Renasant Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012 unless stated otherwise. Renasant operates community banking, insurance and wealth-management businesses in Mississippi, Tennessee, Alabama and Georgia. Dollar amounts below are in millions unless noted.
Financial performance and condition
- Earnings: Net income was $7.57 million, up 26.7% from $5.97 million in Q1 2012. Basic and diluted EPS were $0.30, versus $0.24. Cash dividends were $0.17 per share in both periods.
- Interest income and margin: Net interest income was $33.38 million, up from $32.84 million. Tax-equivalent net interest income was $34.81 million versus $34.34 million; net interest margin improved to 3.89% from 3.85%. Reported interest income fell to $38.95 million from $40.51 million, while interest expense declined to $5.56 million from $7.66 million.
- Other income and expenses: Noninterest income rose to $17.34 million from $16.39 million, including mortgage-loan sale gains of $3.57 million versus $1.28 million. Noninterest expense increased to $37.56 million from $36.62 million, principally due to higher salaries and benefits. The efficiency ratio improved slightly to 72.03% from 72.19%. Income before taxes was $10.11 million; income taxes were $2.54 million.
- Assets, loans and deposits: Total assets were $4.27 billion, up from $4.18 billion. Total loans were essentially flat at $2.81 billion; deposits rose to $3.56 billion from $3.46 billion. Commercial real estate mortgages were $1.43 billion, about 51% of total loans.
- Credit quality: The allowance for loan losses increased to $46.51 million from $44.35 million, equal to 1.66% of total loans. Q1 provision was $3.05 million versus $4.80 million, and net charge-offs declined to $0.89 million from $4.96 million. Nonperforming loans were $75.96 million including covered loans; the company’s separately presented non-covered measure was $27.98 million, or 1.08% of total loans. OREO totaled $74.88 million including covered properties, down from $90.25 million at year-end.
- Liquidity, cash flow and debt: Cash and cash equivalents were $190.03 million, up from $132.42 million at year-end. Q1 operating cash flow was $41.34 million; investing activities used $73.16 million and financing activities provided $89.43 million. Deposits were the principal funding source. Short-term borrowings were $6.85 million and long-term debt was $157.22 million. FHLB advances were $81.65 million; unused FHLB lines were $1.03 billion. The bank was reported well capitalized, with a 9.59% Tier 1 leverage ratio, 12.61% Tier 1 risk-based ratio and 13.87% total risk-based capital ratio.
Material changes and notable items
- Lower funding costs and a shift toward loans and lower-cost deposits supported net interest income and margin despite lower yields on earning assets. Total cost of funds fell to 0.62% from 0.84% year over year.
- Mortgage originations for sale increased to $159.14 million from $111.64 million. Higher related gains contributed to noninterest income, while mortgage commissions and expansion-related staffing contributed to higher personnel costs.
- Nonperforming loans excluding covered assets declined to $27.98 million from $30.19 million at year-end; non-covered OREO fell to $39.79 million from $44.72 million. Covered loans declined to $213.87 million from $237.09 million; the FDIC reimburses 80% of covered losses under applicable agreements.
- The four pooled trust preferred securities had $27.83 million amortized cost and $16.16 million fair value. They remained nonaccrual; no additional impairment charge was recorded in Q1. Management stated it did not expect settlement below amortized cost, but valuation depends on underlying issuer defaults and deferrals.
- Renasant agreed to acquire First M&F Corporation in a stock transaction valued at approximately $118.8 million based on the referenced share price. Closing was expected in Q3 2013, subject to regulatory and shareholder approvals and other conditions. Two putative shareholder class actions sought to enjoin the transaction; defendants said they considered the claims without merit and intended to defend them.
Outlook, risks and controls
The filing provides no earnings or revenue guidance. Management described continued efforts to resolve problem credits and grow core deposits. Principal stated risks include acquisition integration and retention, economic and interest-rate conditions, credit quality and loan-loss estimates, loan and investment concentrations, competition, regulation, capital needs and liquidity. The filing also notes that proposed Basel III rules could affect future capital ratios, but their impact was not yet meaningfully assessable. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the First M&F acquisition received required approvals, closed as expected, and faced any material effect from the shareholder litigation.
- Whether improving nonperforming-loan, charge-off and OREO trends continued, and whether the allowance remains adequate—especially for real-estate exposures.
- Whether mortgage-sale income and lower funding costs are sustainable, given declining asset yields and higher personnel expenses.
- Developments in the trust preferred portfolio, including cash flows, issuer defaults and fair-value assumptions.
- Future liquidity, deposit mix, borrowing levels and regulatory capital requirements, including final Basel III rules.