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

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Form 10-Q for RENASANT CORP


8-Nov-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 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
The following discussion provides details regarding the changes in significant balance sheet accounts at September 30, 2013 compared to December 31, 2012. Acquisition of First M&F Corporation
On September 1, 2013, the Company completed its acquisition of First M&F Corporation ("First M&F"), a bank holding company headquartered in Kosciusko, Mississippi, and the parent of Merchants and Farmers Bank, a Mississippi banking corporation. On the same date, Merchants and Farmers Bank was merged into Renasant Bank. At August 31, 2013, First M&F operated 35 full-service banking offices and 8 insurance offices in Mississippi, Alabama and Tennessee and had total assets of $1,451,432, loans of $944,997, deposits of $1,322,665 and total shareholders' equity of $79,440 prior to the application of any purchase accounting adjustments. See Note M, "Mergers and Acquisitions," in the Notes to Consolidated Financial Statements included in Item 1, "Financial Statements," for additional details regarding the Company's merger with First M&F. Assets
Total assets were $5,736,048 at September 30, 2013 compared to $4,178,616 at 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:


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                                       September 30,     Percentage of      December 31,     Percentage of
                                           2013            Portfolio            2012           Portfolio
Obligations of other U.S. Government
agencies and corporations            $       155,142            17.15 %   $       92,487            13.72 %
Obligations of states and political
subdivisions                                 290,999            32.16            312,803            46.40
Mortgage-backed securities                   417,776            46.17            227,721            33.78
Trust preferred securities                    16,753             1.85             15,068             2.24
Other debt securities                         20,241             2.24             22,930             3.40
Other equity securities                        3,877             0.43              3,068             0.46
                                     $       904,788           100.00 %   $      674,077           100.00 %

The balance of our securities portfolio at September 30, 2013 increased $230,711 to $904,788 from $674,077 at December 31, 2012. The acquisition of First M&F contributed $227,693 to the security portfolio. During the first nine 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 38% and 5%, respectively, of total securities purchased. The carrying value of securities sold during the first nine months of 2013 totaled $13,422, of which $9,128 were CMOs. The remainder consisted of obligations of states and political subdivisions. Maturities and calls of securities during the first nine months of 2013 totaled $147,273.
The Company holds investments in pooled trust preferred securities. This portfolio had a cost basis of $27,629 and $28,612 and a fair value of $16,753 and $15,068 at September 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 330 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 third 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 September 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:

                                       September 30,     Percentage of      December 31,     Percentage of
                                           2013           Total Loans           2012          Total Loans
Commercial, financial, agricultural  $       481,243            12.40 %   $      317,050            11.28 %
Lease financing                                   75             0.01                190             0.01
Real estate - construction                   152,217             3.92            105,706             3.76
Real estate - 1-4 family mortgage          1,192,223            30.72            903,423            32.15
Real estate - commercial mortgage          1,960,584            50.51          1,426,643            50.76
Installment loans to individuals              95,190             2.44             57,241             2.04
Total loans, net of unearned income  $     3,881,532           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 September 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 September 30, 2013 were $3,881,532, an increase of $1,071,279 from $2,810,253 at December 31, 2012. The acquisition of First M&F increased total loans $891,420. Loans covered under loss-share agreements with the FDIC (referred to as "covered loans") were $195,997 at September 30, 2013, a decrease of $41,091, or 17.33%, compared to $237,088 at


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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 September 30, 2013 were $3,685,535, compared to $2,573,165 at December 31, 2012. The acquisition of First M&F increased not covered loans by $891,420 at September 30, 2013. Excluding the loans acquired from First M&F, not covered loans increased $220,950 during the first nine months of 2013. 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 $116,309 of the total increase in loans from December 31, 2012.
During the first nine months of 2013, loans in our Mississippi, Tennessee and Alabama markets, excluding the contribution from First M&F, increased $20,024, $142,302 and $24,829, respectively. Loans in our Georgia markets not covered under loss-share agreements increased $40,564 from December 31, 2012. The following table provides a breakdown of covered loans and loans not covered under loss-share agreements as of the dates presented:

                                    September 30, 2013                             December 31, 2012
                         Covered      Not Covered         Total         Covered      Not Covered         Total
                          Loans          Loans            Loans          Loans          Loans            Loans
Commercial, financial,
agricultural           $  10,295     $    470,948     $   481,243     $  10,800     $    306,250     $   317,050
Lease financing                -               75              75             -              190             190
Real estate -
construction:
Residential                1,648           69,901          71,549         1,648           46,805          48,453
Commercial                     -           79,709          79,709             -           56,201          56,201
Condominiums                   -              959             959             -            1,052           1,052
Total real estate -
construction               1,648          150,569         152,217         1,648          104,058         105,706
Real estate - 1-4
family mortgage:
Primary                   17,236          665,595         682,831        20,623          445,659         466,282
Home equity               13,636          229,364         243,000        15,622          183,159         198,781
Rental/investment         20,465          175,036         195,501        26,586          130,370         156,956
Land development           5,386           65,505          70,891        10,617           70,787          81,404
Total real estate -
1-4 family mortgage       56,723        1,135,500       1,192,223        73,448          829,975         903,423
Real estate -
commercial mortgage:
Owner-occupied            57,235          757,256         814,491        63,683          577,223         640,906
Non-owner occupied        39,833          933,876         973,709        50,879          587,607         638,486
Land development          30,232          142,152         172,384        36,599          110,652         147,251
Total real estate -
commercial mortgage      127,300        1,833,284       1,960,584       151,161        1,275,482       1,426,643
Installment loans to
individuals                   31           95,159          95,190            31           57,210          57,241
Total loans, net of
unearned income        $ 195,997     $  3,685,535     $ 3,881,532     $ 237,088     $  2,573,165     $ 2,810,253

Mortgage loans held for sale were $28,466 at September 30, 2013 compared to $34,845 at December 31, 2012. The decrease in mortgage loans held for sale at September 30, 2013 compared to December 31, 2012 is reflective of the reduction in mortgage production resulting from an increase in mortgage rates during this period. Originations of mortgage loans to be sold totaled $501,818 in the first nine months of 2013 compared to $404,222 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.


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Deposits
The Company relies on deposits as its major source of funds. Total deposits were $4,834,756 and $3,461,221, at September 30, 2013 and December 31, 2012, respectively. Noninterest-bearing deposits were $876,138 and $568,214 at September 30, 2013 and December 31, 2012, respectively, while interest-bearing deposits were $3,958,618 and $2,893,007 at September 30, 2013 and December 31, 2012, respectively. The acquisition of First M&F increased total deposits $1,317,719 at September 30, 2013, of which $295,775 were noninterest-bearing deposits and the remaining $1,021,944 were interest-bearing deposits. Excluding the contribution from First M&F, the balance of total deposits at September 30, 2013 as compared to December 31, 2012 increased slightly, 1.61%, 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 $407,476 and $344,342 at September 30, 2013 and December 31, 2012, respectively. After excluding the contribution from the First M&F acquisition, deposits in our Alabama and Georgia markets decreased $51,007 and $18,717, respectively, at September 30, 2013 from December 31, 2012. Deposits in our Mississippi and Tennessee markets increased $100,404 and $63,612, respectively, at September 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 $76,429 and $83,843 at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013, $1,636 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 $1,193,445 of availability on unused lines of credit with the FHLB at September 30, 2013 compared to $1,160,984 at December 31, 2012. The cost of our FHLB advances was 4.22% and 4.33% for the first nine months of 2013 and 2012, respectively. In connection with the acquisition of First M&F, the Company assumed $30,928 in fixed/floating rate junior subordinated deferrable interest debentures payable to First M&F Statutory Trust I that mature in March 2036. The acquired subordinated debentures require interest to be paid quarterly at a rate of 90-day LIBOR plus 1.33%. The fair value adjustment on the junior subordinated debentures of $12,371 will be amortized on a straight line basis over their remaining life.
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 September 30, 2013 as Compared to the Three Months Ended September 30, 2012
Net Income
Net income for the three month period ended September 30, 2013 was $6,637, a decrease of 5.68%, as compared to net income of $7,037 for the three month period ended September 30, 2012. Basic and diluted earnings per share for the three month period ended September 30, 2013 were $0.24 as compared to $0.28 for the three month period ended September 30, 2012. The Company's 2013 third quarter results include $2,848, or $0.10 per share, in after-tax merger expenses associated with the acquisition of First M&F. Excluding merger expenses, basic and diluted earnings per share were $0.34 for the third quarter of 2013. No merger expenses were recognized during the third quarter of 2012. Net Interest Income


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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 $38,748 for the third quarter of 2013 compared to $33,132 for the same period in 2012. On a tax equivalent basis, net interest income was $40,201 for the third quarter of 2013 as compared to $34,591 for the third quarter of 2012. Net interest margin, the tax equivalent net yield on earning assets, decreased to 3.86% during the third quarter of 2013 from 3.94% for the same period in 2012.


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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 September 30,
                                              2013                                      2012
                                              Interest                                  Interest
                                Average        Income/      Yield/        Average        Income/      Yield/
                                Balance        Expense       Rate         Balance        Expense       Rate
Assets
Interest-earning assets:
Loans(1)                     $ 3,250,739     $  39,458        4.82 %   $ 2,754,017     $  34,553        4.99 %
Securities:
Taxable(2)                       601,158         3,438        2.27         448,960         2,672        2.36
Tax-exempt                       218,401         3,147        5.72         233,163         3,355        5.76
Interest-bearing balances
with banks                        64,470            48        0.30          55,801            33        0.23
Total interest-earning
assets                         4,134,768        46,091        4.42       3,491,941        40,613        4.63
Cash and due from banks          128,780                                    57,487
Intangible assets                214,436                                   191,442
FDIC loss-share
indemnification asset             29,368                                    51,727
Other assets                     221,693                                   285,736
Total assets                 $ 4,729,045                               $ 4,078,333
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Deposits:
Interest-bearing demand(3)   $ 1,675,891     $   1,071        0.25 %   $ 1,285,793     $     867        0.26 %
Savings deposits                 283,690           196        0.27         211,421           124        0.21
Time deposits                  1,314,129         3,046        0.92       1,383,034         3,456        1.21
Total interest-bearing
deposits                       3,273,710         4,313        0.52       2,880,248         4,447        0.63
Borrowed funds                   189,894         1,577        3.29         259,387         1,575        3.55
Total interest-bearing
liabilities                    3,463,604         5,890        0.67       3,139,635         6,022        0.80
Noninterest-bearing deposits     660,415                                   480,699
Other liabilities                 51,324                                    39,396
Shareholders' equity             553,702                                   483,121
Total liabilities and
shareholders' equity         $ 4,729,045                               $ 4,142,851
Net interest income/net
interest margin                              $  40,201        3.86 %                   $  34,591        3.94 %

(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.


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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 third quarter of 2013 compared to the third quarter of 2012:

                                      Volume        Rate       Net(1)
Interest income:
Loans (2)                            $ 6,111     $ (1,206 )   $ 4,905
Securities:
Taxable                                  854          (88 )       766
Tax-exempt                              (208 )          -        (208 )
Interest-bearing balances with banks       6            9          15
Total interest-earning assets          6,763       (1,285 )     5,478
Interest expense:
Interest-bearing demand deposits         425         (221 )       204
Savings deposits                          31           41          72
Time deposits                            235         (645 )      (410 )
Borrowed funds                           112         (110 )         2
Total interest-bearing liabilities       803         (935 )      (132 )
Change in net interest income        $ 5,960     $   (350 )   $ 5,610

(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 third quarter of 2013 as compared to the same period in 2012 was due largely to an increase of $496,722, or 18.04%, in the average balance of loans. First M&F contributed $312,486 to the average balance increase and the remainder was funded primarily by growth in non-time deposits. The improvement in the level of earning assets was partially offset by a 21 basis points reduction in their yield. The cost of interest bearing liabilities declined 13 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. The 8 basis points reduction in the net interest margin from 3.94% for the third quarter of 2012 to 3.86% for the third 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 $46,091 for the third quarter of 2013 compared to $40,613 for the same period in 2012. The increase in interest income was driven primarily by the increased level of the average balance of interest-earning assets offset by a decline in the yield on interest-earning assets. The following table presents the percentage of total average earning assets, by type and yield, for the periods presented: . . .

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