LAFAYETTE, La.--(BUSINESS WIRE)--Jul 30, 2018--MidSouth Bancorp, Inc. (“MidSouth”) (NYSE:MSL) today reported a quarterly net loss available to common shareholders of $1.5 million for the second quarter of 2018, compared to net loss available to common shareholders of $6.2 million reported for the second quarter of 2017 and a $450,000 net loss available to common shareholders for the first quarter of 2018. The second quarter of 2018 included an after-tax charge of $4.2 million for regulatory remediation costs, and an after-tax charge of $15,000 for costs associated with the bulk loan sale. For comparison purposes, the first quarter of 2018 included an after-tax charge of $761,000 resulting from costs associated with the bulk loan sale, an after-tax charge of $3.1 million for regulatory remediation costs, and an after-tax charge of $115,000 related to the branch closures during the quarter. Excluding these non-operating expenses, diluted earnings for the second quarter of 2018 were $0.16 per common share, compared to $0.21 per diluted share for the first quarter of 2018, and a loss of $0.38 per diluted share for the second quarter of 2017.

Commenting on the quarter, Jim McLemore, President and CEO, noted, “As indicated in our fourth quarter 2017 earnings release, we expected 2018 to be a heavy year for costs to remediate issues resulting from our 2017 Written Agreement with the OCC. This continues to be the case as we incurred over $5 million of expenses in the second quarter. As a result of these costs, we reported a loss for the quarter of $1.5 million. Excluding these expenses, the after-tax operating earnings of the Bank would have been $2.6 million.”

Mr. McLemore, commenting on MidSouth Bank’s ongoing transformation, remarked, “It’s been roughly a year since we began our transformation and we are making good progress in our efforts to significantly improve franchise value. Our path to increasing franchise value means reducing risk, becoming more efficient and becoming a more focused commercial banking franchise. In the second quarter, we completed the build out of our senior management team and believe we have put an extremely talented management team in place. Our new talent additions come to us from larger institutions where they bring us insights and experience from a process maturity standpoint that will greatly aid in our transformation efforts. At the same time, these individuals understand the competitive strengths an institution our size has to offer our customers and will help us capitalize on these strengths.”

“On the credit transformation, we continue to meaningfully reduce credit risk while we make good progress improving the Bank’s credit culture. Credit costs were muted again this quarter at only $440,000. We have reduced our level of classified assets from a high of 80% of capital in the second quarter of 2017 down to 53% of capital at the end of the second quarter of 2018.”

“We have rationalized our branch network and reduced our number of branches by 25% over the last year, reflecting the reduction in branch traffic most banks are experiencing. We reallocated $2 million of annual operating costs from these branches to remediation investments to improve the long-term value of the Bank. Despite the closure of these branches, the loss of deposits from these branches has been significantly less than what we estimated. Overall, our deposit franchise continues to perform very well, with steady balances and our cost of funds increasing only 14bps over the second quarter of 2017.”

Remediation Update

Mr. McLemore continued, “In the third quarter of 2017, we began a process of a top-to-bottom review to identify opportunities to strengthen the Bank. Some of the areas we identified for review directly resulted from remediation issues identified in the OCC Written Agreement. At mid-year 2018, expenses in 5 of the 6 major areas are almost complete. In the second quarter, we substantially completed the evaluation phase of the last of these major areas to strengthen our BSA/AML/OFAC program. As a result, we are increasing our total estimated remediation costs for 2018 to $18-$20 million from our previous estimate of $10-$12 million. We recognize there is a significant cost to these remediation efforts but we believe these investments will pay off many times over in terms of increasing the value of the franchise through the reduction of risk and through more efficient and effective processes. We are focused on doing the right things and doing them well.”

Balance Sheet

Consolidated assets remained constant at $1.9 billion for the quarters ended June 30, 2018 and 2017 and March 31, 2018. Our stable core deposit base, which excludes time deposits, totaled $1.3 billion at June 30, 2018 and March 31, 2018 and accounted for 88.5% and 88.3% of deposits at June 30, 2018 and March 30, 2018, respectively. Net loans totaled $1.0 billion at June 30, 2018, compared to $1.1 billion at March 31, 2018 and $1.2 billion at June 30, 2017.

MidSouth’s Tier 1 leverage capital ratio was 12.71% at June 30, 2018, compared to 12.80% at March 31, 2018. Tier 1 risk-based capital and total risk-based capital ratios were 18.07% and 19.33% at June 30, 2018, compared to 17.08% and 18.34% at March 31, 2018, respectively. Tier 1 common equity to total risk-weighted assets at June 30, 2018 was 13.20%, compared to 12.50% at March 31, 2018. Tangible common equity totaled $162.6 million at June 30, 2018, compared to $164.4 million at March 31, 2018. Tangible book value per share at June 30, 2018 was $9.78 versus $9.89 at March 31, 2018.

Asset Quality

Nonperforming assets totaled $74.9 million at June 30, 2018, a decrease of $10.2 million compared to $85.1 million reported at March 31, 2018. The decrease in non-performing assets was primarily attributable to customer payoffs/ paydowns of $17 million of non-accrual loans in the second quarter. These decreases were partially offset by $8.6 million of loans placed on non-accrual during the quarter. Allowance coverage for nonperforming loans increased to 31.97% at June 30, 2018, compared to 30.84% at March 31, 2018. The ALLL/total loans ratio was 2.22% at June 30, 2018 and 2.23% at March 31, 2018. Including valuation accounting adjustments on acquired loans, the total valuation accounting adjustment plus ALLL was 2.30% of loans at June 30, 2018. The ratio of annualized net charge-offs to total loans increased to 0.87% for the three months ended June 30, 2018 compared to 0.54% for the three months ended March 31, 2018.

Total nonperforming assets to total loans plus ORE and other assets repossessed was 7.07% at June 30, 2018 compared to 7.47% at March 31, 2018. Loans classified as troubled debt restructurings, accruing (“TDRs, accruing”) totaled $1.0 million at June 30, 2018 compared to $1.2 million at March 31, 2018. Also included in nonperforming assets were nonperforming loans transferred to held for sale that totaled $808,000 at March 31, 2018; no loans were transferred to held for sale in the second quarter of 2018. Total classified assets, including ORE, were $105.8 million at June 30, 2018 compared to $113.7 million at March 30, 2018. The classified to capital ratio at MidSouth Bank was 52.9% at June 30, 2018 versus 54.3% at March 31, 2018.

More information on our energy loan portfolio and other information on quarterly results can be found on our website at MidSouthBank.com under Investor Relations/Presentations.

Mr. McLemore noted, “The second quarter’s credit costs continue to be muted, with the provision for loan losses totaling $440,000 this quarter. This follows a $0 loan loss provision in the first quarter. As we’ve cautioned before, credit costs could very well be choppy and should be evaluated over a longer-term horizon. We did see a reduction in NPA’s this quarter of $10 million and our classified/capital ratio came down to 53%. Overall, we are seeing good progress on asset quality so far in 2018, but also understand the nature of our credit transformation could be uneven in terms of downgrades of credit and charge-off content. Since the Bank’s turnaround began in the second quarter of 2017, credit costs have been $28 million versus an initial estimate of $31-$50 million.”

Second Quarter 2018 vs. First Quarter 2018 Earnings Comparison

MidSouth reported a net loss available to common shareholders of $1.5 million for the three months ended June 30, 2018, compared to a net loss available to common shareholders of $450,000 for the three months ended March 31, 2018. Revenues from consolidated operations decreased $341,000 in sequential-quarter comparison, not including the loss on mutual fund of $51,000. Net interest income decreased $445,000 in sequential-quarter comparison, resulting from a $258,000 decrease in interest income and a $187,000 increase in interest expense. Operating noninterest income decreased $53,000 in sequential-quarter comparison.

The second quarter of 2018 included non-operating expenses totaling $5.3 million which consisted of $5.3 million of regulatory remediation costs compared to $3.9 million of regulatory remediation costs for the three months ended March 31, 2017. Excluding these non-operating expenses, noninterest expense increased $91,000 in sequential-quarter comparison and consisted primarily of a $663,000 increase in noninterest expense, and offset by a $587,000 decrease in legal expense. The provision for loan losses increased $440,000 in sequential-quarter comparison. We recorded an income tax benefit of $237,000 for the second quarter of 2018 compared to an income tax benefit of $34,000 in the first quarter of 2018.

Dividends on the Series B Preferred Stock issued to the U.S. Treasury as a result of our participation in the Small Business Lending Fund totaled $720,000 for the second quarter of 2018 based on a dividend rate of 9%, unchanged from $720,000 for the first quarter of 2018. Dividends on the Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation totaled $90,000 for the three months ended June 30, 2018 and March 31, 2018.

Fully taxable-equivalent (“FTE”) net interest income decreased $455,000 in sequential-quarter comparison, primarily due to a decrease of $671,000 in interest income on loans, a $171,000 increase in interest expense on deposits, offset primarily by a $403,000 increase in other interest income. Interest income on loans decreased in sequential-quarter comparison due to a decrease in the average yield on loans of 5 bps from 5.60% to 5.55%, as well as a $50.3 million decrease in the average balance of loans. There was no change in the average yield on investment securities in sequential quarters and remained at 2.54%, and the average balance of investment securities decreased $1.0 million. The average yield on total earning assets decreased 16 bps for the same period, from 4.56% to 4.40%, respectively. The FTE net interest margin decreased 19 bps in sequential-quarter comparison, from 4.17% for the first quarter of 2018 to 3.98% for the second quarter of 2018. Excluding purchase accounting adjustments, the FTE net interest margin decreased 19 bps, from 4.14% for the first quarter of 2018 to 3.95% for the second quarter of 2018.

Second Quarter 2018 vs. Second Quarter 2017 Earnings Comparison

MidSouth reported a net loss available to common shareholders of $1.5 million for the three months ended June 30, 2018, compared to net loss available to common shareholders of $6.2 million for the three months ended June 30, 2017. Revenues from consolidated operations decreased $1.6 million in quarterly comparison, from $23.5 million for the three months ended June 30, 2017 to $21.8 million for the three months ended June 30, 2018. Net interest income decreased $1.3 million in quarterly comparison, resulting from a $1.0 million decrease in interest income and a $302,000 increase in interest expense. Noninterest income decreased $341,000 in quarterly comparison.

Excluding non-operating expenses of $5.3 million for the second quarter of 2018 and $2.4 million for the second quarter of 2017, noninterest expenses decreased $298,000 in quarterly comparison and consisted primarily of a $194,000 decrease in salaries and employee benefits costs and a $235,000 decrease in occupancy expense, which were partially offset by a $164,000 increase in legal and professional fees. The provision for loan losses decreased $12.1 million in quarterly comparison. The provision decrease is primarily due to payoffs and charge offs of large energy nonaccrual loans and a release of general energy reserves. A $237,000 income tax benefit was reported for the second quarter of 2018, compared to a $3.2 million income tax benefit that was reported in the second quarter of 2017.

Dividends on preferred stock totaled $810,000 for the three months ended June 30, 2018 and $811,000 for the three months ended June 30, 2017. Dividends on the Series B Preferred Stock were $720,000 for the second quarter of 2018, unchanged from $720,000 for the second quarter of 2017. Dividends on the Series C Preferred Stock totaled $90,000 for the three months ended June 30, 2018 and $91,000 for the three months ended June 30, 2017.

FTE net interest income decreased $1.4 million in prior year quarterly comparison. Interest income on loans decreased $1.4 million due to a decrease in the average balance of loans of $145.0 million in prior year quarterly comparison. The average yield on loans increased 20 bps in prior year quarterly comparison, from 5.35% to 5.55%.

Investment securities totaled $376.7 million, or 20.3% of total assets at June 30, 2018, versus $436.0 million, or 22.4% of total assets at June 30, 2017. The investment portfolio had an effective duration of 3.53 years and a net unrealized loss of $9.3 million at June 30, 2018. FTE interest income on investments decreased $544,000 in prior year quarterly comparison. The average volume of investment securities decreased $60.1 million in prior year quarterly comparison, and the average tax equivalent yield on investment securities decreased 15 bps, from 2.69% to 2.54%.

The average yield on all earning assets decreased 12 bps in prior year quarterly comparison, from 4.52% for the second quarter of 2017 to 4.40% for the second quarter of 2018.

Interest expense increased $302,000 in prior year quarterly comparison. Increases in interest expense included a $437,000 increase in interest expense on deposits and a $29,000 increase in interest expense on FHLB advances, which were partially offset by a $211,000 decrease in interest expense on repurchase agreements. Excluding purchase accounting adjustments on acquired certificates of deposit and FHLB borrowings, the average rate paid on interest-bearing liabilities was 0.63% for the three months ended June 30, 2018 and 0.51% for the three months ended June 30, 2017.

As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin decreased 20 bps, from 4.18% for the second quarter of 2017 to 3.98% for the second quarter of 2018. Excluding purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin decreased 14 bps, from 4.09% for the second quarter of 2017 to 3.95% for the second quarter of 2018.

Year-To-Date Earnings Comparison

MidSouth reported a net loss available to common shareholders of $1.9 million for the six months ended June 30, 2018, compared to net loss available to common shareholders of $4.5 million for the six months ended June 30, 2017. Revenues from consolidated operations decreased $2.6 million in year-over-year comparison, from $46.6 million for the six months ended June 30, 2017 to $44.0 million for the six months ended June 30, 2018. Net interest income decreased $2.0 million in year-over-year comparison, resulting from a $1.6 million decrease in interest income and a $464,000 increase in interest expense. Noninterest income decreased $556,000 in year-over-year comparison and consisted primarily of a $605,000 decrease in service charges on deposits accounts with an offset of a $192,000 increase in ATM/debit card income.

Excluding non-operating expenses of $10.4 million for the six months ended June 30, 2018 and $2.4 million for the six months ended June 30, 2017, noninterest expenses decreased $690,000 in year-over-year comparison and consisted primarily of a $1.2 million decrease in salaries and benefits costs, a $814,000 decrease in occupancy expense, and a $211,000 decrease in ATM/debit card expense, which were partially offset by increases of $1.5 million in legal and professional fees and $110,000 in FDIC premiums. The provision for loan losses decreased $14.9 million in year-over-year comparison, from $15.3 million for the six months ended June 30, 2017 to $440,000 for the six months ended June 30, 2018. A $271,000 income tax benefit was reported for the first six months of 2018, compared to an income tax benefit of $2.6 million for the first six months of 2017.

In year-to-date comparison, FTE net interest income decreased $2.3 million primarily due to a $2.0 million decrease in interest income from total loans as a result of lower average balances of loans of $130,000 for the period as problem loans have been sold or reduced and exposure to energy credits has been limited. This more than offset the 24bps increase in average loan yields from 5.33% to 5.57%. The average volume of investment securities decreased $60.0 million in year-over-year comparison, and the average yield on investment securities decreased from 2.68% to 2.58% for the same period primarily as a result of recent tax law changes that have reduced yield on tax-exempt municipal bonds. The average yield on earning assets decreased from 4.53% at June 30, 2017 to 4.48% at June 30, 2018. The purchase accounting adjustments added 4 bps to the average yield on loans for the six months ended June 30, 2018 and 18 bps for the six months ended June 30, 2017. Net of purchase accounting adjustments, the average yield on earning assets decreased 11 bps, from 4.18% at June 30, 2017 to 4.07% at June 30, 2018.

Interest expense increased $464,000 in year-over-year comparison. Increases in interest expense included a $739,000 increase in interest expense on deposits. This increase was partially offset by a $502,000 decrease in interest expense on repurchase agreements and short-term FHLB advances. The average rate paid on interest-bearing liabilities was 0.59% for the six months ended June 30, 2018, compared to 0.47% for the six months ended June 30, 2017. Net of purchase accounting adjustments, the average rate paid on interest-bearing liabilities increased 9 bps, from 0.50% for the six months ended June 30, 2017 to 0.59% for the six months ended June 30, 2018. The FTE net interest margin decreased from 4.19% for the six months ended June 30, 2017 to 4.07% for the six months ended June 30, 2018. Net of purchase accounting adjustments, the FTE net interest margin decreased from 4.11% to 4.05% for the six months ended June 30, 2017 and 2018, respectively.

About MidSouth Bancorp, Inc.

MidSouth Bancorp, Inc. is a bank holding company headquartered in Lafayette, Louisiana, with total assets of $1.9 billion as of June 30, 2018. MidSouth Bancorp, Inc. trades on the NYSE under the symbol “MSL.” Through its wholly owned subsidiary, MidSouth Bank, N.A., MidSouth offers a full range of banking services to commercial and retail customers in Louisiana and Texas. MidSouth Bank currently has 42 locations in Louisiana and Texas and is connected to a worldwide ATM network that provides customers with access to more than 55,000 surcharge-free ATMs. Additional corporate information is available at MidSouthBank.com.

Forward-Looking Statements

Certain statements contained herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements include, among others, statements regarding expected future financial results, the strength of the Company's balance sheet and its positioning to address problem assets and achieve operating efficiencies and the implementation of the provisions of the formal agreement with the OCC. 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. Factors that might cause such a difference include, among other matters, changes in interest rates and market prices that could affect the net interest margin, asset valuation, and expense levels; changes in local economic and business conditions in the markets we serve, including, without limitation, changes related to the oil and gas industries that could adversely affect customers and their ability to repay borrowings under agreed upon terms, adversely affect the value of the underlying collateral related to their borrowings, and reduce demand for loans; increases in competitive pressure in the banking and financial services industries; increased competition for deposits and loans which could affect compositions, rates and terms; changes in the levels of prepayments received on loans and investment securities that adversely affect the yield and value of the earning assets; our ability to successfully implement and manage our recently announced strategic initiatives; costs and expenses associated with our strategic initiatives and possible changes in the size and components of the expected costs and charges associated with our strategic initiatives; our ability to realize the anticipated benefits and cost savings from our strategic initiatives within the anticipated time frame, if at all; the ability of the Company to comply with the terms of the formal agreement with the Office of the Comptroller of the Currency; credit losses due to loan concentration, particularly our energy lending and commercial real estate portfolios; a deviation in actual experience from the underlying assumptions used to determine and establish our allowance for loan losses (“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 conditions on our operations or require us to increase our allowance for loan losses or write-down assets; changes in the availability of funds resulting from reduced liquidity or increased costs; the timing and impact of future acquisitions or divestitures, the success or failure of integrating acquired operations, and the ability to capitalize on growth opportunities upon entering new markets; the ability to acquire, operate, and maintain effective and efficient operating systems; increased asset levels and changes in the composition of assets that would impact capital levels and regulatory capital ratios; loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels; legislative and regulatory changes, including the impact of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of FDIC insurance and other coverage; regulations and restrictions resulting from our participation in government-sponsored programs such as the U.S. Treasury’s Small Business Lending Fund, including potential retroactive changes in such programs; changes in accounting principles, policies, and guidelines applicable to financial holding companies and banking; increases in cybersecurity risk, including potential business disruptions or financial losses; acts of war, terrorism, cyber intrusion, weather, or other catastrophic events beyond our control; and other factors discussed under the heading “Risk Factors” in MidSouth’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 16, 2018 and in its other filings with the SEC.

MidSouth does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or otherwise, except as required by law.

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