Renasant Corporation — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2017. Renasant provides banking, insurance and wealth-management services across the southeastern United States. Results include Metropolitan BancGroup from its July 1, 2017 acquisition; year-over-year comparisons therefore reflect both acquisition effects and organic performance. Unless indicated otherwise, amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $90.0 | $75.7 | $243.6 | $222.9 |
| Provision for loan losses | $2.2 | $2.7 | $5.4 | $5.9 |
| Noninterest income | $33.4 | $38.3 | $99.7 | $107.2 |
| Noninterest expense | $80.7 | $76.5 | $224.8 | $223.5 |
| Net income | $26.4 | $23.2 | $75.7 | $67.3 |
| Diluted EPS | $0.53 | $0.55 | $1.64 | $1.61 |
| Tax-equivalent net interest margin | 4.08% | 4.15% | 4.12% | 4.21% |
- Q3 net income increased about 14%, while diluted EPS declined because the average diluted share count rose to 49.4 million from 42.3 million. Nine-month net income rose about 12%; diluted EPS increased from $1.61 to $1.64.
- Adjusted net interest margin, excluding problem-loan interest and purchased-loan accounting accretion, was 3.76% in Q3 versus 3.72% a year earlier; for nine months it was 3.76% versus 3.78%. Management attributed higher net interest income primarily to loan growth and the acquisition.
- Mortgage banking income declined to $10.6 million in Q3 from $15.8 million and to $33.5 million for nine months from $41.2 million. Management cited lower refinancing activity, higher mortgage rates, reduced housing supply and competitive margin pressure.
- Efficiency ratio improved to 64.35% in Q3 from 66.06%, and to 64.42% for nine months from 66.65%. Q3 2017 merger and conversion expense of $6.3 million contributed approximately 500 basis points to the ratio.
Financial position, liquidity and credit
- At September 30, total assets were $10.32 billion, loans net of unearned income were $7.45 billion, and deposits were $8.12 billion. At December 31, 2016, the corresponding balances were $8.70 billion, $6.20 billion and $7.06 billion.
- Metropolitan added approximately $1.35 billion of assets, including $967.8 million of loans and $942.1 million of deposits. The $219.5 million purchase consideration included 4.88 million newly issued shares; acquisition accounting remained subject to final valuation. Goodwill increased by $140.5 million.
- Cash and cash equivalents were $332.2 million at September 30. For the first nine months, operating cash flow was $52.4 million, investing cash outflow was $225.5 million, financing cash inflow was $199.1 million, and cash increased $26.0 million.
- Short-term borrowings rose to $384.2 million from $109.7 million, principally as loan growth outpaced organic deposit growth. Long-term debt was $207.7 million versus $202.5 million. The company reported $2.21 billion of available FHLB credit and $80 million of other bank lines, with none drawn on the latter.
- Shareholders’ equity was $1.51 billion, up from $1.23 billion; book value per share was $30.65 versus $27.81. At September 30, the company’s CET1, Tier 1 risk-based, total risk-based and leverage ratios were 11.21%, 12.26%, 14.30% and 10.05%, respectively. The bank’s corresponding ratios were 12.54%, 12.54%, 13.15% and 10.28%.
- Credit measures improved overall: nonperforming loans were $25.5 million, or 0.34% of loans, versus $35.5 million, or 0.57%, at year-end; nonperforming assets were 0.42% of assets versus 0.79%. The allowance was $44.5 million, 174.75% of nonperforming loans. Q3 annualized net charge-offs were 0.10% of average loans, up from 0.05% a year earlier.
Material changes, outlook and risks
- Renasant completed the Metropolitan acquisition on July 1, expanding its Tennessee and Mississippi footprint. Integration expenses were $6.3 million in Q3 and $9.7 million for the nine months; management expects the efficiency ratio to improve through revenue growth and expense control.
- The company transferred all held-to-maturity securities to available-for-sale during Q3 to retain flexibility to sell municipal securities if credit conditions deteriorate. The transfer included a $13.2 million pretax unrealized gain recorded through other comprehensive income. Management reported no significant deterioration in the municipal portfolio and recognized no securities impairment.
- Mortgage market conditions were expected to remain competitive while rates stayed high and housing supply remained limited. If assets remain above $10 billion at December 31, 2017, Renasant expects the Durbin Amendment to limit interchange fees beginning July 1, 2018; management estimated an impact of approximately $2.1–$2.3 million per quarter and was developing mitigation strategies.
- Interest-rate modeling showed a slightly asset-sensitive position: a parallel +100 basis-point shock projected net interest income increases of 3.25% over months 1–12 and 5.91% over months 13–24; a -100 basis-point shock projected decreases of 8.56% and 12.08%, respectively. Actual results may differ because the model depends on assumptions about rates, prepayments, deposits and future business.
- Key risks include acquisition integration and customer retention, credit deterioration and loan concentrations, changing interest rates and funding costs, liquidity and deposit competition, mortgage-market pressure, regulation, and execution of cost savings. Management reported no material changes in risk factors or market risk since year-end and no material changes to internal controls.
Investor facts to verify
- Whether Metropolitan integration delivers expected growth, customer retention and cost synergies, and how final purchase-price allocations affect goodwill and earnings.
- Whether loan growth can be funded without sustained reliance on higher-cost short-term borrowings, and how deposit pricing affects margins.
- Credit trends in commercial real estate, purchased loans and restructured credits, including charge-offs and allowance adequacy.
- Mortgage banking performance and the actual impact and mitigation of the anticipated Durbin Amendment fee limits.
- Effects of rate movements on net interest income, deposit costs and securities values, including the newly available-for-sale portfolio and unrealized losses in pooled trust preferred securities.