RENASANT CORPORATION — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial amounts below are in millions unless stated otherwise. The filing reports unaudited consolidated results.
Business context and reporting period
Renasant provides banking, insurance and wealth-management services across Mississippi, Tennessee, Georgia, Alabama and north Florida. Results include KeyWorth Bank, acquired in April 2016. Metropolitan BancGroup was acquired on July 1, 2017, after the reporting date, so its results are not included in this quarter.
Financial performance and condition
- Q2 earnings: Net income was $25.3 million versus $22.9 million in Q2 2016; diluted EPS was $0.57 versus $0.54.
- Six-month earnings: Net income was $49.3 million versus $44.1 million; diluted EPS was $1.11 versus $1.06.
- Net interest income: Q2 was $79.6 million versus $77.2 million; first-half was $153.6 million versus $147.2 million. Tax-equivalent net interest margin was 4.27% for Q2 (4.29% prior year) and 4.14% for the first half (4.25% prior year). Excluding problem-loan interest and purchased-loan accounting effects, the respective margins were 3.84% versus 3.79% and 3.76% versus 3.80%.
- Other income and expenses: Q2 noninterest income declined to $34.3 million from $35.6 million, largely due to lower mortgage banking income and no securities-sale gain. Noninterest expense fell to $74.8 million from $77.3 million. First-half noninterest income was $66.3 million versus $68.9 million; expense was $144.2 million versus $147.1 million.
- Margins and efficiency: Q2 efficiency ratio improved to 64.68% from 67.46%; the first-half ratio improved to 64.45% from 66.96%. Merger and conversion costs remained material: $3.0 million in Q2 and $3.4 million year to date.
- Balance sheet at June 30: Assets were $8.87 billion; loans, net of unearned income, were $6.37 billion; deposits were $7.20 billion; shareholders’ equity was $1.27 billion. Loans increased $168.3 million and deposits increased $142.9 million from December 31, 2016. Commercial real estate mortgages represented 47.7% of loans.
- Credit quality: Nonperforming loans were $26.8 million, or 0.42% of loans, versus $35.5 million, or 0.57%, at year-end. Nonperforming assets were $46.5 million, or 0.52% of assets, versus $68.5 million, or 0.79%. The allowance for loan losses was $44.1 million; first-half provision was $3.3 million and net charge-offs were $1.8 million.
- Cash flow and liquidity: First-half operating cash flow was $7.7 million; investing activities used $202.8 million and financing activities provided $124.9 million. Cash and cash equivalents decreased $70.2 million to $236.1 million. The company reported $2.34 billion of unused FHLB credit availability and $80 million in other bank credit lines, with none drawn at period-end.
- Debt and capital: Short-term borrowings were $120.1 million and long-term debt was $192.0 million. Bank capital ratios included 12.93% CET1, 13.64% total risk-based capital and 10.75% leverage. Q2 dividends were $0.18 per share.
Material changes, outlook and risks
- Loan growth—particularly in non-purchased loans—supported higher interest income. Deposit and borrowing costs increased, and reported first-half margin narrowed; management noted that loan yields on new or renewed loans were beginning to match or exceed maturing-asset rates.
- Mortgage banking income declined as higher mortgage rates reduced refinancing and loan originations. First-half originations of loans intended for sale were $772.5 million versus $1.01 billion a year earlier.
- On July 1, Renasant completed the approximately $218 million Metropolitan acquisition, issuing 4.88 million shares and paying approximately $4.8 million to option holders. Metropolitan brought approximately $1.22 billion of assets, including $990 million of loans and $940 million of deposits. Purchase accounting was still being finalized.
- Management said it expects the efficiency ratio to improve through revenue growth and expense control; the filing provides no specific earnings or margin guidance. Its interest-rate simulations showed a slightly asset-sensitive position. Results depend on assumptions and actual outcomes may differ.
- Key risks include acquisition integration and customer retention, interest-rate and funding-cost changes, credit deterioration or inadequate loan-loss reserves, commercial real-estate exposure, competition, regulation, and economic conditions. The filing reported no material change in risk factors or market risk from the prior year-end.
- Unusual items included a $205,000 debt prepayment penalty in Q1 2017 and merger/conversion expenses. Management reported no additional other-than-temporary impairment on securities during the first half; one pooled trust-preferred security returned to accrual status in Q2.
Important facts for investors to verify
- Metropolitan’s final purchase-price allocation, integration costs, realized synergies and post-acquisition loan and deposit retention.
- Whether core loan growth and underlying margins persist as deposit costs rise and purchased-loan accretion changes.
- Trends in commercial real-estate credit quality, nonperforming loans, restructured loans, charge-offs and allowance adequacy.
- Liquidity and funding mix, including public-fund deposits, short-term FHLB borrowing and the availability of unused credit lines.
- How much reported earnings and efficiency improvement depends on nonrecurring costs, problem-loan interest and purchased-loan accounting effects.