Renasant Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Figures are unaudited. Unless stated otherwise, dollar amounts below are in millions.
Business context
Renasant operates community banks, an insurance agency and a wealth management business across Mississippi, Tennessee, Alabama and Georgia. Results include First M&F, acquired September 1, 2013; accordingly, comparisons with 2013 are affected by the acquisition and are not fully like-for-like.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net interest income | $52.2 | $34.4 | $102.1 | $67.8 |
| Provision for loan losses | $1.5 | $3.0 | $2.9 | $6.1 |
| Noninterest income | $19.5 | $17.3 | $38.1 | $34.7 |
| Noninterest expense | $49.4 | $37.7 | $97.0 | $75.3 |
| Net income | $14.9 | $8.0 | $28.5 | $15.6 |
| Diluted EPS | $0.47 | $0.32 | $0.90 | $0.62 |
| Net interest margin, tax-equivalent | 4.24% | 3.87% | 4.12% | 3.89% |
| Efficiency ratio | 67.33% | 71.05% | 67.58% | 71.55% |
At June 30, total assets were $5,826.0, loans $3,957.5, deposits $4,886.7, and shareholders’ equity $688.2. Since December 31, 2013, assets rose 1.4%, loans 2.0%, and deposits 0.9%. Total borrowings comprised $25.5 of short-term borrowings and $164.3 of long-term debt. Book value per share was $21.83.
First-half operating cash flow was $59.4; investing activities used $177.9 and financing activities provided $53.1. Cash and cash equivalents fell $65.4 during the half to $181.2. The company paid $10.8 in dividends; the quarterly dividend was $0.17 per share.
Renasant and the Bank exceeded the filing’s “well capitalized” thresholds: holding-company Tier 1 leverage was 8.91%, Tier 1 risk-based capital 11.82%, and total risk-based capital 12.96%; Bank ratios were 8.64%, 11.46%, and 12.59%, respectively.
Changes versus comparable periods
- Q2 net income rose to $14.9 from $8.0; first-half net income rose to $28.5 from $15.6. Management attributed the improvement primarily to First M&F, higher net interest margin and improving credit quality.
- Net interest income and average earning assets increased substantially, largely reflecting the acquired business. Management said accelerated accretion of acquired First M&F loan discounts added 28 basis points to Q2 margin and 24 basis points to first-half margin.
- Noninterest expenses increased, principally because of the acquisition, including higher compensation and intangible amortization. The efficiency ratio nevertheless improved.
- Mortgage activity weakened: first-half originations of loans for sale were $254.6 versus $374.4, and gains on mortgage loan sales were $3.6 versus $7.4.
- Provision expense declined year over year. First-half net charge-offs were $3.3 versus $3.4.
Outlook, risks and unusual items
- Management expected the efficiency ratio to continue improving, citing revenue growth from First M&F markets, maturation of de novo branches and improving credit quality. No specific earnings or revenue guidance was provided.
- Management noted that higher mortgage rates had slowed originations and could further reduce refinancing and future mortgage production.
- Credit measures require attention: nonperforming loans excluding FDIC-covered assets were $31.8, or 0.84% of loans, compared with 0.74% at year-end. Total nonperforming loans including covered and acquired non-covered balances were $73.2; total nonperforming assets, including OREO and nonaccruing securities, were $133.4, or 2.29% of assets. Noncovered OREO was $34.3. The allowance was $47.3; the reported allowance coverage ratio for nonperforming loans not covered by loss-share agreements was 148.69%.
- The securities portfolio included $18.3 fair value of pooled trust preferred securities against $27.4 amortized cost. Two of four positions remained nonaccruing; management recorded no additional impairment in the first half.
- Liquidity sources included $1,603.4 of available FHLB capacity and $75.0 of unsecured bank lines, with none drawn on the latter at quarter-end. Loan commitments were $677.9 and standby letters of credit $29.5.
- Interest-rate sensitivity modeling showed estimated 12-month net interest income changes ranging from -2.06% under a 100-basis-point decline to +0.21% under a 300-basis-point increase. The filing cautions that model assumptions are uncertain. Basel III rules were scheduled to begin taking effect in 2015 and phase in through 2019; management was assessing their impact.
- The filing reported no legal proceedings, no material changes to previously disclosed risk factors, and no significant subsequent events. Management reported effective disclosure controls and no material change to internal control over financial reporting.
Key facts for investors to verify
- Separate acquisition-driven growth from organic growth when assessing earnings, loan and deposit trends.
- Track loan discount accretion and determine whether margin improvement persists as acquired-loan payoffs normalize.
- Review nonperforming and past-due loans, commercial real estate exposure, OREO disposition progress, and allowance adequacy; distinguish FDIC-covered balances from noncovered credit risk.
- Assess the valuation and cash-flow assumptions behind the pooled trust preferred securities, particularly the two nonaccruing positions.
- Monitor mortgage origination and sale income, expense growth, integration and cost savings, liquidity, and the effect of Basel III on capital requirements.