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RNST > SEC Filings for RNST > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for RENASANT CORP

Form 10-Q for RENASANT CORP


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
This Form 10-Q may contain or incorporate by reference statements regarding Renasant Corporation (referred to herein as the "Company", "we", "our", or "us") which may constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements usually include words such as "expects," "projects," "proposes," "anticipates," "believes," "intends," "estimates," "strategy," "plan," "potential," "possible" and other similar expressions. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include (1) the Company's ability to efficiently integrate acquisitions, including the previously announced acquisition of First M&F Corporation, into its operations, retain the customers of these businesses and grow the acquired operations;
(2) the effect of economic conditions and interest rates on a national, regional or international basis; (3) the timing of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (4) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries; (5) the financial resources of, and products available to, competitors; (6) changes in laws and regulations, including changes in accounting standards; (7) changes in policy by regulatory agencies; (8) changes in the securities and foreign exchange markets; (9) the Company's potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (10) changes in the quality or composition of the Company's loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers; (11) an insufficient allowance for loan losses as a result of inaccurate assumptions; (12) general economic, market or business conditions;
(13) changes in demand for loan products and financial services;
(14) concentration of credit exposure; (15) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; and
(16) other circumstances, many of which are beyond management's control. Management undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Financial Condition
Assets
Total assets were $4,249,281 at June 30, 2013 compared to $4,178,616 at December 31, 2012. The following discussion provides details regarding the changes in significant balance sheet accounts at June 30, 2013 compared to December 31, 2012.
Investments
The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented:

                                       June 30,     Percentage of      December 31,     Percentage of
                                         2013         Portfolio            2012           Portfolio
Obligations of other U.S. Government
agencies and corporations            $  132,172            17.70 %   $       92,487            13.72 %
Obligations of states and political
subdivisions                            222,288            29.78            312,803            46.40
Mortgage-backed securities              351,089            47.03            227,721            33.78
Trust preferred securities               15,960             2.14             15,068             2.24
Other debt securities                    21,280             2.85             22,930             3.40
Other equity securities                   3,741             0.50              3,068             0.46
                                     $  746,530           100.00 %   $      674,077           100.00 %


Table of Contents

The balance of our securities portfolio at June 30, 2013 increased $72,453 to $746,530 from $674,077 at December 31, 2012. During the first six months of 2013, we purchased $176,596 in investment securities. Mortgage-backed securities and collateralized mortgage obligations ("CMOs") held in our securities portfolio, included in the "Mortgage-backed securities" line item in the above table, are primarily issued by government sponsored entities and comprised 57% of the purchases. U.S. Government agency securities and obligations of state and political subdivisions accounted for the remaining 37% and 5%, respectively, of total securities purchased. The carrying value of securities sold during the first six months of 2013 totaled $13,420, of which $9,128 were CMOs. The remainder consisted of obligations of states and political subdivisions. Maturities and calls of securities during the first six months of 2013 totaled $77,568.
The Company holds investments in pooled trust preferred securities. This portfolio had a cost basis of $27,711 and $28,612 and a fair value of $15,960 and $15,068 at June 30, 2013 and December 31, 2012, respectively. The investment in pooled trust preferred securities consists of four securities representing interests in various tranches of trusts collateralized by debt issued by over 340 financial institutions. Management's determination of the fair value of each of its holdings is based on the current credit ratings, the known deferrals and defaults by the underlying issuing financial institutions and the degree to which future deferrals and defaults would be required to occur before the cash flow for our tranches is negatively impacted. Management has determined that there has been an adverse change in estimated cash flows for each of the four pooled trust preferred securities. The Company's quarterly evaluation of these investments for other-than-temporary-impairment resulted in no additional write-downs during the second quarter of 2013 or 2012. Furthermore, based on the qualitative factors discussed above, each of the four pooled trust preferred securities was classified as a nonaccruing asset at June 30, 2013 and December 31, 2012. Investment interest income is recorded on the cash-basis method until qualifying for return to accrual status. Loans
The table below sets forth the balance of loans outstanding by loan type and the percentage of each loan type to total loans as of the dates presented:

                                       June 30,      Percentage of      December 31,     Percentage of
                                         2013         Total Loans           2012          Total Loans
Commercial, financial, agricultural  $   318,001            11.02 %   $      317,050            11.28 %
Lease financing                              103             0.01                190             0.01
Real estate - construction               118,987             4.13            105,706             3.76
Real estate - 1-4 family mortgage        920,293            31.90            903,423            32.15
Real estate - commercial mortgage      1,464,522            50.77          1,426,643            50.76
Installment loans to individuals          62,605             2.17             57,241             2.04
Total loans, net of unearned income  $ 2,884,511           100.00 %   $    2,810,253           100.00 %

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At June 30, 2013, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans separate from the categories listed above. Total loans at June 30, 2013 were $2,884,511, an increase of $74,258 from $2,810,253 at December 31, 2012. Loans covered under loss-share agreements with the FDIC (referred to as "covered loans") were $201,494 at June 30, 2013, a decrease of $35,594, or 15.01%, compared to $237,088 at December 31, 2012. For covered loans, the FDIC will reimburse Renasant Bank 80% of the losses incurred on these loans. Management intends to continue the Company's aggressive efforts to bring those covered loans that are commercial in nature to resolution and thus the balance of covered loans is expected to continue to decline. The loss-share agreements applicable to this portfolio provides reimbursement for five years from the acquisition date.
Loans not covered under loss-share agreements with the FDIC (sometimes referred to as "not covered loans") at June 30, 2013 were $2,683,017, an increase of $109,852, compared to $2,573,165 at December 31, 2012. The increase in loans not covered under loss-share agreements was attributable to growth in owner and non-owner occupied commercial real estate loans and commercial loans, as well as loan production generated by our de novo expansion. Loans from our de novo locations in Columbus and Starkville, Mississippi, Tuscaloosa and Montgomery, Alabama and Maryville, Bristol, Jonesborough and Johnson City, Tennessee contributed $86,807 of the total increase in loans from December 31, 2012. During the first half of 2013, loans in our Tennessee and Alabama markets increased $76,559 and $21,404, respectively, while loans in our Mississippi markets decreased $7,162. Loans in our Georgia markets not covered under loss-share agreements increased $22,820 from December 31, 2012.


Table of Contents

The following table provides a breakdown of covered loans and loans not covered under loss-share agreements as of the dates presented:

                                      June 30, 2013                                December 31, 2012
                         Covered      Not Covered         Total         Covered      Not Covered         Total
                          Loans          Loans            Loans          Loans          Loans            Loans
Commercial, financial,
agricultural           $  10,283     $    307,718     $   318,001     $  10,800     $    306,250     $   317,050
Lease financing                -              103             103             -              190             190
Real estate -
construction:
Residential                1,648           53,250          54,898         1,648           46,805          48,453
Commercial                     -           64,089          64,089             -           56,201          56,201
Condominiums                   -                -               -             -            1,052           1,052
Total real estate -
construction               1,648          117,339         118,987         1,648          104,058         105,706
Real estate - 1-4
family mortgage:
Primary                   17,473          469,270         486,743        20,623          445,659         466,282
Home equity               14,275          189,294         203,569        15,622          183,159         198,781
Rental/investment         23,236          138,182         161,418        26,586          130,370         156,956
Land development           5,425           63,138          68,563        10,617           70,787          81,404
Total real estate -
1-4 family mortgage       60,409          859,884         920,293        73,448          829,975         903,423
Real estate -
commercial mortgage:
Owner-occupied            56,285          540,054         596,339        63,683          577,223         640,906
Non-owner occupied        41,947          683,171         725,118        50,879          587,607         638,486
Land development          30,888          112,177         143,065        36,599          110,652         147,251
Total real estate -
commercial mortgage      129,120        1,335,402       1,464,522       151,161        1,275,482       1,426,643
Installment loans to
individuals                   34           62,571          62,605            31           57,210          57,241
Total loans, net of
unearned income        $ 201,494     $  2,683,017     $ 2,884,511     $ 237,088     $  2,573,165     $ 2,810,253

Mortgage loans held for sale were $50,268 at June 30, 2013 compared to $34,845 at December 31, 2012. The increase in mortgage loans held for sale at June 30, 2013 compared to December 31, 2012 is attributable to the increased mortgage production resulting from an improved housing market and historically low interest rates. Originations of mortgage loans to be sold totaled $374,448 in the first six months of 2013 compared to $233,277 for the same period in 2012. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within thirty days after the loan is funded. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market. Deposits
The Company relies on deposits as its major source of funds. Total deposits were $3,505,158 and $3,461,221, at June 30, 2013 and December 31, 2012, respectively. Noninterest-bearing deposits were $560,965 and $568,214 at June 30, 2013 and December 31, 2012, respectively, while interest-bearing deposits were $2,944,193 and $2,893,007 at June 30, 2013 and December 31, 2012, respectively. The balance of total deposits at June 30, 2013 as compared to December 31, 2012 increased slightly, 1.27%, and is primarily attributable to management's focus on growing and maintaining a stable source of funding, specifically core deposits, and allowing more costly deposits, including certain time deposits, to mature. The source of funds that we select depends on the terms and how those terms assist us in mitigating interest rate risk and maintaining our net interest margin. Accordingly, funds are only acquired when needed and at a rate that is prudent under the circumstances.
Public fund deposits are those of counties, municipalities, or other political subdivisions and may be readily obtained based on the Company's pricing bid in comparison with competitors. Since public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. The Company has focused on growing stable sources of deposits which has resulted in the Company relying less on public fund deposits. However, the Company continues to participate in the bidding process for public fund deposits. Our public fund transaction accounts are principally obtained from municipalities including school boards and utilities. Public fund deposits were $357,017 and $344,342 at June 30, 2013 and December 31, 2012, respectively.


Table of Contents

Following management's emphasis on growing a stable source of funding through core deposits and allowing more costly deposits to mature or expire, deposits in our Alabama and Georgia markets decreased $24,845 and $11,973, respectively, at June 30, 2013 from December 31, 2012. Deposits in our Mississippi and Tennessee markets increased $88,016 and $28,138, respectively, at June 30, 2013 from December 31, 2012.
Borrowed Funds
Total borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (the "FHLB") and junior subordinated debentures. Funds are borrowed from the FHLB primarily to match-fund against certain loans, negating interest rate exposure when rates rise. Such match-funded loans are typically large commercial or real estate loans. In addition, short-term FHLB advances and federal funds purchased are used, as needed, to meet day to day liquidity needs. Total FHLB advances were $114,141 and $83,843 at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, $36,794 of the total FHLB advances outstanding were short-term. The Company had no short-term FHLB advances or federal funds purchased outstanding at December 31, 2012. The Company had $995,256 of availability on unused lines of credit with the FHLB at June 30, 2013 compared to $1,160,984 at December 31, 2012. The cost of our FHLB advances was 3.97% and 4.28% for the first half of 2013 and 2012, respectively.
In March 2012, the Company repaid $50,000 of qualifying senior debt securities issued under the Temporary Liquidity Guaranty Program ("TLGP") at maturity. The cost of the TLGP debt was 3.94% while outstanding during 2012.

Results of Operations
Three Months Ended June 30, 2013 as Compared to the Three Months Ended June 30, 2012
Net Income
Net income for the three month period ended June 30, 2013 was $8,019, an increase of 26.38%, as compared to net income of $6,345 for the three month period ended June 30, 2012. Basic and diluted earnings per share for the three month period ended June 30, 2013 were $0.32 as compared to $0.25 for the three month period ended June 30, 2012.
Net Interest Income
Net interest income, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of our net income. The primary concerns in managing net interest income are the mix and the repricing of rate-sensitive assets and liabilities.
Net interest income increased to $34,404 for the second quarter of 2013 compared to $33,410 for the same period in 2012. On a tax equivalent basis, net interest income was $35,789 for the second quarter of 2013 as compared to $34,919 for the second quarter of 2012. Net interest margin, the tax equivalent net yield on earning assets, decreased to 3.88% during the second quarter of 2013 from 3.98% for the same period in 2012.


Table of Contents

The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented:

                                                        Three Months Ended June 30,
                                              2013                                      2012
                                              Interest                                  Interest
                                Average        Income/      Yield/        Average        Income/      Yield/
                                Balance        Expense       Rate         Balance        Expense       Rate
Assets
Interest-earning assets:
Loans(1)                     $ 2,877,578     $  34,721        4.84 %   $ 2,647,321     $  34,168        5.19 %
Securities:
Taxable(2)                       536,114         3,408        2.55         556,327         3,778        2.72
Tax-exempt                       218,401         3,148        5.78         237,026         3,487        5.88
Interest-bearing balances
with banks                        63,316            53        0.34          80,425            54        0.27
Total interest-earning
assets                         3,695,409        41,330        4.49       3,521,099        41,487        4.73
Cash and due from banks           51,523                                    66,506
Intangible assets                190,362                                   191,788
FDIC loss-share
indemnification asset             32,584                                    59,957
Other assets                     262,069                                   284,023
Total assets                 $ 4,231,947                               $ 4,123,373
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Deposits:
Interest-bearing demand(3)   $ 1,480,176     $     935        0.25 %   $ 1,391,645     $   1,029        0.30 %
Savings deposits                 254,247           126        0.20         230,207           123        0.22
Time deposits                  1,219,012         3,034        1.00       1,265,026         3,817        1.21
Total interest-bearing
deposits                       2,953,435         4,095        0.56       2,886,878         4,969        0.69
Borrowed funds                   164,894         1,446        3.52         168,856         1,599        3.80
Total interest-bearing
liabilities                    3,118,329         5,541        0.71       3,055,734         6,568        0.86
Noninterest-bearing deposits     562,103                                   531,209
Other liabilities                 45,290                                    44,266
Shareholders' equity             506,225                                   492,164
Total liabilities and
shareholders' equity         $ 4,231,947                               $ 4,123,373
Net interest income/net
interest margin                              $  35,789        3.88 %                   $  34,919        3.98 %

(1) Includes mortgage loans held for sale and shown net of unearned income.

(2) U.S. Government and some U.S. Government agency securities are tax-exempt in the states in which we operate.

(3) Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.

The average balances of nonaccruing assets are included in the table above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 35% and a state tax rate of 3.3%, which is net of federal tax benefit.


Table of Contents

The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the second quarter of 2013 compared to the second quarter of 2012:

                                      Volume        Rate       Net(1)
Interest income:
Loans (2)                            $ 2,988     $ (2,435 )   $   553
Securities:
Taxable                                 (134 )       (236 )      (370 )
Tax-exempt                              (269 )        (70 )      (339 )
Interest-bearing balances with banks     (13 )         12          (1 )
Total interest-earning assets          2,572       (2,729 )      (157 )
Interest expense:
Interest-bearing demand deposits          66         (160 )       (94 )
Savings deposits                          13          (10 )         3
Time deposits                           (133 )       (650 )      (783 )
Borrowed funds                           (36 )       (117 )      (153 )
Total interest-bearing liabilities       (90 )       (937 )    (1,027 )
Change in net interest income        $ 2,662     $ (1,792 )   $   870

(1) Changes in interest due to both volume and rate have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated.

(2) Includes mortgage loans held for sale and shown net of unearned income.

Our improvement in net interest income for the second quarter of 2013 as compared to the same period in 2012 was due largely to an increase of $230,257, or 8.70%, in the average balance of loans which was funded by redeployment of interest-bearing balances with banks, reduction in the investment portfolio and growth in non-time deposits. The improvement in level and mix of earning assets was partially offset by a 24 basis points reduction in their yield. The cost of interest bearing liabilities declined 15 basis points due both to the run off and repricing of contractual liabilities and the downward repricing of core deposits. The mix of interest bearing liabilities improved as growth in non-time deposits not only helped fund loan growth but also allowed a reduction in higher cost time deposits and borrowing. The10 basis points reduction in the net interest margin from 3.98% for the second quarter of 2012 to 3.88% for the second quarter of 2013 was due to the decline in the rate on interest-earning assets exceeding the decline in the cost of interest bearing liabilities.

Interest income, on a tax equivalent basis, was $41,330 for the second quarter of 2013 compared to $41,487 for the same period in 2012. The decrease in interest income was driven primarily by a decline in the yield on interest-earning assets offset by the increased level and improved mix of the average balance of interest-earning assets. The following table presents the percentage of total average earning assets, by type and yield, for the periods presented:

                       Percentage of Total              Yield
                       Three Months Ended        Three Months Ended
                            June 30,                  June 30,
                        2013          2012        2013         2012
Loans                   77.87 %      75.19 %      4.84 %        5.19 %
Securities              20.42        22.53        3.48          3.66
Other                    1.71         2.28        0.34          2.70
Total earning assets   100.00 %     100.00 %      4.49 %        4.73 %

Interest income on loans, on a tax equivalent basis, was $34,721 for the second quarter of 2013 compared to $34,168 for the same period in 2012. The increase in interest income on loans is attributable to the $230,257 increase in the average balance of loans during the second quarter of 2013 compared to the same period in 2012 offset by a decline of 35 basis points on the loan yields over the same period.


Table of Contents

Investment income, on a tax equivalent basis, decreased $709 to $6,556 for the second quarter of 2013 from $7,265 for the second quarter of 2012. The average balance in the investment portfolio for the second quarter of 2013 was $754,515 compared to $793,353 for the same period in 2012. The tax equivalent yield on the investment portfolio for the second quarter of 2013 was 3.48%, down 18 basis points from the same period in 2012. The decline in yield was a result of the cash flows generated by calls, maturities and sales of higher yielding securities in the Company's securities portfolio used in part to fund the purchase securities that in the current market environment were lower yielding.

Interest expense was $5,541 for the second quarter of 2013, a decrease of $1,027, or 15.64%, as compared to the same period in 2012. The decrease in interest expense was due to the decrease in the cost of interest-bearing liabilities as a result of the run off and repricing of contractual liabilities, the downward repricing of core deposits and an improved mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities, specifically time deposits and borrowed funds. In addition, the average balance of noninterest-bearing deposits increased $30,894, or 5.82%, during the second quarter of 2013 as compared to the same period in . . .

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