Renasant Corporation — Q3 2012 Form 10-Q
Business and period: Regional banking, insurance and wealth-management company serving Mississippi, Tennessee, Alabama and Georgia. This unaudited filing covers the quarter and nine months ended September 30, 2012; income comparisons are against the same periods in 2011. Balance-sheet comparisons are against December 31, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $7.0 million, or $0.28 per diluted share, versus $6.5 million, or $0.26, a year earlier. Pretax income declined to $7.9 million from $8.8 million; the lower effective tax rate (10.81% versus 26.17%) more than offset that decline.
- Nine-month earnings: Net income was $19.4 million, or $0.77 per diluted share, versus $19.8 million, or $0.79, in 2011. The prior-year period included acquisition-related gains.
- Interest income and margin: Q3 net interest income was $33.1 million versus $32.9 million; tax-equivalent net interest margin was 3.94% versus 3.92%. For nine months, net interest income rose to $99.4 million from $96.7 million and tax-equivalent margin to 3.93% from 3.74%. Lower funding costs and loan growth supported the improvement, while asset yields declined.
- Other income and expenses: Q3 noninterest income was $18.0 million versus $18.4 million; the 2011 quarter included $5.0 million of securities gains and a $0.6 million acquisition gain. Mortgage-sale gains increased to $4.4 million from $1.4 million. Q3 noninterest expense rose to $38.6 million from $37.0 million, including higher staffing and expansion costs. The efficiency ratio worsened to 73.44% from 70.05%.
- Loans and credit: Loans were $2.80 billion, up $219.1 million (8.5%) from year-end, mainly in non-covered loans. The allowance was $44.1 million, or 1.57% of total loans. Nonperforming loans excluding FDIC-covered loans were $32.0 million (1.26% of loans), down from $34.9 million (1.56%) at year-end. Total nonperforming loans including covered loans were $96.1 million. Net charge-offs were $14.4 million for nine months, compared with $13.2 million in 2011; provision expense was lower at $14.1 million versus $16.4 million.
- Problem assets: OREO declined to $90.2 million from $113.2 million at year-end. Total nonperforming assets, including covered assets and nonaccruing securities, were $201.6 million, or 4.84% of assets, versus $250.1 million, or 5.95%, at year-end.
- Funding, liquidity and debt: Deposits were $3.40 billion, down modestly from $3.41 billion at year-end. Cash and cash equivalents fell to $118.4 million from $209.0 million. Short-term borrowings increased to $65.0 million from $11.5 million, while long-term debt declined to $157.9 million from $243.2 million. The company reported $1.04 billion of available FHLB borrowing capacity and $85 million of unused bank credit lines. Nine-month operating cash flow was $134.8 million; investing activities used $165.1 million and financing activities used $60.3 million.
- Capital and shareholder returns: Shareholders’ equity was $496.8 million, up from $487.2 million at year-end; book value per share was $19.78. The bank was classified as well capitalized, with a 9.69% leverage ratio, 12.48% Tier 1 risk-based ratio and 13.74% total risk-based capital ratio. The quarterly dividend was $0.17 per share.
Material changes, outlook and risks
- Management attributed improved net interest income to loan growth, redeployment of cash into loans, and a lower-cost deposit mix. It cited lower asset yields as an offset.
- Mortgage originations for sale reached $404.2 million for the first nine months, versus $294.0 million in 2011, supporting higher mortgage-sale gains but also raising compensation costs.
- The FDIC loss-share indemnification asset fell to $46.2 million from $107.8 million at year-end, principally reflecting $77.3 million of reimbursements received. Covered assets are subject to FDIC loss-sharing terms, and covered loans continued to run off.
- Four pooled trust-preferred securities, with $29.5 million amortized cost and $15.3 million fair value, remained nonaccrual. The company reported no additional impairment charge in 2012, but these holdings remain exposed to issuer defaults and deferrals.
- Management provided no specific earnings or financial guidance in the supplied filing text. It identified risks including economic and interest-rate conditions, credit quality and loan concentrations, acquisition integration, competition, regulation, and the sufficiency of loan-loss estimates. Proposed Basel III rules could affect capital ratios; their impact was not yet assessable.
- The company filed an effective shelf registration permitting up to $150 million of securities offerings, subject to market conditions and offering terms. Management reported effective disclosure controls, no material change in internal control, and no material change to previously disclosed risk factors.
Investor facts to verify
- Whether loan growth is sustainable and whether concentrations in commercial real estate and residential mortgage lending create incremental credit risk.
- Trends in net charge-offs, nonperforming loans and OREO, including how much improvement reflects resolution versus changes in covered-asset balances.
- Recoverability and valuation of the trust-preferred portfolio and the remaining FDIC indemnification asset.
- Whether mortgage revenue can be maintained as rates, originations and secondary-market gain margins change, and whether expense growth moderates.
- Liquidity and funding needs given the decline in cash, higher short-term borrowings, deposit mix, and potential use of available credit facilities.
- Effects of future capital rules and any potential issuance under the $150 million shelf registration on capital and per-share value.