Renasant Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Renasant is a regional banking, insurance and wealth-management company operating across Mississippi, Tennessee, Georgia, Alabama and north Florida. Unless otherwise noted, dollar amounts below are in millions; income-statement and cash-flow comparisons are with Q1 2017, while balance-sheet comparisons are with December 31, 2017.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / change |
|---|---|---|
| Net income | $33.8; diluted EPS $0.68 | $24.0; diluted EPS $0.54 |
| Net interest income | $89.2 | $74.0 |
| Net interest margin | 4.20% | 4.01% |
| Noninterest income / expense | $34.0 / $77.9 | $32.0 / $69.3 |
| Efficiency ratio | 62.48% GAAP; 60.43% adjusted | 64.22% GAAP; 62.26% adjusted |
| Provision for loan losses | $1.75 | $1.50 |
| Cash and cash equivalents | $251.0 | Down from $281.5 at year-end |
| Total assets | $10,238.3 | Up from $9,830.0 at year-end |
| Total loans, net of unearned income | $7,698.1 | Up from $7,620.3 at year-end |
| Total deposits | $8,357.8 | Up from $7,921.1 at year-end |
| Short-term borrowings / long-term debt | $57.8 / $207.4 | $89.8 / $207.5 at year-end |
| Shareholders’ equity | $1,532.8 | Book value per share $31.03, versus $30.72 at year-end |
Net cash used in operating activities was $61.2, compared with $55.1 provided in Q1 2017; net cash used in investing was $365.2, including $317.9 of securities purchases. Financing provided $395.9, largely from deposit growth. Cash declined by $30.5 during the quarter. The Bank had $2.707 billion available on unused FHLB lines and $80 million of lines with other banks, none drawn at quarter-end.
Credit indicators remained favorable: nonperforming loans were $22.9 (0.30% of loans), nonperforming assets were $37.5 (0.37% of assets), and the allowance for loan losses was $46.4. Allowance coverage of nonperforming loans was 202.52%. Net charge-offs were $1.56, or 0.08% of average loans annualized.
At March 31, the Company reported a 11.38% common equity Tier 1 ratio, 12.41% Tier 1 risk-based capital ratio, 14.44% total risk-based capital ratio and 10.61% Tier 1 leverage ratio. Renasant Bank’s corresponding ratios were 12.71%, 12.71%, 13.33% and 10.88%.
Material changes versus prior comparable period
- Net income rose about 41%, and diluted EPS increased from $0.54 to $0.68. The filing attributes higher net interest income primarily to loan growth, higher variable-rate loan yields and the Metropolitan acquisition, completed July 1, 2017; therefore, year-over-year results are not fully comparable.
- Net interest margin increased 19 basis points. Average loans increased about $1.45 billion year over year; management cited the Metropolitan acquisition and organic growth. Deposit and borrowing costs also rose.
- Noninterest expense increased $8.6, principally reflecting the larger company after the Metropolitan acquisition and higher salaries, occupancy, advertising and merger/conversion costs. The adjusted efficiency ratio improved to 60.43% from 62.26%.
- Quarter-end securities increased $276.9 from year-end, following $317.9 of purchases as Renasant began releveraging after its 2017 deleveraging strategy. The portfolio’s net-of-tax unrealized securities loss contributed to a $7.0 comprehensive loss for the quarter despite net income of $33.8.
- Loans and deposits grew $77.7 and $436.7, respectively, from year-end. Management said some deposit growth reflected reacquisition of wholesale funding reduced in Q4 2017.
Outlook, transactions and risks
- Management expects the efficiency ratio to continue improving through revenue growth and expense control. The filing gives no numerical earnings or revenue guidance.
- On March 28, 2018, Renasant agreed to acquire Brand Group Holdings, parent of The Brand Banking Company. Consideration is 32.87 Renasant shares plus $77.50 cash per Brand share, subject to possible reduction tied to specified asset divestitures. Brand reported approximately $2.4 billion in assets, $1.91 billion in loans and $1.92 billion in deposits at March 31. Closing was expected in Q3 2018, subject to regulatory and shareholder approvals and other conditions.
- Management described credit quality as strong and said nonperforming loans and charge-offs remained low. Key exposures include credit quality and loan concentrations, interest-rate and funding changes, acquisition integration and retention, competition, regulation, cybersecurity and economic conditions.
- The Company was in an asset-sensitive position in its interest-rate simulations: a parallel +100-basis-point shock projected a 3.92% increase in net interest income for months 1–12 and 6.24% for months 13–24; a −100-basis-point shock projected decreases of 8.67% and 11.11%, respectively. These are model estimates subject to assumptions.
- If assets remain above $10 billion at December 31, 2018, management said the Company would become subject to Durbin Amendment interchange-fee limits beginning July 1, 2019. The Company also is developing its expected-credit-loss model for the CECL standard; the eventual financial impact was not quantified.
- The Tax Act lowered the federal corporate tax rate to 21%; Q1 2018 effective tax rate was 22.24%, compared with 31.95% in Q1 2017. Q1 merger and conversion expenses were $0.9. No debt prepayment penalty was recorded in Q1 2018, versus $0.2 in Q1 2017.
Investor verification priorities
- Track Brand merger approvals, asset divestitures, final consideration, closing timing and integration costs.
- Assess whether loan growth, deposit pricing and purchased-loan accretion can sustain margins as funding costs rise.
- Monitor credit performance, especially commercial real estate, nonperforming loans, charge-offs and allowance adequacy.
- Review the sustainability of cash flows and liquidity as securities purchases, loan growth and deposit funding evolve.
- Confirm the year-end asset level and resulting Durbin Amendment exposure, and seek updates on CECL implementation and impact.