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RNST > SEC Filings for RNST > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for RENASANT CORP

Form 10-Q for RENASANT CORP


9-May-2014

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 March 31, 2014 compared to December 31, 2013. 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 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 $5,902,831 at March 31, 2014 compared to $5,746,270 at December 31, 2013.
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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                                                          Percentage of                            Percentage of
                                       March 31, 2014       Portfolio        December 31, 2013       Portfolio
Obligations of other U.S. Government
agencies and corporations            $        191,171            18.26 %   $           131,129            14.36 %
Obligations of states and political
subdivisions                                  297,354            28.41                 287,014            31.43
Mortgage-backed securities                    515,217            49.22                 453,644            49.67
Trust preferred securities                     19,378             1.85                  17,671             1.93
Other debt securities                          19,098             1.82                  19,554             2.14
Other equity securities                         4,470             0.44                   4,317             0.47
                                     $      1,046,688           100.00 %   $           913,329           100.00 %

The balance of our securities portfolio at March 31, 2014 increased $133,359 to $1,046,688 from $913,329 at December 31, 2013. During the first three months of 2014, we purchased $204,966 in investment securities. Mortgage-backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprised 37.22% 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 56.10% and 6.68%, respectively, of total securities purchased in the first quarter of 2014. There were no securities sold during the first three months of 2014. Maturities and calls of securities during the first three months of 2014 totaled $74,959.
The Company holds investments in pooled trust preferred securities. This portfolio had a cost basis of $27,514 and $27,531 and a fair value of $19,378 and $17,671 at March 31, 2014 and December 31, 2013, 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. The Company's quarterly evaluation of these investments for other-than-temporary-impairment resulted in no additional write-downs during the first quarter of 2014 or 2013. Furthermore, based on the qualitative factors discussed above, each of the four pooled trust preferred securities was classified as a nonaccruing asset at March 31, 2014 and December 31, 2013. 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:

                                                          Percentage of                            Percentage of
                                       March 31, 2014      Total Loans       December 31, 2013      Total Loans
Commercial, financial, agricultural  $        440,116            11.38 %   $           468,963            12.08 %
Lease financing                                   612             0.02                      52             0.01
Real estate - construction                    155,900             4.03                 161,436             4.16
Real estate - 1-4 family mortgage           1,211,260            31.32               1,208,233            31.13
Real estate - commercial mortgage           1,968,158            50.89               1,950,572            50.26
Installment loans to individuals               91,382             2.36                  91,762             2.36
Total loans, net of unearned income  $      3,867,428           100.00 %   $         3,881,018           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 March 31, 2014, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans in the categories table above. Total loans at March 31, 2014 were $3,867,428, a decrease of $13,590 from $3,881,018 at December 31, 2013. Loans covered under loss-share agreements with the FDIC (referred to as "covered loans") were $173,545 at March 31, 2014, a decrease of $8,129, or 4.48% compared to $181,674 at December 31, 2013. 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 provide reimbursement for five years from the acquisition date.


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Loans not covered under loss-share agreements with the FDIC (sometimes referred to as "not covered loans") at March 31, 2014 were $3,693,883, compared to $3,699,344 at December 31, 2013. Loans acquired from First M&F totaled $746,047 at March 31, 2014 compared to $813,543 at December 31, 2013. Excluding the loans acquired from First M&F, not covered loans increased $62,035 during the first three months of 2014. 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 $28,148 from December 31, 2013.
During the first three months of 2014, loans in our de novo markets of Mississippi, Tennessee and Alabama, excluding the contribution from First M&F, increased $14,056, $7,987 and $6,105, respectively.
The following table provides a breakdown of covered loans and loans not covered under loss-share agreements as of the dates presented:

                                                                     March 31, 2014
                                                              Acquired and
                                                             Covered Under                             Total
                                           Not Acquired        Loss Share         Acquired M&F         Loans
Commercial, financial, agricultural     $       347,828     $        8,283     $        84,005     $   440,116
Lease financing                                     612                  -                   -             612
Real estate - construction:
Residential                                      70,532              1,648               4,275          76,455
Commercial                                       78,528                  -                   -          78,528
Condominiums                                        389                  -                 528             917
Total real estate - construction                149,449              1,648               4,803         155,900
Real estate - 1-4 family mortgage:
Primary                                         536,268             16,378             149,597         702,243
Home equity                                     202,144             12,100              33,658         247,902
Rental/investment                               145,128             19,208              29,253         193,589
Land development                                 57,720              4,566               5,240          67,526
Total real estate - 1-4 family mortgage         941,260             52,252             217,748       1,211,260
Real estate - commercial mortgage:
Owner-occupied                                  572,769             51,785             187,967         812,521
Non-owner occupied                              752,969             30,252             202,881         986,102
Land development                                115,666             29,300              24,569         169,535
Total real estate - commercial mortgage       1,441,404            111,337             415,417       1,968,158
Installment loans to individuals                 67,283                 25              24,074          91,382
Total loans, net of unearned income     $     2,947,836     $      173,545     $       746,047     $ 3,867,428


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                                                                   December 31, 2013
                                                              Acquired and
                                                             Covered Under                             Total
                                           Not Acquired        Loss Share         Acquired M&F         Loans
Commercial, financial, agricultural     $       341,600     $        9,546     $       117,817     $   468,963
Lease financing                                      52                  -                   -              52
Real estate - construction:
Residential                                      62,577              1,648               7,907          72,132
Commercial                                       84,498                  -               4,279          88,777
Condominiums                                                             -                 527             527
Total real estate - construction                147,075              1,648              12,713         161,436
Real estate - 1-4 family mortgage:
Primary                                         531,956             16,586             153,909         702,451
Home equity                                     196,387             13,167              34,482         244,036
Rental/investment                               142,488             19,754              31,124         193,366
Land development                                 57,971              4,959               5,450          68,380
Total real estate - 1-4 family mortgage         928,802             54,466             224,965       1,208,233
Real estate - commercial mortgage:
Owner-occupied                                  563,104             54,294             172,520         789,918
Non-owner occupied                              727,744             31,855             229,559         989,158
Land development                                113,769             29,837              27,890         171,496
Total real estate - commercial mortgage       1,404,617            115,986             429,969       1,950,572
Installment loans to individuals                 63,655                 28              28,079          91,762
Total loans, net of unearned income     $     2,885,801     $      181,674     $       813,543     $ 3,881,018

Mortgage loans held for sale were $28,433 at March 31, 2014 compared to $33,440 at December 31, 2013. Originations of mortgage loans to be sold totaled $104,354 in the first three months of 2014 compared to $159,141 for the same period in 2013. Mortgage rates in the latter half of 2011 declined to historic lows and remained at these historically low levels throughout the first quarter of 2013, which prompted a significant increase in refinancings and, thus mortgage originations during this time period. Beginning in the second quarter of 2013 and continuing through the first quarter of 2014, mortgage rates increased from these historically low levels, resulting in a slowdown in originations. The increase in mortgage rates could result in lower future mortgage originations as refinancings decrease.
Mortgage loans to be sold are sold either on a "best efforts" basis or under a mandatory delivery sales agreement. Under a "best efforts" sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. 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 $5,004,784 and $4,841,912 at March 31, 2014 and December 31, 2013, respectively. Noninterest-bearing deposits were $914,964 and $856,020 at March 31, 2014 and December 31, 2013, respectively, while interest-bearing deposits were $4,089,820 and $3,985,892 at March 31, 2014 and December 31, 2013, respectively. The increase in total deposits at March 31, 2014 as compared to December 31, 2013 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. In addition, the increase in total deposits is partially attributable to a seasonal increase in public fund deposits.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


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at a rate that is prudent under the circumstances. Deposits from our de novo locations have also contributed to the increase in deposits during the first three months of 2014. Deposits from our de novo locations in Columbus and Starkville, Mississippi, Tuscaloosa and Montgomery, Alabama and Maryville and Jonesborough, Tennessee totaled $317,173 at March 31, 2014 representing an increase of $45,496 from December 31, 2013.
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 $510,762 and $420,539 at March 31, 2014 and December 31, 2013, respectively. Deposits in our Alabama and Georgia markets decreased $22,586 and $20,769, respectively, at March 31, 2014 from December 31, 2013. Deposits in our Mississippi and Tennessee markets increased $51,456 and $16,626, respectively, at March 31, 2014 from December 31, 2013. Borrowed Funds
Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the FHLB and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include securities sold under agreements to repurchase, federal funds purchased and FHLB advances. There were no short-term borrowings on the balance sheet at March 31, 2014, which is a decrease of $2,283 from December 31, 2013.
At March 31, 2014, long-term debt totaled $168,700 compared to $169,592 at December 31, 2013. 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, fixed rate commercial or real estate loans with long-term maturities. FHLB advances were $74,416 and $75,405 at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, $6,582 of the total FHLB advances outstanding were scheduled to mature within twelve (12) months or less. The Company had $1,609,519 of availability on unused lines of credit with the FHLB at March 31, 2014 compared to $1,595,864 at December 31, 2013. The cost of our FHLB advances was 4.19% and 4.25% for the first three months of 2014 and 2013, respectively.

Results of Operations
Three Months Ended March 31, 2014 as Compared to the Three Months Ended March 31, 2013
Net Income
Net income for the three month period ended March 31, 2014 was $13,597 compared to net income of $7,571 for the three month period ended March 31, 2013. Basic and diluted earnings per share for the three month period ended March 31, 2014 were $0.43 as compared to $0.30 for the three month period ended March 31, 2013. The increase in net income and earnings per share in the first quarter 2014 as compared to the first quarter of 2013 was due primarily to the acquisition of First M&F, improvement in our net interest margin and continued improvement in our credit risk profile.
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, comprising 73.49% of total net revenue for the first quarter of 2014. Total net revenue consists of net interest income on a fully taxable equivalent basis and noninterest income. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities. Net interest income increased to $49,971 for the first quarter of 2014 compared to $33,381 for the same period in 2013. On a tax equivalent basis, net interest income was $51,605 for the first quarter of 2014 as compared to $34,808 for the first quarter of 2013. Net interest margin, the tax equivalent net yield on earning assets, increased to 4.04% during the first quarter of 2014 compared to 3.89% for the first quarter of 2013. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve.


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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 March 31,
                                              2014                                      2013
                                              Interest                                  Interest
                                Average        Income/      Yield/        Average        Income/      Yield/
                                Balance        Expense       Rate         Balance        Expense       Rate
Assets
Interest-earning assets:
Loans(1)                     $ 3,888,673     $  49,767        5.19 %   $ 2,826,965     $  34,324        4.92 %
Securities:
Taxable(2)                       712,102         3,977        2.23         475,150         2,767        2.36
Tax-exempt                       290,417         3,868        5.33         223,713         3,232        5.86
Interest-bearing balances
with banks                       286,877           199        0.28         104,931            49        0.19
Total interest-earning
assets                         5,178,069        57,811        4.52       3,630,759        40,372        4.51
Cash and due from banks           93,578                                   163,321
Intangible assets                303,599                                   190,787
FDIC loss-share
indemnification asset             25,309                                    44,291
Other assets                     327,329                                   177,253
Total assets                 $ 5,927,884                               $ 4,206,411
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Deposits:
Interest-bearing demand(3)   $ 2,243,068     $   1,135        0.21 %   $ 1,492,237     $     922        0.25 %
Savings deposits                 336,655            72        0.09         246,801           120        0.20
Time deposits                  1,495,022         3,166        0.86       1,204,209         3,038        1.02
Total interest-bearing
deposits                       4,074,745         4,373        0.35       2,943,247         4,080        0.56
Borrowed funds                   170,091         1,833        4.35         163,981         1,484        3.67
Total interest-bearing
liabilities                    4,244,836         6,206        0.59       3,107,228         5,564        0.73
Noninterest-bearing deposits     949,317                                   549,514
Other liabilities                 60,685                                    48,035
Shareholders' equity             673,046                                   501,634
Total liabilities and
shareholders' equity         $ 5,927,884                               $ 4,206,411
Net interest income/net
interest margin                              $  51,605        4.04 %                   $  34,808        3.89 %

(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. . . .

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