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Renasant pays up for heft in Atlanta with latest acquisition

Renasant Corp. ramped up its expansion ambitions in Atlanta with a plan to acquire Brand Group Holdings Inc. and its $2.4 billion of banking assets. But the nearly $453 million price tag amplified what analysts expected: Bulking up in the Southeast's largest metropolitan economy is expensive.

SNL valued the deal at 235.5% of tangible book on an aggregate basis. SNL valuations for bank and thrift targets in the Southeast region between March 28, 2017, and the same date this year averaged 166.47% of tangible book.

"They paid a very healthy, full price," analyst John Rodis of FIG Partners said in an interview.

But Rodis and other analysts said expected cost savings and earnings accretion on the deal, along with long-term growth opportunities in Atlanta, justified the relatively high price.

Tupelo, Miss.-based Renasant projected cost savings of 35% of total non-interest expense, with half of that realized this year and the rest in 2019. The deal is scheduled to close in the third quarter. The buyer expects double-digit earnings per share accretion after all of the savings are realized.

Renasant also said it expected to earn back mid-single-digit dilution to tangible book value per share within three years. Rodis noted that investors usually embrace earnback periods shorter than four years.

"So while it is not cheap, the math still works here," he said.

He added that Renasant executives had previously made clear that growth in Atlanta was a priority, and analysts had anticipated a relatively large deal announcement. "This is what they wanted, but you have to pay to play in Atlanta," Rodis said.

Investors pushed up Renasant's stock nearly 1% in morning trading March 29.

With Brand, which is based in an Atlanta suburb, Renasant will pick up about $1.9 billion in loans — excluding mortgages held for sale — and about the same amount in deposits. Renasant executives emphasized on a call that essentially all of the target's assets are in the Atlanta metropolitan area. Brand has eight traditional branches and five locations with virtual teller machines.

After closing, more than a fourth of the combined company's deposits will be in Atlanta, which Renasant noted is the largest metro area in the Southeast by gross domestic product.

Brand steadily grew lending in 2017. It funded that growth with a core, low-cost deposit base, helping it to boost lending profitability at a time when interest rates are rising. "That was one thing that stood out to us," Renasant CFO Kevin Chapman said on the call.

As Hovde Group analyst Brian Zabora pointed out in a report, Brand posted a net interest margin of 4.12% at the close of 2017, up from 3.33% a year earlier. Over the course of last year, its loan yields improved by 71 basis points, while its cost of interest-bearing deposits was stable at 65 basis points.

Chairman and CEO Robin McGraw noted on the call that, with the Brand deal, Renasant also stands to gain proven lending teams in Atlanta as well as a group of executives with established ties to customers in the market.

Brand CEO Bartow Morgan Jr. will become chief commercial banking officer of Renasant's bank. Richard Fairey, president and COO of Brand, is slated to become chief retail banking officer for Renasant's bank. Mike Dunlap, director of commercial banking of Brand's bank, will become president of Renasant's Georgia commercial banking group.

Analyst Matthew Olney of Stephens Inc. said that the new executives would deepen Renasant's leadership bench as it pushes for growth. Also, the assets it stands to acquire will push it from just under $10 billion in assets to well over $12 billion. When banks cross the $10 billion line they must comply with the Durbin rule, which curbs debit interchange income. By surging past the threshold, Renasant will be able to offset the Durbin hit with more lending and fee income, he noted.

Renasant "got more scale, more leadership — a lot of what they were looking for," Olney said in an interview. "And it makes sense for them to go deeper in Atlanta."

Renasant has closed several bank deals in recent years. McGraw said more M&A is likely. "We remain opportunistic," he said.

"We'll take a breather" to ensure closing of the Brand deal, McGraw added. "But we don't expect that to be long term."

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