MidSouth Bancorp, Inc. : Reports First Quarter Results

MidSouth Bancorp, Inc. (“MidSouth”) (NYSE:MSL) today reported a quarterly net loss available to common shareholders of $450,000 for the first quarter of 2018, compared to net earnings available to common shareholders of $1.7 million reported for the first quarter of 2017 and an $11.3 million net loss available to common shareholders for the fourth quarter of 2017. The first quarter of 2018 included an after tax charge of $691,000 resulting from the transfer of loans to held for sale, an after-tax charge of $3.1 million for regulatory remediation costs, an after-tax charge of $115,000 related to the branch closures during the quarter and an after-tax charge of $70,000 for legal fees related to the bulk loan sale. For comparison purposes, the fourth quarter of 2017 included an after tax charge of $3.9 million resulting from the transfer of loans to held for sale, a $3.6 million charge for the write-down of net deferred tax assets as a result of the Tax Cuts and Jobs Act, an after-tax charge of $1.2 million for regulatory remediation costs, an after-tax charge of $512,000 resulting from the write-down of assets held for sale, an after-tax gain on sale of branches of $484,000 and an after-tax charge of $111,000 for severance and retention accruals. Excluding these non-operating income items and expenses, diluted earnings for the first quarter of 2018 were $0.21 per common share, compared to a loss of $0.15 per diluted share for the fourth quarter of 2017 and diluted earnings per common share of $0.15 for the first quarter of 2017.

Jim McLemore, President and CEO, remarked, "The first quarter of 2018 represents the first quarter of our three-year strategic plan submitted to the regulators in November 2017. Although we are making progress on our strategic plan, progress is not yet measurable in terms of positive financial results. Our execution focus in 2018 is to reduce risk and build a solid foundation for future growth. In those terms, we are making good progress. Our focus has expanded to include addressing operational and compliance issues in addition to reducing our criticized asset levels. We are committing significant resources and expertise to accomplish this in a timely and efficient manner. In this regard, we invested approximately $3.9 million during the first quarter in remediation efforts related to our written agreement and strategic plan. These costs are consistent with our communication in January regarding the investment of approximately $10-$12 million in 2018 related to remediation efforts with costs concentrated in the first half of the year."

Balance Sheet

Consolidated assets remained constant at $1.9 billion for the quarters ended March 31, 2018 and 2017 and December 31, 2017. Our stable core deposit base, which excludes time deposits, totaled $1.3 billion at March 31, 2018 and December 31, 2017 and accounted for 88.3% and 87.7% of deposits at March 31, 2018 and December 31, 2017, respectively. Net loans totaled $1.1 billion at March 31, 2018, compared to $1.2 billion at December 31, 2017 and March 31, 2017.

MidSouth’s Tier 1 leverage capital ratio was 12.80% at March 31, 2018, compared to 12.53% at December 31, 2017. Tier 1 risk-based capital and total risk-based capital ratios were 17.08% and 18.34% at March 31, 2018, compared to 16.51% and 17.77% at December 31, 2017, respectively. Tier 1 common equity to total risk-weighted assets at March 31, 2018 was 12.50%, compared to 12.10% at December 31, 2017. Tangible common equity totaled $164.4 million at March 31, 2018, compared to $167.3 million at December 31, 2017. Tangible book value per share at March 31, 2018 was $9.89 versus $10.11 at December 31, 2017.

Asset Quality

Nonperforming assets totaled $85.1 million at March 31, 2018, an increase of $27.8 million compared to $57.3 million reported at December 31, 2017. The increase in non-performing assets was primarily due to four credits moved to non-accrual, $22.5 million of which were previously classified and do not represent new problem credits. The increase is primarily attributable to $37.5 million of loans placed on non-accrual during the quarter. This increase was partially offset by the payoffs/paydowns of $3.7 million of non-accrual loans and the decrease of $4.3 million in nonperforming loans held for sale. Allowance coverage for nonperforming loans decreased to 30.84% at March 31, 2018, compared to 53.77% at December 31, 2017. The ALLL/total loans ratio was 2.23% at March 31, 2018 and 2.27% at December 31, 2017. Including valuation accounting adjustments on acquired loans, the total valuation accounting adjustment plus ALLL was 2.31% of loans at March 31, 2018. The ratio of annualized net charge-offs to total loans decreased to 0.54% for the three months ended March 31, 2018 compared to 2.94% for the three months ended December 31, 2017.

Total nonperforming assets to total loans plus ORE and other assets repossessed was 7.47% at March 31, 2018 compared to 4.83% at December 31, 2017. Loans classified as troubled debt restructurings, accruing (“TDRs, accruing”) totaled $1.2 million at March 31, 2018 compared to $1.4 million at December 31, 2017. Also included in nonperforming assets was nonperforming loans transferred to held for sale that totaled $808,000 and $5.1 million at March 31, 2018 and December 31, 2017, respectively. Total classified assets, including ORE, were $113.7 million at March 31, 2018 compared to $118.2 million at December 31, 2017. The classified to capital ratio at MidSouth Bank was 54.3% at March 31, 2018 versus 56.1% at December 31, 2017.

Our provision for loan losses is intended to create an adequate allowance for loan losses in the loan portfolio at the end of each reporting period. Provisions for loan losses totaling $10.6 million and $2.8 million were appropriate for the quarters ended December 31, 2017 and March 31, 2017, respectively, based on our allowance for loan losses methodology that considers a number of quantitative and qualitative factors. Management determined the allowance for loan losses to be adequate at March 31, 2018, and, as a result, no provision for loan losses was expensed during the quarter ended March 31, 2018. This was primarily due to a reduction in specific reserve allocations on impaired loans as well as a decrease in our overall loan portfolio.

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 “We were pleased to see our level of classified assets and net charge-offs decline this quarter. While we were not pleased with the increase in NPAs during the quarter, the majority of the increase represented continued migration of previously classified credits. There are no recorded impairments on the four credits accounting for the increase. We continue to aggressively identify problem credits as circumstances dictate. Our capital strength with a Tangible Common Equity ratio of 9% continues to allow greater flexibility to invest in operational and compliance enhancements and manage problem assets from a position of strength, but we also remain committed to being as judicious as possible from a capital preservation standpoint."

First Quarter 2018 vs. Fourth Quarter 2017 Earnings Comparison

MidSouth reported a net loss available to common shareholders of $450,000 for the three months ended March 31, 2018, compared to a net loss available to common shareholders of $11.3 million for the three months ended December 31, 2017. The fourth quarter of 2017 included a $744,000 gain on the sale of branches. Excluding this non-operating revenue, revenues from consolidated operations decreased $2.6 million in sequential-quarter comparison. Net interest income decreased $2.1 million in sequential-quarter comparison, resulting from a $2.0 million decrease in interest income and a $144,000 increase in interest expense. Operating noninterest income decreased $455,000 in sequential-quarter comparison.

The first quarter of 2018 included non-operating expenses totaling $5.0 million which consisted of $145,000 of costs related to branch closures, $3.9 million of regulatory remediation costs, an $875,000 loss on the transfer of loans to held for sale and $88,000 of legal fees related to the bulk loan sale. The fourth quarter of 2017 included non-operating expenses totaling $8.8 million which consisted of $171,000 of severance and retention accruals, a $789,000 write-down on assets held for sale, $1.8 million of regulatory remediation costs and a $6.0 million loss on the transfer of loans to held for sale. Excluding these non-operating expenses, noninterest expense decreased $343,000 in sequential-quarter comparison and consisted primarily of a $312,000 decrease in occupancy expense and a $255,000 decrease in expenses on ORE, which were partially offset by a $240,000 increase in legal and professional fees. The provision for loan losses decreased $10.6 million in sequential-quarter comparison. We recorded an income tax benefit of $34,000 for the first quarter of 2018. In connection with the Tax Cuts and Jobs Act, a $3.6 million tax-related charge was recorded during the fourth quarter of 2017 associated with the revaluation of our net deferred tax assets. Excluding this adjustment, we recorded an income tax benefit of $4.1 million for the fourth quarter of 2017.

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 first quarter of 2018 based on a dividend rate of 9%, unchanged from $720,000 for the fourth quarter of 2017. 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 March 31, 2018 and December 31, 2017.

Fully taxable-equivalent (“FTE”) net interest income decreased $2.2 million in sequential-quarter comparison, primarily due to a $2.0 million decrease in interest income on loans, a $257,000 decrease in FTE interest income on investment securities and a $141,000 increase in interest expense on deposits, which were partially offset by a $200,000 increase in interest income on time and interest bearing deposits in other banks. Interest income on loans decreased in sequential-quarter comparison due to a decrease in the average yield on loans of 17 basis points, from 5.77% to 5.60% as well as a $79.2 million decrease in the average balance of loans. The average yield on investment securities decreased 15 basis points, from 2.69% to 2.54%, and the average balance of investment securities decreased $17.3 million. The average yield on total earning assets decreased 23 basis points for the same period, from 4.79% to 4.56%, respectively. The FTE net interest margin decreased 28 basis points in sequential-quarter comparison, from 4.45% for the fourth quarter of 2017 to 4.17% for the first quarter of 2018. Excluding purchase accounting adjustments, the FTE net interest margin decreased 22 basis points, from 4.36% for the fourth quarter of 2017 to 4.14% for the first quarter of 2018.

First Quarter 2018 vs. First Quarter 2017 Earnings Comparison

MidSouth reported a net loss available to common shareholders of $450,000 for the three months ended March 31, 2018, compared to net earnings available to common shareholders of $1.7 million for the three months ended March 31, 2017. Revenues from consolidated operations decreased $911,000 in quarterly comparison, from $23.1 million for the three months ended March 31, 2017 to $22.2 million for the three months ended March 31, 2018. Net interest income decreased $696,000 in quarterly comparison, resulting from a $534,000 decrease in interest income and a $162,000 increase in interest expense. Noninterest income decreased $215,000 in quarterly comparison.

Excluding non-operating expenses of $5.0 million for the first quarter of 2018, noninterest expenses decreased $391,000 in quarterly comparison and consisted primarily of a $970,000 decrease in salaries and employee benefits costs and a $579,000 decrease in occupancy expense, which were partially offset by a $1.3 million increase in legal and professional fees. The provision for loan losses decreased $2.8 million in quarterly comparison. We recorded an income tax benefit of $34,000 for the first quarter of 2018.

Dividends on preferred stock totaled $810,000 for the three months ended March 31, 2018 and $811,000 for the three months ended March 31, 2017. Dividends on the Series B Preferred Stock were $720,000 for the first quarter of 2018, unchanged from $720,000 for the first quarter of 2017. Dividends on the Series C Preferred Stock totaled $90,000 for the three months ended March 31, 2018 and $91,000 for the three months ended March 31, 2017.

FTE net interest income decreased $828,000 in prior year quarterly comparison. Interest income on loans decreased $607,000 due to a decrease in the average balance of loans of $114.5 million in prior year quarterly comparison. The average yield on loans increased 31 basis points in prior year quarterly comparison, from 5.29% to 5.60%.

Investment securities totaled $367.2 million, or 19.8% of total assets at March 31, 2018, versus $390.2 million, or 20.7% of total assets at December 31, 2017. The investment portfolio had an effective duration of 3.6 years and a net unrealized loss of $8.3 million at March 31, 2018. FTE interest income on investments decreased $503,000 in prior year quarterly comparison. The average volume of investment securities decreased $57.8 million in prior year quarterly comparison, and the average tax equivalent yield on investment securities decreased 12 basis points, from 2.66% to 2.54%.

The average yield on all earning assets increased 5 basis points in prior year quarterly comparison, from 4.51% for the first quarter of 2017 to 4.56% for the first quarter of 2018.

Interest expense increased $162,000 in prior year quarterly comparison. Increases in interest expense included a $303,000 increase in interest expense on deposits and a $41,000 increase in interest expense on FHLB advances, which were partially offset by a $194,000 decrease in interest expense on repurchase agreements.

As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin decreased 1 basis point, from 4.18% for the first quarter of 2017 to 4.17% for the first quarter of 2018. Excluding purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin increased 3 basis points, from 4.11% for the first quarter of 2017 to 4.14% for the first quarter of 2018.

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 March 31, 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.