Renasant Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Renasant is a regional financial services company operating across Mississippi, Tennessee, Georgia, Alabama and north Florida. Unless stated otherwise, financial amounts below are in millions of dollars. Metropolitan BancGroup was acquired July 1, 2017, so Q2 2018 includes its operations while the comparable 2017 quarter does not.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $92.4 | $79.6 | $181.6 | $153.6 |
| Noninterest income | $35.6 | $34.3 | $69.5 | $66.3 |
| Net income | $36.7 | $25.3 | $70.5 | $49.3 |
| Diluted EPS | $0.74 | $0.57 | $1.42 | $1.11 |
| Net interest margin, fully tax-equivalent | 4.15% | 4.27% | 4.18% | 4.14% |
| GAAP efficiency ratio | 61.08% | 64.68% | 61.76% | 64.45% |
| Adjusted efficiency ratio (non-GAAP) | 59.46% | 60.75% | 59.94% | 61.48% |
Q2 net income rose about 45% year over year; six-month net income rose about 43%. Net interest income growth reflected the larger loan base, including Metropolitan, and loan growth. Deposit and borrowing costs increased, weighing on quarterly margin. The lower 2018 effective tax rate—22.12% in Q2 versus 32.17%—largely reflects the federal corporate tax-rate reduction under the Tax Cuts and Jobs Act.
Q2 noninterest expense was $79.0 million versus $74.8 million; six-month expense was $157.0 million versus $144.2 million. Higher salaries, data processing and occupancy costs were partly offset by lower merger-related costs. Mortgage banking income was $12.8 million in Q2 and $23.8 million for the first half. Management’s adjusted efficiency ratio excludes intangible amortization and specified transaction-related charges; it is a non-GAAP measure.
Financial position, liquidity and credit
- Balance sheet: Total assets were $10.54 billion at June 30, up from $9.83 billion at December 31, 2017. Loans, net of unearned income, were $7.77 billion, up $147 million; deposits were $8.38 billion, up $460 million.
- Funding and debt: Short-term borrowings increased to $313 million from $90 million, primarily reflecting short-term FHLB advances. Long-term debt was $207 million, little changed. Combined short- and long-term borrowings were approximately $521 million. The company reported $2.65 billion of available FHLB capacity and $80 million in other bank credit lines, none drawn.
- Cash flow: For the six months, operating cash flow was negative $73 million, investing cash flow negative $580 million and financing cash flow positive $665 million; cash and cash equivalents increased $11 million to $293 million. Large securities purchases and mortgage-loan funding and sales affected reported cash flows.
- Credit quality: Nonperforming loans were $21.2 million, or 0.27% of loans, down from $23.4 million and 0.31% at year-end. Nonperforming assets were $34.9 million, or 0.33% of assets. The allowance for loan losses was $47.4 million; first-half net charge-offs were $2.4 million, or 0.06% of average loans on an annualized basis.
- Capital: At June 30, Renasant Corporation’s CET1, Tier 1 risk-based and total risk-based capital ratios were 11.71%, 12.73% and 14.75%, respectively. The Bank’s corresponding ratios were 13.04%, 13.04% and 13.66%.
- Other comprehensive loss: Accumulated other comprehensive loss widened to $20.1 million from $10.5 million at year-end, principally reflecting unrealized losses on available-for-sale securities.
Material changes, outlook and risks
- The company said it completed its balance-sheet releveraging strategy in Q2, following 2017 asset reductions. Securities available for sale increased to $1.09 billion from $671 million at year-end; first-half purchases totaled $498 million, mainly mortgage-backed securities and CMOs.
- Brand Group Holdings acquisition was pending at June 30. Brand had approximately $2.24 billion of assets, $1.73 billion of loans and $1.80 billion of deposits. The filing expected closing in Q3 2018; Brand shareholders approved the deal July 26 and required regulatory approvals had been received. Closing remained subject to customary conditions.
- Management expects the efficiency ratio to continue improving through revenue growth and expense control; the filing provides no specific earnings or revenue guidance. Management described credit quality as strong and said nonperforming loans and OREO had declined during the first half.
- Interest-rate sensitivity modeling showed an asset-sensitive position: a +100-basis-point shock projected net interest income increases of 2.10% over months 1–12 and 5.54% over months 13–24; a −100-basis-point shock projected decreases of 6.86% and 8.45%, respectively. These are modeled scenarios, not forecasts.
- Key risks include acquisition integration and realization of expected benefits, economic and interest-rate changes, credit deterioration and loan concentrations, funding costs and liquidity, competition, regulation, cybersecurity and catastrophic events. If assets remain above $10 billion at December 31, 2018, the filing says interchange-fee limits under the Durbin Amendment would apply beginning July 1, 2019.
- The company was developing its implementation approach for the expected-credit-loss standard (CECL), effective for it after December 15, 2019. Management had not quantified the expected financial impact.
Investor verification points
- Check the final Brand merger terms, closing date, integration costs and realized synergies; the filing’s expected Q3 close was not yet completed as of the report.
- Separate organic growth from Metropolitan acquisition effects when assessing revenue, loan and deposit growth.
- Track deposit pricing, short-term FHLB borrowing levels and net interest margin as rates and competition change.
- Review the quality and concentration of commercial real estate and purchased-loan exposures, alongside allowance adequacy and charge-offs.
- Assess securities portfolio valuation and accumulated unrealized losses, and confirm the impact of any continued asset growth on the Durbin Amendment threshold.
- Compare reported results with the non-GAAP adjusted efficiency ratio and review the assumptions behind management’s interest-rate sensitivity scenarios.