Renasant Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Renasant provides banking, insurance, and wealth-management services across Mississippi, Tennessee, Alabama, and Georgia. Figures below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $50.0 | $33.4 in Q1 2013 |
| Net interest margin, tax-equivalent | 4.04% | 3.89% in Q1 2013 |
| Noninterest income | $18.6 | $17.3 in Q1 2013 |
| Noninterest expense | $47.6 | $37.6 in Q1 2013 |
| Net income / diluted EPS | $13.6 / $0.43 | $7.6 / $0.30 in Q1 2013 |
| Efficiency ratio | 67.85% | 72.03% in Q1 2013 |
| Total assets | $5,902.8 | $5,746.3 at Dec. 31, 2013 |
| Total loans, net of unearned income | $3,867.4 | $3,881.0 at Dec. 31, 2013 |
| Total deposits | $5,004.8 | $4,841.9 at Dec. 31, 2013 |
| Shareholders’ equity | $676.7 | $665.7 at Dec. 31, 2013 |
- Provision for loan losses was $1.45 million, down from $3.05 million in Q1 2013. Net charge-offs were $1.07 million versus $0.89 million; the allowance for loan losses was $48.0 million.
- Cash and cash equivalents were $301.6 million at quarter-end. Operating cash flow was $20.3 million; investing activities used $120.3 million and financing activities provided $155.0 million.
- There were no short-term borrowings at quarter-end. Long-term debt was $168.7 million, including $74.4 million of FHLB advances and $94.3 million of junior subordinated debentures.
- Reported capital ratios were 8.56% Tier 1 leverage, 11.54% Tier 1 risk-based, and 12.70% total risk-based for the holding company; the bank’s corresponding ratios were 8.30%, 11.24%, and 12.39%. Both exceeded the filing’s “well capitalized” thresholds.
Changes versus comparable periods
- Net income increased about 80% year over year, while diluted EPS rose from $0.30 to $0.43. Management attributed the improvement primarily to the First M&F acquisition, higher net interest margin, and improving credit quality.
- The year-over-year comparison is materially affected by the September 2013 First M&F acquisition: Q1 2014 includes its operations, while Q1 2013 does not. Average earning assets and average loans increased substantially as a result.
- Net interest income increased, supported by acquired balances, a higher loan yield, and lower funding costs. Interest expense nevertheless rose with the larger funding base. Noninterest expense also increased, notably salaries, occupancy, communications, and intangible amortization, largely reflecting the acquisition.
- Total loans declined modestly from year-end, although management said non-acquired, non-covered loans grew $62.0 million. Deposits increased $162.9 million, partly from seasonal public funds and growth in core deposits.
- Nonperforming loans were 0.72% of total loans, versus 0.74% at year-end and 1.08% a year earlier. Nonperforming assets were $141.2 million, or 2.39% of assets, including covered assets and nonaccruing securities.
Outlook, risks, and unusual items
- Management expected the efficiency ratio to improve from 2013 levels, citing revenue growth in acquired markets, maturation of de novo offices, and continued reductions in credit-related costs. The filing provides no specific earnings or revenue guidance.
- Mortgage originations for sale fell to $104.4 million from $159.1 million in Q1 2013; management noted that higher mortgage rates could further reduce refinancing and future originations.
- Four pooled trust-preferred securities had a $19.4 million fair value against $27.5 million amortized cost. They were nonaccrual; no additional impairment was recorded in the quarter. Their valuation uses significant unobservable inputs.
- FDIC loss-share agreements reimburse 80% of eligible covered-asset losses, subject to agreement terms. Management expected covered commercial loans to continue declining as it pursued resolutions; coverage periods are limited.
- Interest-rate sensitivity simulations showed estimated 12-month net interest income down 2.01% under a 100-basis-point rate decline and up 0.51% under a 400-basis-point rise. The filing cautions that modeling assumptions and actual results may differ.
- Other risks include acquisition integration and customer retention, credit quality and collateral values, interest rates, deposit competition and funding mix, regulatory changes, and the future effect of Basel III capital rules. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material change in disclosed risk factors.
Most important facts for investors to verify
- How much of earnings growth reflects sustainable operating improvement versus the acquired First M&F business and purchase-accounting accretion.
- Whether deposit growth is durable, given seasonal public-fund balances, and whether funding costs and net interest margin remain favorable.
- Trends in nonperforming loans, charge-offs, impaired loans, and OREO, including the adequacy of the allowance and the impact of acquired credit exposures.
- The valuation and eventual cash recovery of the nonaccruing trust-preferred securities and the assumptions supporting FDIC loss-share assets.
- Future mortgage production, acquisition-related expense and integration progress, and the effect of Basel III implementation on capital.