Renasant Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Renasant is a regional bank holding company operating banking, insurance and wealth-management businesses across seven southeastern states. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 earnings: Net income was $46.6 million, up from $40.1 million year over year; diluted EPS was $0.83 versus $0.71.
- Nine-month earnings: Net income was $119.8 million, down from $138.8 million; diluted EPS was $2.13 versus $2.46.
- Net interest income: Q3 was $130.3 million, up 26% year over year; on a fully tax-equivalent basis it was $132.4 million. Tax-equivalent net interest margin rose to 3.54% from 2.93%. Nine-month tax-equivalent NIM was 3.14%, compared with 3.16%.
- Noninterest income and expense: Q3 noninterest income was $41.2 million, down from $50.8 million, chiefly reflecting lower mortgage banking income. Nine-month noninterest income fell to $115.9 million from $179.4 million. Noninterest expense declined to $101.6 million for Q3 and $293.9 million for nine months, from $104.0 million and $328.7 million, respectively. GAAP efficiency ratio was 58.50% for Q3 and 63.20% year to date.
- Loans and credit: Loans held for investment, before allowance, were $11.11 billion, up from $10.02 billion at year-end 2021. Allowance for credit losses was $174.4 million (1.57% of loans); nine-month net charge-offs were $4.8 million, or 0.06% of average loans. Nonperforming loans were $55.9 million (0.50% of loans), and nonperforming assets were 0.35% of total assets.
- Cash, deposits and borrowings: Cash and cash equivalents were $479.5 million, down from $1.88 billion at year-end. Deposits declined $473.6 million to $13.43 billion; noninterest-bearing deposits increased to $4.83 billion and represented 35.94% of deposits. Short-term borrowings rose to $312.8 million, including $300 million of FHLB advances; long-term debt was $426.8 million. The company reported $3.82 billion of remaining FHLB availability and $180 million of unused bank credit lines.
- Cash flow: Nine-month operating cash flow was $463.1 million; investing activities used $1.59 billion and financing activities used $274.1 million. Cash decreased $1.40 billion during the period.
- Capital and equity: Shareholders’ equity was $2.09 billion, down from $2.21 billion, mainly reflecting accumulated other comprehensive losses and dividends. Company CET1 and total risk-based capital ratios were 10.64% and 15.15%; the Bank’s were 12.61% and 13.71%. The quarterly dividend was $0.22 per share.
Material changes versus comparable periods
- Higher rates and loan growth lifted Q3 net interest income and margin, while deposit and borrowing costs began to rise. Management expected deposit costs to continue increasing through the remainder of 2022.
- Mortgage banking income fell to $12.7 million in Q3 from $23.3 million, and to $30.6 million for nine months from $94.9 million. Mortgage originations and secondary-market gains declined as activity normalized and margins compressed.
- Q3 credit-loss provision was $9.8 million, versus a $1.2 million recovery in Q3 2021; management attributed current-quarter provision activity primarily to strong loan growth.
- Rising rates drove substantial securities valuation losses: nine-month after-tax other comprehensive loss was $205.6 million, and accumulated other comprehensive loss reached $216.1 million. During Q3, $882.9 million of securities was transferred from available-for-sale to held-to-maturity; the related unrealized loss remains in accumulated OCI and will be amortized over the securities’ remaining lives.
- Renasant acquired Southeastern Commercial Finance effective March 1, 2022; the filing reports $6.6 million of goodwill added. In September, the Bank formed a REIT intended to acquire eligible Georgia and Florida real-estate-collateralized loans from the Bank.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management discussed continued loan growth, efforts to retain low-cost deposits and manage funding costs, and a goal of improving efficiency over time through revenue growth and expense control.
- Interest-rate risk is material: simulations show the company’s net interest income as asset-sensitive, with a projected 17.57% increase under an immediate +400-basis-point shock over months 1–12, versus a 23.25% decrease under a -300-basis-point shock. These are model estimates with assumptions and are not forecasts.
- Key stated risks include economic conditions, inflation and monetary policy, interest rates, credit quality and loan concentrations, deposit competition and liquidity, acquisition integration, regulatory changes, cybersecurity, and catastrophe or pandemic impacts. Management reported no material changes to previously disclosed risk factors.
- Q3 included a $3.0 million gain on sale of mortgage servicing rights (MSRs); the company sold servicing rights on loans with $1.70 billion unpaid principal balance for $18.5 million proceeds. This gain contributed about $0.04 to diluted EPS on an after-tax basis.
- Consumer non-sufficient-funds and linked-account transfer fees, totaling approximately $1.5 million in Q3 and $4.1 million year to date, are scheduled to be eliminated January 1, 2023. A new $100 million share-repurchase authorization was approved in October 2022; no shares were repurchased under the prior plan during the first nine months of 2022.
- Unfunded loan commitments were $3.48 billion and standby letters of credit were $98.1 million. The related allowance for unfunded commitments was $19.9 million. The filing states there were no material changes in market risk or internal controls and no material changes to risk factors.
Important facts for investors to verify
- Whether loan growth and higher asset yields continue to offset rising deposit and wholesale funding costs.
- Deposit trends, including the sustainability of noninterest-bearing balances, public-fund deposits and increased FHLB borrowing.
- Mortgage banking performance after lower originations and the MSR sale, and the effect of planned fee eliminations.
- Credit quality in commercial real estate and residential mortgage portfolios, including the increase in restructured loans and nonperforming balances.
- The effect of securities unrealized losses, rate movements and the held-to-maturity transfer on capital, liquidity and future earnings.
- Acquisition integration, REIT implementation, and the status and execution of the new repurchase authorization.