Renasant Corporation (NASDAQ: RNST) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Renasant operates community banking, insurance and wealth-management businesses across Mississippi, Tennessee, Georgia, Alabama and north Florida. Amounts below are in millions of dollars unless noted.
Financial results and position
- Earnings: Net income was $2.0 million, or $0.04 per diluted share, versus $45.1 million, or $0.77 per share, in Q1 2019. Pretax income fell to $2.8 million from $58.7 million.
- Revenue and margin: Net interest income was $106.6 million versus $113.1 million; noninterest income was $37.6 million versus $35.9 million. Net interest margin on a fully tax-equivalent basis declined to 3.75% from 4.27%. The filing attributes the margin pressure chiefly to lower asset yields following Federal Reserve rate cuts.
- Credit costs and expenses: Provision for loan losses rose to $26.4 million from $1.5 million. Noninterest expense increased to $115.0 million from $88.8 million. GAAP efficiency ratio was 78.86%, compared with 59.02%; adjusted efficiency ratio was 70.92%, compared with 57.62% (non-GAAP).
- Cash flow: Operating cash flow was negative $123.0 million and investing cash flow negative $130.3 million; financing provided $476.2 million. Cash and cash equivalents increased $222.8 million during the quarter to $637.8 million. Mortgage-loan funding and sales were significant operating cash-flow items.
- Balance sheet and liquidity: Total assets were $13.90 billion. Loans held for investment were $9.77 billion, up from $9.69 billion at year-end; deposits were $10.41 billion, up from $10.21 billion. Noninterest-bearing deposits were 25.37% of deposits. Short-term borrowings were $803.0 million, primarily $780.0 million of FHLB advances; long-term debt was $376.6 million. The company reported $2.83 billion of remaining FHLB borrowing availability.
- Credit quality and capital: The allowance for loan losses was $120.2 million, or 1.23% of total loans, versus $52.2 million, or 0.55%, at year-end. Nonperforming loans were $50.0 million (0.51% of loans), up from $36.3 million (0.37%). The company’s CET1, total risk-based capital and leverage ratios were 10.63%, 13.44% and 9.90%, respectively; the bank’s corresponding ratios were 12.28%, 13.02% and 10.46%. Each exceeded the stated well-capitalized thresholds.
Material changes and unusual items
- Renasant adopted CECL on January 1, 2020. Adoption increased the loan-loss allowance by $42.5 million and the reserve for unfunded commitments by $10.4 million, reducing retained earnings by $35.1 million after tax. A further $26.4 million loan-loss provision was recorded in Q1, reflecting COVID-19-related economic uncertainty. The company elected regulatory-capital transition relief, so reported regulatory ratios were not affected by CECL adoption in this quarter.
- Mortgage banking income increased to $15.5 million from $10.4 million, supported by higher mortgage production and loan-sale gains, but included a $9.6 million negative mortgage-servicing-rights valuation adjustment as prepayments accelerated. Management disclosed an estimated $0.12 per-share after-tax impact from this adjustment.
- COVID-19-related expenses were $2.9 million pre-tax, with an estimated $0.04 per-share after-tax impact. Management said the amount included employee-related costs and branch protective supplies and cleaning.
- The company repurchased 818,886 shares for approximately $24.5 million before suspending its buyback program in response to the pandemic. The quarterly dividend was $0.22 per share.
- Mortgage production was approximately $1.90 billion, compared with $654 million in Q1 2019. Management cited the interest-rate environment and additional originators as contributing factors.
Outlook, management commentary and risks
- The filing provides no numerical earnings or revenue guidance. Management said elevated pandemic-response expenses may continue, growth conditions remain challenging, and the duration and financial effects of the pandemic are difficult to predict.
- By April 30, the company had granted temporary 90-day payment deferrals on approximately 3,500 loans totaling about $1.7 billion, or 18% of its loan portfolio by dollar value. These modifications were not classified as troubled debt restructurings under the cited guidance. Renasant also reported approving more than $1.1 billion in PPP loans to thousands of small businesses beginning in April.
- Management highlighted heightened credit risk, particularly for hospitality, restaurants, entertainment and retail, and proactively moved certain larger exposures in vulnerable industries to Pass-Watch status. It reported no material energy-industry exposure and said COVID-19 could lead to further allowance increases and customer defaults.
- Other disclosed risks include recession and regional economic weakness, borrower concentration and collateral values, interest-rate and funding-cost movements, cybersecurity and fraud risks from remote operations, and possible vendor or operational disruptions. Management described its interest-rate position as asset-sensitive under its modeled scenarios; actual outcomes may differ from simulations.
Important facts for investors to verify
- How CECL assumptions, economic forecasts and loan deferrals affect subsequent provisions, nonperforming loans and charge-offs.
- The performance and eventual repayment status of the approximately $1.7 billion of deferred loans, including exposures to vulnerable industries.
- Whether mortgage production and gains persist, and whether faster prepayments cause additional MSR valuation losses.
- The sustainability of net interest margin amid lower interest rates, deposit repricing and increased wholesale borrowing.
- Liquidity and funding trends, including FHLB borrowings, public-fund deposits, PPP-related funding needs and capital ratios as pandemic impacts evolve.