Take fever is spreading to Mississippi.
After languishing for several years, stock prices of the state's five major banks have risen an average of 26% since the beginning of the year.
Most of the rise can be traced to the expansion of net interest margins to improving credit quality - the same fundamentals that are driving up bank stocks across the country. But the expectation that some of the Mississippi banks will be acquired also is fueling the rally.
Earnings Momentum Gains
"They are all very-high-probability takeover candidates within the next couple of years," said Bradford M. Johnson, a banking analyst in Atlanta for the regional brokerage firm Sterne, Agee & Leach Inc.
Like most banks in the Southeast, the Mississippi banks grappled with their share of bad loans at the beginning of the decade. They emerged from those problems this year with good earnings momentum.
Jackson-based Deposit Guaranty Corp., state's largest bank, with $4.8 billion in assets, chalked up second-quarter earnings of $11.1 million, or $1.28 a share. This was up 20% from the level in the year-ago quarter.
Profitability as measured by return on assets improved to 0.84% from 0.69, while the nonperforming assets ratio dropped from 4.3% to 3.79%.
A Solid Performance
Deposit Guaranty's stock has appreciated 24% since the beginning of the year, a performance second only to Trustmark Corp.'s 46%. On Friday, Deposit Guaranty's stock was trading unchanged at $41.75. Trustmark, at $31.50, was also unchanged.
"Investors are just now recognizing that the Mississippi bank stocks were out of line," said E.B. "Bud" Robinson Jr., Deposit Guaranty's chairman and chief executive.
Mississippi banks, he added, "don't really have the cycles up and down that many other markets have, so when the economy is improving, we sometimes get overlooked."
The Mississippi banks haven't entirely bridged that perception gap. The average appreciation of 26% in stock price compares to 45% for 22 medium-sized southern regionals tracked by Sterne Agee.
The top five Mississippi banks trade for between nine and 11 times earnings, at the lower end of the regional range.
Asset Mix Helps
But fundamentals are improving. Mississippi banks were particularly well-positioned to benefit from declines in interest rates this year, as their portfolios tend to be heavily weighted toward consumer, residential, and small retail loans that price downward more slowly than large corporate loans.
In addition, Mississippi banks carry a relatively high percentage of large time deposits. Rates on these CDs can be reduced as soon as they mature.
"As rates decline, it affect us fairly dramatically as they affect the rates we pay on those savings instruments," said James T. Boone, president and chief executive of Grenada Sunburst System Corp., Grenada. Mr. Boone's company stock has risen 23% since yearend.
Acquisition speculation provides another source of stock propulsion. John W. Woods, chairman of Birmingham, Ala.-based AmSouth Bancorp., fanned the flames last month when he publicly reiterated Am-South's interest in Mississippi.
List of Acquires
Shares of Deposit Guaranty, Trustmark, and Hancock Holding Co., Gulfport, immediately surged to what were then 52-week highs.
A second Birmingham-based bank, First Alabama Bancshares Inc., had previously expressed interest in Mississippi.
And analysts believe another potential acquirer could come from the west, where New Orleans-based First Commerce Corp. has raised $110 million in new capital this year.
First Commerce chief executive Ian Arnof said he considers Mississippi part of First Commerce's "natural market," which includes the Gulf Coast from the Florida Panhandle to the Texas border. With additional capital, "We'll be taking a new look at Mississippi," he said.
To date, the active pursuit of Mississippi banks has come from farther north. Grenada Sunburst, with $1.9 billion in assets, has already found itself the target of two Tennessee banks.
Earlier in the year, Mississippi's third-ranked bank considered an offer from First Tennessee National Corp., Memphis, but failed to agree on price.
Doubts on Premiums
Two years before, Grenada Sunburst held inconclusive discussions with Union Planters Corp., another Memphis-based bank, which went on to acquire some smaller banks in Mississippi.
Mr. Boone, Grenada Sunburst's president and chief executive, emerged from those discussions skeptical that "banks out-of-state are willing to pay the premium that banks in the state would have to have to make a transaction work.
"If you pay a high premium, you've got to recoup it either by making operational efficiencies or by the growth of the economy," Mr. Boone said.
An out-of-state acquirer going into Mississippi could gain some efficiencies from back-office technology consolidation, but would find few other opportunities for major cost savings.
And the economy wouldn't help much either. Mississippi's per capita income in 1990 was 69% of the U.S. average, the lowest in the South.
The economic forecasting center of Georgia State University reported that Mississippi's economic index gained 1.3% last year, making it one of the few southeastern states to report positive performance in a recessionary year, when the regional index fell 0.9%.
But the center also predicts that Mississippi's growth potential for 1992, when the economy is supposed to recover, ranks with the more sluggish states, such as Florida and South Carolina.
With Wall Street showing increasing nervousness about hefty buyout premiums, out-of-state acquirers may decide to give Mississippi a pass for a while longer.
"A strategic expansion into Mississippi without any opportunity to enhance earnings would not be well received," warned Henry J. Coffey Jr., banking analyst with J.C. Bradford & Co. in Nashville.
In the meantime, some of the Mississippi banks are doing some acquiring of their own. Tupelo-based Bancorp of Mississippi recently purchased a 375 million-asset bank in Jackson, Tenn. Deposit Guaranty, Grenada Sunburst, and Hancock have all picked up troubled banks in Louisiana.Takeover FeverPossible acquisition Assetstargets in Mississippi (billions)(*)Deposit GuarantyJackson $4.9Trustmark Corp.Jackson 3.9Grenada Sunburst SystemGrenada 1.9Bancorp of MississippiTupelo 1.7Hancock Holding Co.Gulfport 1.6Possible Assetsacquirers (billions)(*)AmSouth BancorpBirmingham, Ala. $9.2First Tennessee NationalMemphis 7.7First Alabama BancsharesBirmingham 7.1First CommerceNew Orleans 5.8Union PlantersMemphis 5.2(*) At March 31Sources: Company reports:Sterne, Agee & Leach Inc.