UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

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



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

For the transition period from _____ to _____

COMMISSION FILE NUMBER 1-11826

MIDSOUTH BANCORP, INC.

(Exact name of registrant as specified in its charter)



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

102 Versailles Boulevard, Lafayette, Louisiana 70501

(Address of principal executive offices, including zip code)

(337) 237-8343

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒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,~~2018, there were ~~16,548,829~~16,641,105 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.



Part I – Financial Information		43
	Item 1. Financial Statements	43
	Consolidated Balance Sheets	43
	Consolidated Statements of Operations (unaudited)	54
	Consolidated Statements of Comprehensive ~~Income~~Loss (unaudited)	65
	Consolidated Statement of Shareholders’ Equity (unaudited)	76
	Consolidated Statements of Cash Flows (unaudited)	8
	Notes to Interim Consolidated Financial Statements	9
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.	3231
	Forward-Looking Statements	3331
	Critical Accounting Policies	3432
	Results of Operations	3432
	~~Analysis of~~ Balance Sheet Review	4239
	Liquidity and Capital	4340
	Asset Quality	4441
	Non-GAAP Financial Measures	43
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	4844
	Item 4. Controls and Procedures.	4844
Part II – Other Information		4945
	Item 1. Legal Proceedings.	4945
	Item 1A. Risk Factors.	4945
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	4945
	Item 3. Defaults Upon Senior Securities.	4945
	Item 4. Mine Safety Disclosures.	5045
	Item 5. Other Information.	5045
	Item 6. Exhibits.	5046

~~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 per share amounts)							MidSouth Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except per share amounts)
	September 30, 2017 (unaudited)			December 31, 2016 (audited)				September 30, 2018 (unaudited)			December 31, 2017 (audited)
Assets
Cash and due from banks, including required reserves of $6,545 and $6,669, respectively	$	32,199		$	31,687
Interest-bearing deposits in banks	124,591			47,091
Cash and due from banks, including required reserves of $13,843 and $6,741, respectively								$	33,066		$	34,775
Interest-bearing deposits in other banks								261,985			114,839
Federal funds sold	6,333			3,450				7,837			3,350
Securities available-for-sale, at fair value (cost of $325,888 at September 30, 2017 and $344,416 at December 31, 2016)	326,222			341,873
Securities held-to-maturity (fair value of $84,639 at September 30, 2017 and $98,261 at December 31, 2016)	83,739			98,211
Investment securities available-for-sale, at fair value								352,606			309,191
Investment securities held-to-maturity (fair value of $63,581 and $80,920, respectively)								64,893			81,052
Other investments	12,200			11,355				16,508			12,214
Loans held for sale								—			15,737
Loans	1,235,969			1,284,082				962,743			1,183,426
Allowance for loan losses	(25,053		)	(24,372		)		(24,450		)	(26,888		)
Loans, net	1,210,916			1,259,710				938,293			1,156,538
Bank premises and equipment, net	64,969			68,954				56,006			59,057
Accrued interest receivable	7,697			7,576				6,606			8,283
Goodwill	42,171			42,171				42,171			42,171
Intangibles	3,792			4,621				2,685			3,515
Cash surrender value of life insurance	14,834			14,335				15,071			14,896
Other real estate	1,931			2,175				1,022			2,001
Assets held for sale	1,100			—				1,372			3,995
Other assets	14,372			10,131				26,133			19,538
Total assets	$	1,947,066		$	1,943,340			$	1,826,254		$	1,881,152

Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	428,183		$	414,921			$	425,696		$	416,547
Interest-bearing	1,127,752			1,164,509				1,083,433			1,063,142
Total deposits	1,555,935			1,579,430				1,509,129			1,479,689
Securities sold under agreements to repurchase	54,875			94,461				13,676			67,133
Short-term Federal Home Loan Bank advances	12,500			—
Long-term Federal Home Loan Bank advances	25,110			25,424
Junior subordinated debentures	22,167			22,167
FHLB borrowings								27,506			50,021
Other borrowings								22,167			22,167
Other liabilities	8,836			7,482				12,325			8,127
Total liabilities	1,679,423			1,728,964				1,584,803			1,627,137
Commitments and contingencies

Shareholders’ equity:
Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at September 30, 2017 and December 31, 2016	32,000			32,000
Series C Preferred stock, no par value; 100,000 shares authorized, 89,875 and 91,098 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	8,987			9,110
Common stock, $0.10 par value; 30,000,000 shares authorized, 16,548,829 and 11,362,716 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	1,655			1,136
Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding, respectively								32,000			32,000
Series C Preferred stock, no par value; 100,000 shares authorized, 89,725 and 89,875 shares issued and outstanding, respectively								8,972			8,987
Common stock, $0.10 par value; 30,000,000 shares authorized, 16,641,105 and 16,548,829 shares issued and outstanding, respectively								1,664			1,655
Additional paid-in capital	168,322			111,166				169,070			168,412
Unearned ESOP shares	(967		)	(1,233		)		(845		)	(937		)
Accumulated other comprehensive income (loss)	773			(1,010		)
Accumulated other comprehensive loss								(6,972		)	(1,828		)
Retained earnings	56,873			63,207				37,562			45,726
Total shareholders’ equity	267,643			214,376				241,451			254,015
Total liabilities and shareholders’ equity	$	1,947,066		$	1,943,340			$	1,826,254		$	1,881,152

See notes to unaudited consolidated financial statements.


MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (in thousands, except share and per share data)
MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (dollars in thousands, except per share amounts)										MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (dollars in thousands, except per share amounts)
	Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016		2017			2016			2018			2017		2018			2017
Interest income:
Loans, including fees	$	17,329	$	17,087	$	50,682		$	50,525		$	14,590		$	17,329	$	45,948		$	50,682
Securities and other investments:
Taxable	2,276		1,983		7,019			5,959			2,156			2,276		6,296			7,019
Nontaxable	363		416		1,144			1,294			273			363		866			1,144
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
Interest bearing deposits in other banks											1,417			411		3,061			823
Total interest income	20,379		19,667		59,668			58,336			18,436			20,379		56,171			59,668

Interest expense:
Deposits	1,094		915		3,002			2,725			1,602			1,094		4,249			3,002
Securities sold under agreements to repurchase	149		236		619			702			16			149		82			619
Other borrowings and payables	111		93		290			297
Junior subordinated debentures	212		170		632			507
FHLB borrowings											81			111		330			290
Other borrowings											271			212		750			632
Total interest expense	1,566		1,414		4,543			4,231			1,970			1,566		5,411			4,543

Net interest income	18,813		18,253		55,125			54,105			16,466			18,813		50,760			55,125
Provision for loan losses	4,300		2,900		19,600			8,000			4,300			4,300		4,740			19,600
Net interest income after provision for loan losses	14,513		15,353		35,525			46,105			12,166			14,513		46,020			35,525

Non-interest income:
Service charges on deposits	2,463		2,584		7,339			7,404			2,159			2,463		6,430			7,339
Gain on sale of securities, net	338		—		347			20			—			338		—			347
Loss on equity securities, other investments											(16		)	—		(66		)	—
ATM and debit card income	1,687		1,620		5,156			4,897			1,796			1,687		5,457			5,156
Other charges and fees	998		948		2,911			2,714			1,151			998		2,981			2,911
Total non-interest income	5,486		5,152		15,753			15,035			5,090			5,486		14,802			15,753

Non-interest expenses:
Salaries and employee benefits	7,849		8,034		25,989			24,206			7,762			7,849		23,398			25,989
Occupancy expense	3,711		3,635		11,524			10,899			3,077			3,711		9,315			11,524
ATM and debit card expense	654		833		2,088			2,410			653			654		1,876			2,088
Data processing	640		527		1,928			1,463			730			640		2,061			1,928
FDIC insurance	448		365		1,275			1,214			360			448		1,296			1,275
Regulatory remediation expense											5,502			856		14,658			856
Legal and professional fees	1,404		516		2,983			1,335			2,543			548		5,425			2,127
Other	3,053		3,204		8,806			9,387			2,900			3,053		9,644			8,806
Total non-interest expenses	17,759		17,114		54,593			50,914			23,527			17,759		67,673			54,593
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
(Loss)Income before income tax benefit											(6,271		)	2,240		(6,851		)	(3,315		)
Income tax (benefit)expense											(1,373		)	574		(1,644		)	(2,058		)
Net (loss)income											(4,898		)	1,666		(5,207		)	(1,257		)
Dividends on preferred stock	810		811		2,432			2,049			810			810		2,430			2,432
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
Net (loss)income available to common shareholders											$	(5,708	)	$	856	$	(7,637	)	$	(3,689	)

Basic (loss)earnings per common share											$	(0.34	)	$	0.05	$	(0.46	)	$	(0.28	)
Diluted (loss)earnings per common share											$	(0.34	)	$	0.05	$	(0.46	)	$	(0.28	)
Weighted average number of shares outstanding:
Basic	16,395		11,262		13,314			11,260			16,558			16,395		16,531			13,314
Diluted	16,396		11,263		13,318			11,260			16,558			16,396		16,531			13,314
Dividends declared per common share	$	0.01	$	0.09	$	0.19		$	0.27		$	0.01		$	0.01	$	0.03		$	0.19

See notes to unaudited consolidated financial statements.

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

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

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

Unrealized holding (losses) gains arising during the year (335 ) (645 ) 3,224
4,217
Less: reclassification adjustment for gains on sales of securities available-for-sale (338 ) —
(347 ) (20 )
Net change in unrealized gains (losses) on securities available-for-sale (673 ) (645 ) 2,877
4,197
Unrealized gain on derivative instruments designated as cash flow hedges:
Unrealized holding (losses) gains on derivatives arising during the period (7 ) 55
(130 ) 55
Less: reclassification adjustment for gains on derivative instruments (4 ) —
(4 ) —
Net change in unrealized gain on derivative instruments (11 ) 55
(134 ) 55
Total other comprehensive (loss) income, before tax (684 ) (590 ) 2,743
4,252
Income tax effect related to items of other comprehensive (loss) income 240
206
(960 ) (1,488 )
Total other comprehensive (loss) income, net of tax (444 ) (384 ) 1,783
2,764
Total comprehensive income $ 1,222
$ 2,014
$ 526
$ 10,004



MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Loss (unaudited) (dollars in thousands)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net loss	$	(4,898	)	$	1,666		$	(5,207	)	$	(1,257	)
Other comprehensive (loss) income, net of tax:
Net change in unrealized (loss) gains on securities available-for-sale	(2,025		)	(673		)	(6,946		)	2,877
Net change in unrealized gain on derivative instruments	35			(11		)	434			(134		)
Other comprehensive (loss) income, before tax	(1,990		)	(684		)	(6,512		)	2,743
Income tax effect related to items of other comprehensive (loss) income	418			240			1,368			(960		)
Total other comprehensive (loss) income, net of tax	(1,572		)	(444		)	(5,144		)	1,783
Total comprehensive loss	$	(6,470	)	$	1,222		$	(10,351	)	$	526

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)
MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity (unaudited) (dollars in thousands, except per share amounts)																												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 Income (Loss)				Retained Earnings								Preferred Stock						Common Stock							Additional Paid-in Capital				Unearned ESOP Shares				Accumulated Other Comprehensive Loss			Retained Earnings
	Shares		Amount			Shares	Amount						Unearned ESOP Shares			Total					Retained Earnings			Shares			Amount				Shares			Amount							Total					Unearned ESOP Shares				Accumulated Other Comprehensive Loss			Retained Earnings
Balance - December 31, 2016	123,098		$	41,110		11,362,716	$	1,136	Additional Paid-in Capital			$	111,166			$	Accumulated Other Comprehensive Income (Loss)		(1,233	)		$	(1,010	)		$	63,207			$	214,376			123,098		$	41,110			11,362,716		Additional Paid-in Capital			$	1,136			$	111,166		$	(1,233	)		$	(1,010	)		$	63,207	$	214,376
Net loss	—		—			—	—		—				—				—				(1,257		)		(1,257		)
Net earnings																													—			—			—			—				—				—				—			(1,257		)		(1,257		)
Dividends on Series B and Series C preferred stock	—		—			—	—		—				—				—				(2,432		)		(2,432		)		—			—			—			—				—				—				—			(2,432		)		(2,432		)
Dividends on common stock, $0.19 per share	—		—			—	—		—				—				—				(2,645		)		(2,645		)		—			—			—			—				—				—				—			(2,645		)		(2,645		)
Issuance of common stock, net of offering expenses of $683	—		—			5,100,034	510		56,641				—				—				—				57,151
Issuance of common stock																													—			—			5,100,034			510				56,641				—				—			—				57,151
Restricted stock grant	—		—			58,090	6		(6		)		—				—				—				—				—			—			58,090			6				(6		)		—				—			—				—
Conversion of Series C preferred stock to common stock	(1,223	)	(123		)	6,791	1		122				—				—				—				—				(1,223	)		(123		)	6,791			1				122				—				—			—				—
ESOP shares released for allocation	—		—			—	—		50				266				—				—				316				—			—			—			—				50				266				—			—				316
Exercise of stock options	—		—			20,498	2		264				—				—				—				266				—			—			20,498			2				264				—				—			—				266
Vested restricted stock	—		—			700	—		—				—				—				—				—				—			—			700			—				—				—				—			—				—
Stock option and restricted stock compensation expense	—		—			—	—		85				—				—				—				85				—			—			—			—				85				—				—			—				85
Change in accumulated other comprehensive income (loss)	—		—			—	—		—				—				1,783				—				1,783
Change in accumulated other comprehensive income																													—			—			—			—				—				—				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			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			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
Adoption of ASU 2016-01	—		—			—		—			—			—			31			(31		)	—
Net loss	—		—			—		—			—			—			—			(5,207		)	(5,207		)
Dividends on Series B and Series C preferred stock	—		—			—		—			—			—			—			(2,430		)	(2,430		)
Dividends on common stock, $0.03 per share	—		—			—		—			—			—			—			(496		)	(496		)
Restricted stock grant	—		—			80,748		8			(8		)	—			—			—			—
Restricted stock forfeitures	—		—			(38,837	)	(4		)	4			—			—			—			—
Conversion of Series C preferred stock to common stock	(150	)	(15		)	833		—			15			—			—			—			—
ESOP shares released for allocation	—		—			—		—			—			92			—			—			92
ESOP compensation expense	—		—			—		—			31			—			—			—			31
Exercise of stock options	—		—			49,532		5			637			—			—			—			642
Stock option and restricted stock compensation expense	—		—			—		—			(21		)	—			—			—			(21		)
Change in accumulated other comprehensive loss	—		—			—		—			—			—			(5,175		)	—			(5,175		)
Balance, September 30, 2018	121,725		$	40,972		16,641,105		$	1,664		$	169,070		$	(845	)	$	(6,972	)	$	37,562		$	241,451

See notes to unaudited consolidated financial statements.


MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (in thousands)
MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)							MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)
	For the Nine Months Ended September 30,							For the Nine Months Ended September 30,
	2017			2016				2018			2017
Cash flows from operating activities:
Net (loss) earnings	$	(1,257	)	$	7,240
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Net loss								$	(5,207	)	$	(1,257	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	4,345			4,431				3,484			4,345
Accretion of purchase accounting adjustments	(180		)	(569		)		569			(180		)
Provision for loan losses	19,600			8,000				4,740			19,600
Deferred tax benefit	(704		)	(781		)
Deferred tax expense (benefit)								(1,359		)	(704		)
Amortization of premiums on securities, net	2,128			2,170				2,224			2,128
Stock-based compensation expense	85			165				(21		)	85
Net excess tax benefit from stock-based compensation	379			258				163			379
ESOP compensation expense	50			(88		)		31			50
Net gain on sale of investment securities	(347		)	(20		)		—			(347		)
Net (gain) loss on sale of other real estate owned	(15		)	56
Loss on mutual fund								66			—
Proceeds from sale of loans held for sale								15,623			—
Net loss on sale of other real estate owned								67			(15		)
Net write down of other real estate owned	83			130				154			83
Write down of assets held for sale	570			—				—			570
Net loss (gain) on sale/disposal of premises and equipment	648			(6		)
Loss on transfer of loans to held for sale								879			—
Net loss on sale/disposal of premises and equipment								(183		)	648
Change in accrued interest receivable	(121		)	(568		)		1,677			(121		)
Change in accrued interest payable	(12		)	(42		)		(11		)	(12		)
Change in other assets & other liabilities, net	(3,236		)	1,152				3,069			(3,236		)
Net cash provided by operating activities	22,016			21,528				25,965			22,016

Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale	42,585			47,547				38,015			42,585
Proceeds from maturities and calls of securities held-to-maturity	12,940			12,629				15,578			12,940
Proceeds from sale of securities available-for-sale	16,979			6,803				410			16,979
Proceeds from sale of security held-to-maturity	887			—				—			887
Purchases of securities available-for-sale	(42,172		)	(49,538		)		(92,529		)	(42,172		)
Proceeds from sale of other investments	57			600				—			57
Purchases of other investments	(902		)	(751		)		(2,300		)	(902		)
Net change in loans	28,649			(12,736		)		213,002			28,649
Purchases of premises and equipment	(2,940		)	(5,152		)		(1,058		)	(2,940		)
Proceeds from sale of premises and equipment	249			54				808			249
Proceeds from sale of other real estate owned	1,728			2,374				834			1,728
Net cash provided by investing activities	58,060			1,830				172,760			58,060

Cash flows from financing activities:
Change in deposits	(23,495		)	34,385				29,440			(23,495		)
Change in securities sold under agreements to repurchase	(39,586		)	9,253				(53,457		)	(39,586		)
Borrowings on Federal Home Loan Bank advances	25,000			25,000
Repayments of Federal Home Loan Bank advances	(12,546		)	(50,050		)
Borrowings from FHLB								247,500			25,000
Repayments to FHLB								(270,000		)	(12,546		)
Repayments of notes payable								—			—
Proceeds from exercise of stock options	266			—				642			266
Proceeds from issuance of common stock	57,834			—				—			57,834
Stock offering expenses	(683		)	—				—			(683		)
Payment of dividends on preferred stock	(2,433		)	(1,409		)		(2,430		)	(2,433		)
Payment of dividends on common stock	(3,538		)	(3,071		)		(496		)	(3,538		)
Net cash provided by financing activities	819			14,108
Net cash used by financing activities								(48,801		)	819

Net increase in cash and cash equivalents	80,895			37,466
Net increase (decrease) in cash and cash equivalents								149,924			80,895
Cash and cash equivalents, beginning of period	82,228			89,201				152,964			82,228
Cash and cash equivalents, end of period	$	163,123		$	126,667			$	302,888		$	163,123

Supplemental cash flow information:
Interest paid	$	4,555		$	4,274			$	5,422		$	4,555
Income taxes paid	2,500			2,853				—			2,500
Noncash investing and financing activities:
Transfer of loans to other real estate	1,552			690				76			1,552
Transfer of loans to held for sale								221			—
Change in accrued common stock dividends	(859		)	—				1			(859		)
Change in accrued preferred stock dividends	(1		)	640				—			(1		)
Change in unrealized gains/losses on securities available-for-sale, net of tax								(5,518		)	—
Change in unrealized gains on derivative instruments, net of tax								343			—
Cumulative-effect adjustment to retained earnings due to ASU 2016-01, net of tax								31			—
Net change in loan to ESOP	266			(249		)		92			266

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements

September 30, ~~2017~~2018

(Unaudited)

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

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 operation for the period ended September 30, ~~2017 and~~2018 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.~~10-K for the year ended December 31, 2017.

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

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

~~Use of Estimates~~ ~~— The preparation of financial statements~~NOTE 2: ADOPTION OF NEW ACCOUNTING STANDARDS AND RECENT ACCOUNTING PRONOUNCEMENTS

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

~~Summary of Significant Accounting Policies~~ — The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry. There have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our 2016 Annual Report on Form 10-K.2018

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

have a ~~number of occasions, including the December 2016 AICPA National Conference on Current SEC and PCAOB Developments, the requirements to disclose the potential~~ material ~~effects of newly issued standards and the importance of providing investors with this information. Such disclosures should explain the impact the new standard is expected to have~~effect on the Company’s financial ~~statements and how the adoption~~position, result of the new standard will affect comparability. Entities should discuss both quantitative and qualitative information as available when assessing implementation of a new standard. This ASU was effective immediately for public business entities.operations or cash flows.

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

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

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

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

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

Measurement of financial liabilities denominated in a ~~reporting unit with its carrying amount. An entity will then recognize an impairment charge~~foreign currency for ~~the amount by~~ which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The effective date of this Update is for fiscal years beginning on or after December 15, 2020. The Company does not expect ASU 2017-04 to have an impact on its goodwill impairment tests.

~~ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities~~ was issued in response to diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. As such, these amendments reduce the amortization period for certain callable debt securities carried at a premium and require the premium to be amortized over the period not to exceed the earliest call date. These amendments do not apply to securities carried at a discount. The effective date of this Update is for fiscal years beginning on or after December 15, 2018. The Company is currently amortizing premiums of callable debt securities over a period through the earliest call date. As a result, it does not expect ASU 2017-08 to have an impact on its financial position, results of operations or its financial statement disclosures.

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

~~award require an entity to apply modification accounting under Topic 718. The amendments require an entity to account for the effects of a modification unless all of the following conditions are met:~~

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

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

~~The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.~~

~~The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.~~

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

Adoption of New Accounting Standards —ASU ~~2017-12, Derivatives~~2016-01, Financial Statements - Overall (Subtopic 825-10): Recognition and ~~Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~Measurement of Financial Assets and Financial Liabilities was issued in January 2016 to ~~better align a company's~~address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard impacts how the Company measures certain equity investments and discloses and presents certain financial instruments through the application of the “exit price” notion. The Company adopted the amendments beginning January 1, 2018. Under the new guidance, equity investments can no longer be classified as trading or available for sale (AFS), and related unrealized holding gains and losses can no longer be recognized in OCI. Per the ASU, such equity investments should be measured at fair value, with adjustments recognized in earnings at the end of each reporting ~~for hedging activities~~period. As such, the Company reclassified its portfolio of equity investments previously classified as AFS investment securities to “other investments.” As these equity investments were previously measured at fair value, implementation of the ASU did not impact the Company’s valuation method. In accordance with the ~~economic objectives of those activities. The effective date of this Update is~~ASU, the cumulative-effect adjustment from AOCI to retained earnings for ~~fiscal years beginning after December 15, 2018, with early~~previously recorded fair value adjustments related to these equity investments at adoption ~~including adoption in an interim period, permitted.~~was immaterial. The Company ~~plans~~elected the practical expedient measurement alternative to ~~adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method~~prospectively account for other equity investments that do not have readily determinable fair values at cost less impairment plus or minus observable price changes in ~~which the Company will recognize the cumulative effect~~orderly transactions for an identical or similar investment of the ~~change~~same issuer. The investments are immaterial overall and are classified within “other investments” on the ~~opening balance of each affected component of equity in the~~Company’s consolidated balance ~~sheet~~sheets rather than as of the date of adoption. While the Company continues to assess all potential impacts of the standard, adoption of this Update is not expected to have a material impact on the Company's consolidated financial statements.available-for-sale securities.

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

~~On January 1, 2017, the Company adopted the provisions~~Service charges on deposits - We collect service charges on most of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 requires that all income tax effects associated with share-based payment awards be reported in earnings as an adjustment to income tax expense. Previously, excess tax benefits associated with share-based payments awards were recorded in additional paid-in-capital when the excess tax benefits were realized. The requirement to report those income tax effects in earnings has been applied to settlements occurring on or after January 1, 2017. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. The Company has elected to apply that change in cash flow classificationour non-maturity deposits accounts on a ~~retrospective basis,~~monthly basis. Our fee earned is collected monthly when a particular cycle for a non-maturity deposit account closes. Each cycle is monthly and the fee earned is for our service for the month just closed. Our performance obligations are to process transactions, pay interest (on interest-bearing accounts), collect deposits, and allow access to on-line banking applications and other services ancillary to a banking relationship. Each month when our fee is charged, our obligation is complete. The contract-relationship is a month to month obligation - i.e. our obligation to perform these services would end if the customer closes their deposit account with MidSouth.

ATM and debit card income - ATM fees primarily consist of surcharges assessed to our customers for using a non-Bank ATM or a non-Bank customer using our ATM. Debit card income represents revenues earned from interchange fees, which ~~resulted in~~are earned on debit card transactions conducted with payment networks. Such fees are generally recognized concurrently with the delivery of services on a $258,000 increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statements of cash flows for 2016, as compared to the amounts previously reported.daily basis.

~~2. Investment Securities~~NOTE 3: INVESTMENT SECURITIES

The ~~portfolio~~amortized cost and estimated fair value of available-for-sale investment securities ~~consisted of the following (in~~are as follows (dollars 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



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
September 30, 2018
Available for sale:
State, county, and municipal securities	$	23,775	$	27	$	1,043	$	22,759
Mortgage-backed securities	313,605		468		10,028		304,045
Corporate debt securities	25,566		328		92		25,802
	$	362,946	$	823	$	11,163	$	352,606

December 31, 2017
State, county, and municipal securities	$	23,042	$	209	$	442	$	22,809
Mortgage-backed securities	263,467		915		4,863		259,519
Mutual funds	2,100		—		39		2,061
Corporate debt securities	23,975		837		10		24,802
	$	312,584	$	1,961	$	5,354	$	309,191

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

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



	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
September 30, 2018
Held-to-maturity:
State, county, and municipal securities	$	27,148	$	83	$	149	$	27,082
Mortgage-backed securities	37,745		—		1,246		36,499
	$	64,893	$	83	$	1,395	$	63,581

December 31, 2017
State, county, and municipal securities	$	35,908	$	265	$	22	$	36,151
Mortgage-backed securities	45,144		171		546		$	44,769
	$	81,052	$	436	$	568	$	80,920

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 estimated fair value of debt securities ~~at September 30, 2017~~ by contractual maturity ~~(in~~are summarized in the tables below (dollars in thousands).: Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and collateralized mortgage obligations.



	Amortized Cost		Fair Value
September 30, 2018
Available for sale:
Due in one year or less	$	—	$	—
Due after one year through five years	8,140		8,150
Due after five years through ten years	22,640		22,805
Due after ten years	270,755		261,169
Mortgage-backed securities	61,411		60,482
	$	362,946	$	352,606

Held-to-maturity:
Due in one year or less	$	768	$	767
Due after one year through five years	4,821		4,763
Due after five years through ten years	13,347		13,316
Due after ten years	15,963		15,563
Mortgage-backed securities	29,994		29,172
	$	64,893	$	63,581

The following tables detail the gross unrealized losses and estimated fair value of available for sale and held-to-maturity securities aggregated by category and duration of continuous unrealized loss position at September 30, 2018 and December 31, 2017 (dollars in thousands):



	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
September 30, 2018
Available for sale:
State, county, and municipal securities	$	5,948	$	44	$	12,714	$	999	$	18,662	$	1,043
Mortgage-backed securities	96,704		1,193		179,082		8,835		275,786		10,028
Corporate debt securities	2,908		92		—		—		2,908		92
	$	105,560	$	1,329	$	191,796	$	9,834	$	297,356	$	11,163

December 31, 2017
State, county, and municipal securities	$	596	$	5	$	12,716	$	437	$	13,312	$	442
Mortgage-backed securities	87,390		772		145,696		4,091		233,086		4,863
Mutual funds	2,061		39		—		—		2,061		39
Corporate debt securities	2,990		10		—		—		2,990		10
	$	93,037	$	826	$	158,412	$	4,528	$	251,449	$	5,354

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



	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
September 30, 2018
Held-to-maturity:
State, county, and municipal securities	$	12,645	$	149	$	—	$	—	$	12,645	$	149
Mortgage-backed securities	15,922		226		20,578		1,020		36,500		1,246
	$	28,567	$	375	$	20,578	$	1,020	$	49,145	$	1,395

December 31, 2017
State, county, and municipal securities	$	6,340	$	22	$	—	$	—	$	6,340	$	22
Mortgage-backed securities	13,138		95		12,090		451		25,228		546
	$	19,478	$	117	$	12,090	$	451	$	31,568	$	568

Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality. If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. ~~For~~Effective January 1, 2018, equity securities ~~management reviews~~with readily determinable fair values are measured at fair value with changes in 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 isfair value recognized through ~~other comprehensive~~net income.

As of September 30, ~~2017, 51~~2018, 124 securities had unrealized losses totaling ~~1.29%~~3.50% of the individual securities’ amortized cost basis and ~~0.65%~~2.94% of the Company’s total amortized cost basis. Of the 51124 securities, 1860 had been in an unrealized loss position for over twelve months at September 30, ~~2017.~~2018. These 1860 securities had an amortized cost basis and unrealized loss of ~~$59.0~~$223.2 million and ~~$1.2~~$10.9 million, respectively. The unrealized losses on debt securities at September 30, ~~2017~~2018 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Management identified no impairment related to credit quality. At September 30, ~~2017,~~2018, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized during the three months ended September 30, ~~2017.~~2018.

During the nine months ended September 30, 2018, the Company sold 1 security classified as available-for-sale for $410,000 which resulted in neither a gain nor a loss. During the nine months ended September 30, 2017, the Company sold 16 securities classified as available-for-sale and 1 security classified as held-to-maturity. Of the available-for-sale securities, 13 securities were sold with gains totaling $449,000 and 3 securities were sold at a loss of $109,000 for a net gain of $340,000. The decision to sell the 1 held-to-maturity security, which was sold at a gain of $7,000, was based on the pre-refunding of the bond which would accelerate the maturity of the bond by 15 years with an anticipated call date within six months. ~~During the nine months ended September 30, 2016, the Company sold 2 securities classified as available-for-sale at a gross gain of $20,000.~~

Securities with ~~an aggregate~~a carrying value of approximately ~~$236.3~~$189.4 million ~~and $293.4 million at September 30, 2017 and December 31, 2016, respectively, were pledged~~serve as collateral to secure public ~~funds on deposit~~deposits, securities sold under agreements to repurchase and for other purposes required or permitted by ~~law.~~law at September 30, 2018, compared with $189.0 million at December 31, 2017.

~~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			September 30, 2018			December 31, 2017
Commercial, financial and agricultural	$	447,482		$	459,574		$	295,802		$	435,207
Real estate – construction	90,088			100,959			90,444			90,287
Real estate – commercial	473,046			481,155			394,416			454,051
Real estate – residential	155,676			157,872			136,151			146,751
Installment loans to individuals	63,148			82,660
Consumer and other							45,338			56,398
Lease financing receivable	760			1,095			592			732
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							962,743			1,183,426
Allowance for loan and lease losses							(24,450		)	(26,888		)
Total loans, net							$	938,293		$	1,156,538

The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment. At September 30, ~~2017,~~2018, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio. The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately ~~$197.8~~$128.1 million, or ~~16.0%~~13.3% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At September 30, ~~2017,~~2018, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately ~~$537.9~~$484.9 million, ~~56%~~or 45.5% of total loans, of which 52% are secured by owner-occupied commercial properties. Of the ~~$537.9~~$484.9 million in loans secured by commercial real estate, ~~$20.5~~$24.1 million, or ~~3.8%~~5.0%, were on nonaccrual status at September 30, ~~2017.~~2018.

Allowance for Loan Losses

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

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

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

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

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 is as follows (in thousands):


	September 30, 2017																							September 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	$	16,057		$	585		$	5,384		$	940		$	1,395		$	5		$	6	$	24,372		$	20,577		$	596		$	3,893		$	837		$	982		$	3	$	26,888
Charge-offs	(15,106		)	(70		)	(3,618		)	(293		)	(860		)	—			—		(19,947		)	(6,782		)	(6		)	(1,034		)	(549		)	(606		)	—		(8,977		)
Recoveries	537			—			158			97			235			—			—		1,027			1,628			—			7			1			163			—		1,799
Provision	17,413			28			2,024			(40		)	159			(1		)	18		19,601			2,872			(240		)	687			1,094			327			—		4,740
Ending balance	$	18,901		$	543		$	3,948		$	704		$	929		$	4		$	24	$	25,053		$	18,295		$	350		$	3,553		$	1,383		$	866		$	3	$	24,450
Ending balance: individually evaluated for impairment	$	3,254		$	17		$	904		$	7		$	69		$	1		$	—	$	4,252		$	7,373		$	69		$	105		$	—		$	—		$	—	$	7,547
Ending balance: collectively evaluated for impairment	$	15,647		$	526		$	3,044		$	697		$	860		$	3		$	24	$	20,801		$	10,922		$	281		$	3,448		$	1,383		$	866		$	3	$	16,903

Loans:
Ending balance	$	447,482		$	90,088		$	473,046		$	155,676		$	63,148		$	760		$	5,769	$	1,235,969		$	295,802		$	90,444		$	394,416		$	136,151		$	45,338		$	592	$	962,743
Ending balance: individually evaluated for impairment	$	30,892		$	2,416		$	18,132		$	1,031		$	338		$	34		$	—	$	52,843		$	24,923		$	610		$	23,175		$	—		$	—		$	—	$	48,708
Ending balance: collectively evaluated for impairment	$	416,590		$	87,672		$	454,488		$	154,582		$	62,810		$	726		$	5,769	$	1,182,637		$	270,879		$	89,834		$	371,241		$	136,151		$	45,338		$	592	$	914,035
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	426		$	63		$	—		$	—		$	—	$	489


	September 30, 2016																							September 30, 2017
				Real Estate																							Real Estate
	Coml, Fin, and Agric			Construction			Commercial			Residential			Installment loans to individuals			Lease financing receivable			Other		Total			Coml, Fin, and Agric			Construction			Commercial			Residential			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		$	16,057		$	585		$	5,384		$	940		$	1,401		$	5		$	24,372
Charge-offs	(2,957		)	—			(208		)	(24		)	(991		)	—			—		(4,180		)	(15,106		)	(70		)	(3,618		)	(293		)	(860		)	—			(19,947		)
Recoveries	193			—			115			4			125			—			—		437			537			—			158			97			235			—			1,027
Provision	6,747			(478		)	1,042			(97		)	781			(5		)	10		8,000			17,413			28			2,024			(40		)	177			(1		)	19,601
Ending balance	$	15,251		$	341		$	5,563		$	699		$	1,383		$	9		$	22	$	23,268		$	18,901		$	543		$	3,948		$	704		$	953		$	4		$	25,053
Ending balance: individually evaluated for impairment	$	1,105		$	—		$	2,270		$	194		$	268		$	—		$	—	$	3,837		$	3,254		$	17		$	904		$	7		$	69		$	1		$	4,252
Ending balance: collectively evaluated for impairment	$	14,146		$	341		$	3,293		$	505		$	1,115		$	9		$	22	$	19,431		$	15,647		$	526		$	3,044		$	697		$	884		$	3		$	20,801

Loans:
Ending balance	$	463,031		$	96,365		$	464,853		$	155,653		$	88,537		$	1,449		$	2,912	$	1,272,800		$	447,482		$	90,088		$	473,046		$	155,676		$	68,917		$	760		$	1,235,969
Ending balance: individually evaluated for impairment	$	29,887		$	10		$	28,285		$	1,831		$	464		$	—		$	—	$	60,477		$	30,892		$	2,416		$	18,132		$	1,031		$	338		$	34		$	52,843
Ending balance: collectively evaluated for impairment	$	433,144		$	96,355		$	435,985		$	153,747		$	88,073		$	1,449		$	2,912	$	1,211,665		$	416,590		$	87,672		$	454,488		$	154,582		$	68,579		$	726		$	1,182,637
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	583		$	75		$	—		$	—		$	—	$	658		$	—		$	—		$	426		$	63		$	—		$	—		$	489

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, 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															$	4,814	$	49	$	19,908	$	24,771	$	271,031	$	295,802	$	6
Real estate - construction															1,086		—		176		1,262		89,182		90,444		—
Real estate - commercial															1,200		521		20,009		21,730		372,686		394,416		—
Real estate - residential															1,234		237		1,507		2,978		133,173		136,151		—
Consumer and other															128		61		38		227		45,111		45,338		1
Lease financing receivable															—		—		—		—		592		592		—
															$	8,462	$	868	$	41,638	$	50,968	$	911,775	$	962,743	$	7

	September 30, 2017														December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial, and agricultural	$	2,144	$	512	$	27,161	$	29,817	$	417,665	$	447,482	$	384	$	1,195	$	1,893	$	14,847	$	17,935	$	417,272	$	435,207	$	545
Real estate - construction	335		350		2,416		3,101		86,987		90,088		—		616		—		190		806		89,481		90,287		125
Real estate - commercial	1,804		—		9,749		11,553		461,493		473,046		—		5,889		6,402		4,163		16,454		431,952		448,406		58
Real estate - residential	2,467		28		898		3,393		152,283		155,676		—		1,065		235		559		1,859		144,892		146,751		—
Installment loans to individuals	408		173		215		796		62,352		63,148		18		276		32		34		342		56,056		56,398		—
Lease financing receivable	33		—		—		33		727		760		—		—		—		—		—		732		732		—
Other loans	79		12		—		91		5,678		5,769		—		—		—		—		—		5,645		5,645		—
	$	7,270	$	1,075	$	40,439	$	48,784	$	1,187,185	$	1,235,969	$	402	$	9,041	$	8,562	$	19,793	$	37,396	$	1,146,030	$	1,183,426	$	728

	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

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


	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
Commercial, financial, and agricultural	$	29,337	$	31,461	$	24,919	$	37,418
Real estate - construction	2,416		9		599		66
Real estate - commercial	18,132		28,688		23,468		11,128
Real estate - residential	1,032		1,881		2,450		618
Installment loans to individuals	339		541		40		48
Lease financing receivable	33		—
Other	—		—
	$	51,289	$	62,580	$	51,476	$	49,278

The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately ~~$2.6~~$5.0 million and ~~$2.5~~$2.6 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Interest ~~actually~~ received on non-accrual loans subsequent to their transfer to non-accrual status totaled ~~$201,000~~$253,000 and ~~$128,000~~$201,000 for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

Impaired Loans

Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, are reviewed to determine whether impairment testing is appropriate. All loan relationships with an outstanding commitment balance above a specified threshold are evaluated for potential impairment. All loan relationships with an outstanding commitment balance below the specified threshold are assigned an allowance allocation percentage that is determined by management and adjusted periodically based on certain factors. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is ~~collaterally~~collateral dependent. All impaired loans are reviewed, at a minimum, on a quarterly basis. Existing valuations are reviewed to determine if additional discounts or new appraisals are required. After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance, no specific allocation is reserved.

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


	September 30, 2017										September 30, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	19,853	$	22,105	$	—	$	17,477	$	61	$	7,914	$	12,502	$	—	$	19,153	$	—
Real estate - construction	2,366		2,366		—		1,188		—		254		254		—		127		—
Real estate - commercial	15,371		17,820		—		14,040		—		22,382		23,606		—		11,874		—
Real estate - residential	587		587		—		745		—		—		—		—		151		—
Installment loans to individuals	91		91		—		82		—		—		—		—		—		—
Finance leases	—		—		—		—		—		—		—		—		—		—
Subtotal:	38,268		42,969		—		33,532		61		30,550		36,362		—		31,305		—
With an allowance recorded:
Commercial, financial, and agricultural	11,039		12,071		3,254		13,706		1		17,009		18,928		7,373		15,469		—
Real estate - construction	50		120		17		25		—		356		356		69		178		—
Real estate - commercial	2,761		2,761		904		9,370		—		793		925		105		507		—
Real estate - residential	445		445		7		684		—		—		687		—		158		—
Installment loans to individuals	247		278		69		357		—		—		—		—		24		—
Finance leases	33		33		1		17		—		—		—		—		—		—
Subtotal:	14,575		15,708		4,252		24,159		1		18,158		20,896		7,547		16,336		—
Totals:
Commercial	49,057		54,790		4,159		54,610		62
Construction	2,416		2,486		17		1,213		—
Residential	1,032		1,032		7		1,429		—
Consumer	338		369		69		439		—
Grand total:	$	52,843	$	58,677	$	4,252	$	57,691	$	62


Commercial											48,098		55,961		7,478		47,003		—
Construction											610		610		69		305		—
Residential											—		687		—		309		—
Consumer											—		—		—		24		—
Grand total:											$	48,708	$	57,258	$	7,547	$	47,641	$	—

	December 31, 2016										December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	15,101	$	15,428	$	—	$	18,815	$	90	$	24,659	$	30,630	$	—	$	19,880	$	90
Real estate - construction	9		9		—		23		—		—		—		—		5		—
Real estate - commercial	12,710		12,710		—		9,297		14		10,471		11,965		—		11,590		—
Real estate - residential	903		903		—		1,134		—		302		302		—		602		—
Installment loans to individuals	73		87		—		54		—		—		—		—		37		—
Subtotal:	28,796		29,137		—		29,323		104		35,432		42,897		—		32,114		90
With an allowance recorded:
Commercial, financial, and agricultural	16,372		16,470		4,369		10,781		1		14,119		14,150		7,197		15,245		1
Real estate - construction											66		136		23		33		—
Real estate - commercial	15,979		15,979		2,216		14,992		—		657		657		131		8,318		—
Real estate - residential	923		923		260		730		—		316		316		5		620		—
Installment loans to individuals	468		478		308		419		—		48		50		14		258		—
Subtotal:	33,742		33,850		7,153		26,922		1		15,206		15,309		7,370		24,474		1
Totals:
Commercial	60,162		60,587		6,585		53,885		105		49,906		57,402		7,328		55,033		91
Construction	9		9		—		23		—		66		136		23		38		—
Residential	1,826		1,826		260		1,864		—		618		618		5		1,222		—
Consumer	541		565		308		473		—		48		50		14		295		—
Grand total:	$	62,538	$	62,987	$	7,153	$	56,245	$	105	$	50,638	$	58,206	$	7,370	$	56,588	$	91

Credit Quality

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

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

Special Mention: Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status, and questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable.

Substandard: Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. Currently the borrower maintains the capacity to service the debt. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

Doubtful: Specific weaknesses characterized as Substandard exist that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as Doubtful will usually be placed on non-accrual status. The probability of some loss is extremely high but because of certain important and reasonably specific factors, the amount of loss cannot be determined.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans.

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

September 30, 2017
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
September 30, 2018
Commercial, Financial &
Agricultural	$	236,572	$	18,808	$	40,422	$	—	$	295,802
Real Estate - Construction	89,671		57		716		—		90,444
Real Estate - Commercial	340,452		11,042		42,922		—		394,416
Real Estate - Residential	128,947		988		6,216		—		136,151
Consumer and other	45,241		7		90		—		45,338
Lease Financing Receivable	592		—		—		—		592
Total loans	$	841,475	$	30,902	$	90,366	$	—	$	962,743

December 31, 2017
Commercial, Financial &
Agricultural	$	358,373	$	9,687	$	67,147	$	—	$	435,207
Real Estate - Construction	89,323		600		364		—		90,287
Real Estate - Commercial	416,925		3,823		33,303		—		454,051
Real Estate - Residential	144,250		1,233		1,268		—		146,751
Consumer and other	56,041		—		357		—		56,398
Lease Financing Receivable	699		—		33		—		732
Total loans	$	1,065,611	$	15,343	$	102,472	$	—	$	1,183,426

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, 2018			September 30, 2017
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural	—	$	—	1	$	18

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



	Nine months ended
	September 30, 2018			September 30, 2017
	Number of loans	Pre-modification recorded investment		Number of loans	Pre-modification recorded investment
Commercial, financial and agricultural	—	$	—	6	$	2,002

~~The following table presents TDRs that had a payment default during~~

During the three ~~and nine-month~~month periods ending September 30, 2018 and 2017, ~~and 2016, and~~there were no defaults on any loans that were modified ~~within~~as TDRs during the ~~previous 12~~preceding twelve months. During the three months ended September 30, 2017, there was one loan relationship with a pre-modification balance of $18,000 identified as a troubled debt restructuing as a result of a concession granting reduction in payments. During the nine months ended September 30, 2018 there were no loans modified and identified as a troubled debt restructuring. Comparatively, during the nine months ended, September 30, 2017, there were six loan relationships with a pre-modification balance of $2.0 million identified as a TDR resulting from a concession for a reduction in payments. During the nine months ended September 30, 2018 and 2017, there were no defaults on any loans that were modified as TDRs during the preceding twelve months . The Company defines a payment default as any loan that is greater than 30 days past due or was past due greater than 30 days at any point during the reporting period, or since the date of modification, whichever is shorter.

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

For purposes of the determination of an allowance for loan losses on these TDRs, as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans. As of September 30, ~~2017,~~2018, there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs.

~~4. Intangibles~~

~~A summary of core deposit intangible assets as of September 30, 2017 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~~NOTE 5: DERIVATIVES

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

No ineffectiveness related to the interest rate swaps designated as cash flow hedges was recognized in the consolidated statements of income for the nine months ended September 30, ~~2017.~~2018. The accumulated net after-tax income related to the effective cash flow hedge included in accumulated other comprehensive income is reflected in Note 6 - Other Comprehensive (Loss) Income.

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


		Notional Amounts				Fair Value					Notional Amounts				Fair Value
	Type of Hedge	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		Type of Hedge	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Derivatives designated as hedging instruments:
Interest rate swaps included in other assets	Cash Flow	$	27,500	$	27,500	$	855	$	989	Cash Flow	$	27,500	$	27,500	$	1,513	$	1,078

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

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



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Three Months Ended September 30,				Three Months Ended September 30,
	2018	2017			2018	2017
Interest rate swaps	35	(11	)	Interest Expense	74	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
—



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2018	2017			2018	2017
Interest rate swaps	434	(134	)	Interest Expense	176	4

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

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


	Three Months Ended September 30,																	Three Months Ended September 30,
	2017								2016									2018									2017
	Before Tax Amount			Tax Effect		Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect		Net of Tax Amount
Other comprehensive income (loss):
Other comprehensive (loss) income:
Securities available-for-sale:
Change in unrealized gains during period	$	(335	)	$	118	$	(217	)	$	(645	)	$	225		$	(420	)
Change in unrealized gains/losses during period																		$	(2,025	)	$	425		$	(1,600	)	$	(335	)	$	118	$	(217	)
Reclassification adjustment for gains included in net income	(338		)	119		(219		)	—			—			—			—			—			—			(338		)	119		(219		)
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges	(7		)	2		(5		)	55			(19		)	36			109			(23		)	86			(7		)	2		(5		)
Reclassification adjustment for gains included in net income	(4		)	1		(3		)	(4		)	1			(3		)	(74		)	16			(58		)	(4		)	1		(3		)
Total other comprehensive income (loss)	$	(684	)	$	240	$	(444	)	$	(594	)	$	207		$	(387	)
Total other comprehensive (loss) income																		$	(1,990	)	$	418		$	(1,572	)	$	(684	)	$	240	$	(444	)


	Nine Months Ended September 30,																		Nine Months Ended September 30,
	2017									2016									2018									2017
	Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income:
Other comprehensive (loss) income:
Securities available-for-sale:
Change in unrealized gains during period	$	3,224		$	(1,128	)	$	2,096		$	4,217		$	(1,476	)	$	2,741
Change in unrealized gains/losses during period																			$	(6,946	)	$	1,459		$	(5,487	)	$	3,224		$	(1,128	)	$	2,096
Reclassification adjustment for gains included in net income	(347		)	121			(226		)	(20		)	7			(13		)	—			—			—			(347		)	121			(226		)
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			610			(128		)	482			(130		)	46			(84		)
Reclassification adjustment for gains included in net income	(4		)	1			(3		)	—			—			—			(176		)	37			(139		)	(4		)	1			(3		)
Total other comprehensive income	$	2,743		$	(960	)	$	1,783		$	4,252		$	(1,488	)	$	2,764
Total other comprehensive (loss) income																			$	(6,512	)	$	1,368		$	(5,144	)	$	2,743		$	(960	)	$	1,783

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


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

Gains on derivative instruments:
	$	(4	)	Interest expense	$	—	Interest expense	$	(74	)	Interest expense	$	(4	)	Interest expense
	1			Tax expense	—		Tax expense	14			Tax expense	1			Tax expense
	$	(3	)	Net of tax	$	—	Net of tax	$	(60	)	Net of tax	$	(3	)	Net of tax

Nine Months Ended September 30,
2017 2016
Details about
Accumulated Other
Comprehensive Income (Loss)
Components

Reclassifications Out of
Accumulated Other
Comprehensive Income (Loss)

Income Statement
Line Item
Reclassifications Out of
Accumulated Other
Comprehensive Income (Loss)
Income Statement
Line Item
Unrealized gains and losses on securities available-for-sale:
$ (347 ) Gain on sale of securities, net $ (20 ) Gain on sale of securities, net
121
Tax expense 7
Tax expense
$ (226 ) Net of tax $ (13 ) Net of tax

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



	Nine Months Ended September 30,
	2018				2017
Details about Accumulated Other Comprehensive (Loss) Income Components	Reclassifications Out of Accumulated Other Comprehensive (Loss) Income			Income Statement Line Item	Reclassifications Out of Accumulated Other Comprehensive (Loss) Income			Income Statement Line Item
Unrealized gains and losses on securities available-for-sale:
	$	—		Gain on sale of securities, net	$	(347	)	Gain on sale of securities, net
	—			Tax expense	121			Tax expense
	$	—		Net of tax	$	(226	)	Net of tax

Gains on derivative instruments:
	$	(176	)	Interest expense	$	(4	)	Interest expense
	37			Tax expense	1			Tax expense
	$	(139	)	Net of tax	$	(3	)	Net of tax

~~7. Earnings Per Common Share~~

NOTE 7: EARNINGS PER COMMON SHARE

~~Following~~The following table is a summary of ~~the information used in the~~ computation of earnings 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 September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Net (loss) income	$	(4,898	)	$	1,666	$	(5,207	)	$	(1,257	)
Dividends on preferred stock	810			810		2,430			2,432
Adjusted net loss available to common shareholders	$	(5,708	)	$	856	$	(7,637	)	$	(3,689	)
Weighted average number of common shares outstanding used in computation of basic loss per common share	16,558			16,395		16,531			13,314
Effect of dilutive securities:
Stock options	—			1		—			—
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted loss per share	16,558			16,396		16,531			13,314
Net (loss)/income per common share:
Basic	$	(0.34	)	$	0.05	$	(0.46	)	$	(0.28	)
Diluted	$	(0.34	)	$	0.05	$	(0.46	)	$	(0.28	)

~~Following is~~The Company has reported a ~~summary of~~net loss for the ~~securities that~~three and nine months ended September 30, 2018 as well as the nine months ended September 30, 2017. 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

~~8. Fair Value Measurement~~NOTE 8: FAIR VALUE MEASUREMENT

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

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

Level 2 – ~~Valuation is based upon~~Observable inputs other than Level 1 prices, such as 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~~Unobservable inputs that ~~use at least one~~are supported by little or no market activity and that are significant ~~assumption not observable in~~to the ~~market. These unobservable assumptions reflect estimates~~fair value of ~~assumptions that market participants would use in pricing~~ the ~~asset~~assets or ~~liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.~~liabilities.

~~Following is a description~~The following methods and assumptions were used by the Company in estimating the fair value of ~~valuation methodologies used for~~its assets and liabilities ~~which are either~~ recorded ~~or disclosed~~ at fair ~~value.~~value and for estimating the fair value of its financial instruments.

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

Securities Available-for-Sale—~~Securities available-for-sale~~Fair value of securities available for sale is determined by various valuation methodologies. Where quoted market prices are ~~recorded at~~available in active markets, securities are classified within Level 1 of the fair value ~~on a recurring basis. Fair value measurement is based upon~~hierarchy. If quoted ~~prices, if available. If quoted~~market prices are not available , then fair values are ~~measured~~estimated by using ~~independent~~ pricing models, quoted prices of securities within similar characteristics, or ~~other model-based valuation techniques such as the present value of future~~discounted cash ~~flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.~~flows. Level 12 securities include ~~those traded on~~certain U.S. agency bonds, mortgage-backed securities and debt obligations, and municipal securities. The Level 2 fair value pricing is provided by an independent third party and is based upon similar securities in an active ~~exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers~~market. In certain cases where Level1 or ~~brokers in active over-the-counter market funds. Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent~~

pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are ~~used to value U.S. Agency~~not available, securities mortgage-backed securities, asset-backed securities, municipal securities, single issue trust preferred securities, certain pooled trust preferred securities, collateralized debt obligations and certain equity securities that are ~~not actively traded.~~classified within Level 3 of the hierarchy.

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

Other Investments—~~The carrying value~~FHLB and FRB stock are examples of other investments and do not have readily determinable fair values, as such these investments are carried at original cost basis. It is ~~a reasonable estimate~~not practical to determine the fair values of these investments due to restrictions placed on transferability. These investments are periodically evaluated for impairment based on ultimate recovery of par value or cost basis. The cost basis approximates fair ~~value.~~value for these investments.

Loans—~~For disclosure purposes,~~The fair value for loans held for investment is estimated using an exit price methodology. An exit price methodology considers expected cash flows that take into account contractual loan terms, as applicable, prepayment expectations, probability of default, loss severity in the event of default, recovery lag and, in the case of variable rate loans, expectations for future interest rate movements. These cash flows are present valued at a risk adjusted discount rate, which considers the cost of funding, liquidity, servicing costs, and other factors. Because observable quoted prices seldom exist for identical or similar assets carried in loans held for investment, Level 3 inputs are primarily used to determine fair value exit pricing. The fair value of ~~fixed rate~~impaired loans is estimated ~~by discounting the future~~based on discounted contractual cash flows ~~using~~or underlying collateral values, where applicable. A loan is determined to be impaired if the ~~current rates at which similar~~Company believes it is probable that all principal and interest amounts due according to the terms of the note will not be collected as scheduled. The fair value of impaired loans ~~would be made~~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 ~~borrowers with similar credit ratings. For variable rate~~the provision for loan losses. Losses on impaired loans are charged to the allowance when management believes the uncollectability of a loan is confirmed. Management has determined that the majority of impaired loans are Level 3 assets due to the extensive use of market appraisals.

Cash Surrender Value of Life Insurance—The carrying ~~amount is a reasonable estimate~~value of cash value of bank owned life insurance approximates fair value.

Other Real Estate Owned—The fair value of OREO is determined using certified appraisals and internal evaluations that value the property at its highest and best uses by applying traditional valuation methods common to the industry. The Company does not ~~record loans at fair value on a recurring basis. No adjustment to fair value is taken related to illiquidity discounts. However, from time to time, a loan is considered impaired~~hold any OREO for profit purposes and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management uses one of three methods to measure impairment, which, include collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral or where the loan balance has been charged down to fair value require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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

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

~~Other Real Estate—Other real estate (“ORE”) properties are adjusted to fair value upon transfer of the loans to~~all other real estate ~~and annually thereafter~~is actively marketed for sale. In most cases, management has determined that additional write-downs are required beyond what is calculable from the appraisal to ~~insure other real estate assets are carried~~carry the property 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 valuelevels that would attract buyers. Because this additional write-down 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~~not based on an observable ~~market price or a current appraised value, the Company records the ORE~~inputs, management has determined that OREO should be classified as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the ORE asset as nonrecurring Level 3.

Assets Held For Sale—~~Assets~~The fair value of assets held for sale ~~are carried at~~is determined in 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.~~same manner as OREO noted above.

Derivative Financial Instruments—The Company has entered into derivative financial instruments to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis, performed by an independent third party, reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value of the derivatives is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are ~~determined by~~based on an ~~independent valuation firm and are estimated using prices~~expectation of ~~financial instruments with similar characteristics. As a result, they are classified within Level 2 of the fair value hierarchy.~~future interest rates (forward curves derived from observable market interest rate curves).

Deposits—The ~~fair value~~carrying amount of demand deposits, savings ~~accounts, NOW accounts,~~deposits and ~~money market deposits is the amount payable on demand at the reporting date.~~variable-rate certificates of deposit approximates fair value. The fair value of ~~fixed maturity~~fixed-rate certificates of deposit is estimated ~~by discounting the future~~based on discounted contractual cash flows using ~~the~~interest rates currently being offered for ~~deposits~~certificates 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~~amount of securities sold under agreements to repurchase ~~due to their short-term nature.~~approximates fair value and is classified as Level 1. The carrying amount of variable rate other borrowings approximates fair value and is classified as Level 1. The fair value of fixed rate other borrowings is estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar borrowing arrangements and is classified as Level 2.

~~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~~Other borrowings—The fair value of ~~long-term FHLB advances~~the Company’s trust preferred securities is ~~estimated using a~~based on discounted cash ~~flow analysis that applies interest~~flows using rates ~~currently being offered on similar types of borrowings~~for securities with similar ~~terms.~~terms and remaining maturities and are classified as Level 2.

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

~~Commitments to Extend Credit, Standby Letters of Credit and Credit Card Guarantees~~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.

~~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 ~~(in~~and the level within the fair value hierarchy in which the fair value measurements fall (dollars 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
$ —



	Recurring Basis Fair Value Measurements
	September 30, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
State. county, and municipal securities	$	22,759	$	—	$	22,759	$	—
Mortgage-backed securities	304,045		—		304,045		—
Mutual funds	1,994		1,994
Corporate debt securities	25,802		—		25,802		—
Derivative assets	$	1,513	$	—	$	1,513	$	—
Total recurring assets at fair value	$	356,113	$	1,994	$	354,119	$	—

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
	December 31, 2017
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
State, county, and municipal securities	$	22,809	$	—	$	22,809	$	—
Mortgage-backed securities	259,519		—		259,519		—
Mutual funds	2,061		2,061		—		—
Corporate debt securities	24,802		—		24,802		—
Derivative assets	$	1,078	$	—	$	1,078	$	—
Total recurring assets at fair value	$	310,269	$	2,061	$	308,208	$	—

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
	September 30, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	10,611	$	—	$	—	$	10,611
Other real estate	1,022		—		—		1,022
Assets held for sale	1,372		—		1,372		—
Total nonrecurring assets at fair value	$	13,005	$	—	$	1,372	$	11,633
	Nonrecurring Basis Fair Value Measurements
	December 31, 2017
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	10,227	$	—	$	—	$	10,227
Loans held for sale	15,737		—		15,737		—
Other real estate	2,001		—		—		2,001
Assets held for sale	3,572		—		3,572		—
Total nonrecurring assets at fair value	$	31,537	$	—	$	19,309	$	12,228

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 nine months ended September 30, 2018 and the year ended December 31, 2017, 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

September 30, 2018

Technique

Unobservable Inputs

Impaired loans

19,561

Third party appraisals

Collateral discounts and estimated costs to sell

10,611

Third party appraisals

Collateral discounts and estimated costs to sell

Other real estate

1,931

Third party appraisals

Collateral discounts and estimated costs to sell

1,022

Third party appraisals

Collateral discounts and estimated costs to sell

Fair Value at

Description

December 31, 2016

Technique

Unobservable Inputs

December 31, 2017

Technique

Unobservable Inputs

Impaired loans

26,956

Third party appraisals

Collateral discounts and estimated costs to sell

10,227

Third party appraisals

Collateral discounts and estimated costs to sell

Other real estate

2,175

Third party appraisals

Collateral discounts and estimated costs to sell

2,001

Third party appraisals

Collateral discounts and estimated costs to sell

~~Limitations~~

~~Fair~~The carrying amount and estimated fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, ~~fair value estimates are based on many judgments. These estimates are subjective~~not shown elsewhere 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~~these financial ~~instruments without attempting~~statements, were as follows. The methods used to estimate the fair value of ~~anticipated future business and~~financial instruments at December 31, 2017 approximated an entry price. In accordance with the adoption of ASU 2016-01, the methods utilized to estimate the fair 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~~at June 30, 2018 represent an approximation of ~~the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered~~exit price; however, an actual price derived in ~~the estimates.~~an active market may differ.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows at September 30, ~~2017~~2018 and December 31, ~~2016 (in~~2017 (dollars in thousands):



	Fair Value Measurements
	September 30, 2018
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks, interest-bearing deposits in banks and federal funds sold	$	302,888	$	302,888	$	—	$	—
Available-for-sale securities	352,606				352,606
Securities held-to-maturity	64,893		—		63,581		—
Other investments	16,508		16,508		—		—
Loans, net	938,293		—		—		938,603
Cash surrender value of life insurance	15,071		—		15,071		—
Financial liabilities:
Non-interest-bearing deposits	425,696		—		425,696		—
Interest-bearing deposits	1,083,433		—		981,921		—
Securities sold under agreements to repurchase	13,676		13,676		—		—
FHLB borrowings	27,506		—		27,506		—
Other borrowings	22,167		—		22,167		—


									Fair Value Measurements
			Fair Value Measurements at September 30, 2017 Using:						December 31, 2017
	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	$	—	$	—	$	152,964	$	152,964	$	—	$	—
Securities available-for-sale	326,222		2,079		324,143		—
Available-for-sale securities									309,191		2,061		307,130
Securities held-to-maturity	83,739		—		84,639		—		81,052		—		80,920		—
Other investments	12,200		12,200		—		—		12,214		12,214		—		—
Loans, net	1,210,916		—		—		1,212,881		1,156,538		—		—		1,160,614
Cash surrender value of life insurance policies	14,834		—		14,834		—
Derivative asset	855		—		855		—
Cash surrender value of life insurance									14,896		—		14,896		—
Financial liabilities:
Non-interest-bearing deposits	428,183		—		428,183		—		416,547		—		416,547		—
Interest-bearing deposits	1,127,752		—		936,173		190,407		1,063,142		—		881,139		179,910
Securities sold under agreements to repurchase	54,875		54,875		—		—		67,133		67,133		—		—
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									50,021		—		50,021		—
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 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

Forward-Looking Statements

Certain statements included in this ~~Report, other than statements~~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~~2017 Annual Report on form 10-K and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and the following:

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

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

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

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

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

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

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

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

the ability of the Company to comply with the terms of the formal agreement 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 losses (“ALL”), which could result in greater than expected loan losses;

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

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

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

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

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

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

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

legislative and regulatory changes, including the impact of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of FDIC insurance and other coverage;

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

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

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

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

the ability to manage the risks involved in the foregoing

We can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them ~~does,~~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 2017 Annual Report on Form 10-K. The reader should refer to the ~~valuation~~notes to our consolidated financial statements in our 2017 Annual Report on Form 10-K for a full disclosure of goodwill, intangible assets and other purchase accounting adjustments. We account for acquisitions in accordance with ASC Topic No. 805, which requires the use of the purchase method of accounting. Under this method, we are required to record assets acquired and liabilities assumed at their fair value, including intangible assets. Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions. Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective. Resulting goodwill from an acquisition under the purchase method of accounting represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings. Given the instability of the economic environment, it is reasonably possible that the methodology of the assessment of potential loan losses and goodwill impairment could change in the near-term or could result in impairment going forward.

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

Results of Operations

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

Net ~~earnings~~loss available to common shareholders totaled ~~$856,000~~$5.7 million, or $0.34 per share, for the three months ended September 30, ~~2017,~~2018, compared to net ~~earnings~~income available to common shareholders of ~~$1.6 million~~$856,000, or $0.05 per share, for the three months ended September 30, ~~2016.~~2017. Regulatory remediation costs, after tax, totaled $4.3 million and $556,000 for the three months ended September 30, 2018 and 2017, respectively. The ~~third quarter~~remediation expenses increased substantially during 2018 as a result of having a full year of expenses which consisted primarily of $5.0 million in consulting costs and $400,000 in other outsourcing and legal costs. Comparatively, included in the three months ended September 30, 2017 ~~included an after-tax gain on sales of securities of $220,000 and a non-recurring after-tax expense of $587,000 related to the~~were $903,000 in branch ~~closures during the quarter.~~closure expense. Excluding these non-operating ~~income and~~ expenses, diluted earnings for the third quarter of ~~2017~~2018 were ~~$0.07~~a loss of $1.4 million, or $0.08 per ~~common~~diluted share, compared to ~~earnings~~income of ~~$0.14~~$2.0 million, of $0.12 per diluted share for the third quarter of ~~2016.~~2017.

Fully taxable-equivalent ("FTE") net interest income was $16.5 million for the third quarter of 2018, a $2.5 million decrease compared to $19.0 million for the third quarter of ~~2017, a $531,000 increase compared to $18.5 million for the third quarter of 2016.~~2017. Our annualized net interest margin, on a FTE basis, ~~increased 3~~decreased 27 basis points in prior year quarterly comparison, from ~~4.17% for the third quarter of 2016 to~~ 4.20% for the third quarter of ~~2017. Excluding the impact of purchase accounting adjustments, the FTE margin increased 7 basis points, from 4.05%~~2017 to ~~4.12%~~3.93% for the ~~three months ended September 30, 2016~~third quarter of 2018. Net interest income decreased $2.3 million in quarterly comparison, resulting from a $1.9 million decrease in interest income and ~~2017, respectively.~~a $404,000 increase in interest expense.

Excluding ~~gain on sales~~non-operating expenses of ~~securities~~$5.5 million for the third quarter of ~~$338,000 in~~2018 and $1.8 million for the third quarter of 2017, noninterest ~~income decreased $4,000 in quarterly comparison.~~

~~The third quarter of 2017 included a $903,000 one-time charge related to the closure of 7 branches. Excluding this non-operating expense, noninterest~~ expenses ~~decreased $258,000~~increased $2.0 million 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 $888,000due to a $2.0 million 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.~~expenses. The provision for loan losses ~~increased~~was unchanged in quarterly comparison. A $1.4 million ~~in quarterly comparison, from $2.9 million~~income tax benefit was reported for the ~~three months ended September 30, 2016~~third quarter of 2018, compared to ~~$4.3 million for the three months ended September 30, 2017. Income~~a $574,000 income tax expense ~~decreased $419,000~~reported in ~~quarterly comparison.~~the third quarter of 2017.

Dividends on preferred stock totaled $810,000 for the three months ended September 30, 2018 and 2017, ~~and $811,000 for the three months ended September 30, 2016.~~respectively. Dividends on the Series B Preferred Stock were $720,000 for the third ~~quarter~~quarters of 2018 and 2017, ~~unchanged from $720,000 for the third quarter of 2016.~~respectively. Dividends on the Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation (“PSB”) totaled $90,000 for the three months ended September 30, 2018 and 2017, ~~and $91,000 for the three months ended September 30, 2016.~~respectively.

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

We reported a net loss available to common shareholders of $7.6 million, or $0.46 per diluted share, for the nine months ended September 30, 2018, compared to 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.~~2017. The first nine months of ~~2017 included $347,000 of gain on sales of securities. The first nine months of 2017 also~~2018 included non-operating expenses totaling ~~$3.3~~$15.8 million which consisted of ~~$1.3~~$14.7 million of ~~severance and retention accruals,~~regulatory remediation costs, a ~~$570,000 write-down~~$879,000 loss on ~~assets~~the transfer of loans held for sale, $100,000 on fees related to the bulk loan sale, and a ~~$465,000~~$145,000 one-time charge related to discontinued branch ~~projects and a $903,000 one-time charge related to the closure of 7 branches.~~projects. Excluding these non-operating ~~income and~~ expenses, the operating ~~loss~~earnings per share for the first nine months of ~~2017~~2018 was ~~$0.13.~~$0.29.

FTE net interest income was $51.0 million for the nine months ended September 30, 2018, a $4.7 million decrease compared to $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.~~2017. Our annualized net interest margin, on a FTE basis, was 4.00% for the nine months ended September 30, 2018, compared to 4.19% for the same period in 2017. Net interest income decreased $4.4 million in year-over-year comparison and consisted primarily of a $3.5 million decrease in interest income and an $868,000 increase in interest expense.

Excluding non-operating expenses of $15.8 million for the nine months ended September 30, 2018 and $4.1 million 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~~noninterest expenses increased ~~7 basis points, from 4.04% to 4.11% for the nine months ended September 30, 2016 and 2017, respectively.~~

~~Excluding gains on sales of securities, noninterest income increased $391,000~~$1.4 million in year-over-year comparison and consisted primarily of ~~a $259,000 increase in ATM/debit card income.~~

~~Excluding non-operating expenses~~increases 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~~$0.8 million in ~~data processing costs, which were partially~~other expenses, offset by ~~decreases of $405,000~~$2.2 million in occupancy ~~expense, $330,000 in marketing costs, $391,000 in corporate development, $322,000 in ATM/debit card expense, $203,000 in printing and supplies and $144,000 in expenses on ORE.~~expenses. The provision for loan losses ~~increased $11.6~~decreased $14.9 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 $4.7 million for the ~~high level of charge-offs and additional impairment charges on nonperforming loans in the second and third quarters of 2017.~~nine months ended September 30, 2018. A ~~$2.1~~$1.6 million income tax benefit was reported for the first nine months of ~~2017,~~2018, compared to income tax ~~expense~~benefit of ~~$3.0~~$2.1 million for the first nine months of ~~2016.~~2017.

Net Interest Income

Our primary source of earnings is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other interest-bearing liabilities. Changes in the volume and mix of earning assets and interest-bearing liabilities combined with changes in market rates of interest greatly affect net interest income. Our net interest margin on a taxable equivalent basis, which is net interest income as a percentage of average earning assets, was ~~4.20%~~3.93% and ~~4.17%~~4.20% for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Tables 1 and ~~3 and tables~~ 2 ~~and 4~~ below analyze the changes in net interest income in the three months ended September 30, ~~2017~~2018 and ~~2016 and the nine months ended September 30, 2017 and 2016, respectively.~~

2017.

FTE net interest income ~~increased $531,000~~decreased $2.5 million in prior year quarterly comparison. Interest income on loans ~~increased $242,000~~decreased $2.7 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 $234.1 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 1724 basis points in prior year quarterly comparison, from ~~5.22%~~5.48% to ~~5.39%~~5.72%. ~~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~~decreased $333,000 in prior year quarterly comparison. The average volume of investment securities ~~increased $12.5~~decreased $37.4 million during the three months ended September 30, 2018 compared to same period in ~~prior year quarterly comparison,~~2017 and the average tax equivalent yield on investment securities ~~increased 13~~decreased 9 basis points, from ~~2.52%~~2.65% to ~~2.65%~~2.56%.

The average yield on all earning assets ~~increased 6~~decreased 15 basis points in prior year quarterly comparison, from ~~4.49% for the third quarter of 2016 to~~ 4.55% 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%~~2017 to ~~4.49%~~4.40% for the ~~three-month periods ended September 30, 2016 and 2017, respectively.~~third quarter of 2018.

Interest expense increased ~~$152,000~~$404,000 in ~~prior year~~ quarterly comparison. ~~Increases~~The increase in interest ~~expense included~~is primarily a ~~$179,000~~result of a $508,000 increase in interest expense on deposits and a ~~$42,000~~$59,000 increase in interest expense on ~~variable rate junior subordinated debentures. These increases~~Trust Preferred Securities ("TruPs"), which were partially offset by ~~an $87,000~~a $132,000 decrease in interest expense on repurchase agreements. Excluding purchase accounting adjustments on acquired certificates of deposit and FHLB borrowings, the average rate paid on interest-bearing liabilities was 0.53% for the three months ended September 30, 2017 and 0.46% for the three months ended September 30, 2016.

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

As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin ~~increased 3~~decreased 27 basis points ~~from 4.17% for~~to 3.93% as of September 30, 2018 compared to 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 ofsame period in 2017.

~~In year-to-date comparison,~~ FTE net interest income ~~increased $939,000~~for the nine months ended September 30, 2018 decreased $4.8 million primarily due to ~~an $829,000 increase~~a $4.7 million decline in ~~FTE~~ interest income on loans. Loans decreased $165.0 million during the year, resulting in a yield increase of 29 basis points, from 5.30% to 5.59%. Interest income on investment ~~securities.~~securities decreased $1.4 million. The average volume of investment securities ~~increased $21.7~~decreased $52.4 million in year-over-year comparison, and the average yield on investment securities ~~increased 13~~decreased 12 basis points for the same period. Interest income ~~on loans~~from interest bearing deposits in other banks increased ~~$157,000~~$2.2 million with average volume of interest bearing deposits in other banks up $132.1 million and an increase in average yields to 1.85% up 74 basis points 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~~decreased 4 basis points in year-over-year comparison, from 4.47% at September 30, ~~2016~~2017 to ~~4.53%~~4.43% at September 30, 2017. The purchase accounting adjustments added 8 basis points to the average yield on loans for the nine months ended September 30, 2017 and 13 basis points for the nine months ended September 30, 2016. Net of purchase accounting adjustments, the average yield on earning assets increased 9 basis points, from 4.38% at September 30, 2016 to 4.47% at September 30, 2017.

2018.

Interest expense increased ~~$312,000~~$0.9 million in year-over-year comparison. Increases in interest expense included a ~~$277,000~~$1.2 million 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~~$0.5 million decrease in interest expense on repurchase agreements. The average rate paid on interest-bearing liabilities was ~~0.48%~~0.62% for the nine months ended September 30, ~~2017,~~2018, compared to ~~0.43%~~0.47% 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~~decreased 19 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%~~2017 to ~~4.11%~~4.00% for the nine months ended September 30, ~~2016~~2018.



Table 1 Average Balances, Net Interest Income and Yields/Rates (dollars in thousands)
	Three Months Ended September 30,
	2018						2017
	Average Balance		Income/Expense		Yield/Rate		Average Balance		Income/Expense		Yield/Rate
Assets
Investment securities¹
Taxable	$	347,205	$	2,156	2.48	%	$	372,648	$	2,276	2.44	%
Tax exempt²	43,151		345		3.20	%	55,129		558		4.05	%
Total investment securities	390,356		2,501		2.56	%	427,777		2,834		2.65	%
Federal funds sold	7,250		32		1.77	%	4,319		13		1.18	%
Time and interest bearing deposits in other banks	250,349		1,279		2.04	%	94,675		305		1.26	%
Other investments	15,640		106		2.72	%	12,098		93		3.07	%
Total loans³	1,020,834		14,590		5.72	%	1,254,885		17,329		5.48	%
Total earning assets	1,684,429		18,508		4.40	%	1,793,754		20,574		4.55	%
Nonearning assets	146,405						160,589
Total assets	$	1,830,834					$	1,954,343

Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,083,404	$	1,602	0.59	%	$	1,118,593	$	1,094	0.39	%
Securities sold under repurchase agreements	14,641		16		0.45	%	75,654		149		0.78	%
FHLB borrowings	29,139		81		1.11	%	31,677		111		1.37	%
Other borrowings	22,167		271		4.88	%	22,167		212		3.74	%
Total interest bearing liabilities	1,149,351		1,970		0.69	%	1,248,091		1,566		0.50	%
Demand deposits	420,124						428,244
Other liabilities	11,362						8,973
Shareholders’ equity	249,997						269,035
Total liabilities and shareholders’ equity	$	1,830,834					$	1,954,343

Net interest income and net interest spread			$	16,538	3.71	%			$	19,008	4.05	%
Net interest margin					3.93	%					4.20	%


^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% and 35% as of September 30, 2018 and September 30, 2017, respectively, in adjusting interest on tax-exempt securities to a fully taxable basis. The taxable equivalent adjustments included above are $70,000 for 2018 and $190,000 for 2017 for the quarter ended.


^3.	Interest income includes loan fees of $686,000 for 2018 and $1.0 million for 2017. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.

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

Average
Volume
Interest
Average
Yield/Rate

Average
Volume
Interest
Average
Yield/Rate
Assets
Investment securities¹

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

(21,222 )

Nonearning assets 184,591

186,589

Total assets $ 1,954,344

$ 1,927,351

Liabilities and shareholders’ equity

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

391,533

Other liabilities 8,973

9,874

Shareholders’ equity 269,034

218,976

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

$ 1,927,351

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

4.17 %



Table 2 Average Balances, Net Interest Income and Yields/Rates (dollars in thousands)
	Nine Months Ended September 30,
	2018						2017
	Average Balance		Income/Expense		Yield/Rate		Average Balance		Income/Expense		Yield/Rate
Assets
Investment securities¹
Taxable	$	339,923	$	6,296	2.47	%	$	380,697	$	7,019	2.46	%
Tax exempt²	45,826		1,096		3.19	%	57,436		1,760		4.09	%
Total investment securities	385,749		7,392		2.55	%	438,133		8,779		2.67	%
Federal funds sold	5,754		71		1.64	%	3,823		28		0.97	%
Time and interest bearing deposits in other banks	195,286		2,706		1.85	%	64,124		540		1.11	%
Other investments	15,118		285		2.51	%	11,651		255		2.92	%
Total loans³	1,096,117		45,948		5.59	%	1,261,096		50,682		5.30	%
Total earning assets	1,698,024		56,402		4.43	%	1,778,827		60,284		4.47	%
Nonearning assets	152,472						158,103
Total assets	$	1,850,496					$	1,936,930

Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,080,922	$	4,249	0.52	%	$	1,133,020	$	3,002	0.35	%
Securities sold under repurchase agreements	26,902		82		0.41	%	86,282		619		0.95	%
FHLB borrowings	35,096		330		1.26	%	27,459		290		4.13	%
Other borrowings	22,167		750		4.51	%	22,167		632		3.76	%
Total interest bearing liabilities	1,165,087		5,411		0.62	%	1,268,928		4,543		0.47	%
Demand deposits	423,692						422,656
Other liabilities	9,588						7,218
Shareholders’ equity	252,129						238,128
Total liabilities and shareholders’ equity	$	1,850,496					$	1,936,930

Net interest income and net interest spread			$	50,991	3.81	%			$	55,741	4.00	%
Net interest margin					4.00	%					4.19	%


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

^2.

~~Interest income~~Reflects year-to-date taxable-equivalent adjustments using the federal statutory rate of ~~$190,000 for~~21% and 35% as of September 30, 2018 and September 30, 2017, ~~and $219,000 for 2016 is added to~~respectively, in adjusting interest ~~earned~~ on tax-exempt ~~obligations~~securities to ~~reflect tax~~a fully taxable basis. The taxable equivalent ~~yields using a tax rate of 35%.~~adjustments included above are $230,000 for 2018 and $616,000 for 2017.


^3.	Interest income includes loan fees of ~~$1,008,000~~$2.8 million for ~~2017~~2018 and ~~$969,000~~$2.6 million for ~~2016.~~2017. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.

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

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

(20,214 )

Nonearning assets 181,716

185,276

Total assets $ 1,936,930

$ 1,926,755

Liabilities and shareholders’ equity

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

383,185

Other liabilities 7,218

8,112

Shareholders’ equity 238,128

217,568

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

$ 1,926,755

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

4.19 %

4.15 %


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


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


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

Table 3
Changes in Taxable-Equivalent Net Interest Income
(in thousands)

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 3 Rate/Volume Analysis on a Taxable Equivalent Basis (dollars in thousands)
	Three Months Ended September 30, 2018 vs. 2017									Nine Months Ended September 30, 2018 vs. 2017
	Change Attributable to									Change Attributable to
	Rate			Volume			Change(1)			Rate			Volume			Change(1)
Interest Income:
Investment securities	$	(68	)	$	(265	)	$	(333	)	$	(314	)	$	(1,073	)	$	(1,387	)
Federal funds sold	4			15			19			25			18			43
Time and interest bearing deposits in other banks	419			555			974			522			1,644			2,166
Other investments	2			11			13			(39		)	69			30
Loans, including fees	(810		)	(1,929		)	(2,739		)	2,092			(6,826		)	(4,734		)
Total interest income	(453		)	(1,613		)	(2,066		)	2,286			(6,168		)	$	(3,882	)

Interest Expense:
Deposits	911			(403		)	508			1,390			(143		)	1,247
Securities sold under repurchase agreements	(40		)	(93		)	(133		)	(246		)	(291		)	(537		)
FHLB advances	(58		)	28			(30		)	26			14			40
Other borrowings	105			(46		)	59			118			—			118
Total interest expense	918			(514		)	404			1,288			(420		)	868
Net interest income	$	(1,371	)	$	(1,099	)	$	(2,470	)	$	998		$	(5,748	)	$	(4,750	)

~~Note: In Table 3, 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.

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

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

Non-interest Income

Total non-interest income was $5.1 million for the three months ended September 30, 2018, compared to $5.5 million ~~and~~for the same period in 2017. For the nine months ended September 30, 2018, non-interest income was $14.8 million, compared to $15.8 million for the ~~three and nine-month periods ended September 30, 2017, compared to $5.2 million and $15.0 million for the~~ same ~~periods~~period in ~~2016. Our recurring non-interest income includes service charges on deposit accounts, ATM and debit card income, credit card income and mortgage lending.~~2017.

~~Table 5~~The following table presents the components of non-interest income for the three and nine-month periods ended September 30, 2018 and 2017 ~~and 2016.~~(dollars in thousands):

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



Table 4 Non-Interest Income (dollars in thousands)
	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Service charges on deposit accounts	$	2,159		$	2,463	$	6,430		$	7,339
ATM and debit card income	1,796			1,687		5,457			5,156
Gain on sales of securities, net	—			338		—			347
Loss on equity securities, other investments	(16		)	—		(66		)	—
Other	1,151			998		2,981			2,911
Total non-interest income	$	5,090		$	5,486	$	14,802		$	15,753

~~Excluding gain on sales of securities, non-interest~~Non-interest income decreased ~~$4,000~~approximately $400,000 in quarterly ~~comparison. A $121,000~~comparison, from $5.5 million for the three months ended September 30, 2017 to $5.1 million for the three months ended September 30, 2018. The decrease is primarily due to a decline in service charges on deposit accounts ~~and a $35,000 decrease in mortgage lending income were partially offset by a $67,000 increase in ATM/debit card income and an $85,000 increase in check cashing income.~~of approximately $304,000.

~~Excluding gain on sales of securities, non-interest~~Non-interest income ~~increased $391,000~~decreased approximately $900,000 in year-to-date comparison, from ~~$15.0 million for the nine months ended September 30, 2016 to $15.4~~$15.8 million for the nine months ended September 30, 2017 ~~and consisted primarily~~to $14.8 million for the nine months ended September 30, 2018. The decline in non-interest income is a direct impact of a $259,000 increase in ATM/debit card income, a $104,000 increase in check cashing income, a $43,000 increase in mortgage program fee income and an $81,000 increase in credit card interchange income. These increases were partially offset by a $65,000 decreasethe decline in service charges on deposit ~~accounts.~~accounts during the year of $904,000.

Non-interest Expense

Total non-interest expense was $23.5 million and $67.7 million for the three and nine months ended September 30, 2018, compared to $17.8 million and $54.6 million for the three and ~~nine-month periods~~nine months ended September 30, 2017, compared to $17.1 million and $50.9 million for the same periods in 2016. Our recurring non-interest expense consists of salaries and employee benefits, occupancy expense, ATM and debit card expense and other operating expenses.2017.

~~Table 6~~The following table presents the components of non-interest expense for the three and nine-month periods ended September 30, ~~2017~~2018 and ~~2016.~~2017.

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



Table 5 Non-Interest Expense (dollars in thousands)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Salaries and employee benefits	$	7,762	$	7,849	$	23,398	$	25,989
Occupancy expense	3,077		3,711		9,315		11,524
ATM and debit card	653		654		1,876		2,088
Legal and professional fees	2,543		548		5,425		2,127
FDIC insurance	360		448		1,296		1,275
Data processing	730		640		2,061		1,928
Regulatory remediation costs (non-operating)	5,502		856		14,658		856
Other non-interest expense	2,900		3,053		9,644		8,806
Total non-interest expense	$	23,527	$	17,759	$	67,673	$	54,593

~~Non-interest expenses~~Regulatory remediation expense increased ~~$645,000~~$4.6 million and $13.8 million for the three and nine months ended September 30, 2018, respectively, from the same periods in ~~quarterly comparison.~~2017. The ~~third quarter of 2017 included non-operating expenses totaling $903,000 which consisted of a one-time charge~~increase is related to consulting and outsourcing costs for assistance with addressing and complying with the ~~closure~~terms of 7 branches. Excluding these non-operating expenses, non-interest expense 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 legalthe written regulatory order.

Legal and professional fees increased $2.0 million 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 at the beginning of 2017 caused the fluctuations in those two expense categories. Excluding non-operating expenses of $3.3 million for the ~~first~~three and nine months ~~of 2017, noninterest expenses increased $400,000~~ended September 30, 2018, respectively, from the same periods in ~~year-over-year comparison and consisted~~2017. The increase is primarily ~~of a $442,000~~related to an increase in ~~salaries and benefits costs, a $1.4 million increase in~~services, both legal and professional, ~~fees~~which are also a direct result of management's initiative to address and comply with the terms of the written regulatory order.

Salaries and employee benefits expense decreased $87,000 and $2.6 million for the three and nine months ended September 30, 2018, respectively, from the same periods in 2017. Salaries and employee benefits expense has continued to decline period over period due to efficiencies in the employee base and a ~~$465,000 increase~~reduction of employees due to branch closures and divestitures.

Occupancy expense decreased $634,000 and $2.2 million for the three and nine months ended September 30, 2018, respectively, from the same period in ~~data processing costs, which were partially offset by decreases of $405,000~~2017. The decrease 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.~~is related to ongoing efficiency impacts related to prior period branch closures.

Operating salaries and employee benefits costs increased $442,000 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.Balance Sheet Review

~~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 at the beginning of 2017 caused the fluctuations in those two expense categories for the quarters and years-to-date endedAt September 30, ~~2017~~2018, we had total assets of approximately $1.8 billion, consisting principally of $0.9 billion in net loans, $417.5 million in investment securities and ~~June 30, 2016.~~

~~Analysis of Balance Sheet~~

~~Consolidated assets remained constant at $1.9 billion~~$302.9 million in cash and cash equivalents. Our liabilities at September 30, ~~2017 and~~2018 totaled $1.6 billion, consisting primarily of $1.5 billion in deposits. At September 30, 2018, our shareholders' equity was $0.2 billion.

At December 31, ~~2016. Deposits decreased $23.5 million from year-end 2016. The decrease~~2017, we had total assets of approximately $1.9 billion, consisting principally of $1.2 billion 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 $35.6net loans, $390.2 million in ~~other core~~investment securities and $153.0 million in cash and cash equivalents. Our liabilities at December 31, 2017 totaled $1.6 billion, consisting primarily of $1.5 billion in deposits. ~~These decreases to deposits were partially offset by a $45.8~~At December 31, 2017, our shareholders' equity was $0.3 billion.

Investment securities totaled $417.5 million, ~~increase in brokered certificates~~or 22.9% of ~~deposits. Our stable core deposit base, which excludes time deposits, totaled $1.4 billion~~total assets at September 30, ~~2017 and December 31, 2016 and accounted for 87.5%~~2018, versus $390.2 million, or 20.7% of ~~deposits compared to 90.4% of deposits, respectively.~~

Securities available-for-sale totaled $326.2 million at September 30, 2017, a decrease of $15.7 million from December 31, 2016. Securities held-to-maturity decreased $14.5 million, from $98.2 milliontotal assets at December 31, ~~2016 to $83.7 million at September 30,~~ 2017. The investment ~~securities~~ portfolio had an effective duration of ~~3.1~~3.59 years and a net unrealized ~~gain~~loss of ~~$1.2~~$8.2 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 2017.2018.


Table 7 Composition of Loans (in thousands)
Table 6 Composition of Loans (dollars in thousands)							Table 6 Composition of Loans (dollars in thousands)
	September 30, 2017			December 31, 2016				September 30, 2018			December 31, 2017
Commercial, financial, and agricultural (C&I)	$	447,482		$	459,574
Commercial, financial, and agricultural								$	295,802		$	435,207
Real estate – construction	90,088			100,959				90,444			90,287
Real estate – commercial (CRE)	473,046			481,155
Real estate – commercial								394,416			454,051
Real estate – residential	155,676			157,872				136,151			146,751
Installment loans to individuals	63,148			82,660				45,338			56,398
Lease financing receivable	760			1,095				592			732
Other	5,769			767
	$	1,235,969		$	1,284,082
Total loans								$	962,743		$	1,183,426
Less allowance for loan losses	(25,053		)	(24,372		)		(24,450		)	(26,888		)
Net loans	$	1,210,916		$	1,259,710			$	938,293		$	1,156,538

Our energy-related loan portfolio at September 30, ~~2017~~2018 totaled ~~$197.8~~$128.1 million, or ~~16.0%~~13.3% of total loans, down from ~~$237.4~~$179.7 million, or 15.2% of total loans at December 31, ~~2016.~~2017. The majority of MidSouth’s energy lending is focused on oil field service companies. Of the ~~337~~265 total relationships in our energy-related loan portfolio, 3835 relationships totaling ~~$83.4~~$37.6 million were classified, with ~~$27.8~~$24.3 million on nonaccrual status at September 30, ~~2017.~~2018. At September 30, ~~2017,~~2018, specific reserves for potential energy-related loan losses approximated ~~5.5%~~8.3% of energy loans.

Within the ~~$473.0~~$394.4 million commercial real estate portfolio, ~~$445.4~~$389.6 million is secured by commercial property, ~~$18.7~~$19.3 million is secured by multi-family property, and ~~$8.9~~$5.6 million is secured by farmland. Of the ~~$445.4~~$389.6 million secured by commercial property, ~~$299.7~~$251.2 million, or ~~67.3%~~64.5%, is owner-occupied. Of the ~~$155.7~~$136.2 million residential real estate portfolio, ~~79.3%~~77.3% represented loans secured by first liens.

Assets held for sale totaled ~~$1.1~~$1.4 million at September 30, 2018 compared to $4.0 million at December 31, 2017. During the latter half of 2017 and ~~consisted~~the beginning of ~~two~~2018 several former branch buildings ~~that~~ were ~~previously closed.~~

~~Other~~closed and subsequently sold during the second and third quarters of 2018 which was the driver for the decline in assets ~~increased $4.2 million~~held for sale during the nine months ended September 30, ~~2017, from $10.1~~2018.

Total deposits at September 30, 2018 increased $29.4 million to $1.5 billion when compared to December 31, 2017. Our stable core deposit base, which excludes time deposits, totaled $1.3 billion or 87.7% of total deposits at both September 30, 2018 and December 31, 2017.

FHLB borrowings totaled $27.5 million at September 30, 2018, compared to $50.0 million at December 31, ~~2016 to $14.4 million at September 30,~~ 2017. The ~~increase~~decrease in ~~primarily attributable~~total advances outstanding was the result of the FHLB terminating an advance and as well as overall strategy to ~~a $3.1 million increase in income tax receivable from year-end 2016.~~reduce outstanding debt obligations.

Off-Balance Sheet Arrangements

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

and lines of credit. For the period ended September 30, ~~2017,~~2018, we did not engage in any off-balance sheet transactions reasonably likely to have a material impact on our financial condition, results of operations, or cash flows.

Liquidity and Capital

Bank Liquidity

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

Liquidity is available through four sources: a stable base of funding sources, an adequate level of assets that can be readily converted into cash, borrowing lines with correspondent banks and brokered deposits. Our core deposits are our most stable and important source of funding. Cash deposits at other banks, federal funds sold, and principal payments received on loans and mortgage-backed securities provide additional primary sources of liquidity. Approximately ~~$17.6~~$19.2 million in projected cash flows from securities repayments for the remainder of ~~2017~~2018 provides an additional source of liquidity.

The Bank also has significant borrowing capacity with the FRB-Atlanta and with the FHLB–Dallas. As of September 30, ~~2017,~~2018, we had no borrowings with the FRB-Atlanta. ~~Long-term FHLB-Dallas~~FHLB advances totaled ~~$25.1~~$27.5 million at September 30, ~~2017~~2018 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~~$289.9 million at September 30, ~~2017.~~2018. The Bank has the ability to post additional collateral of approximately ~~$171.5~~$227.4 million if necessary to meet liquidity needs. Additionally, ~~$178.9~~$138.6 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta. Unsecured borrowing lines totaling ~~$53.5~~$30.0 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.

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 30, ~~2017.~~2018.

On December 28, 2012, the Company issued 756,511 shares of common stock and 99,971 shares of Series C Preferred Stock in connection with the PSB acquisition. As of September 30, ~~2017,~~2018, there were ~~89,875~~89,725 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 30, ~~2017.~~2018.

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

~~Dividends from the Bank totaling $4.0 million provided additional liquidity prior to the capital raise for the Company during the nine months ended September 30, 2017.~~ Due to the ~~$3.7 million~~ loss reported for ~~the nine months~~year ended ~~September 30,~~December 31, 2017, we currently

do not have the ability to approve dividends from the Bank to the Company without prior approval from the OCC. As of September 30, ~~2017,~~2018, the Company had ~~$61.5~~$46.5 million of cash to fund general corporate obligations. The Company also renewed a ~~$75.0~~$100.0 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.~~2018.

Capital

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

In addition, the Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer phased in by 2019 of 2.5% above the new regulatory minimum capital ratios. The effect of the capital conservation buffer once fully implemented in 2019 will be to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers. The new minimum capital requirements were effective on January 1, 2015 for community banking organizations, such as MidSouth, whereas other requirements of the Basel III rules including the conservation buffer phase in over time.

At September 30, ~~2017,~~2018, the Company and the Bank were in compliance with statutory minimum capital requirements and were classified as “well capitalized.” Minimum capital requirements include a total risk-based capital ratio (total risk-based capital to risk-weighted assets) of 8.0%, with Tier 1 capital not less than 6.0%, a Tier 1 leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution, and a common equity Tier 1 capital to total risk-weighted assets of 4.5%. However, ~~in connection with its most recent examination,~~ effective July 19, 2017, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 leverage ratio of at least 8%, and a total risk-based capital ratio of at least 12%. The Bank had a Tier 1 leverage capital ratio of 9.94% and a total risk-based capital ratio of 16.40% at September 30, 2018. As of September 30, ~~2017,~~2018, the Company’s Tier 1 leverage ratio was ~~12.84%~~12.53%, Tier 1 capital to risk-weighted assets was ~~17.01%~~19.09%, total capital to risk-weighted assets was ~~18.27%~~20.35% and common equity Tier 1 capital to risk-weighted assets was ~~12.68%~~13.78%. ~~The Bank had a Tier 1 leverage capital ratio of 9.64% and a total risk-based capital ratio of 14.04% at September 30, 2017.~~

Asset Quality

Credit Risk Management

We manage credit risk primarily by observing written, board approved policies that govern all credit underwriting and approval activities. Our Chief Credit Officer (“CCO”) is responsible for credit underwriting as well as management of classified and criticized assets for the Bank. The role of the CCO includes on-going review and development of lending policies, commercial credit analysis, centralized consumer underwriting, and overall credit risk management procedures. The current risk management process requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent reviews performed by the loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Audit Committee of the Board of Directors.

Credit concentrations are monitored and reported quarterly whereby individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity are evaluated for each major standard industry classification segment. At September 30, ~~2017,~~2018, one industry segment concentration, the oil and gas industry, aggregated more than 10% of our loan portfolio. Our exposure in the oil and gas (energy-related) industry, including related service and manufacturing industries, totaled approximately ~~$197.8~~$128.1 million, or ~~16.0%~~13.3% of total loans. Of the ~~337~~265 credit relationships in the energy-related loan portfolio, 3835 relationships totaling ~~$83.4~~$37.6 million were classified with ~~$27.8~~$24.3 million on nonaccrual status at September 30, ~~2017.~~2018.

~~Additionally, we~~The federal banking agencies, including the OCC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for construction, land development and other land represent 100% or more of total capital or (2) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development and other land represent 300% or more of total capital. Owner occupied loans are excluded from this second category. We monitor our exposure to ~~CRE loans.~~each of these segments to ensure the concentration in consistent with our risk tolerance. At September 30, ~~2017, CRE~~2018, loans ~~(including commercial~~for construction, land development and ~~multifamily loans)~~other land totaled approximately ~~$537.9~~$90.4 million, ~~56%~~or 46.9% of ~~which are~~our bank's risk-based capital. Loans secured by ~~owner-occupied commercial properties. Our non-owner occupied CRE~~multifamily and non-farm residential properties and loans ~~as a percentage of our risk-based capital~~for construction, land development and other land totaled ~~90%~~approximately $295.8 million at September 30, ~~2017. A total~~2018, or 153% of ~~$18.1 million, or 3.8%, were on nonaccrual status at September 30, 2017.~~our bank's risk-based capital. 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.~~

periods indicated:


Table 8 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (in thousands)
Table 7 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (dollars in thousands)										Table 7 Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing (dollars in thousands)
	September 30, 2017			December 31, 2016			September 30, 2016				September 30, 2018			December 31, 2017			September 30, 2017
Nonaccrual loans	$	51,289		$	62,580		$	60,522			$	51,476		$	49,278		$	51,289
Loans past due 90 days and over and still accruing	402			268			968				7			728			402
Total nonperforming loans	51,691			62,848			61,490				51,483			50,006			51,691
Nonperforming loans held for sale											—			5,067			—
Other real estate	1,931			2,175			2,317				1,022			2,001			1,931
Other foreclosed assets	234			16			283				—			192			234
Total nonperforming assets	$	53,856		$	65,039		$	64,090			$	52,505		$	57,266		$	53,856

Troubled debt restructurings, accruing	$	1,557		$	152		$	153			$	896		$	1,360		$	1,557

Nonperforming assets to total assets	2.77		%	3.35		%	3.28		%		2.88		%	3.04		%	2.77		%
Nonperforming assets to total loans + ORE + other assets repossessed	4.35		%	5.06		%	5.03		%		5.45		%	4.83		%	4.35		%
ALL to nonperforming loans	48.47		%	38.78		%	37.84		%		47.49		%	53.77		%	48.47		%
ALL to total loans	2.03		%	1.90		%	1.83		%		2.54		%	2.27		%	2.03		%

QTD charge-offs	$	4,381		$	1,835		$	1,161			$	4,339		$	8,931		$	4,381
QTD recoveries	460			339			151				974			166			460
QTD net charge-offs	$	3,921		$	1,496		$	1,010			$	3,365		$	8,765		$	3,921
Annualized net charge-offs to total loans	1.26		%	0.46		%	0.32		%		1.40		%	2.94		%	1.26		%

Nonperforming assets totaled ~~$53.9~~$52.5 million at September 30, ~~2017,~~2018, a decrease of ~~$11.1~~$4.8 million and $1.4 million from ~~the $65.0 million reported at year-end 2016~~December 31, 2017 and ~~a decrease of $10.2 million from the $64.1 million reported at~~ September 30, ~~2016.~~2017 reported amounts, respectively. The decrease since December 31, 2017 is primarily attributable to ~~the payoffs/paydowns of $38.1 million of non-accrual loans and the charge-off of $16.5 million of non-accrual loans. These decreases were partially offset by $43.3~~$46.1 million of loans placed on non-accrual during the ~~year. The~~period. This increase was partially offset by the payoffs/paydowns of $20.7 million of non-accrual loans and the decrease of $4.3 million in ~~non-performing assets reflects our previously announced transition plans that include a more aggressive approach to addressing asset quality.~~nonperforming loans held for sale.

Allowance coverage for nonperforming loans was 47.49% at September 30, 2018 compared to 53.77% at December 31, 2017 and 48.47% at September 30, ~~2017 compared to 38.78% at December 31, 2016 and 37.84% at September 30, 2016.~~2017. The ALL/total loans ratio ~~increased to 2.03%~~was 2.54% at September 30, ~~2017,~~2018, compared to ~~1.90%~~2.27% at year-end ~~2016~~2017 and ~~1.83% at September 30, 2016. Including valuation accounting adjustments on acquired loans, the total adjustments and ALL was 2.13% of loans~~2.03% at September 30, 2017. The ratio of annualized net charge-offs to total loans ~~increased~~was 1.40% for the three months ended September 30, 2018, compared to 2.94% for the three months ended December 31, 2017, and 1.26% for the three months ended September 30, ~~2017, compared to 0.46% for the three months ended December 31, 2016, and 0.32% for the three months ended September 30, 2016.~~2017.

Total nonperforming assets to total loans plus ORE and other assets repossessed ~~decreased~~increased to 5.45% at September 30, 2018 from 4.83% at December 31, 2017 and 4.35% at September 30, ~~2017 from 5.06% at December 31, 2016 and 5.03% at September 30, 2016.~~2017. Performing troubled debt restructurings (“TDRs”) totaled $0.9 billion at September 30, 2018, compared to $1.4 million at December 31, 2017 and $1.6 million at September 30, ~~2017, compared to $152,000 at December 31, 2016 and $153,000 at September 30, 2016.~~2017. Classified assets, including ORE, were ~~$139.7~~$91.4 million at September 30, ~~2017~~2018 compared to ~~$134.2~~$118.2 million at December 31, ~~2016.~~2017. Additional information regarding impaired loans is included in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.

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

losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates. We believe the ~~$25.1~~$24.5 million in the ALL as of September 30, ~~2017~~2018 is sufficient to cover probable losses in the loan portfolio.

Impact of Inflation and Changing Prices

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

Non-GAAP Financial Measures

Certain financial information included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations is determined by methods other than in accordance with GAAP. Table 98 below presents a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures include “core net interest income” ~~and~~, “core net interest margin”, "diluted earnings per share, operating" and "operating earnings available to common shareholders". “Core net interest income” is defined as net interest income excluding net purchase accounting adjustments. “Core net interest margin” is defined as core net interest income expressed as a percentage of average earnings assets. "Diluted earnings per share, operating" is defined as net earnings available to common shareholders adjusted for specified one-time items divided by diluted weighted-average shares. "Operating earnings available to common shareholders" is defined as net earnings available to common shareholders adjusted for specified one-time items.

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

Table 9
Reconciliation of Non-GAAP Financial Measures
(in thousands except per share data)
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



Table 8 Reconciliation of Non-GAAP Financial Measures (dollars in thousands except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017

Adjusted Net Income

Net (loss)income available to common shareholders'	$	(5,708	)	$	856		$	(7,637	)	$	(3,689	)
Adjustment items:
Regulatory remediation costs	5,502			856			14,658			856
Loans held for sale expense	4			—			979			570
Severance and retention expenses	—			—			—			1,341
Branch closure expenses	—			903			145			1,368
Tax effect adjustments	(1,156		)	(616		)	(3,314		)	(1,447		)
Diluted earnings (loss) per share, operating	$	(1,358	)	$	1,999		$	4,831		$	(1,001	)

Weighted average number of shares - diluted	16,557,793			16,395,740			16,530,852			13,314,469
Net income per diluted share	$	(0.34	)	$	0.05		$	(0.46	)	$	(0.28	)
Adjusted net income per diluted share	$	(0.08	)	$	0.12		$	0.29		$	(0.08	)

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 2017 Annual Report on Form 10-K. The reader should reference our 2017 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.

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

During the third quarter of ~~2017,~~2018, there was no change in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

The Office of the Comptroller of the Currency has issued a Consent Order with respect to our Bank ~~is in “troubled condition” and has entered into a formal agreement with the OCC, which subjects us to significant restrictions and will require us to designate a significant amount of resources~~Secrecy Act compliance. Failure to comply with the ~~agreement.~~

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

On July 19, 2017, the Bank entered into a formal written agreement with the OCC (the “Agreement”) that provides, among other things, that the Bank: (i) create a committee to monitor the Bank’s compliance with the Agreement and make quarterly reports to the Board of Directors and the OCC; (ii) adopt and implement a three-year strategic plan for the Bank consistent withadditional 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.action.

The Bank ~~has appointed~~Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program (“BSA/AML Program”) and file suspicious activity and currency transaction reports as appropriate. On October 25, 2018, MidSouth Bank, N.A. (the “Bank”), the wholly owned subsidiary of the Company, entered into a ~~committee~~Stipulation to ~~monitor compliance~~the Issuance of a Consent Order with the ~~Agreement and is working to promptly address the requirements~~Office of the ~~Agreement. There is no guarantee, however, that~~Comptroller of the ~~Bank will successfully address~~Currency (“OCC”), consenting to the ~~OCC’s concerns~~issuance of a consent order (the “Consent Order”) relating to weaknesses in the ~~Agreement~~ Bank’s BSA/AML Program. The Consent Order is expected to result in additional compliance expenses for the Bank. Issuance of the Consent Order does not preclude further enforcement actions with respect to the Bank’s BSA/AML Program, including the possible imposition of fines, sanctions, and/or ~~that we will be able~~restrictions on the activities of the Bank. Failure to comply with ~~it. If we do not comply with~~ the ~~Agreement, we~~Consent Order could be subject us to ~~civil monetary penalties, further~~additional expense and result in these additional regulatory ~~sanctions and/~~enforcement actions or ~~other~~ enforcement ~~actions.~~of the Consent Order through court proceedings. Any of these results could have a material adverse effect on our business, financial condition and results of operations.

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

The Company did not sell any unregistered equity securities or repurchase any equity securities during the quarter ended September 30, ~~2017.~~2018.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.



Exhibit Number	Document Description

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

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

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

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

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

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

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

101	The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, ~~2017,~~2018, formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*



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

Signatures

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



	MidSouth Bancorp, Inc. (Registrant)

Date: November 9, ~~2017~~2018
	/s/ James R. McLemore
	James R. McLemore, President and CEO
	(Principal Executive Officer)

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

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

5147



	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



	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



	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