UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September~~June 30, ~~2017~~2019



☐	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)

Securities registered pursuant to Section 12(b) of the Act



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.10 par value	MSL	New York Stock Exchange

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 ☒x 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 ☒x 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	☒x Accelerated filer	☐Non-accelerated filer	☐x 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 ☒x

As of ~~November 9, 2017,~~August 6, 2019, there were ~~16,548,829~~16,732,149 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.



Part I – Financial Information		4
	Item 1. Financial Statements	4
	Consolidated Balance Sheets	45
	Consolidated Statements of Operations (unaudited)	56
	Consolidated Statements of Comprehensive Income (Loss) (unaudited)	67
	Consolidated Statement of Shareholders’ Equity (unaudited)	78
	Consolidated Statements of Cash Flows (unaudited)	810
	Notes to Interim Consolidated Financial Statements	911
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.	3233
	Forward-Looking Statements	3334
	Critical Accounting Policies	3436
	Results of Operations	3437
	~~Analysis of~~ Balance Sheet Review	4244
	Liquidity and Capital	4345
	Asset Quality	4447
	Non-GAAP Financial Measures	50
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	4851
	Item 4. Controls and Procedures.	4852
Part II – Other Information		4954
	Item 1. Legal Proceedings.	4954
	Item 1A. Risk Factors.	4954
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	4955
	Item 3. Defaults Upon Senior Securities.	4955
	Item 4. Mine Safety Disclosures.	5055
	Item 5. Other Information.	5056
	Item 6. Exhibits.	5056

~~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 and per share amounts)							MidSouth Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except share and per share amounts)
								June 30, 2019			December 31, 2018
	September 30, 2017 (unaudited)			December 31, 2016 (audited)				(unaudited)			(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								$	20,175		$	27,701
Interest-bearing deposits in banks	124,591			47,091				207,902			174,909
Federal funds sold	6,333			3,450				4,375			2,761
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 $421,482 and $443,928)								425,638			437,754
Securities held-to-maturity, (fair value $33,363 and $36,974)								33,219			37,759
Total securities								458,857			475,513
Other investments	12,200			11,355				18,261			16,614
Loans held for sale								10,304			23,876
Loans	1,235,969			1,284,082				880,037			899,785
Allowance for loan losses	(25,053		)	(24,372		)		(28,129		)	(17,430		)
Loans, net	1,210,916			1,259,710				851,908			882,355
Bank premises and equipment, net	64,969			68,954				54,221			55,382
Accrued interest receivable	7,697			7,576
Goodwill	42,171			42,171
Intangibles	3,792			4,621
Operating lease right-of-use assets								7,865			—
Goodwill and Intangibles								44,026			44,580
Cash surrender value of life insurance	14,834			14,335				15,248			15,135
Other real estate	1,931			2,175				387			1,067
Assets held for sale	1,100			—
Other assets	14,372			10,131				21,577			23,505
Total assets	$	1,947,066		$	1,943,340
Total Assets								1,715,106			1,743,398

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	428,183		$	414,921
Noninterest-bearing								$	399,619		$	383,167
Interest-bearing	1,127,752			1,164,509				1,023,770			1,068,904
Total deposits	1,555,935			1,579,430				1,423,389			1,452,071
Securities sold under agreements to repurchase	54,875			94,461				5,456			11,220
Short-term Federal Home Loan Bank advances	12,500			—
Long-term Federal Home Loan Bank advances	25,110			25,424
Operating lease liability								7,816			—
Federal Home Loan Bank advances								27,500			27,500
Junior subordinated debentures	22,167			22,167				22,167			22,167
Other liabilities	8,836			7,482				7,786			8,450
Total liabilities	1,679,423			1,728,964				1,494,114			1,521,408
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, respectively								32,000			32,000
Series C Preferred stock, $10 par value; 100,000 shares authorized, 89,721 and 89,721 shares issued and outstanding, respectively								8,972			8,972
Common stock, $0.10 par value; 30,000,000 shares authorized, 16,733,569 and 16,641,017 shares issued and outstanding, respectively								1,671			1,664
Additional paid-in capital	168,322			111,166				169,147			169,111
Unearned ESOP shares	(967		)	(1,233		)
Accumulated other comprehensive income (loss)	773			(1,010		)		5,610			(4,035		)
Retained earnings	56,873			63,207				3,592			14,278
Total shareholders’ equity	267,643			214,376				220,992			221,990
Total liabilities and shareholders’ equity	$	1,947,066		$	1,943,340			$	1,715,106		$	1,743,398

See notes to unaudited consolidated financial statements.



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (dollars in thousands, except per share amounts)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest income:
Loans, including fees	$	13,023		$	15,344		$	26,010		$	31,359
Securities and other investments:
Taxable	3,100			2,093			6,170			4,140
Nontaxable	160			277			416			593
Interest bearing deposits in other banks	1,663			1,025			2,795			1,644
Total interest income	17,946			18,739			35,391			37,736

Interest expense:
Deposits	1,665			1,410			3,345			2,647
Securities sold under agreements to repurchase	9			25			23			66
Federal Home Loan Bank advances	74			120			155			249
Junior subordinated debentures	283			259			570			479
Total interest expense	2,031			1,814			4,093			3,441

Net interest income	15,915			16,925			31,298			34,295
Provision for loan losses	4,759			440			12,359			440
Net interest income after provision for loan losses	11,156			16,485			18,939			33,855

Non-interest income:
Service charges on deposits	1,854			2,065			3,647			4,271
ATM and debit card income	2,044			1,877			3,969			3,661
Credit card income	425			381			946			752
Gain on sale of securities, net	202			—			575			—
Gain on sale of loans, net	—			—			1,274			—
Other charges and fees	265			559			652			1,027
Total non-interest income	4,790			4,882			11,063			9,711

Non-interest expenses:
Salaries and employee benefits	8,940			7,916			18,638			15,635
Occupancy expense	2,962			3,193			6,269			6,238
ATM and debit card expense	682			648			1,306			1,224
Data processing	853			666			1,701			1,331
Regulatory remediation expense	—			5,323			—			9,249
Merger-related expense	1,149			—			1,149			—
Legal and professional fees	1,163			1,100			3,046			2,789
Loss on transfer of loans to held for sale	—			8			—			883
Other	3,100			3,419			6,626			6,796
Total non-interest expenses	18,849			22,273			38,735			44,145

Loss before income tax benefit	(2,903		)	(906		)	(8,733		)	(579		)
Income tax benefit	—			(237		)	—			(271		)
Net loss	(2,903		)	(669		)	(8,733		)	(308		)
Dividends on preferred stock	810			810			1,620			1,620
Net loss available to common shareholders	$	(3,713	)	$	(1,479	)	$	(10,353	)	$	(1,928	)

Basic loss per common share	$	(0.22	)	$	(0.09	)	$	(0.62	)	$	(0.12	)
Diluted loss per common share	$	(0.22	)	$	(0.09	)	$	(0.62	)	$	(0.12	)
Weighted average number of shares outstanding:
Basic	16,724			16,526			16,699			16,511
Diluted	16,724			16,529			16,699			16,514
Dividends declared per common share	$	0.01		$	0.01		$	0.02		$	0.02

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)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Interest income:
Loans, including fees $ 17,329
$ 17,087
$ 50,682
$ 50,525
Securities and other investments:

Taxable 2,276
1,983
7,019
5,959
Nontaxable 363
416
1,144
1,294
Federal funds sold 13
3
28
11
Time and interest bearing deposits in other banks 305
83
540
274
Other investments 93
95
255
273
Total interest income 20,379
19,667
59,668
58,336

Interest expense:

Deposits 1,094
915
3,002
2,725
Securities sold under agreements to repurchase 149
236
619
702
Other borrowings and payables 111
93
290
297
Junior subordinated debentures 212
170
632
507
Total interest expense 1,566
1,414
4,543
4,231

Net interest income 18,813
18,253
55,125
54,105
Provision for loan losses 4,300
2,900
19,600
8,000
Net interest income after provision for loan losses 14,513
15,353
35,525
46,105

Non-interest income:

Service charges on deposits 2,463
2,584
7,339
7,404
Gain on sale of securities, net 338
—
347
20
ATM and debit card income 1,687
1,620
5,156
4,897
Other charges and fees 998
948
2,911
2,714
Total non-interest income 5,486
5,152
15,753
15,035

Non-interest expenses:

Salaries and employee benefits 7,849
8,034
25,989
24,206
Occupancy expense 3,711
3,635
11,524
10,899
ATM and debit card expense 654
833
2,088
2,410
Data processing 640
527
1,928
1,463
FDIC insurance 448
365
1,275
1,214
Legal and professional fees 1,404
516
2,983
1,335
Other 3,053
3,204
8,806
9,387
Total non-interest expenses 17,759
17,114
54,593
50,914
Income (loss) before income tax expense (benefit) 2,240
3,391
(3,315 ) 10,226
Income tax expense (benefit) 574
993
(2,058 ) 2,986

Net earnings (loss) 1,666
2,398
(1,257 ) 7,240
Dividends on preferred stock 810
811
2,432
2,049
Net earnings (loss) available to common shareholders $ 856
$ 1,587
$ (3,689 ) $ 5,191
Earnings (loss) per share:

Basic $ 0.05
$ 0.14
$ (0.28 ) $ 0.46
Diluted $ 0.05
$ 0.14
$ (0.28 ) $ 0.46
Weighted average number of shares outstanding:

Basic 16,395
11,262
13,314
11,260
Diluted 16,396
11,263
13,318
11,260
Dividends declared per common share $ 0.01
$ 0.09
$ 0.19
$ 0.27



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) (dollars in thousands)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(2,903	)	$	(669	)	$	(8,733	)	$	(308	)
Other comprehensive (loss) income, net of tax:
Unrealized gain (loss) on securities available-for-sale:
Unrealized holding gains (losses) arising during the year	4,428			(873		)	10,905			(4,922		)
Less: reclassification adjustment for net gain on sales of securities available- for-sale	(202		)	—			(575		)	—
Net change in unrealized gains (loss) on securities available-for-sale	4,226			(873		)	10,330			(4,922		)
Unrealized (losses) gain on derivative instruments designated as cash flow hedges:
Unrealized holding (losses) gains on derivatives arising during the period	(423		)	89			(685		)	400
Net change in unrealized (losses) gain on derivative instruments	(423		)	89			(685		)	400
Total other comprehensive income (loss), before tax	3,803			(784		)	9,645			(4,522		)
Income tax effect related to items of other comprehensive income (loss)	—			165			—			950
Total other comprehensive income (loss), net of tax	3,803			(619		)	9,645			(3,572		)
Total comprehensive income (loss)	$	900		$	(1,288	)	$	912		$	(3,880	)

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

~~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) (dollars in thousands, except per share amounts)
	Preferred Stock			Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings
	Shares	Amount		Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings			Total
Balance - December 31, 2018	121,721	$	40,972	16,641,017		$	1,664	$	169,111		$	(4,035	)	$	14,278		$	221,990
Net loss	—	—		—		—		—			—			(8,733		)	(8,733		)
Dividends on Series B and Series C preferred stock	—	—		—		—		—			—			(1,620		)	(1,620		)
Dividends on common stock, $0.02 per share	—	—		—		—		—			—			(333		)	(333		)
Restricted stock grant	—	—		97,602		7		(7		)	—			—			—
Restricted stock forfeitures	—	—		(5,050	)	—		—			—			—			—
Stock option and restricted stock compensation expense	—	—		—		—		43			—			—			43
Change in accumulated other comprehensive income	—	—		—		—		—			9,645			—			9,645
Balance – June 30, 2019	121,721	$	40,972	16,733,569		$	1,671	$	169,147		$	5,610		$	3,592		$	220,992

Balance - March 31, 2019	121,721	$	40,972	16,715,671		$	1,671	$	169,244		$	1,807		$	7,472		$	221,166
Net earnings	—	—		—		—		—			—			(2,903		)	(2,903		)
Dividends on Series B and Series C preferred stock	—	—		—		—		—			—			(810		)	(810		)
Dividends on common stock, $0.01 per share	—	—		—		—		—			—			(167		)	(167		)
Restricted stock grant	—	—		19,898		—		—			—			—			—
Restricted stock forfeitures	—	—		(2,000	)	—		—			—			—			—
Stock option and restricted stock compensation expense	—	—		—		—		(97		)	—			—			(97		)
Change in accumulated other comprehensive income	—	—		—		—		—			3,803			—			3,803
Balance – June 30, 2019	121,721	$	40,972	16,733,569		$	1,671	$	169,147		$	5,610		$	3,592		$	220,992

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
For the Nine Months Ended September 30,
2017 2016
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:

Depreciation 4,345
4,431
Accretion of purchase accounting adjustments (180 ) (569 )
Provision for loan losses 19,600
8,000
Deferred tax benefit (704 ) (781 )
Amortization of premiums on securities, net 2,128
2,170
Stock-based compensation expense 85
165
Net excess tax benefit from stock-based compensation 379
258
ESOP compensation expense 50
(88 )
Net gain on sale of investment securities (347 ) (20 )
Net (gain) loss on sale of other real estate owned (15 ) 56
Net write down of other real estate owned 83
130
Write down of assets held for sale 570
—
Net loss (gain) on sale/disposal of premises and equipment 648
(6 )
Change in accrued interest receivable (121 ) (568 )
Change in accrued interest payable (12 ) (42 )
Change in other assets & other liabilities, net (3,236 ) 1,152
Net cash provided by operating activities 22,016
21,528

Cash flows from investing activities:

Proceeds from maturities and calls of securities available-for-sale 42,585
47,547
Proceeds from maturities and calls of securities held-to-maturity 12,940
12,629
Proceeds from sale of securities available-for-sale 16,979
6,803
Proceeds from sale of security held-to-maturity 887
—
Purchases of securities available-for-sale (42,172 ) (49,538 )
Proceeds from sale of other investments 57
600
Purchases of other investments (902 ) (751 )
Net change in loans 28,649
(12,736 )
Purchases of premises and equipment (2,940 ) (5,152 )
Proceeds from sale of premises and equipment 249
54
Proceeds from sale of other real estate owned 1,728
2,374
Net cash provided by investing activities 58,060
1,830

Cash flows from financing activities:

Change in deposits (23,495 ) 34,385
Change in securities sold under agreements to repurchase (39,586 ) 9,253
Borrowings on Federal Home Loan Bank advances 25,000
25,000
Repayments of Federal Home Loan Bank advances (12,546 ) (50,050 )
Proceeds from exercise of stock options 266
—
Proceeds from issuance of common stock 57,834
—
Stock offering expenses (683 ) —
Payment of dividends on preferred stock (2,433 ) (1,409 )
Payment of dividends on common stock (3,538 ) (3,071 )
Net cash provided by financing activities 819
14,108

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

Supplemental cash flow information:

Interest paid $ 4,555
$ 4,274
Income taxes paid 2,500
2,853
Noncash investing and financing activities:

Transfer of loans to other real estate 1,552
690
Change in accrued common stock dividends (859 ) —
Change in accrued preferred stock dividends (1 ) 640
Net change in loan to ESOP 266
(249 )



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity (unaudited) (dollars in thousands, except per share amounts)
	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
Exercise of stock options	—	—		42,505		4			547			—			—			—			551
ESOP compensation expense	—	—		—		—			20			—			—			—			20
Stock option and restricted stock compensation expense	—	—		—		—			(113		)	—			—			—			(113		)
Change in accumulated other comprehensive income	—	—		—		—			—			—			(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

Balance - March 31, 2018	121,875	$	40,987	16,621,811		$	1,662		$	168,765		$	(906	)	$	(4,782	)	$	45,111		$	250,837
Cumulative-effect adjustment due to the adoption of ASU 2016-01	—	—		—		—			—			—			31			(31		)	—
Net loss	—	—		—		—			—			—			—			(669		)	(669		)
Dividends on Series B and Series C preferred stock	—	—		—		—			—			—			—			(810		)	(810		)
Dividends on common stock, $0.01 per share	—	—		—		—			—			—			—			(165		)	(165		)
Restricted stock grant	—	—		14,057		2			(2		)	—			—			—			—
Restricted stock forfeitures	—	—		(25,400	)	(3		)	3			—			—			—			—
ESOP shares released for allocation	—	—		—		—			—			30			—			—			30
Exercise of stock options	—	—		9,426		1			121			—			—			—			122
ESOP compensation expense	—	—		—		—			10			—			—			—			10
Stock option and restricted stock compensation expense	—	—		—		—			(34		)	—			—			—			(34		)
Change in accumulated other comprehensive income	—	—		—		—			—			—			(649		)	—			(649		)
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) (dollars in thousands)
	For the Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(8,733	)	$	(308	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	3,772			4,165
Provision for loan losses	12,359			440
Deferred tax expense	—			8
ESOP and stock-based compensation expense	43			(44		)
Net gain on sale of investment securities	(575		)	—
Gain on sale of loans held for sale	(1,274		)	—
Proceeds from sale of loans held for sale	20,656			15,623
Net loss on sale of other real estate owned	37			1
Net write down of other real estate owned	116			146
Loss on transfer of loans to held for sale	—			883
Net loss on sale/disposal of premises and equipment	191			67
Change in other assets	(6,735		)	(2,523		)
Change in other liabilities	7,152			4,402
Net cash provided by operating activities	27,009			22,860

Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale	32,759			24,297
Proceeds from maturities and calls of securities held-to-maturity	4,504			12,875
Proceeds from sale of securities available-for-sale	56,286			410
Purchases of securities available-for-sale	(67,114		)	(32,532		)
Purchases of other investments	(1,647		)	(703		)
Net change in loans	12,278			121,129
Purchases of premises and equipment	(1,303		)	(693		)
Proceeds from sale of premises and equipment	181			481
Proceeds from sale of other real estate owned	527			504
Net cash provided by investing activities	36,471			125,768

Cash flows from financing activities:
Change in deposits	(28,682		)	43,331
Change in securities sold under agreements to repurchase	(5,764		)	(52,247		)
Borrowings from FHLB	110,000			165,000
Repayments to FHLB	(110,000		)	(177,500		)
Proceeds from exercise of stock options	—			551
Payment of dividends on preferred stock	(1,620		)	(1,621		)
Payment of dividends on common stock	(333		)	(330		)
Net cash used by financing activities	(36,399		)	(22,816		)

Net increase in cash and cash equivalents	27,081			125,812
Cash and cash equivalents, beginning of period	205,371			152,964
Cash and cash equivalents, end of period	$	232,452		$	278,776

Supplemental cash flow information:
Interest paid	$	4,065		$	3,482
Noncash investing and financing activities:
Transfer of loans to held for sale	5,810			221

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements

~~September~~

June 30, ~~2017~~

2019

(Unaudited)

~~1. Basis~~NOTE 1: BASIS OF PRESENTATION

Overview

MidSouth Bancorp (the "Company" or "we") is a bank holding company whose business is primarily conducted through its wholly-owned banking subsidiary, MidSouth Bank (the "Bank"). We operate a full-service banking business and offer a broad range of ~~Presentation~~commercial and retail banking products to our customers.

The accompanying unaudited consolidated financial statements ~~and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly,~~for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”~~("GAAP"), for interim financial information. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. The interim consolidated financial statements included herein are unaudited, but reflect all adjustments, consisting of normal and recurring items, which, in the opinion of management, are necessary for fair presentation of the consolidated financial position and result of ~~MidSouth Bancorp, Inc. (the “Company”)~~operations for the interim period presented. All significant intercompany accounts and ~~its subsidiaries as~~transactions have been eliminated in consolidation. The results of ~~September~~operations for the three and six-month period ended June 30, ~~2017 and~~2019 are not necessarily indicative of the results ~~of their operations and their cash flows~~expected for the ~~periods presented. The interim~~full year. These financial ~~information~~statements should be read in conjunction with the ~~annual consolidated~~ financial statements and ~~the~~ notes thereto and the report of our independent registered public accounting firm included in the Company’s ~~2016~~ Annual Report on Form ~~10-K.~~

~~The results of operations~~10-K for the ~~nine-month~~year ended December 31, 2018.

Certain amounts have been reclassified to conform with current period ~~ended September~~presentation. The reclassifications had no effect on net loss or shareholders' equity as previously reported.

Proposed Merger with Hancock Whitney Corporation

On April 30, ~~2017 are not necessarily indicative~~2019, the Company entered into a definitive agreement ("Merger Agreement") with Hancock Whitney Corporation ("Hancock Whitney"), whereby MidSouth will merge into Hancock Whitney in a stock-for-stock transaction. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Hancock Whitney, with Hancock Whitney continuing as the surviving corporation. Immediately following the completion of the ~~results to be expected for~~merger, the ~~entire year.~~

~~Use of Estimates~~ ~~— The preparation of financial statements in conformity~~Bank will merge with ~~GAAP requires management to make estimates~~ and ~~assumptions that affect~~into Hancock Whitney Corporation's wholly-owned bank subsidiary, Hancock Whitney Bank, with Hancock Whitney Bank continuing as 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 Annual Report on Form 10-K.

~~Recent Accounting Pronouncements~~ — ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 addresses and codifies the practical considerations and application of the required disclosures under SAB Topic 11.M for the implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); and ASU 2016-13, Financial Instruments-Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The SEC Staff has emphasized on 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 on the financial statements and how the adoption of the new standard will affect comparability. Entities should discuss both quantitative and qualitative information as available when assessing implementation of a new standard. This ASU was effective immediately for public business entities.

~~ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~ was issued in order to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to 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~~surviving bank. Subject 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 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~~and conditions of the Merger Agreement, if the merger is completed, Company shareholders will receive 0.2952 shares of Hancock Whitney Corporation common stock, par value $3.33 per share, for each share of Company common stock, par value $0.10 per share, they hold immediately prior to the merger, plus cash in lieu of fractional shares.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS AND ADOPTION OF NEW ACCOUNTING STANDARDS

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This guidance was further modified ~~award are~~in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842 Leases and ASU No. 2018-11, Leases(Topic 842): Targeted Improvements. These updates require a lessee to recognize in the ~~same as the vesting conditions~~statement of ~~the original award immediately before the original award is modified.~~

~~The classification of the modified award as an equity instrument or~~financial position a liability ~~instrument~~to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is ~~the same as the classification of the original award immediately before the original award is modified.~~

~~The~~permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, these updates are effective date of this Update is for fiscal years beginning on or after December 15, 2017. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. 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.

~~ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~ ~~was issued to better align a company's financial reporting for hedging activities with the economic objectives of those activities. The effective date of this Update is~~ for fiscal years beginning after December 15, 2018, with ~~early~~the option to transition with a modified retrospective application to prior periods presented or to apply the guidance as of the adoption ~~including adoption in an interim period, permitted.~~date without restating prior periods. The Company ~~plans to adopt ASU 2017-12~~adopted the standard on January 1, ~~2019.~~2019 without restating prior periods, and recorded a $8.7 million right of use asset and corresponding lease liability as a result of including leases on the consolidated balance sheet. The adopted guidance did not have an effect on Company's consolidated statement of operations or statement of shareholders' equity.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU ~~2017-12~~No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance was further modified in November 2018 by ASU No. 2018–19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. Application of this update will primarily be on a modified retrospective ~~transition method in~~approach, although the guidance for debt securities for which an other-than-temporary impairment has been recognized before the effective date and for loans previously covered by ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality will be applied on a prospective basis. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Upon adoption, the Company expects that the allowance for credit losses will ~~recognize~~be higher given the ~~cumulative effect~~change to estimated losses for the estimated life of the ~~change on the opening balance of each affected component of equity~~financial asset, however management is still in the ~~consolidated balance sheet as~~process of determining the potential magnitude of the ~~date~~increase. Management has formed a steering committee and has completed a gap assessment that became the basis for a full project plan. In addition, management has selected a vendor model and begun the implementation phase of ~~adoption. While~~the project plan. The Company is implementing a new software program to ensure it is prepared for implementation by the effective date. At the FASB's July 17, 2019, public meeting, the FASB tentatively decided to delay the effective dates for Small Reporting Companies as defined by the Securities and Exchange Commission. This decision is subject to public comment and a final determination. As such, the Company ~~continues~~expects that it could be eligible to ~~assess all potential impacts~~delay implementation until January 2023.

In June 2018, the FASB issued ASU No. 2018-08, Not for Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This update clarifies the guidance about whether a transfer of assets (or the ~~standard, adoption~~reduction, settlement or cancellation of liabilities) is a contribution or an exchange transaction. In addition, the guidance clarifies the determination of whether a transaction is conditional. For public entities, this ~~Update~~update is effective for contributions made in fiscal years beginning after December 15, 2018. The Company does not ~~expected~~expect the new guidance to have a material impact on the ~~Company's~~ consolidated financial statements.

~~Accounting~~In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes ~~Reclassifications and Restatements~~ —~~Certain items in prior financial statements have been reclassified to conform~~ to the ~~current presentation.~~ Disclosure Requirements for Fair Value Measurement. The update removes disclosures that are no longer considered cost beneficial, modifies certain requirements of disclosures, and adds disclosure requirements identified as relevant. For public entities, this guidance is effective for fiscal years ending after December 15, 2019 and, depending on the provision, requires either prospective or retrospective application to prior periods presented. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

~~On January 1, 2017,~~In October 2018, the ~~Company adopted~~FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the provisions of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 requires that all income tax effects associated with share-based payment awards be reported in earnings as an adjustment to income tax expense. Previously, excess tax benefits associated with share-based payments awards were recorded in additional paid-in-capital when the excess tax benefits were realized. The requirement to report those income tax effects in earnings has been applied to settlements occurring on or after January 1, 2017. ASU 2016-09 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 reportedSecured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a ~~reduction to operating cash flows and an increase to financing cash flows to~~Benchmark Interest Rate for Hedge Accounting Purposes. This update permits the ~~extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period.~~OIS rate, based on SOFR, as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The Company ~~has elected~~does not expect the new guidance to ~~apply that change in cash flow classification~~have a material impact on ~~a retrospective basis, which resulted in a $258,000 increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in~~ the ~~accompanying~~ consolidated ~~statements of cash flows for 2016, as compared to the amounts previously reported.~~financial statements.

~~2. Investment Securities~~

NOTE 3: INVESTMENT SECURITIES

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

September 30, 2017

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
GSE mortgage-backed securities 61,578
1,304
22
62,860
Collateralized mortgage obligations: residential 211,808
359
1,958
210,209
Collateralized mortgage obligations: commercial 2,499
—
27
2,472
Mutual funds 2,100
—
21
2,079
Corporate debt securities 23,974
822
4
24,792
$ 325,888
$ 2,718
$ 2,384
$ 326,222

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

Amortized
Cost

Gross
Unrealized
Gains

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

December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

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

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

~~The following table presents the~~ amortized cost and fair value of ~~debt~~available-for-sale investment securities ~~at September 30, 2017~~are as follows (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2019
U.S. Agencies	$	2,867	$	175	$	—	$	3,042
State, county, and municipal securities	12,233		500		—		12,733
Mortgage-backed securities	395,814		4,965		700		400,079
Corporate debt securities	10,568		202		986		9,784
	$	421,482	$	5,842	$	1,686	$	425,638

December 31, 2018
U.S. Agencies	$	3,016	$	56	$	—	$	3,072
State, county, and municipal securities	44,639		214		765		44,088
Mortgage-backed securities	370,706		1,092		5,921		365,877
Corporate debt securities	25,567		433		1,283		24,717
	$	443,928	$	1,795	$	7,969	$	437,754

The amortized cost and fair value of held-to-maturity investment securities are as follows (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2019
State, county, and municipal securities	$	1,659	$	4	$	1	$	1,662
Mortgage-backed securities	31,560		281		140		31,701
	$	33,219	$	285	$	141	$	33,363

December 31, 2018
State, county, and municipal securities	$	1,977	$	1	$	10	$	1,968
Mortgage-backed securities	35,782		—		776		$	35,006
	$	37,759	$	1	$	786	$	36,974

The amortized cost and fair value of available-for-sale and held-to-maturity securities by contractual maturity ~~(in~~are shown below (in thousands). :



	Amortized Cost		Fair Value
June 30, 2019
Due after one year through five years	$	3,300	$	2,333
Due after five years through ten years	13,236		13,622
Due after ten years	9,132		9,604
Mortgage-backed securities¹	395,814		400,079
	$	421,482	$	425,638

Held-to-maturity:
Due in one year or less	$	766	$	767
Due after one year through five years	893		895
Mortgage-backed securities¹	31,560		31,701
	$	33,219	$	33,363

¹Actual maturities ~~will~~may differ from contractual maturities ~~because~~as borrowers may prepay obligations without prepayment penalties.

The following summarizes the fair value 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.~~available-for-sale in an unrealized loss position as of the dates indicated (in thousands):



	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2019
Corporate debt securities	$	604	$	986	$	—	$	—	$	604	$	986
Mortgage-backed securities	—		—		101,623		700		101,623		700
	$	604	$	986	$	101,623	$	700	$	102,227	$	1,686
December 31, 2018
State, county, and municipal securities	$	2,573	$	11	$	19,539	$	754	$	22,112	$	765
Mortgage-backed securities	25,706		34		197,036		5,887		222,742		5,921
Corporate debt securities	3,307		1,283		—		—		3,307		1,283
	$	31,586	$	1,328	$	216,575	$	6,641	$	248,161	$	7,969

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
Due after five years through ten years 43,777
45,080
Due after ten years 268,560
267,411
$ 323,788
$ 324,143

Amortized
Cost

Fair
Value
Held-to-maturity:
Due in one year or less $ 1,204
$ 1,206
Due after one year through five years 5,413
5,465
Due after five years through ten years 43,555
44,335
Due after ten years 33,567
33,633
$ 83,739
$ 84,639

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

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
Available-for-sale:
Obligations of state and political subdivisions $ 8,092
$ 141
$ 5,324
$ 211
$ 13,416
$ 352
GSE mortgage-backed securities 6,168
22
—
—
6,168
22
Collateralized mortgage obligations: residential 118,195
1,153
45,344
805
163,539
1,958
Collateralized mortgage obligations: commercial —
—
2,472
27
2,472
27
Mutual funds 2,079
21
—
—
2,079
21
Corporate debt securities 2,995
4
—
—
2,995
4
$ 137,529
$ 1,341
$ 53,140
$ 1,043
$ 190,669
$ 2,384

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

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 $ 8,054
$ 39
$ —
$ —
$ 8,054
$ 39
GSE mortgage-backed securities 19,408
311
—
—
19,408
311
Collateralized mortgage obligations: residential —
—
8,645
323
8,645
323
Collateralized mortgage obligations: commercial 4,340
12
—
—
4,340
12
$ 31,802
$ 362
$ 8,645
$ 323
$ 40,447
$ 685

The following summarizes the fair value of securities held-to-maturity in an unrealized loss position as of the dates indicated (in thousands):



	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2019
State, county, and municipal securities	$	—	$	—	$	470	$	1	$	470	$	1
Mortgage-backed securities	—		—		10,093		140		10,093		140
	$	—	$	—	$	10,563	$	141	$	10,563	$	141

December 31, 2018
State, county, and municipal securities	$	—	$	—	$	1,703	$	10	$	1,703	$	10
Mortgage-backed securities	—		—		35,006		776		35,006		776
	$	—	$	—	$	36,709	$	786	$	36,709	$	786

At June 30, 2019, the Company had 38 securities in an unrealized loss position. Management evaluates ~~each quarter~~ whether unrealized losses on securities represent impairment that is other than ~~temporary.~~temporary on a quarterly basis. For debt securities, the Company considers its intent to sell or hold the securities orand 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~~ At June 30, ~~2017, 51 securities had unrealized losses totaling 1.29%~~2019, there was no intent to sell any of the ~~individual securities’ amortized cost basis and 0.65% of the Company’s total amortized cost basis. Of the 51~~ securities ~~18 had been~~ in an unrealized loss position, ~~for over twelve months at September 30, 2017. These 18 securities had an~~and it is more likely than not the Company will not be required to sell these securities. Furthermore, the present value of cash flows expected to be collected exceeded the Company's amortized cost basis of the investment securities; therefore, these securities are not deemed to be other than temporarily impaired.

Proceeds from sales of available-for-sale securities as of June 30, 2019 and ~~unrealized loss of $59.0~~2018 were $56.3 million and ~~$1.2 million,~~$410,000, respectively. ~~The unrealized losses~~Net gains on ~~debt~~sales of available-fo-sale securities at September 30, 2017 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Management identified no impairment related to credit quality. At September 30, 2017, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized duringfor the three and six months ended ~~September~~June 30, ~~2017.~~

~~During~~2019 were $202,000 and $575,000 , respectively. There were no gains or losses recognized on the ~~nine~~sales of available-for-sale securities for the three and six months ended ~~September~~June 30, 2017, the Company sold 16 securities classified as available-for-sale and 1 security classified as held-to-maturity. Of the available-for-sale securities, 13 securities were sold with gains totaling $449,000 and 3 securities were sold at a loss of $109,000 for a net gain of $340,000. The decision to sell the 1 held-to-maturity security, which was sold at a gain of $7,000, was based on the pre-refunding of the bond which would accelerate the maturity of the bond by 15 years with an anticipated call date within six months. During the nine months ended September 30, 2016, the Company sold 2 securities classified as available-for-sale at a gross gain of $20,000. 2018.

The composition of investment securities reflects the strategy of management to maintain an appropriate level of liquidity while providing a relatively stable source of revenue. The securities portfolio may at times be used to mitigate interest rate risk associated with other areas of the balance sheet while also providing a means for the investment of available funds, providing liquidity and supplying investment securities that are required to be pledged as collateral against specific deposits and for other purposes. Securities with an aggregate carrying value of ~~approximately $236.3 million and $293.4~~$90.6 million at ~~September~~June 30, ~~2017~~2019 and $162.5 million at December 31, ~~2016, respectively,~~2018 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~~NOTE 4: LOANS

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


	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
Commercial, financial and agricultural	$	447,482		$	459,574		$	226,871		$	267,340
Real estate – construction	90,088			100,959			77,482			87,506
Real estate – commercial	473,046			481,155			409,694			368,449
Real estate – residential	155,676			157,872			126,043			132,435
Installment loans to individuals	63,148			82,660
Consumer and other							39,476			43,506
Lease financing receivable	760			1,095			471			549
Other	5,769			767
	1,235,969			1,284,082
Less allowance for loan losses	(25,053		)	(24,372		)
	$	1,210,916		$	1,259,710
Total loans							880,037			899,785
Allowance for loan and lease losses							(28,129		)	(17,430		)
Total loans, net							$	851,908		$	882,355

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,~~2019, 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~~$113.0 million, or ~~16.0%~~12.8% of total ~~loans. Additionally, the Company’s exposure to~~ loans, secured by commercial real estate is monitored. At September 30, 2017, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $537.9 million, 56% of which are secured by owner-occupied commercial properties. Of the $537.9with $3.0 million in ~~loans secured by commercial real estate, $20.5 million, or 3.8%, were on~~ nonaccrual ~~status at September 30, 2017.~~oil and gas loans.

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 quantitative and qualitative factors. As such, some of the factors considered in determining provisions include estimated losses relative to specific 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. 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. 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 as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 is as follows (in thousands):


	September 30, 2017																							June 30, 2019
				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			Consumer and other			Lease financing receivable			Total
Allowance for loan losses:																								and Agric
Beginning balance	$	16,057		$	585		$	5,384		$	940		$	1,395		$	5		$	6	$	24,372		$	10,633		$	140	$	4,913	$	1,156		$	585		$	3		$	17,430
Charge-offs	(15,106		)	(70		)	(3,618		)	(293		)	(860		)	—			—		(19,947		)	(1,775		)	—		—		—			(167		)	—			(1,942		)
Recoveries	537			—			158			97			235			—			—		1,027			184			—		30		1			67			—			282
Provision	17,413			28			2,024			(40		)	159			(1		)	18		19,601			11,654			402		557		(215		)	(36		)	(3		)	12,359
Ending balance	$	18,901		$	543		$	3,948		$	704		$	929		$	4		$	24	$	25,053		$	20,696		$	542	$	5,500	$	942		$	449		$	—		$	28,129
Ending balance: individually evaluated for impairment	$	3,254		$	17		$	904		$	7		$	69		$	1		$	—	$	4,252		$	10,680		$	—	$	74	$	—		$	—		$	—		$	10,754
Ending balance: collectively evaluated for impairment	$	15,647		$	526		$	3,044		$	697		$	860		$	3		$	24	$	20,801		$	10,016		$	542	$	5,426	$	942		$	449		$	—		$	17,375

Loans:
Ending balance	$	447,482		$	90,088		$	473,046		$	155,676		$	63,148		$	760		$	5,769	$	1,235,969		$	226,871		$	77,482	$	409,694	$	126,043		$	39,476		$	471		$	880,037
Ending balance: individually evaluated for impairment	$	30,892		$	2,416		$	18,132		$	1,031		$	338		$	34		$	—	$	52,843		$	15,934		$	424	$	4,807	$	—		$	—		$	—		$	21,165
Ending balance: collectively evaluated for impairment	$	416,590		$	87,672		$	454,488		$	154,582		$	62,810		$	726		$	5,769	$	1,182,637		$	210,937		$	77,058	$	404,887	$	126,043		$	39,476		$	471		$	858,872
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	426		$	63		$	—		$	—		$	—	$	489


	September 30, 2016																							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			Consumer and other			Lease financing receivable		Total
Allowance for loan losses:
Beginning balance	$	11,268		$	819		$	4,614		$	816		$	1,468		$	14		$	12	$	19,011		$	20,577		$	596		$	3,918		$	837		$	957		$	3	$	26,888
Charge-offs	(2,957		)	—			(208		)	(24		)	(991		)	—			—		(4,180		)	(1,524		)	(2		)	(86		)	(3		)	(221		)	—		(1,836		)
Recoveries	193			—			115			4			125			—			—		437			276			—			6			1			36			—		319
Provision	6,747			(478		)	1,042			(97		)	781			(5		)	10		8,000			(264		)	159			(105		)	64			146			—		—
Ending balance	$	15,251		$	341		$	5,563		$	699		$	1,383		$	9		$	22	$	23,268		$	19,065		$	753		$	3,733		$	899		$	918		$	3	$	25,371
Ending balance: individually evaluated for impairment	$	1,105		$	—		$	2,270		$	194		$	268		$	—		$	—	$	3,837		$	5,968		$	94		$	76		$	20		$	6		$	—	$	6,164
Ending balance: collectively evaluated for impairment	$	14,146		$	341		$	3,293		$	505		$	1,115		$	9		$	22	$	19,431		$	13,097		$	659		$	3,657		$	879		$	912		$	3	$	19,207

Loans:
Ending balance	$	463,031		$	96,365		$	464,853		$	155,653		$	88,537		$	1,449		$	2,912	$	1,272,800		$	401,048		$	94,679		$	444,277		$	145,671		$	50,888		$	692	$	1,137,255
Ending balance: individually evaluated for impairment	$	29,887		$	10		$	28,285		$	1,831		$	464		$	—		$	—	$	60,477		$	55,092		$	192		$	26,005		$	2,088		$	50		$	—	$	83,427
Ending balance: collectively evaluated for impairment	$	433,144		$	96,355		$	435,985		$	153,747		$	88,073		$	1,449		$	2,912	$	1,211,665		$	345,956		$	94,487		$	418,272		$	143,583		$	50,838		$	692	$	1,053,828
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	583		$	75		$	—		$	—		$	—	$	658

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

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
Real estate - construction 335
350
2,416
3,101
86,987
90,088
—
Real estate - commercial 1,804
—
9,749
11,553
461,493
473,046
—
Real estate - residential 2,467
28
898
3,393
152,283
155,676
—
Installment loans to individuals 408
173
215
796
62,352
63,148
18
Lease financing receivable 33
—
—
33
727
760
—
Other loans 79
12
—
91
5,678
5,769
—
$ 7,270
$ 1,075
$ 40,439
$ 48,784
$ 1,187,185
$ 1,235,969
$ 402

December 31, 2016

30-59
Days
Past Due

60-89
Days
Past
Due

Greater
than 90
Days
Past Due

Total
Past
Due
Current Total Loans
Recorded
Investment
> 90 days
and
Accruing
Commercial, financial, and agricultural $ 2,297
$ 902
$ 31,425
$ 34,624
$ 424,950
$ 459,574
$ 96
Real estate - construction 2,613
399
9
3,021
97,938
100,959
—
Real estate - commercial 5,159
1,931
25,408
32,498
448,657
481,155
140
Real estate - residential 1,956
207
1,553
3,716
154,156
157,872
16
Installment loans to individuals 756
36
538
1,330
81,330
82,660
16
Lease financing receivable —
—
—
—
1,095
1,095
—
Other loans 89
5
—
94
673
767
—
$ 12,870
$ 3,480
$ 58,933
$ 75,283
$ 1,208,799
$ 1,284,082
$ 268



	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial and agricultural	$	559	$	11,506	$	3,726	$	15,791	$	211,080	$	226,871	$	—
Real estate – construction	4,097		—		262		4,359		73,123		77,482		—
Real estate – commercial	2,044		—		1,455		3,499		406,195		409,694		—
Real estate – residential	617		73		1,108		1,798		124,245		126,043		—
Consumer and other	129		60		27		216		39,260		39,476		—
Lease financing receivable	—		—		—		—		471		471		—
	$	7,446	$	11,639	$	6,578	$	25,663	$	854,374	$	880,037	$	—

	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial and agricultural	$	385	$	902	$	2,173	$	3,460	$	263,880	$	267,340	$	—
Real estate – construction	47		—		117		164		87,342		87,506		—
Real estate – commercial	435		—		771		1,206		367,243		368,449		—
Real estate – residential	695		31		1,407		2,133		130,302		132,435		—
Consumer and other	176		28		56		260		43,246		43,506		—
Lease financing receivable	—		—		—		—		549		549		—
	$	1,738	$	961	$	4,524	$	7,223	$	892,562	$	899,785	$	—

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


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Commercial, financial, and agricultural	$	29,337	$	31,461	$	15,630	$	3,599
Real estate - construction	2,416		9		468		278
Real estate - commercial	18,132		28,688		4,854		2,977
Real estate - residential	1,032		1,881		2,308		2,008
Installment loans to individuals	339		541
Lease financing receivable	33		—
Other	—		—
Consumer and other					27		58
	$	51,289	$	62,580	$	23,287	$	8,920

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 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively. Interest actually received on non-accrual loans subsequent to their transfer to non-accrual status totaled $201,000 and $128,000 for the nine months ended September 30, 2017 and 2016, respectively.

Impaired Loans

Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, are reviewed to determine whether impairment testing is appropriate. All loan relationships with an outstanding commitment balance above a specified threshold are evaluated for potential impairment. All loan relationships with an outstanding commitment balance below the specified threshold are assigned an allowance allocation percentage that is determined by management and adjusted periodically based on certain factors. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is ~~collaterally~~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, 2019						December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Allowance ⁽¹⁾		Recorded Investment ⁽¹⁾		Unpaid Principal Balance		Related Allowance ⁽¹⁾
With no related allowance recorded:
Commercial, financial, and agricultural	$	19,853	$	22,105	$	—	$	17,477	$	61	$	3,589	$	5,278	$	—	$	2,924	$	3,011	$	—
Real estate - construction	2,366		2,366		—		1,188		—		424		424		—		117		117		—
Real estate - commercial	15,371		17,820		—		14,040		—		4,676		5,835		—		3,395		3,395		—
Real estate - residential	587		587		—		745		—		—		—		—		—				—
Installment loans to individuals	91		91		—		82		—
Finance leases	—		—		—		—		—
Consumer and other											—		—		—		—		—		—
Subtotal:	38,268		42,969		—		33,532		61		8,689		11,537		—		6,436		6,523		—
With an allowance recorded:
Commercial, financial, and agricultural	11,039		12,071		3,254		13,706		1		12,345		12,488		10,680		1,025		1,025		470
Real estate - construction	50		120		17		25		—		—		—		—		131		131		4
Real estate - commercial	2,761		2,761		904		9,370		—		131		131		74		—		—		—
Real estate - residential	445		445		7		684		—		—		—		—		—		—		—
Installment loans to individuals	247		278		69		357		—
Finance leases	33		33		1		17		—
Consumer and other											—		—		—		—		—		—
Subtotal:	14,575		15,708		4,252		24,159		1		12,476		12,619		10,754		1,156		1,156		474
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

Total impaired loans											21,165		24,156		10,754		7,592		7,679		474

⁽¹⁾Troubled debt restructurings totaling $1.6 million and $1.3 million are included in the recorded investment of impaired loans as of June 30, 2019 and December 31, 2018.

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands).

December 31, 2016

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest Income
Recognized
With no related allowance recorded:
Commercial, financial, and agricultural $ 15,101
$ 15,428
$ —
$ 18,815
$ 90
Real estate - construction 9
9
—
23
—
Real estate - commercial 12,710
12,710
—
9,297
14
Real estate - residential 903
903
—
1,134
—
Installment loans to individuals 73
87
—
54
—
Subtotal: 28,796
29,137
—
29,323
104
With an allowance recorded:

Commercial, financial, and agricultural 16,372
16,470
4,369
10,781
1
Real estate - commercial 15,979
15,979
2,216
14,992
—
Real estate - residential 923
923
260
730
—
Installment loans to individuals 468
478
308
419
—
Subtotal: 33,742
33,850
7,153
26,922
1
Totals:

Commercial 60,162
60,587
6,585
53,885
105
Construction 9
9
—
23
—
Residential 1,826
1,826
260
1,864
—
Consumer 541
565
308
473
—
Grand total: $ 62,538
$ 62,987
$ 7,153
$ 56,245
$ 105



	June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized During Impairment		Average Recorded Investment		Interest Income Recognized During Impairment
Commercial, financial, and agricultural	$	16,396	$	—	$	46,935	$	18
Real estate - construction	451		—		129		—
Real estate - commercial	7,126		—		18,567		—
Real estate - residential	—		—		1,353		—
Consumer and other	—		—		—		—
Total	$	23,973	$	—	$	66,984	$	18

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~~Credit Risk 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
Commercial Credit Exposure
Credit Risk Profile by
Creditworthiness Category

Commercial,
financial, and
agricultural Real estate - commercial Total % of Total
Pass $ 345,629
$ 421,071
$ 766,700
83.29 %
Special mention 15,321
8,654
23,975
2.60 %
Substandard 86,523
43,321
129,844
14.11 %
Doubtful 9
—
9
— %
$ 447,482
$ 473,046
$ 920,528
100.00 %

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

Residential Credit Exposure

Credit Risk Profile by
Creditworthiness Category

Real estate - residential % of Total
Pass

$ 149,548
96.06 %
Special mention

1,839
1.18 %
Substandard
4,289
2.76 %

$ 155,676
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
Performing $ 62,791
$ 727
$ 5,769
$ 69,287
99.44 %
Nonperforming
357
33
—
390
0.56 %

$ 63,148
$ 760
$ 5,769
$ 69,677
100.00 %

December 31, 2016
Commercial Credit Exposure
Credit Risk Profile by
Creditworthiness Category

Commercial,
financial, and
agricultural Real estate - commercial Total
%
of Total
Pass $ 346,246
$ 420,970
$ 767,216
81.56 %
Special mention 22,611
23,085
45,696
4.86 %
Substandard 90,300
37,100
127,400
13.54 %
Doubtful 417
—
417
0.04 %
$ 459,574
$ 481,155
$ 940,729
100.00 %

Construction Credit Exposure
Credit Risk Profile by
Creditworthiness Category
Real estate - construction %
of Total
Pass $ 100,775
99.82 %
Special mention —
— %
Substandard 184
0.18 %
$ 100,959
100.00 %

Residential Credit Exposure

Credit Risk Profile by
Creditworthiness Category

Real estate - residential
%
of Total
Pass

$ 153,403
97.17 %
Special mention

1,181
0.75 %
Substandard

3,288
2.08 %

$ 157,872
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
Performing
$ 82,103
$ 1,095
$ 767
$ 83,965
99.34 %
Nonperforming
557
—
—
557
0.66 %

$ 82,660
$ 1,095
$ 767
$ 84,522
100.00 %



			Special
	Pass		Mention		Substandard		Doubtful		Total
June 30, 2019
Commercial, financial and agricultural	$	194,672	$	10,727	$	21,472	$	—	$	226,871
Real estate – construction	70,963		1,463		5,047		9		77,482
Real estate – commercial	366,939		21,554		21,201		—		409,694
Real estate – residential	116,599		1,581		7,176		687		126,043
Consumer and other	39,399		—		64		13		39,476
Lease financing receivable	471		—		—		—		471
Total loans	$	789,043	$	35,325	$	54,960	$	709	$	880,037

December 31, 2018
Commercial, financial and agricultural	$	240,232	$	20,259	$	6,849	$	—	$	267,340
Real estate – construction	83,240		3,910		356		—		87,506
Real estate – commercial	329,213		23,475		15,761		—		368,449
Real estate – residential	125,984		1,955		4,496		—		132,435
Consumer and other	43,416		5		85		—		43,506
Lease financing receivable	549		—		—		—		549
Total loans	$	822,634	$	49,604	$	27,547	$	—	$	899,785

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
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



	Three months ended
	June 30, 2019			June 30, 2018
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural ⁽¹⁾	—	$	—	—	$	—

	Six months ended
	June 30, 2019			June 30, 2018
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural ⁽¹⁾	3	$	1,983	—	$	—

⁽¹⁾The pre-modification and post-modification recorded investment amount represent the recorded investment on the date of the loan modification. Since the modification of these loans were payment modifications, not principal reductions, the pre-modification and post-modification recorded investment amount is the same.

~~The following table presents~~During the six months ended ending June 30, 2019 and 2018, TDRs that had a payment default during the ~~three and nine-month~~twelve-month periods ~~ending September 30, 2017 and 2016,~~ and that were modified within the previous 12 ~~months.~~months was $713,000 and $0, respectively. 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~~A troubled debt restructuring by definition is an impaired loan, as such all TDRs that meet 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~~dollar threshold are 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,~~an impairment exists, either because of a delinquency or other credit ~~quality indicator,~~related issues, a specific reserve is recorded for the ~~Company establishes~~loan. There are no specific reserves ~~for these loans.As of September 30, 2017, there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs.~~

~~4. Intangibles~~

~~A summary of core deposit intangible assets~~on TDRs as of ~~September~~June 30, ~~2017~~2019 and ~~December 31, 2016 is as follows (in thousands):~~

September 30, 2017 December 31, 2016
Gross carrying amount $ 11,674
$ 11,674
Less accumulated amortization (7,882 ) (7,053 )
Net carrying amount $ 3,792
$ 4,621

~~5. Derivatives~~2018.

~~On July 6, 2016, the~~NOTE 5: DERIVATIVES

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

The Company ~~entered into two forward~~uses interest rate ~~swap contracts on a reverse repurchase agreement and long-term FHLB advances. The~~swaps as part of its 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~~risk management strategy. Interest rate swaps, designated as cash flow hedges, ~~was recognized~~involve the receipt of variable amounts from a counterparty in ~~the consolidated statements of income~~exchange for the ~~nine months ended September 30, 2017. The accumulated net after-tax income related to~~Company making fixed payments over the ~~effective~~life of the agreements without the exchange of the underlying notional amount. Forward starting interest rate swaps with a notional amount totaling $12.5 million and $15.0 million were entered into on July 6, 2016 and were designated as cash flow ~~hedge~~hedges of certain repurchase agreements and FHLB advances. The swaps mature in August 2021 and December 2021, respectively. The swaps operate under a pay fixed of .993% and 1.043%, respectively, and receive variable each at LIBOR flat. The swaps were determined to be fully effective during the periods presented and therefore no ineffectiveness has been included in ~~accumulated~~net loss. The aggregate fair value of the swaps is recorded in other assets/other liabilities with changes in fair value recorded in other comprehensive income (loss). The amount included in other comprehensive income (loss) would be reclassified to current earnings if the hedge transactions become probable of not occurring. The Company expects the hedges to remain fully effective during the remaining terms of the swaps. At June 30, 2019 and December 31, 2018, the fair value of the swap recorded in other assets totaled $381,000 and $1.1 million, respectively. Interest expense recorded on the swap transaction totaled $2,000 and $4,000 for the three and six months ended June 30, 2019, respectively and is ~~reflected~~reported as a component of interest expense.

NOTE 6: LEASES

As of January 1, 2019, the Company adopted ASU 2016-02 (Topic 842) on a prospective basis using the effective date method. The adoption of the new standard did not have a material impact on MidSouth's financial statements; however, additional disclosures have been added in accordance with the ASU. See Note ~~6 - Other Comprehensive Income~~2 for additional information on this new accounting standard..

We have operating leases for branches and corporate offices. Our leases have remaining lease terms from 1 to 40 years, some of which have options to extend the leases up to 5 years, and some which include options to terminate the leases within 1 year. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight -line basis over the lease term. We rent or sublease certain real estate to third parties.

The following ~~table discloses the notional amounts~~is a summary of net lease cost and ~~fair value~~other selected information related to operating leases (cost, in thousands):



	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Net lease cost:
Operating lease cost	$	466		$	932
Variable lease cost	(43		)	(89		)
Sub lease income	(44		)	(88		)
Net lease cost	$	379		$	755

Weighted average remaining lease term (years)	14			14
Weighted average discount rate	3.4		%	3.4		%

Maturities of ~~derivative instruments in the Company's balance sheet~~leases payments, undiscounted cash flow, lease liability were as ~~of September 30, 2017 and December 31, 2016~~follows (in thousands):

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



	Lease Payments		Undiscounted Cash Flow		Lease Liability
2019	$	908	$	126	$	782
2020	1,820		210		1,610
2021	1,364		158		1,206
2022	554		134		420
2023	378		124		254
Thereafter	5,248		1,704		3,544
	$	10,272	$	2,456	$	7,816

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

~~6. Other Comprehensive Income (Loss)~~NOTE 7: OTHER COMPREHENSIVE INCOME (LOSS)

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


	Three Months Ended September 30,																	Three Months Ended June 30,
	2017								2016									2019								2018
	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):
Securities available-for-sale:
Change in unrealized gains during period	$	(335	)	$	118	$	(217	)	$	(645	)	$	225		$	(420	)
Change in unrealized gains/losses during period																		$	4,428		$	—	$	4,428		$	(873	)	$	184		$	(689	)
Reclassification adjustment for gains included in net income	(338		)	119		(219		)	—			—			—			(202		)	—		(202		)	—			—			—
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			(423		)	—		(423		)	89			(19		)	70
Reclassification adjustment for gains included in net income	(4		)	1		(3		)	(4		)	1			(3		)
Total other comprehensive income (loss)	$	(684	)	$	240	$	(444	)	$	(594	)	$	207		$	(387	)	$	3,803		$	—	$	3,803		$	(784	)	$	165		$	(619	)


	Nine Months Ended September 30,																		Six Months Ended June 30,
	2017									2016									2019								2018
	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 income (loss):
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																			$	10,905		$	—	$	10,905		$	(4,922	)	$	1,034		$	(3,888	)
Reclassification adjustment for gains included in net income	(347		)	121			(226		)	(20		)	7			(13		)	(575		)	—		(575		)	—			—			—
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			(685		)	—		(685		)	400			(84		)	316
Reclassification adjustment for gains included in net income	(4		)	1			(3		)	—			—			—
Total other comprehensive income	$	2,743		$	(960	)	$	1,783		$	4,252		$	(1,488	)	$	2,764
Total other comprehensive income (loss)																			$	9,645		$	—	$	9,645		$	(4,522	)	$	950		$	(3,572	)

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


	Three Months Ended September 30,							Three months ended June 30,					Six Months Ended June 30,
	2017				2016			2019		2018			2019		2018
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	Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			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	$	202	$	—		575		—			Gain on sale of securities, net
	119			Tax expense	—		Tax expense	—		—			—		—			Tax expense
	$	(219	)	Net of tax	$	—	Net of tax	$	202	$	—		$	575	$	—		Net of tax

Gains on derivative instruments:
	$	(4	)	Interest expense	$	—	Interest expense	$	423	$	(63	)	$	685	$	(102	)	Interest expense
	1			Tax expense	—		Tax expense	—		13			—		21			Tax expense
	$	(3	)	Net of tax	$	—	Net of tax	$	423	$	(50	)	$	685	$	(81	)	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

~~7. Earnings Per Common Share~~

NOTE 8: LOSS PER COMMON SHARE

~~Following~~The following table is a summary of ~~the information used in the~~ computation of ~~earnings~~loss per common share ~~(in thousands)~~based on the weighted average number of common shares outstanding (dollars in thousands, except per share amounts):

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

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.



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(2,903	)	$	(669	)	$	(8,733	)	$	(308	)
Dividends on preferred stock	810			810			1,620			1,620
Adjusted net loss available to common shareholders	$	(3,713	)	$	(1,479	)	$	(10,353	)	$	(1,928	)
Weighted average number of common shares outstanding used in computation of basic loss per common share	16,724			16,526			16,699			16,511
Effect of dilutive securities:
Stock options	—			3			—			3
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted loss per share	16,724			16,529			16,699			16,514
Net loss per common share:
Basic	$	(0.22	)	$	(0.09	)	$	(0.62	)	$	(0.12	)
Diluted	$	(0.22	)	$	(0.09	)	$	(0.62	)	$	(0.12	)

~~Following is~~The Company has reported a ~~summary of~~net loss for the ~~securities that~~three and six months ended June 30, 2019. As such, during those periods all potential common shares were excluded from the ~~computation~~calculation of diluted earnings per share ~~because~~as they would have an anti-dilutive effect for the ~~effects of the shares were anti-dilutive (in thousands):~~respective period.

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

NOTE 9: FAIR VALUE MEASUREMENT

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held-for-sale, other real estate and assets held-for-sale. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value ~~Measurement~~

Hierarchy

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~~cash equivalents—The carrying value of ~~these short-term instruments is a reasonable estimate of~~cash and due from banks, federal funds sold and interest-bearing deposits in other banks, and time deposits in other banks approximate fair value.

Debt 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 and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. 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~~3 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~~in less liquid markets. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers and ~~certain equity securities that~~ are not ~~actively traded.~~

directly observable.

~~Securities Held-to-Maturity~~Loans held for sale—~~The fair value~~Loans held for sale are carried at the lower 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~~or fair value. Fair value is ~~a reasonable estimate of fair value.~~based upon quotes or bids on these loans directly from the purchaser.

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.~~made. 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~~

The fair value of impaired loans is ~~taken related to illiquidity discounts. However, from time to time, a~~estimated based on discounted contractual cash flows or underlying collateral values, where applicable. A loan is ~~considered~~determined to be impaired ~~and an allowance for loan losses is established. Loans for which~~if the Company believes it is probable that ~~payment~~all principal and interest amounts due according to the terms of ~~interest and principal~~the note will not be ~~made~~collected as scheduled. The fair value of impaired loans is determined in accordance with ASC 310-10, Accounting by Creditors for Impairment of a Loan, and generally results in a specific reserve established through a charge to the ~~contractual terms~~provision for loan losses. Losses on impaired loans are charged to the allowance when management believes the uncollectability of ~~the loan agreement are considered impaired. Once~~ a loan is ~~identified as individually impaired, management uses one~~confirmed. Management has determined that the majority 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~~are Level 3 assets due to the extensive use of market appraisals

Cash Surrender Value of Life Insurance Policies—Fair value for ~~which the fair~~life insurance cash surrender 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,~~cash surrender values indicated by 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.insurance companies.

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

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

Other Real Estate—Other real estate ~~(“ORE”)~~ properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value. Exceptions to obtaining initial appraisals are properties where a buy/sell agreement exists for the loan value or greater, or where a Sheriff’s valuation has been received for properties liquidated through a Sheriff sale. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the ~~ORE~~other real estate 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~~other real estate 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 carrying 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~~repurchase 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 approximates carrying amount because of ~~long-term FHLB advances is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types~~the short maturity of ~~borrowings with similar terms.~~these instruments.

Junior Subordinated Debentures—For junior subordinated debentures that bear interest on a floating basis, the fair value approximates carrying ~~amount approximates fair value.~~amount. 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~~Off-Balance-Sheet Instruments—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.~~immaterial for disclosure.

~~Assets Recorded at Fair Value~~

The following table ~~below~~ presents ~~information about~~the fair value measurements of certain assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall (in thousands):

Assets / Liabilities
Measured at Fair Value at

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

Derivative assets $ 855
$ —
$ 855
$ —

Assets / Liabilities
Measured at Fair Value at

Fair Value Measurements
at December 31, 2016
Description December 31, 2016 Level 1 Level 2 Level 3
Available-for-sale securities:
Obligations of state and political subdivisions $ 29,141
$ —
$ 29,141
$ —
GSE mortgage-backed securities 73,578
—
73,578
—
Collateralized mortgage obligations: residential 220,202
—
220,202
—
Collateralized mortgage obligations: commercial 3,082
—
3,082
—
Mutual funds 2,059
2,059
—
—
Corporate debt securities 13,811
—
13,811
—
Total available-for-sale securities $ 341,873
$ 2,059
$ 339,814
$ —

Derivative assets $ 989
$ —
$ 989
$ —



	Recurring Basis Fair Value Measurements
	June 30, 2019
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
U.S. Government agencies	$	3,042	$	—	$	3,042	$	—
State, county, and municipal securities	12,733		$	—	12,733		$	—
Mortgage-backed securities	400,079		—		400,079		—
Corporate debt securities	9,784		—		9,784		—
Derivative assets	669		$	—	669		$	—
Total recurring assets at fair value	$	426,307	$	—	$	426,307	$	—

	Recurring Basis Fair Value Measurements
	December 31, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
U.S. Government agencies	$	3,072	$	—	$	3,072	$	—
State, county, and municipal securities	44,088		$	—	44,088		$	—
Mortgage-backed securities	365,877		—		365,877		—
Corporate debt securities	24,717		—		24,717		—
Derivative assets	1,067		$	—	1,067		$	—
Total recurring assets at fair value	$	438,821	$	—	$	438,821	$	—

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
Description September 30, 2017 Level 1 Level 2 Level 3
Impaired loans $ 19,561
$ —
$ —
$ 19,561
Other real estate 1,931
—
—
1,931
Assets held for sale 1,100
—
1,100
—

Assets / Liabilities
Measured at Fair Value at

Fair Value Measurements
at December 31, 2016
Description December 31, 2016 Level 1 Level 2 Level 3
Impaired loans $ 26,956
$ —
$ —
$ 26,956
Other real estate 2,175
—
—
2,175

The following table presents the fair value measurements of certain assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands):



	Nonrecurring Basis Fair Value Measurements
	June 30, 2019
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	4,307	$	—	$	—	$	4,307
Loans held for sale	10,304		—		10,304		—
Other real estate	387		—		—		387
Assets held for sale	1,024		—		1,024		—
Total nonrecurring assets at fair value	$	16,022	$	—	$	11,328	$	4,694

	Nonrecurring Basis Fair Value Measurements
	December 31, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	3,086	$	—	$	—	$	3,086
Loans held for sale	23,876		—		23,876		—
Other real estate	1,067		—		—		1,067
Assets held for sale	1,024		—		1,024		—
Total nonrecurring assets at fair value	$	29,053	$	—	$	24,900	$	4,153

The inputs used to determine estimated fair value of impaired loans include market conditions, loan terms, underlying collateral characteristics and discount rates. The inputs used to determine fair value of OREO include market conditions, estimated marketing period or holding period, underlying collateral characteristics and discount rates.

For the six months ended June 30, 2019 and the year ended December 31, 2018, there was not a change in the methods and significant assumptions used to estimate fair value for assets carried at fair value.

The following table shows ~~the~~ significant unobservable inputs used in the fair value measurement of Level 3 ~~assets:~~assets (dollars in thousands):

Fair Value at

Description

September 30, 2017

Technique

Unobservable Inputs

June 30, 2019

Technique

Unobservable Inputs

Impaired loans

19,561

Third party appraisals

Collateral discounts and estimated costs to sell

4,307

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

387

Third party appraisals

Collateral discounts and estimated costs to sell

Fair Value at

Description

December 31, 2016

Technique

Unobservable Inputs

December 31, 2018

Technique

Unobservable Inputs

Impaired loans

26,956

Third party appraisals

Collateral discounts and estimated costs to sell

3,086

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

1,067

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 entire 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~~2019 and December 31, ~~2016 (in~~2018 (dollars in thousands):


									Fair Value Measurements
			Fair Value Measurements at September 30, 2017 Using:						June 30, 2019
	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	$	—	$	—
Cash and cash equivalents									$	243,430	$	243,430	$	—	$	—
Securities available-for-sale	326,222		2,079		324,143		—		425,638		—		425,638		—
Securities held-to-maturity	83,739		—		84,639		—		33,219		—		33,363		—
Other investments	12,200		12,200		—		—
Loans, net	1,210,916		—		—		1,212,881		851,908		—		—		862,519
Cash surrender value of life insurance policies	14,834		—		14,834		—
Derivative asset	855		—		855		—
Derivative assets									669		—		669		—
Cash surrender value of life insurance									15,248		—		15,248		—
Financial liabilities:
Non-interest-bearing deposits	428,183		—		428,183		—		$	399,619	$	—	$	399,619	$	—
Interest-bearing deposits	1,127,752		—		936,173		190,407		1,023,770		—		847,109		178,554
Securities sold under agreements to repurchase	54,875		54,875		—		—		7,816		7,816		—		—
Short-term Federal Home Loan Bank advances	12,500		12,500		—		—
Long-term Federal Home Loan Bank advances	25,110		—		25,215		—
Junior subordinated debentures	22,167		—		22,167		—
FHLB borrowings									27,500		—		27,500		—
Other borrowings									22,167		—		22,167		—

									December 31, 2018
									Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents									$	205,371	$	205,371	$	—	$	—
Available-for-sale securities									437,754		—		437,754		—
Securities held-to-maturity									37,759		—		36,974		—
Loans, net									882,355		—		—		885,054
Derivative assets									1,067		—		1,067		—
Cash surrender value of life insurance									15,135		—		15,135		—
Financial liabilities:
Non-interest-bearing deposits									$	383,167	$	—	$	383,167	$	—
Interest-bearing deposits									1,068,904		—		888,806		177,794
Securities sold under agreements to repurchase									11,220		11,220		—		—
FHLB borrowings									27,500		—		27,500		—
Other borrowings									22,167		—		22,167		—

Fair Value Measurements at
December 31, 2016 Using:

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
$ —
$ —
Securities available-for-sale 341,873
2,059
339,814
—
Securities held-to-maturity 98,211
—
98,261
—
Other investments 11,355
11,355
—
—
Loans, net 1,259,710
—
—
1,263,089
Cash surrender value of life insurance policies 14,335
—
14,335
—
Derivative asset 989
—
989
—
Financial liabilities:

Non-interest-bearing deposits 414,921
—
414,921
—
Interest-bearing deposits 1,164,509
—
1,012,633
150,879
Securities sold under agreements to repurchase 94,461
94,461
—
—
Long-term Federal Home Loan Bank advances 25,424
—
25,808
—
Junior subordinated debentures 22,167
—
22,167
—

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

MidSouth Bancorp, Inc. (the “Company”) is a 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~~Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

Cautionary Statement regarding Forward-Looking Statements

Certain statements included in this ~~Report, other than statements~~report are "forward-looking statements" within the meaning of, ~~historical fact, are forward-looking statements (as such term is defined in~~and subject to the protections of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), 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.~~(the "Exchange Act"). Forward-looking statements include ~~but are not limited~~statements with respect to ~~certain statements under~~our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control and which may cause the ~~captions “Business,” “Risk Factors” and “Management’s Discussion and Analysis~~actual results, performance or achievements of ~~Financial Condition and Results of Operations.”~~the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

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~~2018 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 and Consent Order with the ~~OCC;~~Office of the Comptroller of the Currency;

risk of noncompliance with and further enforcement actions regarding the Bank Secrecy Act and other anti-money laundering statues and regulations;

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~~loanand leases losses (“~~ALL”~~ALLL”), which could result in greater than expected loan losses;

the adequacy of the level of our ~~ALL~~ALLL 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;

that required regulatory, shareholder or other approvals for the Company’s pending merger with Hancock Whitney Corporation are not obtained or the conditions to the parties’ obligations to complete the merger are not satisfied in a timely manner or at all;

mergers and acquisitions, including the degree of success in integrating operations following the Company’s pending merger with Hancock Whitney Corporation and merger integration risk in connection with the Company’s pending merger with Hancock Whitney Corporation such as potential deposit attrition, higher than expected costs, customer loss and business disruption associated with the integration with Hancock Whitney Corporation, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration-related matters;

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

the identified material weaknesses in our internal control over financial reporting;

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~~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,~~do, 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~~There have been no significant ~~judgments and estimates used in the preparation of the consolidated financial statements. Our significant accounting policies are described in the notes~~changes 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~~from those disclosed in our 2018 Annual Report on Form 10-K. The reader should refer to the ~~valuation~~notes to our consolidated financial statements in our 2018 Annual Report on Form 10-K for a full disclosure of ~~goodwill, intangible assets~~all critical accounting policies.

The Company adopted ASU No. 2016-02 Leases (Topic 842). This ASU revised certain aspects of recognition, measurement, presentation and disclosure of leasing transactions.

Pending Merger with Hancock Whitney Corporation

On April 30, 2019, the Company and Hancock Whitney Corporation (“Hancock Whitney”) announced that they had entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for, among other ~~purchase accounting adjustments. We account for acquisitions in accordance with ASC Topic No. 805, which requires~~things, the ~~use~~acquisition of the ~~purchase method of accounting.~~Company by Hancock Whitney (the “Merger”). 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~~terms 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~~Merger Agreement, each share of the ~~purchase price over~~Company’s common stock will convert to the ~~fair~~right to receive 0.2952 shares of Hancock Whitney common stock, $3.33 par value per share, plus cash in lieu of ~~net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If~~fractional shares. Immediately following the ~~fair value of an asset exceeds the carrying amount~~completion of the ~~asset, no charge to goodwill~~merger, the Bank will merge with and into Hancock Whitney’s wholly-owned bank subsidiary, Hancock Whitney Bank, with Hancock Whitney Bank continuing as the surviving bank.

The Merger 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 recognizedsubject to the ~~extent that realization~~satisfaction of ~~such benefits~~customary closing conditions, including regulatory approvals and approval by the Company’s shareholders. For more information on the pending Merger, please refer to the Company’s Current Report on Form 8-K filed with the SEC on May 2, 2019. The Merger Agreement was included as Exhibit 2.1 to the Form 8-K filed on May 2, 2019 and 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 indicatedincorporated 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.reference herein.

Results of Operations

For the Three Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018

Net ~~earnings~~loss available to common shareholders totaled ~~$856,000~~$3.7 million, or $0.22 per share, for the three months ended ~~September~~June 30, ~~2017,~~2019, compared to net ~~earnings~~loss available to common shareholders of ~~$1.6~~$1.5 million, or $0.09 per share, for the three months ended ~~September~~June 30, ~~2016. The third quarter of 2017 included an after-tax gain on sales of securities of $220,000~~2018. Provision for loan loss totaled $4.8 million and ~~a non-recurring after-tax expense of $587,000 related to the branch closures during the quarter. Excluding these non-operating income and expenses, diluted earnings~~$440,000 for the ~~third quarter of 2017 were $0.07 per common share, compared~~three months ended June 30, 2019 and 2018, respectively. The loan loss provisions increased substantially during 2019 primarily due to ~~earnings of $0.14 per diluted share~~a $3.4 million impairment charge for ~~the third quarter of 2016.~~

a shared national healthcare credit.

Fully taxable-equivalent ("FTE") net interest income was ~~$19.0~~$16.0 million for the ~~third~~second quarter of ~~2017,~~2019, a ~~$531,000 increase~~$1.0 million decrease compared to ~~$18.5~~$17.0 million for the ~~third~~second quarter of ~~2016.~~2018, resulting from a $821,000 decrease in interest income and a $216,000 increase in interest expense. Our ~~annualized~~ net interest margin, on a FTE basis, increased 3 basis points in prior year quarterly comparison, from ~~4.17%~~3.97% for the ~~third~~second quarter of ~~2016~~2018 to ~~4.20%~~4.00% for the ~~third~~second quarter of ~~2017. Excluding the impact of purchase accounting adjustments, the FTE margin increased 7 basis points, from 4.05% to 4.12% for the three months ended September 30, 2016 and 2017, respectively.~~2019.

Excluding ~~gain on sales~~remediation expenses of ~~securities of $338,000 in~~$5.3 million for the ~~third~~second quarter of ~~2017,~~2018 and merger-related expenses of $1.1 million for the second quarter 2019, noninterest ~~income decreased $4,000~~expenses increased $480,000 in quarterly comparison.

The third quarter of 2017 included a $903,000 one-time charge related to the closure of 7 branches. Excluding this non-operating expense, noninterest expenses decreased $258,000 in quarterly comparison and consisted primarily of decreases of $192,000 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 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. The provision for loan losses increased $1.4 million in quarterly comparison, from $2.9 million for the three months ended September 30, 2016 to $4.3 million for the three months ended September 30, 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~~2019 and ~~$811,000 for the three months ended September 30, 2016.~~2018, respectively. Dividends on the Series B Preferred Stock were $720,000 for the ~~third quarter of 2017, unchanged from $720,000~~three months ended June 30, 2019 and 2018, respectively. Dividends on the Series C Preferred Stock totaled $90,000 for the ~~third quarter~~three months ended June 30, 2019 and 2018, respectively.

For the Six Months Ended June 30, 2019 and 2018

Net loss available to common shareholders totaled $10.4 million, or $0.62 per share, for the six months ended June 30, 2019, compared to net loss available to common shareholders of ~~2016.~~$1.9 million, or $0.12 per share, for the six months ended June 30, 2018. Provision for loan loss totaled $12.4 million and $440,000 for the six months ended June 30, 2019 and 2018, respectively. The loan loss provisions increased substantially during 2019 primarily due to a $10.4 million impairment charge for a shared national healthcare credit.

FTE net interest income was $31.4 million for the of six months ended June 30, 2019, a $3.0 million decrease compared to $34.4 million for the six months ended June 30, 2018, resulting from a $2.3 million decrease in interest income and a $652,000 million increase in interest expense.Our net interest margin, on a FTE basis, increased 4 basis points in prior year quarterly comparison, from 4.04% for the six months ended June 30, 2018 to 4.08% for the six months ended June 30, 2019.

Excluding remediation expenses of $9.0 million for the six months ended June 30, 2018 and merger-related expenses of $1.1 million for the six months ended June 30, 2019, noninterest expenses increased $2.5 million for the six months ended June 30, 2019 compared to six months ended June 30, 2018.

Dividends on preferred stock totaled $1.6 million for the six months ended June 30, 2019 and 2018, respectively. Dividends on the Series B Preferred Stock were $1.4 million for the six months ended June 30, 2019 and 2018, respectively. Dividends on the Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation (“PSB”) totaled ~~$90,000~~$180,000 for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~$91,000 for the three months ended September 30, 2016.~~

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

We reported a net loss available to common shareholders of $3.7 million, or $0.28 per diluted share, for the nine months ended September 30, 2017, compared to net earnings available to common shareholders of $5.2 million, or $0.46 per diluted share, for the nine months ended September 30, 2016. The first nine months of 2017 included $347,000 of gain on sales of securities. The first nine months of 2017 also included non-operating expenses totaling $3.3 million which consisted of $1.3 million of severance and retention accruals, a $570,000 write-down on assets held for sale, a $465,000 one-time charge related to discontinued branch projects and a $903,000 one-time charge related to the closure of 7 branches. Excluding these non-operating income and expenses, the operating loss per share for the first nine months of 2017 was $0.13.

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

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

Excluding non-operating expenses of $3.3 million 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. The provision for loan losses increased $11.6 million in year-over-year comparison, from $8.0 million for the nine months ended September 30, 2016 to $19.6 million for the nine months ended September 30, 2017, primarily due to the high level of charge-offs and additional impairment charges on nonperforming loans in the second and third quarters of 2017. A $2.1 million income tax benefit was reported for the first nine months of 2017, compared to income tax expense of $3.0 million for the first nine months of 2016.

Net Interest Income

Our primary source of earnings is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other interest-bearing liabilities. Changes in the volume and mix of earning assets and interest-bearing liabilities combined with changes in market rates of interest greatly affect net interest income. Our net interest margin on a taxable equivalent basis, which is net interest income as a percentage of average earning assets, was ~~4.20%~~4.00% and ~~4.17%~~3.97% for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. ~~Tables 1~~Net interest margin on a taxable equivalent basis was 4.08% and 34.04% for the six months ended June 30, 2019 and 2018, respectively. The tables ~~2 and 4~~ below analyze the changes in net interest income in the three and six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016 and the nine months ended September 30, 2017 and 2016, respectively.~~

2018.

FTE net interest income ~~increased $531,000~~decreased $1.0 million in prior year quarterly comparison. Interest income on loans ~~increased $242,000~~decreased $2.3 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 $219.2 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 1732 basis points in prior year quarterly comparison, from ~~5.22%~~5.53% to ~~5.39%~~5.85%. ~~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 million, or 21.0% of total assets at September 30, 2017, versus $440.1 million, or 22.6% of total assets at December 31, 2016. The investment portfolio had an effective duration of 3.1 years and a net unrealized gain of $1.2 million at September 30, 2017. FTE interest income on investments increased ~~$211,000~~$862,000 in prior year quarterly comparison. The average volume of investment securities increased ~~$12.5~~$90.8 million during the three months ended June 30, 2019 compared to same period in ~~prior year quarterly comparison,~~2018 and the average tax equivalent yield on investment securities increased 1324 basis points, from ~~2.52%~~2.54% to ~~2.65%~~2.78%.

The average yield on all earning assets increased 12 basis points in prior year quarterly comparison, from 4.39% for the second quarter of 2018 to 4.51% for the second quarter of 2019.

Interest expense increased $216,000 in comparison. The increase in interest is primarily a result of a $255,000 increase in interest expense on deposits and a $24,000 increase in interest expense on Trust Preferred Securities ("TruPs"), which were partially offset by a $63,000 decrease in interest expense on repurchase agreements and FHLB Borrowings.

FTE net interest income decreased $3.0 million in the first six months of 2019 compared with the same time period in 2018. Interest income on loans decreased $5.3 million over the same time period due to a decrease in the average balance of loans of $238.6 million in prior year semi-annual comparison. The average yield on loans increased 28 basis points in prior year semi-annual comparison, from 5.53% to 5.81%.

FTE interest income on investments increased $1.8 million in the first six months of 2019 compared with the same time period in 2018. The average volume of investment securities increased $47.5 million during the six months ended June 30, 2019 compared to same period in 2018 and the average tax equivalent yield on investment securities increased 56 basis points, from 2.55% to 3.11%.

The average yield on all earning assets increased 617 basis points in prior year ~~quarterly~~ comparison, from ~~4.49%~~4.44% for the ~~third quarter of 2016~~six months ended 2018 to ~~4.55%~~4.61% for the ~~third 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~~six months ended ~~September~~June 30, ~~2016 and 2017, respectively.~~2019.

Interest expense increased ~~$152,000~~$652,000 in ~~prior year quarterly comparison. Increases~~the first six months of 2019 compared with the same time period in 2018. The increase in interest ~~expense included~~is primarily a ~~$179,000~~result of a $698,000 increase in interest expense on deposits and a ~~$42,000~~$91,000 increase in interest expense on ~~variable rate junior subordinated debentures. These increases~~TruPs, which were partially offset by ~~an $87,000~~a $137,000 decrease in interest expense on repurchase ~~agreements. Excluding purchase accounting adjustments on acquired certificates of deposit~~agreements 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.~~Borrowings.

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 basis points, from 4.17% for the third quarter of 2016 to 4.20% for the third quarter of 2017. Excluding purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin increased 7 basis points, from 4.05% for the third quarter of 2016 to 4.12% for the third quarter of 2017.

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 84 basis points to ~~the average yield on loans for the nine~~4.08% as of six months ended ~~September~~June 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% for the nine months ended September 30, 2017,2019 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.same period in 2018.

The following tables shows the relationship between interest revenue and expense and the average balances of interest-earning assets are interest-bearing liabilities as of the dates indicated (in thousands):


Table 1 Consolidated Average Balances, Interest and Rates (in thousands)
Average Balances, Net Interest Income and Yields/Rates															Average Balances, Net Interest Income and Yields/Rates
	Three Months Ended September 30,															Three Months Ended June 30,
	2017							2016								2019						2018
	Average Volume			Interest		Average Yield/Rate		Average Volume			Interest		Average Yield/Rate			Average Balance		Income/Expense		Yield/Rate		Average Balance		Income/Expense		Yield/Rate
Assets
Investment securities¹
Investment securities ⁽¹⁾
Taxable	$	372,648		$	2,276	2.44	%	$	354,770		$	1,983	2.24	%		$	452,396	$	3,100	2.74	%	$	340,080	$	2,093	2.46	%
Tax exempt²	55,129			553		4.01	%	60,544			635		4.20	%
Tax exempt⁽²⁾																22,368		203		3.63	%	43,858		348		3.17	%
Total investment securities	427,777			2,829		2.65	%	415,314			2,618		2.52	%		474,764		3,303		2.78	%	383,938		2,441		2.54	%
Federal funds sold	4,319			13		1.18	%	2,703			3		0.43	%		4,370		30		2.75	%	5,008		21		1.68	%
Time and interest bearing deposits in other banks	94,675			305		1.26	%	64,444			83		0.50	%		209,254		1,224		2.34	%	201,281		912		1.81	%
Other investments	12,098			93		3.07	%	11,253			95		3.38	%		17,629		409		9.28	%	14,924		92		2.47	%
Total loans³	1,254,885			17,329		5.48	%	1,268,270			17,087		5.36	%
Total loans⁽³⁾																890,214		13,023		5.85	%	1,109,371		15,344		5.53	%
Total earning assets	1,793,754			20,569		4.55	%	1,761,984			19,886		4.49	%		1,596,231		17,989		4.51	%	1,714,522		18,810		4.39	%
Allowance for loan losses	(24,001		)					(21,222		)
Nonearning assets	184,591							186,589								132,403						146,384
Total assets	$	1,954,344						$	1,927,351							$	1,728,634					$	1,860,906

Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,118,593		$	1,094	0.39	%	$	1,170,660		$	915	0.31	%		$	1,032,778	$	1,665	0.64	%	$	1,087,746	$	1,410	0.52	%
Securities sold under repurchase agreements	75,654			149		0.78	%	88,560			236		1.06	%		7,356		9		0.49	%	26,230		25		0.38	%
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	%
FHLB borrowings																27,500		74		1.08	%	37,514		120		1.28	%
Other borrowings																22,167		283		5.11	%	22,167		259		4.67	%
Total interest bearing liabilities	1,248,091			1,566		0.50	%	1,306,968			1,414		0.43	%		1,089,801		2,031		0.75	%	1,173,657		1,814		0.62	%
Demand deposits	428,244							391,533
Other liabilities	8,973							9,874								416,443						435,971
Shareholders’ equity	269,034							218,976								222,390						251,278
Total liabilities and shareholders’ equity	$	1,954,342						$	1,927,351							1,728,634						$	1,860,906

Net interest income and net interest spread				$	19,003	4.20	%				$	18,472	4.06	%				$	15,958	3.76	%			$	16,996	3.77	%
Net interest margin													4.17	%						4.00	%					3.97	%

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

⁽²⁾Reflects taxable-equivalent adjustments using the federal statutory rate of 21% as of June 30, 2019 and 2018, respectively, in adjusting interest on tax-exempt securities to a fully taxable basis. The taxable equivalent adjustments included above are $43,000 for 2019 and $74,000 for 2018 for the quarter ended.

⁽³⁾ Interest income includes loan fees of $588,000 for 2019 and $1.1 million for 2018. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis



Average Balances, Net Interest Income and Yields/Rates

	Six Months Ended June 30,
	2019						2018
Assets	Average Balance		Income/Expense		Yield/Rate		Average Balance		Income/Expense		Yield/Rate
Investment securities¹
Taxable	$	409,653	$	6,170	3.01	%	$	336,221	$	4,140	2.46	%
Tax exempt²	21,240		526		4.95	%	47,186		746		3.16	%
Total investment securities	430,893		6,696		3.11	%	383,407		4,886		2.55	%
Federal funds sold	4,928		61		2.48	%	4,993		39		1.56	%
Time and interest bearing deposits in other banks	191,497		2,229		2.33	%	167,299		1,426		1.70	%
Other investments	17,284		505		5.84	%	14,853		179		2.41	%
Total loans³	895,806		26,010		5.81	%	1,134,382		31,359		5.53	%
Total earning assets	1,540,408		35,501		4.61	%	1,704,934		37,889		4.44	%
Nonearning assets	193,947						155,556
Total assets	$	1,734,355					$	1,860,490

Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,037,056	$	3,345	0.65	%	$	1,079,660	$	2,647	0.49	%
Securities sold under repurchase agreements	9,699		23		0.47	%	33,134		66		0.40	%
FHLB borrowings	27,500		155		1.13	%	38,124		249		1.31	%
Other borrowings	22,167		570		5.14	%	22,167		479		4.32	%
Total interest bearing liabilities	1,096,422		4,093		0.75	%	1,173,085		3,441		0.59	%
Other liabilities	415,997						447,460
Shareholders’ equity	221,936						255,170
Total liabilities and shareholders’ equity	$	1,734,355					$	1,875,715

Net interest income and net interest spread			$	31,408	3.81	%			$	34,448	3.85	%
Net interest margin					4.08	%					4.04	%

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

⁽²⁾Reflects taxable-equivalent adjustments using the federal statutory rate of 21% in adjusting interest on tax-exempt securities to a fully taxable basis. The taxable equivalent adjustments included above are $110,000 for 2019 and $153,000 for 2018. ⁽³⁾ Interest income includes loan fees of $1.1 million for 2019 and $2.1 million for 2018. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.


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


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


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

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

Three Months Ended
September 30, 2017 compared to September 30, 2016

Total
Increase

Change
Attributable To
(Decrease) Volume Rates
Taxable-equivalent earned on:
Investment securities
Taxable $ 293
$ 103
$ 190
Tax exempt (82 ) (55 ) (27 )
Federal funds sold 10
3
7
Time and interest bearing deposits in other banks 222
53
169
Other investments (2 ) 7
(9 )
Loans, including fees 242
(182 ) 424
Total 683
(71 ) 754

Interest paid on:

Interest bearing deposits 179
(43 ) 222
Securities sold under repurchase agreements (87 ) (31 ) (56 )
Short-term FHLB advances 19
19
—
Long-term FHLB advances (1 ) (2 ) 1
Junior subordinated debentures 42
—
42
Total 152
(57 ) 209
Taxable-equivalent net interest income $ 531
$ (14 ) $ 545

~~Note: In Table 3, changes due to volume and rate have generally been allocated to volume and rate~~The following tables shows the relative effect on net interest revenue resulting from changes in ~~proportion to~~ the ~~relationship~~average outstanding balances (volume) of interest-earning assets and interest-bearing liabilities and the ~~absolute dollar amounts to~~rates earned and paid by the ~~changes~~ Company on such assets and liabilities (in ~~each.~~thousands).

Table 4
Changes in Taxable-Equivalent Net Interest Income
(in thousands)

Nine Months Ended
September 30, 2017 compared to September 30, 2016

Total
Increase

Change
Attributable To
(Decrease) Volume Rates
Taxable-equivalent earned on:
Investment securities
Taxable $ 1,060
$ 435
$ 625
Tax exempt (231 ) (160 ) (71 )
Federal funds sold 17
1
16
Time and interest bearing deposits in other banks 266
(52 ) 318
Other investments (18 ) 9
(27 )
Loans, including fees 157
(63 ) 220
Total 1,251
170
1,081

Interest paid on:

Interest bearing deposits 277
(215 ) 492
Securities sold under repurchase agreements (83 ) (7 ) (76 )
Short-term FHLB advances (4 ) (34 ) 30
Long-term FHLB advances (3 ) (11 ) 8
Junior subordinated debentures 125
—
125
Total 312
(267 ) 579
Taxable-equivalent net interest income $ 939
$ 437
$ 502



Rate/Volume Analysis on a Taxable Equivalent Basis
	Three Months Ended June 30, 2019 vs. 2018
	Change Attributable to
	Volume			Rate			Change(1)
Interest Income:
Investment securities	$	618		$	244		$	862
Federal funds sold	(16		)	25			9
Time and interest bearing deposits in other banks	40			272			312
Other investments	20			297			317
Loans, including fees	(7,095		)	4,774			(2,321		)
Total interest income	(6,433		)	5,612			(821		)

Interest Expense:
Deposits	(425		)	680			255
Securities sold under repurchase agreements	(39		)	22			(17		)
FHLB advances	(28		)	(18		)	(46		)
Other borrowings	—			24			24
Total interest expense	(492		)	708			216
Net interest income	$	(5,941	)	$	4,904		$	(1,037	)

~~Note: In Table 4, changes~~⁽¹⁾ Amounts shown as increase (decrease) due to changes in either volume or rate includes an allocation of the amount that reflects the interaction of volume and rate ~~have generally been allocated to volume and rate changes in proportion to the relationship of~~changes. This allocation is based on the absolute dollar amounts of change due solely to ~~the~~ changes in ~~each.~~volume or rate.



Rate/Volume Analysis on a Taxable Equivalent Basis
	Six Months Ended June 30, 2019 vs. 2018
	Change Attributable to
	Volume			Rate			Change(1)
Interest Income:
Investment securities	$	655		$	1,155		$	1,810
Federal funds sold	(1		)	23			22
Time and interest bearing deposits in other banks	226			577			803
Other investments	35			291			326
Loans, including fees	(9,385		)	4,036			(5,349		)
Total interest income	(8,470		)	6,082			(2,388		)

Interest Expense:
Deposits	(294		)	992			698
Securities sold under repurchase agreements	(70		)	27			(43		)
FHLB advances	(62		)	(32		)	(94		)
Other borrowings	—			91			91
Total interest expense	(426		)	1,078			652
Net interest income	$	(8,044	)	$	5,004		$	(3,040	)

⁽¹⁾ Amounts shown as increase (decrease) due to changes in either volume or rate includes an allocation of the amount that reflects the interaction of volume and rate changes. This allocation is based on the absolute dollar amounts of change due solely to changes in volume or rate.

Non-interest Income

The following table presents the components of non-interest income (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Service charges on deposits	$	1,854	$	2,065	3,647		4,271
ATM and debit card income	2,044		1,877		3,969		3,661
Credit card income	425		381		946		752
Gain on sale of securities, net	202		—		575		—
Gain on sale of loans, net	—		—		1,274		—
Other charges and fees	265		559		652		1,027
Total non-interest income	$	4,790	$	4,882	$	11,063	$	9,711

Non-interest ~~Income~~

~~Total non-interest~~ income ~~was $5.5 million and $15.8~~decreased $92,000 in quarterly comparison, from $4.9 million for the three ~~and nine-month periods~~months ended ~~September~~June 30, ~~2017, compared~~2018 to ~~$5.2 million and $15.0~~$4.8 million for the ~~same periods in 2016. 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 periods~~months ended ~~September~~June 30, ~~2017 and 2016.~~

Table 5
Non-Interest Income
(in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Service charges on deposit accounts $ 2,463
$ 2,584
$ 7,339
$ 7,404
ATM and debit card income 1,687
1,620
5,156
4,897
Gain on sales of securities, net 338
—
347
20
Mortgage lending 155
190
465
422
Increase in cash value of life insurance 69
106
199
250
Credit card interchange income 299
286
890
809
Credit card merchant fee income 86
67
237
221
Check cashing income 85
—
104
—
Other 304
299
1,016
1,012
Total non-interest income $ 5,486
$ 5,152
$ 15,753
$ 15,035

~~Excluding gain on sales of securities, non-interest income decreased $4,000 in quarterly comparison. A $121,000~~2019. The decrease is due to a $211,000 decrease in service charges on ~~deposit accounts~~deposits and a ~~$35,000~~$294,000 decrease in ~~mortgage lending income were partially~~other charges and fees offset by a ~~$67,000 increase~~$202,000 gain on sale of securities. The decline in ~~ATM/debit card~~service charge and other charges and fees income during the six months ended June 30, 2019 is primarily a result of consumer behavior and ~~an $85,000 increase~~a decline year over year in ~~check cashing income.~~non-interest bearing deposits which is also contributing to the change in service charge income recognized.

~~Excluding gain on sales of securities, non-interest~~Non-interest income increased ~~$391,000~~$1.4 million in ~~year-to-date~~ comparison, from ~~$15.0~~$9.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 to ~~$15.4~~$11.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019. The increase is primarily due to a $1.8 million gain on sale of loans 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 partiallysecurities offset by a ~~$65,000~~$624,000 decrease in service charges on ~~deposit accounts.~~deposits. The decline in service charge income during the six months ended June 30, 2019 is primarily a result of consumer behavior but more so due to the influx of tax refunds during this period. Furthermore, non-interest bearing deposits have declined year over year which is also contributing to the change in service charge income recognized.

Non-interest ~~Expense~~Expenses

The following table presents the components of non-interest expense (in thousands).



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Salaries and employee benefits	8,940		7,916		18,638		15,635
Occupancy expense	2,962		3,193		6,269		6,328
ATM and debit card	682		648		1,306		1,223
Data processing	853		666		1,701		1,331
Loss on transfer of loans to held for sale	—		8		—		883
Legal and professional fees	1,163		1,100		3,046		2,789
Regulatory remediation expense	—		5,323		—		9,249
Merger-related expense	1,149		—		1,149		—
Amortization of core deposit intangibles	256		276		553		553
FDIC Insurance	246		507		477		937
Marketing	259		281		578		476
Corporate development	321		248		690		485
Other	2,018		2,107		4,328		4,256
Total non-interest expense	$	18,849	$	22,273	$	38,735	$	44,145

Total non-interest expense was ~~$17.8 million and $54.6~~$18.8 million for the three ~~and nine-month periods~~months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$17.1~~$22.3 million for the three months ended June 30, 2018. Salaries and ~~$50.9~~employee benefits expense increased $1.0 million for the three months ended June 30, 2019, respectively, from the same periods in ~~2016. Our recurring~~2018 due to continued investment in compliance staffing versus the same period a year ago.

Regulatory remediation expense decreased $5.3 million for the three months ended June 30, 2019, compared with the same period in 2018. The decrease is related to completion of various regulatory remediation projects. This was offset slightly by $1.1 million increase in merger-related expenses.

Total non-interest expense ~~consists of salaries~~was $38.7 million for the six months ended June 30, 2019, compared to $44.1 million for the six months ended June 30, 2018. Salaries and employee benefits ~~occupancy~~ expense ~~ATM and debit card~~increased $3.0 million for the six months ended June 30, 2019 from the same period in 2018 due to continued investment in compliance staffing versus the same period a year ago.

Regulatory remediation expense ~~and other operating~~decreased $9.2 million for the six months ended June 30, 2019 from the same period in 2018. The decrease is related to completion of various regulatory remediation projects. This was offset slightly by $1.1 million increase in merger-related expenses.

~~Table 6 presents non-interest expense for the three and nine-month periods ended September~~

Balance Sheet Review

At June 30, ~~2017 and 2016.~~

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

~~Non-interest expenses increased $645,000~~2019, we had total assets of approximately $1.7 billion, consisting principally of $851.9 million in ~~quarterly comparison. The third quarter~~net loans, loans held for sale of ~~2017 included non-operating expenses totaling $903,000 which consisted~~$10.3 million, $458.9 million in investment securities and, $232.5 million in cash and cash equivalents. Loans held for sale of ~~a one-time charge related~~$10.3 million at June 30, 2019 are anticipated to ~~the closure of 7 branches. Excluding these non-operating expenses, non-interest expense decreased $258,000~~close in quarterly comparison and consisted primarily of decreases of $192,000 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 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. A reclass of certain hosted services subscriptions from corporate development into data processing~~2019. Our liabilities 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 consistedJune 30, 2019 totaled $1.5 billion, consisting primarily of $1.4 billion in deposits. At June 30, 2019, our shareholders' equity was $221.0 million.

At December 31, 2018, we had total assets of approximately $1.7 billion, consisting principally of $882.4 million in net loans, $475.5 million in investment securities and $205.4 million in cash and cash equivalents. Our liabilities at December 31, 2018 totaled $1.5 billion, consisting primarily of $1.45 billion in deposits. At December 31, 2018, our shareholders' equity was $222.0 million.

Investment securities totaled $458.9 million, or 26.8% of total assets at June 30, 2019, versus $475.5 million, or 27.3% of total assets at December 31, 2018. The investment portfolio had an effective duration of 2.13 years, as measured on a ~~$442,000 increase~~100 basis point parallel shock in ~~salaries and benefits costs, a $1.4 million increase in legal and professional fees~~interest rates and a ~~$465,000 increase in data processing costs, which were partially offset by decreases~~net unrealized gain 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.~~$4.2 million at June 30, 2019.

~~Operating salaries and employee benefits costs increased $442,000~~ The following table shows the composition of the Company's loan portfolio (in year-to-date comparison and included a $61,000 increase in salary costs and a $356,000 increase in group health costs. The $61,000 increase in salary costs included $119,000 in sign-on bonuses related to hiring new talent for the Company.thousands).



Composition of Loans
	June 30, 2019			December 31, 2018
Commercial, financial and agricultural	$	226,871		$	267,340
Real estate – construction	77,482			87,506
Real estate – commercial	409,694			368,449
Real estate – residential	126,043			132,435
Consumer and other	39,476			43,506
Lease financing receivable	471			549
Total loans	880,037			899,785
Allowance for loan and lease losses	(28,129		)	(17,430		)
Total loans, net	$	851,908		$	882,355

~~The increase in legal and professional fees is primarily due to increased outsourcing expenses to enhance risk management as well as 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~~Total deposits 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.~~

~~Analysis of Balance Sheet~~

~~Consolidated assets~~2019 remained ~~constant~~stable at ~~$1.9~~$1.4 billion ~~at September 30, 2017 and~~with only a slight decrease when compared to 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.2018. Our stable core deposit base, which excludes time deposits, totaled ~~$1.4~~$1.2 billion or 87.8% and 87.6% of total deposits at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016 and accounted for 87.5% of deposits compared to 90.4% of deposits,~~2018, respectively.

~~Securities available-for-sale totaled $326.2~~FHLB borrowings remained unchanged at $27.5 million at ~~September~~June 30, ~~2017, a decrease of $15.7 million from~~2019 and December 31, 2016. Securities held-to-maturity decreased $14.5 million, from $98.2 million at December 31, 2016 to $83.7 million at September 30, 2017. The investment securities portfolio had an effective duration of 3.1 years and a net unrealized gain of $1.2 million at September 30, 2017.

Total loans decreased $48.1 million during the nine months ended September 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.

Table 7
Composition of Loans
(in thousands)
September 30, 2017 December 31, 2016
Commercial, financial, and agricultural (C&I) $ 447,482
$ 459,574
Real estate – construction 90,088
100,959
Real estate – commercial (CRE) 473,046
481,155
Real estate – residential 155,676
157,872
Installment loans to individuals 63,148
82,660
Lease financing receivable 760
1,095
Other 5,769
767
$ 1,235,969
$ 1,284,082
Less allowance for loan losses (25,053 ) (24,372 )
Net loans $ 1,210,916
$ 1,259,710

Our energy-related loan portfolio at September 30, 2017 totaled $197.8 million, or 16.0% of total loans, down from $237.4 million at December 31, 2016. The majority of MidSouth’s energy lending is focused on oil field service companies. Of the 337 total relationships in our energy-related loan portfolio, 38 relationships totaling $83.4 million were classified, with $27.8 million on nonaccrual status at September 30, 2017. At September 30, 2017, reserves for potential energy-related loan losses approximated 5.5% of energy loans.

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

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

Other assets increased $4.2 million during the nine months ended September 30, 2017, from $10.1 million at December 31, 2016 to $14.4 million at September 30, 2017. The increase in primarily attributable to a $3.1 million increase in income tax receivable from year-end 2016.2018.

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,~~2019, 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~~$57.9 million in projected cash ~~flows~~flow from securities repayments for the remainder of ~~2017~~2019 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,~~2019, we had no borrowings with the FRB-Atlanta. ~~Long-term FHLB-Dallas~~FHLB advances totaled ~~$25.1~~$27.5 million at ~~September~~June 30, ~~2017~~2019 and ~~are fixed rate~~consisted of two advances with rates ranging from 1.99% to 3.49% and have a range of maturities from December 2017 to January 2019. One short-term FHLB-Dallas advance totaled $12.5 million at September 30, 2017. The advance matures in October 2017 and bears an interest rate of 1.39%.on existing swap contracts. Under existing agreements with the FHLB-Dallas, our borrowing capacity totaled ~~$219.6~~$292.5 million at ~~September~~June 30, ~~2017.~~2019. The Bank has the ability to post additional collateral of approximately ~~$171.5~~$356.9 million if necessary to meet liquidity needs. Additionally, ~~$178.9~~$130.7 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta. Unsecured borrowing lines totaling ~~$53.5~~$20.0 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.

The Company holds minor investments in certain limited partnerships. As of June 30, 2019, the Bank had a recorded investment of $5.7 million in these limited partnerships and had committed to fund an additional $6.8 million related to future capital calls that has not been reflected in the consolidated balance sheet.

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.~~2019 and 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~~June 30, ~~2017,~~2019, there were ~~89,875~~89,721 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.~~2019 and 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. 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~~quarter ended ~~September~~June 30, ~~2017,~~2019, 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,~~2019, the Company had ~~$61.5~~$40.8 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 inon January 1, 2019 ~~will be~~was 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~~phased in ~~over time.~~as of January 2019.

At ~~September~~June 30, ~~2017,~~2019, 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 9.08% and a total risk-based capital ratio of 15.61% at June 30, 2019. As of ~~September~~June 30, ~~2017,~~2019, the Company’s Tier 1 leverage ratio was ~~12.84%~~11.53%, Tier 1 capital to risk-weighted assets was ~~17.01%~~18.23%, total capital to risk-weighted assets was ~~18.27%~~19.50% and common equity Tier 1 capital to risk-weighted assets was ~~12.68%~~12.37%. ~~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~~following written, ~~board~~Board approved policies and procedures that govern all credit ~~underwriting and approval~~related activities. Our Chief Credit Officer (“CCO”) is responsible for all credit risk management including credit policy and procedure development, underwriting ~~as well as~~oversight, loan approval, portfolio management which includes the 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~~activities are performed through Relationship Managers, Underwriting Analysts, Special Assets and Portfolio Management groups. We have implemented ongoing portfolio management activities that include specific reviews of the largest credit relationships, past due monitoring, risk rating review and certification, annual credit reviews and loan exception tracking. In addition to the credit 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~~function are ~~supplemented by~~ independent reviews performed by ~~the~~a third party 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.~~review.

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,~~2019, 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~~$113.0 million, or ~~16.0%~~12.8% of total loans with $3.0 million in nonaccrual oil and gas loans. ~~Of the 337 credit relationships in the energy-related loan portfolio, 38 relationships totaling $83.4 million were classified with $27.8 million on nonaccrual status at September 30, 2017.~~

Additionally, we monitor our exposure to CRE loans. At September 30, 2017, CRE loans (including commercial construction and multifamily loans) totaled approximately $537.9 million, 56% of which are secured by owner-occupied commercial properties. Our non-owner occupied CRE loans as a percentage of our 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. Additional information regarding credit quality by loan classification is provided in Note 34 – ~~Credit Quality of~~ Loans ~~and Allowance for Loan Losses~~ and Note 89 – Fair Value Measurement in the notes to the interim consolidated financial statements.

Nonperforming Assets and Allowance for Loan Loss

~~Table 8 summarizes~~The following table sets forth the Company's nonperforming assets ~~for the quarters ending September 30, 2017 and 2016, and December 31, 2016.~~

(in thousands):


Table 8 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (in thousands)
Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing										Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing
	September 30, 2017			December 31, 2016			September 30, 2016				June 30, 2019			December 31, 2018			June 30, 2018
Nonaccrual loans	$	51,289		$	62,580		$	60,522			$	23,287		$	8,920		$	73,538
Loans past due 90 days and over and still accruing	402			268			968				—			—			3
Total nonperforming loans	51,691			62,848			61,490				23,287			8,920			73,541
Other real estate	1,931			2,175			2,317
Other foreclosed assets	234			16			283
Nonperforming loans held for sale											—			20,441			—
Other real estate owned											387			1,067			1,365
Other assets repossessed											8			55			—
Total nonperforming assets	$	53,856		$	65,039		$	64,090			$	23,682		$	30,483		$	74,906

Troubled debt restructurings, accruing	$	1,557		$	152		$	153			$	593		$	1,334		$	1,010

Nonperforming assets to total assets	2.77		%	3.35		%	3.28		%		1.38		%	1.75		%	4.03		%
Nonperforming assets to total loans + ORE + other assets repossessed	4.35		%	5.06		%	5.03		%		2.69		%	3.39		%	7.07		%
ALL to nonperforming loans	48.47		%	38.78		%	37.84		%
ALL to total loans	2.03		%	1.90		%	1.83		%
ALLL to nonperforming loans											120.79		%	195.40		%	31.97		%
ALLL to total loans											3.20		%	1.94		%	2.22		%

QTD charge-offs	$	4,381		$	1,835		$	1,161			$	1,558		$	19,277		$	2,801
QTD recoveries	460			339			151				150			258			505
QTD net charge-offs	$	3,921		$	1,496		$	1,010			$	1,408		$	19,019		$	2,296
Annualized net charge-offs to total loans	1.26		%	0.46		%	0.32		%		0.64		%	8.45		%	0.87		%

Nonperforming assets totaled ~~$53.9~~$23.7 million at ~~September~~June 30, ~~2017,~~2019, a decrease of ~~$11.1~~$6.6 million and $61.2 million from ~~the $65.0 million~~December 31, 2018 and June 30, 2018 reported ~~at year-end 2016 and a~~amounts, respectively. The decrease ~~of $10.2 million~~ from ~~the $64.1 million reported at September~~December 31, 2018 to June 30, ~~2016. The decrease~~2019 is primarily attributable to the ~~payoffs/paydowns~~sale of ~~$38.1~~$16.9 million of nonperforming loans, which was offset by a $13.2 million increase in non-accrual loans ~~and the charge-off of $16.5~~that was due primarily to a $11.4 million of non-accrual loans. These decreases were partially offset by $43.3 million of loans placed on non-accrual during the year. The decrease in non-performing assets reflects our previously announced transition plans that include a more aggressive approach to addressing asset quality.shared national healthcare credit.

Allowance coverage for nonperforming loans was ~~48.47%~~120.79% at ~~September~~June 30, ~~2017~~2019 compared to ~~38.78%~~195.40% at December 31, ~~2016~~2018 and ~~37.84%~~31.97% at ~~September~~June 30, ~~2016.~~2018. The ~~ALL/~~ALLL/total loans ratio ~~increased to 2.03%~~was 3.20% at ~~September~~June 30, ~~2017,~~2019, compared to ~~1.90%~~1.94% at ~~year-end 2016~~December 31, 2018 and ~~1.83%~~2.22% at ~~September~~June 30, ~~2016. Including valuation accounting adjustments on acquired loans, the total adjustments and ALL was 2.13% of loans at September 30, 2017.~~2018. The ratio of annualized net charge-offs to total loans ~~increased to 1.26%~~was 0.64% for the three months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~0.46%~~8.45% for the three months ended December 31, ~~2016,~~2018, and ~~0.32%~~0.87% for the three months ended ~~September~~June 30, ~~2016.~~2018.

Total nonperforming assets to total loans plus ORE and other assets repossessed decreased to ~~4.35%~~2.69% at ~~September~~June 30, ~~2017~~2019 from ~~5.06%~~3.39% at December 31, ~~2016~~2018 and ~~5.03%~~7.07% at ~~September~~June 30, ~~2016.~~2018. Performing troubled debt restructurings (“TDRs”) totaled ~~$1.6 million~~$593,000 at ~~September~~June 30, ~~2017,~~2019, compared to ~~$152,000 at December 31, 2016 and $153,000 at September 30, 2016. Classified assets, including ORE, were $139.7 million at September 30, 2017 compared to $134.2~~$1.3 million at December 31, ~~2016.~~2018 and $1.0 million at June 30, 2018. Additional information regarding impaired loans is included in Note 34 – ~~Credit Quality of~~ Loans ~~and Allowance for Loan Losses~~and Note 89 – 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~~ALLL 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,~~ALLL, 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~~$28.1 million in the ~~ALL~~ALLL as of ~~September~~June 30, ~~2017~~2019 is sufficient to cover probable losses in the loan portfolio.

Impact of Inflation and Changing Prices

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

Non-GAAP Financial Measures

Certain financial information included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations is determined by methods other than in accordance with GAAP. ~~Table 9~~The table 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”~~"diluted earnings per share, operating" and ~~“core net interest margin”~~"operating earnings available to common shareholders". ~~“Core net interest income”~~"Diluted earnings per share, operating" is defined as net ~~interest income excluding net purchase accounting adjustments. “Core net interest margin”~~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 ~~core~~ net ~~interest income expressed as a percentage of average~~ earnings ~~assets.~~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.

Reconciliations of these non-GAAP financial measures to the most directly comparable measures as reported in accordance with GAAP are included in the table below (in thousands):

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

Net interest income (FTE) $ 19,003
$ 18,472
$ 55,725
$ 54,786
Less purchase accounting adjustments (355 ) (493 ) (1,009 ) (1,399 )
Core net interest income, net of purchase accounting adjustments A $ 18,648
$ 17,979
$ 54,716
$ 53,387

Total average earning assets $ 1,793,754
$ 1,761,984
$ 1,778,827
$ 1,761,693
Add average balance of loan valuation discount 1,504
2,634
1,728
2,961
Average earnings assets, excluding loan valuation discount B $ 1,795,258
$ 1,764,618
$ 1,780,555
$ 1,764,654

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

Diluted Earnings Per Share, Operating

Diluted earnings (loss) per share $ 0.05
$ 0.14
$ (0.28 ) $ 0.46
Effect of severance and retention accruals —
—
0.07
—
Effect of one-time charge related to discontinued branch projects —
—
0.02
—
Effect of write-down of assets held for sale —
—
0.03
—
Effect of one-time charge related to closure of branches 0.03
0.04

Effect of gain on sales of securities (0.01 ) —
(0.01 ) —
Diluted earnings (loss) per share, operating $ 0.07
$ 0.14
$ (0.13 ) $ 0.46

Operating Earnings (Loss) Available to Common Shareholders

Net earnings (loss) available to common shareholders $ 856
$ 1,587
$ (3,689 ) $ 5,191
Severance and retention accruals, after-tax —
—
872
—
One-time charge related to discontinued branch projects, after-tax —
—
302
—
Write-down of assets held for sale, after-tax —
—
371
—
One-time charge related to closure of branches, after-tax 587
587

Net gain on sale of securities, after-tax (220 ) —
(226 ) (13 )
Operating earnings (loss) available to common shareholders $ 1,223
$ 1,587
$ (1,783 ) $ 5,178



Reconciliation of Non-GAAP Financial Measures
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating Net (Loss) Income
Net loss available to common shareholders	$	(3,713	)	$	(1,479	)	(10,353		)	(1,928		)
Adjustment items:
Merger-related expense	1,149			—			1,149			—
Regulatory remediation costs	—			5,323			—			9,249
Loans held for sale expense	—			20			—			883
Branch closure expenses	—			—			—			145
Tax effect adjustments	—			(1,122		)	—			(2,108		)
Diluted (loss) earnings, operating	$	(2,564	)	$	2,742		$	(9,204	)	$	6,241

Weighted average number of shares - diluted	16,724			16,526			16,699			16,514
Net loss per diluted share	$	(0.22	)	$	(0.09	)	(0.62		)	(0.12		)
Effect of adjustment items	$	0.05		$	0.24		0.05			0.62
Operating net (loss) income per diluted share	$	(0.15	)	$	0.17		(0.57		)	0.50

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes ~~from the information regarding~~to disclosures impacting market risk from those disclosed under the heading ~~“Funding Sources - Interest~~"Funding Sources-Interest Rate ~~Sensitivity”~~Sensitivity" in ~~the Company’s~~our 2018 Annual Report on Form 10-K. The reader should reference our 2018 Annual Report on Form 10-K for the ~~year ended December 31, 2016.~~full disclosure over quantitative and qualitative market risk.

Item 4. Controls and Procedures.

Evaluation of Disclosure 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 were not effective due to the material weaknesses in the Company’s internal control over financial reporting, as described below.

The management of MidSouth Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with the accounting principles generally accepted in the United States of America. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended.

The Company’s internal control systems are ~~effective~~designed to ensure that ~~information required~~transactions are properly authorized and recorded in the financial records and to safeguard assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system.

As previously disclosed in Part II, Item 9A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, we identified a material weakness in our internal control over income tax reporting. This material weakness relates to an error in the Company’s tax entries for the fourth quarter of 2018 that included a misstatement of the Company’s valuation allowance and a related tax expense of $3.6 million. This error was identified by the ~~Company~~Company’s external auditors after the Company’s books were closed but prior to the public release of the Company’s fourth quarter 2018 earnings statement and the related filing with the SEC. With turnover in ~~reports that it submits under~~ the ~~Exchange Act is recorded, processed, summarized,~~Company’s Accounting Department, lack of a repeatable and ~~reported~~sustainable process for determining tax expense was revealed. The error was corrected in the Company’s fourth quarter 2018 earnings statement and the related filing with the SEC. Management performed a severity assessment to determine the significance of the control deficiency and concluded this was an isolated Material Weakness in the internal controls over the creation of the tax entries caused mainly by personnel turnover within the ~~time periods specified in the Securities and Exchange Commission rules and forms.~~

organization.

During the ~~third~~fourth quarter 2018 review of the Allowance for Loan & Lease Losses (ALLL” process management concluded that while controls were in place, they did not operate effectively with regard to: 1) formal documentation for some of the key management estimates, 2) robust documentation for model updates and methodology changes, and 3) well defined review controls. Management performed a severity assessment to determine the significance of the control deficiencies and concluded that although these issues did not require an audit adjustment, they did aggregate to a level of Material Weakness in the internal controls over the preparation of the ALLL.

The identified material weaknesses did not result in any material misstatement in the Company’s consolidated financial statements.

Remediation Activities

Management is committed to timely remediating the identified weaknesses with appropriate oversight from the Company’s Audit Committee. The Company has commenced efforts to remediate the material weaknesses identified above.

Prior to the end of the first quarter of ~~2017, there~~2019 we engaged Horne, LLC, a tax advisory firm, as a subject matter expert to assist management with ongoing income tax related matters including, but not limited to, preparation of the quarterly and annual income tax analyses and the associated period end journal entries. Additional remediation efforts include the development of an ASC 740, Income Taxes, accounting policy, documentation of internal controls and procedures surrounding income tax accounting and in-house training.

In February 2019, the Company engaged GlassRatner, a specialty financial advisory services firm, to review the internal control structure surrounding the ALLL, as well as the ALLL methodology, policies and procedures, and compliance with Generally Accepted Accounting Principles (GAAP) and regulatory guidance. The ALLL process was ~~no change~~fully analyzed with interviews conducted with key members of Credit and Accounting, including the Chief Credit Officer, the Chief Financial Officer, the Director of Special Assets, Director of SEC Reporting, and other Special Assets employees. As part of the immediate remediation to improve documentation, a more robust ALLL memo for first quarter of 2019 was prepared for submission to the Credit Risk Committee and control procedures for review of model inputs that included loans, impairments, net charge-offs and qualitative factors had redundant reviews to ensure accuracy and completeness. During the second quarter of 2019 updated procedures were developed and approved by the Credit Risk Committee. Additional training was implemented by the Chief Credit Officer

with a newly drafted supplemental procedure guide including job aides for the preparation of the ALLL workbook and its components. Each of these actions improved the overall design of the internal control structure surrounding the ALLL.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2019 based on the criteria for effective internal control established in Internal Control - Integrated Framework issued by the ~~Company’s~~Committee of Sponsoring Organizations of the Treadway Commission in 2013. Given the actions outlined above, management believes these efforts have improved the overall internal control structure and the specific internal control design deficiencies surrounding income taxes and the ALLL. Management has not tested the operating effectiveness of the internal controls over financial reporting surrounding income taxes and the ALLL as of June 30, 2019 and, as such, cannot conclude that ~~has~~the previously reported material weaknesses have been fully remediated. Management will continually assess the effectiveness of the remediation efforts and may determine to take additional measures to address control deficiencies or modify the remediation plan described above.

Changes in Internal Control Over Financial Reporting

Other than as described above, there have been no other changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2019 that have materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial ~~reporting.~~reporting, other than the material weaknesses described above.

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~~Because the market price of Hancock Whitney common stock will fluctuate, the value of the merger consideration to be received by our shareholders may change.

Pursuant to the Agreement and Plan of Merger, dated as of April 30, 2019 (the “Merger Agreement”), between Hancock Whitney and the Company, upon completion of the merger, each share of Company common stock, except for certain shares to be canceled in accordance with Section 1.5(c) of the Merger Agreement, that is ~~in “troubled condition”~~issued and ~~has entered into a formal agreement with~~outstanding immediately prior to the ~~OCC, which subjects us~~effective time, will cease to ~~significant restrictions~~be outstanding and will ~~require us~~be converted automatically into the right to ~~designate~~receive 0.2952 shares of Hancock Whitney common stock, par value $3.33 per share. The closing price of Hancock Whitney common stock on the date that the merger is completed may vary from the closing price of Hancock Whitney common stock on the date Hancock Whitney and the Company announced the signing of the Merger Agreement and the date of the special meeting of the Company’s shareholders regarding the merger. Because the merger consideration is determined by a fixed conversion ratio, at the time of the Company special meeting, Company shareholders will not know or be able to calculate the value of the shares of Hancock Whitney common stock they will receive upon completion of the merger. Any change in the market price of Hancock Whitney common stock prior to completion of the merger may affect the value of the merger consideration that Company shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the companies’ respective businesses, operations and prospects, and regulatory considerations, among other things. Many of these factors are beyond the control of Hancock Whitney and the Company. Company shareholders should obtain current market quotations for shares of Hancock Whitney common stock and Company common stock before voting their shares at the Company special meeting.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

Before the transactions contemplated by the Merger Agreement may be completed, various approvals must be obtained from bank regulatory authorities. In determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the proposal in the relevant geographic markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and the regulations promulgated thereunder; effectiveness of the parties in combating money laundering activities; any significant outstanding supervisory matters; and the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. These regulatory authorities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying completion of the merger or of imposing additional costs or limitations on the combined company following the merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the merger that are not anticipated or cannot be met. Furthermore, such conditions or changes may constitute a materially burdensome regulatory condition that may allow the parties to terminate the Merger Agreement. If the consummation of the merger does not occur, or is delayed, including by a delay in receipt of necessary regulatory approvals, the business, financial condition and results of operations of the Company may be materially and adversely affected.

Failure of the merger to be completed, the termination of the Merger Agreement, or a significant ~~amount of resources to comply with~~delay in the ~~agreement.~~

On June 8, 2017, the Bank was informed by the OCC that the OCC has determined that the Bank is in “troubled condition” for purposes of 12 C.F.R. 5.51, Changes in Directors and Senior Executive Officers, which implements the provisions of Section 914consummation of the ~~Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. 1831i, and, as a result,~~merger could negatively impact the ~~Bank~~Company.

The Merger Agreement is subject to ~~specified restrictions on its operations. The OCC’s determination was based on deficiencies identified~~a number of conditions which must be fulfilled in ~~its examination~~order to complete the merger. These conditions to the consummation of the ~~Bank,~~merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the merger is not completed on or before April 30, 2020, either Hancock Whitney or the Company may choose to terminate the Merger Agreement at any time after that date if the failure of the merger to occur on or before that date is not caused by any breach of the Merger Agreement by the party electing to terminate the Merger Agreement, before or after shareholder approval.

If the merger is not consummated, the ongoing business, financial condition and results of operations of the Company may be materially adversely affected and the market price of the Company’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be consummated. If the consummation of the merger is delayed, the business, financial condition and results of operations of the Company may be materially adversely affected.

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the merger, including ~~but not limited to deficiencies~~the diversion of management attention from pursuing other opportunities and the constraints in ~~asset quality, credit administration and strategic planning. Based~~the Merger Agreement on the ~~troubled condition determination, the Bank is now subject~~ability to make significant changes to the ~~following restrictions~~Company’s ongoing business during the pendency of the merger, could have a material adverse effect on ~~its operations: (1)~~ the ~~Bank must seek approval from~~Company’s business, financial condition and results of operations.

Additionally, the ~~OCC prior~~Company’s business may be adversely impacted by the failure to ~~adding or replacing~~pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger, and the market price of Company common stock might decline to the extent that the current market price reflects a ~~member of its~~market assumption that the merger will be completed. If the Merger Agreement is terminated and the Company’s board of directors seeks another merger or ~~employing or promoting any existing employee as a senior executive officer, and (2) the Bank may not, except under~~business combination, Company shareholders cannot be 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 to monitor compliance with the Agreement and is working to promptly address the requirements of the Agreement. There is no guarantee, however, that the Bank will successfully address the OCC’s concerns in the Agreement or that we will be able to ~~comply~~find a party willing to engage in a transaction on equally or more attractive terms than the merger with ~~it. If we do not comply with the Agreement, we could~~Hancock Whitney.

The Company will be subject to ~~civil monetary penalties, further regulatory sanctions and/~~business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel and customers (including depositors and borrowers) pending the consummation of the merger, as such personnel and customers may experience uncertainty about their future roles and relationships following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with the Company to seek to change existing business relationships with the Company or fail to extend an existing relationship with the Company. In addition, competitors may target the Company’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.

The pursuit of the merger and the preparation for the integration may place a burden on the Company’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, the Merger Agreement restricts each party from taking certain actions without the other ~~enforcement actions.~~party’s consent while the merger is pending. These restrictions could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination proposal to the Company that might result in greater value to Company shareholders.

The Merger Agreement contains provisions that may discourage a third party from pursuing, announcing or submitting a business combination proposal to the Company that might result in greater value to Company shareholders than the merger with Hancock Whitney. These provisions include a general prohibition on the Company from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. Furthermore, if the Merger Agreement is terminated, under certain circumstances, the Company may be required to pay Hancock Whitney a termination fee equal to $8,000,000.

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.~~2019.

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
2.1	Agreement and Plan of Merger, dated as of April 30, 2019, by and between Hancock Whitney Corporation and MidSouth Bancorp, Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on May 2, 2019)

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

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

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

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

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

101	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended ~~September~~June 30, ~~2017,~~2019, 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~~August 9, ~~2017~~2019
	/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)

5157



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (in thousands)
	For the Nine Months Ended September 30,
	2017			2016
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:
Depreciation	4,345			4,431
Accretion of purchase accounting adjustments	(180		)	(569		)
Provision for loan losses	19,600			8,000
Deferred tax benefit	(704		)	(781		)
Amortization of premiums on securities, net	2,128			2,170
Stock-based compensation expense	85			165
Net excess tax benefit from stock-based compensation	379			258
ESOP compensation expense	50			(88		)
Net gain on sale of investment securities	(347		)	(20		)
Net (gain) loss on sale of other real estate owned	(15		)	56
Net write down of other real estate owned	83			130
Write down of assets held for sale	570			—
Net loss (gain) on sale/disposal of premises and equipment	648			(6		)
Change in accrued interest receivable	(121		)	(568		)
Change in accrued interest payable	(12		)	(42		)
Change in other assets & other liabilities, net	(3,236		)	1,152
Net cash provided by operating activities	22,016			21,528

Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale	42,585			47,547
Proceeds from maturities and calls of securities held-to-maturity	12,940			12,629
Proceeds from sale of securities available-for-sale	16,979			6,803
Proceeds from sale of security held-to-maturity	887			—
Purchases of securities available-for-sale	(42,172		)	(49,538		)
Proceeds from sale of other investments	57			600
Purchases of other investments	(902		)	(751		)
Net change in loans	28,649			(12,736		)
Purchases of premises and equipment	(2,940		)	(5,152		)
Proceeds from sale of premises and equipment	249			54
Proceeds from sale of other real estate owned	1,728			2,374
Net cash provided by investing activities	58,060			1,830

Cash flows from financing activities:
Change in deposits	(23,495		)	34,385
Change in securities sold under agreements to repurchase	(39,586		)	9,253
Borrowings on Federal Home Loan Bank advances	25,000			25,000
Repayments of Federal Home Loan Bank advances	(12,546		)	(50,050		)
Proceeds from exercise of stock options	266			—
Proceeds from issuance of common stock	57,834			—
Stock offering expenses	(683		)	—
Payment of dividends on preferred stock	(2,433		)	(1,409		)
Payment of dividends on common stock	(3,538		)	(3,071		)
Net cash provided by financing activities	819			14,108

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

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



	September 30, 2017
	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
GSE mortgage-backed securities	61,578		1,304		22		62,860
Collateralized mortgage obligations: residential	211,808		359		1,958		210,209
Collateralized mortgage obligations: commercial	2,499		—		27		2,472
Mutual funds	2,100		—		21		2,079
Corporate debt securities	23,974		822		4		24,792
	$	325,888	$	2,718	$	2,384	$	326,222



	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
Available-for-sale:
Obligations of state and political subdivisions	$	8,092	$	141	$	5,324	$	211	$	13,416	$	352
GSE mortgage-backed securities	6,168		22		—		—		6,168		22
Collateralized mortgage obligations: residential	118,195		1,153		45,344		805		163,539		1,958
Collateralized mortgage obligations: commercial	—		—		2,472		27		2,472		27
Mutual funds	2,079		21		—		—		2,079		21
Corporate debt securities	2,995		4		—		—		2,995		4
	$	137,529	$	1,341	$	53,140	$	1,043	$	190,669	$	2,384

	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



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



	September 30, 2017
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
			Commercial, financial, and agricultural		Real estate - commercial		Total		% of Total
Pass			$	345,629	$	421,071	$	766,700	83.29	%
Special mention			15,321		8,654		23,975		2.60	%
Substandard			86,523		43,321		129,844		14.11	%
Doubtful			9		—		9		—	%
			$	447,482	$	473,046	$	920,528	100.00	%

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

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
							Real estate - residential		% of Total
Pass							$	149,548	96.06	%
Special mention							1,839		1.18	%
Substandard							4,289		2.76	%
							$	155,676	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
Performing	$	62,791	$	727	$	5,769	$	69,287	99.44	%
Nonperforming	357		33		—		390		0.56	%
	$	63,148	$	760	$	5,769	$	69,677	100.00	%



	September 30, 2017			December 31, 2016
Gross carrying amount	$	11,674		$	11,674
Less accumulated amortization	(7,882		)	(7,053		)
Net carrying amount	$	3,792		$	4,621



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



	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	—



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

Derivative assets	$	855	$	—	$	855	$	—



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

Derivative assets	$	989	$	—	$	989	$	—



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

Interest paid on:
Interest bearing deposits	179			(43		)	222
Securities sold under repurchase agreements	(87		)	(31		)	(56		)
Short-term FHLB advances	19			19			—
Long-term FHLB advances	(1		)	(2		)	1
Junior subordinated debentures	42			—			42
Total	152			(57		)	209
Taxable-equivalent net interest income	$	531		$	(14	)	$	545




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

Interest paid on:
Interest bearing deposits	277			(215		)	492
Securities sold under repurchase agreements	(83		)	(7		)	(76		)
Short-term FHLB advances	(4		)	(34		)	30
Long-term FHLB advances	(3		)	(11		)	8
Junior subordinated debentures	125			—			125
Total	312			(267		)	579
Taxable-equivalent net interest income	$	939		$	437		$	502