Renasant Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and reporting period
Renasant provides banking, insurance and wealth-management services across Mississippi, Tennessee, Alabama, Georgia and Florida. On July 1, 2015, it completed its acquisition of Heritage Financial Group for approximately $297.3 million, primarily in stock. The transaction added 48 offices and materially increased the company’s assets, loans and deposits, affecting comparisons with 2014.
Financial performance and position
- Q3 earnings: Net income was $16.2 million, up from $15.5 million a year earlier. Diluted EPS was $0.40, down from $0.49, reflecting a substantially larger share count as well as acquisition-related costs. Q3 pretax merger expense was $7.7 million.
- Nine-month earnings: Net income was $46.9 million versus $44.0 million; diluted EPS was $1.35 versus $1.39. Merger expense was $9.7 million for the 2015 period versus $0.2 million in 2014.
- Revenue and margin: Q3 net interest income was $68.7 million versus $50.5 million; noninterest income was $32.1 million versus $22.6 million. Nine-month net interest income was $169.2 million versus $152.6 million, and noninterest income was $76.9 million versus $60.7 million. Tax-equivalent net interest margin was 4.09% in Q3 versus 4.12%, and 4.10% year to date versus 4.13%.
- Drivers and costs: Mortgage-loan sale gains rose to $10.6 million in Q3 from $2.6 million, with higher production and Heritage’s mortgage business contributing. Q3 noninterest expense increased to $76.1 million from $48.2 million; the efficiency ratio rose to 74.06% from 64.43%. Management attributed the increase in part to Heritage, merger costs and mortgage activity.
- Loans and credit: Loans totaled $5.28 billion at September 30, up from $3.99 billion at year-end, including $1.11 billion of loans added with Heritage. The allowance for loan losses was $42.1 million. Q3 net charge-offs were $0.6 million, or 0.04% of average loans, versus $5.0 million, or 0.50%, a year earlier. Nonperforming loans were $47.2 million, or 0.89% of loans; nonperforming assets were $93.5 million, or 1.18% of assets.
- Balance sheet and funding: Total assets were $7.92 billion, versus $5.81 billion at December 31, 2014. Deposits were $6.23 billion versus $4.84 billion. Cash and cash equivalents were $203.8 million. Short-term borrowings were $402.1 million, including $377.1 million of overnight FHLB borrowings; long-term debt was $149.6 million. The filing attributes much of the increase in short-term borrowing to funding mortgage loans held for sale.
- Cash flow: For the nine months, operating activities provided $129.2 million, investing activities used $139.5 million, and financing activities provided $52.6 million. Cash and cash equivalents increased $42.3 million to $203.8 million. Mortgage-loan originations and sales were large components of operating cash flows.
- Capital: Shareholders’ equity was $1.03 billion. At September 30, the company’s CET1, Tier 1 risk-based, total risk-based and leverage ratios were 9.92%, 11.46%, 12.27% and 8.95%, respectively; the bank’s corresponding ratios were 11.02%, 11.02%, 11.82% and 8.75%. Both exceeded the filing’s stated “well capitalized” thresholds.
Material changes, outlook and risks
- Heritage’s acquisition was the principal structural change. Its preliminary purchase accounting included $177.3 million of goodwill; fair values remained subject to finalization.
- Management said it expects the efficiency ratio to improve through revenue growth and cost control, but provided no numerical earnings or margin guidance. It also described a strategy to grow variable-rate lending and less rate-sensitive transactional deposits. The filing’s modeled rate scenarios showed a slightly asset-sensitive position; actual results may differ from simulations.
- On October 20, 2015, Renasant announced a definitive agreement to acquire KeyWorth Bank in an all-stock transaction valued at approximately $58.7 million. Closing was expected in Q1 2016, subject to regulatory and shareholder approvals and other conditions.
- Key risks identified include acquisition integration and customer retention, economic and interest-rate changes, credit quality and loan-loss estimates, competition, regulatory changes, funding and liquidity, and loan or industry concentrations. The company held $18.9 million in pooled trust preferred securities at fair value, including one security classified as nonaccrual; it recorded no additional impairment during the period.
- A Heritage-related shareholder lawsuit was subject to a proposed settlement and court approval. Potential attorneys’ fees and costs of $262,500 were disclosed. Management reported no material change in previously disclosed risk factors or market risk, and stated that disclosure controls were effective.
Important facts for investors to verify
- How Heritage integration, cost savings and retention progress, and whether the preliminary purchase accounting changes.
- Whether mortgage gains and production remain sustainable, and the implications of the elevated mortgage loans held for sale and related short-term borrowings.
- Credit trends after the acquisition, including nonperforming loans, restructured loans, OREO and allowance coverage; distinguish acquired and FDIC-covered balances when comparing periods.
- Future net interest margin and funding costs as rates and deposit mix change, and the sensitivity of the reported results to acquired-loan accretion.
- KeyWorth closing conditions and financing or capital implications, along with the outcome of the pending Heritage litigation settlement.