MidSouth Bancorp’s new leadership has a mandate to prove the Lafayette, La., company doesn't need to sell itself.
The $1.9 billion-asset company made that point abundantly clear in a presentation at its recent annual meeting, noting in one slide that “independence is earned and not a God-given right.” The presentation was included in a regulatory filing.
To that end, MidSouth outlined several priorities for management that include resolving problematic energy credits, building capital, strengthening underwriting and reviewing the company’s branch network, products and expenses. MidSouth did not provide a timetable for when any decisions will be made.
Responsibility for the effort now belongs to James McLemore, who just became MidSouth’s permanent president and CEO. McLemore, previously MidSouth’s chief financial officer, was named interim CEO since April when founder Rusty Cloutier was abruptly fired.
Any shortcoming could spur MidSouth’s board to consider selling.
“I believe Jim has gotten a leash from the board to execute … with the ultimate goal to drive MidSouth to the top quartile of its peer group,” said William Wallace IV, an analyst at Raymond James. “If they can’t do that, I don’t think you’ll see a CEO search. I think they will look for a partner.”
McLemore did not return a call seeking comment.
MidSouth has been underperforming similar-sized institutions in recent quarters, largely due to lingering issues with energy lending. It has one of the nation’s highest concentrations of energy loans, with nearly a fifth of total loans dedicated to the sector. Many of those loans were made to services firms that generally lag other energy subsectors during a recovery.
MidSouth’s 0.49% return on average assets in 2016 was half that of a median peer group made up of banks that have assets of $1 billion to $4 billion and are covered by at least three analysts, according to slides shared at its May 24 annual meeting. Its 72% efficiency ratio at Dec. 31 was considerably higher than the peer group’s 64%.
Those types of numbers likely factored heavily into the board’s decision to fire Cloutier, along with his son, in a surprising shake-up. Performance was highlighted at the time as a reason for the switch.
“The board was looking to hold people accountable,” said Brian Martin, an analyst at FIG Partners. McLemore “will lead the next chapter, so what that signals to me is that they are focused on improving operating performance more quickly than the company has in the past.”
MidSouth was sparse on details about its turnaround, though it did discuss opportunities to maximize branch performance in cities such as Dallas, Houston and Baton Rouge, La. The company, for instance, said in its presentation that it has the potential to more than triple the $93.6 million in deposits it currently has around Dallas.
The company is also expected to get more aggressive about charging off energy credits.
If so, MidSouth’s ratio of net chargeoffs to average loans could spike to 74 basis points from 41 basis points last year, Brian Zabora, an analyst at Hovde Group, wrote in a Thursday note to clients. “The board clearly has confidence in [McLemore] to address the energy issues and improve the operating performance,” he added.
Capital is another area to watch. The company, which noted in its presentation that it needs to “efficiently manage” its capital position, remains in the Small Business Lending Fund even though it is paying a 9% dividend on the $32 million it obtained from the program in 2011.
A possibility is a stock offering, though it might make sense for MidSouth to wait for its stock price to appreciate more. While its stock has risen by 36% since the presidential election, shares remain nearly 30% below where they traded in mid-2014.
Management has also mentioned that improving credit quality should result in excess cash, Zabora said.
Expense reductions are another possibility for McLemore and his team.
MidSouth’s expenses totaled almost 3.6% of average earnings assets in the first quarter, versus a median among regional peers of 2.8%, with occupancy and equipment costs serving as the biggest differentiator, Zabora said.
While all options are likely on the table, it would be surprising to see MidSouth exit any markets, Wallace said.
The company has also been looking to diversify away from energy by expending in commercial real estate and other commercial sectors, especially in markets such as Dallas and Houston, where it has hired lenders.
Then there is the question of time. Specifically, how much time will McLemore have to improve performance before the board, led by Jake Delhomme, its chairman and a former professional football player, decides to find a buyer instead.
The board could give McLemore at least two years to turn the company around, Wallace said. That could change, of course, if management stubs its toe or a motivated buyer approaches directors with a compelling offer.
“The new management team wants to make their imprint on the company and they have the right plan in place,” Martin said. “Now it is just a matter of executing.”