Business context and reporting period
Renasant Corporation is a regional banking, insurance and wealth-management company operating across Mississippi, Tennessee, Georgia, Alabama and north Florida. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons are principally with the corresponding 2019 periods, and balance-sheet comparisons are with December 31, 2019. Dollar amounts below are rounded to millions unless otherwise noted.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $106.3 | $108.8 | $318.7 | $334.8 |
| Noninterest income | $70.9 | $38.0 | $172.7 | $115.8 |
| Net income | $30.0 | $37.4 | $52.1 | $129.2 |
| Diluted EPS | $0.53 | $0.64 | $0.92 | $2.21 |
| Net interest margin, fully tax-equivalent | 3.29% | 3.98% | 3.47% | 4.14% |
| GAAP efficiency ratio | 65.16% | 65.10% | 70.49% | 61.25% |
- Net interest income plus noninterest income was approximately $177.2 million in Q3 and $491.3 million for the first nine months. The filing reports no separate line called total revenue.
- Mortgage banking income rose to $49.7 million in Q3 from $15.7 million, and to $110.7 million year to date from $42.7 million, largely on higher mortgage production and loan-sale gains. Nine-month mortgage loan originations were $3.28 billion, versus $1.68 billion.
- Credit costs increased sharply: provision for loan losses was $23.1 million in Q3 and $76.4 million year to date, compared with $1.7 million and $4.1 million, respectively. The allowance for loan losses was $168.1 million, or 1.52% of loans (1.72% excluding PPP loans); coverage of nonperforming loans was 367%.
- Noninterest expense was $116.5 million in Q3 and $349.8 million year to date. The year-to-date total includes $8.7 million provision for unfunded commitments and $9.7 million of COVID-related expenses; GAAP efficiency ratio was 70.49%, versus 61.25%.
- At September 30, total assets were $14.81 billion, loans held for investment were $11.08 billion, and deposits were $11.93 billion. Loans grew $1.40 billion from year-end; deposits grew $1.72 billion. Noninterest-bearing deposits were 31.49% of deposits, up from 24.99% at year-end.
- Cash and cash equivalents were $414.1 million, little changed from $414.9 million at year-end. Nine-month operating cash flow was $44.0 million; investing cash outflow was $1.36 billion and financing cash inflow was $1.31 billion.
- Short-term borrowings fell to $42.6 million from $489.1 million at year-end. Long-term debt rose to $475.1 million from $376.5 million, including $100 million of 4.50% fixed-to-floating subordinated notes issued in September. The company reported $3.59 billion of available FHLB credit and $180 million of unused commercial-bank lines.
- Shareholders’ equity was $2.10 billion. At September 30, the company’s CET1, Tier 1 and total capital ratios were 10.80%, 11.79% and 14.89%; the bank’s were 12.38%, 12.38% and 13.53%. Both exceeded stated well-capitalized thresholds.
Material changes versus prior periods
- Net income and EPS declined year over year, especially year to date, reflecting the larger credit-loss provision, lower net interest income and higher expenses. Lower market rates reduced asset yields; the company partly offset this by reducing deposit costs.
- Mortgage banking drove much of the increase in noninterest income. Conversely, the company recorded $13.7 million of MSR valuation adjustments for the first nine months, mainly reflecting faster mortgage prepayments; Q3 included an $0.8 million recovery.
- CECL adoption on January 1 increased the loan allowance by $42.5 million and the reserve for unfunded commitments by $10.4 million, reducing retained earnings by $35.1 million after tax.
- PPP lending contributed $1.31 billion of loans at quarter-end and helped drive deposit growth. PPP loans carry a statutory 1% rate and reduced Q3 net interest margin by 12 basis points, according to management.
- Nonperforming loans increased to $45.8 million from $36.3 million at year-end; nonperforming assets were $53.9 million. Management attributed $4.7 million of the increase in nonaccruing loans to CECL treatment of purchased credit-deteriorated loans. Loans on COVID deferral declined to 1,269, totaling about $497 million, from 5,200 loans and $2.09 billion at June 30.
Outlook, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management said elevated COVID-related expenses were expected to continue and described continued uncertainty around the pandemic’s duration, economic recovery, unemployment and borrower performance.
- Management’s credit-loss estimate incorporated a two-year reasonable-and-supportable forecast, including expectations of elevated unemployment through 2020–2022 and negative to minimal GDP growth relative to pre-pandemic levels. The company continued heightened monitoring of hospitality and healthcare exposures.
- COVID-19 remains the principal stated risk: further economic weakness, business restrictions, customer defaults, credit-line draws and additional allowance needs could adversely affect results, liquidity, asset quality and capital. Remote work and increased online activity also raise cybersecurity and fraud risks; vendor disruptions had not been material as of the filing.
- MSR values are sensitive to prepayment speeds and interest rates; management warned that further rate declines or faster prepayments could lead to additional negative valuation adjustments. The company is also transitioning away from LIBOR and was evaluating the accounting impact.
- On October 20, 2020, the board authorized a new $50 million repurchase program, but management said it had no current plans to begin repurchases. Branch lobbies reopened October 19 with capacity and safety restrictions.
- Other notable items: the company reported $20.3 million of restructured loans in compliance with modified terms; securities unrealized losses totaled $4.5 million, including $3.6 million on trust preferred securities, with no securities credit-loss allowance recorded. Regulatory capital benefited from elected transitional relief for CECL.
Important facts for investors to verify
- Whether the elevated provision and allowance adequately reflect COVID-related credit risk, particularly in commercial real estate, hospitality and healthcare, and how deferrals perform after relief ends.
- How much of mortgage banking income is sustainable, and the net effect of mortgage production, loan-sale gains, MSR valuation changes and prepayment assumptions.
- Whether deposit growth and lower funding costs persist as PPP balances are forgiven or spent, and whether loan growth can offset lower asset yields and margin pressure.
- The trajectory of nonperforming and restructured loans, charge-offs, CECL estimates and the unfunded-commitment reserve.
- Capital and liquidity headroom after subordinated-note issuance, future credit losses, dividends and any potential stock repurchases; also confirm applicable regulatory limits on distributions.