The First Bancshares (FBMS) just reported a solid third quarter, navigating the treacherous waters of a difficult operating environment. Analysts are focusing on margin compression, deposit headwinds, and loan growth, but they're missing something much bigger. Something lurking beneath the surface, subtly hinted at in the transcript, but poised to become FBMS's secret weapon.

That weapon? Their CDFI designation.

The Community Development Financial Institutions Fund (CDFI Fund) is a little-known government agency with a big mission: to invest in economically distressed communities. Organizations with a CDFI designation, like FBMS, have access to grants, tax credits, and other financial incentives to support lending and investment in underserved areas.

On the surface, FBMS's CDFI activities seem like standard CRA compliance, a box to tick on the regulatory checklist. But the Q4 2023 earning call transcript reveals a deeper strategy, a 'Trojan Horse' approach, using the CDFI designation not just for compliance, but as a springboard for growth.

Evidence of the Trojan Horse Strategy

Significant CDFI Grant: FBMS received a $6.2 million CDFI grant this quarter, a significant sum even for a $8 billion bank. This grant, specifically from the Economic Recovery Program, targets areas hardest hit by COVID-19. (Q3 2023 earnings transcript)

Presence in Underserved Markets: FBMS operates in several underserved markets across the Southeast. These markets, while economically distressed, hold immense potential for growth. They lack the intense banking competition found in major metro areas, offering FBMS a unique advantage.

Strategic Hiring: FBMS is actively seeking to hire experienced bankers in key markets like Atlanta, Tampa, and Jacksonville. They're capitalizing on cost-cutting at larger banks, strategically positioning themselves to capture talent and market share in these growing regions. (Q3 2023 earnings transcript)

Potential Acquisitions: While M&A activity has slowed, FBMS remains open to acquisitions in the latter half of 2024. Could they be targeting smaller banks in underserved markets, using their CDFI expertise to leverage grant funding and accelerate growth? (Q4 2023 earnings transcript, Q3 2023 earnings transcript)

The Hypothesis

FBMS is leveraging their CDFI designation as a competitive advantage, targeting underserved markets where traditional banks fear to tread. They're using grant funding to fuel expansion, attracting talent, and potentially eyeing acquisitions, all while fulfilling their CRA obligations.

Why This Matters

This strategy could be a game-changer for FBMS. Underserved markets, often overlooked by larger institutions, offer untapped potential for growth. By establishing a strong presence in these communities, FBMS can gain a loyal customer base, achieve higher margins, and significantly enhance franchise value.

"Key Financial Advantages"

The Trojan Horse's Impact

FBMS's CDFI strategy, while subtle now, is poised to become a major driver of future growth. As larger banks retrench, FBMS is quietly building a powerful franchise in underserved markets, leveraging a unique advantage that other analysts have yet to fully grasp. This 'Trojan Horse' approach, disguised as compliance, may be the key to unlocking FBMS's true potential.

Loan Growth Over Time

FBMS has shown strong loan growth, especially in Q3 and Q4 of 2023. This chart, based on earnings transcripts, illustrates that growth:

References

Q4 2023 Earnings Call Transcript

Q3 2023 Earnings Call Transcript

Highlights and Fun Facts

"Fun Fact: The CDFI Fund was established in 1994 as part of the Riegle Community Development and Regulatory Improvement Act. Reference: https://www.cdfifund.gov/"

"Interesting Note: As of September 30, 2023, FBMS had a loan-to-deposit ratio of 79%, indicating a healthy liquidity position. Reference: Q3 2023 earnings transcript"