Renasant Corporation (NASDAQ: RNST) — Q2 2019 Form 10-Q
Business and period: Regional banking, insurance and wealth management company operating across Mississippi, Tennessee, Georgia, Alabama and north Florida. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Unless stated otherwise, dollar amounts below are in millions. The September 2018 Brand acquisition materially affects year-over-year comparability.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $112.8 | $92.4 | $225.9 | $181.6 |
| Noninterest income | $42.0 | $35.6 | $77.8 | $69.5 |
| Net income | $46.6 | $36.7 | $91.7 | $70.5 |
| Diluted EPS | $0.80 | $0.74 | $1.56 | $1.42 |
| Provision for loan losses | $0.9 | $1.8 | $2.4 | $3.6 |
Q2 net income rose about 27% year over year; first-half net income rose about 30%. Tax-equivalent net interest margin was 4.19% for Q2 and 4.23% for the first half, versus 4.15% and 4.18%, respectively, in 2018. GAAP efficiency ratio improved to 59.73% for Q2 and 59.38% for the first half, from 61.08% and 61.76%; adjusted non-GAAP ratios were 58.30% and 57.97%.
Mortgage banking income was $16.6 million in Q2 and $27.0 million for the first half. Noninterest expense increased to $93.3 million in Q2 and $182.1 million for the first half, driven mainly by Brand-related operating costs, higher staffing and production hires. Management attributed higher interest income chiefly to the acquired earning assets and organic loan growth; higher deposit and borrowing costs partially offset those gains.
Financial position, cash flow and credit
- At June 30, total assets were $12.89 billion, deposits $10.19 billion, total loans excluding loans held for sale $9.05 billion, and shareholders’ equity $2.12 billion. Loans were nearly flat versus year-end as growth in non-purchased loans was offset by paydowns in purchased loans.
- Cash and cash equivalents were $443.9 million, down $125.2 million from year-end. First-half operating cash flow was $44.8 million, investing cash flow $55.2 million and financing cash flow negative $225.3 million. Financing outflows included $248.7 million of net short-term borrowing repayments, $25.4 million of dividends and $12.9 million of share repurchases.
- Total short-term borrowings were $139.0 million, down from $387.7 million at year-end; long-term debt was $262.9 million. The company reported $3.52 billion of available FHLB credit and $150 million in unused bank lines. Total deposits increased $61.5 million from year-end, including $90.3 million growth in noninterest-bearing deposits and a $28.8 million decline in interest-bearing deposits.
- Loan-loss allowance was $50.1 million, or 0.55% of loans. First-half net charge-offs were $1.4 million (0.03% annualized of average loans), down from $2.4 million (0.06%) in 2018. Nonperforming loans increased to $33.4 million, or 0.37% of loans, from $26.0 million and 0.29% at year-end; nonperforming assets were $42.1 million. Management said credit metrics remained low by historical standards and considered reserves adequate. Restructured loans totaled $15.5 million, up from $12.8 million at year-end.
- Regulatory capital remained above well-capitalized thresholds: company CET1 ratio was 11.64% and total capital ratio 14.62%; the Bank’s ratios were 13.71% and 14.25%, respectively.
Material changes, outlook and risks
- Brand acquisition effects include higher average loan balances and operating expenses; management said separating acquired-operation results from historical results was impracticable. Purchased loans declined to $2.35 billion from $2.69 billion at year-end, while non-purchased loans increased to $6.70 billion from $6.39 billion.
- Management expects the efficiency ratio to improve from current levels through revenue growth and expense control; the filing provides no numerical earnings or revenue guidance. Strategic production hires reduced Q2 and first-half diluted EPS by approximately $0.02 in each period.
- Effective July 1, 2019, the company became subject to Durbin Amendment interchange-fee limits and expects an annual reduction of approximately $11–$12 million; management was developing strategies to offset the impact.
- The company adopted lease accounting standard ASC 842 in 2019, recording operating right-of-use assets and lease liabilities. It was preparing for CECL, effective for the company in 2020, and expected a preliminary calculation in Q3 2019; the eventual financial impact was not yet clear.
- Interest-rate modeling indicated an asset-sensitive position: a parallel +100-basis-point shock projected net interest income increases of 1.66% in months 1–12 and 3.41% in months 13–24; a -100-basis-point shock projected declines of 2.42% and 4.02%. These are scenario estimates, not forecasts, and depend on assumptions.
- Principal disclosed risks include acquisition integration and retention, credit quality and concentrations, interest-rate and funding conditions, competition, regulatory and accounting changes, cybersecurity, and natural disasters. No material change in risk factors or market risk was reported. Controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth, deposit pricing and net interest margin can sustain earnings as funding costs rise.
- Whether nonperforming loans and restructured loans continue to increase, and whether the allowance remains adequate, particularly for acquired and purchased-credit-deteriorated loans.
- The realized impact of Durbin Amendment limits versus management’s $11–$12 million annual estimate and its offsetting actions.
- Brand integration progress, expense trends, and any revisions to acquisition-related fair values or goodwill.
- The eventual CECL allowance adjustment and its effects on capital and reported earnings.
- Whether cash resources, available borrowing capacity and regulatory capital remain sufficient as lending commitments and liquidity needs evolve.