 and $91,000 for the three months ended September 30, 2016.

For the Nine Months Ended September 30, ~~2016~~2017 and ~~2015~~2016

~~For~~We reported a net loss available to common shareholders of $3.7 million, or $0.28 per diluted share, for the nine months ended September 30, ~~2016,~~2017, compared to net earnings available to common shareholders ~~totaled~~of $5.2 million, ~~a $3.5 million decrease compared to $8.7 million~~or $0.46 per diluted share, for the ~~same period in 2015. Diluted earnings for the first~~ nine months ~~of 2016 were $0.46 per common share, compared to $0.75 per common share reported for the first nine months of 2015.~~ended September 30, 2016. The first nine months of ~~2015~~2017 included $347,000 of gain on sales of ~~securities~~securities. The first nine months of ~~$1.2~~2017 also included non-operating expenses totaling $3.3 million which consisted of $1.3 million of severance and ~~income from~~retention accruals, a ~~death benefit~~$570,000 write-down on ~~bank owned life insurance~~assets held for sale, a $465,000 one-time charge related to discontinued branch projects and a $903,000 one-time charge related to the closure of ~~$160,000.~~7 branches. Excluding ~~this~~these non-operating income and expenses, the operating ~~earnings~~loss per share for the first nine months of ~~2015~~2017 was ~~$0.67.~~$0.13.

FTE net interest income was ~~$55.6~~$55.7 million for the nine months ended September 30, ~~2016,~~2017, a ~~$3.1 million decrease~~$939,000 increase compared to ~~$58.7~~$54.8 million for the nine months ended September 30, ~~2015.~~2016. Our annualized net interest margin, on a FTE basis, was ~~4.22%~~4.19% for the nine months ended September 30, ~~2016,~~2017, compared to ~~4.38%~~4.15% for the same period in ~~2015.~~2016. Excluding the impact of purchase accounting adjustments, the FTE margin ~~decreased 14~~increased 7 basis points, from ~~4.24%~~4.04% to ~~4.10% for the nine months ended September 30, 2015 and 2016, respectively.~~

Excluding non-operating income of $20,000 for the first nine months of 2016 and $1.4 million for the first nine months of 2015, noninterest income decreased $137,000 in year-to-date comparison and consisted primarily of a $73,000 decrease in mortgage banking fees and an $88,000 decrease in letter of credit income.

~~Noninterest expenses~~4.11% for the nine months ended September 30, 2016 and 2017, respectively.

Excluding gains on sales of securities, noninterest income increased ~~$1.3~~$391,000 in year-over-year comparison and consisted primarily of a $259,000 increase in ATM/debit card income.

Excluding non-operating expenses of $3.3 million ~~compared to~~for the ~~same period~~first nine months of 2017, noninterest expenses increased $400,000 in ~~2015. Salaries~~year-over-year comparison and consisted primarily of a $442,000 increase in salaries and benefits costs, ~~our largest component~~a $1.4 million increase in legal and professional fees and a $465,000 increase in data processing costs, which were partially offset by decreases of ~~noninterest~~$405,000 in occupancy expense, ~~increased $414,000~~$330,000 in ~~year-to-date comparison.~~marketing costs, $391,000 in corporate development, $322,000 in ATM/debit card expense, $203,000 in printing and supplies and $144,000 in expenses on ORE. The provision for loan losses ~~decreased $2.9~~increased $11.6 million in ~~year-to-date~~year-over-year comparison, from ~~$10.9 million for the nine months ended September 30, 2015 to~~ $8.0 million for the nine months ended September 30, ~~2016. Income~~2016 to $19.6 million for the nine months ended September 30, 2017, primarily due to the high level of charge-offs and additional impairment charges on nonperforming loans in the second and third quarters of 2017. A $2.1 million income tax benefit was reported for the first nine months of 2017, compared to income tax expense ~~decreased $831,000 in year-to-date comparison.~~of $3.0 million for the first nine months of 2016.

Net Interest Income

Our primary source of earnings is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other interest-bearing liabilities. Changes in the volume and mix of earning assets and interest-bearing liabilities combined with changes in market rates of interest greatly affect net interest income. Our net interest margin on a taxable equivalent basis, which is net interest income as a percentage of average earning assets, was ~~4.24%~~4.20% and ~~4.34%~~4.17% for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Tables 1 and 3 and tables 2 and 4 below analyze the changes in net interest income in the three months ended September 30, ~~2016~~2017 and ~~2015~~2016 and the nine months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively.

FTE net interest income ~~totaled $18.8 million and $19.4 million for the quarters ended September 30, 2016 and 2015, respectively. The FTE net interest income decreased $665,000~~increased $531,000 in prior year quarterly ~~comparison primarily due to a $619,000 decrease in interest income on loans.~~comparison. Interest income on loans ~~decreased~~increased $242,000 due to ~~a $17.7 million decrease in the average balance of loans, as well a decrease~~an increase in the average yield on loans of 1012 basis ~~points, from 5.55% to 5.45%.~~points. The average balance of loans decreased $13.4 million in prior year quarterly comparison. Purchase accounting adjustments added 9 basis points to the average yield on loans for the third quarter of 2017 and 14 basis points to the average yield on loans for the third quarter of ~~2016 and 20 basis points to the average yield on loans for the third quarter of 2015.~~2016. Excluding the impact of the purchase accounting adjustments, average loan yields ~~declined 4~~increased 17 basis points in prior year quarterly comparison, from ~~5.35%~~5.22% to ~~5.31%~~5.39%. ~~Loan~~The increase was primarily due to higher yields ~~have declined primarily~~on originated loans as well as increases in the ~~result of a sustained low interest rate environment and a higher volume of loans on nonaccrual status.~~federal funds target rate.

Investment securities totaled ~~$420.0~~$410.0 million, or ~~21.5%~~21.0% of total assets at September 30, ~~2016,~~2017, versus ~~$406.5~~$440.1 million, or ~~20.6%~~22.6% of total assets at ~~September 30, 2015.~~December 31, 2016. The investment portfolio had an effective duration of ~~3.2~~3.1 years and a net unrealized gain of ~~$7.6~~$1.2 million at September 30, ~~2016.~~2017. FTE interest income on investments increased $211,000 in prior year quarterly comparison. The average volume of investment securities increased ~~$599,000~~$12.5 million in prior year quarterly ~~comparison. The~~comparison, and the average tax equivalent yield on investment securities ~~decreased 7~~increased 13 basis points, from ~~2.59%~~2.52% to ~~2.52%~~2.65%.

The average yield on all earning assets ~~decreased 10~~increased 6 basis points in prior year quarterly comparison, from ~~4.65%~~4.49% for the third quarter of ~~2015~~2016 to 4.55% for the third quarter of ~~2016.~~2017. Excluding the impact of purchase accounting adjustments, the average yield on total earning assets ~~decreased 5~~increased 10 basis points, from ~~4.51%~~4.39% to ~~4.46%~~4.49% for the ~~three month~~three-month periods ended September 30, ~~2015~~2016 and ~~2016,~~2017, respectively.

Interest expense increased ~~$23,000~~$152,000 in prior year quarterly comparison. Increases in interest expense included a ~~$32,000~~$179,000 increase in interest expense on deposits and a ~~$20,000~~$42,000 increase in interest expense on variable rate junior subordinated debentures. These increases were partially offset by ~~a $16,000~~an $87,000 decrease in interest expense on ~~short-term FHLB advances and a $13,000 decrease in interest expense on securities sold under agreements to repurchase.~~repurchase agreements. Excluding purchase accounting adjustments on acquired certificates of deposit and FHLB borrowings, the average rate paid on interest-bearing liabilities was 0.53% for the three months ended September 30, 2017 and 0.46% for the three months ended September 30, ~~2016 and 0.45% for the three months ended September 30, 2015.~~2016.

Long-term FHLB advances totaled $25.1 million at September 30, 2017, compared to $25.5 million at September 30, ~~2016, compared to $26.0 million at September 30, 2015.~~2016. The FHLB advances are fixed rate advances with rates ranging from 1.99% to ~~5.06%~~3.49% and have a range of maturities from ~~October 2016~~December 2017 to January 2019. The FHLB advances are collateralized by a blanket lien on first mortgages and other qualifying loans. Short-term FHLB advances consisted of one advance totaling $12.5 million at September 30, 2017. The advance matures in October 2017 and bears an interest rate of 1.39%.

As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin ~~decreased 10~~increased 3 basis points, from ~~4.34%~~4.17% for the third quarter of ~~2015~~2016 to ~~4.24%~~4.20% for the third quarter of ~~2016.~~2017. Excluding purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin ~~decreased 5~~increased 7 basis points, from ~~4.17%~~4.05% for the third quarter of ~~2015~~2016 to 4.12% for the third quarter of ~~2016.~~2017.

In year-to-date comparison, FTE net interest income ~~decreased $3.1 million~~increased $939,000 primarily due to ~~a $3.0 million decrease~~an $829,000 increase in FTE interest income from investment securities. The average volume of investment securities increased $21.7 million in year-over-year comparison, and the average yield on ~~loans.~~investment securities increased 13 basis points for the same period. Interest income on loans increased $157,000 in year-over-year comparison. The average volume of loans ~~decreased $39.8~~increased $2.0 million in year-over-year comparison, and the average yield on loans ~~decreased 14~~increased 1 basis ~~points,~~point, from ~~5.59%~~5.36% to ~~5.45%~~5.37%. ~~The average volume of investment securities decreased $751,000 in year-over-year comparison, and the average yield on investment securities decreased 8 basis points for the same period.~~ The average yield on earning assets ~~decreased~~increased 6 basis points in year-over-year comparison, from ~~4.70%~~4.47% at September 30, ~~2015~~2016 to ~~4.54%~~4.53% at September 30, ~~2016. Purchase~~2017. The purchase accounting adjustments added 178 basis points to the average yield on loans for the nine months ended September 30, ~~2015~~2017 and 13 basis points for the nine months ended September 30, 2016. Net of purchase accounting adjustments, the average yield on earning assets ~~decreased 13~~increased 9 basis points, from ~~4.58%~~4.38% at September 30, ~~2015~~2016 to ~~4.45%~~4.47% at September 30, ~~2016.~~2017.

Interest expense ~~decreased $1,000~~increased $312,000 in year-over-year comparison. ~~A $26,000 decrease~~Increases in interest expense included a $277,000 increase in interest expense on deposits ~~a $14,000 decrease in interest expense on short-term FHLB advances~~ and a ~~$19,000 decrease in interest expense on securities sold under agreements to repurchase were partially offset by a $56,000~~$125,000 increase in interest expense on junior subordinated debentures. These increases were partially offset by an $83,000 decrease in interest expense on repurchase agreements. The average rate paid on interest-bearing liabilities was ~~0.43%~~0.48% for the nine months ended September 30, ~~2016,~~2017, compared to 0.42% for the nine months ended September 30, 2015. Net of purchase accounting adjustments, the average rate paid on interest-bearing liabilities remained unchanged at 0.46% for the nine months ended September 30, 2016 and 2015. The FTE net interest margin decreased 16 basis points, from 4.38% for the nine months ended September 30, 2015 to 4.22%0.43% for the nine months ended September 30, 2016. Net of purchase accounting adjustments, the ~~FTE net interest margin decreased 14~~average rate paid on interest-bearing liabilities increased 5 basis points, from ~~4.24% to 4.10%~~0.46% for the nine months ended September 30, ~~2015~~2016 to 0.51% for the nine months ended September 30, 2017. The FTE net interest margin increased 4 basis points, from 4.15% for the nine months ended September 30, 2016 to 4.19% for the nine months ended September 30, 2017. Net of purchase accounting adjustments, the FTE net interest margin increased 7 basis points, from 4.04% to 4.11% for the nine months ended September 30, 2016 and ~~2016, respectively, primarily due to a decline in the average rate earned on loans and the decreased average volume of loans.~~2017.


Table 1 Consolidated Average Balances, Interest and Rates (in thousands)	Table 1 Consolidated Average Balances, Interest and Rates (in thousands)															Table 1 Consolidated Average Balances, Interest and Rates (in thousands)
		Three Months Ended September 30,															Three Months Ended September 30,
		2016							2015								2017							2016
		Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate			Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate
Assets
Investment securities¹
Taxable		$	354,770		$	1,983	2.24	%	$	341,192		$	1,864	2.19	%		$	372,648		$	2,276	2.44	%	$	354,770		$	1,983	2.24	%
Tax exempt²		60,544			635		4.20	%	73,523			818		4.45	%		55,129			553		4.01	%	60,544			635		4.20	%
Total investment securities		415,314			2,618		2.52	%	414,715			2,682		2.59	%		427,777			2,829		2.65	%	415,314			2,618		2.52	%
Federal funds sold		2,703			3		0.43	%	3,349			1		0.12	%		4,319			13		1.18	%	2,703			3		0.43	%
Time and interest bearing deposits in other banks		64,444			83		0.50	%	62,086			40		0.25	%		94,675			305		1.26	%	64,444			83		0.50	%
Other investments		11,253			95		3.38	%	10,508			99		3.77	%		12,098			93		3.07	%	11,253			95		3.38	%
Total loans³		1,268,270			17,373		5.45	%	1,285,991			17,992		5.55	%		1,254,885			17,329		5.48	%	1,268,270			17,087		5.36	%
Total earning assets		1,761,984			20,172		4.55	%	1,776,649			20,814		4.65	%		1,793,754			20,569		4.55	%	1,761,984			19,886		4.49	%
Allowance for loan losses		(21,222		)					(15,853		)						(24,001		)					(21,222		)
Nonearning assets		186,589							188,556								184,591							186,589
Total assets		$	1,927,351						$	1,949,352							$	1,954,344						$	1,927,351

Liabilities and shareholders’ equity
Total interest bearing deposits		$	1,170,660		$	915	0.31	%	$	1,150,190		$	883	0.30	%		$	1,118,593		$	1,094	0.39	%	$	1,170,660		$	915	0.31	%
Securities sold under repurchase agreements		88,560			236		1.06	%	89,025			249		1.11	%		75,654			149		0.78	%	88,560			236		1.06	%
Short-term FHLB advances		—			—		—	%	31,196			16		0.20	%		6,522			19		1.14	%	—			—		—	%
Long-term FHLB advances		25,581			93		1.42	%	26,007			93		1.40	%		25,155			92		1.43	%	25,581			93		1.42	%
Junior subordinated debentures		22,167			170		3.00	%	22,167			150		2.65	%		22,167			212		3.74	%	22,167			170		3.00	%
Total interest bearing liabilities		1,306,968			1,414		0.43	%	1,318,585			1,391		0.42	%		1,248,091			1,566		0.50	%	1,306,968			1,414		0.43	%
Demand deposits		391,533							409,118								428,244							391,533
Other liabilities		9,874							7,026								8,973							9,874
Shareholders’ equity		218,976							214,623								269,034							218,976
Total liabilities and shareholders’ equity		$	1,927,351						$	1,949,352							$	1,954,342						$	1,927,351

Net interest income and net interest spread					$	18,758	4.12	%				$	19,423	4.23	%					$	19,003	4.20	%				$	18,472	4.06	%
Net interest margin							4.24	%						4.34	%														4.17	%


^1.	Securities classified as available-for-sale are included in average balances. Interest income figures reflect interest earned on such securities.


^2.	Interest income of $190,000 for 2017 and $219,000 for 2016 ~~and $282,000 for 2015~~ is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 35%.


^3.	Interest income includes loan fees of ~~$1,255,000~~$1,008,000 for ~~2016~~2017 and ~~$1,393,000~~$969,000 for ~~2015.~~2016. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.



Table 2 Consolidated Average Balances, Interest and Rates (in thousands)	Table 2 Consolidated Average Balances, Interest and Rates (in thousands)															Table 2 Consolidated Average Balances, Interest and Rates (in thousands)
		Nine Months Ended September 30,															Nine Months Ended September 30,
		2016							2015								2017							2016
		Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate			Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate
Assets
Investment securities¹
Taxable		$	354,272		$	5,959	2.24	%	$	340,898		$	5,642	2.21	%		$	380,697		$	7,019	2.46	%	$	354,272		$	5,959	2.24	%
Tax exempt²		62,156			1,975		4.24	%	76,281			2,564		4.48	%		57,436			1,744		4.05	%	62,156			1,975		4.24	%
Total investment securities		416,428			7,934		2.54	%	417,179			8,206		2.62	%		438,133			8,763		2.67	%	416,428			7,934		2.54	%
Federal funds sold		3,398			11		0.43	%	3,463			5		0.19	%		3,823			28		0.97	%	3,398			11		0.43	%
Time and interest bearing deposits in other banks		71,560			274		0.50	%	59,151			112		0.25	%		64,124			540		1.11	%	71,560			274		0.50	%
Other investments		11,225			273		3.24	%	10,109			259		3.42	%		11,651			255		2.92	%	11,225			273		3.24	%
Total loans³		1,259,082			51,334		5.45	%	1,298,844			54,314		5.59	%		1,261,096			50,682		5.37	%	1,259,082			50,525		5.36	%
Total earning assets		1,761,693			59,826		4.54	%	1,788,746			62,896		4.70	%		1,778,827			60,268		4.53	%	1,761,693			59,017		4.47	%
Allowance for loan losses		(20,214		)					(14,176		)						(23,613		)					(20,214		)
Nonearning assets		185,276							189,244								181,716							185,276
Total assets		$	1,926,755						$	1,963,814							$	1,936,930						$	1,926,755

Liabilities and shareholders’ equity
Total interest bearing deposits		$	1,175,857		$	2,725	0.31	%	$	1,174,399		$	2,751	0.31	%		$	1,133,020		$	3,002	0.35	%	$	1,175,857		$	2,725	0.31	%
Securities sold under repurchase agreements		86,605			702		1.08	%	84,434			721		1.14	%		86,282			619		0.96	%	86,605			702		1.08	%
Federal funds purchased		1			—		—		—			—		—	%		—			—		—	%	1			—		—	%
Short-term FHLB advances		7,573			23		0.40	%	28,956			37		0.17	%		2,198			19		1.15	%	7,573			23		0.40	%
Long-term FHLB advances		25,687			274		1.40	%	26,113			272		1.37	%		25,261			271		1.43	%	25,687			274		1.40	%
Junior subordinated debentures		22,167			507		3.01	%	22,167			451		2.68	%		22,167			632		3.76	%	22,167			507		3.01	%
Total interest bearing liabilities		1,317,890			4,231		0.43	%	1,336,069			4,232		0.42	%		1,268,928			4,543		0.48	%	1,317,890			4,231		0.43	%
Demand deposits		383,185							407,077								422,656							383,185
Other liabilities		8,112							7,752								7,218							8,112
Shareholders’ equity		217,568							212,916								238,128							217,568
Total liabilities and shareholders’ equity		$	1,926,755						$	1,963,814							$	1,936,930						$	1,926,755

Net interest income and net interest spread					$	55,595	4.11	%				$	58,664	4.28	%					$	55,725	4.05	%				$	54,786	4.04	%
Net interest margin							4.22	%						4.38	%	��						4.19	%						4.15	%


^1.	Securities classified as available-for-sale are included in average balances. Interest income figures reflect interest earned on such securities.


^2.	Interest income of $600,000 for 2017 and $681,000 for 2016 ~~and $885,000 for 2015~~ is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 35%.


^3.	Interest income includes loan fees of ~~$3,678,000~~$2,567,000 for ~~2016~~2017 and ~~$3,945,000~~$2,869,000 for ~~2015.~~2016. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.


Table 3 Changes in Taxable-Equivalent Net Interest Income (in thousands)	Table 3 Changes in Taxable-Equivalent Net Interest Income (in thousands)										Table 3 Changes in Taxable-Equivalent Net Interest Income (in thousands)
		Three Months Ended September 30, 2016 compared to September 30, 2015										Three Months Ended September 30, 2017 compared to September 30, 2016
		Total Increase			Change Attributable To							Total Increase			Change Attributable To
		(Decrease)			Volume			Rates				(Decrease)			Volume			Rates
Taxable-equivalent earned on:
Investment securities
Taxable		$	119		$	75		$	44			$	293		$	103		$	190
Tax exempt		(183		)	(138		)	(45		)		(82		)	(55		)	(27		)
Federal funds sold		2			—			2				10			3			7
Time and interest bearing deposits in other banks		43			1			42				222			53			169
Other investments		(4		)	7			(11		)		(2		)	7			(9		)
Loans, including fees		(619		)	(266		)	(353		)		242			(182		)	424
Total		(642		)	(321		)	(321		)		683			(71		)	754

Interest paid on:
Interest bearing deposits		32			15			17				179			(43		)	222
Securities sold under repurchase agreements		(13		)	(1		)	(12		)		(87		)	(31		)	(56		)
Short-term FHLB advances		(16		)	(16		)	—				19			19			—
Long-term FHLB advances		—			(2		)	2				(1		)	(2		)	1
Junior subordinated debentures		20			—			20				42			—			42
Total		23			(4		)	27				152			(57		)	209
Taxable-equivalent net interest income		$	(665	)	$	(317	)	$	(348	)		$	531		$	(14	)	$	545

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



Table 4 Changes in Taxable-Equivalent Net Interest Income (in thousands)	Table 4 Changes in Taxable-Equivalent Net Interest Income (in thousands)										Table 4 Changes in Taxable-Equivalent Net Interest Income (in thousands)
		Nine Months Ended September 30, 2016 compared to September 30, 2015										Nine Months Ended September 30, 2017 compared to September 30, 2016
		Total Increase			Change Attributable To							Total Increase			Change Attributable To
		(Decrease)			Volume			Rates				(Decrease)			Volume			Rates
Taxable-equivalent earned on:
Investment securities
Taxable		$	317		$	224		$	93			$	1,060		$	435		$	625
Tax exempt		(589		)	(455		)	(134		)		(231		)	(160		)	(71		)
Federal funds sold		6			—			6				17			1			16
Time and interest bearing deposits in other banks		162			28			134				266			(52		)	318
Other investments		14			28			(14		)		(18		)	9			(27		)
Loans, including fees		(2,980		)	(1,725		)	(1,255		)		157			(63		)	220
Total		(3,070		)	(1,900		)	(1,170		)		1,251			170			1,081

Interest paid on:
Interest bearing deposits		(26		)	2			(28		)		277			(215		)	492
Securities sold under repurchase agreements		(19		)	18			(37		)		(83		)	(7		)	(76		)
Short-term FHLB advances		(14		)	(40		)	26				(4		)	(34		)	30
Long-term FHLB advances		2			(2		)	4				(3		)	(11		)	8
Junior subordinated debentures		56			—			56				125			—			125
Total		(1		)	(22		)	21				312			(267		)	579
Taxable-equivalent net interest income		$	(3,069	)	$	(1,878	)	$	(1,191	)		$	939		$	437		$	502

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

Non-interest Income

Total non-interest income was ~~$4.9~~$5.5 million and ~~$14.2~~$15.8 million for the three and nine-month periods ended September 30, ~~2016,~~2017, compared to ~~$4.8~~$5.2 million and ~~$15.7~~$15.0 million for the same periods in ~~2015.~~2016. Our recurring non-interest income includes service charges on deposit accounts, ATM and debit card income, credit card income and mortgage ~~lending and increase in cash value of life insurance.~~lending.

Table 5 presents non-interest income for the three and nine-month periods ended September 30, ~~2016~~2017 and ~~2015.~~

2016.


Table 5 Non-Interest Income (in thousands)	Table 5 Non-Interest Income (in thousands)									Table 5 Non-Interest Income (in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2016		2015		2016		2015			2017		2016		2017		2016
Service charges on deposit accounts		$	2,509	$	2,491	$	7,213	$	7,170		$	2,463	$	2,584	$	7,339	$	7,404
ATM and debit card income		1,620		1,563		4,897		4,847			1,687		1,620		5,156		4,897
Gain on securities, net		—		—		20		1,243
Gain on sales of securities, net											338		—		347		20
Mortgage lending		190		197		422		495			155		190		465		422
Increase in cash value of life insurance		106		78		250		255			69		106		199		250
Income from death benefit on BOLI		—		—		—		160
Credit card income		75		92		263		300
Letter of credit income		4		4		5		93
Credit card interchange income											299		286		890		809
Credit card merchant fee income											86		67		237		221
Check cashing income											85		—		104		—
Other		362		343		1,156		1,183			304		299		1,016		1,012
Total non-interest income		$	4,866	$	4,768	$	14,226	$	15,746		$	5,486	$	5,152	$	15,753	$	15,035

~~Non-interest~~

Excluding gain on sales of securities, non-interest income ~~increased $98,000~~decreased $4,000 in quarterly ~~comparison, from $4.8 million for the three months ended September 30, 2015 to $4.9 million for the three months ended September 30, 2016,~~comparison. A $121,000 decrease in service charges on deposit accounts and ~~consisted primarily of~~ a ~~$57,000~~$35,000 decrease in mortgage lending income were partially offset by a $67,000 increase in ATM/debit card income and ~~a $28,000~~an $85,000 increase in ~~the income earned from the cash surrender value of life insurance.~~check cashing income.

~~Non-interest~~Excluding gain on sales of securities, non-interest income ~~decreased $1.5 million~~increased $391,000 in year-to-date comparison, from ~~$15.7~~$15.0 million for the nine months ended September 30, ~~2015~~2016 to ~~$14.2~~$15.4 million for the nine months ended September 30, ~~2016. The first nine months of 2016 included $20,000 in gain on sales of securities. The first nine months of 2015 included $1.2 million in gain on sales of securities~~2017 and $160,000 of income from a death benefit on bank owned life insurance. Excluding these non-operating revenues, non-interest income decreased $137,000 in quarterly comparison. Decreases in non-interest income consisted primarily of ~~$73,000~~a $259,000 increase in ATM/debit card income, a $104,000 increase in check cashing income, a $43,000 increase in mortgage ~~banking fees~~program fee income and ~~$88,000~~an $81,000 increase in ~~letter of~~ credit card interchange income. These increases were partially offset by a $65,000 decrease in service charges on deposit accounts.

Non-interest Expense

Total non-interest expense was ~~$17.1~~$17.8 million and ~~$50.9~~$54.6 million for the three and nine-month periods ended September 30, ~~2016,~~2017, compared to ~~$16.5~~$17.1 million and ~~$49.6~~$50.9 million for the same periods in ~~2015.~~2016. Our recurring non-interest expense consists of salaries and employee benefits, occupancy expense, ATM and debit card expense and other operating expenses.

Table 6 presents non-interest expense for the three and nine-month periods ended September 30, ~~2016~~2017 and ~~2015.~~2016.


Table 6 Non-Interest Expense (in thousands)	Table 6 Non-Interest Expense (in thousands)									Table 6 Non-Interest Expense (in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2016		2015		2016		2015			2017		2016		2017		2016
Salaries and employee benefits		$	8,034	$	7,653	$	24,206	$	23,792		$	7,849	$	8,034	$	24,648	$	24,206
Occupancy expense		3,635		3,815		10,899		11,365			3,443		3,635		10,494		10,899
ATM and debit card		833		770		2,410		2,126			654		833		2,088		2,410
Legal and professional fees		516		385		1,335		1,112			1,404		516		2,726		1,335
FDIC premiums		365		391		1,214		1,003			448		365		1,275		1,214
Marketing		442		408		1,174		1,112			302		442		844		1,174
Corporate development		395		371		1,149		1,078			189		395		758		1,149
Data processing		527		476		1,463		1,400			640		527		1,928		1,463
Printing and supplies		191		228		602		708			81		191		399		602
Expenses on ORE, net		100		146		330		244			15		100		186		330
Amortization of core deposit intangibles		277		277		830		830			277		277		830		830
Severance and retention accruals											—		—		1,341		—
One-time charge related to discontinued branch projects											—		—		465		—
Write-down of assets held for sale											—		—		570		—
One-time charge related to closure of branches											903		—		903		—
Other non-interest expense		1,799		1,572		5,302		4,859			1,554		1,799		5,138		5,302
Total non-interest income		$	17,114	$	16,492	$	50,914	$	49,629
Total non-interest expense											$	17,759	$	17,114	$	54,593	$	50,914

Non-interest expenses increased ~~$622,000~~$645,000 million in quarterly comparison. The third quarter of 2017 included non-operating expenses totaling $903,000 which consisted of a one-time charge related to the closure of 7 branches. Excluding these non-operating expenses, non-interest expense decreased $258,000 in quarterly comparison and consisted primarily of ~~a $381,000 increase~~decreases of $192,000 in occupancy expense, $206,000 in corporate development, $185,000 in salaries and ~~employee~~ benefits costs, ~~a $131,000~~$140,000 in marketing costs and $110,000 in printing and supplies,which were partially offset by an $888,000 increase in legal and professional fees and a ~~$63,000~~$113,000 increase in ~~ATM~~data processing costs. Several other smaller decreases in other non-interest expense categories contributed to the overall decrease from the third quarter of 2016. A reclass of certain hosted services subscriptions from corporate development into data processing at the beginning of 2017 caused the fluctuations in those two expense categories. Excluding non-operating expenses of $3.3 million for the first nine months of 2017, noninterest expenses increased $400,000 in year-over-year comparison and ~~debit card processing~~consisted primarily of a $442,000 increase in salaries and benefits costs, a $1.4 million increase in legal and professional fees and a ~~$78,000~~$465,000 increase in ~~losses on wire fraud,~~data processing costs, which were partially offset by ~~a $180,000 decrease~~decreases of $405,000 in occupancy ~~expense. Non-interest~~expense, $330,000 in marketing costs, $391,000 in corporate development, $322,000 in ATM/debit card expense, $203,000 in printing and supplies and $144,000 in expenses on ORE.

Operating salaries and employee benefits costs increased ~~$1.3 million~~$442,000 in year-to-date comparison and ~~primarily~~ included ~~$414,000~~a $61,000 increase in ~~salaries~~salary costs and ~~benefits~~a $356,000 increase in group health costs. The $61,000 increase in salary costs ~~$284,000~~included $119,000 in ~~ATM and debit card processing fees, $211,000 in FDIC premiums, $223,000~~sign-on bonuses related to hiring new talent for the Company.

The increase in legal and professional fees ~~$137,000 in recruiting expense and $142,000 in shares tax expense, which were partially offset by a $446,000 decrease in occupancy expense.~~

~~Salaries and employee benefits costs increased $381,000 in prior year quarterly comparison~~is primarily due to ~~a $119,000 increase in salaries expense and~~increased outsourcing expenses to enhance risk management as well as to address the ~~impact~~provisions of ~~a $450,000 reduction in annual incentive compensation accruals recorded in~~our written agreement with the third quarter of 2015. These increases were partially offset by a $47,000 decrease in stock compensation expense. The number of full-time equivalent (“FTE”) employees remained unchanged at 535 FTE employees at September 30, 2016 and September 30, 2015. Salaries and employee benefits costs increased $414,000 in year-to-date comparison primarily due to a $364,000 increase in group health costs and $200,000 in incentive compensation, which were partially offset by a $92,000 decrease in stock compensation expense.OCC.

ATM and debit card expense ~~increased $63,000~~decreased $322,000 in ~~prior year quarterly~~year-to-date comparison and was primarily driven by a ~~$45,000 increase~~$256,000 decrease in losses on ATM/debit card processing. ~~A $284,000 increase~~In addition, we changed processors during the first quarter of 2017 which resulted in ~~ATM and debit card expense in year-to-date comparison was primarily~~lower processing costs.

~~driven by a $280,000 increase~~A reclass of certain hosted services subscriptions from corporate development into data processing at the beginning of 2017 caused the fluctuations in ~~losses on ATM/debit card processing~~those two expense categories for the ~~same period. Losses on ATM/debit card processing for the nine months~~quarters and years-to-date ended September 30, ~~2015 included a $55,000 insurance reimbursement for losses sustained in 2014. Excluding this insurance reimbursement, ATM~~2017 and ~~debit card expenses increased $229,000 for the nine months ended September~~June 30, ~~2016 compared to the nine months ended September 30, 2015 and losses on ATM/debit card processing increased $225,000 for the same period.~~

FDIC premiums increased $211,000 in year-to-date comparison, primarily due to an increase in our nonperforming loans. Occupancy expense decreased $180,000 in in quarterly comparison and $466,000 in year-to-date comparison primarily as a result of lower lease expense and depreciation expense.2016.

Analysis of Balance Sheet

Consolidated assets ~~totaled $2.0~~remained constant at $1.9 billion at September 30, ~~2016, compared to $1.9 billion at~~2017 and December 31, ~~2015.~~2016. Deposits ~~increased $34.4~~decreased $23.5 million from year-end ~~2015.~~2016. The decrease in deposits is primarily attributable to a $28.7 million decrease in a lawsuit settlement account as claims have been paid out since year-end 2016. Excluding the lawsuit settlement account, we also had a decrease of $35.6 million in other core deposits. These decreases to deposits were partially offset by a $45.8 million increase in brokered certificates of deposits. Our stable core deposit base, which excludes time deposits, totaled $1.4 billion at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 and accounted for ~~90.0%~~87.5% of deposits compared to ~~89.1%~~90.4% of deposits, respectively.

Securities available-for-sale totaled ~~$316.1~~$326.2 million at September 30, ~~2016,~~2017, a decrease of ~~$2.0~~$15.7 million from December 31, ~~2015.~~2016. Securities held-to-maturity decreased ~~$13.4~~$14.5 million, from ~~$116.8~~$98.2 million at December 31, ~~2015~~2016 to ~~$103.4~~$83.7 million at September 30, ~~2016.~~2017. The investment securities portfolio had an effective duration of ~~3.2~~3.1 years and a net unrealized gain of ~~$7.6~~$1.2 million at September 30, ~~2016.~~2017.

Total loans ~~increased $9.2~~decreased $48.1 million during the nine months ended September 30, ~~2016. Increases~~2017 as a result of our accelerated efforts to address nonperforming loans, which resulted in ~~real estate construction loans~~the high level of charge-offs and ~~C&I loans were mostly offset by decreases in installment loans and CRE loans.~~pay-offs during 2017.


Table 7 Composition of Loans (in thousands)	Table 7 Composition of Loans (in thousands)							Table 7 Composition of Loans (in thousands)
		September 30, 2016			December 31, 2015				September 30, 2017			December 31, 2016
Commercial, financial, and agricultural (C&I)		$	463,031		$	454,028			$	447,482		$	459,574
Real estate – construction		96,365			74,952				90,088			100,959
Real estate – commercial (CRE)		464,853			471,141				473,046			481,155
Real estate – residential		155,653			149,064				155,676			157,872
Installment loans to individuals		88,537			111,009				63,148			82,660
Lease financing receivable		1,449			1,968				760			1,095
Other		2,912			1,483				5,769			767
		$	1,272,800		$	1,263,645			$	1,235,969		$	1,284,082
Less allowance for loan losses		(23,268		)	(19,011		)		(25,053		)	(24,372		)
Net loans		$	1,249,532		$	1,244,634			$	1,210,916		$	1,259,710

Our energy-related loan portfolio at September 30, ~~2016~~2017 totaled ~~$243.3~~$197.8 million, or ~~19.1%~~16.0% of total loans, down from ~~$264.7~~$237.4 million at December 31, ~~2015.~~2016. The majority of MidSouth’s energy lending is focused on oil field service companies. Of the ~~412~~337 total relationships in our energy-related loan portfolio, 2738 relationships totaling ~~$77.3~~$83.4 million were classified, with ~~$30.8~~$27.8 million on nonaccrual status at September 30, ~~2016.~~

2017. At September 30, ~~2016,~~2017, reserves for potential energy-related loan losses approximated ~~4.6%~~5.5% of energy loans. ~~Included in the 4.6% is 1.0% reserved for potential yet unidentified losses in the energy-related portfolio.~~

Within the ~~$464.9~~$473.0 million commercial real estate portfolio, ~~$433.4~~$445.4 million is secured by commercial property, ~~$18.6~~$18.7 million is secured by multi-family property, and ~~$12.9~~$8.9 million is secured by farmland. Of the ~~$433.4~~$445.4 million secured by commercial property, ~~$250.4~~$299.7 million, or ~~57.8%~~67.3%, is owner-occupied. Of the $155.7 million residential real estate portfolio, ~~85.5%~~79.3% represented loans secured by first liens.

Assets held for sale totaled $1.1 million at September 30, 2017 and consisted of two former branch buildings that were previously closed.

Other assets increased $4.2 million during the nine months ended September 30, 2017, from $10.1 million at December 31, 2016 to $14.4 million at September 30, 2017. The increase in primarily attributable to a $3.1 million increase in income tax receivable from year-end 2016.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit

and lines of credit. For the period ended September 30, ~~2016,~~2017, we did not engage in any off-balance sheet transactions reasonably likely to have a material impact on our financial condition, results of operations, or cash flows.

Liquidity and Capital

Bank Liquidity

Liquidity is the availability of funds to meet maturing contractual obligations and to fund operations. The Bank’s primary liquidity needs involve its ability to accommodate customers’ demands for deposit withdrawals as well as customers’ requests for credit. Liquidity is deemed adequate when sufficient cash to meet these needs can be promptly raised at a reasonable cost to the Bank.

Liquidity is ~~provided primarily by three~~available through four sources: a stable base of funding sources, an adequate level of assets that can be readily converted into cash, ~~and~~ borrowing lines with correspondent ~~banks. Although the Bank historically has not utilized~~banks and brokered ~~deposits, this is a fourth potential source of liquidity, albeit one that is more costly and volatile.~~deposits. Our core deposits are our most stable and important source of funding. Cash deposits at other banks, federal funds sold, and principal payments received on loans and mortgage-backed securities provide additional primary sources of liquidity. Approximately ~~$23.0~~$17.6 million in projected cash flows from securities repayments for the remainder of ~~2016~~2017 provides an additional source of liquidity.

The Bank also has significant borrowing capacity with the FRB-Atlanta and with the FHLB–Dallas. As of September 30, ~~2016,~~2017, we had no borrowings with the FRB-Atlanta. Long-term FHLB-Dallas advances totaled ~~$25.5~~$25.1 million at September 30, ~~2016~~2017 and are fixed rate advances with rates ranging from 1.99% to ~~5.06%~~3.49% and have a range of maturities from ~~October 2016~~December 2017 to January 2019. One short-term FHLB-Dallas advance totaled $12.5 million at September 30, 2017. The advance matures in October 2017 and bears an interest rate of 1.39%. Under existing agreements with the FHLB-Dallas, our borrowing capacity totaled ~~$251.8~~$219.6 million at September 30, ~~2016.~~2017. The Bank has the ability to post additional collateral of approximately ~~$107.5~~$171.5 million if necessary to meet liquidity needs. Additionally, ~~$195.6~~$178.9 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta. Unsecured borrowing lines totaling $53.5 million are available through correspondent banks. We utilize these contingency funding alternatives to meet deposit volatility, which is more likely in the current environment, given unusual competitive offerings within our markets.

Company Liquidity

At the Company level, cash is needed primarily to meet interest payments on the junior subordinated debentures, dividends on our common stock and dividend payments on the Series B and Series C Preferred Stocks. The ~~weighted average~~ dividend rate on the $32.0 million of Series B Preferred Stock issued to the U.S. Treasury for participation in the Small Business Lending Fund (“SBLF”) was 9.0% for the three month period ended September 30, 2016. The dividend rate increased to 9.0% on February 25, 2016. Management is reviewing options to repay all or a portion of the $32.0 million, but it is unlikely that any amount will be repaid in the near term until credit pressures in the energy portfolio improve.2017.

On December 28, 2012, the Company issued 756,511 shares of common stock and 99,971 shares of Series C Preferred Stock in connection with the PSB acquisition. As of September 30, ~~2016,~~2017, there were ~~91,098~~89,875 shares of Series C Preferred Stock issued and outstanding. The Series C Preferred Stock is entitled to the payment of noncumulative dividends, if and when declared by the Company’s Board of Directors, at the rate of 4.00% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The Series C Preferred Stock paid dividends totaling $91,000 for the three months ended September 30, ~~2016.~~2017.

On June 13, 2017, the Company completed the sale of 4,583,334 shares of its common stock pursuant to an underwritten public offering, and on July 11, 2017, the Company completed the sale of an additional 516,700 shares of common stock, pursuant to the partial exercise of the option to purchase additional shares granted to the underwriter. After deducting the underwriting discount and costs associated with the capital raise, the offering resulted in net proceeds of $57.2 million. The Company, subject to regulatory approval, intends to use $32.0 million of the net proceeds to redeem all of the outstanding Series B Preferred Stock issued to the U.S. Treasury as a result of its participation in the SBLF and have commenced discussions with our regulators to obtain approval to do so. The Company intends to use the remaining portion of the net proceeds to enhance its capital structure, to fund future organic growth, for working capital, and other general corporate purposes.

Dividends from the Bank totaling ~~$6.0~~$4.0 million provided additional liquidity prior to the capital raise for the Company during the nine months ended September 30, ~~2016.~~2017. Due to the $3.7 million loss reported for the nine months ended September 30, 2017, we currently

do not have the ability to approve dividends from the Bank to the Company without prior approval from the OCC. As of September 30, ~~2016, the Bank had the ability to pay dividends to~~2017, the Company had $61.5 million of ~~approximately $9.3 million without prior approval from its primary regulator. As a publicly traded company, the Company also has the ability, subject~~cash to ~~market conditions, to issue additional shares of common stock and other securities to provide funds as needed for operations and future growth of the Company.~~fund general corporate obligations. The Company renewed a $75.0 million Universal Shelf Registration during the third quarter of ~~2015.~~2015 and has $13.8 million remaining after completion of its recent capital raise and overallotment issuance.

Capital

The Company and the Bank are required to maintain certain minimum capital levels. Risk-based capital requirements are intended to make regulatory capital more sensitive to the risk profile of an institution's assets. Effective January 1, 2015, the Company and the Bank adopted the Basel III rules which included new minimum risk-based and leverage ratios, and modified capital and asset definitions for purposes of calculating these ratios. These rules also created a new regulatory capital standard based on Tier 1 common equity and increased the minimum leverage and risk-based capital ratios applicable to all banking organizations.

In addition, the Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer phased in by 2019 of 2.5% above the new regulatory minimum capital ratios. The effect of the capital conservation buffer once fully implemented in 2019 will be to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital

ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers. The new minimum capital requirements were effective on January 1, 2015 for community banking organizations, such as MidSouth, whereas other requirements of the Basel III rules including the conservation buffer phase in over time.

At September 30, ~~2016,~~2017, the Company and the Bank were in compliance with statutory minimum capital requirements and were classified as “well capitalized.” Minimum capital requirements include a total risk-based capital ratio (total risk-based capital to risk-weighted assets) of 8.0%, with Tier 1 capital not less than 6.0%, a Tier 1 leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution, and a common equity Tier 1 capital to total risk-weighted assets of 4.5%. However, in connection with its most recent examination, effective July 19, 2017, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 leverage ratio of at least 8%, and a total risk-based capital ratio of at least 12%. As of September 30, ~~2016,~~2017, the Company’s Tier 1 leverage ratio was ~~10.27%~~12.84%, Tier 1 capital to risk-weighted assets was ~~13.07%~~17.01%, total capital to risk-weighted assets was ~~14.33%~~18.27% and common equity Tier 1 capital to risk-weighted assets was ~~8.83%~~12.68%. The Bank had a Tier 1 leverage capital ratio of ~~9.52%~~9.64% and a total risk-based capital ratio of 14.04% at September 30, ~~2016.~~2017.

Asset Quality

Credit Risk Management

We manage credit risk primarily by observing written, board approved policies that govern all credit underwriting and approval activities. Our Chief Credit Officer (“CCO”) is responsible for credit underwriting as well as management of classified and ~~loan operations~~criticized assets for the Bank. The role of the CCO includes on-going review and development of lending policies, commercial credit analysis, centralized consumer underwriting, ~~loan operations documentation and funding,~~ and overall credit risk management procedures. The current risk management process requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent reviews performed by the loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Audit Committee of the Board of Directors. We believe the conservative nature of our underwriting practices has resulted in strong credit quality in our loan portfolio. Completed loan applications, credit bureau reports, financial statements, and a committee approval process remain a part of credit decisions. Documentation of the loan decision process is required on each credit application, whether approved or denied, to ensure thorough and consistent procedures. Additionally, we have historically recognized and disclosed significant problem loans quickly and taken prompt action to address material weaknesses in those credits.

Credit concentrations are monitored and reported quarterly whereby individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity are evaluated for each major standard industry classification segment. At September 30, ~~2016,~~2017, one industry segment concentration, the oil and gas industry, aggregated more than 10% of our loan portfolio. Our exposure in the oil and gas (energy-related) industry, including related service and manufacturing industries, totaled approximately ~~$243.3~~$197.8 million, or ~~19.1%~~16.0% of total loans. Of the ~~412~~337 credit relationships in the energy-related loan portfolio, 2738 relationships totaling ~~$77.3~~$83.4 million were classified with ~~$30.8~~$27.8 million on nonaccrual status at September 30, ~~2016.~~2017.

Additionally, we monitor our exposure to ~~loans secured by commercial real estate.~~CRE loans. At September 30, ~~2016,~~2017, CRE loans ~~secured by commercial real estate~~ (including commercial construction ~~farmland~~ and multifamily loans) totaled approximately ~~$542.2 million. Of the $542.2~~$537.9 million, ~~$464.9 million represent CRE loans, 54%~~56% of which are secured by owner-occupied commercial properties. ~~Of the $542.2 million in~~Our non-owner occupied CRE loans ~~secured by commercial real estate, $28.3~~as a percentage of our risk-based capital totaled 90% at September 30, 2017. A total of $18.1 million, or ~~5.2%~~3.8%, were on nonaccrual status at September 30, ~~2016.~~2017. Additional information regarding credit quality by loan classification is provided in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.

Nonperforming Assets and Allowance for Loan Loss

Table 8 summarizes the Company's nonperforming assets for the quarters ending September 30, ~~2016~~2017 and ~~2015,~~2016, and December 31, ~~2015.~~2016.


Table 8 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (in thousands)	Table 8 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (in thousands)										Table 8 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (in thousands)
		September 30, 2016			December 31, 2015			September 30, 2015				September 30, 2017			December 31, 2016			September 30, 2016
Nonaccrual loans		$	60,522		$	50,051		$	51,616			$	51,289		$	62,580		$	60,522
Loans past due 90 days and over and still accruing		968			147			82				402			268			968
Total nonperforming loans		61,490			50,198			51,698				51,691			62,848			61,490
Other real estate		2,317			4,187			4,661				1,931			2,175			2,317
Other foreclosed assets		283			38			—				234			16			283
Total nonperforming assets		$	64,090		$	54,423		$	56,359			$	53,856		$	65,039		$	64,090

Troubled debt restructurings, accruing		$	153		$	164		$	168			$	1,557		$	152		$	153

Nonperforming assets to total assets		3.28		%	2.82		%	2.85		%		2.77		%	3.35		%	3.28		%
Nonperforming assets to total loans + ORE + other assets repossessed		5.03		%	4.29		%	4.32		%		4.35		%	5.06		%	5.03		%
ALL to nonperforming loans		37.84		%	37.87		%	36.63		%		48.47		%	38.78		%	37.84		%
ALL to total loans		1.83		%	1.50		%	1.46		%		2.03		%	1.90		%	1.83		%

QTD charge-offs		$	1,161		$	3,091		$	1,000			$	4,381		$	1,835		$	1,161
QTD recoveries		151			163			91				460			339			151
QTD net charge-offs		$	1,010		$	2,928		$	909			$	3,921		$	1,496		$	1,010
Annualized net charge-offs to total loans		0.32		%	0.92		%	0.28		%		1.26		%	0.46		%	0.32		%

Nonperforming assets totaled ~~$64.1~~$53.9 million at September 30, ~~2016, an increase~~2017, a decrease of ~~$9.7~~$11.1 million from the ~~$54.4~~$65.0 million reported at year-end ~~2015~~2016 and ~~an increase~~a decrease of ~~$7.7~~$10.2 million from the ~~$56.4~~$64.1 million reported at September 30, ~~2015.~~2016. The ~~increase in~~decrease is primarily attributable to the ~~first nine months~~payoffs/paydowns of ~~2016 resulted primarily from a $5.6~~$38.1 million ~~commercial real estate loan unrelated to energy~~of non-accrual loans and ~~a $6.5~~the charge-off of $16.5 million ~~energy-related relationship that~~of non-accrual loans. These decreases were ~~placed on nonaccrual during the period. The $12.1 million increase was~~ partially offset by ~~$1.2~~$43.3 million ~~in partial charge-offs~~ of ~~energy-related loans. Our largest credit~~loans placed on non-accrual ~~is energy-related and is secured by~~during the year. The decrease in non-performing assets reflects our previously announced transition plans that include a ~~fleet of jack-up boats. The balance of this credit at September 30, 2016 was $20.5 million. Based on the most recent appraisals, the credit is not currently impaired.~~more aggressive approach to addressing asset quality.

Allowance coverage for nonperforming loans was 48.47% at September 30, 2017 compared to 38.78% at December 31, 2016 and 37.84% at September 30, ~~2016 compared to 37.87% at December 31, 2015 and 36.63% at September 30, 2015.~~2016. The ALL/total loans ratio increased to 2.03% at September 30, 2017, compared to 1.90% at year-end 2016 and 1.83% at September 30, ~~2016, compared to 1.50% at year-end 2015 and 1.46% at September 30, 2015.~~2016. Including valuation accounting adjustments on acquired loans, the total adjustments and ALL was ~~2.02%~~2.13% of loans at September 30, ~~2016.~~2017. The ratio of annualized net charge-offs to total loans ~~was~~increased to 1.26% for the three months ended September 30, 2017, compared to 0.46% for the three months ended December 31, 2016, and 0.32% for the three months ended September 30, 2016, compared to 0.92% for the three months ended December 31, 2015, and 0.28% for the three months ended September 30, 2015. Energy-related charge-offs totaled $1.2 million in the first nine months of 2016.

Total nonperforming assets to total loans plus ORE and other assets repossessed ~~increased~~decreased to 4.35% at September 30, 2017 from 5.06% at December 31, 2016 and 5.03% at September 30, ~~2016 from 4.29% at December 31, 2015 and 4.32% at September 30, 2015.~~2016. Performing troubled debt restructurings (“TDRs”) totaled $1.6 million at September 30, 2017, compared to $152,000 at December 31, 2016 and $153,000 at September 30, ~~2016, compared to $164,000 at December 31, 2015 and $168,000 at September 30, 2015.~~2016. Classified assets, including ORE, ~~increased $42.0 million, or 54.8%, to $118.6~~were $139.7 million at September 30, ~~2016~~2017 compared to ~~$76.6~~$134.2 million at December 31, 2015. The increase in classified assets during the year ended September 30, 2016 is primarily due to the downgrade of 6 energy-related credits totaling $38.0 million and the downgrade of two non energy-related credits totaling $3.8 million.2016. Additional information regarding impaired loans is included in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.

Quarterly evaluations of the allowance for loan losses are performed in accordance with GAAP and regulatory guidelines. The ALL is comprised of specific reserves assigned to each impaired loan for which a probable loss has been identified as well as general reserves to maintain the allowance at an acceptable level for other loans in the portfolio where historical loss experience is available that indicates certain probable losses may exist. Factors considered in determining provisions include estimated losses in significant credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off-balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management; and the results of examinations of the loan portfolio by regulatory agencies and others. The processes by which we determine the appropriate level of the ALL, and the corresponding provision for probable credit

losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates. We believe the ~~$23.3~~$25.1 million in the ALL as of September 30, ~~2016~~2017 is sufficient to cover probable losses in the loan portfolio.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto, presented herein, have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Non-GAAP Financial Measures

Certain financial information included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations is determined by methods other than in accordance with GAAP. Table 9 below presents a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures include “core net interest income”, and “core net interest margin”~~, “diluted earnings per share, operating” and “operating earnings available to common shareholders”~~. “Core net interest income” is defined as net interest income excluding net purchase accounting adjustments. “Core net interest margin” is defined as core net interest income expressed as a percentage of average earnings assets. “Diluted earnings per share, operating” is defined as net earnings available to common shareholders adjusted for specified one-time items divided by diluted weighted-average shares. “Operating earnings available to common shareholders” is defined as net income available to common shareholders less tax-effected nonoperating income and expense items, including securities gains/losses.

We use non-GAAP measures because we believe they are useful for evaluating our financial condition and performance over periods of time, as well as in managing and evaluating our business and in discussions about our performance. We also believe these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial condition as well as comparison to financial results for prior periods. These results should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures that other companies may use.


Table 9 Reconciliation of Non-GAAP Financial Measures (in thousands except per share data)	Table 9 Reconciliation of Non-GAAP Financial Measures (in thousands except per share data)													Table 9 Reconciliation of Non-GAAP Financial Measures (in thousands except per share data)
		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015				2017			2016			2017			2016
Core Net Interest Margin

Net interest income (FTE)		$	18,758		$	19,423		$	55,595		$	58,664			$	19,003		$	18,472		$	55,725		$	54,786
Less purchase accounting adjustments		(493		)	(689		)	(1,399		)	(1,832		)		(355		)	(493		)	(1,009		)	(1,399		)
Core net interest income, net of purchase accounting adjustments	A	$	18,265		$	18,734		$	54,196		$	56,832		A	$	18,648		$	17,979		$	54,716		$	53,387

Total average earning assets		$	1,761,984		$	1,776,649		$	1,764,654		$	1,788,746			$	1,793,754		$	1,761,984		$	1,778,827		$	1,761,693
Add average balance of loan valuation discount		2,634			4,269			2,961			4,775				1,504			2,634			1,728			2,961
Average earnings assets, excluding loan valuation discount	B	$	1,764,618		$	1,780,918		$	1,767,615		$	1,793,521		B	$	1,795,258		$	1,764,618		$	1,780,555		$	1,764,654

Core net interest margin	A/B	4.12		%	4.17		%	4.10		%	4.24		%	A/B	4.12		%	4.05		%	4.11		%	4.04		%

Diluted Earnings Per Share, Operating

Diluted earnings per share		$	0.14		$	0.21		$	0.46		$	0.75
Effect of net gain on sale of securities, after-tax		—			—			—			(0.07		)
Effect of income from death benefit on bank owned life insurance		—			—			—			(0.01		)
Diluted earnings per share, operating		$	0.14		$	0.21		$	0.46		$	0.67
Diluted earnings (loss) per share															$	0.05		$	0.14		$	(0.28	)	$	0.46
Effect of severance and retention accruals															—			—			0.07			—
Effect of one-time charge related to discontinued branch projects															—			—			0.02			—
Effect of write-down of assets held for sale															—			—			0.03			—
Effect of one-time charge related to closure of branches															0.03						0.04
Effect of gain on sales of securities															(0.01		)	—			(0.01		)	—
Diluted earnings (loss) per share, operating															$	0.07		$	0.14		$	(0.13	)	$	0.46

Operating Earnings Available to Common Shareholders
Operating Earnings (Loss) Available to Common Shareholders

Net earnings available to common shareholders		$	1,587		$	2,417		$	5,191		$	8,662
Non-interest income adjustments:
Income from death benefit on bank owned life insurance		—			—			—			(160		)
Net earnings (loss) available to common shareholders															$	856		$	1,587		$	(3,689	)	$	5,191
Severance and retention accruals, after-tax															—			—			872			—
One-time charge related to discontinued branch projects, after-tax															—			—			302			—
Write-down of assets held for sale, after-tax															—			—			371			—
One-time charge related to closure of branches, after-tax															587						587
Net gain on sale of securities, after-tax		—			—			(13		)	(808		)		(220		)	—			(226		)	(13		)
Operating earnings available to common shareholders		$	1,587		$	2,417		$	5,178		$	7,694
Operating earnings (loss) available to common shareholders															$	1,223		$	1,587		$	(1,783	)	$	5,178

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes from the information regarding market risk disclosed under the heading “Funding Sources - Interest Rate Sensitivity” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Item 4. Controls and Procedures.

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

During the third quarter of ~~2016,~~2017, there was no change in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings.

The Bank has been named as a defendant in various legal actions arising from normal business activities in which damages of various amounts are claimed. While the amount, if any, of ultimate liability with respect to such matters cannot be currently determined, management believes, after consulting with legal counsel, that any such liability will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. However, in the event of unexpected future developments in these matters, if the ultimate resolution of any such matter is unfavorable, the result may be material to the Company’s consolidated financial position, consolidated results of operations or consolidated cash flows.

Item 1A. Risk Factors.

~~There have been no material changes~~The Bank is in “troubled condition” and has entered into a formal agreement with the OCC, which subjects us to significant restrictions and will require us to designate a significant amount of resources to comply with the agreement.

On June 8, 2017, the Bank was informed by the OCC that the OCC has determined that the Bank is in “troubled condition” for purposes of 12 C.F.R. 5.51, Changes in Directors and Senior Executive Officers, which implements the provisions of Section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 1831i, and, as a result, the Bank is subject to specified restrictions on its operations. The OCC’s determination was based on deficiencies identified in its examination of the Bank, including but not limited to deficiencies in asset quality, credit administration and strategic planning. Based on the troubled condition determination, the Bank is now subject to the following restrictions on its operations: (1) the Bank must seek approval from the ~~risk factors previously disclosed~~OCC prior to adding or replacing a member of its board of directors, or employing or promoting any existing employee as a senior executive officer, and (2) the Bank may not, except under certain circumstances, enter into any agreements to make severance or indemnification payments or make any such payments to “institution-affiliated parties” as defined in ~~our Form 10-K~~the regulations.

On July 19, 2017, the Bank entered into a formal written agreement with the OCC (the “Agreement”) that provides, among other things, that the Bank: (i) create a committee to monitor the Bank’s compliance with the Agreement and make quarterly reports to the Board of Directors and the OCC; (ii) adopt and implement a three-year strategic plan for the ~~year ended December 31, 2015.~~Bank consistent with regulatory guidance and to be reviewed and updated on at least an annual basis by the Board of Directors; (iii) protect its interests in its criticized assets (those assets classified as “doubtful,” “substandard,” or “special mention” by internal or external loan review or examination), and adopt and implement a written program designed to eliminate the basis of criticism of criticized assets equal to or exceeding $250,000, which shall be reviewed and, as necessary, revised, on a quarterly basis; (iv) may not extend additional credit to any borrower with an aggregate outstanding loan balance of $250,000 that is a criticized asset unless approved and deemed by the Bank's Board of Directors to be necessary to promote the best interests of the Bank and will not compromise the Bank's written program with respect to such loans; (v) develop and implement a written program to improve the Bank's loan portfolio management and provide the Board of Directors with written reports on the Bank's loan portfolio to enhance problem loan identification; (vi) review and, as necessary, revise the Bank's loan review program to ensure the timely identification and categorization of problem credits consistent with regulatory guidance; (vii) adopt and implement certain enhancements to its policies and procedures relating to its ALLL and the methodology related thereto; and (viii) revise its internal audit program to ensure Bank adherence to an independent and comprehensive internal audit program. The Company may also become subject to formal or informal enforcement actions by the Board of Governors of the Federal Reserve System.

While subject to the Agreement, we expect that our management and Board of Directors will be required to focus considerable time and attention on taking corrective actions to comply with its terms. We may also hire third party consultants and advisors to assist us in complying with the Agreement, which could increase our non-interest expense and reduce our earnings.

The Bank has appointed a committee to monitor compliance with the Agreement and is working to promptly address the requirements of the Agreement. There is no guarantee, however, that the Bank will successfully address the OCC’s concerns in the Agreement or that we will be able to comply with it. If we do not comply with the Agreement, we could be subject to civil monetary penalties, further regulatory sanctions and/or other enforcement actions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company did not sell any unregistered equity securities or repurchase any equity securities during the quarter ended September 30, ~~2016.~~2017.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.



Exhibit Number	Document Description

3.1	Amended and Restated Articles of Incorporation of MidSouth Bancorp, Inc. (restated solely for purposes of Item 601(b)(3) of Regulation S-K) (filed as Exhibit 3.1 to MidSouth's Annual Report on Form 10-K filed on March 18, 2013 and incorporated herein by reference).

3.2	Amended and Restated By-laws of MidSouth Bancorp, Inc. effective as of September 26, 2012 (restated solely for purposes of Item 601(b)(3) of Regulation S-K (filed as Exhibit 3.3 to MidSouth’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference).

~~31.1~~ 10.1	Formal Agreement by and between MidSouth, N.A. and the Comptroller of the Currency dated July 19, 2017 (filed as Exhibit 10.1 to MidSouth’s Current Report on Form 8-K filed on July 25, 2017 and incorporated herein by reference)

31.1	Certification pursuant to Exchange Act Rules 13(a) – 14(a)

31.2	Certification pursuant to Exchange Act Rules 13(a) – 14(a)

32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, ~~2016,~~2017, formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*



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

Signatures

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



	MidSouth Bancorp, Inc. (Registrant)

Date: November 9, ~~2016~~2017
	/s/ C.James R. ~~Cloutier~~McLemore
	C.James R. ~~Cloutier,~~McLemore, President and CEO
	(Principal Executive Officer)

	/s/ ~~James R. McLemore~~Lorraine D. Miller
	~~James R. McLemore,~~Lorraine D. Miller, CFO
	(Principal Financial Officer)

	/s/ Teri S. Stelly
	Teri S. Stelly, Controller (Principal Accounting Officer)

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