Renasant Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; dollar amounts below are in millions unless noted. Renasant provides banking, insurance and wealth-management services across Mississippi, Tennessee, Alabama and Georgia. The 2013 comparison is affected by the September 1, 2013 acquisition of First M&F: its results are included only from the acquisition date.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $50.5 | $38.7 | $152.6 | $106.5 |
| Provision for loan losses | $2.2 | $2.3 | $5.1 | $8.4 |
| Noninterest income | $22.6 | $18.9 | $60.7 | $53.6 |
| Noninterest expense | $48.2 | $46.6 | $145.2 | $121.9 |
| Net income | $15.5 | $6.6 | $44.0 | $22.2 |
| Diluted EPS | $0.49 | $0.24 | $1.39 | $0.85 |
- Net interest margin, on a fully tax-equivalent basis, was 4.12% in Q3 and 4.13% year to date, up from 3.84% and 3.85%, respectively, in 2013. Management attributed improvement to the acquired portfolio, loan growth and funding mix; accelerated accretion on First M&F acquired loans contributed 11 basis points to Q3 margin and 20 basis points year to date.
- Efficiency ratio improved to 64.43% in Q3 from 78.82%, and to 66.50% year to date from 74.17%. Q3 2013 included $3.8 million of merger expense; Q3 2014 had none.
- Mortgage-loan sale gains declined to $2.6 million in Q3 from $2.8 million, and to $6.2 million year to date from $10.2 million. Management linked lower originations to higher mortgage rates and fewer refinancing opportunities.
Financial position, liquidity and credit
- Total assets were $5.752 billion at September 30, nearly unchanged from year-end 2013. Loans grew to $3.957 billion from $3.881 billion; securities rose to $980.3 million from $913.3 million.
- Deposits were $4.764 billion, down from $4.842 billion. Noninterest-bearing deposits increased to $935.5 million from $856.0 million, while interest-bearing deposits declined. Cash and cash equivalents were $141.6 million, down $105.1 million from the beginning of the year.
- Short-term borrowings increased to $65.6 million from $2.3 million; long-term debt was $162.0 million, down from $169.6 million. FHLB advances were $67.5 million, with $1.606 billion of unused FHLB capacity; the company also reported $75 million in other-bank credit lines, undrawn at quarter-end.
- Operating cash flow was $90.2 million for the first nine months, versus $124.1 million in 2013. Investing activities used $157.9 million, and financing activities used $37.4 million. The filing attributes investing outflows largely to securities purchases and loan growth.
- Allowance for loan losses was $44.6 million, down from $47.7 million at year-end; nine-month net charge-offs were $8.2 million, or 0.28% of average loans, compared with $6.4 million, or 0.29%, in 2013. Q3 net charge-offs increased to $5.0 million, or 0.50% of average loans, from $3.1 million, or 0.38%.
- Nonperforming loans were $71.8 million including acquired FDIC-covered assets; excluding covered assets, they were $36.6 million, or 0.96% of loans, versus $27.3 million, or 0.74%, at year-end. Nonperforming assets including covered assets were $118.3 million, or 2.06% of assets, down from $147.1 million, or 2.56%. OREO declined to $34.1 million from $52.9 million.
- Shareholders’ equity was $700.5 million, up from $665.7 million; book value per share was $22.21 versus $21.21. Renasant Corporation’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 9.31%, 12.28% and 13.43%; the bank’s respective ratios were 9.01%, 11.88% and 13.01%. Both exceeded the filing’s “well capitalized” thresholds.
Changes, outlook and risks
- Management attributed higher earnings chiefly to First M&F, improved net interest margin and continued improvement in credit quality. Comparisons are not like-for-like because First M&F contributed for only one month of Q3 2013 and was not included in the first eight months of that year.
- Management expects the efficiency ratio to continue improving, citing revenue growth from acquired markets and maturing de novo locations, as well as potential reduction in credit-related costs. The filing gives no earnings, revenue or margin guidance.
- Credit quality shows mixed signals: aggregate nonperforming assets and OREO declined, but nonperforming loans excluding covered assets and Q3 net charge-offs increased. Management said a $4.7 million matured loan that was more than 90 days past due was brought current and renewed after quarter-end, and stated it believed nonperforming loans were adequately reserved.
- Two of four pooled trust preferred securities remained nonaccruing; their combined fair value was $19.6 million against $26.7 million amortized cost. No additional impairment was recorded in the quarter or first nine months. Their valuation relies on management estimates and Level 3 inputs.
- Other risks cited include economic and interest-rate changes, competition, acquisition integration and retention, loan and investment credit quality, concentrations, liquidity and regulatory changes. 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 material change in market risk or risk factors and no significant subsequent event through issuance.
- Unfunded loan commitments were $685.8 million and standby letters of credit were $32.4 million. The FDIC loss-share agreements reimburse 80% of eligible covered-asset losses, but management expects covered loans to decline as it resolves them.
Investor verification priorities
- Assess how much of earnings and margin improvement depends on acquired First M&F operations and acquired-loan accretion, and whether that accretion is sustainable.
- Review the rise in nonperforming loans excluding covered assets and Q3 net charge-offs, including performance of commercial real estate and acquired loans.
- Verify allowance adequacy and the impact of loans acquired with deteriorated credit quality, for which future cash-flow deterioration could require additional provisions.
- Monitor deposit outflows, the increase in short-term borrowings, cash usage and pledged securities, alongside the reported borrowing capacity and capital ratios.
- Track mortgage origination and sale trends, Level 3 trust preferred valuations and nonaccrual status, and the effect of Basel III implementation.