Business context and reporting period
Renasant Corporation is a regional bank holding company operating through Renasant Bank and insurance and wealth-management businesses across Mississippi, Tennessee, Alabama, Florida and Georgia. This Form 10-K covers the fiscal year ended December 31, 2017; quarterly figures below identify the fourth quarter where relevant. The company completed its $219.5 million acquisition of Metropolitan BancGroup on July 1, 2017, issuing about 4.9 million shares and adding eight banking locations.
Financial performance and condition
- Profit: 2017 net income was $92.2 million, up 1.4% from $90.9 million in 2016. Diluted EPS was $1.96, down from $2.17; the share count increased in part due to the Metropolitan acquisition. The fourth-quarter net income was $16.5 million and diluted EPS was $0.33, versus $23.6 million and $0.55 in fourth-quarter 2016.
- Revenue and margin: Net interest income increased 11.9% to $336.9 million; noninterest income declined 3.8% to $132.1 million, primarily as mortgage banking income fell to $43.4 million from $49.4 million. Net interest margin was 4.16%, compared with 4.22% in 2016; excluding purchased-loan accretion and problem-loan interest, management’s non-GAAP margin was 3.78%, versus 3.76%. The reported efficiency ratio improved to 63.12% from 66.25%; adjusted non-GAAP efficiency ratio improved to 59.55% from 62.97%.
- Credit quality: Provision for loan losses was $7.6 million, nearly unchanged from 2016. Net charge-offs fell to $4.1 million, or 0.06% of average loans, from $7.2 million, or 0.12%. Nonperforming loans were $23.4 million (0.31% of loans), down from $35.5 million (0.57%); the allowance was $46.2 million, 0.61% of loans and 197.31% of nonperforming loans.
- Balance sheet and liquidity: Year-end assets were $9.83 billion, loans $7.62 billion, deposits $7.92 billion and shareholders’ equity $1.51 billion. Total loans grew 22.9% year over year, including acquisition effects; non-purchased loans grew 18.6%. Cash and cash equivalents were $281.5 million, down from $306.2 million. Operating cash flow was $201.6 million; investing activities provided $75.1 million, while financing activities used $301.5 million.
- Debt and capital: Short-term borrowings were $89.8 million and long-term debt $207.5 million, including $114.1 million of subordinated notes and $85.9 million of junior subordinated debentures. The company’s capital ratios remained above “well-capitalized” thresholds: CET1 11.34%, Tier 1 risk-based 12.39%, total risk-based 14.46% and leverage 10.18%. The bank’s corresponding ratios were 12.69%, 12.69%, 13.32% and 10.42%.
- Cash dividends: Dividends declared and paid were $0.73 per share for 2017, up from $0.71 in 2016.
Material changes versus the prior comparable period
- Metropolitan’s acquisition materially expanded the balance sheet and added $942.1 million of deposits and approximately $965 million of loans at acquisition-date fair value. Purchase accounting valuations remained subject to change.
- Net income rose slightly, but diluted EPS declined, reflecting the larger share base and a $14.5 million deferred-tax-asset revaluation charge.
- Mortgage banking income decreased by $6.0 million year over year, mainly because of lower loan originations and refinancing activity; originations for sale fell to $1.68 billion from $1.95 billion.
- Noninterest expense increased 2.2% to $301.6 million, with acquisition-related costs and higher compensation and occupancy expenses. Merger and conversion expenses were $10.4 million, versus $4.0 million in 2016.
- Securities declined to $671.5 million from $1.03 billion. The company sold securities and shortened the mortgage-loan holding period to keep year-end assets below $10 billion and delay Durbin Amendment debit-interchange limits. Management reported an approximately $450,000 pretax fourth-quarter cost of this initiative, partly offset by a $91,000 securities-sale gain.
- Nonperforming assets declined to $39.4 million from $68.5 million, while the allowance for loan losses increased to $46.2 million from $42.7 million.
Outlook, commentary, risks and unusual items
- Management expects the adjusted efficiency ratio to continue improving through revenue growth and expense control; the filing does not provide numerical earnings or revenue guidance.
- Management reported improved credit quality and low charge-offs, while noting that loan growth requires continued allowance build and monitoring. Commercial, construction and commercial real estate loans comprised about 66.9% of the portfolio; real estate represented about 84.1% of loan collateral, creating concentration sensitivity to local economic and property-market conditions.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. The required $14.5 million deferred-tax-asset revaluation increased the 2017 effective tax rate to 42.34% and reduced diluted EPS by $0.31. Management’s adjusted effective tax rate excluding this charge was 33.27%.
- The company used its asset-reduction strategy to remain below the $10 billion threshold at year-end, delaying potential Durbin Amendment interchange-fee limits and certain heightened regulatory requirements. The strategy’s reported pretax cost was approximately $450,000 in fourth-quarter 2017.
- Key risks include acquisition integration and realizing expected savings, interest-rate and funding-cost changes, credit and commercial-real-estate concentrations, liquidity, competition, cybersecurity and regulatory changes. Management cited gradual Federal Reserve rate increases as warranted by economic conditions; actual rate effects and results remain uncertain.
- The Metropolitan acquisition generated $140.5 million of goodwill and $7.0 million of core deposit intangibles; final fair values were still being completed. Management reported no material pending legal proceedings and no significant subsequent events before issuance. The auditor gave an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether Metropolitan integration, customer retention, acquired-loan performance and final purchase accounting support expected benefits and goodwill values.
- How earnings and EPS trend after the one-time $14.5 million tax revaluation and with a larger share count; reconcile GAAP results with management’s non-GAAP adjustments.
- Whether core loan growth remains sound given CRE exposure, rising restructured loans ($14.6 million versus $11.5 million), and the allowance’s coverage of future losses.
- How net interest margin and deposit costs respond to further rate changes, including the contribution from purchased-loan accretion and problem-loan interest.
- Whether the company remains below the $10 billion year-end asset threshold, and the resulting timing and effect of Durbin interchange limits and other regulatory requirements.
- Liquidity and funding resilience, including public-fund deposits of $1.00 billion, time-deposit maturities, available FHLB capacity and $1.62 billion of unfunded loan commitments.