Business context and reporting period
Renasant Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; amounts below are in millions unless noted. The company operates community banking, insurance and wealth management businesses across Mississippi, Tennessee, Alabama and Georgia.
A major comparability factor was the September 1 acquisition of First M&F for approximately $156.8 million in stock. It added $1.5 billion of fair-value assets, including $899.2 million of loans, and $1.3 billion of deposits. The acquired business contributed results for only four months of 2013.
Financial performance and position
- Earnings: Net income was $33.5 million, up 25.7% from $26.6 million in 2012. Diluted EPS was $1.22 versus $1.06. Fourth-quarter net income was $11.3 million and diluted EPS was $0.36.
- Revenue and margin: Net interest income was $157.2 million, up 17.9%; fully taxable-equivalent net interest income was $163.0 million. Net interest margin (tax-equivalent) edged up to 3.96% from 3.94%. Noninterest income increased 4.7% to $72.0 million.
- Expenses and profitability: Noninterest expense rose 15.0% to $173.1 million, including $6.0 million of First M&F merger costs. The efficiency ratio increased to 73.65% from 72.35%; excluding merger costs, management reported 71.09% for 2013. Return on average assets was 0.71% (0.64% in 2012) and return on average equity was 6.01% (5.39%).
- Credit: Provision for loan losses declined to $10.4 million from $18.1 million; net charge-offs fell to $7.0 million, or 0.22% of average loans, from $18.1 million, or 0.67%. Year-end nonperforming loans were $76.5 million (1.97% of loans) and nonperforming assets were $147.1 million (2.56% of assets). The allowance was $47.7 million; reported coverage was 174.44%, or 248.90% excluding First M&F and FDIC-covered loans.
- Balance sheet: Total assets rose 37.5% to $5.75 billion; loans increased 38.1% to $3.88 billion and deposits increased 39.9% to $4.84 billion. Excluding First M&F, management said loans grew $257.2 million and deposits grew 2.3%.
- Cash flow and liquidity: Operating cash flow was $153.3 million, investing cash use was $57.2 million and financing cash provided was $18.1 million. Cash and cash equivalents ended at $246.6 million, up from $132.4 million. The Bank had $1.60 billion of unused FHLB borrowing capacity and $75 million of unsecured, uncommitted correspondent lines, with none drawn at year-end.
- Debt and capital: Long-term debt was $169.6 million, including $75.4 million of FHLB advances and $94.2 million of junior subordinated debentures; short-term borrowings were $2.3 million. The Bank’s capital ratios were 8.40% leverage, 11.05% Tier 1 risk-based and 12.20% total risk-based, above the stated well-capitalized thresholds. The quarterly dividend remained $0.17 per share.
Material changes versus 2012
- Growth in assets, loans, deposits and net interest income primarily reflects the First M&F acquisition, so headline growth is not wholly organic.
- Lower funding costs and a larger average earning-asset base supported net interest income, while yields on loans and securities declined.
- Credit metrics improved and OREO expense declined to $7.0 million from $13.6 million. At the same time, noninterest expenses increased, reflecting acquisition and branch costs, and the efficiency ratio worsened before excluding merger expenses.
- Unrealized losses on securities increased to $20.0 million from $14.0 million, primarily due to rising interest rates. The four pooled trust preferred securities, fair-valued at $17.7 million against $27.5 million cost, remained on nonaccrual.
Outlook, risks and unusual items
No specific earnings or revenue guidance is provided. Management expects the efficiency ratio to improve through First M&F revenue growth, maturation of newer branches and continued reduction in credit costs; these expectations are not quantified. Management also highlighted the goal of growing core deposits and diversifying fee income.
Key risks include the substantial commercial real estate exposure (50.26% of loans) and broad real-estate collateral concentration (85.55%); interest-rate and funding sensitivity; uncertain economic and property-market conditions; acquisition integration and purchase-accounting estimates; and regulatory costs, including Basel III implementation. FDIC loss-share protection applies to certain legacy acquired assets, but payments are subject to agreement terms and protection expires according to specified timelines.
Unusual items include $6.0 million of First M&F merger expenses and $91.3 million of acquisition goodwill. First M&F purchase-price allocations were preliminary, and its separate post-acquisition revenue and earnings were not tracked. The company reported an unqualified audit opinion and effective internal controls; however, management and the auditor excluded First M&F operations from the 2013 internal-control assessment and audit scope. The filing reports no material pending legal proceedings in its business section; the notes also disclose various claims and lawsuits that management does not expect to materially affect the financial statements.
Important facts for investors to verify
- How much of future loan, deposit and earnings growth is organic, and whether First M&F integration delivers expected synergies without customer or deposit attrition.
- Final acquisition fair values, acquired-loan performance, goodwill recoverability and any subsequent credit provisions.
- Commercial real estate concentration, delinquency trends, allowance adequacy and the evolution of nonperforming assets, including acquired and covered balances.
- Realized losses and cash-flow assumptions for pooled trust preferred securities, as well as sensitivity of securities values to interest rates.
- Liquidity, deposit retention, funding costs and capital ratios as Basel III requirements phase in; the filing states management expected to meet requirements but provides no quantified forward earnings guidance.