Business context and reporting period
Renasant Corporation is a regional financial services holding company operating banking, insurance and wealth management businesses across Mississippi, Tennessee, Alabama and Georgia. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. Unless otherwise noted, financial amounts below are in millions of dollars.
After quarter-end, on July 1, 2015, Renasant completed its approximately $287.5 million acquisition of Heritage Financial Group. The transaction added approximately $1.87 billion in assets, $1.14 billion in loans, $1.37 billion in deposits and 48 offices, before final purchase-accounting adjustments; these amounts are not included in June 30 balances.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net income | $15.4 | $14.9 | $30.6 | $28.5 |
| Diluted EPS | $0.48 | $0.47 | $0.96 | $0.90 |
| Net interest income | $51.7 | $52.2 | $100.5 | $102.1 |
| Provision for loan losses | $1.2 | $1.5 | $2.3 | $2.9 |
| Noninterest income | $22.9 | $19.5 | $44.8 | $38.1 |
| Noninterest expense | $51.2 | $49.4 | $98.6 | $97.0 |
| Tax-equivalent net interest margin | 4.17% | 4.24% | 4.10% | 4.12% |
For the quarter, net income rose about 3.6%; for the first half it rose about 7.7%. Management attributed the gains chiefly to lower funding costs and higher noninterest income. Mortgage-loan sale gains were $5.4 million for the quarter and $10.0 million for the half-year, up from $2.0 million and $3.6 million, respectively, a major driver of noninterest income growth. Results included Heritage merger expenses of $1.5 million for Q2 and $1.9 million for the first half. The six-month efficiency ratio improved to 66.25% from 67.58%.
Net interest income and margin declined year over year despite loan growth. Lower market yields and repricing of maturing loans weighed on asset yields; lower deposit costs partly offset that pressure. First-half net charge-offs were $2.7 million, or 0.13% of average loans, versus $3.3 million, or 0.17%, in the prior-year period.
At June 30, total assets were $5.90 billion, deposits $4.89 billion, gross loans net of unearned income $4.04 billion, and shareholders’ equity $731.0 million. Loans increased $49.3 million from year-end; excluding acquired loans, management reported growth of $140.4 million. Noninterest-bearing deposits rose $52.8 million from year-end, while interest-bearing deposits were nearly unchanged.
The allowance for loan losses was $41.9 million. Disclosed nonperforming loans were 0.63% of loans excluding FDIC-covered loans, versus 0.80% at December 31, 2014; the filing also reports 1.10% including covered loans. Nonperforming assets were 1.43% of total assets, down from 1.76% at year-end. Other real estate owned declined to $27.1 million from $34.5 million.
Cash and cash equivalents were $155.0 million. For the first half, operating cash flow was negative $32.4 million, investing cash flow negative $45.7 million and financing cash flow positive $71.5 million, resulting in a $6.6 million decline in cash. Operating cash use reflected mortgage-loan production and funding: originations exceeded sale proceeds during the period, and loans held for sale increased to $108.0 million from $25.6 million at year-end. Available liquidity included $1.58 billion of unused FHLB lines and $70 million of unsecured bank lines, with none drawn on the latter at June 30.
Short-term borrowings were $64.2 million and long-term debt was $154.9 million. Company capital ratios were 10.45% common equity Tier 1, 12.52% Tier 1 risk-based and 13.55% total risk-based; the Bank’s corresponding ratios were 12.20%, 12.20% and 13.21%. Both exceeded the filing’s well-capitalized thresholds. The quarterly dividend was $0.17 per share.
Material changes, outlook and risks
- Mortgage originations increased to $407.9 million in the first half from $254.6 million a year earlier, supported by lower mortgage rates and recent hiring. Management elected to hold some loans for sale longer to collect additional interest.
- Management said it expects the efficiency ratio to continue improving from 2014 levels through revenue growth and expense control. It also described its interest-rate strategy as maintaining a slightly asset-sensitive position; modeled results depend on assumptions and actual outcomes may differ.
- Key risks identified include acquisition integration and customer retention, economic and interest-rate changes, competition, credit quality and loan concentrations, funding and liquidity, regulatory changes, and the adequacy of loan-loss estimates. Management reported no material change in market risk or risk factors from the 2014 Form 10-K.
- A Heritage-related shareholder lawsuit was settled subject to court approval. The settlement could involve $262,500 in attorneys’ fees and costs and would conclude the litigation if approved. The filing states the parties were preparing the approval pleadings.
- One pooled trust preferred security remained nonaccrual/payment-in-kind; its fair value was $10.0 million against $12.1 million amortized cost. No additional OTTI was recorded in the period. Management reported that disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Heritage’s post-close contribution, final purchase-accounting valuations, integration costs and realization of expected growth and cost benefits.
- Whether mortgage gains and production remain strong, and the earnings and liquidity effects of the larger mortgage-loans-held-for-sale balance.
- Net interest margin trends, deposit mix and pricing, and performance if rates change from the scenarios modeled by management.
- Loan quality trends, including restructured and acquired loans, nonperforming assets, commercial real estate exposure, and allowance adequacy.
- Liquidity and funding needs, particularly changes in short-term borrowings and the timing of cash conversion from mortgage loans.
- Court approval and final cost of the Heritage shareholder litigation settlement.