MidSouth Bancorp, Inc. Reports Second Quarter 2017 Results and Declares Quarterly Dividends

• Total energy loans, as defined above, decreased $23.0 million during 2Q17 to $208.8 million, or 16.8% of total loans, from 18.2% at March 31, 2017 primarily due to $16.1 million of payoffs during the quarter.
• Direct C&I energy loans were $171.5 million or 13.8% of total loans and had a weighted average maturity of 3.1 years at June 30, 2017.
• Energy-related CRE and residential real estate loans were $37.0 million or 3.0% of total loans at June 30, 2017.
• Total criticized energy-related loans decreased $18.0 million, or 16.1%, during 2Q17 to $93.5 million and represented 44.7% of energy loans at June 30, 2017, versus 48.1% at March 31, 2017.
• Seven energy loan relationships had rating changes during the quarter.
• Two loan relationship totaling $1.4 million were downgraded to Special Mention
• Four loan relationships totaling $5.7 million were downgraded to Substandard
• One loan relationship totaling $195,000 was upgraded to Pass
• Three energy-related charge-offs totaled $6.0 million, including $5.6 million of collateral dependent charge-offs on 2 relationships, of which $2.4 million was reserved as of March 31, 2017.
• Cycle to date net charge-offs totaled $10.0 million, or 3.76% of December 31, 2014 energy loans, which was when the effects of declining oil prices began to surface.
• Five new energy-related impairments totaling $2.3 million were identified during 2Q17 and three additional impairment charges of $2.6 million were recorded related to existing impaired loans identified prior to 2Q17.
• The energy reserve as a percentage of total energy loans, as defined, was 5.4% at June 30, 2017. The reserve attributable to C&I energy loans was approximately 6.4%. The reserve on all other energy loans was 1.0%.
• The Bank has two Shared National Credits (SNCs) totaling $12.9 million in the energy portfolio at June 30, 2017 and both are rated as Substandard.
• To date, during the month of July 2017, the Bank has had one rating related change to its energy portfolio:
• One credit in the amount of $93,000 was downgraded from Pass to Classified

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.

Balance Sheet

Consolidated assets remained constant at $1.9 billion for the quarters ended June 30, 2017 and 2016 and March 31, 2017.  Our stable core deposit base, which excludes time deposits, totaled $1.4 billion at June 30, 2017 and March 31, 2017 and accounted for 90.3% and 90.4% of deposits at June 30, 2017 and March 31, 2017, respectively.  Net loans totaled $1.216 billion at June 30, 2017, compared to $1.247 billion at March 31, 2017 and $1.241 billion at June 30, 2016.  The $31.8 million reduction in loans during the second quarter demonstrates our accelerated efforts to address nonperforming loans, which resulted in the high level of charge-offs and pay-offs during the quarter.

MidSouth's Tier 1 leverage capital ratio was 12.66% at June 30, 2017, compared to 10.27% at March 31, 2017.  Tier 1 risk-based capital and total risk-based capital ratios were 16.48% and 17.73% at June 30, 2017, compared to 13.14% and 14.40% at March 31, 2017, respectively.  Tier 1 common equity to total risk-weighted assets at June 30, 2017 was 12.15%, compared to 8.91% at March 31, 2017.  Tangible common equity totaled $174.2 million at June 30, 2017, compared to $128.4 million at March 31, 2017.  Tangible book value per share at June 30, 2017 was $10.87 versus $11.28 at March 31, 2017.  The changes in regulatory capital levels, tangible common equity and tangible book value per share are primarily attributable to the 4,583,334 shares of common stock issued with the $55.0 million capital raise during the quarter.

Asset Quality

Nonperforming assets totaled $56.4 million at June 30, 2017, a decrease of $2.5 million compared to $58.9 million reported at March 31, 2017.  The decrease is primarily attributable to the payoffs/paydowns of $15.3 million of non-accrual loans and the charge-off of $9.1 million of non-accrual loans, which included the charge-offs of $6.9 million of collateral-dependent loans that were on non-accrual at March 31, 2017.  These decreases were partially offset by $22.7 million of loans placed on non-accrual during the quarter.  Allowance coverage for nonperforming loans increased to 44.88% at June 30, 2017, compared to 42.96% at March 31, 2017.  The ALLL/total loans ratio was 1.99% at June 30, 2017 and 1.93% at March 31, 2017.  Including valuation accounting adjustments on acquired loans, the total valuation accounting adjustment plus ALLL was 2.11% of loans at June 30, 2017.  The ratio of annualized net charge-offs to total loans increased to 4.01% for the three months ended June 30, 2017 compared to 0.83% for the three months ended March 31, 2017.

Total nonperforming assets to total loans plus ORE and other assets repossessed was 4.54% at June 30, 2017 compared to 4.62% at March 31, 2017.  Loans classified as troubled debt restructurings, accruing ("TDRs, accruing") decreased to $1.7 million at June 30, 2017 compared to $2.0 million at March 31, 2017.  Classified assets, including ORE, were $148.8 million at June 30, 2017 compared to $148.4 million at March 31, 2017.  Downgrades to classified assets totaling $39.5 million during the quarter were partially offset by the payoff/paydown of $29.3 million of classified relationships during the second quarter as well as charge-offs of $9.6 million of loans rated as classified at March 31, 2017.

Second Quarter 2017 vs. First Quarter 2017 Earnings Comparison

MidSouth reported a net loss available to common shareholders of $6.2 million for the three months ended June 30, 2017, compared to net earnings available to common shareholders of $1.7 million for the three months ended March 31, 2017.  Net interest income increased $180,000 in sequential-quarter comparison.  Noninterest income increased $179,000 in sequential-quarter comparison.

The second quarter of 2017 included non-operating expenses totaling $2.4 million which consisted of $1.3 million of severance and retention accruals, a $570,000 write-down on assets held for sale and a $465,000 one-time charge related to discontinued branch projects.  Excluding these non-operating expenses, noninterest expense decreased $2,000 in sequential-quarter comparison.  Decreases of $579,000 in salaries and benefits costs and $196,000 in occupancy expenses were primarily offset by increases of $551,000 in legal and professional fees and a $187,000 provision for unfunded lines of credit.   The increase in legal and professional fees is primarily due to legal costs related to management transition issues and increased outsourcing expenses to enhance risk management.  The provision for loan losses increased $9.7 million in sequential-quarter comparison.  A $3.2 million income tax benefit was reported for the second quarter of 2017, compared to income tax expense of $589,000 for the first quarter of 2017.

Dividends on the Series B Preferred Stock issued to the Treasury as a result of our participation in the Small Business Lending Fund ("SBLF") totaled $720,000 for the second quarter of 2017 based on a dividend rate of 9%, unchanged from $720,000 for the first quarter of 2017.  Dividends on the Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation ("PSB") totaled $91,000 for the three months ended June 30, 2017 and March 31, 2017.

Fully taxable-equivalent ("FTE") net interest income increased $163,000 in sequential-quarter comparison, primarily due to an increase in interest income on loans of $109,000 as well as a $65,000 increase in interest income on time and interest-bearing deposits in other banks.  Interest income on loans increased in sequential-quarter comparison due to an increase in the average yield on loans of 6 basis points, from 5.29% to 5.35%.  The average balance of loans decreased $19.8 million in sequential-quarter comparison due to the high level of charge-offs and payoffs.  Excluding purchase accounting adjustments, the loan yield increased 3 basis points, from 5.22% to 5.25% during the same period.  Interest income on investment securities increased $39,000 in sequential-quarter comparison.  The average yield on investment securities increased 3 basis points, from 2.66% to 2.69%, and the average balance of investment securities increased $1.3 million.  The average yield on total earning assets increased one basis point for the same period, from 4.51% to 4.52%, respectively.  The FTE net interest margin remained unchanged at 4.18% in sequential-quarter comparison.  Excluding purchase accounting adjustments, the FTE net interest margin decreased 2 basis points, from 4.11% for the first quarter of 2017 to 4.09% for the second quarter of 2017.

Second Quarter 2017 vs. Second Quarter 2016 Earnings Comparison

MidSouth reported a net loss available to common shareholders of $6.2 million for the three months ended June 30, 2017, compared to net earnings available to common shareholders of $1.7 million for the three months ended June 30, 2016.  Revenues from consolidated operations increased $605,000 in quarterly comparison, from $22.9 million for the three months ended June 30, 2016 to $23.5 million for the three months ended June 30, 2017.  Net interest income increased $521,000 in quarterly comparison, resulting from a $636,000 increase in interest income, which was partially offset by a $115,000 increase in interest expense.  Noninterest income increased $84,000 in quarterly comparison and consisted primarily of a $98,000 increase in ATM/debit card income and a $44,000 increase in mortgage program fee income.  The increases were partially offset by a $55,000 decrease in service charges on deposits accounts.

Excluding non-operating expenses of $2.4 million for the second quarter of 2017, noninterest expenses increased $187,000 in quarterly comparison and consisted primarily of a $500,000 increase in legal and professional fees and a $189,000 increase in data processing costs, which were partially offset by a $239,000 decrease in occupancy expense and a $166,000 decrease in corporate development.  A reclass of certain hosted services subscriptions from corporate development into data processing at the beginning of 2017 caused the fluctuations in those two expense categories.  The provision for loan losses increased $10.2 million in quarterly comparison, from $2.3 million for the three months ended June 30, 2016 to $12.5 million for the three months ended June 30, 2017.  A $3.2 million income tax benefit was reported for the second quarter of 2017, compared to income tax expense of $1.0 million for the second quarter of 2016.

Dividends on preferred stock totaled $811,000 for the three months ended June 30, 2017 and June 30, 2016.  Dividends on the Series B Preferred Stock were $720,000 for the second quarter of 2017, unchanged from $720,000 for the second quarter of 2016.  Dividends on the Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation ("PSB") totaled $91,000 for the three months ended June 30, 2017 and June 30, 2016.

FTE net interest income increased $496,000 in prior year quarterly comparison.  Interest income on loans increased $159,000 due to an increase in the average yield on loans of 4 basis points.  The average balance of loans decreased $1.7 million in prior year quarterly comparison.  Purchase accounting adjustments added 10 basis points to the average yield on loans for the second quarter of 2017 and 9 basis points to the average yield on loans for the second quarter of 2016.  Excluding the impact of the purchase accounting adjustments, average loan yields increased 3 basis points in prior year quarterly comparison, from 5.22% to 5.25%.

Investment securities totaled $436.0 million, or 22.4% of total assets at June 30, 2017, versus $440.1 million, or 22.6% of total assets at December 31, 2016.  The investment portfolio had an effective duration of 3.0 years and a net unrealized gain of $2.0 million at June 30, 2017.  Interest income on investments increased $405,000 in prior year quarterly comparison.  The average volume of investment securities increased $33.7 million in prior year quarterly comparison, and the average tax equivalent yield on investment securities increased 17 basis points, from 2.52% to 2.69%.

The average yield on all earning assets increased 9 basis points in prior year quarterly comparison, from 4.43% for the second quarter of 2016 to 4.52% for the second quarter of 2017.  Excluding the impact of purchase accounting adjustments, the average yield on total earning assets increased 9 basis points, from 4.36% to 4.45% for the three-month periods ended June 30, 2016 and 2017, respectively.

Interest expense increased $115,000 in prior year quarterly comparison.  Increases in interest expense included a $70,000 increase in interest expense on deposits and a $42,000 increase in interest expense on variable rate junior subordinated debentures.  Excluding purchase accounting adjustments on acquired certificates of deposit and FHLB borrowings, the average rate paid on interest-bearing liabilities was 0.51% for the three months ended June 30, 2017 and 0.46% for the three months ended June 30, 2016.

As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin increased 7 basis points, from 4.11% for the second quarter of 2016 to 4.18% for the second quarter of 2017.  Excluding purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin increased 7 basis points, from 4.02% for the second quarter of 2016 to 4.09% for the second quarter of 2017.

Year-To-Date Earnings Comparison

MidSouth reported a net loss available to common shareholders of $4.5 million for the six months ended June 30, 2017, compared to net earnings available to common shareholders of $3.6 million for the six months ended June 30, 2016.  Revenues from consolidated operations increased $844,000 in year-over-year comparison, from $45.7 million for the six months ended June 30, 2016 to $46.6 million for the six months ended June 30, 2017.  Net interest income increased $460,000 in year-over-year comparison, resulting from a $620,000 increase in interest income, which was partially offset by a $160,000 increase in interest expense.  Noninterest income increased $384,000 in year-over-year comparison and consisted primarily of a $192,000 increase in ATM/debit card income, a $78,000 increase in mortgage program fee income and a $56,000 increase in service charges on deposits accounts.

Excluding non-operating expenses of $2.4 million for the second quarter of 2017, noninterest expenses increased $658,000 in year-over-year comparison and consisted primarily of a $627,000 increase in salaries and benefits costs, a $502,000 increase in legal and professional fees and a $352,000 increase in data processing costs, which were partially offset by decreases of $212,000 in occupancy expense, $190,000 in marketing costs, $185,000 in corporate development and $143,000 in ATM/debit card expense.  A reclass of certain hosted services subscriptions from corporate development into data processing at the beginning of 2017 caused the fluctuations in those two expense categories.  The provision for loan losses increased $10.2 million in year-over-year comparison, from $5.1 million for the six months ended June 30, 2016 to $15.3 million for the six months ended June 30, 2017, primarily due to the high level of charge-offs and additional impairment charges on nonperforming loans in the second quarter of 2017.  A $2.6 million income tax benefit was reported for the first six months of 2017, compared to income tax expense of $2.0 million for the first six months of 2016.

In year-to-date comparison, FTE net interest income increased $408,000 primarily due to a $618,000 increase in interest income from investment securities.  The average volume of investment securities increased $26.4 million in year-over-year comparison, and the average yield on investment securities increased 13 basis points for the same period.  Interest income on loans decreased $85,000 in year-over-year comparison.  The average volume of loans increased $9.8 million in year-over-year comparison, and the average yield on loans decreased 3 basis points, from 5.36% to 5.33%. The average yield on earning assets increased 6 basis points in year-over-year comparison, from 4.47% at June 30, 2016 to 4.53% at June 30, 2017.  The purchase accounting adjustments added 8 basis points to the average yield on loans for the six months ended June 30, 2017 and 13 basis points for the six months ended June 30, 2016.  Net of purchase accounting adjustments, the average yield on earning assets increased 9 basis points, from 4.38% at June 30, 2016 to 4.47% at June 30, 2017.

Interest expense increased $160,000 in year-over-year comparison.  Increases in interest expense included a $74,000 increase in interest expense on deposits and an $83,000 increase in interest expense on junior subordinated debentures.  These increases were partially offset by a $23,000 decrease in interest expense on short-term FHLB advances.  The average rate paid on interest-bearing liabilities was 0.47% for the six months ended June 30, 2017, compared to 0.43% for the six months ended June 30, 2016.  Net of purchase accounting adjustments, the average rate paid on interest-bearing liabilities increased 4 basis points, from 0.46% for the six months ended June 30, 2016 to 0.50% for the six months ended June 30, 2017.  The FTE net interest margin increased 4 basis points, from 4.15% for the six months ended June 30, 2016 to 4.19% for the six months ended June 30, 2017.  Net of purchase accounting adjustments, the FTE net interest margin increased 7 basis points, from 4.04% to 4.11% for the six months ended June 30, 2016 and 2017.

Dividends

MidSouth's Board of Directors announced a cash dividend was declared in the amount of $0.01 per share to be paid on its common stock on October 2, 2017 to shareholders of record as of the close of business on September 15, 2017.  The quarterly common stock cash dividend has been reduced to conserve capital as we work to reduce problem assets.  Additionally, a quarterly cash dividend of 1.00% per preferred share on its 4.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series C was declared payable on October 16, 2017 to shareholders of record as of the close of business on October 2, 2017.

About MidSouth Bancorp, Inc.

MidSouth Bancorp, Inc. is a financial holding company headquartered in Lafayette, Louisiana, with assets of $1.9 billion as of June 30, 2017. 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 57 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 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.

Actual results may differ materially from the results anticipated in these 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 our strategic initiatives to adequately address the anticipated concerns of the Office of the Comptroller of the Currency (the "OCC") in its current examination of us and the ability of the Company to comply with the terms of the formal agreement with the OCC; credit losses due to loan concentration, particularly our energy lending and legacy 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, 2016 filed with the SEC on March 16, 2017 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.

MIDSOUTH BANCORP, INC. and SUBSIDIARIES
Condensed Consolidated Financial Information (unaudited)
(in thousands except per share data)
		Quarter		Quarter		Quarter		Quarter		Quarter
		Ended		Ended		Ended		Ended		Ended
EARNINGS DATA		6/30/2017		3/31/2017		12/31/2016		9/30/2016		6/30/2016
Total interest income		$     19,758		$     19,531		$      19,694		$     19,667		$     19,122
Total interest expense		1,512		1,465		1,459		1,414		1,397
Net interest income		18,246		18,066		18,235		18,253		17,725
FTE net interest income		18,442		18,279		18,478		18,472		17,946
Provision for loan losses		12,500		2,800		2,600		2,900		2,300
Non-interest income		5,223		5,044		5,071		5,152		5,139
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