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RNST > SEC Filings for RNST > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for RENASANT CORP

Form 10-K for RENASANT CORP


11-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
Performance Overview
Net income was $33,487 for 2013 compared to $26,637 for 2012 and $25,632 for 2011. The fluctuation in net income since 2011 was influenced by a number of factors:
- On September 1, 2013, the Company acquired First M&F Corporation, (First M&F), which operated 35 full-service banking offices and eight insurance offices throughout Mississippi, Tennessee and Alabama. The Company issued approximately 6.2 million shares of its common stock for 100% of the voting equity interests in First M&F in a transaction valued at $156,834. Including the effect of purchase accounting adjustments, the Company acquired assets with a fair value of $1,516,603 including loans with a fair value of $899,246, and assumed liabilities with a fair value of $1,361,079, including deposits with a fair value of $1,325,872. At the acquisition date, approximately $91,333 of goodwill and $25,033 of core deposit intangible assets were recorded.
- The Company expanded its franchise by opening de novo locations in Starkville, Mississippi and Montgomery and Tuscaloosa, Alabama during 2011, and Maryville and Jonesborough, Tennessee during 2012. In 2013, the Company expanded its Tennessee footprint by adding de novo locations in Johnson City and Bristol. These de novo branches contributed $327,020 to total loans and $271,677 to total deposits at December 31, 2013, and $185,722 to total loans and $134,113 to total deposits at December 31, 2012.
- Net interest income increased 17.90% to $157,201 for 2013 as compared to $133,338 for 2012; net interest income was $129,286 for 2011. Interest income on a tax equivalent basis increased 12.83% to $186,428 for 2013 from $165,236 for 2012. The increase from 2012 to 2013 was due primarily to the increase in average earnings assets from the acquisition of First M&F. Interest expense decreased 9.90% to $23,403 for 2013 compared to $25,975 for 2012; interest expense was $41,401 for 2011. The decrease was due to a shift from higher interest-bearing liabilities and the declining interest rate environment.
- Net charge-offs as a percentage of average loans decreased to 0.22% in 2013 compared to 0.67% in 2012. Net charge-offs as a percentage of average loans was 0.91% in 2011. The provision for loan losses was $10,350 for 2013 compared to $18,125 for 2012 and $22,350 for 2011.
- Noninterest income was $71,971 for 2013 compared to $68,711 for 2012 and $64,699 for 2011. The First M&F merger, higher levels of mortgage loan refinancings and fees and commissions on deposit services in 2013 helped drive the increase in noninterest income from 2012 and 2011. Our goal is to continue developing products that generate noninterest income in order to diversify our revenue streams.
- Noninterest expenses were $173,076 for 2013 compared to $150,459 for 2012 and $136,960 for 2011. The increase in noninterest expense during 2013 was primarily due to compensation and occupancy costs associated with our de novo locations and as well as our merger with First M&F.
- Loans, net of unearned income, totaled $3,881,018 at December 31, 2013, an increase of $1,070,765, or 38.10%, from December 31, 2012. Excluding the acquired loans of $813,543 from First M&F, the portfolio increased in size by $257,222. Our eight de novo branches contributed $141,298 in loan growth for 2013.
- Deposits totaled $4,841,912 at December 31, 2013, an increase of $1,380,691, or 39.89%, from December 31, 2012. Deposits acquired from First M&F totaled $1,301,130 at December 31, 2013. Management's strategy to build and maintain a stable source of funding through core deposits, driven by noninterest-bearing deposits, has allowed for certain higher costing time deposits to mature or expire without renewal, some of which have been replaced with noninterest-bearing deposits and other lower costing deposits. Deposits from our de novo locations also contributed $137,564 in deposits year over year.

A historical look at key performance indicators is presented below.

                                         2013       2012        2012        2010        2009
Diluted EPS                            $ 1.22     $ 1.06     $  1.02      $ 1.38     $  0.87
Diluted EPS Growth                      15.09 %     3.92 %    (26.09 )%    58.62 %    (23.68 )%
Return on Average Assets                 0.71 %     0.64 %      0.60  %     0.80 %      0.50  %
Return on Average Shareholders' Equity   6.01 %     5.39 %      5.34  %     7.16 %      4.56  %


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Critical Accounting Policies
Our financial statements are prepared using accounting estimates for various accounts. Wherever feasible, we utilize third-party information to provide management with estimates. Although independent third parties are engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. We monitor the status of proposed and newly issued accounting standards to evaluate the impact on our financial condition and results of operations. Our accounting policies, including the impact of newly issued accounting standards, are discussed in further detail in Note A, "Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data. The following discussion presents some of the more significant estimates used in preparing our financial statements.
Allowance for Loan Losses
The accounting policy most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses. The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under the Financial Accounting Standards Board Accounting Standards Codification Topic ("ASC") 450, "Contingencies" ("ASC 450"). Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310, "Receivables" ("ASC 310"). The balance of the loans determined to be impaired under ASC 310 and the related allowance is included in management's estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance is sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. Additionally, the estimate of the allowance required to absorb credit losses in the entire portfolio may change due to shifts in the mix and level of loan balances outstanding and in prevailing economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment rates and energy costs. While no one factor is dominant, each could cause actual loan losses to differ materially from originally estimated amounts. For a discussion of other considerations in establishing the allowance for loan losses and our loan policies and procedures for addressing credit risk, please refer to the disclosures in this Item under the heading "Risk Management - Credit Risk and Allowance for Loan Losses."
Certain loans acquired in acquisitions or mergers are accounted for under ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). ASC 310-30 prohibits the carryover of an allowance for loan losses for loans acquired in which the acquirer concludes that it will not collect the contractual amount. As a result, these loans are carried at values which represent management's estimate of the future cash flows of these loans. Increases in expected cash flows to be collected from the contractual cash flows are required to be recognized as an adjustment of the loan's yield over its remaining life, while decreases in expected cash flows are required to be recognized as an impairment. A more detailed discussion of loans accounted for under ASC 310-30, which were acquired in connection with our mergers with First M&F in 2013, Capital Bancorp, Inc. ("Capital") in 2007 and with Heritage Financial Holding Corporation ("Heritage") in 2005 and our acquisitions of Crescent and American Trust in FDIC-assisted transactions in 2010 and 2011, respectively, is set forth below under the heading "Risk Management - Credit Risk and Allowance for Loan Losses" and in Note D, "Loans and the Allowance for Loan Losses," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data. Other-Than-Temporary-Impairment on Investment Securities On a quarterly basis, we evaluate our investment portfolio for other-than-temporary-impairment ("OTTI") in accordance with ASC 320, "Investments - Debt and Equity Securities." An investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis. When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded in earnings. When impairment of a debt security is considered to be other-than-temporary, the security is written down to its fair value. The amount of OTTI recorded as a loss in earnings depends on whether we intend to sell the debt security and whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value is recorded as an impairment loss in earnings. If we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, OTTI is separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss is recognized in earnings. The amount related to other market factors is recognized in other comprehensive income, net of applicable taxes.
The amount of OTTI recorded in earnings as a credit loss is dependent upon management's estimate of discounted future cash flows expected from the investment security. The difference between the expected cash flows and the amortized cost basis of the security is considered to be credit loss. The remaining difference between the fair value and the amortized cost basis of the security is considered to be related to all other market factors. Our estimate of discounted future cash flows incorporates a number of assumptions based on both qualitative and quantitative factors. Performance indicators of the security's underlying assets, including


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credit ratings and current and projected default and deferral rates, as well as the credit quality and capital ratios of the issuing institutions are considered in the analysis. Changes in these assumptions could impact the amount of OTTI recognized as a credit loss in earnings. For additional information regarding the evaluation of our securities portfolio for OTTI, please refer to Note A, "Significant Accounting Policies," and Note C, "Securities," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.
Intangible Assets
Our intangible assets consist primarily of goodwill, core deposit intangibles, and customer relationship intangibles. Goodwill arises from business combinations and represents the value attributable to unidentifiable intangible elements of the business acquired. We review the goodwill of each of our reporting units (that is, our reportable segments for financial accounting purposes) for impairment on an annual basis, or more often, if events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is below the carrying value of its equity. In determining the fair value of our reporting units, we use both the market and discounted cash flow approaches. The market approach averages the values derived by applying a market multiple, based on observed purchase transactions, to the book value, tangible book value, loan and/or deposit balances and the last twelve months adjusted and unadjusted net income. The discounted cash flow approach requires assumptions about short and long-term net cash flow growth rates for each reporting unit, as well as discount rates. Long-term net cash flow forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, market share changes, anticipated loan and deposit growth, historical performance, and industry and economic trends, among other considerations.
We assess the reasonableness of the estimated fair value of the reporting units by reference to our market capitalization; however, due to the significant volatility in the equity markets with respect to the financial institution sector since 2008, we also consulted supplemental information based on observable market multiples, adjusting to reflect our specific factors, as well as current market conditions.
The estimated fair value of a reporting unit is highly sensitive to changes in the estimates and assumptions. In some instances changes in these assumptions could impact whether the fair value of a reporting unit is greater than its carrying value. We perform sensitivity analyses around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. If the carrying value of a reporting unit's equity exceeds its estimated fair value, we then calculate the fair value of the reporting unit's implied goodwill. Implied goodwill is the excess fair value of a reporting unit (as determined using the above-described methodology) over the fair value of its net assets and is calculated by determining the fair value of the reporting unit's assets and liabilities, including previously unrecognized intangible assets, on an individual basis. This calculation is performed in the same manner as goodwill is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.
Other identifiable intangible assets, primarily core deposit intangibles and customer relationship intangibles, are reviewed at least annually for events or circumstances which could impact the recoverability of the intangible asset, such as loss of core deposits, increased competition or adverse changes in the economy. To the extent any other identifiable intangible asset is deemed unrecoverable, an impairment loss would be recorded as a noninterest expense to reduce the carrying amount. These events or circumstances, when or if they occur, could be material to our operating results for any particular reporting period.
Benefit Plans and Stock Based Compensation Our independent actuary firm prepares actuarial valuations of our pension cost under ASC 715, "Compensation - Retirement Benefits" ("ASC 715"). The discount rate utilized in the December 31, 2013 valuation was 4.83%, compared to 3.90% in 2012. Actual plan assets as of December 31, 2013 were used in the calculation and the expected long-term return on plan assets assumed for this valuation was 8.00%. Changes in these assumptions and estimates can materially affect the benefit plan obligation and the funded status of the plan which in turn may impact shareholders' equity through an adjustment to accumulated other comprehensive income and future pension expense. The pension plan covered under ASC 715 was frozen as of December 31, 1996.
The Company recognizes compensation expense for all share-based payments to employees in accordance with ASC 718, "Compensation - Stock Compensation." We utilize the Black-Scholes model for determining fair value of our options. Determining the fair value of, and ultimately the expense we recognize related to, our stock options requires us to make assumptions regarding dividend yields, expected stock price volatility, estimated forfeitures and the expected life of the option. Changes in these assumptions and estimates can materially affect the calculated fair value of stock-based compensation and the related expense to be recognized. Due to the low historical forfeiture rate, the Company has not estimated any forfeitures in determining the fair value of options granted in 2013, 2012 and 2011. Changes in this assumption in the future could result in lower expenses related to the Company's stock options. For a description of our assumptions utilized in calculating the fair value of our share-based payments, please refer to Note N, "Employee Benefit and Deferred Compensation Plans," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.


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Business Combinations, Accounting for Acquired Loans and Related Assets The Company accounts for its acquisitions under ASC 805, "Business Combinations", which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value measurements incorporate assumptions regarding credit risk. The fair value measurements of acquired loans are based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. The Company evaluates, as of the end of each fiscal quarter, the present value of the acquired loans determined using the effective interest rates. If the cash flows expected to be collected have decreased, the Company recognizes a provision for loan loss in its consolidated statement of income; for any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan's or pool's remaining life.
Because the FDIC will reimburse the Company for losses related to a portion of the loans acquired in the Crescent and American Trust transactions, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans and measured on the same basis, subject to collectability or contractual limitations. The fair value of the indemnification asset reflects the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties. The indemnification asset is measured on the same basis as the related indemnified loans. Subsequent changes to the fair value of the indemnification asset also follow that model. Decreases in the future cash flows expected to be collected on the loans immediately increase the fair value of the indemnification asset. Increases in the future cash flows expected to be collected on the loans decrease the fair value of the indemnification asset, with such decrease being accreted into interest income over (1) the same period or (2) the life of the fair value of the indemnification asset, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared loss agreements.
Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding receivable is recorded on the balance sheet until cash is received from the FDIC. Income Taxes
Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of "Other assets" in the Consolidated Balance Sheets. The calculation of our income tax expense is complex and requires the use of many estimates and judgments in its determination.
Management's determination of the realization of the net deferred tax asset is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income earned by certain subsidiaries and the implementation of various tax plans to maximize realization of the deferred tax asset. Management believes that the Company and its subsidiaries will generate sufficient operating earnings to realize the deferred tax assets. For certain business plans enacted by the Company, management bases the estimates of related tax liabilities on its belief that future events will validate management's current assumptions regarding the ultimate outcome of tax-related exposures. As part of this process, management consults with its outside advisers to assess the relative merits and risks of our proposed tax treatment of such business plans. Although we have received from these outside advisers opinions that our proposed tax treatment should prevail, the examination of our income tax returns, changes in tax law and regulatory guidance may impact the tax treatment of these transactions and resulting provisions for income taxes.
We believe that we employ appropriate methods for these calculations and that the results of such calculations closely approximate the actual cost. We review the calculated results for reasonableness and compare those calculations to prior period costs. We also consider the effect of current economic conditions on the calculations.
For additional information regarding our income tax accounting, please refer to Note A, "Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

Financial Condition
Assets
Total assets were $5,746,270 at December 31, 2013 compared to $4,178,616 at December 31, 2012. The increase in total assets in 2013 as compared to 2012 is primarily attributable to the acquisition of First M&F. The following discussion provides details regarding the changes in significant balance sheet accounts.


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Acquisition of First M&F Corporation
On September 1, 2013, the Company completed its acquisition of First M&F, a bank holding company headquartered in Kosciusko, Mississippi, and the Bank completed its acquisition of First M&F's wholly-owned subsidiary, Merchants and Farmers Bank. Prior to the merger, First M&F operated 35 full-service banking offices and eight insurance offices throughout Mississippi, Tennessee and Alabama. The Company issued approximately 6.2 million shares of its common stock for 100% of the voting equity interests in First M&F in a transaction valued at $156,834. Including the effect of purchase accounting adjustments, the Company acquired assets with a fair value of $1,516,603 including loans with a fair value of $899,246, and assumed liabilities with a fair value of $1,361,079, including deposits with a fair value of $1,325,872. At the acquisition date, approximately $91,333 of goodwill and $25,033 of core deposit intangible assets were recorded. See Note B, "Mergers and Acquisitions," in the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," for additional details regarding the Company's merger with First M&F. 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, at December 31:

                                           2013                       2012                       2011
                                                  % of                       % of                       % of
                                   Balance     Portfolio      Balance     Portfolio      Balance     Portfolio
Obligations of other U.S.
Government agencies and
corporations                     $ 131,129        14.36 %   $  92,487        13.72 %   $ 125,055        15.70 %
Obligations of states and
political subdivisions             287,014        31.43       227,721        33.78       224,750        28.22
Mortgage-backed securities         453,644        49.67       312,803        46.40       409,639        51.44
Trust preferred securities          17,671         1.93        15,068         2.24        12,785         1.61
Other debt securities               19,554         2.14        22,930         3.40        21,875         2.75
Other equity securities              4,317         0.47         3,068         0.46         2,237         0.28
                                 $ 913,329       100.00 %   $ 674,077       100.00 %   $ 796,341       100.00 %

The balance of our investment portfolio at December 31, 2013 was $913,329 compared to $674,077 at December 31, 2012. The acquisition of First M&F contributed $227,693 to the securities portfolio. During 2013, we purchased $233,221 in investment securities. Mortgage-backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprised 68.06% of the purchases. CMOs are included in the "Mortgage-backed securities" line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. U.S. Government Agency securities and municipal securities accounted for 29.15% and 3.47%, respectively, of total securities purchased in 2013. The carrying value of securities sold during 2013 totaled $13,409. Maturities and calls of securities during 2013 totaled $193,041. At December 31, 2013 and 2012, unrealized losses of $20,041 and $14,035, respectively, were recorded on investment securities with a carrying value of $279,165 and $78,908, respectively. The increase in unrealized losses and the amount of investments securities in an unrealized loss position is due primarily to an increase in interest rates during 2013. The Company holds investments in pooled trust preferred securities that had a cost basis of $27,531 and $28,612 and a fair value of $17,671 and $15,068 at December 31, 2013 and 2012, respectively. The investments in pooled trust preferred securities consist 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. The Company's quarterly evaluation of these investments for other-than-temporary-impairment resulted in no write-downs for the years ended December 31, 2013 and 2012. The Company recorded a $262 other-than-temporary-impairment for the year ended December 31, 2011. Furthermore, based on the qualitative factors discussed above, each of the four . . .

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