Renasant Corporation — Q2 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2016. Renasant provides banking, insurance and wealth-management services across the Southeast. The April 1, 2016 KeyWorth acquisition and the July 1, 2015 Heritage acquisition materially affected the balance sheet and make year-over-year comparisons less like-for-like. Unless noted otherwise, amounts below are in millions.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparison |
|---|---|---|
| Net income | $22.9; diluted EPS $0.54 | Q2 2015: $15.4; diluted EPS $0.48 |
| Six-month net income | $44.1; diluted EPS $1.06 | First half 2015: $30.6; diluted EPS $0.96 |
| Net interest income | $77.2 in Q2; $147.2 for six months | Q2 2015: $51.6; first half 2015: $100.4 |
| Net interest margin, taxable-equivalent | 4.29% in Q2; 4.25% for six months | Q2 2015: 4.17%; first half 2015: 4.10% |
| Noninterest income / expense | $35.6 / $77.3 in Q2 | Q2 2015: $22.9 / $51.1 |
| Efficiency ratio | 67.46% in Q2; 66.96% for six months | Q2 2015: 67.00%; first half 2015: 66.20% |
| Total assets | $8,529.6 | December 31, 2015: $7,926.5 |
| Loans, net of unearned income | $5,965.4 | December 31, 2015: $5,413.5 |
| Deposits | $6,702.5 | December 31, 2015: $6,218.6 |
| Cash and cash equivalents | $210.8 | December 31, 2015: $211.6 |
| Borrowings | $445.0 short-term; $143.7 long-term | December 31, 2015: $422.3 short-term; $148.2 long-term |
| Shareholders’ equity | $1,124.3; book value per share $26.71 | December 31, 2015: $1,036.8; $25.73 per share |
Mortgage banking income rose to $13.4 in Q2 from $6.8 a year earlier; six-month income was $25.3 versus $12.2. Loan growth, the acquisitions and higher mortgage activity supported revenue. The six-month provision for loan losses was $3.2 versus $2.3 a year earlier. Q2 net charge-offs were $0.2, or 0.01% of average loans, compared with $1.6, or 0.16%, in Q2 2015.
For the six months, operating cash flow was negative $6.2 versus negative $32.4 in 2015; investing cash flow was negative $129.9 versus negative $45.7, primarily reflecting loan growth and other investing activity; financing cash flow was positive $135.3 versus positive $71.5. Cash ended the period at $210.8. The Bank had $1,603.9 of unused FHLB availability and $75.0 of unsecured lines with other banks, with no amounts drawn on those bank lines.
At June 30, the Company’s capital ratios included a 10.13% common equity Tier 1 ratio, 11.56% Tier 1 risk-based ratio and 12.31% total risk-based ratio. Renasant Bank’s corresponding ratios were 11.17%, 11.17% and 11.93%; both Company and Bank exceeded the stated “well capitalized” thresholds.
Material changes and notable items
- KeyWorth added approximately $415.2 of assets, $272.3 of loans and $349.0 of deposits at acquisition; six Atlanta-area locations were acquired. Purchase accounting remained subject to finalization, and KeyWorth added approximately $20.6 of goodwill.
- Loans increased $552.0 from year-end. Management reported $462.1 of growth in loans excluding acquired loans, with growth across lending categories and markets. Commercial real estate mortgages represented 47.33% of total loans at June 30.
- Nonperforming assets were $82.0, or 0.96% of assets, compared with $91.3, or 1.15%, at year-end. Total nonperforming loans were $43.1; the filing also reports a 0.66% nonperforming-loan ratio excluding loans covered by FDIC loss-share agreements, versus 0.72% at year-end.
- Other real estate owned declined to $29.3 from $35.4 at year-end. Six-month OREO expense included $1.3 of impairments.
- Merger and conversion expense was $2.8 in Q2 and $3.8 for the first half; management said these costs reduced Q2 EPS by $0.05 and first-half EPS by $0.06. A $0.3 debt-extinguishment penalty was recorded in the first half.
- One pooled trust preferred security, carried at $9.6 fair value, remained nonaccrual and in payment-in-kind status. Total pooled trust preferred securities had $24.7 cost and $18.2 fair value; no additional impairment was recorded in the first half.
Outlook, risks and contingencies
Management gave no specific earnings or revenue guidance. It expects the efficiency ratio, excluding merger-related expenses, to improve through revenue growth and expense control. Management described the company as slightly asset-sensitive and aims to maintain that position, including through variable-rate loan growth and less rate-sensitive deposits. Its interest-rate simulations showed estimated net interest income increases under upward rate shocks; the filing cautions that results depend on uncertain assumptions and actual outcomes may differ.
Key risks cited include acquisition integration and customer retention, economic and interest-rate changes, competition, credit quality and loan concentrations, the adequacy of loan-loss estimates, liquidity and funding needs, regulation, and the ability to support growth with sufficient capital. Unfunded loan commitments were $1,227.0 and standby letters of credit were $33.4. Certain loss-share coverage periods for commercial loans had expired or were nearing expiration. Management reported no material change in risk factors from its 2015 Form 10-K, no significant subsequent events through issuance, and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings and margin benefited from acquisition-related loan accretion, and whether these contributions are sustainable.
- KeyWorth integration progress, final purchase-price allocation, and whether expected revenue enhancements and cost synergies are realized.
- Credit trends in commercial real estate and acquired portfolios, including delinquency migration, nonperforming loans, charge-offs and allowance adequacy.
- Mortgage banking earnings sensitivity to low rates, refinancing activity, origination volumes and servicing-rights valuations.
- Funding and liquidity trends, including reliance on FHLB overnight borrowings, deposit mix and the availability of pledged securities.
- Fair-value and credit developments in the pooled trust preferred securities, particularly the nonaccrual position and Level 3 valuation assumptions.