Renasant Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Renasant provides banking, insurance and wealth-management services across the southeastern United States. The April 1, 2016 acquisition of KeyWorth Bank added six Atlanta-area locations; reported comparisons also reflect the July 2015 Heritage acquisition for differing portions of the periods.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $75.7 | $68.6 | $222.9 | $169.0 |
| Noninterest income | $38.3 | $32.1 | $107.2 | $76.8 |
| Noninterest expense | $76.5 | $76.0 | $223.5 | $174.4 |
| Provision for loan losses | $2.7 | $0.8 | $5.9 | $3.0 |
| Net income | $23.2 | $16.2 | $67.3 | $46.9 |
| Diluted EPS | $0.55 | $0.40 | $1.61 | $1.35 |
- Q3 net interest margin was 4.15%, versus 4.09% a year earlier; excluding acquired-loan accretable yield, it was 3.77% versus 3.81%. Nine-month margin was 4.21% versus 4.09%, or 3.82% versus 3.81% excluding accretable yield.
- Mortgage banking income increased to $15.8 million in Q3 from $11.9 million and to $41.2 million for nine months from $24.1 million. Management attributed the Q3 increase mainly to improved sale margins; nine-month growth also reflected higher production and Heritage operations.
- Q3 efficiency ratio was 66.06%, compared with 74.03%; nine-month ratio was 66.65%, compared with 69.40%. Lower merger costs helped comparisons; Q3 2016 also included a debt-prepayment penalty.
- At September 30, total assets were $8.54 billion, loans $6.11 billion, deposits $6.82 billion and shareholders’ equity $1.14 billion. Versus December 31, 2015, these were higher by approximately $616 million, $692 million, $599 million and $105 million, respectively. Acquisitions contributed to balance-sheet growth.
- Cash and cash equivalents were $217.4 million. For the nine months, operating cash flow was $124.7 million, investing cash outflow $240.1 million, financing cash inflow $121.2 million, and cash increased $5.8 million.
- Short-term borrowings were $266.9 million and long-term debt $202.6 million, totaling $469.6 million, versus $570.5 million at year-end 2015. Deposits remained the principal funding source. The company reported $1.96 billion of unused FHLB credit availability and $75 million of other-bank credit lines, with none drawn at quarter-end.
- At September 30, company capital ratios included 10.16% CET1, 11.57% Tier 1 risk-based capital, 13.84% total risk-based capital and 9.38% Tier 1 leverage. The Bank’s corresponding ratios were 11.19%, 11.19%, 11.96% and 9.08%.
Changes, outlook and risks
- Quarterly net income rose about 43% year over year; nine-month net income rose about 44%. Growth reflected greater earning assets, loan growth, acquisitions and mortgage revenue. Comparability is affected by acquisition timing and purchase-accounting accretion.
- Loans grew $691.8 million from year-end; management reported growth across loan categories and markets. Net charge-offs were $0.8 million in Q3, or 0.05% of average loans, versus $0.6 million and 0.04% a year earlier. The nine-month provision rose to $5.9 million, which management linked to loan growth and credit provisioning.
- Nonperforming loans were $41.9 million, or 0.69% of loans, including acquired and FDIC-covered assets; nonperforming assets were $77.9 million, or 0.91% of assets. Management’s measures excluding covered assets showed nonperforming loans at 0.65% of loans. Total loans 30–89 days past due increased to $21.6 million from $14.4 million at year-end.
- The company issued $100 million of fixed-to-floating subordinated notes in August, receiving net proceeds of $98.2 million, and prepaid $38.9 million of long-term FHLB advances in Q3. The Q3 prepayment penalty was $2.2 million; nine-month penalties were $2.5 million. Nine-month merger and conversion expense was $4.0 million, down from $9.7 million.
- Management expects the efficiency ratio to improve through revenue growth and expense control and described the balance sheet as slightly asset-sensitive. No specific earnings or revenue guidance was provided. Interest-rate sensitivity simulations showed estimated net interest income changes of +0.67% to +1.30% over 1–12 months and +3.57% to +9.16% over 13–24 months for rate increases of 100–400 basis points; management cautioned that model assumptions and actual outcomes may differ.
- Key stated risks include acquisition integration and customer retention, credit quality and loan concentrations, interest rates and funding costs, competition, economic conditions, regulation, and the adequacy of the loan-loss allowance. One pooled trust-preferred security remained nonaccrual and had a $6.5 million unrealized loss; no additional impairment was recorded. Management reported effective disclosure controls and no material changes in internal control or risk factors during the period.
Investor verification priorities
- Separate organic loan, deposit and earnings growth from KeyWorth and Heritage contributions, purchase-accounting accretion and mortgage-banking volatility.
- Review past-due and nonperforming loan trends, acquired-credit performance, reserve adequacy, and the impact of expired FDIC loss-share coverage.
- Assess funding-cost trends, the new subordinated notes, FHLB prepayments and available liquidity against loan growth and mortgage-related funding needs.
- Validate the sustainability of the reported margin and efficiency-ratio improvement, including the effects of loan accretion, merger costs and debt penalties.
- Monitor the remaining nonaccrual trust-preferred security, its valuation assumptions, and the final purchase-accounting values for KeyWorth.