In the last few years Southern Bancorp Inc. in Arkadelphia, Ark., looked at potential acquisitions around its home state, but until recently it had not found a fit.
Since Southern is a community development financial institution, focused on revitalizing rural areas, "I have mayors across Arkansas who call and ask me to buy the bank in their town," said Phil Baldwin, its president and chief executive.
With a relatively healthy balance sheet and an $11 million capital injection from the Treasury Department's Troubled Asset Relief Program, the company is in a good position to make deals, but concerns about prices and asset quality usually had discouraged it from doing so.
Over the past month, however, the $600 million-asset Southern has announced two deals that it found too good to pass up. It agreed to buy the $140 million-asset Timberland Bank in El Dorado, for $6 million, and the $310 million-asset First Delta Bankshares Inc. in Blytheville, for an undisclosed amount.
Baldwin says both deals serve the dual goals of a CDFI: making a profit (though not necessarily an outsize one) while bettering lives in the community. Since Arkansas has some of the poorest communities in the country, "we think a bank like us that does the things we do is really needed, and we would like to expand into those places as much as we can."
Industry watchers said Southern's model of serving poor rural areas appears to be working — communities are getting much-needed services, and the company is making money while keeping a comparatively clean portfolio — so now is a good time to expand.
"Their model seems to be successful," said Dan Bass, the managing director in the Houston office of Carson Medlin Co. "Taking that and expanding it throughout the region makes a lot of sense."
Last year Southern's three banking subsidiaries had a return on assets of 0.83%, compared with averages of 0.80% for all banks in Arkansas and 0.08% for all banks nationally, according to Federal Deposit Insurance Corp. data. Southern's return on equity was 7.49%, compared with 7.70% for Arkansas banks and 0.79% for banks nationwide.
The company's loan portfolio is holding up well, especially considering the low-income communities it serves, Baldwin said. The ratio of noncurrent loans to total loans was 2.01%, compared with 1.73% for Arkansas banks and 2.93% for banks nationwide.
"We aren't doing all that bad … considering we are carrying some stuff we wouldn't carry if we were out to maximize profits," he said.
In addition to serving people who might not use a bank otherwise, Southern's subsidiaries develop low-income housing, conduct strategic community planning, operate a business development center, and encourage financial literacy and personal savings.
Randy Dennis, the president of DD&F Consulting Group in Little Rock, said expanding Southern would make more community projects possible and improve its results.
"Phil recognizes that you have to have some size on the banking side, and the bigger you are, the more you can do on the community development side," Dennis said. "He seems to have done a great job blending the two functions together."
Baldwin said the price Southern agreed to pay for Timberland Bank was roughly half its book value.
Timberland has been operating under a cease-and-desist order. Its parent company, Timberland Bancshares Inc., would retain roughly $6.5 million of loans classified as nonperforming. Baldwin said this "clean slate" arrangement clinched the deal for Southern, which expects to make a return of 20% on its investment in the first year.
He said he would have wanted to acquire First Delta under any economic conditions. Though the seller did not want the price disclosed, it is "well above" book value.
And as far as continuing Southern's mission, First Delta, which has two bank subsidiaries, is in an area of Arkansas known for its poverty, he said. "These two banks are very good performing banks. They have all the things you would want to be part of an organization."
The Timberland deal is expected to close next month. The First Delta deal is expected to close in September.
Though Tarp infusions have been controversial — some bankers said last year that they were pressured to take the money, and others have returned it or announced plans to do so in recent weeks — Baldwin said that for Southern, taking the funds in January was a "no-brainer." The government already owned a 20% stake in his company through the Treasury's CDFI Fund. Other owners include the Walton Family Foundation, the McArthur Foundation, the MetLife Foundation, the Winthrop Rockefeller Foundation and Fannie Mae.
Southern was started in 1986. Its organizers included Bill and Hillary Clinton, then the state's governor and first lady, along with Rob Walton, now the chairman of Wal-Mart Stores Inc., and Thomas F. "Mack" McClarty, who later became the White House chief of staff.
In past years Southern was an active acquirer, announcing two bank deals in 2001 and four branch deals from 2001 to 2004.
Baldwin said his company does not expect to make any more deals in the near future, because First Delta and Timberland are all it has the capital to buy.
Raising more capital is on Baldwin's list of things to do when the economy turns and bank stocks come back into favor. "One of our goals is to be the first publicly traded philanthropic bank in the country," he said.
(Another CDFI, ShoreBank Corp. of Chicago, said in 2006 that it planned to go public, but it never did. A spokesman for ShoreBank said Wednesday that it raised capital elsewhere.)
With an initial public offering, "we can sell stock in the bank, and you can hang it on your wall, because it is helping people," Baldwin said. "We can run a good bank, provide a good return to stockholders, but use the bank as a mission entity, not a nonprofit. It's a new form of philanthropy."
