Energy lender unveils far-reaching plan to address capital, credit woes

MidSouth Bancorp in Lafayette, La., has unveiled a sweeping plan to shore up capital and address ongoing issues with energy credits.

The $1.9 billion-asset company will raise capital, cut jobs, close branches and severely slice its quarterly dividend as part of a broad restructuring plan, according to a presentation tied to its planned stock offering.

The aggressive moves come just weeks after MidSouth fired its founding CEO and frankly informed shareholders that changes were necessary if it wanted to remain independent. The company also warned in a prospectus that it faces a formal regulatory order and designation as a "troubled institution" from the Office of the Comptroller of the Currency.

That message was underscored by the company’s new management team.

“You could say the sense of urgency is a lesson learned from issues in the past where we took a go-slow approach” on credit quality, said Lorraine Miller, who became chief financial officer in May after previously serving as director of mergers and acquisitions. “We’re trying to have a realistic view on what we can achieve and focus on things we can control.”

“We believe we have to earn our independence,” added Jim McLemore, who was recently named permanent CEO. “We believe there’s more value to be created now through the turnaround than it would be through a sale.”

Addressing credit quality is “job No. 1,” McLemore said.

That could mean a bumpy ride over the next few quarters.

An outside firm recently completed a review of MidSouth’s loan book, looking over about half of its credits and 40% of its unfunded loan commitments. As a result, MidSouth expects to incur $31.5 million on credit-related losses over the life of loans in its portfolio.

Management plans to record a loan-loss provision of $7 million to $12 million tied to up to $3.8 million in net chargeoffs, along with changes in qualitative factors and “potential impairments arising from the loan review,” the presentiation said.

For perspective, MidSouth set aside a total of $10.6 million last year to cover problematic loans.

There are some loans on the books that “we wouldn’t make again,” McLemore said, noting that MidSouth “didn’t fully appreciate” its subconcentration in liftboat services in the energy sector.

A planned $55 million stock offering will help MidSouth absorb the shock of elevated net chargeoffs. The company also plans to reduce its energy exposure from 18% of total loans at March 31 to no more than 15% by mid-2018.

The company intends to use $32 million of the capital raised to exit the Small Business Lending Fund, which will eliminate a 9% dividend it has been paying to the Treasury Department.

Management will also pad capital by roughly $4 million annually by cutting the quarterly dividend to just 1 cent a share.

Investors seemed spooked by the disclosure of a reduced dividend and dilutive capital raise; the company’s stock fell by nearly 15% on Thursday.

MidSouth plans to cut $1 million in annual expenses through staff reductions, $700,000 from a branch restructuring and $300,000 via other moves. MidSouth plans to sell two branches and close five other locations; it did not specify the number of jobs it will cut. The expected cuts represent less than 3% of the company's 2016 noninterest expenses.

Management is determined to boost MidSouth’s return on average assets to 1% by the end of 2019, McLemore said. That metric stood at 0.49% at Dec. 31.

McLemore said he also plans to visit MidSouth’s branches and meet more of its employees to boost transparency and morale.

“I’d really love to get out and look people in the eye and shake their hands,” he said. “As hard as we’re trying to communicate with everyone, there’s no substitute for that.”