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Acquisitions and mergers

Flurry of activity may be in the future of many Mississippi institutions

A desire to offset dried up demand for consumer and business loans may set off a round of acquisitions and mergers among Mississippi banks.

With ledger sheets showing greatly diminished interest income, bankers must get resourceful if they want to see some money flowing. Banking consultant Hans Pettit said he thinks he knows how they may make that happen.

“Without growing their loans, acquisitions may be the only way to grow business,” said Pettit, a Jackson-based partner in the HORNE CPA & Financial Advisors firm and head of the financial institutions practice.

Such a strategy could prove helpful to both parties, Pettit said. “If you’re trying to raise capital, shareholders want to see some asset growth. How do you accomplish this without loan demand? Historically, acquisitions have been the way to do that.”

Pettit said his feeling is that Mississippi will see strategic acquisitions next year that “aren’t FDIC-assisted,” or healthy banks buying healthy banks.

Tupelo’s Renasant is already doing that. With its interest margin having declined to 3.15 percent in the second quarter from 3.27 percent the quarter before, Renasant appears to be following Petitt’s expectation that growth is a way to beat the loan volume doldrums.

“We’ve opened two new banks, acquired 11 locations and have one on the way in Columbus,” said John Oxford, vice president and director of external affairs for the $3.6-billion regional bank.

The growth includes acquisitions of a community bank in Georgia through an FDIC sale, establishment of a branch in the high-end Birmingham suburb of Crestline and the setting up of operations in New Albany to take part in the economic bonanza from a new Toyota manufacturing plant.

BancorpSouth Bank plans a growth spurt, as well. Chairman Aubrey Patterson told a gathering of Chicago analysts in late August that the regional banking company is hunting for attractive acquisitions.  Nearly a month later, those plans are moving forward, Patterson said in an interview last Tuesday.

BancorpSouth wants to find “new partners among community banks,” he said, describing the likely acquisitions as community banks that are feeling competitive pressures on “net-interest margins,” or money generated from lending.

Pressure from federal banking reform will also contribute to a willingness toward acquisition, Patterson noted.

When taken together — the dearth of new revenue growth opportunities and increased costs of regulatory compliance — fatigue is likely to set in among community banks in Mississippi and elsewhere over the next 12 to 18 months, according to Patterson. “A number of good, strong community banks are going to come to the conclusion they want to be part of a larger regional bank like BancorpSouth Bank.”

HORNE’s Pettit expects BancorpSouth’s hunting grounds will be outside Mississippi. “They are pretty saturated here,” he said. “My guess is they’ll be in Louisiana and Texas. It just depends on what opportunities present themselves.”

John Allison, Mississippi banking commissioner, said he thinks the larger banks will look to acquire institutions that add to market categories and increase geographical reach. “This would mean diversity in terms of both geography and in the types of loans and other businesses the targeted banks are involved with,” Allison said.

Some banks “may be as strong as nails” but might not be  “attractive to a regional institution,” he added.

He expects the most suitable targets will be in the $1-billion asset neighborhood.

Allison said there’s been talk of some smaller banks in close proximity “just merging up front and trying to fight the battle that way.”

This would not only be a defense against acquisitions, he said. It’s a way to achieve the economies of scale smaller banks will need in the new regulatory era, he said. And, added Allison, the unity strategy would help them survive the current slumping loan volume.

The percentage of unprofitable banks in Mississippi stood at 12.09 June 30. Allison said he thinks most will bounce back. “I would imagine the majority of them should show a profit again.”

Though more than one in 10 Mississippi banks are in the red, the state’s banking sector looks like a blue chipper compared to  Florida and Georgia, which together totaled 104 banks with “zero” ratings in the Bauer Financial rating issued last week. The Coral Gables, Fla.-based bank rating agency gave only one Mississippi bank its lowest grade – Heritage Banking Group of Carthage.  The zero rating does not mean a bank is imminent danger of failing but denotes it has stiff challenges ahead, Bauer says.

A risk aversion that kept most Mississippi bankers from riding the highs of the real estate boom has spared the state — and to a lesser degree neighboring Alabama — the zero ratings and Federal Deposit Insurance Corporation takeovers seen in Georgia and Florida.

But the same perspective that provided the state’s banking sector its current good health could now be what threatens it.

Banking Commissioner Allison isn’t prone to clichés but he agreed in a recent interview that it seems some chickens have come home to roost. “Exactly,” Allison said. “Borrowers are too conservative to borrow.”

Just as Mississippi bankers wouldn’t roll the dice on the real estate boom, their individual and business customers don’t like the odds today’s economy presents, at least not enough to commit to a loan.

“They want the cushion they may need later,” Allison said.

Mississippi Banking Association Chairman Joel Clements said a Federal Reserve governor at a recent bankers’ gathering in New Orleans left him astonished with a harangue over a reluctance to lend to small business. You have to ask to receive, and that’s not happening, said Clements, president & chairman of First State Bank in Waynesboro.

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