Renasant Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; figures are consolidated and in U.S. dollars. This is an annual filing, not a standalone fourth-quarter report. Renasant operates community banking, insurance and wealth-management businesses across Mississippi, Tennessee, Alabama, Florida and Georgia.
Financial results and condition
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Net interest income | $396.5 million | $336.9 million | Up 17.7% |
| Noninterest income | $144.0 million | $132.1 million | Up 8.9% |
| Net revenue (net interest income plus noninterest income) | $540.5 million | $469.0 million | Up 15.3% |
| Net income | $146.9 million | $92.2 million | Up 59.4% |
| Diluted earnings per share | $2.79 | $1.96 | Up 42.4% |
| Net interest margin | 4.16% | 4.16% | Flat |
| Noninterest expense | $345.0 million | $301.6 million | Up 14.4% |
| Provision for loan losses | $6.8 million | $7.6 million | Down $0.7 million |
Interest income rose with loan growth, acquisition-related balances and higher variable-rate loan yields. Funding costs also increased: interest expense rose to $65.3 million from $37.9 million, as deposit and borrowing rates increased. The reported effective tax rate fell to 22.12% from 42.34%; 2017 included a $14.5 million deferred-tax-asset write-down following federal tax reform.
- Balance sheet: Total assets were $12.93 billion, up from $9.83 billion. Loans, net of unearned income, were $9.08 billion versus $7.62 billion; deposits were $10.13 billion versus $7.92 billion.
- Credit quality: Net charge-offs were $4.0 million, or 0.05% of average loans, versus $4.1 million and 0.06%. Nonperforming loans were $26.0 million (0.29% of loans), compared with $23.4 million (0.31%). The allowance for loan losses was $49.0 million; allowance coverage of total nonperforming loans was 188.77%.
- Cash flow and liquidity: Cash and cash equivalents ended the year at $569.1 million, up from $281.5 million. Net cash from operating activities was $77.4 million versus $201.6 million; investing activities used $498.6 million, while financing activities provided $708.8 million. The Bank had $3.30 billion available on unused FHLB lines and $150 million in uncommitted correspondent-bank lines, with no amounts drawn on the latter.
- Debt and capital: Borrowings totaled $651.3 million, including $387.7 million short-term borrowings and $263.6 million long-term debt. Company total risk-based capital was 14.12%; the Bank’s was 13.58%. The Company’s GAAP shareholders’ equity-to-assets ratio was 15.80%; tangible common equity-to-tangible assets, a non-GAAP measure, was 8.92%.
- Cash returns: Dividends were $0.80 per share for the year. The Company repurchased 199,065 shares for $7.1 million in the fourth quarter under a $50 million authorization.
Material changes and notable items
- Renasant acquired Brand Group Holdings on September 1, 2018, in a transaction valued at approximately $474 million. It issued 9.31 million shares and paid cash; the acquisition added about $2.34 billion of assets, including $1.59 billion of loans, and $1.71 billion of deposits. The acquisition expanded the Atlanta presence. Purchase accounting valuations were not final, and $321.9 million of goodwill was recorded.
- Growth in average assets and earnings also reflects the 2017 Metropolitan acquisition and organic loan growth. Excluding purchased loans, loans grew 14.34% year over year.
- Merger and conversion expenses rose to $14.2 million from $10.4 million and reduced 2018 diluted EPS by $0.21, according to management. Salaries and benefits, the largest expense category, rose 16.1%.
- Mortgage banking income was $50.1 million versus $43.4 million in 2017; 2018 included $3.7 million from Brand Mortgage Group before its October divestiture. Management attributed lower mortgage refinancing activity versus 2016 to higher mortgage rates.
- The 2017 results included the $14.5 million tax revaluation charge, reducing diluted EPS by $0.31. The 2016 comparison included a $2.1 million FDIC loss-share termination charge and $2.5 million debt prepayment penalties.
- Fourth-quarter 2018 net income was $44.4 million and diluted EPS was $0.76, versus $16.5 million and $0.33 in fourth-quarter 2017. The comparison is affected by tax and acquisition timing; fourth-quarter 2018 merger expense was part of the full-year $14.2 million.
Outlook, risks and contingencies
- Management provided no quantified earnings or revenue guidance. It said it expects the efficiency ratio to improve through revenue growth and expense control. The GAAP efficiency ratio was 63.15% in 2018; adjusted, non-GAAP efficiency ratio was 59.22%.
- Starting July 1, 2019, the Bank is subject to the Durbin Amendment interchange-fee cap after exceeding $10 billion in assets. Management said it was developing strategies to offset the expected fee impact. The filing does not quantify the expected reduction.
- CECL credit-loss accounting was scheduled to take effect in 2020. Management said the adoption impact was not yet known and could materially increase reserves and create more allowance volatility.
- Credit concentration merits attention: approximately 83.53% of loans had real estate as a primary or secondary collateral component; commercial real estate loans were approximately $4.52 billion. Management identified economic weakness, real-estate values, borrower repayment capacity and adequacy of the allowance as material risks.
- Other identified risks include interest-rate and funding-cost changes, competition, acquisition integration and goodwill valuation, cybersecurity and third-party system failures, regulatory costs, and the planned LIBOR transition. The filing notes that the Brand acquisition’s fair values remained subject to change.
- Unfunded loan commitments were $2.07 billion and standby letters of credit were $104.7 million. Management said pending claims and lawsuits were not expected to have a material effect. No material legal proceedings were reported.
- Management and the auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued unqualified opinions on the financial statements and internal controls.
Key facts investors should verify
- Track Brand integration, customer and deposit retention, realization of expected synergies, and final purchase-accounting adjustments.
- Assess underlying earnings apart from acquisition-related costs and the 2017 tax revaluation; compare GAAP results with management’s non-GAAP adjustments.
- Monitor deposit pricing, short-term FHLB borrowing, net interest margin and the actual revenue effect of the Durbin cap.
- Review commercial real-estate and other property-related credit trends, purchased-loan performance, nonperforming loans and allowance adequacy.
- Follow the CECL implementation estimates and the effect of the LIBOR transition on loans, debt and hedging instruments.
- Confirm the figures and definitions in the audited financial statements and notes; annual results include Brand only from its September 1, 2018 acquisition date.