Southern Bancorp in Arkadelphia, Ark., doesn’t mind reeling in smaller fish.

While the $1.2 billion-asset company has completed several acquisitions since the financial crisis, the biggest bank it bought had just $211 million in assets. Those acquisitions have largely focused on rural markets in Arkansas and Mississippi.

CEO Darrin Williams sees no reason to alter that strategy after bringing in almost $18 million in fresh capital. Expect Southern, which is also a community development financial institution, to keep scooping up banks that target largely underserved populations.

“We want to be profitable but with a purpose,” Williams said. “We talk about riding a bicycle. The front wheel is our mission, while the back wheel pushes us forward. No margin, no mission.”

Large deals focused on high-density urban markets tend to receive splashy headlines, but smaller acquisitions can also be profitable and foster growth, industry observers said. And smaller deals are much more representative of current industry consolidation.

“There are plenty of banks that are out in these urban areas and high-growth markets, but to really do well in those types of markets, in my opinion, you need scale," said Greyson Tuck, a lawyer at Gerrish Smith Tuck Consultants. "That can be difficult for a community bank.”

Southern has bought three banks since the financial crisis, including last year's purchase of the $43 million-asset Farmers Bank in Hamburg, Ark. The company, which raised capital in April from investors that included Simmons Bank in Pine Bluff, Ark., and BancorpSouth Bank in Tupelo, Miss., could bring in another $20 million later this year, Williams said.

The money should help Southern buy other banks with $500 million or less in assets that are within a 150-mile radius of current branches, Williams said. Though management has a preference for rural institutions, Southern has also started lending outside Memphis, Tenn., and it would consider buying urban-oriented institutions that reach underserved populations.

Southern was founded in 1986 by investors who were concerned about economic decline in rural Arkansas. Today, Williams must find ways to stay true to the bank's roots while generating returns for a growing investor base.

Those objectives are achievable, industry observers said.

Institutions like Southern run into less competition in more rural markets. Other institutions, including Bank of America, have exited a number of rural areas in recent years, opening up opportunities.

Deposits are typically cheaper in rural markets, providing Southern with low funding costs. Salaries and real estate expenses also tend to be lower.

“If you're a good lender, you can benefit from this strategy and make pretty good money,” said Bob Wray, a managing director of the investment bank and consulting firm Capital Corp. “If you pick good communities, you can help provide capital for people in those areas. The rural strategy is a pretty good one.”

Some of those advantages can be seen in some of Southern’s financial metrics.

Its first-quarter funding costs of 0.37% was much lower than the 0.57% average for banks with $1 billion to $2 billion in assets, according to data from the Federal Deposit Insurance Corp. The company's 4.25% net interest margin was wider than the 3.71% average for similarly sized banks.

Still, its 1.02% return on assets and 8.82% return on equity are lagging. Banks with $1 billion to $2 billion of assets had an average return on assets of 1.20% and an average return on equity of 10.71%, according to FDIC data.

Southern tries to help customers break through generational poverty by focusing on things that build wealth like homeownership and starting a business. Customers that are unable to qualify for a loan are paired with "high-touch service providers" who help them "get on a path where they're bankable,” Williams said.

Southern’s ability to reach underserved communities helped attract BancorpSouth and Simmons, a unit of the $15.6 billion-asset Simmons First.

Simmons became familiar with Southern after selling it a branch several years ago. While this is the first CDFI investment for Simmons, Marty Casteel, chairman and CEO of Simmons Bank, said he would like to collaborate more with Southern in areas such as homeownership counseling.

Southern "is experienced and well positioned to be successful in providing banking services to underserved markets,” Casteel said in a statement. “They are meeting a need that exists throughout their footprint by offering financial products and programs tailored to the underserved communities.”

The $17.2 billion-asset BancorpSouth, which has invested in several CDFIs, views helping Southern access new markets as an extension of that work, Chairman and CEO Dan Rollins said.

Southern's “efforts to improve financial inclusion in underserved and economically distressed communities align with a key component of our mission: To support the betterment of our communities,” Rollins said in a statement. “Our primary consideration for the investment was the positive impact it would make in rural America and the opportunity to partner with such a well-respected and established organization in this important social mission.”

BancorpSouth, which recently had its Community Reinvestment Act rating raised, and Simmons also received CRA credit for their investments.

It may make more sense for larger banks like BancorpSouth and Simmons to make such investments rather than trying to build a rural branch network on their own, industry experts said. A bigger institution’s more bureaucratic nature and rigid underwriting may not allow loan officers to tailor credit to meet a community’s needs.

“Let the specialists do their thing,” said Steven Reider, president of the consulting firm Bancography. “Some banks would argue that there's greater benefit in the community keeping its community-based bank rather than [another] bank competing with them in the same marketplace.”

Williams touted Southern's nimble nature, adding that it would be hard to use a formulaic approach to lending in the communities that his bank serves. Instead, more personalized underwriting based on knowing customers is needed.

“Our loan officers grew up in these communities,” Williams said. “We go to church with them. ... We work hard to structure these loans so they can repay them. While there may be some questions about an ability to repay, there's an extreme willingness to repay.”

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