Business context and reporting period
Renasant Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013. The company provides banking, insurance and wealth-management services across Mississippi, Tennessee, Alabama and Georgia. Financial amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net interest income | $34.4 | $33.4 | $67.8 | $66.3 |
| Provision for loan losses | $3.0 | $4.7 | $6.1 | $9.5 |
| Noninterest income | $17.3 | $16.3 | $34.7 | $32.7 |
| Noninterest expense | $37.7 | $36.8 | $75.3 | $73.4 |
| Net income | $8.0 | $6.3 | $15.6 | $12.3 |
| Diluted EPS | $0.32 | $0.25 | $0.62 | $0.49 |
| Tax-equivalent net interest margin | 3.88% | 3.98% | 3.89% | 3.92% |
| Efficiency ratio | 71.05% | 71.78% | 71.55% | 72.00% |
- Q2 net income increased 26.4% year over year; first-half net income increased 26.6%. Lower loan-loss provisions and lower funding costs helped, while asset yields and net interest margins declined.
- Mortgage-loan sale gains rose to $3.9 million in Q2 and $7.4 million in the first half, versus $2.4 million and $3.7 million, respectively, a year earlier. First-half mortgage originations for sale were $374.4 million, compared with $233.3 million.
- Q2 noninterest expense included $0.4 million of merger-related costs. Salaries and benefits rose, partly reflecting mortgage-production commissions and staffing for newer markets; OREO expense fell year over year.
Balance sheet, liquidity and credit
- Total assets were $4,249.3 million at June 30, up from $4,178.6 million at year-end 2012. Loans were $2,884.5 million, up $74.3 million; deposits were $3,505.2 million, up $43.9 million.
- Cash and cash equivalents were $79.0 million, down from $132.4 million at year-end. First-half operating cash flow was $58.0 million; investing activities used $178.3 million and financing activities provided $66.9 million. Net cash decreased $53.4 million.
- Short-term borrowings were $42.8 million and long-term debt was $153.0 million. The company reported $995.3 million of remaining FHLB credit availability and $87.5 million of unused lines with other banks. Total shareholders’ equity was $500.7 million.
- Renasant Bank’s capital ratios were 9.63% Tier 1 leverage, 12.64% Tier 1 risk-based and 13.89% total risk-based; the bank was reported as well capitalized.
- Nonperforming loans not covered by FDIC loss-share agreements were $22.5 million, or 0.84% of total loans, versus 1.17% at year-end 2012. The allowance was $47.0 million, equal to 1.63% of total loans; first-half net charge-offs were $3.4 million, or 0.24% of average loans on an annualized basis. Total OREO was $61.1 million, down from $90.3 million at year-end.
- FDIC loss-share agreements cover 80% of eligible losses on covered assets. Covered loans declined to $201.5 million from $237.1 million, and the related indemnification asset declined to $30.7 million from $44.2 million.
Material changes, outlook and risks
- Growth in average loan balances and lower deposit and borrowing costs supported net interest income, but yields on earning assets fell and margins narrowed. Management attributed the margin pressure to asset yields declining more than funding costs.
- Management said it intended to continue resolving covered commercial problem loans and expected covered-loan balances to continue declining. It cited improving credit-quality measures as a reason for lower provisions, while noting ongoing borrower, collateral-value and economic risks.
- The proposed First M&F Corporation acquisition, announced at an estimated $118.8 million transaction value in stock, had shareholder approval and was expected to close in Q3 2013, subject to regulatory approval and other customary conditions. Management identified integration, customer retention and growth as risks. Two shareholder lawsuits had been brought relating to the transaction; one was dismissed and the other no longer sought to enjoin the merger, with settlement formalities and court approval still pending.
- No earnings or revenue guidance is provided. Management identified interest-rate changes, credit quality, economic conditions, competition, regulation, deposit funding and acquisition integration among the risks to future results. It also noted potential pressure on overdraft and debit-card fee income from regulation.
- Available-for-sale securities generated a $5.7 million net-of-tax other comprehensive loss in the first half, primarily reflecting unrealized securities losses. Four pooled trust-preferred securities, with $16.0 million fair value and $27.7 million amortized cost, remained nonaccruing; no additional impairment was recorded in the period.
- The company said July 2013 banking-capital rules take effect after January 1, 2015 and projected it would remain above well-capitalized requirements. This is management’s projection, not a guarantee.
Important facts for investors to verify
- Whether the First M&F acquisition received regulatory approval, closed as expected and achieved anticipated integration and retention outcomes.
- Subsequent trends in net interest margin, loan yields, funding costs and mortgage-sale income as market rates and mortgage production change.
- Whether improving nonperforming-loan and OREO trends continue, and whether the allowance remains adequate against commercial real-estate and other credit exposures.
- Future valuation, cash flows and impairment status of the nonaccruing trust-preferred securities, and the timing and collectibility of FDIC loss-share reimbursements.
- Liquidity and funding trends, including cash balances, deposit mix, short-term borrowings and available borrowing capacity.
- Resolution of the remaining acquisition-related litigation and any material effect on the transaction.