Renasant Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Renasant provides banking, insurance, and wealth-management services across Mississippi, Tennessee, Georgia, Alabama, and north Florida. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $105.8 | $112.8 | $212.4 | $225.9 |
| Provision for loan credit losses | $26.9 | $0.9 | $53.3 | $2.4 |
| Noninterest income | $64.2 | $42.0 | $101.7 | $77.8 |
| Noninterest expense | $118.3 | $93.3 | $233.3 | $182.1 |
| Net income | $20.1 | $46.6 | $22.1 | $91.7 |
| Diluted EPS | $0.36 | $0.80 | $0.39 | $1.56 |
| Net interest margin, fully tax-equivalent | 3.38% | 4.19% | 3.56% | 4.23% |
- Balance sheet at June 30: Assets were $14.90 billion, up from $13.40 billion at year-end 2019. Loans held for investment were $11.00 billion, including $1.28 billion of PPP loans. Deposits were $11.85 billion, up from $10.21 billion; noninterest-bearing deposits were 31.57% of deposits versus 24.99% at year-end.
- Credit and allowance: Allowance for loan credit losses was $145.4 million, or 1.32% of loans (1.50% excluding PPP loans), versus $52.2 million at year-end. Nonperforming loans were $44.1 million, 0.40% of loans; net charge-offs were $2.5 million for the first half, or 0.05% annualized of average loans.
- Liquidity and debt: Cash and cash equivalents were $616.9 million, compared with $414.9 million at year-end. Short-term borrowings were $341.8 million and long-term debt $376.7 million, totaling $718.5 million, down from $865.6 million. The company reported $3.33 billion of available FHLB capacity and $180 million in other bank lines, with none drawn.
- Cash flows, first half: Operating activities provided $54.9 million; investing activities used $1.29 billion, largely reflecting loan growth; financing activities provided $1.44 billion, including $1.63 billion of deposit growth. Cash and cash equivalents increased $202.0 million.
- Capital: Renasant Corporation’s CET1 ratio was 10.69% and total risk-based capital ratio 13.72%; Renasant Bank’s respective ratios were 12.33% and 13.30%. Both exceeded stated well-capitalized thresholds.
Changes versus comparable periods
- Net income fell 57% in Q2 and 76% in the first half year over year. Higher credit-loss provisions, lower net interest income, and increased expenses more than offset stronger mortgage banking revenue.
- Q2 mortgage banking income rose to $45.5 million from $16.6 million, driven by higher mortgage originations and loan-sale gains. Across the first half, originations were $2.02 billion versus $938.8 million.
- Net interest margin contracted as lower market rates reduced asset yields and excess liquidity weighed on returns. The Q2 average earning-asset yield was 3.95%, versus 5.11% a year earlier; lower deposit costs partly offset the decline.
- Loan balances increased $1.31 billion from year-end, substantially reflecting PPP lending. Excluding PPP, management described loan growth as moderate in commercial mortgages, largely offset by declines elsewhere.
- GAAP efficiency ratio increased to 68.92% in Q2 from 59.73%; first-half ratio was 73.49% versus 59.38%. Adjusted ratios, a company-defined non-GAAP measure, were 60.89% and 64.56%, respectively.
Outlook, risks, and unusual items
- COVID-19 and credit: Management cited substantial uncertainty around pandemic duration, unemployment, GDP, and economic recovery. The CECL estimate used a one-year reasonable-and-supportable forecast. Management flagged hotel/motel, restaurant, entertainment, and retail trade exposures for heightened monitoring. Further allowance increases may be required.
- Deferrals: Approximately 5,200 loans totaling $2.09 billion were on payment deferral at June 30, excluding PPP loans. Eligible borrowers could receive a second 90-day deferral; these pandemic deferrals were not classified as troubled restructurings under applicable guidance.
- Unusual items: The first-half provision for loan credit losses was $53.3 million, including the effect of CECL adoption, which reduced opening retained earnings by $35.1 million. The allowance increased $42.5 million on adoption. COVID-related expenses were $6.3 million in Q2 and $9.2 million in the first half. Mortgage-servicing-rights valuation adjustments were $5.0 million and $14.5 million, respectively, reflecting faster-than-assumed prepayments.
- Management commentary: Management expects the efficiency ratio to improve through revenue growth and expense control, but gave no numerical earnings or financial guidance. Branch lobbies remained generally appointment-only, and elevated pandemic-related operating costs were expected to continue while conditions remained challenging.
- Other risks and capital actions: The stock repurchase program was suspended in March; the company reported approximately $5.5 million of remaining authorization. Risks include pandemic-related borrower defaults, further credit-loss provisions, rate and margin changes, mortgage prepayments, operational/cybersecurity disruption, and uncertainty in government relief programs. The filing reports effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent performance, forgiveness, fee recognition, and repayment trends for the $1.28 billion PPP portfolio.
- How much of the $2.09 billion deferral balance returned to regular payment, and whether credit quality or charge-offs deteriorated after quarter-end.
- CECL assumptions and sensitivity of the $145.4 million allowance to unemployment, GDP, collateral values, and industry concentrations.
- Whether exceptional mortgage production persists and whether prepayment speeds drive further MSR valuation losses.
- Deposit stability, use of wholesale funding or the PPPLF, and preservation of capital and dividend capacity under prolonged stress.