Many small banks, when prowling for deals, aim to lure targets with a publicly traded stock and the potential for price appreciation.
First South Bancorp in Lexington, Tenn., isn't one of those suitors. The $2.3 billion-asset privately owned bank has been controlled by Jim Ayers for nearly three decades. Over that time, the company has been a very selective acquirer. Its last deal involved the purchase of seven branches that Regions Financial (RF) divested in 2006.
The potential of an economic recovery has management thinking more about acquisitions, says Chris Holmes, First South's president and chief executive. Ayers, who has extensive holdings in real estate and car dealerships, also has the capital to fuel deals, and the company exited the Troubled Asset Relief Program late last year.
In a recent interview, Holmes discussed the company's expansion plans, its diversified business model and its ability to operate in big cities and rural markets. Here is an edited transcript.
What are your expansion plans for Tennessee?
CHRIS HOLMES: We've been expanding in the Nashville market primarily, but we're also looking in other markets, primarily Chattanooga, Knoxville and possibly Memphis. All of those are places where we're looking to add to our staff and potentially our physical presence. We will be adding a branch in Murfreesboro, Tenn., in October, one in the Green Hills area of Nashville in November, and a branch in Franklin, Tenn., in the first quarter of 2014.
Why is now a good time to add branches?
We've become very attractive to commercial customers that are larger and have more sophisticated treasury needs and credit needs than what most community banks can handle.
Typically we go into a market with a branch that would have more of a commercial focus to it. We would keep a smaller branch until we decided we had enough market presence to be able to develop a retail franchise. When you put in a branch today, you better be able to attract some retail business. If you can't, you really don't need a branch.
You mentioned credit needs that are bigger than what most community banks can handle. How big are those loans?
Certainly, we will get into eight figures.
FirstBank has branches around Spartanburg, S.C., and Huntsville, Ala. Are you looking to expand in other Southeastern markets?
Those are mortgage offices. They're not full bank branches. Our mortgage business is regional in the Southeast. We'll do close to $900 million to $1 billion in mortgage originations this year. We're not actively looking at any market expansion beyond where we are right now. But we don't feel bound, necessarily, by state lines, as is evidenced by the mortgage offices.
Can you discuss the mortgage business?
It's origination-focused. We certainly got a boost from the refinance boom. However, 70% of our business is purchase mortgages. We feel like we're positioned reasonably well. As rates move up, everybody's business is going to slow down. We've got a pretty good mix of originations versus refinance, so we feel pretty good. We do not service our mortgages.
Has First South considered going public?
It's usually not discussed very much by us, but people ask us about that all the time. We certainly are happy with our capital and ownership structure the way it is. We have plenty of capital and we have access to more capital, for organic growth or for other purposes. We don't feel restricted from any capital perspective.
What's the outlook for acquisitions over next 12 months?
We feel like it's more of a buyer's market and we want to be involved in that. But we're very particular about what we would be interested in. But it is something that we could do and would do under the right circumstances.
Commercial real estate is a fairly significant part of your loan book. How have those loans performed?
Heading into the recession, we were too heavily weighted in CRE and we've worked to reduce that percentage. It's manageable now. We're not over-weighted in real estate, so we are doing a little more CRE. When we do our internal allocations, we've still got room to do some CRE. Part of that is because our C&I portfolio has really grown significantly.
How do you feel about your loan mix?
I'd love to see our consumer loan book grow a little faster than it has. We'd love to see our consumer and small-business portfolio grow a little faster. Part of that is a function of our geography. Some of our markets are growing at a pace faster than the national average.
You've also got some smaller and more rural markets that are slower than the national average. That's where we've got smaller consumer books those portfolios have not been growing. That's a function of the economy.
We'd love to see the economy be stronger, but that's not going to happen any time soon. In those markets, we do some home equity loans. We also do car loans, boat loans and a general consumer loan. That goes back to the fact that in those markets we're a community bank. When those folks come into our bank, they want to borrow money. For an ATV, a boat or home repair, we're generally making that loan.
Many other small banks have written off that type of consumer lending, right?
That's right, especially when [a bank] gets to our size. If it is not a specific part of your business plan or your business model, you have written it off. We're careful in how we measure our return on the capital invested and how we measure the margins. Part of our business plan is that we get a very good return on capital in those markets.
We let the geographies run the bank. In some of our markets, we're not getting a lot of growth, but we're getting a very good return on capital. In one county, there are only two banks. That tells you how small it is.
But we also have a very good growth story in the Nashville market, one of the most preferred banking markets in the Southeast. We feel like we've developed a model that allows us to compete very well in rural and urban areas. As most banks are growing, they're going to a model that makes it difficult to operate in both types of markets.