Renasant Corporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2019, not just the fourth quarter. Renasant is a regional banking and financial-services company operating in Mississippi, Tennessee, Alabama, Florida and Georgia, with Community Banks, Insurance and Wealth Management segments. The 2018 Brand acquisition expanded the company’s presence in greater Atlanta and affects year-over-year comparisons.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $542.6 million | $461.9 million |
| Net interest income | $443.7 million | $396.5 million |
| Net interest margin | 4.08% | 4.16% |
| Noninterest income | $153.3 million | $144.0 million |
| Noninterest expense | $374.2 million | $345.0 million |
| Net income | $167.6 million | $146.9 million |
| Diluted earnings per share | $2.88 | $2.79 |
| Return on average assets | 1.30% | 1.32% |
| GAAP efficiency ratio | 62.03% | 63.15% |
- Growth and funding: Year-end assets were $13.40 billion, loans $9.69 billion and deposits $10.21 billion. Loans grew 6.68%; excluding purchased loans, they increased 18.75%. Noninterest-bearing deposits rose to 24.99% of deposits from 22.89%.
- Credit: Provision for loan losses was $7.1 million; net charge-offs were $3.9 million, or 0.04% of average loans. Nonperforming loans rose to $36.3 million from $26.0 million, and nonperforming assets were 0.33% of total assets. The allowance was $52.2 million.
- Cash flow and liquidity: Operating cash flow was $163.6 million, investing cash flow was negative $505.9 million, and financing cash flow was $188.1 million. Cash and cash equivalents declined to $414.9 million from $569.1 million. Available unused FHLB lines were approximately $3.16 billion; the company also had $150 million in unsecured, uncommitted bank lines, with no balance outstanding.
- Debt and capital: Borrowings totaled $865.6 million, including $489.1 million short-term borrowings and $376.5 million long-term debt. Company total risk-based capital was 13.78%; the Bank’s was 13.36%. Both exceeded the stated “well capitalized” thresholds.
Material changes versus the prior comparable period
- Net income increased 14.1% and diluted EPS rose 3.2%. Net interest income grew 11.9%, principally from higher average earning assets, Brand-related scale and organic loan growth.
- Net interest margin declined 8 basis points. Deposit costs rose as competition increased; the Federal Reserve cut rates three times in 2019.
- Noninterest income increased 6.5%, supported by Brand and mortgage banking. The Durbin Amendment reduced interchange fees by approximately $6 million in the second half of 2019.
- Noninterest expense rose 8.4%, driven largely by Brand, hiring and operating costs. Merger expense fell to $0.3 million from $14.2 million in 2018. Adjusted efficiency ratio, a non-GAAP measure, was 60.48%, compared with 59.22%.
- Mortgage banking income increased to $57.9 million from $50.1 million, while a $1.8 million mortgage servicing rights valuation adjustment reflected faster-than-estimated prepayments as mortgage rates fell.
- Commercial real estate, construction and C&I lending carry elevated concentration exposure; 81.92% of loans had real estate as a primary or secondary component of collateral. Nonperforming loans increased year over year, although management described overall credit quality as strong.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management said it expects the efficiency ratio to improve through revenue growth and expense control.
- CECL took effect January 1, 2020. The filing gives differing estimates: an after-tax reduction of approximately $31–$40 million to opening equity in the risk/regulatory discussion; elsewhere, an expected $35–$45 million increase in the allowance for credit losses and $10–$15 million increase in reserves for unfunded commitments. Management noted estimates remained subject to final model assumptions. Verify the final recorded impact.
- Principal stated risks include economic weakness in the company’s regional markets, commercial real estate and borrower concentration, loan-loss estimation, interest-rate and funding pressures, acquisition integration, cybersecurity, regulatory costs and the transition away from LIBOR. The filing also identified the emerging coronavirus outbreak as a potential economic risk.
- There were no material pending legal proceedings disclosed. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- In the fourth quarter, net income was $38.4 million and diluted EPS was $0.67, versus $44.4 million and $0.76 in fourth-quarter 2018. Fourth-quarter provision for loan losses was $3.0 million.
Important facts for investors to verify
- Final CECL adoption adjustment to equity, allowance and unfunded-commitment reserves, and any regulatory-capital phase-in effects.
- Drivers and severity of the increase in nonperforming loans, including the commercial and residential exposures and reserve coverage.
- Whether organic loan growth and deposit mix improvements can offset higher funding costs and pressure on net interest margin.
- Durbin-related fee reductions and mortgage-servicing valuation sensitivity if rates or prepayment speeds change.
- Acquisition integration, goodwill of $939.7 million, and ability to achieve growth while controlling expenses.