Renasant Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Renasant provides banking, insurance and wealth-management services across Mississippi, Tennessee, Georgia, Alabama and north Florida. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $99.4 | $90.0 | $281.1 | $243.6 |
| Noninterest income | $38.1 | $33.4 | $107.6 | $99.7 |
| Net income | $32.0 | $26.4 | $102.5 | $75.7 |
| Diluted EPS | $0.61 | $0.53 | $2.03 | $1.64 |
| Net interest margin, tax-equivalent | 4.07% | 4.08% | 4.14% | 4.12% |
| GAAP efficiency ratio | 68.20% | 64.35% | 64.03% | 64.42% |
Q3 pretax income was $40.5 million versus $40.6 million; lower income-tax expense helped lift net income. The effective tax rate fell to 21.07% from 34.96%, primarily reflecting the federal corporate tax rate reduction. Q3 merger and conversion expenses were $11.2 million, versus $6.3 million a year earlier. The company reported an adjusted efficiency ratio of 58.84% for Q3 and 59.55% year to date; these are non-GAAP measures.
Balance sheet, cash flow and capital
- At September 30, total assets were $12.75 billion, loans net of unearned income were $9.12 billion, and deposits were $10.17 billion. Compared with year-end 2017, total loans rose $1.50 billion and deposits rose $2.25 billion; these comparisons include the Brand acquisition.
- Cash and cash equivalents were $369.6 million. For the first nine months, operating cash flow was $2.0 million, investing cash outflow was $472.7 million, and financing cash inflow was $558.8 million. Financing included $538.9 million of deposit growth; investing included $576.6 million of securities purchases.
- Short-term borrowings were $175.6 million and long-term debt was $264.0 million. Available borrowing capacity on unused FHLB lines was $2.91 billion. Management reported no amounts outstanding on its $85 million of other-bank credit lines.
- Company capital ratios were 10.80% CET1, 11.84% Tier 1 risk-based and 13.85% total risk-based. The Bank’s corresponding ratios were 12.75%, 12.75% and 13.30%.
Material changes and credit quality
- Renasant completed its acquisition of Brand Group Holdings on September 1, 2018, in a transaction valued at approximately $474.5 million. It issued 9.31 million common shares and paid cash consideration and option settlements. Brand added approximately $2.34 billion of estimated assets and $1.71 billion of deposits at acquisition; purchase-price valuations remained subject to finalization. Goodwill recorded was $316.2 million.
- Total loans grew materially, with commercial real estate mortgages representing 45.08% of loans at quarter-end. Nonperforming loans were $26.3 million, or 0.29% of total loans, versus $23.4 million and 0.31% at year-end 2017. The allowance for loan losses was $48.6 million; year-to-date net charge-offs were $3.4 million, or 0.06% of average loans on an annualized basis.
- Mortgage banking income rose to $14.4 million in Q3 from $10.6 million, while salary and employee-benefit expense increased to $55.2 million from $48.5 million. Management attributed expense growth largely to acquisitions, compensation increases and mortgage commissions.
- Available-for-sale securities rose to $1.18 billion from $671.5 million at year-end 2017, reflecting the company’s completed balance-sheet releveraging. Accumulated other comprehensive loss widened to $24.2 million from $10.5 million, including unrealized securities losses.
Outlook, risks and unusual items
- Management said it expects the efficiency ratio to improve from reported levels through revenue growth and expense control. It gave no specific earnings or revenue guidance.
- The filing identifies acquisition integration, customer retention and realization of expected synergies as risks. Other stated risks include credit quality and loan concentrations, interest-rate and liquidity exposure, competition, regulation, cybersecurity and regional disasters.
- Management described credit quality as strong and reported historically low charge-offs and nonperforming loans relative to the post-2008–2009 period. It noted that loan growth required a higher provision to maintain the allowance.
- The company expects total assets to remain above $10 billion at December 31, 2018; if so, it expects the Durbin Amendment’s interchange-fee limits to apply beginning July 1, 2019. Management said it was evaluating ways to offset the impact.
- After quarter-end, the Board authorized up to $50 million of share repurchases over one year. The company completed the sale of Brand’s mortgage subsidiary, BMG, on October 31, 2018; the filing says the sale had no material impact. BMG was included in Q3 results and reported a $0.29 million pretax loss for the period included.
- Interest-rate simulations show an asset-sensitive position: a parallel 100-basis-point increase was estimated to raise net interest income by 2.72% over 1–12 months and 4.43% over 13–24 months. Management cautions that actual results may differ because the model relies on assumptions about rates, prepayments and customer behavior.
Most important facts for investors to verify
- How Brand integration progresses, whether customer retention and anticipated synergies are achieved, and how final purchase accounting changes reported goodwill or loan values.
- Whether earnings growth persists after separating acquisition effects, merger expenses and the lower tax rate; monitor the rising cost of deposits and the adjusted efficiency ratio.
- Credit performance in the enlarged loan portfolio, especially commercial real estate exposure, acquired loans, delinquencies and allowance adequacy.
- The effect of possible Durbin Amendment interchange limits, the $50 million repurchase authorization and changes in capital or liquidity needs.
- Actual interest-rate sensitivity versus modeled outcomes, and the impact of unrealized securities losses on accumulated other comprehensive loss and capital.