Mississippi community banks are leveraging a generous government program that benefits low and moderate-income financial institutions to fund M&A transactions.
Funding from the Emergency Capital Investment Program (ECIP) is playing a significant role in the state's M&A environment, sources said in interviews with S&P Global Market Intelligence. As interest rates stabilize and deal activity in Mississippi shows signs of an uptick, community development financial institutions (CDFIs) in the state that have received ECIP funding are likely the best positioned to strike a deal.
The buyers in the five most recent bank deals in the state were all ECIP recipients. Commerce Bancorp Inc. received $70 million from the program, Guaranty Capital Corp. received $183.8 million, BankFirst Capital Corp. received $175 million and Merchants and Planters Bank received $18.5 million, according to US Treasury data.
"The terms are quite generous, and the amount of capital provided is stupendous relative to the size of the institutions," Jeff Davis, managing director of Mercer Capital's financial institutions group, said in an interview. "For some institutions, this capital provides the means for acquisitions."
ECIP funding opens doors to M&A
ECIP allows banks to sell perpetual preferred stock to the US Treasury with no dividend for the first two years and an annual dividend no higher than 2% thereafter. If the capital can be deployed and produce higher returns than the dividend, the differential accrues to the common shareholders, Davis said.
The federal government established the program as part of the Consolidated Appropriations Act of 2021 in an effort to help minority deposit institutions and CDFIs make loans and support affordable housing initiatives. As a result, 175 such institutions across the country received a total of $8.57 billion in investments, including more than $1.6 billion to 25 financial institutions in Mississippi.
The access to inexpensive capital that ECIP provides for minority deposit institutions and CDFIs has a significant impact in Mississippi, which has a disproportionate amount of CDFIs, Nelson Mullins banking partner Robert Klingler said in an interview. The 2% dividend cap has made the funding increasingly attractive as the Federal Reserve hiked rates over the past year, and in some cases, using that capital to make an acquisition can be easier than deploying it for organic growth, he added.
Banks that have struck deals in recent years are likely to remain acquisitive, and those that have received ECIP funding are also well-positioned, Davis said.
"If you've got ECIP capital, your holding company is probably cash-rich," Davis said.
Miss. deal activity picking up
M&A activity in Mississippi has been limited because out-of-state banks have not had an interest in making acquisitions in the state, and Mississippi regional banks already have a presence in the markets they are interested in, Davis said. As a result, most of the deals in the last decade have been in-state transactions between community banks.
Only four of the 25 most recent deals in the state have been out-of-state deals, all of which took place in or before 2014, according to S&P Global Market Intelligence data.
Mississippi banks have announced two deals so far in 2023, including Guaranty's acquisition of First American Bancshares Inc. and Commerce Bancorp Inc's pending acquisition of Morton Bancorp Inc. In a sign that deal activity may be picking up in the state, the announcements came at a slightly faster clip than in 2022, when the state did not reach two deal announcements for the year until September.
Subsiding uncertainty around interest rates may explain the uptick, Klingler said.
"There's just a little greater ability to say [that] what we look like today is likely to still be what we're going to look like in six months or nine months," Klingler said.
Mixed performance at Miss. community banks
Over the 12 months ended June 30, Mississippi community banks of all asset classes underperformed in terms of year-over-year changes in return on average equity (ROAE) and net interest margin (NIM) compared to the median US bank. Mississippi community bank efficiency ratios also worsened across asset categories as the median US bank's efficiency ratio improved year over year by 192 basis points.
Nonperforming asset (NPA) trends at Mississippi community banks were mostly in line with the median year-over-year decline of 2 basis points, except for Mississippi banks with assets between $500 million and $3 billion, which reported no median change year over year.
Mississippi community banks outperformed the median US bank in terms of loans and deposits. Those with assets between $3 billion and $10 billion reported both the largest median year-over-year deposit growth, at 6.7%, and the largest median loan increase, at 17.9%. The median US bank recorded deposit declines of 1.2% and loan increases of 10.7%.
Among the 20 largest community banks in the state, Peoples Bank Biloxi Mississippi had the highest ROAE at 23.21%, Merchants & Marine Bancorp Inc. had the highest NIM at 4.37% and BNA Bank had the lowest efficiency ratio at 51.88%.
FNB Oxford Bank had the fewest NPAs relative to assets at just 0.1%, while BankFirst Financial Services recorded the greatest year-over-year deposit growth at 28.6% and The First Bank recorded the most loan growth at 60.2%.
