National scrutiny of financial institutions generates in-state interest since quite a few of Mississippi’s publicly-traded companies are financial services providers. However, so goes the nation is not necessarily how the Magnolia State goes, economically speaking.
“A lot of Mississippians own stock in regional or national companies that were once local, so the local economic implications are pretty much the same,” says Danny Williams of Woodridge Capital Portfolio Management in Ridgeland. “For the most part, our state’s financial companies are fairing a little better than major money center companies, but not much. Mississippi is not immune to the economic problems that we’re experiencing nationally.”
Chris McAlpin of Financial Strategies Group says, “Two banks to note are BancorpSouth and Trustmark. They have a similar story to the real estate companies. Their industry has taken a real beating across the country, and their stock returns have reflected this. However, both have promising returns on their equity statistics and promising profit margins.”
Williams goes on to say that the sub-prime mortgage issue has resulted in the tightening of qualifying guidelines in the housing market.
“Lenders have taken a closer look at their borrower qualification guidelines, so these loans are not as easily available,” he said. “Most shareholders are well aware that stock prices for our local bank, real estate and mortgage-related companies have gone down quite a bit. A lot of this decline has occurred simply because they are lumped into the financial sector. When negative news comes out in a sector, it’s not uncommon for investors to sell across the board and sort out the innocent victims later.”
Half empty? Half full?
However, Carl Chaney, CEO of Hancock Holding Company, which operates Hancock Bank branches in four states, says it can be a good time to be a financial services company if you are well managed, have a large, stable capital base and are not highly leveraged.
“That is, have a relatively low loan-to-deposit ratio. A high loan-to-deposit ratio means that you have lent out most if not all of your deposits and have to pay up or seek less stable forms of funding,” he said. “As mentioned, Hancock fits the criteria of a financial services company that is well managed, has a strong and stable capital base and also a much lower loan-to-deposit ratio than the industry as a whole (ours is about 70% compared to most banks who are near 100% lent up).
“In addition, not having the significant asset quality problems (loan losses) that many of our peer banks have, allows us to increase our market share in our various markets because we are actively taking deposits and making loans, whereas some other banks are focused on dealing with their asset quality issues (loan workouts).”
Nash Allen, chief financial officer for BancorpSouth, is also optimistic about the status of financial services companies. “Most commercial and community banks are doing fairly well,” he said. “We are the largest financial institution in Mississippi. We are a primary source of credit and cover the whole state. We’re in a position to help foster economic growth and feel that bank stocks should be considered by investors buying stock.”
With operations in eight states and 4,400 employees, BancorpSouth has 109 locations and 2,259 employees in Mississippi.
Chaney says current stock market conditions are affecting Hancock Bank in two ways.
“First, most all financial stocks are down and have been for most of the last 15 months. Most of the peer banks we follow and compare ourselves to are down in excess of 30% — some much more than that,” he said. “Over the course of 2007, Hancock’s stock was down 28%. However, as the current financial crisis has worsened, many investors have realized the tremendous value of banking companies who are conservatively managed (no subprime lending exposure) and have strong capital bases, and have flocked to those companies. As a result, our stock is up nearly 12% so far this year.”
Ups and downs
He adds that the second way the stock market is affecting Hancock Holding is the recent volatility in stocks that is not unusual for a several-hundred-point gain followed the very next day by a large decline.
“Many investors are fleeing stocks and moving their money out of the stock market and into the safety of strong, stable commercial banks like Hancock,” he said. “We typically see an increase in our deposit base when the stock market is in a state of disarray, and that is certainly happening now.”
Asked if he considers financial services companies sound investments, Williams responded that it’s a mistake to lump them all in one general category as there are often good opportunities after significant price declines.
“However, just because these stocks have gone down doesn’t necessarily mean that now is the time to buy,” he said. “It might take a while for them to reverse their negative trend. One thing we try to avoid is chasing a stock while it is going down. Sometimes it can keep declining and may take months or years to recover.”
He also cautions that investors may get emotionally attached to investing in local companies that they see and hear about in the local media.
“As we should have learned from the past, just because we think we know a company and its management team doesn’t mean it is a good investment now,” he added. “We believe there is a difference between a great stock and a great company.”
Waiting it out
Although current market conditions have somewhat slowed the growth of banks, these companies are reflective of the state’s and national economy, Allen points out. “The national credit markets and real estate do have some impact on us,” he said. “They have caused a narrowing of interest spreads on loans and deposits. We will have to wait it out, and I don’t see any change for several months.”
As for the state outlook, he feels Mississippi will continue to have slow, steady growth with significant amounts of construction in the northern one-third related to the huge Toyota plant. The southern part of the state will continue to benefit from hurricane recovery and GO Zone incentives. Banks will figure prominently into that growth.
“Banks in general and especially national banks are experiencing some pretty tough times,” he added. “We don’t see that much here.”
Looking into the year’s crystal ball, Chaney sees a slight deepening of the current financial crisis as more banks report additional subprime losses in the first quarter of 2008.
“The Fed will probably lower short term interest rates another 75 to 100 basis points by the end of the year,” he said. “However, we do think the economy will start to grow again by the third quarter, and the financial crisis will also be behind us at that point.”
Williams also predicts a recovery this year. “It may not happen as quickly as we would like,” he said.
Contact MBJ contributing writer Lynn Lofton at firstname.lastname@example.org.