MidSouth Bancorp Inc.'s newly minted top executives said they are urgently moving to turn around the struggling Lafayette, La.-based bank by raising capital, cutting costs, ramping up risk management, reducing exposure to the energy sector and bolstering credit quality.
"These are the things, right out of the gate, we needed to establish," James McLemore, who was promoted from finance chief to president and CEO of MidSouth in May, said in an interview June 8, the day the company priced a common stock offering at $12.00 per share for gross proceeds of $55 million.
McLemore said MidSouth anticipates soon receiving a formal enforcement action from its federal regulator, the Office of the Comptroller of the Currency, and being placed on a troubled condition status. These moves put pressure on the bank to make swift changes, and they likely will come with restrictions. The bank expects that these will include limits on changes to the board or further promotions of senior officers.
McLemore and Lorraine Miller, who was promoted from director of mergers and acquisitions to CFO in May, said they are operating under a mandate to prove the company can thrive independently. They said they are moving quickly to address what has ailed the company in the wake of an oil-price slump that battered many of its energy clients and bruised the bank's loan books.
The new leadership team — which also represents several other promotions and heightened levels of responsibility around risk and oversight for other executives — "is very much dedicated to turning this bank around," Miller said in an interview.
MidSouth moved slower than other lenders active in the Gulf South energy sector to reduce its exposure, leaving it with relatively high levels of criticized assets. MidSouth's board grew restless with the former management's course, one that effectively had the company patiently waiting for the energy sector to rebound, and it shook up the leadership ranks. In late April, the board fired former CEO Clive "Rusty" Cloutier along with his son Troy Cloutier, who was president and CEO of the company's bank unit.
At the time, the company said its total energy loans decreased $5.6 million during the first quarter, to $231.8 million, or 18.2% of total loans, from 18.5% at the end of 2016. MidSouth said its total criticized energy-related loans decreased $7.7 million, or 6.5%, during the first quarter, to $111.5 million, but still represented 48.1% of energy loans, compared with 50.2% three months earlier.
It represented progress, but not enough, the board concluded. MidSouth's overall ratio of classified assets to capital was approximately 75% at the close of the first quarter, up substantially from 48% a year earlier.
MidSouth, with about $1.93 billion in assets, posted first-quarter net earnings available to common shareholders of $1.7 million, down from $1.9 million a year earlier. Its 2016 net income of about $9.4 million was down from more than $19 million two years earlier.
Now, McLemore and Miller said they are aiming to reduce energy-related exposure to below 15% over the next 12 months and push down the classified asset ratio.
"Asset quality is job No. 1," McLemore said. "We've got to get that right."
Additionally, following a third-party review of its loan books, McLemore said MidSouth would increase its loan-loss allowance from nearly $25 million in the first quarter to around $31.5 million — a one-time move made to ensure the bank is fully guarded against potential losses.
The capital raise, meanwhile, will enable MidSouth to redeem $32 million of preferred stock issued to the U.S. Treasury under the Small Business Lending Fund, or SBLF. This would result in annual savings of about $2.9 million in the aggregate due to the elimination of a 9% dividend tied to the SBLF stock.
MidSouth also is examining its branch network and aims to close or sell seven of its 57 branches to further reduce expenses and bolster profitability. It also is looking to improve internal processes to create efficiencies and further reduce costs, among other steps.
These moves are expected to produce an increase of about $1.3 million in annual net earnings, in addition to the benefit of the savings from the SBLF redemption.
Risk management also is getting beefed up, the executives said. As part of the management shakeup, for example, MidSouth established a chief lending officer position to create additional oversight, and it is reviewing loan officer pay incentives to reward front-line lenders for proactively identifying risks in their portfolios. Moreover, the bank now has its chief risk officer report directly to the board, strengthening that officer's independence, and it is adding positions to fortify its risk-assessment team.
Miller said the changes should help MidSouth address regulators' concerns, allow it to work through the pending enforcement action and enable it to work its way off of the anticipated troubled condition status.
"These are solvable issues," Miller said.