Renasant Corp. concluded years of preparing for the $10 billion asset threshold by announcing a deal with an in-market partner that will completely offset the cost of crossing, management said during the bank's fourth-quarter 2016 earnings call.
The Tupelo, Miss.-based bank announced it agreed to acquire Ridgeland, Miss.-based Metropolitan BancGroup Inc. in an all-stock transaction valued at about $190.2 million. The pro-forma company is now expected to cross $10 billion in late 2017.
Management expects the deal to be immediately accretive to Renasant's estimated earnings, even including the impact associated with crossing $10 billion. It is estimated to be about 2.9% dilutive to projected tangible book value with a projected earnback period of about three years. Its impact to EPS will be in the low single digits when factoring in the cost of crossing $10 billion, said CFO Kevin Chapman. Metropolitan's earnings stream justifies the acquisition by offsetting costs, but the bank also has an attractive growth engine that the pro-forma company can leverage.
The addition of acquired and organically grown assets will move the pro-forma company just over $10 billion by the close of the year, but management pointed out accretion will "more than offset" the impact of crossing, according to a Jan. 18 report from Hovde Group analyst Kevin Fitzsimmons.
"While some bankers have discussed a need to vault over the threshold by a wide margin in order to gain the needed scale to offset the negative impact from crossing (e.g., Durbin limits on debit interchange fees, increased FDIC costs, other expenses), [Renasant] points out that the accretion from the deal will more than offset the negative impact of crossing," he wrote.
Management scaled back Metropolitan's assumed annual growth to be more conservative and their financial estimates do not include any revenue synergies. Renasant Chairman and CEO Edward McGraw said Metropolitan's team of commercial and private bankers will be able to add product lines and services from Renasant, such as wealth management and lending areas such as asset-based, healthcare and SBA.
The deal carries cost savings of 37.5%, which is higher than previous Renasant deals. Chapman said the elevated level stems from the overlapping markets and the savings generated by consolidating redundant locations.
Breaching $10 billion will reduce the pro-forma company's pre-tax income by about $10 million annually. About 80% of that stems from a reduction in debit interchange income as a result of the Durbin amendment, with the remainder made up of increased FDIC insurance premiums as well as the finalization of compliance programs and the Dodd-Frank Act Stress Test. The bank has been preparing for the threshold since 2013, following the First M&F acquisition that increased its asset size to $6 billion, and sizable infrastructure expenses have already been included in its run rate.
The discussion of the deal came as part of the bank's fourth-quarter 2016 and full-year 2016 results. Renasant disclosed that net income for the fourth quarter of 2016 was about $23.6 million, an increase of 11.70% from $21.2 million recorded in the fourth quarter of 2015. Earnings per share was 55 cents for the fourth quarter of 2016, compared to 52 cents a year prior.
Net income for 2016 was $90.9 million, compared to $68.0 million for 2015. EPS for 2016 was $2.17, compared to $1.88 the previous year.