Every portfolio can use a few fast-growing regional banks for a nice mix of dividends and capital appreciation. Mississippi, the poorest state in the U.S. and definitely off the beaten path when considering investments, is home to four solid, profitable regional banks that might be worth adding to your portfolio. In this article, I’m going to do a quick review of these banks and suggest which ones are suitable for investment right now - pending, of course, your own due diligence. Will it be worth the time? Let’s see.
A Banking Industry Oddity
For a state with a population of only 3 million - 19.8% living in poverty - to produce four solid, profitable regional banks is truly a banking industry oddity. Several factors may have helped the state develop a strong banking tradition; the early relative isolation and continuing small-town agricultural nature of the state, the need for responsive local institutions to finance the cotton crop, local railroads and barge companies and later, the shrimping and oil industries in the Gulf of Mexico, the distrust of northern bankers after the Civil War, and the formation of the Mississippi Bankers Association in 1889.
No matter the cause, the result was our four banks. They are, in no particular order; Renasant Corporation (NASDAQ: RNST), Trustmark Corporation (NASDAQ: TRMK), Bancorp South Bank (NYSE: BXS) and Hancock Whitney Corporation (NASDAQ: HWC).
If you take a look at the map of Mississippi above, you can find tiny Tupelo, MS in the northeastern corner of the state. Tupelo, with a population of only 38,000, is famous as the birthplace of Elvis Presley and is home to two of our banks, $12.8 billion-asset RNST and $18.9 billion-asset BXS. And that’s not all. Mississippi is home to TRMK, headquartered in Jackson, MS, the state’s largest city and capital, with $13.5 billion in assets and HWC, the largest of our four banks, headquartered in Gulfport, MS, on the Gulf Coast, with $28.7 billion in assets.
After a lot of data wrangling, here’s the first of four tables we’re going to review. This table will set the stage as we proceed with our discussion. All data is as of the end of 2Q 2019 unless noted.
Sources: Seeking Alpha, 2Q 2019 10Q for each bank.
We’ll run some numbers based on this table later, but there is one important fact to consider here. Each of the banks has branched outside of Mississippi, all into faster-growing Florida and Tennessee and three of the four into the rapidly growing Texas economy as well. I would view exposure to Texas as a plus. RNST is not in Texas, but is the only one operating in the fairly strong Georgia economy.
So far, the banks have seemed pretty similar, but with our second table we begin to see some divergence in performance. In the table, the best performance across each metric is in green while the worst is in yellow. All data is either as of, or for, the quarter ended 2Q 2019 unless noted.
Sources: Seeking Alpha, 2Q 2019 10Q for each bank.
RNST wins in ROAA and HWC wins in ROAE. How can a bank report good ROAA and ROAE numbers? In our table, RNST benefits from a good net interest margin, squeaky clean balance sheet and better expense control. HWC reports higher ROAE through about 6% more leverage than RNST combined with the second-best expense control in the table - and, conversely, RNST’s group leading 16.44% equity to assets ratio penalizes the bank’s ROAE. Interestingly, that squeaky clean balance sheet combined with the highest net interest margin at 4.19% implies that RNST isn’t taking undue risk to achieve its high ROAA.
When it comes to non-interest income, TRMK’s wealth management and insurance businesses ensure that it leads in at least one metric. The other banks are all within a fairly narrow band.
In terms of efficiency, RNST is the clear leader with an efficiency ratio of 60.79% while TRMK is the clear laggard at 71.12%. The efficiency ratio is a non-GAAP measure subject to all sorts of finagling. For example, for the trailing twelve months ending 2Q 2019, TRMK’s self-reported efficiency ratio is 65.92%. To keep a level playing field, in our table it’s just the last four quarters of GAAP non-interest expense divided by the comparable GAAP total revenue (net interest income plus non-interest income) - no adjustments, no one-time exclusions. Why? Look at this footnote explaining TRMK’s efficiency ratio from the 2Q 2019 Press Release:
(1) The efficiency ratio is noninterest expense (excluding amortization of purchased intangibles and other real estate expense, net) to total net interest income (FTE) and noninterest income (excluding security gains (losses), net and amortization of partnership tax credits). Any significant non-routine income and expense items are adjusted accordingly.
There’s just no way to make the same adjustments - exactly what are they, anyway? - across multiple banks in a timely manner. HWC’s efficiency ratio is a bit of a surprise because I began this analysis assuming the bank’s expenses might still be inflated from the 2011 combination of Hancock Bank of Gulfport, MS and the larger Whitney Bank of New Orleans, LA that created HWC, but acquired expenses were controllable while asset quality was not. To give you an idea what HWC inherited, on December 22, 2010, The New Orleans Times Picayune noted Whitney’s problems:
The famously conservative Whitney got into trouble after it expanded into Florida during the real estate boom and found itself saddled with many bad loans, prompting it to take $300 million from the federal Troubled Asset Relief Program in 2008. In October, Whitney agreed to sell $180 million of problem loans in an attempt to resolve the credit issues the bank had been grappling with in Florida.
When we talk about asset quality we’ll see that there are still some lingering issues resulting from that merger - almost a decade later.
In funding efficiency, BXS is the leader in leveraging its deposit base against its loan portfolio held for investment with a 90.34% loan to deposits ratio, somewhat offsetting the drag of its rather high 68.47% efficiency ratio. RNST and HWC are in the neighborhood, but TRMK lags at 79.58%.
Responsible asset growth is a prerequisite for capital appreciation in the world of regional banks. It’s almost impossible to find a regional bank that has not acquired its way to growth and all of our banks are serial acquirers; they developed their multi-state franchises in search of faster economic growth outside of Mississippi. The growth king among our banks is RNST which averaged 17.22% annual growth over the past five years. Have they grown too fast? A legitimate worry, and, to be fair, a lot of that growth came with the 2018 BrandBank acquisition, but RNST also boasts high asset quality. BXS and HWC are in the 7% to 8% range, which I find acceptable, but TRMK lags badly - again - at 2.25%, a rate of growth arguably less than inflation. Here’s a schedule of each bank’s last or pending acquisition(s):
Sources: Press releases for subject banks
We’ve touched on asset quality already, but it’s safe to say RNST is the star here with non-performing loans at 0.37% of loans and non-performing assets at just 0.33% of assets. For some context, according to the FDIC Quarterly Banking Profile for June 30, 2019, FDIC-insured commercial banks in aggregate reported non-performing loans equal to 0.93% of total loans and non-performing assets equal to 0.54% of assets. The other banks are well within the acceptable range, except HWC. HWC reported non-performing loans at 1.54% of total loans and non-performing assets at 1.18% of assets. As we noted, HWC has been working through oil industry problem loans, largely within the portfolio it inherited from Whitney Bank. The bank, however, may have turned the corner on its energy loan exposure. On June 11, 2019, Moody’s noted the progress HWC had made in reducing energy loan exposure in affirming its ratings and changing its outlook to positive:
In changing the rating outlook to positive from stable, Moody's noted Hancock Whitney's improving asset risk profile evidenced by its reduced energy concentration. Hancock Whitney's energy portfolio accounted for 5.3% of loans as of 31 March 2019, down from 10% at year-end 2015. While loans to the energy services subsector remain significant, the bank has reduced the portion to 46% of its total energy portfolio as of 31 March 2019, down from 62% reported at year-end 2017. The reduced energy concentration and reduced exposure to higher risk energy services companies benefit the bank's standalone credit profile, in Moody's view.
RNST has the largest capital cushion of the group with equity to assets of a fairly remarkable 16.44% and a total capital ratio of 14.62%, but all the banks meet the FDIC’s definition of “well-capitalized.”
Finally, as an indicator of deposit-gathering efficiency, HWC leads the pack with an average of $119.2 million in deposits per branch, largely due to an average of about $175 million in deposits per branch in its New Orleans - Metairie MSA branches acquired from Whitney Bank. The others are all on the low side of what I like see, perhaps due to a lot of smaller small-town and rural branches.
How does the market value these banks? By now, we should be able to hazard an educated guess as to which banks deserve a higher valuation. Well, we’re in for at least one surprise. Take a look at the table below; all the price multiple data is based on September 13, 2019.
Source: Seeking Alpha
I do not understand the valuation accorded TRMK. I agree that the bank is solid and it’s been a fixture in Mississippi for 130 years, but calling it overly conservative would be generous. Almost no growth in assets and no growth in its dividend for over five years? The book and PE multiples accorded this bank do not appear warranted.
The other results are more in line with my expectations. I understand HWC’s position as the laggard here; they stepped in it with the Whitney Bank merger, have paid the price for almost a decade and, if you believe Moody’s, are just now turning the corner. The relatively cheap valuation; 1.38 times tangible book and a PE of 9.82, might be an enticing turnaround story - more on that later.
To me, RNST and BXS are the clear winners. I’m troubled by the lack of dividend growth in RNST, but I am also not certain BXS deserves that much of a higher valuation, in spite of the brisk 38.88% average annual growth in dividends for the past five years - after all, it still yields only 2.47%. RNST trades at 1.84 times tangible book and a PE of 12.32. BXS trades at 1.97 times tangible book and a PE of 13.74. To provide understanding of the current tradeoffs investors make, JPMorgan Chase (NYSE: JPM), which has averaged annual asset growth of just 1.59% for the past five years, trades at 2.04 times tangible book, a PE of 12.29 and a 2.99% dividend yield. Of course, expectations are vastly different for RNST and BXS. My expectations - and I assume those of most investors - are for much more rapid growth in these small, mid-cap regional banks to drive capital appreciation.
Time for Some Charts
How have the stocks performed? Let’s look at a chart. And maybe another.
Well, that’s a messy chart and it sent me back to TRMK’s 10Q’s, press releases, etc. to figure out why the bank has had the best performing stock of the bunch for every period from six months to five years. All I came up with was generally improving earnings and a March 15, 2019 announcement that the bank was authorizing another stock repurchase program; $100.0 million or about 4.50% of its outstanding stock. This buyback follows a similar one for $100.0 million dating back to 2016.
It’s no surprise that HWC brings up the rear again. Over the last five years only TRMK and BXS - no real surprise there - beat the Invesco KBW Regional Bank ETF (NASDAQ: KBWR). What surprises me is RNST’s comparatively weak performance. At the risk of making this article too long, I have to include the 10-year price performance chart.
Here, everything’s right with the world as all my preconceived expectations are met! BXS and RNST dominate, both beating the KBWR, and TRMK and HWC lag.
We’ve reviewed four regional banks from the poorest state in the Union – and, surprisingly, they’re actually all pretty good banks. At this point, however, I should caution the reader that this has been a quick review, not a rigorous individual bank analysis and I am basing my conclusions on what you have read so far plus my own knowledge of these banks - which, other than TRMK, is relatively limited.
There is one I find of no investment interest; TRMK. There is one I find of "special" investment interest - albeit with an asterisk - HWK, and two definitely deserving investment consideration; BXS and RNST - oddly, both from Tupelo, MS, a tiny town of 38,000 where they force everyone to attend some sort of secret banking school. Okay, we all have the same thought. If these banks were to merge they could eliminate lots of expenses and create a regional powerhouse. I am certain there are hundreds of people living in Tupelo who pray every night that this does not happen.
Briefly, TRMK is slow-growing and conservative with uninspiring numbers. No, I can’t rationally, or perhaps adequately, explain the stock price performance. Will you lose your shirt if you buy this bank? No, but I would not expect to outperform, for example, the KBWR, unless there are major operational and strategic changes. As a friend from Ripley, MS, would say, could be that possum’s on the stump, i.e., it might be as good as it gets.
Here’s the explanation for the written asterisk above. For the better part of 20 years, HWK was the bank to beat in Mississippi. It might be finally heading back to the future after suffering a Mardi Gras-sized hangover from the ill-timed purchase of Whitney Bank. Is it a bargain turnaround play? At a 2.76% dividend yield they’re not exactly paying us big bucks to hang around waiting - and I always worry about asset quality. Will the MidSouth Bank deal change anything? Yes, more energy exposure - after literally years spent reducing energy exposure. However, if you agree with Moody’s and believe HWK has turned the corner on asset quality - after your own due diligence focused on the existing and acquisition loan portfolios - and you want to buy and wait for a “return to the mean” type of multiple expansion, I would bless that as a reasonable investment.
On the other hand, BXS and RNST are the Terrific Tupelo Twins of Mississippi banking. Both offer solid balance sheets, excellent asset quality, earnings growth, exposure to strong markets and an expansionary future. RNST has a higher net interest margin, cleaner balance sheet, more room to leverage its deposits, stronger capital position and better expense control. It has also - thanks to the BrandBank acquisition - grown faster. One cautionary note about RNST is that C. Robinson McGraw, who led the bank as CEO beginning in 2000 while it grew from $1.2 billion to $10.2 billion in assets, retired in 2018 and became executive chairman. However, there was a promote-from-within succession plan in place and no radical changes are expected. BXS also has a lot going for it; it’s larger, has access to the high-growth Texas market, two 2019 acquisitions increasing its growth rate, a higher return on equity and a much better record of dividend growth.
If you want to own two faster-growing regional banks in the Sun Belt that provide the opportunity for safe, increasing dividends and capital appreciation through growth - and maybe a takeover or spectacular cross-town merger, split your investment dollars and buy equal positions in RNST and BXS. If you buy RNST and BXS and hold them for 3 to 5 years, in the words of another friend of mine, this one from Grenada, MS, I suspect you’ll do fine as a frog’s hair.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RNST, BXS OR HWC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.