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 June 30, 2019

OR

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

For the transition period from _____ to _____

COMMISSION FILE NUMBER 1-11826

MIDSOUTH BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

102 Versailles Boulevard, Lafayette, Louisiana 70501

(Address of principal executive offices, including zip code)

(337) 237-8343

(Registrant’s telephone number, including area code)

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

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

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

YES   x   NO   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 August 6, 2019, there were 16,732,149 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.

Part I – Financial Information		4
	Item 1. Financial Statements	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Operations (unaudited)	6
	Consolidated Statements of Comprehensive Income (Loss) (unaudited)	7
	Consolidated Statement of Shareholders’ Equity (unaudited)	8
	Consolidated Statements of Cash Flows (unaudited)	10
	Notes to Interim Consolidated Financial Statements	11
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.	33
	Forward-Looking Statements	34
	Critical Accounting Policies	36
	Results of Operations	37
	Balance Sheet Review	44
	Liquidity and Capital	45
	Asset Quality	47
	Non-GAAP Financial Measures	50
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	51
	Item 4. Controls and Procedures.	52
Part II – Other Information		54
	Item 1. Legal Proceedings.	54
	Item 1A. Risk Factors.	54
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	55
	Item 3. Defaults Upon Senior Securities.	55
	Item 4. Mine Safety Disclosures.	55
	Item 5. Other Information.	56
	Item 6. Exhibits.	56

Part I – Financial Information

Item 1. Financial Statements.

4

MidSouth Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (dollars in thousands, except share and per share amounts)
	June 30, 2019			December 31, 2018
	(unaudited)			(audited)
Assets
Cash and due from banks	$	20,175		$	27,701
Interest-bearing deposits in banks	207,902			174,909
Federal funds sold	4,375			2,761
Securities available-for-sale, at fair value (cost $421,482 and $443,928)	425,638			437,754
Securities held-to-maturity, (fair value $33,363 and $36,974)	33,219			37,759
Total securities	458,857			475,513
Other investments	18,261			16,614
Loans held for sale	10,304			23,876
Loans	880,037			899,785
Allowance for loan losses	(28,129		)	(17,430		)
Loans, net	851,908			882,355
Bank premises and equipment, net	54,221			55,382
Operating lease right-of-use assets	7,865			—
Goodwill and Intangibles	44,026			44,580
Cash surrender value of life insurance	15,248			15,135
Other real estate	387			1,067
Other assets	21,577			23,505
Total Assets	1,715,106			1,743,398
Liabilities:
Deposits:
Noninterest-bearing	$	399,619		$	383,167
Interest-bearing	1,023,770			1,068,904
Total deposits	1,423,389			1,452,071
Securities sold under agreements to repurchase	5,456			11,220
Operating lease liability	7,816			—
Federal Home Loan Bank advances	27,500			27,500
Junior subordinated debentures	22,167			22,167
Other liabilities	7,786			8,450
Total liabilities	1,494,114			1,521,408
Shareholders’ equity:
Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding, respectively	32,000			32,000
Series C Preferred stock, $10 par value; 100,000 shares authorized, 89,721 and 89,721 shares issued and outstanding, respectively	8,972			8,972
Common stock, $0.10 par value; 30,000,000 shares authorized, 16,733,569 and 16,641,017 shares issued and outstanding, respectively	1,671			1,664
Additional paid-in capital	169,147			169,111
Accumulated other comprehensive income (loss)	5,610			(4,035		)
Retained earnings	3,592			14,278
Total shareholders’ equity	220,992			221,990
Total liabilities and shareholders’ equity	$	1,715,106		$	1,743,398

See notes to unaudited consolidated financial statements.

5

MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) (dollars in thousands, except per share amounts)
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest income:
Loans, including fees	$	13,023		$	15,344		$	26,010		$	31,359
Securities and other investments:
Taxable	3,100			2,093			6,170			4,140
Nontaxable	160			277			416			593
Interest bearing deposits in other banks	1,663			1,025			2,795			1,644
Total interest income	17,946			18,739			35,391			37,736
Interest expense:
Deposits	1,665			1,410			3,345			2,647
Securities sold under agreements to repurchase	9			25			23			66
Federal Home Loan Bank advances	74			120			155			249
Junior subordinated debentures	283			259			570			479
Total interest expense	2,031			1,814			4,093			3,441
Net interest income	15,915			16,925			31,298			34,295
Provision for loan losses	4,759			440			12,359			440
Net interest income after provision for loan losses	11,156			16,485			18,939			33,855
Non-interest income:
Service charges on deposits	1,854			2,065			3,647			4,271
ATM and debit card income	2,044			1,877			3,969			3,661
Credit card income	425			381			946			752
Gain on sale of securities, net	202			—			575			—
Gain on sale of loans, net	—			—			1,274			—
Other charges and fees	265			559			652			1,027
Total non-interest income	4,790			4,882			11,063			9,711
Non-interest expenses:
Salaries and employee benefits	8,940			7,916			18,638			15,635
Occupancy expense	2,962			3,193			6,269			6,238
ATM and debit card expense	682			648			1,306			1,224
Data processing	853			666			1,701			1,331
Regulatory remediation expense	—			5,323			—			9,249
Merger-related expense	1,149			—			1,149			—
Legal and professional fees	1,163			1,100			3,046			2,789
Loss on transfer of loans to held for sale	—			8			—			883
Other	3,100			3,419			6,626			6,796
Total non-interest expenses	18,849			22,273			38,735			44,145
Loss before income tax benefit	(2,903		)	(906		)	(8,733		)	(579		)
Income tax benefit	—			(237		)	—			(271		)
Net loss	(2,903		)	(669		)	(8,733		)	(308		)
Dividends on preferred stock	810			810			1,620			1,620
Net loss available to common shareholders	$	(3,713	)	$	(1,479	)	$	(10,353	)	$	(1,928	)
Basic loss per common share	$	(0.22	)	$	(0.09	)	$	(0.62	)	$	(0.12	)
Diluted loss per common share	$	(0.22	)	$	(0.09	)	$	(0.62	)	$	(0.12	)
Weighted average number of shares outstanding:
Basic	16,724			16,526			16,699			16,511
Diluted	16,724			16,529			16,699			16,514
Dividends declared per common share	$	0.01		$	0.01		$	0.02		$	0.02

See notes to unaudited consolidated financial statements.

6

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

See notes to unaudited consolidated financial statements.

7

MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity (unaudited) (dollars in thousands, except per share amounts)
	Preferred Stock			Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings
	Shares	Amount		Shares		Amount											Total
Balance - December 31, 2018	121,721	$	40,972	16,641,017		$	1,664	$	169,111		$	(4,035	)	$	14,278		$	221,990
Net loss	—	—		—		—		—			—			(8,733		)	(8,733		)
Dividends on Series B and Series C preferred stock	—	—		—		—		—			—			(1,620		)	(1,620		)
Dividends on common stock, $0.02 per share	—	—		—		—		—			—			(333		)	(333		)
Restricted stock grant	—	—		97,602		7		(7		)	—			—			—
Restricted stock forfeitures	—	—		(5,050	)	—		—			—			—			—
Stock option and restricted stock compensation expense	—	—		—		—		43			—			—			43
Change in accumulated other comprehensive income	—	—		—		—		—			9,645			—			9,645
Balance – June 30, 2019	121,721	$	40,972	16,733,569		$	1,671	$	169,147		$	5,610		$	3,592		$	220,992
Balance - March 31, 2019	121,721	$	40,972	16,715,671		$	1,671	$	169,244		$	1,807		$	7,472		$	221,166
Net earnings	—	—		—		—		—			—			(2,903		)	(2,903		)
Dividends on Series B and Series C preferred stock	—	—		—		—		—			—			(810		)	(810		)
Dividends on common stock, $0.01 per share	—	—		—		—		—			—			(167		)	(167		)
Restricted stock grant	—	—		19,898		—		—			—			—			—
Restricted stock forfeitures	—	—		(2,000	)	—		—			—			—			—
Stock option and restricted stock compensation expense	—	—		—		—		(97		)	—			—			(97		)
Change in accumulated other comprehensive income	—	—		—		—		—			3,803			—			3,803
Balance – June 30, 2019	121,721	$	40,972	16,733,569		$	1,671	$	169,147		$	5,610		$	3,592		$	220,992

See notes to unaudited consolidated financial statements.

8

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															Total
Balance - December 31, 2017	121,875	$	40,987	16,548,829		$	1,655		$	168,412		$	(937	)	$	(1,828	)	$	45,726		$	254,015
Cumulative-effect adjustment due to the adoption of ASU 2016-01	—	—		—		—			—			—			31			(31		)	—
Net loss	—	—		—		—			—			—			—			(308		)	(308		)
Dividends on Series B and Series C preferred stock	—	—		—		—			—			—			—			(1,621		)	(1,621		)
Dividends on common stock, $0.02 per share	—	—		—		—			—			—			—			(330		)	(330		)
Restricted stock grant	—	—		66,335		7			(7		)	—			—			—			—
Restricted stock forfeitures	—	—		(37,775	)	(4		)	4			—			—			—			—
ESOP shares released for allocation	—	—		—		—			—			61			—			—			61
Exercise of stock options	—	—		42,505		4			547			—			—			—			551
ESOP compensation expense	—	—		—		—			20			—			—			—			20
Stock option and restricted stock compensation expense	—	—		—		—			(113		)	—			—			—			(113		)
Change in accumulated other comprehensive income	—	—		—		—			—			—			(3,603		)	—			(3,603		)
Balance – June 30, 2018	121,875	$	40,987	16,619,894		$	1,662		$	168,863		$	(876	)	$	(5,400	)	$	43,436		$	248,672
Balance - March 31, 2018	121,875	$	40,987	16,621,811		$	1,662		$	168,765		$	(906	)	$	(4,782	)	$	45,111		$	250,837
Cumulative-effect adjustment due to the adoption of ASU 2016-01	—	—		—		—			—			—			31			(31		)	—
Net loss	—	—		—		—			—			—			—			(669		)	(669		)
Dividends on Series B and Series C preferred stock	—	—		—		—			—			—			—			(810		)	(810		)
Dividends on common stock, $0.01 per share	—	—		—		—			—			—			—			(165		)	(165		)
Restricted stock grant	—	—		14,057		2			(2		)	—			—			—			—
Restricted stock forfeitures	—	—		(25,400	)	(3		)	3			—			—			—			—
ESOP shares released for allocation	—	—		—		—			—			30			—			—			30
Exercise of stock options	—	—		9,426		1			121			—			—			—			122
ESOP compensation expense	—	—		—		—			10			—			—			—			10
Stock option and restricted stock compensation expense	—	—		—		—			(34		)	—			—			—			(34		)
Change in accumulated other comprehensive income	—	—		—		—			—			—			(649		)	—			(649		)
Balance – June 30, 2018	121,875	$	40,987	16,619,894		$	1,662		$	168,863		$	(876	)	$	(5,400	)	$	43,436		$	248,672

See notes to unaudited consolidated financial statements.

9

MidSouth Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)
	For the Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(8,733	)	$	(308	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	3,772			4,165
Provision for loan losses	12,359			440
Deferred tax expense	—			8
ESOP and stock-based compensation expense	43			(44		)
Net gain on sale of investment securities	(575		)	—
Gain on sale of loans held for sale	(1,274		)	—
Proceeds from sale of loans held for sale	20,656			15,623
Net loss on sale of other real estate owned	37			1
Net write down of other real estate owned	116			146
Loss on transfer of loans to held for sale	—			883
Net loss on sale/disposal of premises and equipment	191			67
Change in other assets	(6,735		)	(2,523		)
Change in other liabilities	7,152			4,402
Net cash provided by operating activities	27,009			22,860
Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale	32,759			24,297
Proceeds from maturities and calls of securities held-to-maturity	4,504			12,875
Proceeds from sale of securities available-for-sale	56,286			410
Purchases of securities available-for-sale	(67,114		)	(32,532		)
Purchases of other investments	(1,647		)	(703		)
Net change in loans	12,278			121,129
Purchases of premises and equipment	(1,303		)	(693		)
Proceeds from sale of premises and equipment	181			481
Proceeds from sale of other real estate owned	527			504
Net cash provided by investing activities	36,471			125,768
Cash flows from financing activities:
Change in deposits	(28,682		)	43,331
Change in securities sold under agreements to repurchase	(5,764		)	(52,247		)
Borrowings from FHLB	110,000			165,000
Repayments to FHLB	(110,000		)	(177,500		)
Proceeds from exercise of stock options	—			551
Payment of dividends on preferred stock	(1,620		)	(1,621		)
Payment of dividends on common stock	(333		)	(330		)
Net cash used by financing activities	(36,399		)	(22,816		)
Net increase in cash and cash equivalents	27,081			125,812
Cash and cash equivalents, beginning of period	205,371			152,964
Cash and cash equivalents, end of period	$	232,452		$	278,776
Supplemental cash flow information:
Interest paid	$	4,065		$	3,482
Noncash investing and financing activities:
Transfer of loans to held for sale	5,810			221

 See notes to unaudited consolidated financial statements.

10

MidSouth Bancorp, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements

June 30, 2019

(Unaudited)

11

NOTE 1: BASIS OF PRESENTATION

Overview

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

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 operations for the interim period presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six-month period ended June 30, 2019 are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto and the report of our independent registered public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

Proposed Merger with Hancock Whitney Corporation

On April 30, 2019, the Company entered into a definitive agreement ("Merger Agreement") with Hancock Whitney Corporation ("Hancock Whitney"), whereby MidSouth will merge into Hancock Whitney in a stock-for-stock transaction. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Hancock Whitney, with Hancock Whitney continuing as the surviving corporation. Immediately following the completion of the merger, the Bank will merge with and into Hancock Whitney Corporation's wholly-owned bank subsidiary, Hancock Whitney Bank, with Hancock Whitney Bank continuing as the surviving bank. Subject to the terms and conditions of the Merger Agreement, if the merger is completed, Company shareholders will receive 0.2952 shares of Hancock Whitney Corporation common stock, par value $3.33 per share, for each share of Company common stock, par value $0.10 per share, they hold immediately prior to the merger, plus cash in lieu of fractional shares.

12

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

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This guidance was further modified in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842 Leases and ASU No. 2018-11, Leases(Topic 842): Targeted Improvements. These updates require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, these updates are effective for fiscal years beginning after December 15, 2018, with the option to transition with a modified retrospective application to prior periods presented or to apply the guidance as of the adoption date without restating prior periods. The Company adopted the standard on January 1, 2019 without restating prior periods, and recorded a $8.7 million right of use asset and corresponding lease liability as a result of including leases on the consolidated balance sheet. The adopted guidance did not have an effect on Company's consolidated statement of operations or statement of shareholders' equity.

Recent Accounting Pronouncements

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

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

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

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This update permits the OIS rate, based on SOFR, as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.

13

NOTE 3: INVESTMENT SECURITIES

The amortized cost and fair value of available-for-sale investment securities are as follows (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2019
U.S. Agencies	$	2,867	$	175	$	—	$	3,042
State, county, and municipal securities	12,233		500		—		12,733
Mortgage-backed securities	395,814		4,965		700		400,079
Corporate debt securities	10,568		202		986		9,784
	$	421,482	$	5,842	$	1,686	$	425,638
December 31, 2018
U.S. Agencies	$	3,016	$	56	$	—	$	3,072
State, county, and municipal securities	44,639		214		765		44,088
Mortgage-backed securities	370,706		1,092		5,921		365,877
Corporate debt securities	25,567		433		1,283		24,717
	$	443,928	$	1,795	$	7,969	$	437,754

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

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2019
State, county, and municipal securities	$	1,659	$	4	$	1	$	1,662
Mortgage-backed securities	31,560		281		140		31,701
	$	33,219	$	285	$	141	$	33,363
December 31, 2018
State, county, and municipal securities	$	1,977	$	1	$	10	$	1,968
Mortgage-backed securities	35,782		—		776		$	35,006
	$	37,759	$	1	$	786	$	36,974

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

	Amortized Cost		Fair Value
June 30, 2019
Due after one year through five years	$	3,300	$	2,333
Due after five years through ten years	13,236		13,622
Due after ten years	9,132		9,604
Mortgage-backed securities¹	395,814		400,079
	$	421,482	$	425,638
Held-to-maturity:
Due in one year or less	$	766	$	767
Due after one year through five years	893		895
Mortgage-backed securities¹	31,560		31,701
	$	33,219	$	33,363

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

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

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

15

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

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2019
State, county, and municipal securities	$	—	$	—	$	470	$	1	$	470	$	1
Mortgage-backed securities	—		—		10,093		140		10,093		140
	$	—	$	—	$	10,563	$	141	$	10,563	$	141
December 31, 2018
State, county, and municipal securities	$	—	$	—	$	1,703	$	10	$	1,703	$	10
Mortgage-backed securities	—		—		35,006		776		35,006		776
	$	—	$	—	$	36,709	$	786	$	36,709	$	786

At June 30, 2019, the Company had 38 securities in an unrealized loss position. Management evaluates whether unrealized losses on securities represent impairment that is other than temporary on a quarterly basis. For debt securities, the Company considers its intent to sell or hold the securities and if it is more likely than not the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality. If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  For equity securities, management reviews the near term prospects of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors when determining if an unrealized loss is other than temporary. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income. At June 30, 2019, there was no intent to sell any of the securities in an unrealized loss position, and it is more likely than not the Company will not be required to sell these securities. Furthermore, the present value of cash flows expected to be collected exceeded the Company's amortized cost basis of the investment securities; therefore, these securities are not deemed to be other than temporarily impaired.

Proceeds from sales of available-for-sale securities as of June 30, 2019 and 2018 were $56.3 million and $410,000, respectively. Net gains on sales of available-fo-sale securities for the three and six months ended June 30, 2019 were $202,000 and $575,000 , respectively. There were no gains or losses recognized on the sales of available-for-sale securities for the three and six months ended June 30, 2018.

The composition of investment securities reflects the strategy of management to maintain an appropriate level of liquidity while providing a relatively stable source of revenue. The securities portfolio may at times be used to mitigate interest rate risk associated with other areas of the balance sheet while also providing a means for the investment of available funds, providing liquidity and supplying investment securities that are required to be pledged as collateral against specific deposits and for other purposes. Securities with an aggregate carrying value of $90.6 million at June 30, 2019 and $162.5 million at December 31, 2018 were pledged to secure public funds on deposit and for other purposes required or permitted by law.

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NOTE 4: LOANS

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

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

The 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 June 30, 2019, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio.  The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $113.0 million, or 12.8% of total loans, with $3.0 million in nonaccrual oil and gas loans. 

Allowance for Loan Losses

The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance for loan losses at the time of recovery.  Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various quantitative and qualitative factors. As such, some of the factors considered in determining provisions include estimated losses relative to specific credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off–balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management; and the results of examinations of the loan portfolio by regulatory agencies and others. Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries).

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

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.

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A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans as of and for the six months ended June 30, 2019 and 2018 is as follows (in thousands):

	June 30, 2019
				Real Estate
	Coml, Fin, and Agric			Construction		Commercial		Residential			Consumer and other			Lease financing receivable			Total
Allowance for loan losses:	and Agric
Beginning balance	$	10,633		$	140	$	4,913	$	1,156		$	585		$	3		$	17,430
Charge-offs	(1,775		)	—		—		—			(167		)	—			(1,942		)
Recoveries	184			—		30		1			67			—			282
Provision	11,654			402		557		(215		)	(36		)	(3		)	12,359
Ending balance	$	20,696		$	542	$	5,500	$	942		$	449		$	—		$	28,129
Ending balance: individually evaluated for impairment	$	10,680		$	—	$	74	$	—		$	—		$	—		$	10,754
Ending balance: collectively evaluated for impairment	$	10,016		$	542	$	5,426	$	942		$	449		$	—		$	17,375
Loans:
Ending balance	$	226,871		$	77,482	$	409,694	$	126,043		$	39,476		$	471		$	880,037
Ending balance: individually evaluated for impairment	$	15,934		$	424	$	4,807	$	—		$	—		$	—		$	21,165
Ending balance: collectively evaluated for impairment	$	210,937		$	77,058	$	404,887	$	126,043		$	39,476		$	471		$	858,872

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	June 30, 2018
				Real Estate
	Coml, Fin, and Agric			Construction			Commercial			Residential			Consumer and other			Lease financing receivable		Total
Allowance for loan losses:
Beginning balance	$	20,577		$	596		$	3,918		$	837		$	957		$	3	$	26,888
Charge-offs	(1,524		)	(2		)	(86		)	(3		)	(221		)	—		(1,836		)
Recoveries	276			—			6			1			36			—		319
Provision	(264		)	159			(105		)	64			146			—		—
Ending balance	$	19,065		$	753		$	3,733		$	899		$	918		$	3	$	25,371
Ending balance: individually evaluated for impairment	$	5,968		$	94		$	76		$	20		$	6		$	—	$	6,164
Ending balance: collectively evaluated for impairment	$	13,097		$	659		$	3,657		$	879		$	912		$	3	$	19,207
Loans:
Ending balance	$	401,048		$	94,679		$	444,277		$	145,671		$	50,888		$	692	$	1,137,255
Ending balance: individually evaluated for impairment	$	55,092		$	192		$	26,005		$	2,088		$	50		$	—	$	83,427
Ending balance: collectively evaluated for impairment	$	345,956		$	94,487		$	418,272		$	143,583		$	50,838		$	692	$	1,053,828

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):

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	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial and agricultural	$	559	$	11,506	$	3,726	$	15,791	$	211,080	$	226,871	$	—
Real estate – construction	4,097		—		262		4,359		73,123		77,482		—
Real estate – commercial	2,044		—		1,455		3,499		406,195		409,694		—
Real estate – residential	617		73		1,108		1,798		124,245		126,043		—
Consumer and other	129		60		27		216		39,260		39,476		—
Lease financing receivable	—		—		—		—		471		471		—
	$	7,446	$	11,639	$	6,578	$	25,663	$	854,374	$	880,037	$	—
	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans >90 Days Past Due and Still Accruing
Commercial, financial and agricultural	$	385	$	902	$	2,173	$	3,460	$	263,880	$	267,340	$	—
Real estate – construction	47		—		117		164		87,342		87,506		—
Real estate – commercial	435		—		771		1,206		367,243		368,449		—
Real estate – residential	695		31		1,407		2,133		130,302		132,435		—
Consumer and other	176		28		56		260		43,246		43,506		—
Lease financing receivable	—		—		—		—		549		549		—
	$	1,738	$	961	$	4,524	$	7,223	$	892,562	$	899,785	$	—

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

	June 30, 2019		December 31, 2018
Commercial, financial, and agricultural	$	15,630	$	3,599
Real estate - construction	468		278
Real estate - commercial	4,854		2,977
Real estate - residential	2,308		2,008
Consumer and other	27		58
	$	23,287	$	8,920

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 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 troubled debt restructuring (TDR).

	June 30, 2019						December 31, 2018
	Recorded Investment(1)		Unpaid Principal Balance		Related Allowance (1)		Recorded Investment (1)		Unpaid Principal Balance		Related Allowance (1)
With no related allowance recorded:
Commercial, financial, and agricultural	$	3,589	$	5,278	$	—	$	2,924	$	3,011	$	—
Real estate - construction	424		424		—		117		117		—
Real estate - commercial	4,676		5,835		—		3,395		3,395		—
Real estate - residential	—		—		—		—				—
Consumer and other	—		—		—		—		—		—
Subtotal:	8,689		11,537		—		6,436		6,523		—
With an allowance recorded:
Commercial, financial, and agricultural	12,345		12,488		10,680		1,025		1,025		470
Real estate - construction	—		—		—		131		131		4
Real estate - commercial	131		131		74		—		—		—
Real estate - residential	—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—
Subtotal:	12,476		12,619		10,754		1,156		1,156		474
Total impaired loans	21,165		24,156		10,754		7,592		7,679		474

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

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

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

Credit Quality

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

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

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

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

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

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

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

			Special
	Pass		Mention		Substandard		Doubtful		Total
June 30, 2019
Commercial, financial and agricultural	$	194,672	$	10,727	$	21,472	$	—	$	226,871
Real estate – construction	70,963		1,463		5,047		9		77,482
Real estate – commercial	366,939		21,554		21,201		—		409,694
Real estate – residential	116,599		1,581		7,176		687		126,043
Consumer and other	39,399		—		64		13		39,476
Lease financing receivable	471		—		—		—		471
Total loans	$	789,043	$	35,325	$	54,960	$	709	$	880,037
December 31, 2018
Commercial, financial and agricultural	$	240,232	$	20,259	$	6,849	$	—	$	267,340
Real estate – construction	83,240		3,910		356		—		87,506
Real estate – commercial	329,213		23,475		15,761		—		368,449
Real estate – residential	125,984		1,955		4,496		—		132,435
Consumer and other	43,416		5		85		—		43,506
Lease financing receivable	549		—		—		—		549
Total loans	$	822,634	$	49,604	$	27,547	$	—	$	899,785

Troubled Debt Restructurings

A 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 (in thousands):

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

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

During the six months ended ending June 30, 2019 and 2018, TDRs that had a payment default during the twelve-month periods and that were modified within the previous 12 months was $713,000 and $0, respectively. The Company defines a payment default as any loan that is greater than 30 days past due or was past due greater than 30 days at any point during the reporting period, or since the date of modification, whichever is shorter.

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A troubled debt restructuring by definition is an impaired loan, as such all TDRs that meet the dollar threshold are reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology.  If it is determined an impairment exists, either because of a delinquency or other credit related issues, a specific reserve is recorded for the loan. There are no specific reserves on TDRs as of June 30, 2019 and 2018.

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NOTE 5: DERIVATIVES

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

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

NOTE 6: LEASES

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

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

The following is a summary of net lease cost and other selected information related to operating leases (cost, in thousands):

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Net lease cost:
Operating lease cost	$	466		$	932
Variable lease cost	(43		)	(89		)
Sub lease income	(44		)	(88		)
Net lease cost	$	379		$	755
Weighted average remaining lease term (years)	14			14
Weighted average discount rate	3.4		%	3.4		%

Maturities of leases payments, undiscounted cash flow, lease liability were as follows (in thousands):

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

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NOTE 7: OTHER COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended June 30,
	2019								2018
	Before Tax Amount			Tax Effect		Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income (loss):
Securities available-for-sale:
Change in unrealized gains/losses during period	$	4,428		$	—	$	4,428		$	(873	)	$	184		$	(689	)
Reclassification adjustment for gains included in net income	(202		)	—		(202		)	—			—			—
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges	(423		)	—		(423		)	89			(19		)	70
Total other comprehensive income (loss)	$	3,803		$	—	$	3,803		$	(784	)	$	165		$	(619	)

	Six Months Ended June 30,
	2019								2018
	Before Tax Amount			Tax Effect		Net of Tax Amount			Before Tax Amount			Tax Effect			Net of Tax Amount
Other comprehensive income (loss):
Securities available-for-sale:
Change in unrealized gains/losses during period	$	10,905		$	—	$	10,905		$	(4,922	)	$	1,034		$	(3,888	)
Reclassification adjustment for gains included in net income	(575		)	—		(575		)	—			—			—
Derivative instruments designated as cash flow hedges:
Change in fair value of derivative instruments designated as cash flow hedges	(685		)	—		(685		)	400			(84		)	316
Total other comprehensive income (loss)	$	9,645		$	—	$	9,645		$	(4,522	)	$	950		$	(3,572	)

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

	Three months ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Details about Accumulated Other Comprehensive Income (Loss) Components	Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			Reclassifications Out of Accumulated Other Comprehensive Income (Loss)		Reclassifications Out of Accumulated Other Comprehensive Income (Loss)			Income Statement  Line Item
Unrealized gains and losses on securities available-for-sale:
	$	202	$	—		575		—			Gain on sale of securities, net
	—		—			—		—			Tax expense
	$	202	$	—		$	575	$	—		Net of tax
Gains on derivative instruments:
	$	423	$	(63	)	$	685	$	(102	)	Interest expense
	—		13			—		21			Tax expense
	$	423	$	(50	)	$	685	$	(81	)	Net of tax

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NOTE 8: LOSS PER COMMON SHARE

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

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

The Company has reported a net loss for the three and six months ended June 30, 2019. As such, during those periods all potential common shares were excluded from the calculation of diluted earnings per share as they would have an anti-dilutive effect for the respective period.

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NOTE 9: FAIR VALUE MEASUREMENT

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

Fair Value Hierarchy

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

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

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

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

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

Cash and cash equivalents—The carrying value of cash and due from banks, federal funds sold and interest-bearing deposits in other banks, and time deposits in other banks approximate fair value.

Debt Securities—Securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and Treasury securities that are traded by dealers or brokers in active over-the-counter market and money market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers and are not directly observable.

Loans held for sale—Loans held for sale are carried at the lower of carrying value or fair value. Fair value is based upon quotes or bids on these loans directly from the purchaser.

Loans—For disclosure purposes, the fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The Company does not record loans at fair value on a recurring basis.

The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable. A loan is determined to be impaired if the 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 is determined in accordance with ASC 310-10, Accounting by Creditors for Impairment of a Loan, and generally results in a specific reserve established through a charge to the 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 Policies—Fair value for life insurance cash surrender value is based on cash surrender values indicated by the insurance companies.

Other Real Estate—Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the other real estate as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the other real estate asset as nonrecurring Level 3.

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

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

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

Federal Home Loan Bank Advances—The fair value approximates carrying amount because of the short maturity of these instruments.

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

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 for disclosure.

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

	Recurring Basis Fair Value Measurements
	June 30, 2019
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
U.S. Government agencies	$	3,042	$	—	$	3,042	$	—
State, county, and municipal securities	12,733		$	—	12,733		$	—
Mortgage-backed securities	400,079		—		400,079		—
Corporate debt securities	9,784		—		9,784		—
Derivative assets	669		$	—	669		$	—
Total recurring assets at fair value	$	426,307	$	—	$	426,307	$	—
	Recurring Basis Fair Value Measurements
	December 31, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
U.S. Government agencies	$	3,072	$	—	$	3,072	$	—
State, county, and municipal securities	44,088		$	—	44,088		$	—
Mortgage-backed securities	365,877		—		365,877		—
Corporate debt securities	24,717		—		24,717		—
Derivative assets	1,067		$	—	1,067		$	—
Total recurring assets at fair value	$	438,821	$	—	$	438,821	$	—

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

	Nonrecurring Basis Fair Value Measurements
	June 30, 2019
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	4,307	$	—	$	—	$	4,307
Loans held for sale	10,304		—		10,304		—
Other real estate	387		—		—		387
Assets held for sale	1,024		—		1,024		—
Total nonrecurring assets at fair value	$	16,022	$	—	$	11,328	$	4,694
	Nonrecurring Basis Fair Value Measurements
	December 31, 2018
	Fair Value		Level 1		Level 2		Level 3
Financial assets:
Impaired loans	$	3,086	$	—	$	—	$	3,086
Loans held for sale	23,876		—		23,876		—
Other real estate	1,067		—		—		1,067
Assets held for sale	1,024		—		1,024		—
Total nonrecurring assets at fair value	$	29,053	$	—	$	24,900	$	4,153

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

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

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

	Fair Value at
Description	June 30, 2019		Technique	Unobservable Inputs
Impaired loans	$	4,307	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	387		Third party appraisals	Collateral discounts and estimated costs to sell
	Fair Value at
Description	December 31, 2018		Technique	Unobservable Inputs
Impaired loans	$	3,086	Third party appraisals	Collateral discounts and estimated costs to sell
Other real estate	1,067		Third party appraisals	Collateral discounts and estimated costs to sell

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments

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The carrying amounts and estimated fair values of the Company’s financial instruments are as follows at June 30, 2019 and December 31, 2018 (dollars in thousands):

	Fair Value Measurements
	June 30, 2019
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	243,430	$	243,430	$	—	$	—
Securities available-for-sale	425,638		—		425,638		—
Securities held-to-maturity	33,219		—		33,363		—
Loans, net	851,908		—		—		862,519
Derivative assets	669		—		669		—
Cash surrender value of life insurance	15,248		—		15,248		—
Financial liabilities:
Non-interest-bearing deposits	$	399,619	$	—	$	399,619	$	—
Interest-bearing deposits	1,023,770		—		847,109		178,554
Securities sold under agreements to repurchase	7,816		7,816		—		—
FHLB borrowings	27,500		—		27,500		—
Other borrowings	22,167		—		22,167		—
	December 31, 2018
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	205,371	$	205,371	$	—	$	—
Available-for-sale securities	437,754		—		437,754		—
Securities held-to-maturity	37,759		—		36,974		—
Loans, net	882,355		—		—		885,054
Derivative assets	1,067		—		1,067		—
Cash surrender value of life insurance	15,135		—		15,135		—
Financial liabilities:
Non-interest-bearing deposits	$	383,167	$	—	$	383,167	$	—
Interest-bearing deposits	1,068,904		—		888,806		177,794
Securities sold under agreements to repurchase	11,220		11,220		—		—
FHLB borrowings	27,500		—		27,500		—
Other borrowings	22,167		—		22,167		—

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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 42 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 Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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Cautionary Statement regarding Forward-Looking Statements

Certain statements included in this report are "forward-looking statements" within the meaning of, 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 (the "Exchange Act"). Forward-looking statements include statements with respect to 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 actual results, performance or achievements of 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 2018 Annual Report on form 10-K and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and the following:

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

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

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

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

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

• our ability to successfully implement and manage our 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 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 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 loanand leases losses (“ALLL”), which could result in greater than expected loan losses;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them 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.

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Critical Accounting Policies

There have been no significant changes to our critical accounting policies from those disclosed in our 2018 Annual Report on Form 10-K. The reader should refer to the notes to our consolidated financial statements in our 2018 Annual Report on Form 10-K for a full disclosure of all critical accounting policies.

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

Pending Merger with Hancock Whitney Corporation

On April 30, 2019, the Company and Hancock Whitney Corporation (“Hancock Whitney”) announced that they had entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for, among other things, the acquisition of the Company by Hancock Whitney (the “Merger”). Under the terms of the Merger Agreement, each share of the Company’s common stock will convert to the right to receive 0.2952 shares of Hancock Whitney common stock, $3.33 par value per share, plus cash in lieu of fractional shares. Immediately following the completion of the merger, the Bank will merge with and into Hancock Whitney’s wholly-owned bank subsidiary, Hancock Whitney Bank, with Hancock Whitney Bank continuing as the surviving bank.

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

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Results of Operations

For the Three Months Ended June 30,2019 and 2018

Net loss available to common shareholders totaled $3.7 million, or $0.22 per share, for the three months endedJune 30, 2019, compared to net loss available to common shareholders of $1.5 million, or $0.09 per share, for the three months endedJune 30, 2018. Provision for loan loss totaled $4.8 million and $440,000 for the three months endedJune 30, 2019 and 2018, respectively. The loan loss provisions increased substantially during 2019 primarily due to a $3.4 million impairment charge for a shared national healthcare credit.

Fully taxable-equivalent ("FTE") net interest income was $16.0 million for the second quarter of 2019, a $1.0 million decrease compared to $17.0 million for the second quarter of 2018, resulting from a $821,000 decrease in interest income and a $216,000 increase in interest expense. Our net interest margin, on a FTE basis, increased 3 basis points in prior year quarterly comparison, from 3.97% for the second quarter of 2018 to 4.00% for the second quarter of 2019.

Excluding remediation expenses of $5.3 million for the second quarter of 2018 and merger-related expenses of $1.1 million for the second quarter 2019, noninterest expenses increased $480,000 in quarterly comparison.

Dividends on preferred stock totaled $810,000 for the three months endedJune 30, 2019 and 2018, respectively. Dividends on the Series B Preferred Stock were $720,000 for the three months endedJune 30, 2019 and 2018, respectively. Dividends on the Series C Preferred Stock totaled $90,000 for the three months endedJune 30, 2019 and 2018, respectively.

For the Six Months Ended June 30,2019 and 2018

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

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

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

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

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 4.00% and 3.97% for the three months ended June 30, 2019 and 2018, respectively. Net interest margin on a taxable equivalent basis was 4.08% and 4.04% for the six months ended June 30, 2019 and 2018, respectively. The tables below analyze the changes in net interest income in the three and six months ended June 30, 2019 and 2018.

FTE net interest income decreased $1.0 million in prior year quarterly comparison. Interest income on loans decreased $2.3 million due to a decrease in the average balance of loans of $219.2 million in prior year quarterly comparison. The average yield on loans increased 32 basis points in prior year quarterly comparison, from 5.53% to 5.85%.

FTE interest income on investments increased $862,000 in prior year quarterly comparison. The average volume of investment securities increased $90.8 million during the three months ended June 30, 2019 compared to same period in 2018 and the average tax equivalent yield on investment securities increased 24 basis points, from 2.54% to 2.78%.

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

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

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

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

The average yield on all earning assets increased 17 basis points in prior year comparison, from 4.44% for the six months ended 2018 to 4.61% for the six months ended June 30, 2019.

Interest expense increased $652,000 in the first six months of 2019 compared with the same time period in 2018. The increase in interest is primarily a result of a $698,000 increase in interest expense on deposits and a $91,000 increase in interest expense on TruPs, which were partially offset by a $137,000 decrease in interest expense on repurchase agreements and FHLB Borrowings.

As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin increased 4 basis points to 4.08% as of six months ended June 30, 2019 compared to the same period in 2018.

38

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

Average Balances, Net Interest Income and Yields/Rates
	Three Months Ended June 30,
	2019						2018
	Average Balance		Income/Expense		Yield/Rate		Average Balance		Income/Expense		Yield/Rate
Assets
Investment securities (1)
Taxable	$	452,396	$	3,100	2.74	%	$	340,080	$	2,093	2.46	%
Tax exempt (2)	22,368		203		3.63	%	43,858		348		3.17	%
Total investment securities	474,764		3,303		2.78	%	383,938		2,441		2.54	%
Federal funds sold	4,370		30		2.75	%	5,008		21		1.68	%
Time and interest bearing deposits in other banks	209,254		1,224		2.34	%	201,281		912		1.81	%
Other investments	17,629		409		9.28	%	14,924		92		2.47	%
Total loans(3)	890,214		13,023		5.85	%	1,109,371		15,344		5.53	%
Total earning assets	1,596,231		17,989		4.51	%	1,714,522		18,810		4.39	%
Nonearning assets	132,403						146,384
Total assets	$	1,728,634					$	1,860,906
Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,032,778	$	1,665	0.64	%	$	1,087,746	$	1,410	0.52	%
Securities sold under repurchase agreements	7,356		9		0.49	%	26,230		25		0.38	%
FHLB borrowings	27,500		74		1.08	%	37,514		120		1.28	%
Other borrowings	22,167		283		5.11	%	22,167		259		4.67	%
Total interest bearing liabilities	1,089,801		2,031		0.75	%	1,173,657		1,814		0.62	%
Other liabilities	416,443						435,971
Shareholders’ equity	222,390						251,278
Total liabilities and shareholders’ equity	1,728,634						$	1,860,906
Net interest income and net interest spread			$	15,958	3.76	%			$	16,996	3.77	%
Net interest margin					4.00	%					3.97	%

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

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

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

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Average Balances, Net Interest Income and Yields/Rates
	Six Months Ended June 30,
	2019						2018
Assets	Average Balance		Income/Expense		Yield/Rate		Average Balance		Income/Expense		Yield/Rate
Investment securities1
Taxable	$	409,653	$	6,170	3.01	%	$	336,221	$	4,140	2.46	%
Tax exempt2	21,240		526		4.95	%	47,186		746		3.16	%
Total investment securities	430,893		6,696		3.11	%	383,407		4,886		2.55	%
Federal funds sold	4,928		61		2.48	%	4,993		39		1.56	%
Time and interest bearing deposits in other banks	191,497		2,229		2.33	%	167,299		1,426		1.70	%
Other investments	17,284		505		5.84	%	14,853		179		2.41	%
Total loans3	895,806		26,010		5.81	%	1,134,382		31,359		5.53	%
Total earning assets	1,540,408		35,501		4.61	%	1,704,934		37,889		4.44	%
Nonearning assets	193,947						155,556
Total assets	$	1,734,355					$	1,860,490
Liabilities and shareholders’ equity
Total interest bearing deposits	$	1,037,056	$	3,345	0.65	%	$	1,079,660	$	2,647	0.49	%
Securities sold under repurchase agreements	9,699		23		0.47	%	33,134		66		0.40	%
FHLB borrowings	27,500		155		1.13	%	38,124		249		1.31	%
Other borrowings	22,167		570		5.14	%	22,167		479		4.32	%
Total interest bearing liabilities	1,096,422		4,093		0.75	%	1,173,085		3,441		0.59	%
Other liabilities	415,997						447,460
Shareholders’ equity	221,936						255,170
Total liabilities and shareholders’ equity	$	1,734,355					$	1,875,715
Net interest income and net interest spread			$	31,408	3.81	%			$	34,448	3.85	%
Net interest margin					4.08	%					4.04	%

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

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

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The following tables shows the relative effect on net interest revenue resulting from changes in the average outstanding balances (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid by the Company on such assets and liabilities (in thousands).

Rate/Volume Analysis on a Taxable Equivalent Basis
	Three Months Ended June 30, 2019 vs. 2018
	Change Attributable to
	Volume			Rate			Change(1)
Interest Income:
Investment securities	$	618		$	244		$	862
Federal funds sold	(16		)	25			9
Time and interest bearing deposits in other banks	40			272			312
Other investments	20			297			317
Loans, including fees	(7,095		)	4,774			(2,321		)
Total interest income	(6,433		)	5,612			(821		)
Interest Expense:
Deposits	(425		)	680			255
Securities sold under repurchase agreements	(39		)	22			(17		)
FHLB advances	(28		)	(18		)	(46		)
Other borrowings	—			24			24
Total interest expense	(492		)	708			216
Net interest income	$	(5,941	)	$	4,904		$	(1,037	)

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

Rate/Volume Analysis on a Taxable Equivalent Basis
	Six Months Ended June 30, 2019 vs. 2018
	Change Attributable to
	Volume			Rate			Change(1)
Interest Income:
Investment securities	$	655		$	1,155		$	1,810
Federal funds sold	(1		)	23			22
Time and interest bearing deposits in other banks	226			577			803
Other investments	35			291			326
Loans, including fees	(9,385		)	4,036			(5,349		)
Total interest income	(8,470		)	6,082			(2,388		)
Interest Expense:
Deposits	(294		)	992			698
Securities sold under repurchase agreements	(70		)	27			(43		)
FHLB advances	(62		)	(32		)	(94		)
Other borrowings	—			91			91
Total interest expense	(426		)	1,078			652
Net interest income	$	(8,044	)	$	5,004		$	(3,040	)

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

Non-interest Income

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

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

Non-interest income decreased $92,000 in quarterly comparison, from $4.9 million for the three months ended June 30, 2018 to $4.8 million for the three months ended June 30, 2019. The decrease is due to a $211,000 decrease in service charges on deposits and a $294,000 decrease in other charges and fees offset by a $202,000 gain on sale of securities. The decline in service charge and other charges and fees income during the six months ended June 30, 2019 is primarily a result of consumer behavior and a decline year over year in non-interest bearing deposits which is also contributing to the change in service charge income recognized.

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

Non-interest Expenses

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

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

Total non-interest expense was $18.8 million for the three months ended June 30, 2019, compared to $22.3 million for the three months ended June 30, 2018. Salaries and employee benefits expense increased $1.0 million for the three months ended June 30, 2019, respectively, from the same periods in 2018 due to continued investment in compliance staffing versus the same period a year ago.

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

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

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

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Balance Sheet Review

At June 30, 2019, we had total assets of approximately $1.7 billion, consisting principally of $851.9 million in net loans, loans held for sale of $10.3 million, $458.9 million in investment securities and, $232.5 million in cash and cash equivalents. Loans held for sale of $10.3 million at June 30, 2019 are anticipated to close in the third quarter of 2019. Our liabilities at June 30, 2019 totaled $1.5 billion, consisting primarily of $1.4 billion in deposits. At June 30, 2019, our shareholders' equity was $221.0 million.

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

Investment securities totaled $458.9 million, or 26.8% of total assets at June 30, 2019, versus $475.5 million, or 27.3% of total assets at December 31, 2018. The investment portfolio had an effective duration of 2.13 years, as measured on a 100 basis point parallel shock in interest rates and a net unrealized gain of $4.2 million at June 30, 2019.

The following table shows the composition of the Company's loan portfolio (in thousands).

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

Total deposits at June 30, 2019 remained stable at $1.4 billion with only a slight decrease when compared to December 31, 2018. Our stable core deposit base, which excludes time deposits, totaled $1.2 billion or 87.8% and 87.6% of total deposits at June 30, 2019 and December 31, 2018, respectively.

FHLB borrowings remained unchanged at $27.5 million at June 30, 2019 and December 31, 2018. 

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit.  For the period ended June 30, 2019, we did not engage in any off-balance sheet transactions reasonably likely to have a material impact on our financial condition, results of operations, or cash flows.

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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 $57.9 million in projected cash flow from securities repayments for the remainder of 2019 provides an additional source of liquidity.

The Bank also has significant borrowing capacity with the FRB-Atlanta and with the FHLB–Dallas.  As of June 30, 2019, we had no borrowings with the FRB-Atlanta. FHLB advances totaled $27.5 million at June 30, 2019 and consisted of two advances on existing swap contracts. Under existing agreements with the FHLB-Dallas, our borrowing capacity totaled $292.5 million at June 30, 2019.  The Bank has the ability to post additional collateral of approximately $356.9 million if necessary to meet liquidity needs.  Additionally, $130.7 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta. Unsecured borrowing lines totaling $20.0 million are available through correspondent banks.  We utilize these contingency funding alternatives to meet deposit volatility, which is more likely in the current environment, given unusual competitive offerings within our markets.

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

Company Liquidity

At the Company level, cash is needed primarily to meet interest payments on the junior subordinated debentures, dividends on our common stock and dividend payments on the Series B and Series C Preferred Stocks.  The dividend rate on the $32.0 million of Series B Preferred Stock issued to the U.S. Treasury for participation in the Small Business Lending Fund (“SBLF”) was 9.0% for the three month period ended June 30, 2019 and 2018.

As of June 30, 2019, there were 89,721 shares of Series C Preferred Stock issued and outstanding.  The Series C Preferred Stock is entitled to the payment of noncumulative dividends, if and when declared by the Company’s Board of Directors, at the rate of 4.00% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year.  The Series C Preferred Stock paid dividends totaling $90,000 for the three months ended June 30, 2019 and 2018.

Due to the loss reported for quarter ended June 30, 2019, we currently do not have the ability to approve dividends from the Bank to the Company without prior approval from the OCC.  As of June 30, 2019, the Company had $40.8 million of cash to fund general corporate obligations.

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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 regulatory minimum capital ratios.  The effect of the capital conservation buffer fully implemented on January 1, 2019 was to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.  The new minimum capital requirements were effective on January 1, 2015 for community banking organizations, such as MidSouth, whereas other requirements of the Basel III rules including the conservation buffer phased in as of January 2019.

At June 30, 2019, the Company and the Bank were in compliance with statutory minimum capital requirements and were classified as “well capitalized.”  Minimum capital requirements include a total risk-based capital ratio (total risk-based capital to risk-weighted assets) of 8.0%, with Tier 1 capital not less than 6.0%, a Tier 1 leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution, and a common equity Tier 1 capital to total risk-weighted assets of 4.5%. However, effective July 19, 2017, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 leverage ratio of at least 8%, and a total risk-based capital ratio of at least 12%. The Bank had a Tier 1 leverage capital ratio of 9.08% and a total risk-based capital ratio of 15.61% at June 30, 2019. As of June 30, 2019, the Company’s Tier 1 leverage ratio was 11.53%, Tier 1 capital to risk-weighted assets was 18.23%, total capital to risk-weighted assets was 19.50% and common equity Tier 1 capital to risk-weighted assets was 12.37%. 

46

Asset Quality

Credit Risk Management

We manage credit risk by following written, Board approved policies and procedures that govern all credit related activities.  Our Chief Credit Officer (“CCO”) is responsible for all credit risk management including credit policy and procedure development, underwriting oversight, loan approval, portfolio management which includes the management of classified and criticized assets for the Bank. The credit risk management activities are performed through Relationship Managers, Underwriting Analysts, Special Assets and Portfolio Management groups. We have implemented ongoing portfolio management activities that include specific reviews of the largest credit relationships, past due monitoring, risk rating review and certification, annual credit reviews and loan exception tracking. In addition to the credit risk management function are independent reviews performed by a third party loan review.

Credit concentrations are monitored and reported quarterly whereby individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity are evaluated for each major standard industry classification segment.  At June 30, 2019, one industry segment concentration, the oil and gas industry, aggregated more than 10% of our loan portfolio.  Our exposure in the oil and gas (energy-related) industry, including related service and manufacturing industries, totaled approximately $113.0 million, or 12.8% of total loans with $3.0 million in nonaccrual oil and gas loans. 

Additional information regarding credit quality by loan classification is provided in Note 4 – Loans and Note 9 – Fair Value Measurement in the notes to the interim consolidated financial statements.

47

Nonperforming Assets and Allowance for Loan Loss

The following table sets forth the Company's nonperforming assets (in thousands):

Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing
	June 30, 2019			December 31, 2018			June 30, 2018
Nonaccrual loans	$	23,287		$	8,920		$	73,538
Loans past due 90 days and over and still accruing	—			—			3
Total nonperforming loans	23,287			8,920			73,541
Nonperforming loans held for sale	—			20,441			—
Other real estate owned	387			1,067			1,365
Other assets repossessed	8			55			—
Total nonperforming assets	$	23,682		$	30,483		$	74,906
Troubled debt restructurings, accruing	$	593		$	1,334		$	1,010
Nonperforming assets to total assets	1.38		%	1.75		%	4.03		%
Nonperforming assets to total loans + ORE + other assets repossessed	2.69		%	3.39		%	7.07		%
ALLL to nonperforming loans	120.79		%	195.40		%	31.97		%
ALLL to total loans	3.20		%	1.94		%	2.22		%
QTD charge-offs	$	1,558		$	19,277		$	2,801
QTD recoveries	150			258			505
QTD net charge-offs	$	1,408		$	19,019		$	2,296
Annualized net charge-offs to total loans	0.64		%	8.45		%	0.87		%

Nonperforming assets totaled $23.7 million at June 30, 2019, a decrease of $6.6 million and $61.2 million from December 31, 2018 and June 30, 2018 reported amounts, respectively.  The decrease from December 31, 2018 to June 30, 2019 is primarily attributable to the sale of $16.9 million of nonperforming loans, which was offset by a $13.2 million increase in non-accrual loans that was due primarily to a $11.4 million shared national healthcare credit.

Allowance coverage for nonperforming loans was 120.79% at June 30, 2019 compared to 195.40% at December 31, 2018 and 31.97% at June 30, 2018.  The ALLL/total loans ratio was 3.20% at June 30, 2019, compared to 1.94% at December 31, 2018 and 2.22% at June 30, 2018.  The ratio of annualized net charge-offs to total loans was 0.64% for the three months ended June 30, 2019, compared to 8.45% for the three months ended December 31, 2018, and 0.87% for the three months ended June 30, 2018.

Total nonperforming assets to total loans plus ORE and other assets repossessed decreased to 2.69% at June 30, 2019 from 3.39% at December 31, 2018 and 7.07% at June 30, 2018.  Performing troubled debt restructurings (“TDRs”) totaled $593,000 at June 30, 2019, compared to $1.3 million at December 31, 2018 and $1.0 million at June 30, 2018.  Additional information regarding impaired loans is included in Note 4 – Loans and Note 9 – 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 ALLL is comprised of specific reserves assigned to each impaired loan for which a probable loss has been identified as well as general reserves to maintain the allowance at an acceptable level for other loans in the portfolio where historical loss experience is available that indicates certain probable losses may exist.  Factors considered in determining provisions include estimated losses in significant credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off-balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management; and the results of examinations of the loan portfolio by regulatory agencies and others.  The processes by which we determine the appropriate level of the ALLL, and the corresponding provision for probable credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates. We believe the $28.1 million in the ALLL as of June 30, 2019 is sufficient to cover probable losses in the loan portfolio.

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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.

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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. The table below presents a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures include, "diluted earnings per share, operating" and "operating earnings available to common shareholders". "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.

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

Reconciliation of Non-GAAP Financial Measures
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating Net (Loss) Income
Net loss available to common shareholders	$	(3,713	)	$	(1,479	)	(10,353		)	(1,928		)
Adjustment items:
Merger-related expense	1,149			—			1,149			—
Regulatory remediation costs	—			5,323			—			9,249
Loans held for sale expense	—			20			—			883
Branch closure expenses	—			—			—			145
Tax effect adjustments	—			(1,122		)	—			(2,108		)
Diluted (loss) earnings, operating	$	(2,564	)	$	2,742		$	(9,204	)	$	6,241
Weighted average number of shares - diluted	16,724			16,526			16,699			16,514
Net loss per diluted share	$	(0.22	)	$	(0.09	)	(0.62		)	(0.12		)
Effect of adjustment items	$	0.05		$	0.24		0.05			0.62
Operating net (loss) income per diluted share	$	(0.15	)	$	0.17		(0.57		)	0.50

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes to disclosures impacting market risk from those disclosed under the heading "Funding Sources-Interest Rate Sensitivity" in our 2018 Annual Report on Form 10-K. The reader should reference our 2018 Annual Report on Form 10-K for the full disclosure over quantitative and qualitative market risk.

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Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were not effective due to the material weaknesses in the Company’s internal control over financial reporting, as described below.

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

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

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

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

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

Remediation Activities

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

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

In February 2019, the Company engaged GlassRatner, a specialty financial advisory services firm, to review the internal control structure surrounding the ALLL, as well as the ALLL methodology, policies and procedures, and compliance with Generally Accepted Accounting Principles (GAAP) and regulatory guidance. The ALLL process was fully analyzed with interviews conducted with key members of Credit and Accounting, including the Chief Credit Officer, the Chief Financial Officer, the Director of Special Assets, Director of SEC Reporting, and other Special Assets employees. As part of the immediate remediation to improve documentation, a more robust ALLL memo for first quarter of 2019 was prepared for submission to the Credit Risk Committee and control procedures for review of model inputs that included loans, impairments, net charge-offs and qualitative factors had redundant reviews to ensure accuracy and completeness. During the second quarter of 2019 updated procedures were developed and approved by the Credit Risk Committee. Additional training was implemented by the Chief Credit Officer

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

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

Changes in Internal Control Over Financial Reporting

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

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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.

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

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

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

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

Failure of the merger to be completed, the termination of the Merger Agreement, or a significant delay in the consummation of the merger could negatively impact the Company.

The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. These conditions to the consummation of the merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the merger is not completed on or before April 30, 2020, either Hancock Whitney or the Company may choose to terminate the Merger Agreement at any time after that date if the failure of the merger to occur on or before that date is not caused by any breach of the Merger Agreement by the party electing to terminate the Merger Agreement, before or after shareholder approval.

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

In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the merger, including the diversion of management attention from pursuing other opportunities and the constraints in the Merger Agreement on the ability to make significant changes to the Company’s ongoing business during the pendency of the merger, could have a material adverse effect on the Company’s business, financial condition and results of operations.

Additionally, the Company’s business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger, and the market price of Company common stock might decline to the extent that the current market price reflects a market assumption that the merger will be completed. If the Merger Agreement is terminated and the Company’s board of directors seeks another merger or business combination, Company shareholders cannot be certain that the Company will be able to find a party willing to engage in a transaction on equally or more attractive terms than the merger with Hancock Whitney.

The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.

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

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

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

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

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

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

The Company did not sell any unregistered equity securities or repurchase any equity securities during the quarter ended June 30, 2019.

Item 3.    Defaults Upon Senior Securities.

None.

Item 4.    Mine Safety Disclosures.

None.

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Item 5.    Other Information.

None.

Item 6.    Exhibits.

Exhibit Number	Document Description
2.1	Agreement and Plan of Merger, dated as of April 30, 2019, by and between Hancock Whitney Corporation and MidSouth Bancorp, Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on May 2, 2019)
3.1	Amended and Restated Articles of Incorporation of MidSouth Bancorp, Inc. (restated solely for purposes of Item 601(b)(3) of Regulation S-K) (filed as Exhibit 3.1 to MidSouth's Annual Report on Form 10-K filed on March 18, 2013 and incorporated herein by reference)
3.2	Amended and Restated By-laws of MidSouth Bancorp, Inc. effective as of September 26, 2012 (restated solely for purposes of Item 601(b)(3) of Regulation S-K (filed as Exhibit 3.3 to MidSouth’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference)
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 June 30, 2019, formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*

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

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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: August 9, 2019
	/s/ James R. McLemore
	James R. McLemore, President and CEO
	(Principal Executive Officer)
	/s/ Lorraine D. Miller
	Lorraine D. Miller, CFO
	(Principal Financial Officer and Principal Accounting Officer)

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