More Related Content Similar to MidSouth Bank Report Similar to MidSouth Bank Report (20) 1. March 24, 2015
MIDSOUTH BANCORP INC.
MSL/NYSE
Continuing Coverage:
Oil Industry on the Rocks
Lacks Southern Comfort
Investment Rating: Market Outperform
PRICE: $ 14.49 S&P 500: 2,091.5 DJIA: 18,011.14 RUSSELL 2000: 1,263.46
Oil Industry is the main driver of MidSouth’s success or failure
Regional economic dependency impacts growth prospects
Cautious approach towards lending keeps asset portfolio resilient
Loan growth to see minor decline from impressive 2014
Our 12‐month target price is $20.00.
Valuation 2014 A 2015 E 2016 E
EPS $ 1.58 $ 1.50 $ 1.84
P/E 9.2x 9.7x 7.9x
TBVPS $ 13.44 $ 14.66 $ 16.25
P/TBVPS 1.1x 1.0x 0.9x
* Net interest income per share
Market Capitalization Stock Data
Equity Market Cap (MM): $ 163.7 52‐Week Range: $ 6.67
Enterprise Value (MM): N/A 12‐Month Stock Performance: ‐14.08%
Shares Outstanding (MM): 11.30 Dividend Yield: 2.45%
Estimated Float (MM): 7.70 Book Value Per Share: $ 18.50
6‐Mo. Avg. Daily Volume: 27,747 Beta: 0.94
Company Quick View:
Description: MidSouth Bancorp Inc., the holding company for MidSouth Bank NA, has
branches located throughout Louisiana and eastern Texas. The bank provides
commercial and consumer lending, while also offering interest and non‐interest bearing
checking accounts, investment accounts, cashier’s checks, U.S. Saving Bonds, credit card
services, and traveler’s checks. MidSouth specializes in energy lending, which makes up
approximately one‐fifth of its portfolio.
Website: www.midsouthbank.com
Analysts: Investment Research Manager:
Aaron Sacks Nikunj Bajaj
Yeri Shin
Jared Tromer
John Vigil
Joe Wilkinson
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's
Freeman School of Business. The reports are not investment advice and you should not and may not rely on
them in making any investment decision. You should consult an investment professional and/or conduct your
own primary research regarding any potential investment.
Wall Street's Farm Team
BURKENROADREPORTS
2. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Figure 1: Five‐year Stock Price Performance
Source: Yahoo! Finance
INVESTMENT SUMMARY
We rate MidSouth Bancorp, Inc., as Market Outperform with a 12‐month target price of
$20.00 based on taking the average target prices from the discounted cash flow (DCF), peer
group P/E multiple, historical P/E multiple, and price‐to‐tangible book value (P/TBV) methods
of valuation. Headquartered in Lafayette Louisiana, MidSouth is a regional commercial bank
with 58 locations throughout Louisiana and East Texas. The Company focuses its lending on
small to medium sized businesses, with approximately one‐fifth of its loans being distributed to
companies in the energy industry which, due to the recent decline in oil prices, has created
significant challenges for MidSouth’s share price. MidSouth currently holds about $1.9 billion
in assets and has a market value of $169.33 million.
MidSouth’s large loan investment in the oil industry poses as a risk for the Company due to the
oil industry’s overall volatility. Recently, oil prices have dropped significantly leaving the oil
industry in a worrisome state. MidSouth has not yet experienced any losses due to this drop,
however the Company’s stock price has preemptively declined as investors grow concerned
about the potential for higher defaults and losses resulting from MidSouth’s large energy loan
exposure.
Because MidSouth is a small regional bank, its own success is dependent on the current state
of the regional economy where it operates. Some areas that MidSouth operates in have shown
signs of growth, while other have seen declines. For instance, Lake Charles, an area that
currently holds around 9% of MidSouth’s loans, has an economy experiencing drastic declines
primarily due to postponed oil operations. Houston and Dallas, on the other hand, are both
projected to increase in size and in average household income. Overall, MidSouth’s geographic
reach in oil‐dependent areas causes the bank to be particularly volatile to the price of the
resource. If the price of oil stays low, MidSouth’s reach may exacerbate the drop in prices and
cause the bank significant harm. On the other hand, if prices begin to rebound, MidSouth could
benefit tremendously due to its extended reach in these areas.
3. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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The loan to deposit ratio (LTD) often describes a bank’s attitude towards lending. MidSouth
has a LTD ratio of 81.02%, which is the lowest among MidSouth’s peers, largely because of the
company’s high exposure to the energy industry. This cautiousness allows MidSouth to remain
strong even when oil prices wane.
Although oil prices are currently low, MidSouth continues to distribute loans to companies that
meet the bank’s lending criteria. The bank does not expect its non‐performing assets (NPAs) to
increase substantially and the Company continues to operate with the expectation that oil
prices will increase soon. MidSouth’s loans have grown 12.8% since the fourth quarter of 2013.
In 2013, MidSouth concentrated on efficiency by cutting costs. The capital saved by this
initiative was used to finance the increase in loans.
MidSouth’s future prospects will be largely determined by the price of oil going forward. The
bank has made substantial growth in the past few years and has a very comfortable LTD ratio.
However, the bank’s geographical reach and loan portfolio both heavily rely on the oil industry.
If oil prices stay at the current level, the bank could begin to suffer with a lower deposit base
and an increase in NPAs from its energy loans. If oil prices increase, the bank should continue
to grow and will possibly expand its loan growth at a rate similar to that of 2014. Regardless of
the price of oil, we expect MidSouth to do well due to its steady growth, expertise, and solid
metrics (including its low LTD). We also expect oil prices to rebound in the coming year, which
will certainly increase the price of MidSouth’s stock.
Table 1: Historical Burkenroad Ratings and Prices
Date Rating Price*
03/25/14 Market Perform $17.67
04/05/13 Market Perform $17.00
04/03/12 Market Perform $16.00
03/17/11 Market Perform $16.21
03/16/10 Market Underperform $15.19
04/01/09 Market Outperform $15.04
04/07/08 Market Perform $22.37
04/12/07 Market Perform $31.79
04/19/06 Market Perform $23.12
12/02/04 Market Outperform $19.98
12/05/03 Market Perform $17.48
03/26/03 Buy $8.65
03/22/02 Market Outperform $5.95
*Price at time of report date
5. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Regional economic dependency impacts growth prospects
MidSouth, like most small banks, is dependent on the regions in which it operates (see Figure
3). For example, MidSouth currently has about 9% of its total loans in the Lake Charles area.
This region was booming when oil prices were high during the summer, but now has about
$46.6 billion in oil‐related projects on hold while oil prices are low. In particular, the South
African company SASOL was planning to build a $22 billion complex in the region, but has
delayed action due to the current economy. Regions such as this that are so reliant on oil
prices can see a “ripple effect” as the low price of oil may cause increased unemployment and
lower wages which will lead to other industries in the area struggling as consumers will have
less purchasing power.
Figure 3: MidSouth Branch Locations
Source: MidSouth Website
While areas such as Lake Charles have fallen on hard times, the cities of Dallas and Houston are
poised for economic expansion, offering MidSouth some potential for future loan growth. Both
of these cities are expected to increase in size and in average household income. Overall, the
growth potential for the different regions of MidSouth’s operations are mixed, but the bank
would be wise to concentrate its future operations in the more promising locations, as
outlined in Table 2.
TEXAS
LOUISIANA
6. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Table 2: MidSouth’s Areas of Operations
State City
Projected Population
Change 2014‐2019 (%)
Median HH
Income ($)
Projected HH Income
Change 2014‐2019 (%)
Beaumont 0.1 44,122 4.36
Dallas‐Fort
Worth
7.2 56,739 2.69
Texas Houston 7.3 56,545 4.18
Texarkana 0.4 44,436 9.99
Tyler 3.9 43,519 (1.06)
Alexandria 0.4 36,303 (3.07)
Baton
Rouge
2.7 50,972 8.49
Houma‐
Thibodaux
0.5 45,739 0.89
Louisiana Lafayette 2.7 46,125 7.42
Lake
Charles
1.2 44,063 4.16
Shreveport
‐Bossier
City
2.6 45,383 14.4
National
Avg.
2.7 51,579 4.58
Source: MidSouth Investor Presentation
Cautious approach towards lending keeps asset portfolio resilient
A critical consideration for any bank currently involved in energy lending is its loan to deposit
ratio (LTD). If a bank has too high a LTD ratio, and the possibility of a major increase in
nonperforming assets (NPAs), investors may fear that the bank would be unable to cover the
decrease in revenue with its cash on hand. The bank would then have to rely on other sources
of funding, which is not a promising position to be in.
MidSouth’s LTD ratio is currently 81.02%. This percentage is the lowest in the peer class and is
well below the average of 94.36% (see Figure 4). A low LTD ratio is nothing new for MidSouth,
as the bank has always maintained a conservative lending approach in relation to its deposits.
While the argument can be made that MidSouth is losing out on possible revenue with such a
low LTD ratio, the bank compensates for being risk averse in this aspect by the riskiness of it
loans in the energy sector. So, while MidSouth is in a good position in terms of its LTD ratio, its
strategy of fewer loans with higher yields means that an increase in loan defaults will have a
larger negative effect on the Company’s net interest income than that of its peers.
8. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Loan growth to see minor decline from impressive 2014
MidSouth’s concentration in energy lending puts the Company in a high‐risk, high‐reward
position. In the current economic climate, banks with high percentages of energy lending are
negatively impacted by the expected increase in NPAs. However, MidSouth has still been able
to grow its loans by 5.4% since the first quarter of 2014 while only increasing its percentage of
oil loans to the total in its portfolio from 20.2% in the first quarter of 2014 to 20.6% in the
fourth quarter of 2014. These statistics show that MidSouth has focused its loan growth in
areas other than oil during this difficult period.
To date, MidSouth has yet to experience any losses from the oil price decline, and the
Company has continued to make loans with the expectation that energy prices will increase. As
such, loan growth for MidSouth in 2014 was generated by a variety of factors. First, the bank’s
efficiency initiative, in which it focused on cutting costs, allowed the bank to obtain additional
capital to finance loans. Second, the bank also benefitted from an increase in deposits by
4.37% since the fourth quarter of 2013 which also helped increase loan growth. Finally,
MidSouth was able to benefit from the maturity of its securities in order to finance loans. The
amount invested into securities has fallen by 15.89% since the fourth quarter of 2013, as a
result of the loan growth (see Figure 6). Therefore, investors should expect MidSouth to
continue to grow its loans as it has done so every quarter since the fourth quarter of 2013.
However, the growth in loans will not be as high as in 2014, as the bank cannot benefit from its
efficiency initiative or sale of securities. Finally, the growth in loans will certainly be affected by
the oil industry and will depend on when oil prices will rise from historic lows.
Source: Company 10‐Ks
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
First Quarter Second Quarter Third Quarter Fourth Quarter
Figure 6: Loan Growth Per Quarter in 2014
9. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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VALUATION
We estimated our 12‐month target price of $20.00 for MidSouth Bancorp, Inc. by taking the
average of the discounted cash flow (DCF) valuation, the peer group P/E multiple valuation,
the historical P/E multiple valuation, and the price to tangible book value (P/TBV) valuation.
We gave each valuation method an equal weight of 25% when determining the target price.
Discounted Cash Flow: Net Income
Because banks use cash differently from companies in other industries, we used a DCF model
discounting net income instead of free cash flows. With a risk‐free rate of 2.31% from the 20‐
Year Treasury Rate, a market risk premium of 5.7%, and an unlevered beta of 0.94, we
calculated the cost of equity or in a banks case, the weighted average of cost of capital
(WACC). After applying a tax rate of 36.5%, after tax WACC becomes 7.67%. To calculate the
discount rate for MidSouth, we adjusted liquidity risk premium to 7%, because the market
capitalization of Midsouth is small compared to its peer group. Therefore, our estimated share
price for 2015 is $13.63, and our one‐year target price from today is $15.62.
Relative Multiple Method: P/E
We used a relative multiple method of P/E, as it is a common method of valuation for financial
institutions. MidSouth’s peer average P/E multiple is approximately 19.38x. By multiplying the
average P/E by MidSouth’s estimated earnings per share of $1.35, we arrived at a target price
of $26.17.
Relative Multiple Method: P/TBV
We also used a relative multiple method of P/TBV, which is another common method of
valuation for financial institutions. MidSouth’s peer average P/TBV multiple is approximately
165.54%. By multiplying the average P/TBV by MidSouth’s current tangible book value per
share of $10.46, we arrived at a target price of $17.32.
Historical Multiple Method: P/E
Because of the wide range in target prices between the valuation methods used, we applied a
historical P/E multiple. By multiplying MidSouth’s current trading multiple of 9.2 by estimating
its earnings per share of $2.23, we arrived at a target price of $20.50. Figure 7 illustrates these
financial ratios.
10. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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INDUSTRY ANALYSIS
Banking companies like MidSouth Bancorp, Inc. provide payment services, credit services, and
loan and deposit services to individuals or businesses. Banks use numerous avenues to
generate revenue, such as through interest, transaction fees, and financial services. The most
common expense that banks incur is interest expenses as a result of borrowing from other
banks. Other expenses include loan and lease loss provisions and employee wages.
The financial services industry is the largest industry within the U.S., with a current market
capitalization of $6.99 trillion. Commercial banks possess 44% of the financial services market
with a current market capitalization of $3.08 trillion. Also, as of June 30, 2014 the commercial
banking industry held $13.4 trillion in assets.
There are four different divisions of the banking industry, distinguished by size and location.
These divisions include big banks, regional banks, community banks, and direct/internet banks.
The commercial banking industry has four large firms that dominate the industry: Bank of
America, Wells Fargo, JPMorgan Chase, and Citigroup. These four firms combined held $6.27
trillion in assets, taking up 46.8% of the commercial banking industry. Regional banks, like
MidSouth, hold anywhere between $1 billion and $100 billion in assets. Accordingly,
community banks hold less than $1 billion in assets and focus on lending to families and
businesses within the immediate communities. Finally, direct/internet banks only operate
online.
Although the banking industry is now strong, it lost approximately $165 billion in revenue
during the recession in 2008. This loss displays that the banking industry is cyclical, meaning
that the industry moves parallel to the economy. During times of economic uncertainty, banks
try to increase lending, while sustaining asset growth.
Figure 7:Valuation Methods
11. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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MidSouth in the Banking Industry
MidSouth operates 58 branches in the Louisiana and Texas region. As of September 30, 2014,
the bank held $1.9 billion in assets. As of December 31, 2014, net deposits and net loans each
totaled $1.3 billion. Both of these figures are significant because MidSouth specializes in loan
and deposit services. In MidSouth’s respective region it only held a .19% market share of all
deposits, as of June 30, 2014. In comparison, JPMorgan Chase, the leading market shareholder
within the region, held 22.15% of all deposits.
Regional Banking Industry
Because the banking industry is cyclical, regional banking success depends on the regional
economy. Thus, regional banks rely on the businesses that produce the highest incomes in the
respective regions. MidSouth depends upon energy and oil, medicine, technology, research,
and agriculture as the main industries in its region. If those industries are thriving within the
region, MidSouth benefits.
Regulations in the Banking Industry
Several agencies, such as the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board, and the Office of the Comptroller of the Currency, constantly regulate banks.
Along with these federal regulatory agencies, there are also state regulators that supervise
state‐chartered banks. Bank regulators work to eliminate privacy issues, money laundering,
fraud, and terrorism. These regulating agencies have access to bank records, which allows
agencies to keep banks in order. There are also statutes in place, such as the Dodd Frank Act,
designed to promote transparency in the financial service industry.
Threat of Entry
The banking industry has many barriers to entry, which works in MidSouth’s favor. In order to
open a bank, a large amount of capital is required. Banks also need regulatory approval, which
can be difficult and costly to attain. Finally, Banks also rely on repeat customers, and
developing relationships with customers takes time and money.
Bargaining Power of Suppliers
Suppliers have high bargaining power. Most banks offer the exact same services at fairly
similar rates and prices. Thus, little differentiation exists, because services are so standardized.
Therefore, suppliers can move deposits to another bank for the exact same services.
Bargaining Power of Buyers
A recent development in the banking industry is the relatively high bargaining power of buyers.
Buyers once chose banks based on word of mouth and trust. It was also fairly difficult to switch
banks. Now, the banking industry has consolidated and most banks are largely the same. It is
now easy to switch banks and depositors have the power of the Internet to research
alternatives.
12. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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However, the bargaining power of buyers is lower in certain situations. When banks have
specific industry experience and expertise, businesses in those industries have lower
bargaining power.
Availabilities of Substitutes
The banking industry has a large availability of substitutes. Traditional, FDIC insured banks are
the main players in the banking industry. However, other non‐banking options can potentially
provide higher returns than bank deposits. These other options include fixed income and
equity securities, pension funds, mutual funds, insurance companies, and credit unions. Still,
only traditional banks provide the FDIC insurance guarantee, which means these options are
not necessarily equal substitutes.
Competitive Rivalry
As stated earlier, banks have very little differentiation among competitors, which makes the
banking industry extremely competitive. Many bank customers can be lured away by other
banks in several ways, including special promotions and lower interest rates on loans. In the
areas that MidSouth serves, large players such as JP Morgan Chase and Capital One are the
leading banks in the industry. Smaller regional banks such as IBERIABANK and
Hancock/Whitney Bank supplement this competition. Since there is so much competition from
larger banks, the smaller banks, such as MidSouth must compete for a small pool of customers.
ABOUT MIDSOUTH
On February 7, 1985, C.R. “Rusty” Cloutier, founded MidSouth Bancorp, Inc., a holding
company for MidSouth Bank N.A. headquartered in Lafayette, Louisiana. This regional bank
provides commercial and retail community banking services to markets in Louisiana and East
Texas. Currently, MidSouth has 58 branches across Louisiana and Texas and has accumulated
approximately $1.9 billion in assets.
Company History
MidSouth began operations with $4 million in assets in the mid‐1980s, when the region’s
unemployment rate touched 22% in Louisiana. Even though the economy was severely hurt by
the oil and gas industry crash, MidSouth managed to persevere through this difficult period.
Two years after MidSouth was founded, the bank expanded with the purchase of the Breaux
Bridge Bank & Trust Co. In 1989, MidSouth started to lose money, yet positioned itself to
expand. Later that year, MidSouth bought Commerce and Energy Bank, which included
Lafayette branches. MidSouth soon decided to move its headquarters to downtown Lafayette.
In April 1993, although considered one of the smallest banks in the country, CEO Rusty Cloutier
managed to take the Company public. Between 1995 and 2005, MidSouth expanded its market
across Louisiana, opening locations in Opelousas, Morgan City, Thibodaux, Houma, Baton
Rouge, and New Iberia.
13. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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In 2004, MidSouth acquired Lamar Bank of Texas, allowing MidSouth to expand its market into
East Texas. MidSouth then took part in its largest transaction to date when it merged with
Peoples State Bank of Many, Louisiana in 2012, adding 15 new branches.
Product and Services
As a community oriented bank, MidSouth provides commercial and consumer loan and deposit
services to both business firms and individuals through its network of 58 branches. MidSouth
operates exclusively in Louisiana and Texas, and makes it a priority to build and maintain
strong customer relationships within those markets. As shown in Figure 8, loans provided by
MidSouth include commercial and industrial loans, commercial real estate loans, loans secured
by real estate, and consumer loans. Among these, the combination of commercial, financial,
and agricultural loans constitute the largest portion of total loans at approximately 36%.
Specifically, real estate‐commercial loans represent approximately 34.5% of MidSouth’s total
loans.
Figure 8: Composition of Loans (Sep, 2014)
Source: MidSouth 8‐K
As shown by Figure 9, deposits provided by MidSouth cover diverse products and services,
including checking accounts, investment accounts, cash management services, and electronic
banking services. Electronic banking services include deposit capturing services, internet
banking, and debit or credit cards. Customers also have access to an in‐house call center and to
more than 55,000 surcharge‐free ATMs.
Commercial,
financial, and
agricultural, 36.21%
Lease Financing
Receivable , 0.42%
Real estate ‐
Construction, 6.91%
Real esate ‐
commercial, 34.52%
Real estate ‐
residential, 12.33%
Installment loans to
individuals, 9.32%
Other, 0.28%
14. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Source: MidSouth 8‐K
Strategies
MidSouth Bancorp, Inc. has four major strategies: to focus on the oil and gas industry, to focus
on small businesses, to maintain conservative practices, and to accelerate earnings
improvement.
Focus on the Oil and Gas Industry
As of December 31, 2014, MidSouth had approximately $265 million in loans to the oil and gas
industry, representing approximately 20.6% of total loans. The oil and gas industry is extremely
volatile, and when the industry suffers it is likely that MidSouth will suffer as well. The “oil
bust” of the 1980s severely impacted the economy in MidSouth’s region, and the current
downturn in oil and gas prices is starting to have a similar effect. MidSouth’s stock price has
experienced a 23% decrease since November, however it has started to slowly rise. Providing a
significant portion of total loans to the oil and gas industry is risky, but when the oil market is
strong MidSouth thrives.
Focus on Small Business
MidSouth’s total assets have increased by 45.8% since 2010, and much of this growth can be
attributed to its focus on small to medium sized businesses. MidSouth is a part of the Small
Business Lending Fund (SBLF), a program of the U.S. Treasury. The SBLF program allows
MidSouth to lend to businesses at a lower interest rate, if the business meets certain
requirements. While some competitors did not take advantage of the program, decreasing
small businesses loans by 20%, the program allowed MidSouth to grow its small business loans
by 10% in 2013.
Time Deposits of
$100,000 or more
, 7.61%
Time Deposits of
less than
$100,000, 6.67%
Money
Market/Savings,
30.25%NOW & Other,
29.42%
Noninterest
bearing , 26.06%
Figure 9: Composition of Deposits (Sep, 2014)
15. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Conservative Attitude
MidSouth commenced operations in the midst of an economic downturn, and the bank prides
itself on a conservative approach towards lending as an operating principle. The approach
affects funding and credit decisions to the point where MidSouth underwrites loans based on
the cash flows of the buyer. MidSouth focuses its lending on companies with seasoned
experience in the oil industry to reduce risk when the oil market ebbs and flows. Also, the
Company identifies and manages risk through a risk management group that reports directly to
the Chairman of its Audit Committee. This group is involved in audit, collections, compliance,
in‐house legal counsel, loan review, and security functions.
Accelerate Earnings Improvement
MidSouth has carefully analyzed its operations to increase revenue. Namely, the Company
engaged FIS Consulting Services to identify key areas for increasing operating efficiencies and
revenue. In particular, MidSouth completely reassessed its branch network and decided to
increase the amount of automated and interactive teller machines, which were more in line
with consumer demands. Then, in late 2013 through 2014, MidSouth expanded the customer
call center and decided to slow the pace of brick‐and‐mortar growth to focus on its current
locations.
Recent Developments
MidSouth Bancorp’s stock price has decreased by 28.7% from its 52 week high of $20.34 on
July 23, 2014 to its current price of $14.51. The drop in oil prices by over 55% since June 2014
has been the main catalyst for the bank’s plummeting stock price. The oil price decline
represents a significant issue regarding MidSouth’s success, as the bank has a large stake in the
price of oil. As of December 31, 2014, the bank has loaned $265 million to clients in the oil and
gas industry. This figure makes up roughly 20.6% of all loans provided by the bank.
Fourth Quarter earnings did not offer reasons for significant near‐term optimism. Earnings per
share (EPS) were reported at $.31. This price is a seven‐cent decrease and an 18.4% drop from
the third quarter price of $.38. Additionally, net income available to common shareholders
dropped by $808,000 from the third quarter to the fourth quarter of 2014. Some of the drop in
revenue can be attributed to a real estate loan that was placed on nonaccrual status during the
period. A nonaccrual loan is a loan in which no payments have been made in 90 days. This
status change caused the company to record an impairment of $575,000. Additionally, the
Company also decided to implement an allowance of $650,000 for losses on energy loans. This
allowance serves as an acknowledgment by the Company of the increasing risk of default on
energy loans and should be seen as a possible sign of uncertainty by MidSouth.
MidSouth also reported an increase in nonperforming assets in the fourth quarter of 2014. A
nonperforming asset is similar to a nonaccrual loan in that it is essentially a credit instrument
that has not received payments for a period of time. The increase in nonperforming assets
from the third quarter to the fourth quarter of 2014 was $2.6 million, or 20.8%.
16. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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MidSouth made it clear in the fourth quarter report that most of this increase was due to a real
estate loan and not related to energy. Regardless of which loan(s) underperformed, a 20.8%
increase in nonperforming assets is not a positive sign.
Other data from MidSouth’s fourth‐quarter 2014 report was more optimistic. Loans and
deposits both increased in the quarter by 2.58% and 2.48%, respectively. The increase in both
categories is important as the bank kept its loan to deposit ratio (LTD) constant at 81%.
Keeping the LTD at a safe level is important so that the bank has enough cash in order to
protect itself from any possible downturns, such as companies defaulting on loans.
The main problem for the bank in the fourth quarter of 2014 was the expectation and
preparation for future loan default. If the energy companies that MidSouth has loaned to are
able to fulfill debt obligations, MidSouth should be able to rebound from this negative quarter.
If, however, these companies are unable to pay debt and these loans become nonaccrual,
MidSouth’s nonperforming assets will increase, which could lead to trouble for the bank.
PEER ANALYSIS
Three main factors were taken into account when choosing MidSouth’s peers: the products
and services each bank offers, the region each bank operates in, and the clients each bank
serves. MidSouth’s main source of revenue comes from commercial and consumer loan and
deposit services. The branches of the bank are located mainly throughout East Texas and
Louisiana. The bank lends primarily to small and medium sized companies with a focus on
energy companies. The peer group consists of six main competitors: Southwest Bancorp Inc.
(OKSB), Guaranty Bancorp (GBNK), Independent Bank Group, Inc. (IBTX), Texas Capital
BancShares Inc. (TCBI), LegacyTexas Financial Group Inc. (LTXB), and Green Bancorp, Inc.
(GNBC), (see Table 3).
17. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
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Table 3: Peer Analysis Table
Company
Name
Ticker
Symbol
Market
Cap
P/E P/BV
NPAs/
Assets
Div.
Yield
ROE ROA NIM
LTD
RATIO
Southwest
Bancorp
OKSB $335.9M 16.49x 1.28x 0.65% 1% 7.94% 1.07% 3.45% 91.26%
Guaranty
Bancorp
GBNK $352.23M 26.14x 1.7x 0.70% 1.5% 6.82% 0.67% 3.66% 97.38%
Independent
Bank Group
IBTX $682.53M 21.55x 1.3x 0.36% .7% 7.48% .92% 4.19% 98.64%
Texas
Capital Bank
TCBI $2,230M 16.9x 1.66x 0.28% N/A 10.57% .99% 3.78% 95.66%
Legacy Texas
Financial
Group Inc.
LTXB $801.2M 27.99x 1.44x 0.58% 2.2% 5.62% .81% 3.6% 128.7%
Green
Bancorp Inc.
GNBC $299.98M 17.91x 1.03x 0.58% N/A 2.83% 0.38% 3.78% 99.09%
MidSouth
Bancorp
MSL $169.33M 9.45x 1.01x 0.78% 2.4% 9.56% 1.01% 4.63% 82.08%
Peer
Average
$783.64M 21.16x 1.40x .525% 1.35% 6.88% 7.08% 3.74% 101.79%
*Millions ‐ Source: Company 10‐Qs and Yahoo Finance
Compared to this group of peers, MidSouth Bank has the lowest market capitalization. What
stands out for the bank is its impressive 4.64% net interest margin (see Figure 10). NIM
represents a bank’s net interest income divided by its total average earning assets. In essence,
the statistic represents the yield a bank makes on interest earning assets (most commonly
loans). In addition to its impressive NIM, MidSouth has the lowest loan to deposit (LTD) ratio
and total earning assets (see Figure 11) of the entire group. This combination of metrics for
MidSouth is very impressive as the bank is receiving the highest yield on its earning assets
while giving out the least percentage of loans compared to deposits. Part of the reason why
MidSouth is able to achieve this feat is because the bank charges by far the highest interest
rate in the peer group at 5.96%. This percentage is over one percent higher than the peer
average (see Figure 12). By charging such a high interest rate, MidSouth is able to keep its LTD
low, while still receiving net income that is very competitive with its peers.
18. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
18
Source: Company 10‐Ks
Source: Company 10‐Ks
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
MidSouth
Bank
Southwest
Bancorp
Guaranty
Bancorp
Independent
Bank Group
LegacyTexas
Financial
Group Inc.
Green Bancorp
Inc.
Figure 10: Net Interest Income
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
MidSouth
Bank
Southwest
Bancorp
Guaranty
Bancorp
Independent
Bank Group
Texas Capital
Bancshares
LegacyTexas
Financial
Group Inc.
Green
Bancorp Inc.
Figure 11: Average Loan Yield
19. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
19
Source: Company 10‐Ks
Southwest Bancorp, Inc. (OKSB/NASDAQ)
Southwest Bancorp Inc. is a bank holding company for the Stillwater National Bank. Like
MidSouth, Southwest offers commercial and consumer banking services to small and midsized
businesses. Southwest is based in Oklahoma but also operates in Kansas and Texas.
Guaranty Bancorp, (GBNK/NASDAQ)
Guaranty Bancorp is a $2.1 billion financial services company that operates as the bank holding
company for Guaranty Bank and Trust Company. Guaranty Bancorp is similar to MidSouth in its
goal to serve small to medium sized businesses, while also offering banking services to
individuals. As of December 31, 2014, Guaranty Bancorp had 26 branches and one advisory
firm located in the Denver metropolitan area. The company was formerly known as Centennial
Bank Holdings, Inc. and changed its name to Guaranty Bancorp in May 2008. Both MidSouth
and Guaranty Bancorp have experience with energy lending.
Independent Bank Group, (IBTX/NASDAQ)
Independent Bank Group, headquartered in McKinney, Texas, operates as a financial holding
company for Independent Bank. Independent Bank currently operates 30 branches mainly
throughout the Dallas‐Fort Worth, Austin, and Houston areas. Although Independent Bank is
over three‐times larger in terms of market capitalization, the locational proximity of the banks
put Independent Bank Group in direct competition with MidSouth. Independent Bank offers
many of the same services as MidSouth, including energy lending.
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
MidSouth Bank Southwest
Bancorp
Guaranty
Bancorp
Independent
Bank Group
LegacyTexas
Financial Group
Inc.
Green Bancorp
Inc.
Figure 12: Total Earning Assets
20. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
20
Texas Capital Bancshares, Inc. (TCBI/NASDAQ)
Texas Capital Bancshares, Inc., headquartered in Dallas, Texas, is the holding company for
Texas Capital Bank. Texas Capital Bank currently operates 12 branches located in Dallas Fort
Worth, Houston, and San Antonio. Much like MidSouth, Texas Capital Bancshares offers a
variety of banking services, including loans to oil and gas companies. However, unlike
MidSouth Bank, loans to energy companies only comprise a small portion of the Texas Capital
Bank’s portfolio. Therefore, Texas Capital Bank is much less reliant on oil prices than MidSouth
is.
LegacyTexas Financial Group, Inc (LTXB/NASDAQ)
LegacyTexas Financial Group, Inc, originally ViewPoint Financial Group, is a bank holding
company for LegacyTexas Bank based in Plano, Texas. LegacyTexas Bank constitutes the largest
market share among Texas based banks. It operates 51 banking offices in 19 cities in North
Texas, including 48 branches in the Dallas‐Fort Worth Metroplex. Like MidSouth, it offers
banking products and services including commercial loans, consumer deposits, and lending
products to small sized companies. Energy loans, reported as industrial and commercial loans
on LegacyTexas’ balance sheet, totaled $359.6 million in December 2014, which increased by a
total of $193.1 million from the previous year.
Green Bancorp, Inc. (GNBC/NASDAQ)
Green Bancorp, Inc. is a bank holding company for Green Bank. Green Bank offers banking
products and services to customers in Houston, Dallas, and Austin through its 15 branches. As
one of the energy lenders, it provides reserve‐based energy loans to regional companies, oil
and gas producers, and other businesses. According to the third quarter 2014 earnings report,
reserve‐based lending constitutes 11% of total loans, with oil comprising 75% of lending,
natural gas making‐up 22% of lending, and natural gas liquids totaling 3% of lending. In
addition, oil and gas companies constitute 8% of Green Bancorp’s total loan portfolio.
MANAGEMENT PERFORMANCE AND BACKGROUND
MidSouth’s management team has built an extensive track record of strong returns. Rusty
Cloutier, who has served as Chief Executive Officer (CEO) since 1984, has built a management
team that has achieved consistent growth through both organic and inorganic means.
Return on Invested Capital and Return on Assets
Return on invested capital (ROIC) is a metric commonly used to measure management
effectiveness. The metric measures a firm’s return relative to its capital investment.
Essentially, ROIC is designed to indicate management’s effectiveness in generating profit
relative to its amount of total capital. Similarly, return on assets (ROA) is another ratio that
measures a firm’s profit relative to its amount of assets.
21. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
21
MidSouth performs above average in both ROIC and ROA. The bank especially performs well
in ROIC as its metric is over twice the peer average. This prowess by the bank can be partially
explained, once again, by its ability to achieve competitive net interest income relative to its
peers, despite being at a much lower market capitalization. This achievement allows its net
income to be high, while its total capital to be low, generating a large ROIC. A partial
explanation for MidSouth’s high net interest income is its energy loans, which offer a higher
return but also much more risk than other loans.
Table 4: Peer ROIC and ROA
Bank ROIC ROA
Southwest Bancorp 8.70% 1.07%
Guaranty Bancorp 6.40% 0.67%
Independent Bank Group 6.90% 0.92%
Texas Capital Bank 7.20% 0.99%
Legacy Texas Financial Group Inc. 3.70% 0.81%
Green Bancorp Inc. 10.90% 0.38%
Peer Average 7.30% 1.01%
MSL 18.00% 7.08%
Source: Thompson One
C.R Rustry Cloutier
Chief Executive Officer (67)
Last year marked Rusty Cloutier’s 30th
year as CEO of MidSouth Bank. Previously, Mr.Cloutier
served as Chairman of the National Advisory Committee of Fannie Mae in Washington, D.C.
He has also served on the Securities and Exchange Commission Advisory Committee on
Smaller Public Companies, and as Director of the New Orleans Branch of the Federal Reserve
Branch of Atlanta. He received a Bachelor of Science in Finance and Economics from Nicholls
State University. Mr.Cloutier has also been recognized on multiple occasions for his work in
the community receiving the 2004 Civic Cup Award, given to Lafayette, Louisiana’s best
citizen, the Most Distinguished Citizen Award in 2006 from the Evangeline Area Council Boy
Scouts of America, and the NAACP Meritorious Award for Community Service.
James R. McLemore
Chief Financial Officer and Senior Executive Vice President (55)
James R. McLemore Jr. currently serves as Chief Financial Officer and Senior Executive for
MidSouth. He has also served as Chief Financial Officer and Executive Vice President for
Security Bank Corp., The Independent Bankers Bank, and IBERIABANK. Mr. McLemore
received his degree from the University of Florida and is a Certified Public Accountant as well
as a Chartered Financial Analyst.
22. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
22
Troy M. Cloutier
Chief Banking Officer and Senior Executive Vice President (41)
Troy M. Cloutier, son of CEO Rusty Cloutier, currently serves as MidSouth’s Chief Banking
Officer and Senior Executive Vice President. He has held these positions since February 2012.
However, Mr.Cloutier has been with the bank for 18 years and has held various positions,
including Regional President of the South and East regions, Chairman of the Regional Loan
Committee, Bank Board Director, Credit Analyst, head of the collection apartment, Insurance
Clerk, Loan Administrator, and Teller.
Jeffery L. Blum
Senior Executive Vice President and Chief Credit Officer (46)
Jeffery Blum, an undergraduate alumnus of Tulane University, became Senior Executive Vice
President and Chief Credit Officer at MidSouth in July 2014. For 21 years, Mr.Blum served as
President at Whitney Bank in Morgan City. Blum was an active member of the Morgan City
community before relocating to Lafayette. He served in the St. Mary Industrial Group and as a
board member of the Atchafalaya Petroleum Institute and the Petroleum Club. He was also a
member of the Holy Cross Church Finance Committee and the Central Catholic Finance
Committee & Advisory Council. At MidSouth, Mr. Blum develops loan policies, oversees loan
underwriting, identifies credit risk, and provides business lending guidance.
Carolyn B. Lay
Senior Vice President and Chief Retail Officer (55)
In July 2010, Carolyn Lay became Senior Vice President and Chief Retail Officer at MidSouth.
She is responsible for directing and supervising retail sales and services at all of MidSouth’s
branches. Six years prior to her promotion, Ms. Lay served as Vice President and Regional
Retail Manager at MidSouth, overseeing only a few bank locations. She has worked for
MidSouth for 16 years.
Lorraine D. Miller
Senior Vice President, Director of Mergers and Acquisitions, and Treasurer (51)
Lorraine Miller has worked for MidSouth since November 2009, originally serving as a
consultant. In November 2010, Miller officially joined the bank’s staff as Senior Vice President
and Director of Mergers and Acquisitions. Ms. Miller was responsible for finances during
acquisition processes, and in this role she helped the Company double its total assets. In fact,
Ms. Miller directed MidSouth to its largest transaction to date, the $40 million merger with
Peoples State Bank of Many, Louisiana. In February 2013, Ms. Miller took on the role of
Treasurer, responsible for the management of MidSouth’s investment portfolio and its
asset/liability management function. Before working at MidSouth, she was the Senior Vice
President and Director of Investor Relations for West Point Home and Security Bank Corp.
23. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
23
Compensation and Incentives
MidSouth’s Compensation Committee, which operates under the Board of Directors, is
responsible for determining the compensation levels of the Company’s executive officers. On
a yearly basis, the committee evaluates and approves compensation goals and objectives for
the CEO, and assesses whether those goals and objectives were met. After the Board
approves the recommended compensation level for the CEO, the committee works with the
CEO to determine compensation levels for all other executive officers. The Board has final say
on all compensation and incentive decisions.
MidSouth uses different elements to compensate its executive officers. These elements
include a base salary, annual incentives, equity‐based rewards, discretionary bonus rewards,
retirement benefits, and other forms of compensation, such as split dollar life insurance. Base
salary and annual incentives make‐up the largest percentage of total compensation payable to
executive officers.
When determining the recommendation for an executive’s base salary, the committee
considers the executive’s abilities, qualifications, accomplishments, and prior work
experience. In 2013, the committee increased the base salaries of MidSouth’s Named
Executive Officers (NEOs). This increase moved salaries within 5% of the midpoint range of
NEOs at comparable companies.
Succession Plans
All senior executives, including the CEO, are required to create a succession plan for their area
of oversight. The executives must review their responsibilities and compile and evaluate this
plan before presenting it to the CEO. The CEO then provides input on every succession plan
before reviewing the plans with the Board of Directors. After the initial plans have been
created, MidSouth’s Corporate Governance and Nominating Committee must periodically
report the succession plans for all executive officers to the Board of Directors.
Board of Directors
MidSouth currently has ten individuals who serve on its Board of Directors. All ten members
have a wide range of experience and expertise. Will Charbonnet, Sr., Chairman of the Board, is
the Treasurer and Managing Director of Crossroads Catholic Bookstore, and he is also the
Controller of Philadelphia Fresh Foods, L.L.C. The only MidSouth employee to serve on the
Board is Rusty Cloutier, President and CEO of the Company. The other Board members are:
Milton B. Kidd III, R. Glen Pumpelly, William M. Simmons, James R. Davis Jr., Clayton Paul
Hilliard, Timothy J. Lemoine, Leonard Q. Abington, and Joseph V. Tortorice Jr.
SHAREHOLDER ANALYSIS
As of March 25, 2015, MidSouth had 11.349,081 shares outstanding. The largest shareholder,
MidSouth Bancorp Employee Stock Ownership Plan(ESOP), owned 5.13%, or 581,513 shares.
Among the ten‐largest investors, seven are institutions and three are insiders.
24. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
24
The seven institutional investors together control 27.14% of MidSouth’s common equity,
while the remaining three insiders owned 11.7%.
Institutional Investors
Table 5 lists the ten largest investors, as of February 9, 2015. The ESOP is on top of the list
with 581,513 shares, 5.17% of the total number of shares outstanding. Compared to 2014, the
top‐ten shareholders remained fairly stable, except for Jacobs Asset Management LLC with a
position change of (32,154) or a reduction of about 181,000 shares. Jacob Asset Management
LLC has sold about 31% of its shares since the first quarter of 2014 and, thus, fell from the
second position (early 2014) to the eighth position so far this year. On the other hand,
Dimensional Fund Advisors LP purchased about 20,000 shares between the third quarter of
2014 and February 9, 2015.
Table 5: Top‐Ten Largest Shareholders
Ranking Holder Name
Type of
Investor
Position
(Shares)
%
Owned
Filing
Source
Position
Change
1
MidSouth
Bancorp ESOP
N/A 581,513 5.13 Proxy 17,085
2
Heartland
Advisors
Incorporated
Institutional 550,000 4.85 13F 0
3
Wasatch Advisors
Incorporated
Institutional 490,042 4.32 13F 92,739
4
Abington,
Leonard Q.
Individual 468,109 4.13 Form 4 (1,000)
5 Hargroder, J.B. Individual 452,968 4.00 Form 4 6,000
6 Cloutier, C.R. Individual 405,282 3.57 Form 4 3,720
7
BlackRock Fund
Advisors
Institutional 393,990 3.47
ULT‐
AGG
32,146
8
Jacobs Asset
Management LLC
Institutional 390,116 3.44 13F (32,154)
9
MidSouth
Bancorp
Directors
Deferred Comp.
N/A 386,994 3.41 Proxy 0
10
Dimensional
Fund Advisors LP
Institutional 286,056 2.52 13F 18,899
Source: Bloomberg
25. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
25
Insider Shareholders
Table 6 shows the top‐ten insider shareholders of MidSouth, with the exceptions of ESOP and
Directors Deferred Compensation Plan, which account for 23.23% ownership of the Company.
MidSouth Bancorp had 17 significant insiders as of February 9, 2015. The top‐nine insider
holders are current board members. The last time an insider from this list sold a share was in
November of 2013, and the number of shares held by these shareholders keeps growing with
more share acquisitions.
Table 6: Top ten insider shareholders
Ranking Holder Name
Position
(Shares)
% Owned
Filing
Source
Position
Change
1 Abington Leonard Q. 468,109 4.13 Form 4 (1,000)
2 Hargroder, J.B. 452,968 4.00 Form 4 6,000
3 Cloutier, C.R. 405,282 3.57 Form 4 3,720
4 Kidd, Milton B. III 249,057 2.20 Form 4 2,592
5 Simmons, William M. 235,707 2.08 Form 4 500
6 Charbonnet, Will Sr. 182, 103 1.61 Form 4 3,000
7 Hilliard Clayton Paul 173,482 1.53 Form 5 (80,000)
8 Tortorice, Joseph V. Jr. 126,052 1.11 Form 4 1,675
9 Davis, James R. Jr. 81,347 0.72 Form 4 870
10 Reaux, Gerald Jr. 76,000 0.67 Form 4 1,000
Source: Bloomberg
RISK ANALYSIS AND INVESTMENT CAVEATS
All banks, including MidSouth Bancorp, Inc., are subject to risk. The three main categories of
risk for banks are financial risk, operational risk, and regulatory risk. In each of these major
categories of risk there are subcategories of risk. Subcategories of risk vary depending on the
size, location, and management of the bank.
26. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
26
Operational Risks
Regional Economic Risk
Because MidSouth is a regional bank, the regional economy drives its success. The economy in
both Louisiana and East Texas is largely dominated by the oil and gas industry. The
manufacturing, transportation, and technological industries are also tied to the oil and gas
industry. If the oil and gas industry starts to suffer, the other industries involved will suffer as
well. As of December 31, 2014, roughly 20.6% of MidSouth’s total loans outstanding belonged
to companies operating within the oil and gas industry. Since June 2014, the oil and gas
industry has suffered due to an excess supply of oil. Oil and gas prices have decreased
significantly, which in turn has caused MidSouth’s stock price to decrease. On February 2,
2015, MidSouth’s stock price dropped to $13.67, a new 52 week low. When the oil and gas
industry suffers, so does MidSouth.
Of MidSouth’s total loans, 55.1% were issued to the real estate industry. The real estate
industry is another industry with many factors that drive its success. Factors such as the
interest rate on mortgages, tax credits, and unemployment rates can impact demand for real
estate. With a large percentage of loans issued to the industry, a change in real estate
demand will have a meaningful impact on MidSouth’s interest income.
Environmental Risk
MidSouth operates in Louisiana and East Texas, where natural disasters periodically occur.
When a hurricane, tornado, or flood, occurs it is possible that it will have an effect on
MidSouth’s physical and technological infrastructure. Damage to the bank’s branch offices
and the hindrance of the bank’s online operations are two potential infrastructural issues.
Another potential issue is that MidSouth’s clients may also struggle, which could result in
defaulted loans. For instance, segments of the economy, such as real estate and construction,
could weaken, resulting in a lower demand for future loans. A natural disaster would alter
MidSouth’s short‐term outlook and, depending on the severity of the disaster, it could hurt
the bank for a long period of time.
Customer Credit Risk
Banks generate revenue largely by issuing loans to clients. A major risk involved with issuing
loans is credit risk, or the risk that a client will default on a loan. Commercial and industrial
loans, which carry more risk than standard residential loans due to the size of the loan and the
volatility of the markets, make up approximately 35.5% of MidSouth’s total loans. The
principle amount of these loans are largely dependent on the cash flow of the borrower,
rather than the value of the collateral provided. MidSouth focuses lending on small and
medium sized businesses. A smaller business has less capital, and thus, less borrowing
capacity. Such a business is also more likely to default on its loans if the regional economy is in
flux.
27. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
27
A regional economic downturn could affect the financial status of MidSouth’s borrowers,
which, in turn, could make it difficult for MidSouth to collect repayment on its loans. Loans
that are not repaid, or defaulted loans, are non‐performing assets, or NPAs. As of December
31, 2014, MidSouth’s non‐performing assets to total assets ratio is 0.78%, which is largely
above the NPA ratio of its peers (see Figure 13). In just one year, MidSouth’s NPA ratio
increased by 0.13%. Although this is concerning, the increase is mainly due to a large real
estate loan which was identified as a nonaccrual loan in the fourth quarter 2014. A nonaccrual
loan is one that has not made payments in ninety days. Thus, while some investors may
believe that an increase in NPAs is due to the Company’s large lending to energy companies,
the increase in the fourth quarter 2014 was not accredited to loans in the energy sector.
Source: Company 10‐Ks
Legislative and Regulatory Risk
Legislative and regulatory risk refers to the current standards banks must meet according to
law. The banking industry is one of the most regulated sectors in the country and the industry
has undergone even more regulation since the recent financial crisis. One of the most
impactful rules set since the crisis is the Basel Capital requirements that force banks to
exercise more caution in issuing assets.
Basel III Capital Rules
The Basel III legislation is a system of capital requirements that banks must uphold by law.
These rules are designed to avoid another banking crisis and have just begun to fully take
effect. The rules establish a minimum percentage for various ratios, including total capital to
risk‐weighted assets (8%), tier 1 capital to risk‐weighted assets (4%), and tier 1 capital to
average assets (4%). Tier 1 capital consists of, but is not limited to, common stock, retained
earnings, and preferred stock.
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
Southwest
Bancorp
Guaranty
Bancorp
Independent
Bank Group
Texas Capital
Bank
Legacy Texas
Financial
Group Inc
Green
Bancorp Inc
MidSouth
Bancorp
Figure 13: Nonperforming Assets/Total Assets
28. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
28
The goal of tier 1 capital is to measure the financial strength of a bank. For example, a bank is
considered well capitalized if total capital to risk‐weighted assets are 10%, tier 1 capital to risk
weighted assets are 6%, and tier 1 capital to average assets are 5%.
MidSouth’s total capital to risk‐weighted assets, tier 1 capital to risk‐weighted assets, and tier
1 capital to average assets are 13.63%, 12.93%, and 9.56%, respectively. Although these ratios
are all below the peer average, MidSouth is still above the benchmark for being well‐
capitalized and is in no immediate danger of falling below the required ratios. Therefore,
investors should not be overly concerned with the performance of the bank as these ratios are
designed as a measure of solvency rather than performance (see Figure 14).
Source: Company 10‐Ks
Financial Risks
Interest Rate Risk
During the recent economic recession, the Federal Reserve implemented a monetary policy
known as Quantitative Easing (QE) to help the economy recover. In the program, the
government purchased bonds in to inject money into the economy with the goal of increasing
spending. The increase in the availability of money also decreased interest rates to extremely
low levels, as the demand for loanable funds was reduced. However, as the recession seems
to be a thing of the past, the Federal Reserve has announced its intention to end the QE
program, which might increase interest rates gradually over time.
5.00%
7.00%
9.00%
11.00%
13.00%
15.00%
17.00%
19.00%
21.00%
23.00%
Figure 14: Basel III Capital Requirements
Total Cap to
R‐W Assets
Tier 1 Capital
to R‐W Assets
Tier 1 Capital
to Avg Assets
29. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
29
The effect of an increase in interest rates is huge for any bank. One important metric that is
employed to analyze a bank’s effectiveness relative to interest rates is its net interest margin
(NIM). NIM is a bank’s net interest income divided by its total earning assets. Currently,
MidSouth performs at the top of its class in NIM (see Figure 15). The bank performs well in
this category because it charges higher interest rates than its peers on a lower amount of
loans. The key to success for the bank moving forward will be how well it adjusts its lending
strategy if interest rates begin to rise.
Source: Company 10‐Ks
Liquidity Risk
An important factor for MidSouth is the liquidity of the bank relative to its peers. This
consideration is important because if the bank is not liquid enough to finance its day‐to‐day
operations, it has to loan funds from the repurchase agreement (REPO) market. The problem
with this approach is that if an unexpected event were to occur, a bank that is not very liquid
will be reliant on the REPO market for funding, and if the bank is unable to receive the funds,
the bank could be in serious trouble. Having cash on hand is especially important for a small,
energy‐lending bank like MidSouth because of the current status of oil prices. If the bank
stops receiving payments from energy companies that become insolvent, the bank will lose a
large source of revenue. It is important, therefore, to have additional cash so that the bank
does not have to rely on such a risky asset to finance its operations.
MidSouth Bank has maintained conservative practices and has remained very liquid, with the
lowest loan to deposit ratio (LTD) among its peer group of about 81.02%. While some of the
other banks loan out more than they receive in deposits, MidSouth has been conservative in
its approach by maintaining 20% of its deposits in the bank. This conservative approach should
enable the bank to remain very liquid and finance its day‐to‐day operations as well as cover
the costs of any unexpected events (see Figure 16).
2.00%
3.00%
4.00%
5.00%
MidSouth
Bank
Southwest
Bancorp
Guaranty
Bancorp
Independent
Bank Group
Texas Capital
Bancshares
LegacyTexas
Financial
Group Inc.
Green
Bancorp Inc.
Figure 15: Net Interest Margin (NIM)
30. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
30
Source: Company 10‐Ks
FINANCIAL PERFORMANCE AND PROJECTIONS
To determine the financial performance for MidSouth Bancorp, Inc. we relied on a few main
factors for a regional bank: economic position, loan growth, and investing and financing
decisions.
Economic Position
Over the last few years, the U.S. economy has steadily improved, with much help coming from
low interest rates issued by the Federal Reserve. Although there is no certainty that the
Federal Reserve will raise interest rates in the near future, many experts predict that interest
rates will rise at the end of 2015. In our growth rate revenue model, we predicted that rates
would remain the same throughout 2015, and that in the following years the rate would show
slight and steady growth. The oil industry is extremely profitable, so for years many
companies started developing new ways of drilling and started drilling more frequently. These
developments have led to a dramatic increase in the supply of oil, which has led to a large
drop in the price of oil. A large portion of MidSouth’s lending is to companies in the oil
industry and companies affected by the oil industry. Although these circumstances seem like
they could affect MidSouth poorly, the Company won’t see any adverse effects unless the oil
industry continues to struggle for the next year to 18 months. Therefore, we did not account
for the oil price decline in our revenue model as we expect the price of oil to return to a more
stable level going forward.
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
110.00%
120.00%
MidSouth
Bank
Southwest
Bancorp
Guaranty
Bancorp
Independent
Bank Group
Texas Capital
Bancshares
LegacyTexas
Financial
Group Inc.
Green
Bancorp Inc.
Figure 16: Loan to Deposit Ratio (LTD)
31. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
31
Operating Decisions
Like any bank, MidSouth garners most of its revenue through its loans. The bank has made
significant progress in its loan growth as its total loans have grown by 12.78% since the end of
2013. In order to forecast loan growth, we considered the growth rates of each type of loan
that MidSouth offers over the past eight, three, and two years. We then calculated a
projection for the growth rate of each type of loan by weighting each of these rates. We
weighted the past eight year growth rate as 20 per cent of out projection, the past three year
rate as 35 per cent of our projection, and the past two year rate as 45 per cent of our
projection. The reasoning behind these weights was to give the most recent growth more
importance over the earlier rates. We used these computed projections for 2015 and 2016
loan growth. We then applied the historical loan growth annual average of eight percent as a
terminal growth rate until 2026. Then, we took the historical average of the bank’s loan yield
per quarter and applied this percentage to the loan projection to obtain net interest income.
MidSouth maintains a conservative approach in terms of its loan to deposit ratio. At our visit
to the bank’s headquarters, MidSouth’s executives informed us that the bank would maintain
a loan to deposit ratio of about 82% for the foreseeable future. Therefore, we forecasted our
deposits by taking 82% of our loan projection for each quarter.
For non‐interest income, we forecasted service charges on deposit accounts, ATM and debit
card income, and other charges and fees. For service charges and ATM and debit card income,
we took historical averages compared to non‐interest bearing deposits and forecasted out
based on our deposit projection. For other charges and fees, we took the historical average
compared to deposit interest expense and forecasted out into the future. Deposit interest
expense was calculated by using its historical average compared to total deposits, which has
been fairly constant over time.
Investing and Financing Decisions
We had to make a few assumptions when predicting investing activities for MidSouth. First,
we made the assumption that the bank will not increase the number of branches in the future
during this difficult period for the oil industry. Likewise, we do not believe that the bank will
be merging or acquiring another bank, as the bank’s primary focus at this time will be
preserving the loans that it currently has keeping its NPAs at a reasonable level.
Finally, MidSouth is currently fully self‐sufficient and we do not see the bank raising capital
through any means in the future. MidSouth’s dividend has been historically constant at
around $.08 and $.09. We predicted the dividends to remain at $.09. Additionally, the bank
has issued $6,155, $14,177, and $10,240 in the past three years in stock options. We took the
average of these three of $8,653 and added it on an annual basis to increase the total amount
of equity per year for the bank.
32. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
32
SITE VISIT
On February 20, 2015, our analyst team travelled to the headquarters of MidSouth Bancorp,
Inc. in Lafayette, Louisiana. Shortly after arriving our team met Troy Cloutier, MidSouth’s Chief
Banking Officer, who showed us around the office and offered us coffee and soft drinks. He
then introduced us to his father, and President and Chief Executive Officer of MidSouth, C.R.
“Rusty” Cloutier. Before Troy Cloutier introduced the investor relations presentation, James
McLemore, Chief Financial Officer, and Jefferey Blum, Chief Credit Officer, both took their
seats.
Troy Cloutier conducted an investor relations presentation, allowing us to ask questions to all
available executives. The presentation displayed MidSouth’s basic information, essential
statistics, and growth projections. The presentation focused mainly on ways to increase
revenue organically, because governmental regulations make it extremely hard for banks to
grow inorganically.
Throughout the presentation, management consistently professed its optimism about its
current situation and the team does not believe the current oil crisis will have as large an
impact on the Company that many investors may predict. This optimism and confidence is
reinforced by insider ownership of the Company’s stock of about 20%. These insiders believe
that the bank’s stock is currently undervalued, mainly due to investor concerns over oil prices.
This belief is evidenced by MidSouth’s price to earnings ratio of 10.3x, which is much smaller
than its peers.
In addition, the executives also informed us that earlier in the week they brought in
management members of energy companies that they lend to, in order to explain future
strategies in the current oil price environment. The executives came away from these
meetings confident, believing that the oil companies will be able to make future payments.
However, Troy Cloutier did warn us that the bank would be able to withstand low oil prices for
about 36 months, at which point the bank could begin to see serious negative effects. While it
may take over a year for the bank to see major issues, the bank’s non‐performing assets could
see an increase as early as the third quarter in 2015. This increase in non‐performing assets
would negatively impact the bank’s net interest income in the future.
In addition to oil companies adjusting to the current oil price environment, MidSouth is also
preparing for possible setbacks. Specifically, the bank made a $600,000 allowance for energy‐
related losses as a safety net for any losses received on energy loans. Although the bank
realizes the negative situation of the current economy, they also stressed that they are not
simply sitting back and waiting for oil prices to rise.
Troy Cloutier made sure to point out that the bank will not turn down an oil company simply
because of the current situation. The bank has not changed its lending strategy during this
period and will still lend to any company that meets its criteria. Supporting this claim is the
bank’s loan to deposit ratio (LTD).
33. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
33
While very conservative relative to its peers, MidSouth’s LTD is about as high as it has ever
been at 82%. The bank usually operates within the 70‐75% range. The executives agreed that
while they are satisfied with the bank’s current LTD, 82% is about as high as the bank will go.
MidSouth’s executives also included a summary of its branch locations, and they expect
economic growth in all of these areas. The executives agreed that growth in big cities like
Dallas and Houston is extremely exciting. Texas as a whole is the more promising state
compared to Louisiana when it comes to growth prospects. Although excited about Texas, the
executives were not worried about growth in Louisiana, and made a point to focus on Lake
Charles in the presentation. While many investors are worried due to the suspension of $50
billion in oil‐related projects, MidSouth once again expressed optimism about the situation in
Lake Charles. Troy Cloutier noted that the region still has billions of dollars in projects, and
that the current level of production is sufficient for the region. Still, this area is particularly
volatile due to its reliance on oil and will be an important area for Midsouth to monitor going
forward.
Finally, the executives walked us through their expectations for the coming year. Troy Cloutier
made it clear that a main objective in 2014 was cutting costs and growing loans. However,
growing loans in 2015 will not be easy and the bank will probably not experience the same
level of growth this year as it did in previous years. Nevertheless, the executives believe that
MidSouth will continue to churn out impressive earnings numbers, and that the bank will
continue to strive to be more efficient throughout all of its operations. Cloutier added that an
area of focus might be noninterest income, as the bank will try to capitalize on its increase in
deposits.
After the presentation and our Q&A session with MidSouth’s executives we all ate lunch.
Rusty and Troy Cloutier continued to talk about the banking industry, stating that it is
extremely hard for banks to grow due to governmental regulation. Rusty doesn’t fear for his
own bank’s safety longevity, however, he does fear that the banking industry will see a decline
in overall growth. After Rusty provided these words of caution, our team and the rest of the
executives discussed Tulane’s sports, Mardi Gras, and the history of this state. As our team
left the conference room we stopped to take a photo at the MidSouth logo.
34. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
34
Site Visit Photo
INDEPENDENT OUTSIDE RESEARCH
In order to create a reliable report, our team of analysts utilized a variety of outside sources to
develop our viewpoint on MidSouth's financial future. Our main sources for general financial
data were ThomsonOne, Bloomberg, and Yahoo! Finance. We also found impactful
information on the Federal Deposit Insurance Corporation website, as well as on the Federal
Reserve’s website. Additionally, we used competitor websites and SEC filings to complete the
peer analysis section of our report. Much of our historical information on MidSouth was
derived from annual and quarterly SEC filings, presentations, and press releases accessed
through the Company’s website.
In addition we gathered some of our best information from our site visit at MidSouth's
headquarters in Lafayette, Louisiana, where we met with the management team. Executives
answered many of the questions we came across in prior research and provided us with very
valuable insight that we would not have been able to find elsewhere. Speaking with top
management of the Company enriched our perspective on MidSouth and of the banking
industry in the Louisiana and Texas regions.
35. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
35
ANOTHER WAY TO LOOK AT IT
ALTMAN Z‐SCORE
The Altman Z‐score is a measure of insolvency developed by Edward Altman in 1968. While
the score has been fairly accurate in predicting insolvency for many companies, it is not
applicable for banks and cannot be used as a reliable indicator of insolvency for MidSouth
Bank.
PETER LYNCH EARNINGS MULTIPLE VALUATION
In his book One Up On Wall Street, Peter Lynch introduces a charting tool that simplifies
investment decisions. The “Peter Lynch Chart” graphs a company’s current stock price versus
its earnings line. This earnings line is a theoretical price equal to 15 times the company’s
earnings per share.
In order to tell if a stock is overpriced, Lynch would look at the stock price line versus its
earnings line. If the stock price falls below the earnings line, then Lynch would buy the stock.
If the stock price line rose above the earnings line, then Lynch would sell the stock.
Figure 17 demonstrates the “Peter Lynch Chart” for our Company over the past five years to
March 24, 2015. It shows our Company’s stock price line in relation to the Company’s
earnings line.
MidSouth has a current price of $14.92 per share and has a trailing 12‐month earnings per
share at $21.937. Because the stock price is below its earnings, Peter Lynch would purchase
the company at this time.
0
5
10
15
20
25
4/8/10 4/8/11 4/8/12 4/8/13 4/8/14
Share Price
Date
Figure 17: Peter Lynch Analysis
Last Price
Trailing 12M
Earnings Per Share
36. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
36
WWBD?
What Would Ben (Graham) Do?
Ben Graham, the “father of value investing,” was the mentor of Warren Buffett and a
professor at Columbia Business School. The Ben Graham Analysis is one of many tools we used
to analyze MidSouth. This analysis allows investors to assess the value of a prospective
investment and to measure its potential growth.
The Ben Graham Analysis considers companies attractive if they meet four of the eight criteria
or “hurdles” established by Ben Graham. The first six hurdles of the analysis help investors
determine if a company is undervalued in the marketplace. The last two hurdles evaluate a
company’s growth potential by examining both its growth over the past five years and its
ability to continue growing in the future.
MidSouth passed five out of the eight hurdles in the Ben Graham Analysis, meaning Ben
Graham would probably invest in MidSouth. Three out of the first six hurdles were passed,
meaning that there is a chance that the Company is undervalued. MidSouth passed the last
two hurdles, which means that there is probably future growth potential within the Company.
While investors should not expect MidSouth to grow at the same pace organically as it has
inorganically throughout the past few years, the positive growth year after year is certainly a
positive sign for MidSouth’s future prospects (see Figure 18).
Figure 18: Ben Graham Analysis
37. MidSouth Bancorp Inc. (MSL) BURKENROAD REPORTS (www.burkenroad.org) March 24, 2015
37
Earnings per share (ttm) 1.60$ Price: 14.59$
Earnings to Price Yield 10.99%
10 Year Treasury (2X) 3.96%
P/E ratio as of 12/31/10 32.68
P/E ratio as of 12/31/11 48.54
P/E ratio as of 12/31/12 21.26
P/E ratio as of 12/31/13 16.05
P/E ratio as of 12/31/14 10.97
Current P/E Ratio 9.1
Dividends per share (ttm) 0.35$ Price: 14.59$
Dividend Yield 2.40%
1/2 Yield on 10 Year Treasury 0.99%
Stock Price 14.59$
Book Value per share as ofuarter 4 2014 14.78
150% of book Value per share as ofuarter 4 2014 22.17$
Interest‐bearing debt as of uarter 4 2014 27,649$
Book value as ofuarter 4 2014 209.01$
Current assets as ofuarter 4 2014 1,892,079$
Current liabilities as of uarter 4 2014 1,892,079$
Current ratio as ofuarter 4 2014 10.97
EPS for year ended 12/31/14 1.43$
EPS for year ended 12/31/13 1.14$
EPS for year ended 12/31/12 0.85$
EPS for year ended 12/31/11 0.43$
EPS for year ended 12/31/10 0.47$
EPS for year ended 12/31/14 1.43$ 25.44%
EPS for year ended 12/31/13 1.14$ 34.12%
EPS for year ended 12/31/12 0.85$ 97.67%
EPS for year ended 12/31/11 0.43$ ‐8.51%
EPS for year ended 12/31/10 0.47$
Stock price data as of M arch 24, 2015
Yes
MIDSOUTH BANCORP INC. (MSL)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
Yes
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
Yes
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
No
Hurdle # 4: A Stock Price less than 1.5 BV
Yes
Hurdle # 5: Total Debt less than Book Value
No
Hurdle # 6: Current Ratio of Two or More
N/A
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
Yes
Hurdle # 8: Stability in Growth of Earnings
