Renasant Corp. in Tupelo, Miss., will close its latest bank acquisition with a clean slate from the perspective of credit quality.
The $9.8 billion-asset company, as part of its agreement to buy Brand Group Holdings in Lawrenceville, Ga., is requiring the $2.4 billion-asset seller to purge $55 million of its $57 million in classified loans before the deal closes.
Mandating such sales, which will also influence the transaction's overall value, will save Renasant the time and resources of tackling them later, industry experts said.
“Carving out these problem assets is very positive” for Renasant, said John Rodis, an analyst at FIG Partners. “That is just something that takes more time to deal with" after a deal's completion. " ... They have dealt with it in their negotiations.”
During due diligence, a buyer combs through a seller’s loan portfolio to determine the fair market value of credits. This can sometimes create sticking points in negotiations, especially when buyers and sellers disagree over the underlying credit quality, which in turn can scuttle a deal, experts said.
One solution is to have a target sell certain assets prior to closing, an approach that could gain more traction in future deals. In the case of the Brand deal, the sale's roughly $453 million price tag will be lowered if the credits are sold at a discount.
In the aftermath of the financial crisis, some buyers were willing to take on problem loans, especially if they had a special assets department already in place, said Matt Olney, an analyst at Stephens. Given that credit quality is stronger now, more buyers may be unwilling to take on problem loans.
“This is also probably a win for Brand because they want to recognize the full value of those loans so they will do it themselves,” Olney said.
Brand's credit quality has lagged that of similar sized institutions, which noncurrent loans equal to 2.63% of total loans at Dec. 31. That ratio averaged 0.76% for all banks with $1 billion to $5 billion of assets, according to data from the Federal Deposit Insurance Corp.
Brand's classified portfolio that is being sold mostly consists of commercial real estate loans; the bank has been able to collect payments on them.
Bartow Morgan Jr., Brand's CEO, volunteered to take on the credits pre-closing, Robin McGraw, Renasant's chairman and CEO, said. Morgan, for his part, said he preferred tackling the loans rather than haggling over the portfolio's value as part of the overall price of the deal.
“The easiest thing is for you to take care of the loan,” Morgan said.
While the deal had a unique structure, Robin McGraw, Renasant's chairman and CEO, seemed open to applying similar thinking to future acquisitions. Brand is set to become the seventh whole bank deal for Renasant since mid-2010.
Bartow "was willing to step up and say, ‘This is not your problem, it is ours. We will sell them and any losses will be on our books,’ ” McGraw said. “We thought it was a great thing to do. It’s very attractive.”
Brand will also divest its mortgage unit prior to closing, though the company was already looking to shed the business, Morgan said. The business is structured as a joint venture with the mortgage unit's management team. Morgan, a fifth generation leader who at one time was Brand's only shareholder, decided to dissolve the venture to boost overall franchise value.
Renasant-Brand is the third-largest bank deal announced this year by deal value. Another deal in the top five — Ameris Bancorp's agreement to buy Hamilton State Bancshares — also involves the Atlanta area.
Renasant was attracted to Brand’s footprint — all 13 of its branches are in the Atlanta metro area — because it helps build scale in a desirable market. Gwinnett County, which is northeast of Atlanta and where Brand largely operates, is the second-most populous and fourth-fastest- growing county in the Atlanta area, Renasant said in its presentation materials for the merger.
While Renasant could consider more acquisitions, it probably will not announce another one until later this year, Rodis said. Though Renasant may look to enter the Carolinas, another transaction would likely be an in-market deal within the five states where it already does business.
McGraw said during a conference call Thursday that he would remain an opportunistic acquirer.
“I think Renasant has done a good job over the years of executing on acquisitions,” Rodis said. “I think they have learned some things from past acquisitions.”