Renasant Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with FY 2014. Renasant is a regional banking and financial-services holding company operating in Mississippi, Tennessee, Alabama, Florida and Georgia, with community banking, insurance and wealth-management segments. Financial amounts below are in millions of dollars unless otherwise noted.
Key financial results
| Metric | FY 2015 | FY 2014 | Change / context |
|---|---|---|---|
| Net interest income | $241.4 | $202.5 | Up 19.2%; fully taxable-equivalent net interest income was $248.6, up $39.3. |
| Net interest margin | 4.16% | 4.12% | Fully taxable-equivalent basis. |
| Provision for loan losses | $4.8 | $6.2 | Lower provision and improved credit measures. |
| Noninterest income | $108.3 | $80.5 | Up 34.5%, chiefly from Heritage and mortgage banking. |
| Noninterest expense | $245.1 | $190.9 | Includes $11.6 of merger-related expense, versus $0.7. |
| Net income | $68.0 | $59.6 | Up 14.1%. |
| Diluted EPS | $1.88 | $1.88 | Flat despite higher net income; share count rose with the Heritage stock issuance. |
| Return on average assets / equity | 0.99% / 7.76% | 1.02% / 8.61% | Both declined year over year. |
| Efficiency ratio | 68.68% | 65.88% | Higher; merger expenses added approximately 325 basis points in 2015. |
Fourth-quarter results
Unaudited Q4 2015 net income was $21.2 million and diluted EPS was $0.52, compared with $15.6 million and $0.49 in Q4 2014. Q4 2015 provision for loan losses was $1.8 million.
Balance sheet, liquidity and capital at December 31, 2015
- Total assets were $7,926.5 million, up from $5,805.1 million; loans, net of unearned income, were $5,413.5 million versus $3,987.9 million.
- Deposits were $6,218.6 million, including $1,278.3 million of noninterest-bearing deposits. Cash and cash equivalents were $211.6 million.
- Total borrowings were $570.5 million: $422.3 million short-term and $148.2 million long-term. Short-term borrowings included $400.0 million in overnight FHLB borrowings, used in part to fund mortgage loans held for sale.
- Available unused FHLB credit was $1,659.8 million; correspondent-bank lines totaled $75.0 million and were undrawn. Operating cash flow was $252.6 million; investing cash flow was negative $247.4 million and financing cash flow was positive $44.8 million.
- Company capital ratios were 9.16% leverage, 9.99% common equity Tier 1, 11.51% Tier 1 risk-based and 12.32% total risk-based. The Bank’s corresponding ratios were 8.82%, 11.09%, 11.09% and 11.89%; both exceeded the stated “well-capitalized” thresholds.
- Book value per share was $25.73, and annual cash dividends were $0.68 per share.
Material changes and notable items
- Heritage acquisition: Completed July 1, 2015, for a transaction value of approximately $295.4 million. Renasant issued about 8.64 million shares and paid $5.9 million to option holders. The acquired fair-value assets were approximately $2.0 billion, including $1.46 billion in loans, and assumed liabilities were $1.72 billion, including $1.38 billion in deposits. Goodwill of $171.2 million was recorded; purchase-price allocations remained preliminary. Heritage’s results are included only from the acquisition date, and the company said separate acquired revenue and expense amounts were impracticable to disclose after system conversion and integration.
- Loan and deposit growth: Year-end loans rose $1.43 billion and deposits rose $1.38 billion, primarily due to Heritage. Excluding acquired loans, loans grew $562.9 million during 2015.
- Mortgage banking: Mortgage banking income increased to $35.8 million from $14.9 million; mortgage originations for sale rose to $1.48 billion from $547.4 million. Loans held for sale were $225.3 million at year-end, compared with $25.6 million.
- Credit quality: Net charge-offs fell to $4.6 million, or 0.10% of average loans, from $11.5 million, or 0.29%. Total reported nonperforming loans were $45.4 million (0.84% of loans); excluding covered assets, management reported a 0.72% ratio. The allowance for loan losses was $42.4 million.
- Pending KeyWorth transaction: A definitive agreement was signed for an all-stock acquisition valued at approximately $58.7 million; closing was expected in Q2 2016, subject to shareholder approval and customary conditions. KeyWorth reported approximately $407.8 million in assets, $252.1 million in loans and $355.1 million in deposits at year-end.
- Other unusual items: A shareholder lawsuit relating to the Heritage merger was settled and concluded after court approval in November 2015; attorney fees and costs were $262,500. No other material pending legal proceedings were reported. Auditors issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Outlook, commentary and principal risks
The filing gives no quantified earnings or revenue guidance. Management said it expects the efficiency ratio, excluding merger expenses, to improve from 2014 and 2013 levels through revenue growth and expense control. It described the balance sheet as slightly asset-sensitive and intended to maintain a modestly asset-sensitive position, emphasizing variable-rate loan production and less rate-sensitive deposits. In modeled rate shocks, a 100-basis-point increase reduced projected net interest income by 0.20% over months 1–12 and increased it by 2.21% over months 13–24; actual outcomes may differ because the analysis depends on assumptions.
- Credit exposure is concentrated in real estate: 85.47% of loans had real estate as a primary or secondary collateral component, and commercial real estate loans were 46.80% of total loans. Management identified deterioration in property values, local economies or borrower cash flows as potential sources of increased losses.
- Integration, asset-quality estimates and realization of expected benefits from Heritage—and the pending KeyWorth transaction—could affect costs, customer retention, credit quality and earnings. Heritage purchase accounting was not final.
- Interest-rate changes, continued low rates, deposit competition, liquidity needs and borrower repayment capacity may affect margins, funding costs and loan performance. Growth in mortgage activity also contributed to elevated short-term borrowing.
- FDIC loss-sharing arrangements reimburse 80% of eligible losses on covered assets, but coverage periods are expiring at different dates; post-expiration losses may not qualify, and certain transactions require FDIC consent.
- The filing also cites regulatory and compliance costs, intense competition, cybersecurity and service-disruption risks, and possible adverse economic or severe-weather events in its markets.
Most important facts for investors to verify
- How Heritage integration, preliminary purchase accounting and acquired-loan performance affect future earnings, goodwill and credit provisions.
- Whether organic loan and core-deposit growth continue, and whether the $400 million year-end overnight borrowing balance declines as mortgage funding needs change.
- Trends in commercial real estate concentrations, nonperforming loans, the allowance and charge-offs, with acquired and FDIC-covered assets clearly distinguished.
- Whether mortgage banking income and its unusually high 2015 production are sustainable, and how interest rates affect mortgage servicing rights and gain-on-sale revenue.
- Completion, terms and integration results of the KeyWorth acquisition, including any share dilution and expected synergies.
- Capital and liquidity headroom after the phased Basel III conservation buffer, and the effect of any future capital issuance or regulatory changes.