Business context and reporting period
Renasant Corporation’s Form 10-K covers the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing. Renasant is a regional bank holding company operating through community banks, insurance and wealth management businesses across Mississippi, Tennessee, Alabama and Georgia. Its audited consolidated financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise.
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $133.3 | $129.3 |
| Provision for loan losses | $18.1 | $22.4 |
| Noninterest income | $68.7 | $64.7 |
| Noninterest expense | $150.5 | $137.0 |
| Net income | $26.6 | $25.6 |
| Diluted earnings per share | $1.06 | $1.02 |
| Net interest margin, tax-equivalent | 3.94% | 3.77% |
| Efficiency ratio | 72.35% | 68.54% |
- Interest income declined 6.7% to $159.3 million, but interest expense fell 37.3% to $26.0 million as funding costs declined and higher-cost funding was replaced with lower-cost deposits. Net interest income rose 3.1%.
- Loan balances were $2.810 billion, up 8.9%; deposits were $3.461 billion, up 1.4%. Commercial real estate was 50.76% of loans, and 86.67% of loans had real estate as a primary or secondary collateral component.
- Asset quality improved: net charge-offs fell to $18.1 million, or 0.67% of average loans, from $23.4 million, or 0.91%. Nonperforming loans excluding FDIC-covered assets were $30.2 million, down from $34.9 million; restructured loans declined to $29.4 million from $36.3 million. The allowance for loan losses was $44.3 million.
- Year-end assets were $4.179 billion, shareholders’ equity $498.2 million and cash and cash equivalents $132.4 million. Total deposits were $3.461 billion; borrowings were $164.7 million, including $75.6 million in junior subordinated debentures. Renasant Bank’s total risk-based capital ratio was 13.73%; its leverage ratio was 9.67%, and it was classified as well capitalized.
- Operating cash flow was $177.7 million; investing activities used $196.8 million and financing activities used $57.5 million. Cash and cash equivalents decreased $76.6 million during the year. The bank also reported $1.161 billion of remaining FHLB credit availability and $85 million of uncommitted correspondent-bank lines, with no amounts drawn on the latter at year-end.
- Fourth-quarter 2012 net income was $7.3 million, or $0.29 per diluted share, compared with $5.8 million, or $0.23, in fourth-quarter 2011.
Material changes versus the prior comparable period
- Net income increased 3.9%, supported by higher net interest income, lower loan-loss provision and increased mortgage-related income. The 2012 result did not include acquisition gains; 2011 included a $9.3 million gain on acquisitions, while 2010 included a $42.2 million Crescent acquisition gain.
- Noninterest income rose 6.2%, including mortgage-loan sale gains of $12.5 million versus $4.1 million in 2011. Wealth Management revenue increased to $6.9 million from $4.9 million.
- Noninterest expense rose 9.9% to $150.5 million, driven principally by salaries and benefits, mortgage-production commissions, health insurance and costs of newer branches. The efficiency ratio consequently worsened.
- Loans grew while deposits increased modestly; management said Georgia deposits fell by $78.3 million because of intentional time-deposit runoff. Securities declined to $674.1 million from $796.3 million, as proceeds helped fund loan growth and reduce borrowings.
- Nonperforming assets, including FDIC-covered assets and nonaccruing securities, declined to $188.7 million from $250.1 million. Other real estate owned fell to $90.3 million from $113.2 million, although 2012 included $7.3 million of write-downs in OREO expense.
Outlook, commentary, risks and unusual items
- Management expected the efficiency ratio to improve as newer branches mature, credit costs continue to decline and unusually high 2012 health-insurance costs moderate. This is qualitative commentary; the filing gives no formal earnings or revenue guidance.
- On February 7, 2013, Renasant announced an all-stock agreement to acquire First M&F Corporation for an exchange ratio of 0.6425 Renasant shares per First M&F share; the stated transaction value was approximately $118.8 million. Closing was expected in the third quarter of 2013, subject to shareholder, regulatory and other approvals. Management expected capital ratios to remain above well-capitalized requirements and did not expect a material adverse liquidity effect.
- Key risks include the concentration in commercial real estate and other real-estate-secured lending, economic and collateral-value deterioration, interest-rate sensitivity, liquidity and deposit competition, regulatory change, and execution and integration risks from acquisitions. The company also disclosed cyber-security, operational, environmental and severe-weather risks.
- FDIC loss-share agreements cover specified acquired assets and generally reimburse 80% of eligible losses, subject to contractual terms and time limits. Covered loans declined to $237.1 million from $339.5 million; the related indemnification asset declined to $44.2 million from $107.8 million. The FDIC can delay or refuse payments for noncompliance with agreement terms.
- Four pooled trust preferred securities, with $28.6 million cost and $15.1 million fair value, remained nonaccrual at year-end. No additional impairment was recognized in 2012; their valuation relies on significant unobservable assumptions.
- Management reported no material pending legal proceedings in the business section; the financial-statement notes separately refer to various claims and lawsuits and state that management did not expect a material effect.
Most important facts for investors to verify
- Whether loan growth, particularly commercial real estate growth, is accompanied by stable underwriting, collateral values and credit performance.
- Whether reductions in nonperforming loans and OREO persist, and whether the $44.3 million allowance remains adequate as FDIC-covered balances and loss protection run off.
- Whether lower funding costs and improved net interest margin can offset continued pressure on asset yields and the increased operating expense base.
- How much recurring earnings depend on mortgage refinancing and loan-sale gains, and whether management’s expected efficiency-ratio improvement is achieved.
- First M&F transaction approvals, final economics, preferred-stock and warrant treatment, integration costs, and actual effects on capital and liquidity.
- The recoverability and valuation of pooled trust preferred securities, FDIC indemnification balances, deferred tax assets and other significant estimates.