Have patience, seize on opportunity.
That's the strategy of Renasant (RNST) in Tupelo, Miss., and a script a lot of recovering community banks may want to copy.
The $4.2 billion-asset Renasant survived the recession and is profitable. Management wants to grow but finds it challenging. Credit is better, yet there is still room for improvement.
Renasant has set a path to return to precrisis performance levels, but it could take another two years to get there. For all those reasons, Renasant is a poster child for midsize community banks, particularly those in the Southeast.
It is taking steps to improve its bottom line. Last month, it announced its first open-bank acquisition in years, though Renasant says it will refrain from pursuing another deal until next year at the earliest. It is also getting ready to offer asset-based lending services after snagging a lending team from SunTrust Banks (STI) in Atlanta.
"We're very focused on being opportunistic," Robin McGraw, the company's chief executive, said in an interview. "If we're able to acquire a good team to start a de novo operation, we'll take advantage of that. … We'd definitely like to do more acquisitions, but we'll have to pace ourselves with that."
Renasant plans to complete its $119 million deal for First M&F (FMFC), in Kosciusko, Miss., on July 1; the conversion will not take place until early November. Renasant has 75 offices in Mississippi, Tennessee, Alabama and Georgia. The First M&F deal would give it an additional $1.6 billion in assets, $1.4 billion in deposits and 36 branches in Mississippi, Alabama and Tennessee.
Renasant is on a track to return to precrisis investor returns, though it will take time, McGraw said. Return on assets should surpass 1% by the end of next year, when return on equity is expected to reach 10%. (The company's ROA and ROE stood at 1.33% and 13.5%, respectively, in 2006.)
To get there, the company is focusing on markets and business lines that it believes are primed for expansion. The Atlanta area, where Renasant has already bought two failed banks, is one market that draws McGraw's attention. He said the city's high-end Buckhead community is worth exploring and an eastward expansion into Athens, the home of the University of Georgia, is a possibility in the "distant" future.
Renasant would like to buy more failed banks there, but McGraw said that changing dynamics are making it difficult. Once among the top bidders for failures around Atlanta, Renasant found itself in the lowest quartile in a recent bidding process.
"It is a whole new ball game because the [Federal Deposit Insurance Corp.] doesn't want anything covered by loss share" agreements, McGraw said. "When we first started with FDIC acquisitions there were only two real banks in Georgia" in a position to bid. "That has increased multifold today. There's a lot of capital out there, and bidding has gotten very competitive."
There are other geographic holes that McGraw wants to fill, and Tennessee is a good candidate, too. "We would consider further expansion in Knoxville, Chattanooga and anything in between," he said. "If you look at our map there are some natural opportunities."
But Renasant is willing to grow by recruiting bankers and building branches rather than make acquisitions. De novo banking has already allowed the company to enter Starkville, Miss., and Tuscaloosa, Ala. Most of those efforts are profitable — east Tennessee is the one exception — but they are still incredibly inefficient.
Improved efficiency in de novo markets, along with improved credit, will be crucial this year, Kevin Fitzsimmons, an analyst at Sandler O'Neill, wrote in a note to clients after Renasant reported fourth-quarter earnings in January. "We will watch for progress on both fronts," he wrote.
Credit is the other area that McGraw is focusing on, particularly Renasant's foreclosed properties. In recent weeks, the company has sold three buildings and another development to Hibernian Pacific Holdings, a real estate investment company in Alpharetta, Ga.
Other real estate owned has bounced between $12 million and $15 million over the past two years, McGraw said. "As credit continues to improve we'll start to see that expense drop dramatically," he said. "By 2014, you should see fairly significantly drops."
A number of the company's watch-list credits were paid off in recent quarters, too. Still, total loans rose 9% in 2012 from a year earlier, to $2.8 billion. The net interest margin expanded by 13 basis points from a year earlier, to 3.94% for last year, as management focused on lower funding costs.
"Rather than try to grow deposits, we grew noninterest demand deposits by 7% and let some high-priced [certificates of deposit], so-called hot money, run off," McGraw said. Renasant also used cash generated from its FDIC deals to pay off Federal Home Loan Bank borrowings.
"We felt it was important to not necessarily grow but to improve the profile" of the balance sheet, he said.