UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM ~~10-Q~~10-Q/A

Amendment No.1



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

For the quarterly period ended ~~September~~June 30, ~~2017~~2018



☐	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 of 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 an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



☐Large accelerated filer	☒Accelerated filer	☐Non-accelerated filer	☐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~~August 9, ~~2017,~~2018, there were ~~16,548,829~~16,639,650 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-Q/A to amend and restate in their entirety the following items of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 as originally filed with the Securities and Exchange Commission on August 9, 2018 (the “Original Form 10-Q”): (i) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations," (ii) “Exhibits,” and we have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-Q/A restates in its entirety, as amended, our Original Form 10-Q. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and does not reflect events occurring after that date, or modify or update disclosures in any way other than as required to reflect the restatement described below.

We have determined that our previously reported Subsequent Event for the quarter ended June 30, 2018 erroneously stated the reduction of energy loans as a percentage of total loans from 14.5% to 1.38%, and should have stated a reduction of energy loans as a percentage of total loans from 14.5% to 13.8%. We have made necessary changes in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations," Subsequent Events for the correction of this error.



Part I – Financial Information		43
	Item 1. Financial Statements	43
	Consolidated Balance Sheets	43
	Consolidated Statements of Operations (unaudited)	54
	Consolidated Statements of Comprehensive ~~Income~~Loss (unaudited)	65
	Consolidated Statement of Shareholders’ Equity (unaudited)	76
	Consolidated Statements of Cash Flows (unaudited)	87
	Notes to Interim Consolidated Financial Statements	98
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.	3230
	Forward-Looking Statements	3331
	Critical Accounting Policies	3432
	Results of Operations	3432
	Analysis of Balance Sheet	4240
	Liquidity and Capital	4341
	Asset Quality	4443
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	4847
	Item 4. Controls and Procedures.	4847
Part II – Other Information		4948
	Item 1. Legal Proceedings.	4948
	Item 1A. Risk Factors.	4948
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	4948
	Item 3. Defaults Upon Senior Securities.	4948
	Item 4. Mine Safety Disclosures.	5048
	Item 5. Other Information.	5048
	Item 6. Exhibits.	5049

~~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, 2017 (unaudited)			December 31, 2016 (audited)				June 30, 2018 (unaudited)			December 31, 2017 (audited)
Assets
Cash and due from banks, including required reserves of $6,545 and $6,669, respectively		$	32,199		$	31,687
Cash and due from banks, including required reserves of $10,470 and $6,741, respectively									$	31,145		$	34,775
Interest-bearing deposits in banks		124,591			47,091				241,492			114,839
Federal funds sold		6,333			3,450				6,139			3,350
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
Securities available-for-sale, at fair value (cost of $317,251 at June 30, 2018 and $312,584 at December 31, 2017)									308,937			309,191
Securities held-to-maturity (fair value of $66,758 at June 30, 2018 and $80,920 at December 31, 2017)									67,777			81,052
Other investments		12,200			11,355				14,927			12,214
Loans held for sale									—			15,737
Loans		1,235,969			1,284,082				1,057,963			1,183,426
Allowance for loan losses		(25,053		)	(24,372		)		(23,514		)	(26,888		)
Loans, net		1,210,916			1,259,710				1,034,449			1,156,538
Bank premises and equipment, net		64,969			68,954				56,834			59,057
Accrued interest receivable		7,697			7,576				7,131			8,283
Goodwill		42,171			42,171				42,171			42,171
Intangibles		3,792			4,621				2,962			3,515
Cash surrender value of life insurance		14,834			14,335				15,002			14,896
Other real estate		1,931			2,175				1,365			2,001
Assets held for sale		1,100			—				3,995			3,995
Other assets		14,372			10,131				24,591			19,538
Total assets		$	1,947,066		$	1,943,340			$	1,858,917		$	1,881,152

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing		$	428,183		$	414,921			$	419,517		$	416,547
Interest-bearing		1,127,752			1,164,509				1,103,503			1,063,142
Total deposits		1,555,935			1,579,430				1,523,020			1,479,689
Securities sold under agreements to repurchase		54,875			94,461				14,886			67,133
Short-term Federal Home Loan Bank advances		12,500			—				27,500			40,000
Long-term Federal Home Loan Bank advances		25,110			25,424				10,011			10,021
Junior subordinated debentures		22,167			22,167				22,167			22,167
Other liabilities		8,836			7,482				12,661			8,127
Total liabilities		1,679,423			1,728,964				1,610,245			1,627,137
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, 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
Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at June 30, 2018 and December 31, 2017									32,000			32,000
Series C Preferred stock, no par value; 100,000 shares authorized, 89,875 shares issued and outstanding at June 30, 2018 and December 31, 2017									8,987			8,987
Common stock, $0.10 par value; 30,000,000 shares authorized, 16,619,894 and 16,548,829 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively									1,662			1,655
Additional paid-in capital		168,322			111,166				168,863			168,412
Unearned ESOP shares		(967		)	(1,233		)		(876		)	(937		)
Accumulated other comprehensive income (loss)		773			(1,010		)
Accumulated other comprehensive loss									(5,400		)	(1,828		)
Retained earnings		56,873			63,207				43,436			45,726
Total shareholders’ equity		267,643			214,376				248,672			254,015
Total liabilities and shareholders’ equity		$	1,947,066		$	1,943,340			$	1,858,917		$	1,881,152

See notes to unaudited consolidated financial statements.


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)										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 June 30,						Six Months Ended June 30,
		2017		2016		2017			2016			2018			2017			2018			2017
Interest income:
Loans, including fees		$	17,329	$	17,087	$	50,682		$	50,525		$	15,344		$	16,731		$	31,359		$	33,353
Securities and other investments:
Taxable		2,276		1,983		7,019			5,959			2,093			2,416			4,140			4,743
Nontaxable		363		416		1,144			1,294			277			374			593			781
Federal funds sold		13		3		28			11			21			9			39			15
Time and interest bearing deposits in other banks		305		83		540			274			912			150			1,426			235
Other investments		93		95		255			273			92			78			179			162
Total interest income		20,379		19,667		59,668			58,336			18,739			19,758			37,736			39,289

Interest expense:
Deposits		1,094		915		3,002			2,725			1,410			973			2,647			1,908
Securities sold under agreements to repurchase		149		236		619			702			25			236			66			470
Other borrowings and payables		111		93		290			297
Short-term FHLB advances												75			—			159			—
Long-term FHLB advances												45			91			90			179
Junior subordinated debentures		212		170		632			507			259			212			479			420
Total interest expense		1,566		1,414		4,543			4,231			1,814			1,512			3,441			2,977

Net interest income		18,813		18,253		55,125			54,105			16,925			18,246			34,295			36,312
Provision for loan losses		4,300		2,900		19,600			8,000			440			12,500			440			15,300
Net interest income after provision for loan losses		14,513		15,353		35,525			46,105			16,485			5,746			33,855			21,012

Non-interest income:
Service charges on deposits		2,463		2,584		7,339			7,404			2,065			2,396			4,271			4,876
Gain on sale of securities, net		338		—		347			20			—			3			—			9
Loss on equity securities, other investments												(51		)	—			(51		)	—
ATM and debit card income		1,687		1,620		5,156			4,897			1,877			1,766			3,661			3,469
Other charges and fees		998		948		2,911			2,714			991			1,058			1,830			1,913
Total non-interest income		5,486		5,152		15,753			15,035			4,882			5,223			9,711			10,267

Non-interest expenses:
Salaries and employee benefits		7,849		8,034		25,989			24,206			7,916			9,451			15,635			18,140
Occupancy expense		3,711		3,635		11,524			10,899			3,193			4,189			6,238			7,813
ATM and debit card expense		654		833		2,088			2,410			648			713			1,223			1,434
Data processing		640		527		1,928			1,463			666			667			1,331			1,288
FDIC insurance		448		365		1,275			1,214			507			430			937			827
Legal and professional fees		1,404		516		2,983			1,335			1,100			936			2,789			1,321
Loss on transfer of loans to held for sale												8			—			883			—
Other		3,053		3,204		8,806			9,387			8,235			3,218			15,109			6,011
Total non-interest expenses		17,759		17,114		54,593			50,914			22,273			19,604			44,145			36,834
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
Income before income tax benefit												(906		)	(8,635		)	(579		)	(5,555		)
Loss tax benefit												(237		)	(3,221		)	(271		)	(2,632		)

Net earnings (loss)		1,666		2,398		(1,257		)	7,240
Net loss												(669		)	(5,414		)	(308		)	(2,923		)
Dividends on preferred stock		810		811		2,432			2,049			810			811			1,620			1,622
Net earnings (loss) available to common shareholders		$	856	$	1,587	$	(3,689	)	$	5,191
Earnings (loss) per share:
Net loss available to common shareholders												$	(1,479	)	$	(6,225	)	$	(1,928	)	$	(4,545	)
Loss per share:
Basic		$	0.05	$	0.14	$	(0.28	)	$	0.46		$	(0.09	)	$	(0.51	)	$	(0.12	)	$	(0.39	)
Diluted		$	0.05	$	0.14	$	(0.28	)	$	0.46		$	(0.09	)	$	(0.51	)	$	(0.12	)	$	(0.39	)
Weighted average number of shares outstanding:
Basic		16,395		11,262		13,314			11,260			16,526			12,227			16,511			11,749
Diluted		16,396		11,263		13,318			11,260			16,529			12,237			16,514			11,762
Dividends declared per common share		$	0.01	$	0.09	$	0.19		$	0.27		$	0.01		$	0.09		$	0.02		$	0.18

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net earnings (loss) $ 1,666
$ 2,398
$ (1,257 ) $ 7,240
Other comprehensive (loss) income, net of tax:

Unrealized gains (losses) on securities available-for-sale:

Unrealized holding (losses) gains arising during the year (335 ) (645 ) 3,224
4,217
Less: reclassification adjustment for gains on sales of securities available-for-sale (338 ) —
(347 ) (20 )
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 (684 ) (590 ) 2,743
4,252
Income tax effect related to items of other comprehensive (loss) income 240
206
(960 ) (1,488 )
Total other comprehensive (loss) income, net of tax (444 ) (384 ) 1,783
2,764
Total comprehensive income $ 1,222
$ 2,014
$ 526
$ 10,004



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Loss (unaudited) (in thousands)
	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net loss	$	(669	)	$	(5,414	)	$	(308	)	$	(2,923	)
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities available-for-sale:
Unrealized holding (loss) gains arising during the year	(873		)	2,739			(4,922		)	3,559
Less: reclassification adjustment for gains on sales of securities available-for-sale	—			(3		)	—			(9		)
Net change in unrealized (loss) gains on securities available-for-sale	(873		)	2,736			(4,922		)	3,550
Unrealized (loss) gain on derivative instruments designated as cash flow hedges:
Unrealized holding gains on derivatives arising during the period	152			(136		)	502			(123		)
Less: reclassification adjustment for gains on derivative instruments	(63		)	—			(102		)	—
Net change in unrealized gain on derivative instruments	89			(136		)	400			(123		)
Total other comprehensive (loss) income, before tax	(784		)	2,600			(4,522		)	3,427
Income tax effect related to items of other comprehensive (loss) income	165			(910		)	950			(1,200		)
Total other comprehensive (loss) income, net of tax	(619		)	1,690			(3,572		)	2,227
Total comprehensive loss	$	(1,288	)	$	(3,724	)	$	(3,880	)	$	(696	)

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, 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 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



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity (unaudited) For the Six Months Ended June 30, 2018 (in thousands, except share and per share data)
	Preferred Stock			Common Stock					Additional Paid-in Capital			Unearned ESOP Shares			Accumulated Other Comprehensive Loss			Retained Earnings
	Shares	Amount		Shares		Amount			Additional Paid-in Capital			Unearned ESOP Shares			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance - December 31, 2017	121,875	$	40,987	16,548,829		$	1,655		$	168,412		$	(937	)	$	(1,828	)	$	45,726		$	254,015
Cumulative-effect adjustment due to the adoption of ASU 2016-01	—	—		—		—			—			—			31			(31		)	—
Net loss	—	—		—		—			—			—			—			(308		)	(308		)
Dividends on Series B and Series C preferred stock	—	—		—		—			—			—			—			(1,621		)	(1,621		)
Dividends on common stock, $0.02 per share	—	—		—		—			—			—			—			(330		)	(330		)
Restricted stock grant	—	—		66,335		7			(7		)	—			—			—			—
Restricted stock forfeitures	—	—		(37,775	)	(4		)	4			—			—			—			—
ESOP shares released for allocation	—	—		—		—			—			61			—			—			61
ESOP compensation expense	—	—		—		—			20			—			—			—			20
Exercise of stock options	—	—		42,505		4			547			—			—			—			551
Stock option and restricted stock compensation expense	—	—		—		—			(113		)	—			—			—			(113		)
Change in accumulated other comprehensive loss	—	—		—		—			—			—			(3,603		)	—			(3,603		)
Balance – June 30, 2018	121,875	$	40,987	16,619,894		$	1,662		$	168,863		$	(876	)	$	(5,400	)	$	43,436		$	248,672

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 Six Months Ended June 30,
		2017			2016				2018			2017
Cash flows from operating activities:
Net (loss) earnings		$	(1,257	)	$	7,240
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Net loss									$	(308	)	$	(2,923	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		4,345			4,431				2,368			2,933
Accretion of purchase accounting adjustments		(180		)	(569		)		340			(101		)
Provision for loan losses		19,600			8,000				440			15,300
Deferred tax benefit		(704		)	(781		)
Deferred tax expense (benefit)									8			(1,057		)
Amortization of premiums on securities, net		2,128			2,170				1,457			1,390
Stock-based compensation expense		85			165				(113		)	66
Net excess tax benefit from stock-based compensation		379			258				49			(357		)
ESOP compensation expense		50			(88		)		20			50
Net gain on sale of investment securities		(347		)	(20		)		—			(9		)
Net (gain) loss on sale of other real estate owned		(15		)	56
Loss on mutual fund									51			—
Proceeds from sale of loans held for sale									15,623			—
Net loss on sale of other real estate owned									1			4
Net write down of other real estate owned		83			130				146			83
Write down of assets held for sale		570			—				—			570
Net loss (gain) on sale/disposal of premises and equipment		648			(6		)
Loss on transfer of loans to held for sale									883			—
Net loss on sale/disposal of premises and equipment									67			12
Change in accrued interest receivable		(121		)	(568		)		1,152			364
Change in accrued interest payable		(12		)	(42		)		(42		)	3
Change in other assets & other liabilities, net		(3,236		)	1,152				718			(2,874		)
Net cash provided by operating activities		22,016			21,528				22,860			13,454

Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale		42,585			47,547				24,297			28,100
Proceeds from maturities and calls of securities held-to-maturity		12,940			12,629				12,875			9,431
Proceeds from sale of securities available-for-sale		16,979			6,803				410			6,965
Proceeds from sale of security held-to-maturity		887			—				—			887
Purchases of securities available-for-sale		(42,172		)	(49,538		)		(32,532		)	(39,172		)
Proceeds from sale of other investments		57			600				—			57
Purchases of other investments		(902		)	(751		)		(703		)	(368		)
Net change in loans		28,649			(12,736		)		121,129			28,616
Purchases of premises and equipment		(2,940		)	(5,152		)		(693		)	(1,662		)
Proceeds from sale of premises and equipment		249			54				481			249
Proceeds from sale of other real estate owned		1,728			2,374				504			1,611
Net cash provided by investing activities		58,060			1,830				125,768			34,714

Cash flows from financing activities:
Change in deposits		(23,495		)	34,385				43,331			(43,210		)
Change in securities sold under agreements to repurchase		(39,586		)	9,253				(52,247		)	(3,662		)
Borrowings on Federal Home Loan Bank advances		25,000			25,000				165,000			—
Repayments of Federal Home Loan Bank advances		(12,546		)	(50,050		)		(177,500		)	(35		)
Proceeds from exercise of stock options		266			—				551			266
Proceeds from issuance of common stock		57,834			—				—			51,975
Stock offering expenses		(683		)	—				—			(622		)
Payment of dividends on preferred stock		(2,433		)	(1,409		)		(1,621		)	(1,622		)
Payment of dividends on common stock		(3,538		)	(3,071		)		(330		)	(2,049		)
Net cash provided by financing activities		819			14,108
Net cash used by financing activities									(22,816		)	1,041

Net increase in cash and cash equivalents		80,895			37,466
Net increase (decrease) in cash and cash equivalents									125,812			49,209
Cash and cash equivalents, beginning of period		82,228			89,201				152,964			82,228
Cash and cash equivalents, end of period		$	163,123		$	126,667			$	278,776		$	131,437

Supplemental cash flow information:
Interest paid		$	4,555		$	4,274			$	3,482		$	2,975
Income taxes paid		2,500			2,853				—			2,500
Noncash investing and financing activities:
Transfer of loans to other real estate		1,552			690				15			910
Transfer of loans to held for sale									221			—
Change in accrued common stock dividends		(859		)	—				1			418
Change in accrued preferred stock dividends		(1		)	640
Change in unrealized gains/losses on securities available-for-sale, net of tax									(3,918		)	2,307
Change in unrealized gains on derivative instruments, net of tax									315			(80		)
Cumulative-effect adjustment to retained earnings due to ASU 2016-01, net of tax									31			—
Net change in loan to ESOP		266			(249		)		61			219

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements

~~September~~June 30, ~~2017~~2018

(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~~June 30, ~~2017~~2018 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 ~~2016~~2017 Annual Report on Form 10-K.

The results of operations for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2018 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 ~~2016~~2017 Annual Report on Form 10-K.

Recent Accounting Pronouncements — In May 2018, the FASB issued ASU ~~2017-03, Accounting Changes~~2018-06, Codification Improvements to Topic 942, Financial Services - Depository and ~~Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments~~Lending. ASU 2018-06 removes outdated guidance related to ~~SEC Paragraphs Pursuant to Staff Announcements at~~Circular 202 because that guidance has been rescinded by the ~~September 22, 2016 and November 17, 2016 EITF Meetings.~~ ~~ASU 2017-03 addresses and codifies the practical considerations and application~~Office of the ~~required disclosures under SAB Topic 11.M for~~Comptroller of the ~~implementation~~Currency. The amendments in this update are effective upon issuance. The adoption of this ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); and ASU 2016-13, Financial Instruments-Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The SEC Staff has emphasized ondid not

have a ~~number of occasions, including the December 2016 AICPA National Conference on Current SEC and PCAOB Developments, the requirements to disclose the potential~~ material ~~effects of newly issued standards and the importance of providing investors with this information. Such disclosures should explain the impact the new standard is expected to have~~effect on the Company’s financial ~~statements and how the adoption~~position, result 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 public business entities.operations or cash flows.

ASU ~~2017-04, Intangibles - Goodwill~~2018-03, Technical Corrections and ~~Other (Topic 350)~~Improvements to Financial Instruments – Overall (Subtopic 825-10): ~~Simplifying the Test for Goodwill Impairment~~Recognition and Measurement of Financial Assets and Financial Liabilities was issued to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities in ~~order~~ASU 2016-01:

Clarification regarding the ability to ~~simplify~~discontinue application of the ~~subsequent~~ measurement alternative for equity securities without a readily determinable fair value

Clarification of ~~goodwill by eliminating Step 2 from~~ the ~~goodwill impairment test. Under~~measurement date for fair value adjustments to the ~~amendments in this ASU, an entity should perform its annual or interim goodwill impairment test by comparing~~carrying amount of equity securities without a readily determinable fair value for which the measurement alternative is elected

Clarification of the unit of account for fair value adjustments to forward contracts and purchased options on equity securities without a readily determinable fair value for which the measurement alternative is expected to be elected

Presentation requirements for certain hybrid financial liabilities for which the fair value option is elected

Measurement of financial liabilities denominated in a ~~reporting unit with its carrying amount. An entity will then recognize an impairment charge~~foreign currency 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 that reporting unit. The effective date of this Update is for fiscal years beginning on or after December 15, 2020. The Company does not expect ASU 2017-04 to have an impact on its goodwill impairment tests.

~~ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities~~ was issued in response to diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a 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 require the premium to be amortized over the period not to exceed the earliest call date. These amendments do not apply to 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 currently amortizing premiums of callable debt securities over a period through the earliest call date. As a result, it does not expect ASU 2017-08 to have an impact on its financial position, results of operations or its financial statement disclosures.

~~ASU 2017-09, Compensation - Stock Compensation (Topic 350): Scope of Modification Accounting~~ was issued 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 following conditions are met:~~

~~The~~ fair value ~~(or intrinsic or calculated~~option is elected

Transition guidance for equity securities without a readily determinable fair value ~~if elected) of the modified award 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 the same as the vesting conditions of the original award immediately before the original award is modified.~~

~~The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the 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, ~~2017. The~~2017 and for interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018 are not required to adopt the amendments ~~in this ASU should be applied prospectively to an award modified on or~~until interim periods beginning after ~~the adoption date.~~June 15, 2018. Adoption of this Update is not expected to have a material effect on the Company's financial position, results of operations or its financial statement disclosures.

Adoption of New Accounting Standards —ASU ~~2017-12, Derivatives~~2016-01, Financial Statements - Overall (Subtopic 825-10): Recognition and ~~Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~Measurement of Financial Assets and Financial Liabilities was issued in January 2016 to ~~better align a company's~~address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard impacts how the Company measures certain equity investments and discloses and presents certain financial instruments through the application of the “exit price” notion. The Company adopted the amendments beginning January 1, 2018. Under the new guidance, equity investments can no longer be classified as trading or available for sale (AFS), and related unrealized holding gains and losses can no longer be recognized in OCI. Per the ASU, such equity investments should be measured at fair value, with adjustments recognized in earnings at the end of each reporting ~~for hedging activities~~period. As such, the Company reclassified its portfolio of equity investments (approximately $2.0 million at March 31, 2018) previously classified as AFS investment securities to “other investments.” As these equity investments were previously measured at fair value, implementation of the ASU did not impact the Company’s valuation method. In accordance with the ~~economic objectives of those activities.~~ASU, the cumulative-effect adjustment from AOCI to retained earnings for previously recorded fair value adjustments related to these equity investments at adoption was immaterial. The effective date of this Update is for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim 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 not expected to have a material impact on the Company's consolidated financial statements.

~~Accounting Changes, Reclassifications~~Company elected the practical expedient measurement alternative to prospectively account for other equity investments that do not have readily determinable fair values at cost less impairment plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer. These investments are immaterial overall and ~~Restatements~~are classified within “other investments” on the Company’s consolidated balance sheets.

In May 2014, the FASB issued —ASU 2014-09 - Revenue from Contracts with Customers~~Certain items~~, which created a new principle-based framework to determine when and how an entity recognizes revenue from its customer contracts. FASB has established a core principle for recognizing revenue within the new rules, which states that revenue should only be recorded when services are provided or goods are transferred to customers at the agreed price. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Description of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in ~~prior financial~~our income statements ~~have been reclassified to conform to the current presentation.~~ as components of non-interest income are as follows:

~~On January 1, 2017, the Company adopted the provisions~~Service charges on deposits - We collect service charges on most 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 2016-09 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 classificationour non-maturity deposits accounts on a ~~retrospective basis,~~monthly basis. Our fee earned is collected monthly when a particular cycle for a non-maturity deposit account closes. Each cycle is monthly and the fee earned is for our service for the month just closed. Our performance obligations are to process transactions, pay interest (on interest-bearing accounts), collect deposits, and allow access to on-line banking applications and other services ancillary to a banking relationship. Each month when our fee is charged, our obligation is complete. The contract-relationship is a month to month obligation - i.e. our obligation to perform these services would end if the customer closes their deposit account with MidSouth.

ATM and debit card income - ATM fees primarily consist of surcharges assessed to our customers for using a non-Bank ATM or a non-Bank customer using our ATM. Debit card income represents revenues earned from interchange fees, which ~~resulted in~~are earned on debit card transactions conducted with payment networks. Such fees are generally recognized concurrently with the delivery of services on 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.daily basis.

2. Investment Securities

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


									June 30, 2018
									Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Obligations of state and political subdivisions									$	20,473		$	82	$	746	$	19,809
GSE mortgage-backed securities									53,195			416		1,093		52,518
Collateralized mortgage obligations: residential									215,868			85		7,239		208,714
Collateralized mortgage obligations: commercial									2,149			—		48		2,101
Corporate debt securities									25,566			336		107		25,795
									$	317,251		$	919	$	9,233	$	308,937

	September 30, 2017								December 31, 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	$	23,929	$	233	$	352	$	23,810	$	23,042		$	209	$	442	$	22,809
GSE mortgage-backed securities	61,578		1,304		22		62,860		58,620			825		321		59,124
Collateralized mortgage obligations: residential	211,808		359		1,958		210,209		202,573			90		4,508		198,155
Collateralized mortgage obligations: commercial	2,499		—		27		2,472		2,274			—		34		2,240
Mutual funds	2,100		—		21		2,079		2,100			—		39		2,061
Corporate debt securities	23,974		822		4		24,792		23,975			837		10		24,802
	$	325,888	$	2,718	$	2,384	$	326,222	$	312,584	��	$	1,961	$	5,354	$	309,191

December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
Available-for-sale:
Obligations of state and political subdivisions $ 29,935
$ 226
$ 1,020
$ 29,141
GSE mortgage-backed securities 72,144
1,736
302
73,578
Collateralized mortgage obligations: residential 223,602
206
3,606
220,202
Collateralized mortgage obligations: commercial 3,135
—
53
3,082
Mutual funds 2,100
—
41
2,059
Corporate debt securities 13,500
311
—
13,811
$ 344,416
$ 2,479
$ 5,022
$ 341,873


	September 30, 2017								June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Obligations of state and political subdivisions	$	36,080	$	658	$	—	$	36,738	$	27,486	$	169	$	95	$	27,560
GSE mortgage-backed securities	37,729		524		59		38,194		31,978		—		687		31,291
Collateralized mortgage obligations: residential	7,819		—		223		7,596		6,833		—		394		6,439
Collateralized mortgage obligations: commercial	2,111		—		—		2,111		1,480		—		12		1,468
	$	83,739	$	1,182	$	282	$	84,639	$	67,777	$	169	$	1,188	$	66,758

	December 31, 2016								December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		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	$	35,908	$	265	$	22	$	36,151
GSE mortgage-backed securities	44,375		426		311		44,490		35,751		171		219		35,703
Collateralized mortgage obligations: residential	8,969		—		323		8,646		7,450		—		321		7,129
Collateralized mortgage obligations: commercial	4,352		—		12		4,340		1,943		—		6		1,937
	$	98,211	$	735	$	685	$	98,261	$	81,052	$	436	$	568	$	80,920

With the exception of one private-label collateralized mortgage obligations (“CMOs”) with a balance remaining of ~~$8,000~~$7,000 at ~~September~~June 30, ~~2017,~~2018, 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~~June 30, ~~2017~~2018 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	$	1,136	$	1,139	$	—	$	—
Due after one year through five years	10,315		10,513		8,672		8,638
Due after five years through ten years	43,777		45,080		47,548		47,394
Due after ten years	268,560		267,411		261,031		252,905
	$	323,788	$	324,143	$	317,251	$	308,937

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Held-to-maturity:
Due in one year or less	$	1,204	$	1,206	$	515	$	515
Due after one year through five years	5,413		5,465		5,044		5,006
Due after five years through ten years	43,555		44,335		43,312		42,639
Due after ten years	33,567		33,633		18,906		18,598
	$	83,739	$	84,639	$	67,777	$	66,758

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


													June 30, 2018
													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
Available-for-sale:
Obligations of state and political subdivisions													$	576	$	24	$	12,405	$	722	$	12,981	$	746
GSE mortgage-backed securities													34,138		893		5,344		200		39,482		1,093
Collateralized mortgage obligations: residential													82,531		1,430		124,108		5,809		206,639		7,239
Collateralized mortgage obligations: commercial													—		—		2,101		48		2,101		48
Corporate debt securities													6,483		107		—		—		6,483		107
													$	123,728	$	2,454	$	143,958	$	6,779	$	267,686	$	9,233

	September 30, 2017												December 31, 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	$	8,092	$	141	$	5,324	$	211	$	13,416	$	352	$	596	$	5	$	12,716	$	437	$	13,312	$	442
GSE mortgage-backed securities	6,168		22		—		—		6,168		22		29,725		224		5,858		97		35,583		321
Collateralized mortgage obligations: residential	118,195		1,153		45,344		805		163,539		1,958		57,665		548		137,598		3,960		195,263		4,508
Collateralized mortgage obligations: commercial	—		—		2,472		27		2,472		27		—		—		2,240		34		2,240		34
Mutual funds	2,079		21		—		—		2,079		21		2,061		39		—		—		2,061		39
Corporate debt securities	2,995		4		—		—		2,995		4		2,990		10		—		—		2,990		10
	$	137,529	$	1,341	$	53,140	$	1,043	$	190,669	$	2,384	$	93,037	$	826	$	158,412	$	4,528	$	251,449	$	5,354

	December 31, 2016
	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
Available-for-sale:
Obligations of state and political subdivisions	$	13,402	$	1,020	$	—	$	—	$	13,402	$	1,020
GSE mortgage-backed securities	29,119		302		—		—		29,119		302
Collateralized mortgage obligations: residential	187,235		3,099		14,194		507		201,429		3,606
Collateralized mortgage obligations: commercial	961		4		2,121		49		3,082		53
Mutual funds	2,059		41		—		—		2,059		41
	$	232,776	$	4,466	$	16,315	$	556	$	249,091	$	5,022


	September 30, 2017
	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
Held-to-maturity:
GSE mortgage-backed securities	$	5,287	$	59	$	—		$	—	$	5,287	$	59
Collateralized mortgage obligations: residential	—		—		7,596		—	223		7,596		223
	$	5,287	$	59	$	7,596		$	223	$	12,883	$	282

	December 31, 2016													June 30, 2018
	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	$	8,054	$	39	$	—		$	—	$	8,054	$	39	$	6,318	$	95	$	—	$	—	$	6,318	$	95
GSE mortgage-backed securities	19,408		311		—			—		19,408		311		$	26,853	$	475	$	4,438	$	212	$	31,291	$	687
Collateralized mortgage obligations: residential	—		—		8,645			323		8,645		323		$	—	$	—	$	6,439	$	394	$	6,439	$	394
Collateralized mortgage obligations: commercial	4,340		12		—			—		4,340		12		1,468		12		—		—		1,468		12
	$	31,802	$	362	$	8,645		$	323	$	40,447	$	685	$	34,639	$	582	$	10,877	$	606	$	45,516	$	1,188

														December 31, 2017
														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
Held-to-maturity:
Obligations of state and political subdivisions														$	6,340	$	22	$	—	$	—	$	6,340	$	22
GSE mortgage-backed securities														11,201		89		4,961		130		16,162		219
Collateralized mortgage obligations: residential														—		—		7,129		321		7,129		321
Collateralized mortgage obligations: commercial														1,937		6		—		—		1,937		6
														$	19,478	$	117	$	12,090	$	451	$	31,568	$	568

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~~June 30, ~~2017, 51~~2018, 103 securities had unrealized losses totaling ~~1.29%~~3.22% of the individual securities’ amortized cost basis and ~~0.65%~~2.71% of the Company’s total amortized cost basis. Of the 51103 securities, 1845 had been in an unrealized loss position for over twelve months at ~~September~~June 30, ~~2017.~~2018. These 1845 securities had an amortized cost basis and unrealized loss of ~~$59.0~~$162.2 million and ~~$1.2~~$7.4 million, respectively. The unrealized losses on debt securities at ~~September~~June 30, ~~2017~~2018 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~~June 30, ~~2017,~~2018, 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~~June 30, ~~2017.~~2018.

During the ~~nine~~six months ended ~~September~~June 30, 2018, the Company sold 1 security classified as available-for-sale for $410,000 which resulted in neither a gain nor a loss. During the six months ended June 30, 2017, the Company sold 1610 securities classified as available-for-sale and 1 security classified as held-to-maturity. Of the available-for-sale securities, 137 securities were sold with gains totaling ~~$449,000~~$111,000 and 3 securities were sold at a loss of $109,000 for a net gain of ~~$340,000.~~$2,000. 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.~~

Securities with an aggregate carrying value of approximately ~~$236.3~~$207.4 million and ~~$293.4~~$177.9 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Commercial, financial and agricultural	$	447,482		$	459,574		$	354,944		$	435,207
Real estate – construction	90,088			100,959			98,108			90,287
Real estate – commercial	473,046			481,155			414,526			448,406
Real estate – residential	155,676			157,872			141,104			146,751
Installment loans to individuals	63,148			82,660			47,406			56,398
Lease financing receivable	760			1,095			632			732
Other	5,769			767			1,243			5,645
	1,235,969			1,284,082			1,057,963			1,183,426
Less allowance for loan losses	(25,053		)	(24,372		)	(23,514		)	(26,888		)
	$	1,210,916		$	1,259,710		$	1,034,449		$	1,156,538

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~~June 30, ~~2017,~~2018, 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 ~~$197.8~~$153.6 million, or ~~16.0%~~14.5% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At ~~September~~June 30, ~~2017,~~2018, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately ~~$537.9~~$481.0 million, ~~56%~~or 45.5% of total loans, of which 52% are secured by owner-occupied commercial properties. Of the ~~$537.9~~$481.0 million in loans secured by commercial real estate, ~~$20.5~~$31.4 million, or ~~3.8%~~6.5%, were on nonaccrual status at ~~September~~June 30, ~~2017.~~2018.

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 three to 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. The current analysis indicates no additional allowance is necessary on our acquired loan portfolio as of June 30, 2018. 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~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 is as follows (in thousands):


	September 30, 2017																							June 30, 2018
				Real Estate																							Real Estate
	Coml, Fin, and Agric			Construction			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	$	16,057		$	585		$	5,384		$	940		$	1,395		$	5		$	6	$	24,372		$	20,577		$	596		$	3,893		$	837		$	957		$	3	$	25		$	26,888
Charge-offs	(15,106		)	(70		)	(3,618		)	(293		)	(860		)	—			—		(19,947		)	(3,647		)	(6		)	(216		)	(321		)	(448		)	—		—			(4,638		)
Recoveries	537			—			158			97			235			—			—		1,027			696			—			6			1			121			—		—			824
Provision	17,413			28			2,024			(40		)	159			(1		)	18		19,601			172			(201		)	(460		)	623			323			—		(17		)	440
Ending balance	$	18,901		$	543		$	3,948		$	704		$	929		$	4		$	24	$	25,053		$	17,798		$	389		$	3,223		$	1,140		$	953		$	3	$	8		$	23,514
Ending balance: individually evaluated for impairment	$	3,254		$	17		$	904		$	7		$	69		$	1		$	—	$	4,252		$	4,452		$	49		$	126		$	198		$	13		$	—	$	—		$	4,838
Ending balance: collectively evaluated for impairment	$	15,647		$	526		$	3,044		$	697		$	860		$	3		$	24	$	20,801		$	13,346		$	340		$	3,097		$	942		$	940		$	3	$	8		$	18,676

Loans:
Ending balance	$	447,482		$	90,088		$	473,046		$	155,676		$	63,148		$	760		$	5,769	$	1,235,969		$	354,944		$	98,108		$	414,526		$	141,104		$	47,406		$	632	$	1,243		$	1,057,963
Ending balance: individually evaluated for impairment	$	30,892		$	2,416		$	18,132		$	1,031		$	338		$	34		$	—	$	52,843		$	40,228		$	717		$	29,917		$	3,623		$	65		$	—	$	—		$	74,550
Ending balance: collectively evaluated for impairment	$	416,590		$	87,672		$	454,488		$	154,582		$	62,810		$	726		$	5,769	$	1,182,637		$	314,716		$	97,391		$	384,609		$	137,481		$	47,341		$	632	$	1,243		$	983,413
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	426		$	63		$	—		$	—		$	—	$	489


	September 30, 2016																							June 30, 2017
				Real Estate																							Real Estate
	Coml, Fin, and Agric			Construction			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		)	(11,319		)	(1		)	(3,448		)	(198		)	(599		)	—			—		(15,565		)
Recoveries	193			—			115			4			125			—			—		437			290			—			33			96			148			—			—		567
Provision	6,747			(478		)	1,042			(97		)	781			(5		)	10		8,000			13,272			623			1,845			(438		)	(1		)	(2		)	1		15,300
Ending balance	$	15,251		$	341		$	5,563		$	699		$	1,383		$	9		$	22	$	23,268		$	18,300		$	1,207		$	3,814		$	400		$	943		$	3		$	7	$	24,674
Ending balance: individually evaluated for impairment	$	1,105		$	—		$	2,270		$	194		$	268		$	—		$	—	$	3,837		$	3,092		$	9		$	1,120		$	28		$	103		$	—		$	—	$	4,352
Ending balance: collectively evaluated for impairment	$	14,146		$	341		$	3,293		$	505		$	1,115		$	9		$	22	$	19,431		$	15,208		$	1,198		$	2,694		$	372		$	840		$	3		$	7	$	20,322

Loans:
Ending balance	$	463,031		$	96,365		$	464,853		$	155,653		$	88,537		$	1,449		$	2,912	$	1,272,800		$	451,767		$	98,695		$	461,064		$	156,394		$	70,031		$	866		$	1,436	$	1,240,253
Ending balance: individually evaluated for impairment	$	29,887		$	10		$	28,285		$	1,831		$	464		$	—		$	—	$	60,477		$	35,276		$	25		$	19,526		$	1,325		$	311		$	—		$	—	$	56,463
Ending balance: collectively evaluated for impairment	$	433,144		$	96,355		$	435,985		$	153,747		$	88,073		$	1,449		$	2,912	$	1,211,665		$	416,491		$	98,670		$	441,108		$	155,003		$	69,720		$	866		$	1,436	$	1,183,294
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	583		$	75		$	—		$	—		$	—	$	658		$	—		$	—		$	430		$	66		$	—		$	—		$	—	$	496

Non-Accrual and Past Due Loans

Loans are considered past due if the required principal and interest 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, 2017														June 30, 2018
	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	$	2,144	$	512	$	27,161	$	29,817	$	417,665	$	447,482	$	384	$	8,504	$	4,347	$	24,762	$	37,613	$	317,331	$	354,944	$	3
Real estate - construction	335		350		2,416		3,101		86,987		90,088		—		1,175		—		220		1,395		96,713		98,108		—
Real estate - commercial	1,804		—		9,749		11,553		461,493		473,046		—		1,655		9,523		18,102		29,280		385,246		414,526		—
Real estate - residential	2,467		28		898		3,393		152,283		155,676		—		1,077		99		1,692		2,868		138,236		141,104		—
Installment loans to individuals	408		173		215		796		62,352		63,148		18		215		27		61		303		47,103		47,406		—
Lease financing receivable	33		—		—		33		727		760		—		—		—		—		—		632		632		—
Other loans	79		12		—		91		5,678		5,769		—		51		10		—		61		1,182		1,243		—
	$	7,270	$	1,075	$	40,439	$	48,784	$	1,187,185	$	1,235,969	$	402	$	12,677	$	14,006	$	44,837	$	71,520	$	986,443	$	1,057,963	$	3

	December 31, 2016														December 31, 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	$	2,297	$	902	$	31,425	$	34,624	$	424,950	$	459,574	$	96	$	1,195	$	1,893	$	14,847	$	17,935	$	417,272	$	435,207	$	545
Real estate - construction	2,613		399		9		3,021		97,938		100,959		—		616		—		190		806		89,481		90,287		125
Real estate - commercial	5,159		1,931		25,408		32,498		448,657		481,155		140		5,889		6,402		4,163		16,454		431,952		448,406		58
Real estate - residential	1,956		207		1,553		3,716		154,156		157,872		16		1,065		235		559		1,859		144,892		146,751		—
Installment loans to individuals	756		36		538		1,330		81,330		82,660		16		276		32		34		342		56,056		56,398		—
Lease financing receivable	—		—		—		—		1,095		1,095		—		—		—		—		—		732		732		—
Other loans	89		5		—		94		673		767		—		—		—		—		—		5,645		5,645		—
	$	12,870	$	3,480	$	58,933	$	75,283	$	1,208,799	$	1,284,082	$	268	$	9,041	$	8,562	$	19,793	$	37,396	$	1,146,030	$	1,183,426	$	728

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


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Commercial, financial, and agricultural	$	29,337	$	31,461	$	39,218	$	37,418
Real estate - construction	2,416		9		1,531		66
Real estate - commercial	18,132		28,688		29,916		11,128
Real estate - residential	1,032		1,881		2,808		618
Installment loans to individuals	339		541		65		48
Lease financing receivable	33		—
Other	—		—
	$	51,289	$	62,580	$	73,538	$	49,278

The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately ~~$2.6~~$3.4 million and ~~$2.5~~$1.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Interest ~~actually~~ received on non-accrual loans subsequent to their transfer to non-accrual status totaled ~~$201,000~~$176,000 and ~~$128,000~~$195,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, 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~~collateral 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.

The following table presents loans that are individually evaluated for impairment (in thousands). Interest income recognized represents interest on accruing loans modified in a ~~TDR.~~troubled debt restructuring (TDR).


	September 30, 2017										June 30, 2018
	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	$	19,853	$	22,105	$	—	$	17,477	$	61	$	28,188	$	32,776	$	—	$	26,424	$	32
Real estate - construction	2,366		2,366		—		1,188		—		1,164		1,164		—		582		—
Real estate - commercial	15,371		17,820		—		14,040		—		29,020		30,242		—		19,745		—
Real estate - residential	587		587		—		745		—		1,599		1,599		—		950		—
Installment loans to individuals	91		91		—		82		—		24		24		—		12		—
Finance leases	—		—		—		—		—		—		—		—		—		—
Subtotal:	38,268		42,969		—		33,532		61		59,995		65,805		—		47,713		32
With an allowance recorded:
Commercial, financial, and agricultural	11,039		12,071		3,254		13,706		1		12,040		13,959		4,452		13,079		—
Real estate - construction	50		120		17		25		—		367		367		49		216		—
Real estate - commercial	2,761		2,761		904		9,370		—		897		1,028		126		777		—
Real estate - residential	445		445		7		684		—		1,210		1,897		198		763		—
Installment loans to individuals	247		278		69		357		—		41		41		13		45		—
Finance leases	33		33		1		17		—		—		—		—		—		—
Subtotal:	14,575		15,708		4,252		24,159		1		14,555		17,292		4,838		14,880		—
Totals:
Commercial	49,057		54,790		4,159		54,610		62
Construction	2,416		2,486		17		1,213		—
Residential	1,032		1,032		7		1,429		—
Consumer	338		369		69		439		—
Grand total:	$	52,843	$	58,677	$	4,252	$	57,691	$	62


Commercial											70,145		78,005		4,578		60,025		32
Construction											1,531		1,531		49		798		—
Residential											2,809		3,496		198		1,713		—
Consumer											65		65		13		57		—
Grand total:											$	74,550	$	83,097	$	4,838	$	62,593	$	32

	December 31, 2016										December 31, 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	$	15,101	$	15,428	$	—	$	18,815	$	90	$	24,659	$	30,630	$	—	$	19,880	$	90
Real estate - construction	9		9		—		23		—		—		—		—		5		—
Real estate - commercial	12,710		12,710		—		9,297		14		10,471		11,965		—		11,590		—
Real estate - residential	903		903		—		1,134		—		302		302		—		602		—
Installment loans to individuals	73		87		—		54		—		—		—		—		37		—
Subtotal:	28,796		29,137		—		29,323		104		35,432		42,897		—		32,114		90
With an allowance recorded:
Commercial, financial, and agricultural	16,372		16,470		4,369		10,781		1		14,119		14,150		7,197		15,245		1
Real estate - construction											66		136		23		33		—
Real estate - commercial	15,979		15,979		2,216		14,992		—		657		657		131		8,318		—
Real estate - residential	923		923		260		730		—		316		316		5		620		—
Installment loans to individuals	468		478		308		419		—		48		50		14		258		—
Subtotal:	33,742		33,850		7,153		26,922		1		15,206		15,309		7,370		24,474		1
Totals:
Commercial	60,162		60,587		6,585		53,885		105		49,906		57,402		7,328		55,033		91
Construction	9		9		—		23		—		66		136		23		38		—
Residential	1,826		1,826		260		1,864		—		618		618		5		1,222		—
Consumer	541		565		308		473		—		48		50		14		295		—
Grand total:	$	62,538	$	62,987	$	7,153	$	56,245	$	105	$	50,638	$	58,206	$	7,370	$	56,588	$	91

Credit Quality

The Company manages credit risk by observing written underwriting standards and the 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 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 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 deterioration of financial ratios, past due status, and 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 poor liquidity and deterioration of financial ratios. Currently the borrower maintains the capacity to service the debt. 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 are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as 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 be Pass rated loans.

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


	September 30, 2017										June 30, 2018
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			$	345,629	$	421,071	$	766,700	83.29	%			$	275,744	$	361,281	$	637,025	82.79	%
Special mention			15,321		8,654		23,975		2.60	%			21,320		9,985		31,305		4.07	%
Substandard			86,523		43,321		129,844		14.11	%			57,880		43,260		101,140		13.14	%
Doubtful			9		—		9		—	%
			$	447,482	$	473,046	$	920,528	100.00	%			$	354,944	$	414,526	$	769,470	100.00	%

Construction Credit Exposure
Credit Risk Profile by Creditworthiness Category
							Real estate - construction		% of Total								Real estate - construction		% of Total
Pass							$	85,295	94.68	%							$	96,225	98.08	%
Special mention							1,834		2.04	%							85		0.09	%
Substandard							2,959		3.28	%							1,798		1.83	%
							$	90,088	100.00	%							$	98,108	100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
							Real estate - residential		% of Total								Real estate - residential		% of Total
Pass							$	149,548	96.06	%							$	134,952	95.64	%
Special mention							1,839		1.18	%							602		0.43	%
Substandard							4,289		2.76	%							5,550		3.93	%
							$	155,676	100.00	%							$	141,104	100.00	%

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	$	62,791	$	727	$	5,769	$	69,287	99.44	%	$	47,355	$	632	$	1,243	$	49,230	99.90	%
Nonperforming	357		33		—		390		0.56	%	51		—		—		51		0.10	%
	$	63,148	$	760	$	5,769	$	69,677	100.00	%	$	47,406	$	632	$	1,243	$	49,281	100.00	%


	December 31, 2016											December 31, 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				$	346,246	$	420,970	$	767,216	81.56	%				$	358,373	$	411,280	$	769,653	87.10	%
Special mention				22,611		23,085		45,696		4.86	%				9,687		3,823		13,510		1.53	%
Substandard				90,300		37,100		127,400		13.54	%				67,147		33,303		100,450		11.37	%
Doubtful				417		—		417		0.04	%
				$	459,574	$	481,155	$	940,729	100.00	%				$	435,207	$	448,406	$	883,613	100.00	%

Construction Credit Exposure
Credit Risk Profile by Creditworthiness Category
								Real estate - construction		% of Total									Real estate - construction		% of Total
Pass								$	100,775	99.82	%								$	89,323	98.93	%
Special mention								—		—	%								600		0.67	%
Substandard								184		0.18	%								364		0.40	%
								$	100,959	100.00	%								$	90,287	100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
								Real estate - residential		% of Total									Real estate - residential		% of Total
Pass								$	153,403	97.17	%								$	144,250	98.30	%
Special mention								1,181		0.75	%								1,233		0.84	%
Substandard								3,288		2.08	%								1,268		0.86	%
								$	157,872	100.00	%								$	146,751	100.00	%

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		$	82,103	$	1,095	$	767	$	83,965	99.34	%		$	56,041	$	699	$	5,645	$	62,385	99.38	%
Nonperforming		557		—		—		557		0.66	%		357		33		—		390		0.62	%
		$	82,660	$	1,095	$	767	$	84,522	100.00	%		$	56,398	$	732	$	5,645	$	62,775	100.00	%

Troubled Debt Restructurings

A ~~troubled debt restructuring (“TDR”)~~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.

The following tables present information about TDRs that were modified during the periods presented by portfolio ~~segment:~~segment (in thousands):

Three months ended

June 30, 2018

June 30, 2017

Number of loans

Pre-modification recorded investment

Number of loans

Pre-modification recorded investment

Commercial, financial and agricultural

—

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, 2017 September 30, 2016
Number of loans Pre-modification recorded investment Number of loans Pre-modification recorded investment
Commercial, financial and agricultural 6
$ 2,002
2
$ 3,943
Real estate – commercial —
—
2
1,572
6
$ 2,002
4
$ 5,515



	Six months ended
	June 30, 2018			June 30, 2017
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural	—	$	—	1	$	1,984

~~The following table presents TDRs that had a payment default during~~During the three ~~and nine-month~~month periods ending ~~September~~June 30, 2018 and 2017, ~~and 2016, and~~there were no defaults on any loans that were modified ~~within~~as TDRs during the ~~previous 12~~preceding twelve months. During the six months ended June 30, 2018 there were no defaults on any loans that were modified as TDRs during the preceding twelve months. During the six months ended June 30, 2017, there was one loan relationship with a pre-modification balance of $2.0 million identified as a TDR after a reduction in payments. There were no defaults on any loans that were modified as TDRs during the preceding twelve 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

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~~June 30, ~~2017,~~2018, 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~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 is as follows (in thousands):


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Gross carrying amount	$	11,674		$	11,674		$	11,674		$	11,674
Less accumulated amortization	(7,882		)	(7,053		)	(8,712		)	(8,159		)
Net carrying amount	$	3,792		$	4,621		$	2,962		$	3,515

5. Derivatives

On July 6, 2016, the Company entered into two forward interest rate swap contracts on 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~~six months ended ~~September~~June 30, ~~2017.~~2018. 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 (Loss) Income.

The following table discloses the notional amounts and fair value of derivative instruments in the Company's balance sheet as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):


		Notional Amounts				Fair Value					Notional Amounts				Fair Value
	Type of Hedge	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		Type of Hedge	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Derivatives designated as hedging instruments:
Interest rate swaps included in other assets	Cash Flow	$	27,500	$	27,500	$	855	$	989	Cash Flow	$	27,500	$	27,500	$	1,477	$	1,078

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

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 Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended June 30,				Three Months Ended June 30,
	2018	2017			2018	2017
Interest rate swaps	90	(136	)	Interest Expense	63	—

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
—



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Six Months Ended June 30,				Six Months Ended June 30,
	2018	2017			2018	2017
Interest rate swaps	400	(123	)	Interest Expense	102	—

6. Other Comprehensive (Loss) Income ~~(Loss)~~

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


	Three Months Ended September 30,																	Three Months Ended June 30,
	2017								2016									2018									2017
	Before Tax Amount			Tax Effect		Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income (loss):
Other comprehensive (loss) income:
Securities available-for-sale:
Change in unrealized gains during period	$	(335	)	$	118	$	(217	)	$	(645	)	$	225		$	(420	)
Change in unrealized gains/losses during period																		$	(873	)	$	184		$	(689	)	$	2,739		$	(959	)	$	1,780
Reclassification adjustment for gains included in net income	(338		)	119		(219		)	—			—			—			—			—			—			(3		)	1			(2		)
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			152			(32		)	120			(136		)	48			(88		)
Reclassification adjustment for gains included in net income	(4		)	1		(3		)	(4		)	1			(3		)	(63		)	13			(50		)	—			—			—
Total other comprehensive income (loss)	$	(684	)	$	240	$	(444	)	$	(594	)	$	207		$	(387	)
Total other comprehensive (loss) income																		$	(784	)	$	165		$	(619	)	$	2,600		$	(910	)	$	1,690


	Nine Months Ended September 30,																		Six Months Ended June 30,
	2017									2016									2018									2017
	Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income:
Other comprehensive (loss) income:
Securities available-for-sale:
Change in unrealized gains during period	$	3,224		$	(1,128	)	$	2,096		$	4,217		$	(1,476	)	$	2,741
Change in unrealized gains/losses during period																			$	(4,922	)	$	1,034		$	(3,888	)	$	3,559		$	(1,246	)	$	2,313
Reclassification adjustment for gains included in net income	(347		)	121			(226		)	(20		)	7			(13		)	—			—			—			(9		)	3			(6		)
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			502			(105		)	397			(123		)	43			(80		)
Reclassification adjustment for gains included in net income	(4		)	1			(3		)	—			—			—			(102		)	21			(81		)	—			—			—
Total other comprehensive income	$	2,743		$	(960	)	$	1,783		$	4,252		$	(1,488	)	$	2,764
Total other comprehensive (loss) income																			$	(4,522	)	$	950		$	(3,572	)	$	3,427		$	(1,200	)	$	2,227

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


	Three Months Ended September 30,							Three Months Ended June 30,
	2017				2016			2018				2017
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
Details about Accumulated Other Comprehensive (Loss) Income Components								Reclassifications Out of Accumulated Other Comprehensive (Loss) Income			Income Statement Line Item	Reclassifications Out of Accumulated Other Comprehensive (Loss) Income			Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
	$	(338	)	Gain on sale of securities, net	$	—	Gain on sale of securities, net	$	—		Gain on sale of securities, net	$	(3	)	Gain on sale of securities, net
	119			Tax expense	—		Tax expense	—			Tax expense	1			Tax expense
	$	(219	)	Net of tax	$	—	Net of tax	$	—		Net of tax	$	(2	)	Net of tax

Gains on derivative instruments:
	$	(4	)	Interest expense	$	—	Interest expense	$	(63	)	Interest expense	$	—		Interest expense
	1			Tax expense	—		Tax expense	13			Tax expense	—			Tax expense
	$	(3	)	Net of tax	$	—	Net of tax	$	(50	)	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



	Six Months Ended June 30,
	2018				2017
Details about Accumulated Other Comprehensive (Loss) Income Components	Reclassifications Out of Accumulated Other Comprehensive (Loss) Income			Income Statement Line Item	Reclassifications Out of Accumulated Other Comprehensive (Loss) Income			Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
	$	—		Gain on sale of securities, net	$	(9	)	Gain on sale of securities, net
	—			Tax expense	3			Tax expense
	$	—		Net of tax	$	(6	)	Net of tax

Gains on derivative instruments:
	$	(102	)	Interest expense	$	—		Interest expense
	21			Tax expense	—			Tax expense
	$	(81	)	Net of tax	$	—		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,
2017 2016 2017 2016
Net earnings available to common shareholders $ 856
$ 1,587
$ (3,689 ) $ 5,191
Dividends on Series C preferred stock —
—
—
—
Adjusted net earnings available to common shareholders $ 856
$ 1,587
$ (3,689 ) $ 5,191
Weighted average number of common shares outstanding used in computation of basic earnings per common share 16,395
11,262
13,314
11,260
Effect of dilutive securities:

Stock options 1
1
4
—
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted earnings per share 16,396
11,263
13,318
11,260



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net loss available to common shareholders	$	(1,479	)	$	(6,225	)	$	(1,928	)	$	(4,545	)
Dividends on Series C preferred stock	—			—			—			—
Adjusted net loss available to common shareholders	$	(1,479	)	$	(6,225	)	$	(1,928	)	$	(4,545	)
Weighted average number of common shares outstanding used in computation of basic loss per common share	16,526			12,227			16,511			11,749
Effect of dilutive securities:
Stock options	3			10			3			13
Restricted stock	—			—			—			—
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted loss per share	16,529			12,237			16,514			11,762

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 June 30,		Six Months Ended June 30,
	2017	2016	2017	2016	2018	2017	2018	2017
Stock options	236	304	84	309	31	84	31	84
Restricted stock	—	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	500	507	500	507	500	505	500	505

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.

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

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~~estate. Subsequently, other real estate ~~assets~~properties are carried at the ~~lower of carrying value or fair~~net realizable 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 derivatives are determined by an independent valuation firm and are estimated using prices of financial instruments with similar 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						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at June 30, 2018
Description	September 30, 2017		Level 1		Level 2		Level 3		June 30, 2018		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of state and political subdivisions	$	23,810	$	—	$	23,810	$	—	$	19,809	$	—	$	19,809	$	—
GSE mortgage-backed securities	62,860		—		62,860		—		52,518		—		52,518		—
Collateralized mortgage obligations: residential	210,209		—		210,209		—		208,714		—		208,714		—
Collateralized mortgage obligations: commercial	2,472		—		2,472		—		2,101		—		2,101		—
Mutual funds	2,079		2,079		—		—
Corporate debt securities	24,792		—		24,792		—		25,795		—		25,795		—
Total available-for-sale securities	$	326,222	$	2,079	$	324,143	$	—	$	308,937	$	—	$	308,937	$	—

Derivative assets	$	855	$	—	$	855	$	—	$	1,477	$	—	$	1,477	$	—


	Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2016						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2017
Description	December 31, 2016		Level 1		Level 2		Level 3		December 31, 2017		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of state and political subdivisions	$	29,141	$	—	$	29,141	$	—	$	22,809	$	—	$	22,809	$	—
GSE mortgage-backed securities	73,578		—		73,578		—		59,124		—		59,124		—
Collateralized mortgage obligations: residential	220,202		—		220,202		—		198,155		—		198,155		—
Collateralized mortgage obligations: commercial	3,082		—		3,082		—		2,240		—		2,240		—
Mutual funds	2,059		2,059		—		—		2,061		2,061		—		—
Corporate debt securities	13,811		—		13,811		—		24,802		—		24,802		—
Total available-for-sale securities	$	341,873	$	2,059	$	339,814	$	—	$	309,191	$	2,061	$	307,130	$	—

Derivative assets	$	989	$	—	$	989	$	—	$	1,078	$	—	$	1,078	$	—

The Company records impaired loans at fair value, measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are considered level 3 assets when measured using appraisals from third parties, discounted for selling costs and other collateral-based discounts. Other real estate properties are considered level 3 assets when measured using appraisals from 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, 2017						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at June 30, 2018
Description	September 30, 2017		Level 1		Level 2		Level 3		June 30, 2018		Level 1		Level 2		Level 3
Impaired loans	$	19,561	$	—	$	—	$	19,561	$	14,880	$	—	$	—	$	14,880
Other real estate	1,931		—		—		1,931		1,365		—		—		1,365
Assets held for sale	1,100		—		1,100		—		3,995		—		3,995		—

	Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2016						Assets / Liabilities Measured at Fair Value at		Fair Value Measurements at December 31, 2017
Description	December 31, 2016		Level 1		Level 2		Level 3		December 31, 2017		Level 1		Level 2		Level 3
Impaired loans	$	26,956	$	—	$	—	$	26,956	$	10,227	$	—	$	—	$	10,227
Loans held for sale									15,737		—		15,737		—
Other real estate	2,175		—		—		2,175		2,001		—		—		2,001
Assets held for sale									3,572		—		3,572		—

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

June 30, 2018

Technique

Unobservable Inputs

Impaired loans

19,561

Third party appraisals

Collateral discounts and estimated costs to sell

14,880

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

1,365

Third party appraisals

Collateral discounts and estimated costs to sell

Fair Value at

Description

December 31, 2016

Technique

Unobservable Inputs

December 31, 2017

Technique

Unobservable Inputs

Impaired loans

26,956

Third party appraisals

Collateral discounts and estimated costs to sell

10,227

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

2,001

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~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):


			Fair Value Measurements at September 30, 2017 Using:								Fair Value Measurements at June 30, 2018 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	$	163,123	$	163,123	$	—	$	—	$	278,776	$	278,776	$	—	$	—
Securities available-for-sale	326,222		2,079		324,143		—
Available-for-sale securities									308,937				308,937
Securities held-to-maturity	83,739		—		84,639		—		67,777		—		66,758		—
Other investments	12,200		12,200		—		—		14,927		14,927		—		—
Loans, net	1,210,916		—		—		1,212,881		1,034,449		—		—		1,038,460
Cash surrender value of life insurance policies	14,834		—		14,834		—
Derivative asset	855		—		855		—
Cash surrender value of life insurance									15,002		—		15,002		—
Financial liabilities:
Non-interest-bearing deposits	428,183		—		428,183		—		419,517		—		419,517		—
Interest-bearing deposits	1,127,752		—		936,173		190,407		1,103,503		—		901,846		171,757
Securities sold under agreements to repurchase	54,875		54,875		—		—		14,886		14,886		—		—
Short-term Federal Home Loan Bank advances	12,500		12,500		—		—		27,500		27,500		—		—
Long-term Federal Home Loan Bank advances	25,110		—		25,215		—		10,011		—		9,991		—
Junior subordinated debentures	22,167		—		22,167		—		22,167		—		22,167		—


			Fair Value Measurements at December 31, 2016 Using:								Fair Value Measurements at December 31, 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	$	82,228	$	82,228	$	—	$	—	$	152,964	$	152,964	$	—	$	—
Securities available-for-sale	341,873		2,059		339,814		—
Available-for-sale securities									309,191		2,061		307,130
Securities held-to-maturity	98,211		—		98,261		—		81,052		—		80,920		—
Other investments	11,355		11,355		—		—		12,214		12,214		—		—
Loans, net	1,259,710		—		—		1,263,089		1,156,538		—		—		1,160,614
Cash surrender value of life insurance policies	14,335		—		14,335		—
Derivative asset	989		—		989		—
Cash surrender value of life insurance									14,896		—		14,896		—
Financial liabilities:
Non-interest-bearing deposits	414,921		—		414,921		—		416,547		—		416,547		—
Interest-bearing deposits	1,164,509		—		1,012,633		150,879		1,063,142		—		881,139		179,910
Securities sold under agreements to repurchase	94,461		94,461		—		—		67,133		67,133		—		—
Short-term Federal Home Loan Bank advances									40,000		40,000		—		—
Long-term Federal Home Loan Bank advances	25,424		—		25,808		—		10,021		—		10,011		—
Junior subordinated debentures	22,167		—		22,167		—		22,167		—		22,167		—

9. Subsequent Events

On August 1, 2018, the Bank received an $8.5 million payoff of a significant non-accruing classified energy relationship. Assuming this payoff had occurred on June 30, 2018, pro forma Classified Assets to Bank Capital would have been reduced to 47.9% from 52.9% and energy loans as a percentage of total loans would have decreased from 14.5% to 13.8%.

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

MidSouth Bancorp, Inc. (the “Company”) is a bank holding company headquartered in Lafayette, Louisiana that conducts substantially all of its business through its wholly owned subsidiary bank, MidSouth Bank, N.A. (the “Bank”). We offer complete banking services to commercial and retail customers in Louisiana and south and central Texas with 5042 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, ~~2016.~~2017.

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 ~~2016~~2017 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 regulatory remediation efforts and possible changes in the size and components of the expected costs and charges associated with our strategic ~~initiatives;~~initiatives and regulatory remediation efforts;

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;~~Office of the Comptroller of the Currency;

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 additional enforcement actions or conditions on our operations, require additional regulatory remediation efforts 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 and impact of 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 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 impact of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of FDIC insurance and other coverage;

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

changes in accounting principles, policies, and guidelines applicable to 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

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~~June 30, ~~2017~~2018 and ~~2016~~2017

Net ~~earnings~~loss available to common shareholders totaled ~~$856,000~~$1.5 million, or $0.09 per share, for the three months ended ~~September~~June 30, ~~2017,~~2018, compared to a net ~~earnings~~loss available to common shareholders of ~~$1.6~~$6.2 million, or $0.51 per share, for the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~third~~second quarter of 2018 included non-operating expenses totaling $5.3 million of regulatory remediation costs and the second quarter of 2017 included ~~an after-tax gain on sales~~non-operating expenses of ~~securities~~$2.4 million consisting of ~~$220,000~~$1.3 million for severance and ~~a non-recurring after-tax expense of $587,000 related to the~~$1.0 million for costs associated with branch ~~closures during the quarter.~~closures. Excluding these non-operating ~~income and~~ expenses, diluted earnings for the ~~third~~second quarter of ~~2017~~2018 were ~~$0.07~~$0.16 per ~~common~~diluted share, compared to ~~earnings~~a loss of ~~$0.14~~$0.38 per diluted share for the ~~third~~second quarter of ~~2016.~~2017.

Fully taxable-equivalent ("FTE") net interest income was ~~$19.0~~$17.0 million for the ~~third~~second quarter of ~~2017,~~2018, a ~~$531,000 increase~~$1.4 million decrease compared to ~~$18.5~~$18.4 million for the ~~third~~second quarter of ~~2016.~~2017. Our annualized net interest margin, on a FTE basis, ~~increased 3~~decreased 20 basis points in prior year quarterly comparison, from ~~4.17%~~4.18% for the ~~third~~second quarter of ~~2016~~2017 to ~~4.20%~~3.98% for the ~~third~~second quarter of ~~2017.~~2018. Excluding the impact of purchase accounting adjustments, the FTE margin ~~increased 7~~decreased 14 basis points, from ~~4.05%~~4.09% to ~~4.12%~~3.95% for the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2017,~~2018, respectively.

Net interest income decreased $1.3 million in quarterly comparison, resulting from a $1.0 million decrease in interest income and a $302,000 increase in interest expense.

Excluding ~~gain on sales~~non-operating expenses of ~~securities~~$5.3 million for the second quarter of ~~$338,000 in~~2018 and $2.4 million for the ~~third~~second quarter of 2017, noninterest ~~income 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~~$298,000 in quarterly comparison and consisted primarily of ~~decreases of $192,000~~a $194,000 decrease in salaries and employee benefits costs and a $235,000 decrease in occupancy expense, ~~$206,000 in corporate development, $185,000 in salaries and benefits costs, $140,000 in marketing costs and $110,000 in printing and supplies,~~ which were partially offset by ~~an $888,000~~a $164,000 increase in legal and professional ~~fees and a $113,000 increase in data processing costs. Several other smaller decreases in other non-interest expense categories contributed to the overall decrease from the third quarter of 2016.~~fees. The provision for loan losses ~~increased $1.4~~decreased $12.1 million in quarterly ~~comparison, from $2.9 million~~comparison. The provision decrease is primarily due to payoffs and charge offs of large energy nonaccrual loans and a release of general energy reserves. A $237,000 income tax benefit was reported for the ~~three months ended September 30, 2016~~second quarter of 2018, compared to ~~$4.3~~a $3.2 million ~~for~~income tax benefit that was reported in the ~~three months ended September 30,~~second quarter of 2017. ~~Income tax expense decreased $419,000 in quarterly comparison.~~

Dividends on preferred stock totaled $810,000 for the three months ended ~~September~~June 30, ~~2017~~2018 and $811,000 for the three months ended ~~September~~June 30, ~~2016.~~2017. Dividends on the Series B Preferred Stock were $720,000 for the ~~third~~second quarter of ~~2017,~~2018, unchanged from $720,000 for the ~~third~~second quarter of ~~2016.~~2017. 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~~June 30, ~~2017~~2018 and $91,000 for the three months ended ~~September~~June 30, ~~2016.~~2017.

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

We reported a net loss available to common shareholders of ~~$3.7~~$1.9 million, or ~~$0.28~~$0.09 per diluted share, for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, compared to net ~~earnings~~loss available to common shareholders of ~~$5.2~~$4.5 million, or ~~$0.46~~$0.39 per diluted share, for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The first ~~nine~~six months of ~~2017 included $347,000 of gain on sales of securities. The first nine months of 2017 also~~2018 included non-operating expenses totaling ~~$3.3~~$10.4 million which consisted of ~~$1.3~~$9.2 million of ~~severance and retention accruals,~~regulatory remediation costs, a ~~$570,000 write-down~~$883,000 loss on ~~assets~~the transfer of loans held for sale, $100,000 on fees related to the bulk loan sale, and a ~~$465,000~~$145,000 one-time charge related to discontinued branch ~~projects and a $903,000 one-time charge related to the closure of 7 branches.~~projects. Excluding these non-operating ~~income and~~ expenses, the operating ~~loss~~earnings per share for the first ~~nine~~six months of ~~2017~~2018 was ~~$0.13.~~$0.37.

FTE net interest income was ~~$55.7~~$34.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, a ~~$939,000 increase~~$2.3 million decrease compared to ~~$54.8~~$36.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. Our annualized net interest margin, on a FTE basis, was ~~4.19%~~4.07% for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, compared to ~~4.15%~~4.18% for the same period in ~~2016.~~2017. Excluding the impact of purchase accounting adjustments, the FTE margin ~~increased 7~~decreased 5 basis points, from ~~4.04%~~4.10% to ~~4.11%~~4.05% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2017,~~2018, respectively.

~~Excluding gains on sales of securities, noninterest~~Noninterest income ~~increased $391,000~~decreased $556,000 in year-over-year comparison and consisted primarily of a ~~$259,000~~$605,000 decrease in service charges on deposit accounts, and a $152,000 decrease in mortgage lending income which were partially offset by a $192,000 increase in ATM/debit card income.

Excluding non-operating expenses of ~~$3.3~~$10.4 million for the ~~first nine~~six months ofended June 30, 2018 and $2.4 million for the six months ended June 30, 2017, noninterest expenses ~~increased $400,000~~decreased $690,000 in year-over-year comparison and consisted primarily of a ~~$442,000 increase~~$1.2 million decrease in salaries and benefits costs, a ~~$1.4 million increase~~$211,000 decrease in ~~legal and professional fees~~ATM/ debit card expense, and a ~~$465,000 increase~~$814,000 decrease in ~~data processing costs,~~occupancy expense, which were partially offset by ~~decreases~~an increase of ~~$405,000~~$1.5 million in ~~occupancy expense, $330,000 in marketing costs, $391,000 in corporate development, $322,000 in ATM/debit card expense, $203,000 in printing~~legal and ~~supplies and $144,000 in expenses on ORE.~~professional fees. The provision for loan losses ~~increased $11.6~~decreased $14.9 million in year-over-year comparison, from ~~$8.0~~$15.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 to ~~$19.6 million~~$440,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, primarily due to ~~the high level~~an $11.2 million reduction of charge-offs ~~and additional impairment charges on nonperforming loans in~~for the ~~second and third quarters of 2017.~~comparable period. A ~~$2.1 million~~$271,000 income tax benefit was reported for the first ~~nine~~six months of ~~2017,~~2018, compared to income tax ~~expense~~benefit of ~~$3.0~~$2.6 million for the first ~~nine~~six months of ~~2016.~~2017.

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 ~~4.20%~~3.98% and ~~4.17%~~4.18% for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Tables 1 and ~~3 and tables~~ 2 ~~and 4~~ below analyze the changes in net interest income in the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016 and the nine months ended September 30, 2017 and 2016, respectively.~~

2017.

FTE net interest income ~~increased $531,000~~decreased $1.4 million in prior year quarterly comparison. Interest income on loans ~~increased $242,000~~decreased $1.4 million due to ~~an increase~~a decrease in the ~~average yield on loans of 12 basis points. The~~ average balance of loans ~~decreased $13.4~~of $145 million in prior year quarterly comparison. ~~Purchase accounting adjustments added 9 basis points to the~~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. Excluding the impact of the purchase accounting adjustments, average loan yields~~ increased 1720 basis points in prior year quarterly comparison, from ~~5.22%~~5.35% to ~~5.39%~~5.55%. ~~The increase was primarily due to higher yields on originated loans as well as increases in the federal funds target rate.~~

Investment securities totaled ~~$410.0~~$376.7 million, or ~~21.0%~~20.3% of total assets at ~~September~~June 30, ~~2017,~~2018, versus ~~$440.1~~$367.2 million, or ~~22.6%~~19.8% of total assets at ~~December~~March 31, ~~2016.~~2018. The investment portfolio had an effective duration of ~~3.1~~3.53 years and a net unrealized ~~gain~~loss of ~~$1.2~~$9.3 million at ~~September~~June 30, ~~2017.~~2018. FTE interest income on investments ~~increased $211,000~~decreased $544,000 in prior year quarterly comparison. The average volume of investment securities ~~increased $12.5~~decreased $60.1 million in prior year quarterly comparison, and the average tax equivalent yield on investment securities ~~increased 13~~decreased 15 basis points, from ~~2.52%~~2.69% to ~~2.65%~~2.54%.

The average yield on all earning assets ~~increased 6~~decreased 12 basis points in prior year quarterly comparison, from ~~4.49%~~4.52% for the ~~third~~second quarter of ~~2016~~2017 to ~~4.55%~~4.40% for the ~~third~~second quarter of 2017. Excluding the impact of purchase accounting adjustments, the average yield on total earning assets increased 10 basis points, from 4.39% to 4.49% for the three-month periods ended September 30, 2016 and 2017, respectively.2018.

~~Interest expense increased $152,000~~Net interest income decreased $1.3 million in ~~prior year~~ quarterly ~~comparison.~~comparison, resulting from a $1.0 million decrease in interest income and a $302,000 increase in interest expense. Increases in interest ~~expense included~~reflect a ~~$179,000~~$437,000 increase in interest expense on deposits and a ~~$42,000~~$29,000 increase in interest expense on ~~variable rate junior subordinated debentures. These increases~~FHLB advances, which were partially offset by ~~an $87,000~~a $211,000 decrease in interest expense on 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.

Long-term FHLB advances totaled $25.1 million at September 30, 2017, compared to $25.5 million at September 30, 2016. The FHLB advances are fixed rate advances with rates ranging from 1.99% to 3.49% and have a range of maturities from 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 ~~increased 3~~decreased 20 basis points, from ~~4.17%~~4.18% for the ~~third~~second quarter of ~~2016~~2017 to ~~4.20%~~3.98% for the ~~third~~second quarter of ~~2017.~~2018. Excluding purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin ~~increased 7~~decreased 14 basis points, from ~~4.05%~~4.09% for the ~~third~~second quarter of ~~2016~~2017 to ~~4.12%~~3.95% for the ~~third~~second quarter of ~~2017.~~2018.

In year-to-date comparison, FTE net interest income increased $939,000 primarily due to 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 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 increased $2.0 million in year-over-year comparison, and the average yield on loans increased 1 basis point, from 5.36% to 5.37%. The average yield on earning assets increased 6 basis points in year-over-year comparison, from 4.47% at September 30, 2016 to 4.53% at September 30, 2017. The purchase accounting adjustments added 8 basis points to the average yield on loans for the nine months ended September 30, 2017 and 13 basis points for the nine months ended September 30, 2016. Net of purchase accounting adjustments, the average yield on earning assets increased 9 basis points, from 4.38% at September 30, 2016 to 4.47% at September 30, 2017.

Interest expense increased $312,000 in year-over-year comparison. Increases in interest expense included a $277,000 increase in interest expense on deposits and a $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 0.48%



Table 1 Consolidated Average Balances, Interest and Rates (in thousands)
	Three Months Ended June 30,
	2018							2017
	Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate
Assets
Investment securities¹
Taxable	$	340,080		$	2,093	2.46	%	$	387,441		$	2,416	2.49	%
Tax exempt²	43,858			348		3.18	%	56,622			570		4.03	%
Total investment securities	383,938			2,442		2.54	%	444,063			2,986		2.69	%
Federal funds sold	5,008			21		1.63	%	3,573			9		1.00	%
Time and interest bearing deposits in other banks	201,281			912				55,331			150
Other investments	14,924			92		1.79	%	11,493			78		1.07	%
Total loans³	1,109,371			15,344		2.45	%	1,254,402			16,731		2.71	%
Total earning assets	1,714,522			18,810		5.55	%	1,768,862			19,954		5.35	%
Allowance for loan losses	(25,025		)			4.40%		(22,819		)			4.52%
Nonearning assets	171,409							180,365
Total assets	$	1,860,906						$	1,926,408

Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,087,746		$	1,410	0.52	%	$	1,125,482		$	973	0.35	%
Securities sold under repurchase agreements	26,230			25		0.39	%	90,807			236		1.04	%
Short-term FHLB advances	27,500			75		1.08	%	—			—		—	%
Long-term FHLB advances	10,014			45		1.79	%	25,260			91		1.43	%
Junior subordinated debentures	22,167			259		4.63	%	22,167			212		3.78	%
Total interest bearing liabilities	1,173,657			1,814		0.62	%	1,263,716			1,512		0.48	%
Demand deposits	426,575							426,017
Other liabilities	9,396							7,804
Shareholders’ equity	251,278							228,871
Total liabilities and shareholders’ equity	$	1,860,906						$	1,926,408

Net interest income and net interest spread				$	16,996	3.78	%				$	18,442	4.04	%
Net interest margin						3.98	%						4.18	%


^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 $71,000 for 2018 and $196,000 for 2017 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 21% and 35%, respectively.

^3.

Interest income includes loan fees of $1,065,000 for 2018 and $853,000 for the nine months ended September 30, 2017, compared to 0.43% for the nine months ended September 30, 2016. Net of purchase accounting adjustments, the average rate paid on interest-bearing liabilities increased 5 basis points, from 0.46% for the nine months ended September 30, 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 2017. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.

Table 1
Consolidated Average Balances, Interest and Rates
(in thousands)
Three Months Ended September 30,
2017 2016

Average
Volume
Interest
Average
Yield/Rate

Average
Volume
Interest
Average
Yield/Rate
Assets
Investment securities¹

Taxable $ 372,648
$ 2,276
2.44 % $ 354,770
$ 1,983
2.24 %
Tax exempt²
55,129
553
4.01 % 60,544
635
4.20 %
Total investment securities 427,777
2,829
2.65 % 415,314
2,618
2.52 %
Federal funds sold 4,319
13
1.18 % 2,703
3
0.43 %
Time and interest bearing deposits in other banks 94,675
305
1.26 % 64,444
83
0.50 %
Other investments 12,098
93
3.07 % 11,253
95
3.38 %
Total loans³
1,254,885
17,329
5.48 % 1,268,270
17,087
5.36 %
Total earning assets 1,793,754
20,569
4.55 % 1,761,984
19,886
4.49 %
Allowance for loan losses (24,001 )

(21,222 )

Nonearning assets 184,591

186,589

Total assets $ 1,954,344

$ 1,927,351

Liabilities and shareholders’ equity

Total interest bearing deposits $ 1,118,593
$ 1,094
0.39 % $ 1,170,660
$ 915
0.31 %
Securities sold under repurchase agreements 75,654
149
0.78 % 88,560
236
1.06 %
Short-term FHLB advances 6,522
19
1.14 % —
—
— %
Long-term FHLB advances 25,155
92
1.43 % 25,581
93
1.42 %
Junior subordinated debentures 22,167
212
3.74 % 22,167
170
3.00 %
Total interest bearing liabilities 1,248,091
1,566
0.50 % 1,306,968
1,414
0.43 %
Demand deposits 428,244

391,533

Other liabilities 8,973

9,874

Shareholders’ equity 269,034

218,976

Total liabilities and shareholders’ equity $ 1,954,342

$ 1,927,351

Net interest income and net interest spread
$ 19,003
4.20 %
$ 18,472
4.06 %
Net interest margin

4.17 %



Table 2 Consolidated Average Balances, Interest and Rates (in thousands)
	Six Months Ended June 30,
	2018							2017
	Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate
Assets
Investment securities¹
Taxable	$	336,221		$	4,140	2.50	%	$	384,788		$	4,743	2.47	%
Tax exempt²	47,186			746		3.20	%	58,609			1,191		4.06	%
Total investment securities	383,407			4,886		2.58	%	443,397			5,934		2.68	%
Federal funds sold	4,993			39		1.57	%	3,572			15		0.84	%
Time and interest bearing deposits in other banks	167,299			1,426		1.72	%	48,595			235		0.96	%
Other investments	14,853			179		2.44	%	11,424			162		2.84	%
Total loans³	1,134,382			31,359		5.57	%	1,264,253			33,353		5.32	%
Total earning assets	1,704,934			37,889		4.48	%	1,771,241			39,699		4.52	%
Allowance for loan losses	(25,747		)					(23,416		)
Nonearning assets	181,303							181,628
Total assets	$	1,860,490						$	1,929,453

Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,079,660		$	2,647	0.49	%	$	1,140,361		$	1,908	0.34	%
Securities sold under repurchase agreements	33,134			66		0.40	%	91,684			470		1.03	%
Short-term FHLB advances	28,108			159		—		—			—		—
Long-term FHLB advances	10,016			90		1.80	%	25,315			179		1.41	%
Junior subordinated debentures	22,167			479		4.30	%	22,167			420		3.77	%
Total interest bearing liabilities	1,173,085			3,441		0.59	%	1,279,527			2,977		0.47	%
Demand deposits	425,505							419,933
Other liabilities	8,687							7,574
Shareholders’ equity	253,213							222,419
Total liabilities and shareholders’ equity	$	1,860,490						$	1,929,453

Net interest income and net interest spread				$	34,448	4.07	%				$	36,722	4.05	%
Net interest margin						3.89	%						4.18	%


^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~~$152,000 for ~~2017~~2018 and ~~$219,000~~$410,000 for ~~2016~~2017 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 21% and 35%.


^3.	Interest income includes loan fees of ~~$1,008,000~~$2,073,000 for ~~2017~~2018 and ~~$969,000~~$1,559,000 for ~~2016.~~2017. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.

Table 2
Consolidated Average Balances, Interest and Rates
(in thousands)
Nine Months Ended September 30,
2017 2016
Average
Volume Interest Average
Yield/Rate Average
Volume Interest Average
Yield/Rate
Assets
Investment securities¹

Taxable $ 380,697
$ 7,019
2.46 % $ 354,272
$ 5,959
2.24 %
Tax exempt²
57,436
1,744
4.05 % 62,156
1,975
4.24 %
Total investment securities 438,133
8,763
2.67 % 416,428
7,934
2.54 %
Federal funds sold 3,823
28
0.97 % 3,398
11
0.43 %
Time and interest bearing deposits in other banks 64,124
540
1.11 % 71,560
274
0.50 %
Other investments 11,651
255
2.92 % 11,225
273
3.24 %
Total loans³
1,261,096
50,682
5.37 % 1,259,082
50,525
5.36 %
Total earning assets 1,778,827
60,268
4.53 % 1,761,693
59,017
4.47 %
Allowance for loan losses (23,613 )

(20,214 )

Nonearning assets 181,716

185,276

Total assets $ 1,936,930

$ 1,926,755

Liabilities and shareholders’ equity

Total interest bearing deposits $ 1,133,020
$ 3,002
0.35 % $ 1,175,857
$ 2,725
0.31 %
Securities sold under repurchase agreements 86,282
619
0.96 % 86,605
702
1.08 %
Federal funds purchased —
—
— % 1
—
— %
Short-term FHLB advances 2,198
19
1.15 % 7,573
23
0.40 %
Long-term FHLB advances 25,261
271
1.43 % 25,687
274
1.40 %
Junior subordinated debentures 22,167
632
3.76 % 22,167
507
3.01 %
Total interest bearing liabilities 1,268,928
4,543
0.48 % 1,317,890
4,231
0.43 %
Demand deposits 422,656

383,185

Other liabilities 7,218

8,112

Shareholders’ equity 238,128

217,568

Total liabilities and shareholders’ equity $ 1,936,930

$ 1,926,755

Net interest income and net interest spread
$ 55,725
4.05 %
$ 54,786
4.04 %
Net interest margin ��

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 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 $2,567,000 for 2017 and $2,869,000 for 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, 2017 compared to September 30, 2016										Three Months Ended June 30, 2018 compared to June 30, 2017
		Total Increase			Change Attributable To							Total Increase			Change Attributable To
		(Decrease)			Volume			Rates				(Decrease)			Volume			Rates
Taxable-equivalent earned on:
Investment securities
Taxable		$	293		$	103		$	190			$	(323	)	$	(318	)	$	(5	)
Tax exempt		(82		)	(55		)	(27		)		(222		)	(118		)	(104		)
Federal funds sold		10			3			7				12			10			2
Time and interest bearing deposits in other banks		222			53			169				762			305			457
Other investments		(2		)	7			(9		)		14			9			5
Loans, including fees		242			(182		)	424				(1,387		)	(1,057		)	(330		)
Total		683			(71		)	754				(1,144		)	(1,169		)	25

Interest paid on:
Interest bearing deposits		179			(43		)	222				437			(34		)	471
Securities sold under repurchase agreements		(87		)	(31		)	(56		)		(211		)	(112		)	(99		)
Short-term FHLB advances		19			19			—				75			75			—
Long-term FHLB advances		(1		)	(2		)	1				(46		)	(65		)	19
Junior subordinated debentures		42			—			42				47			—			47
Total		152			(57		)	209				302			(136		)	438
Taxable-equivalent net interest income		$	531		$	(14	)	$	545			$	(1,446	)	$	(1,033	)	$	(413	)

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, 2017 compared to September 30, 2016										Six Months Ended June 30, 2018 compared to June 30, 2017
		Total Increase			Change Attributable To							Total Increase			Change Attributable To
		(Decrease)			Volume			Rates				(Decrease)			Volume			Rates
Taxable-equivalent earned on:
Investment securities
Taxable		$	1,060		$	435		$	625			$	(603	)	$	(624	)	$	21
Tax exempt		(231		)	(160		)	(71		)		(445		)	(211		)	(234		)
Federal funds sold		17			1			16				24			8			16
Time and interest bearing deposits in other banks		266			(52		)	318				1,191			909			282
Other investments		(18		)	9			(27		)		17			43			(26		)
Loans, including fees		157			(63		)	220				(1,994		)	(3,538		)	1,544
Total		1,251			170			1,081				(1,810		)	(3,413		)	1,603

Interest paid on:
Interest bearing deposits		277			(215		)	492				739			(107		)	846
Securities sold under repurchase agreements		(83		)	(7		)	(76		)		(404		)	(206		)	(198		)
Short-term FHLB advances		(4		)	(34		)	30				159			80			79
Long-term FHLB advances		(3		)	(11		)	8				(89		)	(127		)	38
Junior subordinated debentures		125			—			125				59			—			59
Total		312			(267		)	579				464			(360		)	824
Taxable-equivalent net interest income		$	939		$	437		$	502			$	(2,274	)	$	(3,053	)	$	779

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 ~~$5.5 million and $15.8~~$4.8 million for the three ~~and nine-month periods~~months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~$5.2 million and $15.0~~$5.0 million for the ~~same periods in 2016.~~three months ended March 31, 2017. Our recurring non-interest income includes service charges on deposit accounts, ATM and debit card income, credit card income and mortgage lending.

Table 5 presents non-interest income for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.


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 June 30,					Six Months Ended June 30,
		2017		2016		2017		2016			2018			2017		2018			2017
Service charges on deposit accounts		$	2,463	$	2,584	$	7,339	$	7,404		$	2,065		$	2,396	$	4,271		$	4,879
ATM and debit card income		1,687		1,620		5,156		4,897			1,877			1,766		3,661			3,469
Gain on sales of securities, net		338		—		347		20			—			3		—			9
Mortgage lending		155		190		465		422			66			167		158			310
Increase in cash value of life insurance		69		106		199		250			54			66		106			129
Credit card interchange income		299		286		890		809			285			297		571			591
Credit card merchant fee income		86		67		237		221			82			82		149			151
Check cashing income		85		—		104		—			63			—		122			—
Loss on equity securities, other investments											(51		)	—		(51		)	—
Other		304		299		1,016		1,012			441			446		724			732
Total non-interest income		$	5,486	$	5,152	$	15,753	$	15,035		$	4,882		$	5,223	$	9,711		$	10,270

~~Excluding gain on sales of securities, non-interest~~Non-interest income decreased ~~$4,000~~$341,000 in quarterly ~~comparison. A $121,000~~comparison, from $5.2 million for the three months ended June 30, 2017 to $4.9 million for the three months ended June 30, 2018. The decrease consisted primarily of a $313,000 decrease in service charges on deposit accounts, a $12,000 decrease in credit card interchange income, and a ~~$35,000~~$101,000 decrease in mortgage lending income which were partially offset by ~~a $67,000~~an $111,000 increase in ATM/debit card ~~income and an $85,000 increase in check cashing~~ income.

~~Excluding gain on sales of securities, non-interest~~Non-interest income ~~increased $391,000~~decreased $559,000 in year-to-date comparison, from ~~$15.0~~$10.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 to ~~$15.4~~$9.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and consisted primarily of a $259,000 increase in ATM/debit card income, a $104,000 increase in check cashing income, a $43,000 increase in mortgage program fee income and an $81,000 increase in credit card interchange income. These increases were partially offset by a $65,000$608,000 decrease in service charges on deposit ~~accounts.~~accounts, a $152,000 decrease in mortgage lending income, offset by a $192,000 increase in ATM/debit card income.

Non-interest Expense

Total non-interest expense was ~~$17.8~~$22.3 million and ~~$54.6~~$44.1 million for the three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017,~~2018, compared to ~~$17.1~~$19.6 million and ~~$50.9~~$36.8 million for the ~~same periods in 2016.~~three and six months ended June 30, 2017. 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~~six-month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.


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 June 30,				Six Months Ended June 30,
		2017		2016		2017		2016			2018		2017		2018		2017
Salaries and employee benefits		$	7,849	$	8,034	$	24,648	$	24,206		$	7,916	$	8,110	$	15,635	$	16,799
Occupancy expense		3,443		3,635		10,494		10,899			3,193		3,428		6,238		7,052
ATM and debit card		654		833		2,088		2,410			648		713		1,223		1,434
Legal and professional fees		1,404		516		2,726		1,335			1,100		936		2,789		1,321
FDIC premiums		448		365		1,275		1,214			507		430		937		827
Marketing		302		442		844		1,174			281		262		476		542
Corporate development		189		395		758		1,149			248		253		485		569
Data processing		640		527		1,928		1,463			666		667		1,331		1,288
Printing and supplies		81		191		399		602			133		135		256		318
Expenses on ORE, net		15		100		186		330			138		92		214		171
Amortization of core deposit intangibles		277		277		830		830			276		276		553		553
Severance and retention accruals		—		—		1,341		—
One-time charge related to discontinued branch projects		—		—		465		—
Severance and retention accruals (non-operating)											—		1,341		—		1,341
Loss on transfer of loans to held for sale (non-operating)											8		—		883		—
One-time charge related to closure of branches (non-operating)											—		465		145		465
Write-down of assets held for sale		—		—		570		—			—		570		—		570
One-time charge related to closure of branches		903		—		903		—
Regulatory remediation costs (non-operating)											5,323		—		9,249		—
Legal fees related to bulk loan sale (non-operating)											12		—		100		—
Other non-interest expense		1,554		1,799		5,138		5,302			1,824		1,926		3,631		3,584
Total non-interest expense		$	17,759	$	17,114	$	54,593	$	50,914		$	22,273	$	19,604	$	44,145	$	36,834

Non-interest expenses increased ~~$645,000~~$2.7 million in quarterly comparison. The ~~third~~second quarter of ~~2017~~2018 included non-operating expenses totaling ~~$903,000~~$5.3 million which consisted of ~~a one-time charge~~$8,000 loss on the transfer of loans to held for sale, $5.3 million of regulatory remediation costs, and $12,000 of legal fees related to the ~~closure of 7 branches.~~bulk loan sale. Excluding ~~these~~ non-operating expenses ~~non-interest expense~~of $5.3 million for the second quarter of 2018 and $2.4 million for the second quarter of 2017, noninterest expenses decreased ~~$258,000~~$298,000 in quarterly comparison and consisted primarily of ~~decreases of $192,000~~a $194,000 decrease in salaries and employee benefits costs and a $235,000 decrease in occupancy expense, ~~$206,000 in corporate development, $185,000 in salaries and benefits costs, $140,000 in marketing costs and $110,000 in printing and supplies,~~which were partially offset by ~~an $888,000~~a $164,000 increase in legal and professional ~~fees~~fees. The provision for loan losses decreased $12.1 million in quarterly comparison. The provision decrease is primarily due to payoffs and charge offs of large energy nonaccrual loans and a ~~$113,000 increase in data processing costs. Several other smaller decreases in other non-interest expense categories contributed to the overall decrease from the third quarter~~release 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 consisted primarily of a $442,000 increase in salaries and benefits costs, 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 $405,000 in occupancy 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.general energy reserves.

~~Operating salaries~~The $9.2 million of regulatory remediation costs incurred during the six months ended June 30, 2018 represented consulting and outsourcing costs for assistance in complying with terms of our regulatory written agreement.

Salaries and employee benefits costs ~~increased $442,000~~decreased $1.2 million in year-to-date comparison and included a ~~$61,000 increase~~$801,000 decrease in salary costs, a $139,000 decrease in bonus and incentive costs, and a ~~$356,000 increase~~$189,000 decrease in ~~group health costs. The $61,000 increase~~stock compensation expense. A decrease in ~~salary costs included $119,000~~the number of employees on a full-time equivalent basis of 61 during the same period, from 489 at June 30, 2017 to 428 at June 30, 2018, branch closures contributed to the decrease in ~~sign-on bonuses related~~salaries expense and a decrease in the number of employees.

Occupancy expense decreased $814,000 in year-to-date comparison and is primarily due to ~~hiring new talent for~~ the ~~Company.~~closure and sale of 9 branches in 2017 and 6 branches in 2018.

ATM and debit card expense decreased $211,000 in year-to-date comparison, primarily due to the 15 branch closures.

The increase in legal and professional fees is primarily due to increased ~~outsourcing expenses~~legal fees related to ~~enhance risk management~~the elevated level of non-performing loans as well as increased outsourcing costs related to ~~address the provisions of our written agreement with the OCC.~~

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

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 for the quarters and years-to-date ended September 30, 2017 and June 30, 2016.internal audit services.

Analysis of Balance Sheet

Consolidated assets remained constant at $1.9 billion at ~~September~~June 30, ~~2017~~2018 and December 31, 2016. Deposits decreased $23.5 million from year-end 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, 2017 and December 31, 2016 and accounted for 87.5% of deposits compared to 90.4% of deposits, respectively.2017.

Securities available-for-sale totaled ~~$326.2~~$308.9 million at ~~September~~June 30, ~~2017,~~2018, a decrease of ~~$15.7 million~~$254,000 from December 31, ~~2016.~~2017. Securities held-to-maturity decreased ~~$14.5~~$13.3 million, from ~~$98.2~~$81.1 million at December 31, ~~2016~~2017 to ~~$83.7~~$67.8 million at ~~September~~June 30, ~~2017.~~2018. The investment securities portfolio had an effective duration of ~~3.1~~3.5 years and a net unrealized ~~gain~~loss of ~~$1.2~~$9.3 million at ~~September~~June 30, ~~2017.~~2018.

Total loans decreased ~~$48.1~~$125.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017 as a result of our accelerated efforts to address nonperforming loans, which resulted in the high level of charge-offs and pay-offs during 2017.~~2018.


Table 7 Composition of Loans (in thousands)	Table 7 Composition of Loans (in thousands)							Table 7 Composition of Loans (in thousands)
		September 30, 2017			December 31, 2016				June 30, 2018			December 31, 2017
Commercial, financial, and agricultural (C&I)		$	447,482		$	459,574			$	354,944		$	435,207
Real estate – construction		90,088			100,959				98,108			90,287
Real estate – commercial (CRE)		473,046			481,155				414,526			448,406
Real estate – residential		155,676			157,872				141,104			146,751
Installment loans to individuals		63,148			82,660				47,406			56,398
Lease financing receivable		760			1,095				632			732
Other		5,769			767				1,243			5,645
		$	1,235,969		$	1,284,082
Total loans									$	1,057,963		$	1,183,426
Less allowance for loan losses		(25,053		)	(24,372		)		(23,514		)	(26,888		)
Net loans		$	1,210,916		$	1,259,710			$	1,034,449		$	1,156,538

Our energy-related loan portfolio at ~~September~~June 30, ~~2017~~2018 totaled ~~$197.8~~$153.6 million, or ~~16.0%~~14.5% of total loans, down from ~~$237.4~~$172.8 million at ~~December~~March 31, ~~2016.~~2018. The majority of MidSouth’s energy lending is focused on oil field service companies. Of the ~~337~~286 total relationships in our energy-related loan portfolio, 3832 relationships totaling ~~$83.4~~$51.3 million were classified, with ~~$27.8~~$40.4 million on nonaccrual status at ~~September~~June 30, ~~2017.~~2018. At ~~September~~June 30, ~~2017,~~2018, reserves for potential energy-related loan losses approximated ~~5.5%~~5.6% of energy loans.

Within the ~~$473.0~~$414.5 million commercial real estate portfolio, ~~$445.4~~$389.6 million is secured by commercial property, ~~$18.7~~$19.3 million is secured by multi-family property, and ~~$8.9~~$5.6 million is secured by farmland. Of the ~~$445.4~~$389.6 million secured by commercial property, ~~$299.7~~$251.2 million, or ~~67.3%~~64.5%, is owner-occupied. Of the ~~$155.7~~$141.1 million residential real estate portfolio, ~~79.3%~~77.3% represented loans secured by first liens.

Assets held for sale totaled ~~$1.1~~$4.0 million at ~~September~~June 30, 2018 and December 31, 2017 and consisted of ~~two~~seven former branch buildings that were previously closed.

Deposits increased $43.3 million from year-end 2017. Our stable core deposit base, which excludes time deposits, totaled $1.3 billion at June 30, 2018 and March 31, 2018 and accounted for 88.5% of deposits compared to 88.3% of deposits, respectively.

~~Other assets increased $4.2 million during the nine months ended September 30, 2017, from $10.1~~Long-term FHLB advances totaled $10.0 million at ~~December 31, 2016~~June 30, 2018, compared to ~~$14.4~~$25.2 million at ~~September~~June 30, 2017. Long-term FHLB advances at June 30, 2018 consisted of one advance that matures in January 2019 and bears a fixed interest rate of 1.985%. The ~~increase in primarily attributable to~~FHLB advances are collateralized by a ~~$3.1~~blanket lien on first mortgages and other qualifying loans. Short-term FHLB advances totaled $27.5 million ~~increase in income tax receivable from year-end 2016.~~at June 30, 2018 and consisted of two advances with a maturity of 1 month at a fixed interest rate of 1.88%. There were no short-term FHLB advances outstanding at June 30, 2017.

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~~June 30, ~~2017,~~2018, 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 available through four sources: a stable base of funding sources, an adequate level of assets that can be readily converted into cash, borrowing lines with correspondent banks and brokered 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 ~~$17.6~~$33.7 million in projected cash flows from securities repayments for the remainder of ~~2017~~2018 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~~June 30, ~~2017,~~2018, we had no borrowings with the FRB-Atlanta. Long-term FHLB-Dallas advances totaled ~~$25.1~~$10.0 million at ~~September~~June 30, ~~2017~~2018 and ~~are fixed rate advances with rates ranging from 1.99% to 3.49% and have a range~~consisted of ~~maturities from December 2017 to January 2019. One short-term FHLB-Dallas~~one advance ~~totaled $12.5 million at September 30, 2017. The advance~~that matures in ~~October 2017~~January 2019 and bears ana fixed interest rate of ~~1.39%~~1.985%. Short-term FHLB advances totaled $27.5 million at June 30, 2018 and consisted of two advances with a maturity of 1 month at a fixed interest rate of 1.88%. Under existing agreements with the FHLB-Dallas, our borrowing capacity totaled ~~$219.6~~$291.6 million at ~~September~~June 30, ~~2017.~~2018. The Bank has the ability to post additional collateral of approximately ~~$171.5~~$148.1 million if necessary to meet liquidity needs. Additionally, ~~$178.9~~$143.2 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta. Unsecured borrowing lines totaling ~~$53.5~~$33.5 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 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~~June 30, ~~2017.~~2018.

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, 2017,~~March 31, 2018, there were 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~~$90,000 for the three months ended ~~September~~June 30, ~~2017.~~2018.

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.~~SBLF. 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 $4.0 million provided additional liquidity prior to the capital raise for the Company during the nine months ended September 30, 2017.~~ Due to the ~~$3.7 million~~ loss reported for ~~the nine months~~year ended ~~September 30,~~December 31, 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~~June 30, ~~2017,~~2018, the Company had ~~$61.5~~$47.8 million of cash to fund general corporate obligations. The Company renewed a $75.0 million Universal Shelf Registration during the third quarter of 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~~June 30, ~~2017,~~2018, 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%. The Bank had a Tier 1 leverage capital ratio of 10.10% and a total risk-based capital ratio of 15.61% at June 30, 2018. As of ~~September~~June 30, ~~2017,~~2018, the Company’s Tier 1 leverage ratio was ~~12.84%~~12.71%, Tier 1 capital to risk-weighted assets was ~~17.01%~~18.07%, total capital to risk-weighted assets was ~~18.27%~~19.33% and common equity Tier 1 capital to risk-weighted assets was ~~12.68%~~13.20%. ~~The Bank had a Tier 1 leverage capital ratio of 9.64% and a total risk-based capital ratio of 14.04% at September 30, 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 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, 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.

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~~June 30, ~~2017,~~2018, 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 ~~$197.8~~$153.6 million, or ~~16.0%~~14.5% of total loans. Of the ~~337~~286 credit relationships in the energy-related loan portfolio, 3832 relationships totaling ~~$83.4~~$51.3 million were classified with ~~$27.8~~$40.4 million on nonaccrual status at ~~September~~June 30, ~~2017.~~2018.

~~Additionally, we~~The federal banking agencies, including the OCC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for construction, land development and other land represent 100% or more of total capital or (2) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development and other land represent 300% or more of total capital. Owner occupied loans are excluded from this second category. We monitor our exposure to ~~CRE loans.~~each of these segments to ensure the concentration in consistent with our risk tolerance. At ~~September~~June 30, ~~2017, CRE~~2018, loans ~~(including commercial~~for construction, land development and ~~multifamily loans)~~other land totaled approximately ~~$537.9~~$98.1 million, ~~56%~~or 47% of ~~which are~~our bank's risk-based capital. Loans secured by ~~owner-occupied commercial properties. Our non-owner occupied CRE~~multifamily and non-farm residential properties and loans ~~as a percentage~~for construction, land development and other land totaled approximately $254.0 million at June 30, 2018, or 123% of our bank's risk-based ~~capital totaled 90% at September 30, 2017. A total of $18.1 million, or 3.8%, were on nonaccrual status at September 30, 2017.~~capital. 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 86 summarizes the Company's nonperforming assets for the quarters ending ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, and December 31, ~~2016.~~2017.


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, 2017			December 31, 2016			September 30, 2016				June 30, 2018			December 31, 2017			June 30, 2017
Nonaccrual loans		$	51,289		$	62,580		$	60,522			$	73,538		$	49,278		$	54,810
Loans past due 90 days and over and still accruing		402			268			968				3			728			165
Total nonperforming loans		51,691			62,848			61,490				73,541			50,006			54,975
Nonperforming loans held for sale												—			5,067			—
Other real estate		1,931			2,175			2,317				1,365			2,001			1,387
Other foreclosed assets		234			16			283				—			192			36
Total nonperforming assets		$	53,856		$	65,039		$	64,090			$	74,906		$	57,266		$	56,398

Troubled debt restructurings, accruing		$	1,557		$	152		$	153			$	1,010		$	1,360		$	1,653

Nonperforming assets to total assets		2.77		%	3.35		%	3.28		%		4.03		%	3.04		%	2.90		%
Nonperforming assets to total loans + ORE + other assets repossessed		4.35		%	5.06		%	5.03		%		7.07		%	4.83		%	4.54		%
ALL to nonperforming loans		48.47		%	38.78		%	37.84		%		31.97		%	53.77		%	44.88		%
ALL to total loans		2.03		%	1.90		%	1.83		%		2.22		%	2.27		%	1.99		%

QTD charge-offs		$	4,381		$	1,835		$	1,161			$	2,801		$	8,931		$	12,659
QTD recoveries		460			339			151				505			166			255
QTD net charge-offs		$	3,921		$	1,496		$	1,010			$	2,296		$	8,765		$	12,404
Annualized net charge-offs to total loans		1.26		%	0.46		%	0.32		%		0.87		%	2.94		%	4.01		%

Nonperforming assets totaled ~~$53.9~~$74.9 million at ~~September~~June 30, ~~2017, a decrease~~2018, an increase of ~~$11.1~~$17.6 million from the ~~$65.0~~$57.3 million reported at year-end ~~2016~~2017 and ~~a decrease~~an increase of ~~$10.2~~$18.5 million from the ~~$64.1~~$56.4 million reported at ~~September~~June 30, ~~2016.~~2017. The ~~decrease~~increase since December 31, 2017 is primarily attributable to ~~the payoffs/paydowns of $38.1 million of non-accrual loans and the charge-off of $16.5 million of non-accrual loans. These decreases were partially offset by $43.3~~$46.1 million of loans placed on non-accrual during the ~~year. The~~period. This increase was partially offset by the payoffs/paydowns of $20.7 million of non-accrual loans and the decrease of $4.3 million in ~~non-performing assets reflects our previously announced transition plans that include a more aggressive approach to addressing asset quality.~~nonperforming loans held for sale.

Allowance coverage for nonperforming loans was ~~48.47%~~31.97% at ~~September~~June 30, ~~2017~~2018 compared to ~~38.78%~~53.77% at December 31, ~~2016~~2017 and ~~37.84%~~44.88% at ~~September~~June 30, ~~2016.~~2017. The ALL/total loans ratio ~~increased to 2.03%~~was 2.22% at ~~September~~June 30, ~~2017,~~2018, compared to ~~1.90%~~2.27% at year-end ~~2016~~2017 and ~~1.83%~~1.99% at ~~September~~June 30, ~~2016.~~2017. Including valuation accounting adjustments on acquired loans, the total adjustments and ALL was ~~2.13%~~2.30% of loans at ~~September~~June 30, ~~2017.~~2018. The ratio of annualized net charge-offs to total loans ~~increased~~decreased to ~~1.26%~~0.87% for the three months ended ~~September~~June 30, ~~2017,~~2018, compared to ~~0.46%~~2.94% for the three months ended December 31, ~~2016,~~2017, and ~~0.32%~~4.01% for the three months ended ~~September~~June 30, ~~2016.~~2017.

Total nonperforming assets to total loans plus ORE and other assets repossessed ~~decreased~~increased to ~~4.35%~~7.07% at ~~September~~June 30, ~~2017~~2018 from ~~5.06%~~4.83% at December 31, ~~2016~~2017 and ~~5.03%~~4.54% at ~~September~~June 30, ~~2016.~~2017. Performing troubled debt restructurings (“TDRs”) totaled ~~$1.6~~$1.0 million at ~~September~~June 30, ~~2017,~~2018, compared to ~~$152,000~~$1.4 million at December 31, ~~2016~~2017 and ~~$153,000~~$1.7 million at ~~September~~June 30, ~~2016.~~2017. Classified assets, including ORE, were ~~$139.7~~$105.8 million at ~~September~~June 30, ~~2017~~2018 compared to ~~$134.2~~$113.7 million at ~~December~~March 31, ~~2016.~~2018. 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 ~~$25.1~~$23.5 million in the ALL as of ~~September~~June 30, ~~2017~~2018 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 97 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 earnings available to common shareholders adjusted for specified one-time items.

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 June 30,						Six Months Ended June 30,
		2017			2016			2017			2016				2018			2017			2018			2017
Core Net Interest Margin

Net interest income (FTE)		$	19,003		$	18,472		$	55,725		$	54,786			$	16,996		$	18,442		$	34,447		$	36,721
Less purchase accounting adjustments		(355		)	(493		)	(1,009		)	(1,399		)		(98		)	(380		)	(213		)	(654		)
Core net interest income, net of purchase accounting adjustments	A	$	18,648		$	17,979		$	54,716		$	53,387		A	$	16,898		$	18,062		$	34,234		$	36,067

Total average earning assets		$	1,793,754		$	1,761,984		$	1,778,827		$	1,761,693			$	1,714,522		$	1,768,862		$	1,704,934		$	1,771,241
Add average balance of loan valuation discount		1,504			2,634			1,728			2,961				859			1,720			915			1,841
Average earnings assets, excluding loan valuation discount	B	$	1,795,258		$	1,764,618		$	1,780,555		$	1,764,654		B	$	1,715,381		$	1,770,582		$	1,705,849		$	1,773,082

Core net interest margin	A/B	4.12		%	4.05		%	4.11		%	4.04		%	A/B	3.95		%	4.09		%	4.05		%	4.10		%

Diluted Earnings Per Share, Operating

Diluted earnings (loss) per share		$	0.05		$	0.14		$	(0.28	)	$	0.46
Diluted loss per share															$	(0.09	)	$	(0.51	)	$	(0.12	)	$	(0.39	)
Effect of one-time charge related to closure of branches															—			—			0.01			—
Effect of severance and retention accruals		—			—			0.07			—				—			0.08			—			0.08
Effect of one-time charge related to discontinued branch projects		—			—			0.02			—				—			0.02			—			0.02
Effect of write-down of assets held for sale		—			—			0.03			—				—			0.03			—			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		)	—
Effect of loss on transfer of loans to held for sale															—			—			0.04			—
Effect of regulatory remediation costs															0.25			—			0.44			—
Diluted earnings (loss) per share, operating		$	0.07		$	0.14		$	(0.13	)	$	0.46			$	0.16		$	(0.38	)	$	0.37		$	(0.26	)

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

Net earnings (loss) available to common shareholders		$	856		$	1,587		$	(3,689	)	$	5,191
Loss available to common shareholders															$	(1,479	)	$	(6,225	)	$	(1,929	)	$	(4,545	)
Net gain on sales of securities, after-tax															—			(2		)	—			(6		)
Net loss on equity securities not trading, after-tax															40			—			40			—
Severance and retention accruals, after-tax		—			—			872			—				—			872			—			872
One-time charge related to discontinued branch projects, after-tax		—			—			302			—				—			302			—			302
One-time charge related to closure of branches, after-tax															—			—			115			—
Write-down of assets held for sale, after-tax		—			—			371			—				—			371			—			371
One-time charge related to closure of branches, after-tax		587						587
Net gain on sale of securities, after-tax		(220		)	—			(226		)	(13		)
Loss on transfer of loans to held for sale, after-tax															6			—			697			—
Regulatory remediation costs															4,205			—			7,307			—
Legal fees related to bulk loan sale															9			—			79			—
Operating earnings (loss) available to common shareholders		$	1,223		$	1,587		$	(1,783	)	$	5,178			$	2,781		$	(4,682	)	$	6,309		$	(3,006	)

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, ~~2016.~~2017.

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~~second quarter of ~~2017,~~2018, 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.

~~The Bank is in “troubled condition”~~We face a risk of noncompliance and ~~has entered into a formal agreement~~enforcement action with the ~~OCC, which subjects us to significant restrictions~~Bank Secrecy Act 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~~other anti-money laundering statutes 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 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 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 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~~Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to ~~monitor compliance with~~institute and maintain an effective anti-money laundering program (“BSA/AML Program”) and file suspicious activity and currency transaction reports as appropriate. Failure or 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 ableinability to comply with ~~it. If we do not comply with~~these laws and regulations could result in fines or penalties, curtailment of expansion opportunities, enforcement actions, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. We have developed policies and continue to augment procedures and systems designed to remediate and strengthen our BSA/AML Program. Our remediation measures will result in increased expense to the ~~Agreement, we~~Bank and the issues giving rise to those measures could ~~be subject to civil monetary penalties, further regulatory sanctions and/or~~result in other ~~enforcement actions.~~consequences that could adversely affect us such as those outlined above.

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~~June 30, ~~2017.~~2018.

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)

~~10.1~~10.4	~~Formal Agreement by~~Second Amendment to the MidSouth Bankcorp, Inc . Amended and ~~between~~Restated 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~~Bancorp, Inc. Deferred Compensation Plan Effective July, 25, ~~2017 and incorporated herein by reference)~~2018

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~~June 30, ~~2017,~~2018, 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, 2017~~May 10, 2018
	/s/ James R. McLemore
	James R. McLemore, President and CEO
	(Principal Executive Officer)

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

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

5150



	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	—