UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2011
Or
For the transition period from to
Commission file number 001-13253
RENASANT CORPORATION
(Exact name of registrant as specified in its charter)
(662) 680-1001
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of October 31, 2011, 25,061,068 shares of the registrant’s common stock, $5.00 par value per share, were outstanding. The registrant has no other classes of securities outstanding.
RENASANT CORPORATION AND SUBSIDIARIES
Form 10-Q
CONTENTS
PART I - FINANCIAL INFORMATION
PART II - OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX
PART I. FINANCIAL INFORMATION
Renasant Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
Assets
Cash and due from banks
Interest-bearing balances with banks
Cash and cash equivalents
Securities held to maturity (fair value of $262,342 and $228,157, respectively)
Securities available for sale, at fair value
Mortgage loans held for sale
Loans, net of unearned income:
Covered under loss-share agreements
Not covered under loss-share agreements
Total loans, net of unearned income
Allowance for loan losses
Loans, net
Premises and equipment, net
Other real estate owned and repossessions:
Total other real estate owned and repossessions
Goodwill
Other intangible assets, net
FDIC loss-share indemnification asset
Other assets
Total assets
Liabilities and shareholders’ equity
Liabilities
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term debt
Other liabilities
Total liabilities
Shareholders’ equity
Preferred stock, $.01 par value – 5,000,000 shares authorized; no shares issued and outstanding
Common stock, $5.00 par value – 75,000,000 shares authorized, 26,715,797 shares issued; 25,061,068 and 25,043,112 shares outstanding, respectively
Treasury stock, at cost
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements.
3
Consolidated Statements of Income (Unaudited)
Interest income
Loans
Securities
Taxable
Tax-exempt
Other
Total interest income
Interest expense
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges on deposit accounts
Fees and commissions
Insurance commissions
Trust revenue
Gains on sales of securities
Other-than-temporary-impairment losses on securities available for sale
Non-credit related portion of other-than-temporary impairment on securities, recognized in other comprehensive income
Net impairment losses on securities
BOLI income
Gains on sales of mortgage loans held for sale
Gain on acquisition
Total noninterest income
Noninterest expense
Salaries and employee benefits
Data processing
Net occupancy and equipment
Other real estate owned
Professional fees
Advertising and public relations
Intangible amortization
Communications
Merger-related expenses
Extinguishment of debt
Total noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends per common share
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Operating activities
Net cash provided by operating activities
Investing activities
Purchases of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from call/maturities of securities available for sale
Purchases of securities held to maturity
Proceeds from sales of securities held to maturity
Proceeds from call/maturities of securities held to maturity
Net (increase) decrease in loans
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Net cash paid in acquisition
Net cash received in acquisition
Net cash provided by investing activities
Financing activities
Net increase in noninterest-bearing deposits
Net decrease in interest-bearing deposits
Net increase (decrease) in short-term borrowings
Proceeds from long-term debt
Repayment of long-term debt
Cash paid for dividends
Cash received on exercise of stock-based compensation
Excess tax benefit from stock-based compensation
Proceeds from equity offering
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures
Noncash transactions:
Transfers of loans to other real estate
5
Notes to Consolidated Financial Statements (Unaudited)
Note A – Significant Accounting Policies
Basis of Presentation: Renasant Corporation (referred to herein as the “Company”) owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. The Company offers a diversified range of financial and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and north central Mississippi, west and middle Tennessee, north and central Alabama and north Georgia.
The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information regarding the Company’s accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
The Company has evaluated subsequent events that have occurred after September 30, 2011 through the date of issuance of its financial statements for consideration of recognition or disclosure.
Impact of Recently-Issued Accounting Standards and Pronouncements: In January 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification Topic (“ASC”) 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) that requires a reporting entity to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using Level 3 inputs. These disclosures are effective for interim and annual reporting periods beginning after December 15, 2010. See Note J, “Fair Value Measurements,” in these Notes to Consolidated Financial Statements for further disclosures regarding the Company’s adoption of this update.
In July 2010, FASB issued an update to ASC 310, “Receivables,” (“ASC 310”) that requires enhanced and additional disclosures that will provide financial statement users with greater transparency about a reporting entity’s allowance for credit losses and the credit quality of its financial receivables. A reporting entity must provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in its portfolio of financing receivables, explaining how that risk is analyzed and assessed in arriving at the allowance for credit losses, and detailing the changes and reasons for those changes in the allowance for credit losses. To achieve those objectives, a reporting entity should provide disclosures by portfolio segment and/or by class of financing receivable. This update to ASC 310 amends existing disclosures to require a reporting entity to provide a rollforward schedule of the allowance for credit losses on a portfolio segment basis, with the ending balance further segregated by impairment method. A reporting entity must also present nonaccrual, past due 90 days or more and still accruing and impaired financing receivables by class. Additional disclosures include (i) credit quality indicators of financing receivables at the end of the reporting period presented by class, (ii) the aging of past due financing receivables at the end of the reporting period presented by class, (iii) the nature and extent of troubled debt restructurings that occurred during the period presented by class and their effect on the allowance for credit losses, (iv) the nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period presented by class and their effect on the allowance for credit losses, and (v) significant purchases and sales of financing receivables during the reporting period presented by portfolio segment. The disclosures as of the end of a reporting period became effective for the Company’s financial statements at December 31, 2010. The disclosures about activity that occurs during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011. See Note D, “Loans and the Allowance for Loan Losses,” in these Notes to Consolidated Financial Statements for disclosures reflecting the Company’s adoption of this update. An update issued in January 2011 temporarily deferred the effective date for the disclosures related to troubled debt restructurings to be concurrent with the effective date of the then-proposed update which is discussed in the following paragraph.
6
Note A – Significant Accounting Policies (continued)
In April 2011, FASB issued an update to ASC 310 that clarifies which loan modifications constitute troubled debt restructurings in conformity with ASC 310 and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude both that the restructuring constitutes a concession by the creditor to the borrower and that the borrower is experiencing financial difficulties. This update to ASC 310 became effective for interim and annual reporting periods beginning on or after June 15, 2011 and was to be applied retrospectively to troubled debt restructurings occurring on or after the beginning of the fiscal year of adoption. See Note D, “Loans and the Allowance for Loan Losses,” in these Notes to Consolidated Financial Statements for disclosures reflecting the Company’s adoption of this update.
In June 2011, FASB issued an update to ASC 220, “Comprehensive Income,” (“ASC 220”) that eliminates the option to present components of other comprehensive income as part of the Statements of Changes in Shareholders’ Equity. This update requires that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update to ASC 220 is effective for interim and annual reporting periods beginning on or after December 15, 2011 and should be applied retrospectively. The Company is currently in the process of evaluating the impact of adopting this update on its financial statements.
In September 2011, FASB issued an update to ASC 350, “Intangibles – Goodwill and Other,” (“ASC 350”) that gives a reporting entity the option, before performing the two-step impairment test required under ASC 350, to first assess qualitative factors to determine whether the existence of events or circumstances requires a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing these qualitative factors, a reporting entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if a reporting entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the reporting entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. The update to ASC 350 also provides that a reporting entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. A reporting entity may resume performing the qualitative assessment in any subsequent period. This update to ASC 350 is effective for annual and interim impairment tests beginning after December 15, 2011. The Company is currently in the process of evaluating the impact of adopting this update on its goodwill impairment testing process.
7
Note B – Mergers and Acquisitions
Acquisition of RBC Bank (USA) Trust Division
On August 31, 2011, the Company acquired the Birmingham, Alabama-based trust department of RBC Bank (USA), which services clients in Alabama and Georgia. Under the terms of the transaction, RBC Bank (USA) transferred its approximately $680,000 in assets under management, comprised of personal and institutional clients with over 200 trust, custodial and escrow accounts, to a wholly-owned subsidiary, and Renasant Bank acquired all of the ownership interests in the subsidiary. In connection with the acquisition, the Company recognized a gain of $570, which is recognized under the line item “Gain on acquisition” in the Consolidated Statements of Income for the three and nine months ended September 30, 2011. Acquisition costs related to the transaction of $326 were recognized under the line item “Merger-related expenses” in the Consolidated Statements of Income for the three and nine months ended September 30, 2011.
FDIC-Assisted Acquisition of Certain Assets and Liabilities of American Trust Bank
On February 4, 2011, the Bank entered into a purchase and assumption agreement with loss-share agreements with the Federal Deposit Insurance Corporation (the “FDIC”) to acquire specified assets and assume specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”). American Trust operated 3 branches in the northwest region of Georgia.
In connection with the acquisition, the Bank entered into loss-share agreements with the FDIC that covered $73,657 of American Trust loans (the “covered loans”). The Bank will share in the losses on the asset pools (including single family residential mortgage loans and commercial loans) covered under the loss-share agreements. Pursuant to the terms of the loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses with respect to covered loans, beginning with the first dollar of loss incurred. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered loans.
The acquisition of American Trust resulted in a pre-tax gain of $8,774. Due to the difference in tax bases of the assets acquired and liabilities assumed, the Company recorded a deferred tax liability of $3,356, resulting in an after-tax gain of $5,418. Acquisition costs related to the American Trust acquisition of $1,325 were recognized under the line item “Merger-related expenses” in the Consolidated Statements of Income for the nine months ended September 30, 2011.
The following table sets forth the fair values of the assets acquired and liabilities assumed by the Bank in the acquisition of American Trust as of February 4, 2011:
Assets Acquired
Securities available for sale
Federal Home Loan Bank stock
Core deposit intangible
Total assets acquired
Liabilities Assumed
Deposits:
Advances from the Federal Home Loan Bank
Accrued expenses and other liabilities
Total liabilities assumed
Net assets acquired
Deferred tax liability
Net assets assumed, including deferred tax liability
8
Note B – Mergers and Acquistions (continued)
The Company’s operating results for the three and nine months ended September 30, 2011 include the operating results of the assets acquired and liabilities assumed in the American Trust acquisition subsequent to the February 4, 2011 closing date. The significance of the fair value adjustments recorded as well as the nature of the loss-share agreements in connection with an FDIC-assisted transaction are integral to accurately assessing the impact of the acquired operations on the operations of the Company. Disclosure of pro forma financial information is made more difficult by the troubled nature of American Trust prior to the date of the acquisition. Therefore, the Company has determined that pro forma financial information in relation to the acquisition of American Trust is neither practical nor meaningful.
FDIC-Assisted Acquisition of Certain Assets and Liabilities of Crescent Bank & Trust
On July 23, 2010 the Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the FDIC, as receiver for Crescent. For more information regarding the Crescent acquisition, please refer to Note B, “FDIC-Assisted Acquisition of Certain Assets and Liabilities of Crescent Bank & Trust,” in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
9
Note C – Securities
The amortized cost and fair value of securities held to maturity were as follows:
September 30, 2011
Obligations of other U.S. Government agencies and corporations
Obligations of states and political subdivisions
December 31, 2010
In light of the ongoing fiscal uncertainty in state and local governments, the Company analyzed its exposure to potential losses in its security portfolio. Management reviewed the underlying credit rating and analyzed the financial condition of the respective issuers. Based on this analysis, the Company sold certain securities representing obligations of state and political subdivisions that were classified as held to maturity. The securities sold showed significant credit deterioration in that an analysis of the financial condition of the respective issuers showed the issuers were operating at net deficits with little to no financial cushion to offset future contingencies. These securities had a carrying value of $13,017 and the Company recognized a net gain of $16 on the sale during the nine months ended September 30, 2011.
The amortized cost and fair value of securities available for sale were as follows:
Mortgage-backed securities
Trust preferred securities
Other equity securities
Gross gains on sales of securities available for sale for the nine months ended September 30, 2011 and 2010 were $5,041 and $4,499, respectively. No securities available for sale were sold at a loss during the nine months ended September 30, 2011. Gross losses on sales of securities available for sale were $544 for the nine months ended September 30, 2010.
10
Note C – Securities (continued)
The amortized cost and fair value of securities at September 30, 2011 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
The following table presents the age of gross unrealized losses and fair value by investment category:
Held to Maturity:
Obligations of other U.S Government agencies and corporations
Total
Available for Sale:
11
The Company evaluates its investment portfolio for other-than-temporary-impairment (“OTTI”) on a quarterly basis. Impairment is assessed at the individual security level. The Company considers an investment security 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 as a loss within noninterest income in the Consolidated Statements of Income. 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 within noninterest income depends on whether an entity intends to sell the debt security and whether it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis. If an entity intends to, or has decided to, sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, OTTI must be recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the debt security and it is not more likely than not that the entity 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 Company holds investments in pooled trust preferred securities that had a cost basis of $30,410 and $29,452 and a fair value of $9,986 and $1,433 at September 30, 2011 and December 31, 2010, respectively. The investments in pooled trust preferred securities consists of four securities representing interests in various tranches of trusts collateralized by debt issued by over 358 financial institutions. Management’s determination of the fair value of each of its holdings in pooled trust preferred securities 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 the Company’s tranches is negatively impacted. In addition, management continually monitors key credit quality and capital ratios of the issuing institutions. This determination is further supported by quarterly valuations of each security obtained by the Company performed by third parties. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of the investments’ amortized cost, which may be maturity. At September 30, 2011, management did not, and does not currently, believe such securities will be settled at a price less than the amortized cost of the investment.
The following table provides information regarding the Company’s investments in pooled trust preferred securities at September 30, 2011:
Name
XIII
XXIII
XXIV
XXVI
The Company recognized credit related impairment losses on securities deemed other-than-temporarily impaired of $262 and $3,075 during the nine months ended September 30, 2011 and 2010, respectively. The following table provides a summary of the cumulative credit related losses recognized in earnings for which a portion of OTTI has been recognized in other comprehensive income:
Balance at January 1
Additions related to credit losses for which OTTI was not previously recognized
Increases in credit loss for which OTTI was previously recognized
Balance at September 30
12
Note D – Loans and the Allowance for Loan Losses
The following is a summary of loans:
Commercial, financial, agricultural
Lease financing
Real estate – construction
Real estate – 1-4 family mortgage
Real estate – commercial mortgage
Installment loans to individuals
Gross loans
Unearned income
Loans, net of unearned income
Net loans
Loans acquired in FDIC-assisted acquisitions were recorded, as of their respective acquisition dates, at fair value. The fair value of these loans represents the expected discounted cash flows to be received over the lives of the loans, taking into account the Company’s estimate of future credit losses on the loans. These loans were excluded from the calculation of the allowance for loan losses and no provision for loan losses was recorded for these loans during the nine months ended September 30, 2011 or for the year ended December 31, 2010 because the fair value measurement incorporates an estimate of losses on acquired loans. The Company will continue to monitor future cash flows on these loans; to the extent future cash flows deteriorate below initial projections, the Company may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses.
In these Notes to Consolidated Financial Statements, the Company refers to loans subject to the loss-share agreements as “covered loans” or “loans covered under loss-share agreements” and loans that are not subject to the loss-share agreements as “not covered loans” or “loans not covered by loss-share agreements.”
A summary of loans acquired in FDIC-assisted acquisitions at fair value follows:
13
Note D – Loans and the Allowance for Loan Losses (continued)
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to earnings resulting from measurements of inherent credit risk in the loan portfolio and estimates of probable losses or impairments of individual loans. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The following table provides a rollforward of the allowance for loan losses and a breakdown of the ending balance of the allowance based on the Company’s impairment methodology for the periods presented:
Three months ended September 30, 2011
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Ending balance
Nine Months Ended September 30, 2011
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired with deteriorated credit quality
Three months ended September 30, 2010
Nine Months Ended September 30, 2010
September 30, 2010
Includes lease financing receivables.
14
The following table provides recorded investment in loans, net of unearned income, based on the Company’s impairment methodology as of the dates presented:
15
Credit Quality
For commercial and commercial real estate secured loans, internal risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances of commercial and commercial real estate secured loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans that migrate toward the “Pass” grade (those with a risk rating between 1 and 4) or within the “Pass” grade generally have a lower risk of loss and therefore a lower risk factor. The “Watch” grade (those with a risk rating of 5) is utilized on a temporary basis for “Pass” grade loans where a significant risk-modifying action is anticipated in the near term. Loans that migrate toward the “Substandard” grade (those with a risk rating between 6 and 9) generally have a higher risk of loss and therefore a higher risk factor applied to those related loan balances. The following table presents the Company’s loan portfolio by risk-rating grades:
For portfolio balances of consumer, consumer mortgage and certain other similar loan types, allowance factors are determined based on historical loss ratios by portfolio for the preceding eight quarters and may be adjusted by other qualitative criteria. The following table presents the performing status of the Company’s loan portfolio not subject to risk rating:
16
Past Due and Nonaccrual Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, the recognition of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer and other retail loans are typically charged-off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans may be placed on nonaccrual regardless of whether or not such loans are considered past due. All interest accrued for the current year, but not collected, for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table provides an aging of past due and nonaccrual loans, segregated by class:
Real estate –
1-4 family mortgage
17
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for commercial and construction loans above a minimum dollar amount threshold by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are evaluated collectively for impairment. When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded balance has been reduced to zero, future cash receipts are applied to interest income, to the extent any interest has been foregone, and then they are recorded as recoveries of any amounts previously charged-off. For impaired loans, a specific reserve is established to adjust the carrying value of the loan to its estimated net realizable value.
Impaired loans recognized in conformity with ASC 310, segregated by class, were as follows:
With a related allowance recorded:
With no related allowance recorded:
Totals
Includes interest income recognized using the cash-basis method of income recognition of $500 and $342, respectively.
Includes interest income recognized using the cash-basis method of income recognition of $891 and $599, respectively.
18
Restructured Loans
Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest.
The following table presents restructured loans segregated by class:
Changes in the Company’s restructured loans were as follows:
Totals at January 1, 2011
Additional loans with concessions
Reductions due to:
Reclassified as nonperforming
Transfer to other real estate owned
Principal paydowns
Lapse of concession period
Totals at September 30, 2011
The allocated allowance for loan losses attributable to restructured loans was $5,807 and $5,138 at September 30, 2011 and December 31, 2010, respectively. The Company had $772 and $1,122 in remaining availability under commitments to lend additional funds on these restructured loans at September 30, 2011 and December 31, 2010, respectively.
19
Loans Acquired with Deteriorated Credit Quality
Certain loans acquired in connection with prior acquisitions (excluding FDIC-assisted acquisitions) exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, and it was probable that all contractually required payments would not be collected. The amount of such loans included in the Consolidated Balance Sheets under the line item “Loans - Not covered under loss-share agreements” at September 30, 2011 were as follows:
Total outstanding balance
Nonaccretable difference
Cash flows expected to be collected
Accretable yield
Fair value
Changes in the accretable yield of these loans were as follows:
Balance at January 1, 2011
Additions
Reclassifications from nonaccretable difference
Accretion
Balance at September 30, 2011
The following table presents the fair value of loans covered by loss-share agreements determined to be impaired at the time of acquisition and determined not to be impaired at the time of acquisition at September 30, 2011:
Contractually-required principal and interest
Nonaccretable difference(1)
Accretable yield(2)
Represents contractual principal and interest cash flows of $67,385 and $11,152, respectively, not expected to be collected.
Represents future interest payments of $6,678 expected to be collected and purchase discount of $3,779.
Changes in the accretable yield of covered loans were as follows:
Additions through acquisition
20
Note E – Other Real Estate and Repossessions
The following table provides details of the Company’s other real estate owned and repossessions (“OREO”) covered and not covered under a loss-share agreement:
Residential real estate
Commercial real estate
Residential land development
Commercial land development
Total other real estate and repossessions
Changes in the Company’s OREO covered and not covered under a loss-share agreement were as follows:
Transfers of loans
Capitalized improvements
Impairments
Dispositions
OREO with a cost basis of $34,759 was sold during the nine months ended September 30, 2011, resulting in a net loss of $2,414, while OREO with a cost basis of $19,216 was sold during the nine months ended September 30, 2010, resulting in a net loss of $746.
21
Note F – FDIC Loss-Share Indemnification Asset
As part of the loan portfolio fair value estimation in connection with the Crescent and American Trust acquisitions, the Bank established a FDIC loss-share indemnification asset, which represents the present value of the estimated losses on loans to be reimbursed by the FDIC. The estimated losses were based on the same cash flow estimates used in determining the fair value of the loans. The FDIC loss-share indemnification asset will be reduced as losses are recognized on loans and loss-share payments are received from the FDIC. Realized losses in excess of estimates as of the dates of the respective acquisitions will increase the FDIC loss-share indemnification asset. Conversely, if realized losses are less than these estimates, the portion of the FDIC loss-share indemnification asset no longer expected to result in a payment from the FDIC will be amortized to interest income using the effective interest method.
Changes in the loss-share indemnification asset were as follows:
Realized losses in excess of initial estimates
Reimbursements received
Note G - Employee Benefit and Deferred Compensation Plans
The plan expense for the Company-sponsored noncontributory defined benefit pension plan (“Pension Benefits”) and post-retirement health and life plans (“Other Benefits”) for the periods presented was as follows:
Service cost
Interest cost
Expected return on plan assets
Prior service cost recognized
Recognized actuarial loss
Recognized curtailment loss
Net periodic benefit (income) cost
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Note G – Employee Benefit and Deferred Compensation Plans (continued)
In January 2011 and 2010, the Company granted stock options which generally vest and become exercisable in equal installments of 33 1/3% upon completion of one, two and three years of service measured from the grant date. The fair value of stock option grants is estimated on the grant date using the Black-Scholes option-pricing model. The Company employed the following assumptions with respect to its stock option grants in 2011 and 2010 for the nine month periods ended September 30, 2011 and 2010:
Shares granted
Dividend yield
Expected volatility
Risk-free interest rate
Expected lives
Weighted average exercise price
Weighted average fair value
In addition, the Company awarded 7,500 shares of time-based restricted stock and 34,500 shares of performance-based restricted stock in January 2011. The time-based restricted stock is earned 100% upon completion of three years of service measured from the grant date. The performance-based restricted stock is earned, if at all, if the Company meets or exceeds financial performance results defined by the board of directors for the year in which the grant was made. The fair value of the restricted stock grants on the date of the grants was $16.91 per share.
During the nine months ended September 30, 2011, the Company reissued 17,956 shares from treasury in connection with the exercise of stock-based compensation. The Company recorded total stock-based compensation expense of $904 and $373 for the nine months ended September 30, 2011 and 2010, respectively.
Note H – Segment Reporting
The Company’s internal reporting process is currently organized into four segments that account for the Company’s principal activities: the delivery of financial services through its community banks in Mississippi, Tennessee and Alabama and the delivery of insurance services through its insurance agency. In order to give the Company’s regional management a more precise indication of the income and expenses they can control, the results of operations for the geographic regions of the community banks and for the insurance company reflect the direct revenues and expenses of each respective segment. The Company believes this management approach will enable its regional management to focus on serving customers through loan originations and deposit gathering. Indirect revenues and expenses, including but not limited to income from the Company’s investment portfolio, as well as certain costs associated with data processing and back office functions, are not allocated to the Company’s segments. Rather, these revenues and expenses are shown in the “Other” column along with the operations of the holding company and eliminations which are necessary for purposes of reconciling to the consolidated amounts. The operations of Crescent and American Trust are included in the operations of the Tennessee community bank. Management believes future strategic opportunities in eastern Tennessee will result from the operations acquired in Georgia.
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Note H – Segment Reporting (continued)
The following table provides financial information for the Company’s operating segments for the periods presented:
Three Months Ended September 30, 2011
Net income (loss)
Three Months Ended September 30, 2010
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Note I – Derivative Instruments
The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure and to facilitate the needs of its customers. The Company’s objectives for utilizing these derivative financial instruments are described below.
The Company utilizes interest rate contracts, including swaps, caps and/or floors, to mitigate exposure to interest rate risk and to facilitate the needs of its customers. Beginning in the first quarter of 2011, the Company began entering into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At September 30, 2011, the Company had notional amounts of $27,248 on interest rate contracts with corporate customers and $32,348 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts.
In May 2010, the Company terminated two interest rate swaps, each designated as a cash flow hedge, designed to convert the variable interest rate on an aggregate of $75,000 of loans to a fixed rate. As of the termination date, there were $1,679 of deferred gains related to the swaps, which are being amortized into interest income over the designated hedging periods ending in August 2012 and August 2013. Deferred gains related to the swaps of $457 and $209 were amortized into net interest income for the nine months ended September 30, 2011 and 2010, respectively.
The Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans. The notional amount of commitments to fund fixed-rate mortgage loans was $66,546 and $31,685 at September 30, 2011 and December 31, 2010, respectively. The Company also enters into forward commitments to sell residential mortgage loans to secondary market investors. The notional amount of commitments to sell residential mortgage loans to secondary market investors was $68,311 at September 30, 2011. These mortgage loan commitments are recorded at fair value, with gains and losses arising from changes in the valuation of the commitments reflected under the line item “Gains on sales of mortgage loans held for sale” on the Consolidated Statements of Income and do not qualify for hedge accounting.
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Note I – Derivative Instruments (continued)
The following table provides details on the Company’s derivative financial instruments:
Derivative assets:
Not designated as hedging instruments:
Interest rate contracts
Interest rate lock commitments
Derivative liabilities:
Forward commitments
Totals not designated as hedging instruments
The effect of the Company’s derivative financial instruments on the Consolidated Statements of Income was as follows:
Derivatives not designated as hedging instruments:
Derivatives designated as cash flow hedging instruments:
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Note J – Fair Value Measurements
Fair Value Measurements and the Fair Level Hierarchy
ASC 820 provides guidance for using fair value to measure assets and liabilities and also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to a valuation based on quoted prices in active markets for identical assets and liabilities (Level 1), moderate priority to a valuation based on quoted prices in active markets for similar assets and liabilities and/or based on assumptions that are observable in the market (Level 2), and the lowest priority to a valuation based on assumptions that are not observable in the market (Level 3).
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities that are measured on a recurring basis:
Securities available for sale: Securities available for sale consist primarily of debt securities such as obligations of U.S. Government agencies and corporations, mortgage-backed securities and trust preferred securities. For securities available for sale, fair values for debt securities are based on quoted market prices, where available, or a discounted cash flow model. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of equity securities traded in an active market is based on quoted market prices; for equity securities not traded in an active market, fair value approximates their historical cost.
Derivative instruments: Interest rate contracts, including swaps, caps and/or floors, are extensively traded in over-the-counter markets at prices based upon projections of future cash payments/receipts discounted at market rates. The fair value of the Company’s interest rate contracts is determined based upon discounted cash flows. The fair values of the Company’s interest rate lock commitments to fund fixed-rate residential mortgage loans and forward commitments to sell residential mortgage loans to secondary market investors are based on readily available quoted market prices.
Certain assets may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities measured on a nonrecurring basis:
Mortgage loans held for sale: Mortgage loans held for sale are carried at the lower of cost or fair value. If fair value is used, it is determined using current secondary market prices for loans with similar characteristics, that is, using Level 2 inputs. Mortgage loans held for sale were carried at cost on the Consolidated Balance Sheets at September 30, 2011 and December 31, 2010.
Impaired loans: Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Impaired loans covered under loss-share agreements were recorded at their fair value upon the acquisition date, and no fair value adjustments were necessary through September 30, 2011 or for the year ended December 31, 2010.
Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO covered under loss-share agreements were recorded at their fair value upon their acquisition date. OREO not covered under loss-share agreements acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3.
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Note J – Fair Value Measurements (continued)
The following table presents assets and liabilities that are measured at fair value on a recurring basis:
Financial assets:
Securities available for sale:
Total securities available for sale
Derivative instruments:
Total derivative instruments
Total financial assets
Financial liabilities:
Total financial liabilities
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The following table provides a reconciliation for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2011:
Transfers in and/or out of Level 3
Realized gains (losses) included in net income
Unrealized gains (losses) included in other comprehensive income
Capitalization of interest
Settlements
The following table presents assets measured at fair value on a nonrecurring basis that were still held in the Consolidated Balance Sheets at those respective dates:
Impaired loans
Other real estate owned:
Total other real estate owned
Impaired loans not covered under loss-share agreements with a carrying value of $79,408 and $78,954 had an allocated allowance for loan losses of $19,717 and $17,529 at September 30, 2011 and December 31, 2010, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.
OREO covered under loss-share agreements with a carrying amount of $1,985 was written down to $1,875, resulting in a loss of $110, of which $22 was included in the results of operations for the nine months ended September 30, 2011. The remainder of $88 increased the FDIC loss-share indemnification asset. OREO covered under loss-share agreements were recorded at their fair value upon the acquisition date of July 23, 2010, and no fair value adjustments were necessary through December 31, 2010.
OREO not covered under loss-share agreements with a carrying amount of $21,826 was written down to $15,239, resulting in a loss of $6,587, which was included in the results of operations for the nine months ended September 30, 2011. OREO with a carrying amount of $18,816 was written down to $15,150, resulting in a loss of $3,666, which was included in the results of operations for the year ended December 31, 2010.
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Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows:
Financial assets
Securities held to maturity
Loans covered under loss-share agreements
Loans not covered under loss-share agreements
Derivative instruments
Financial liabilities
Federal Home Loan Bank advances
Junior subordinated debentures
TLGP Senior Note
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above.
Cash and cash equivalents: Cash and cash equivalents consists of cash and due from banks and interest-bearing balances with banks. The carrying amount reported in the Consolidated Balance Sheets for cash and cash equivalents approximates fair value based on the short-term nature of these assets.
Securities held to maturity: For securities held to maturity, fair values for debt securities are based on quoted market prices, where available, or a discounted cash flow model. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans covered under loss-share agreements: The fair value of loans covered under loss-share agreements is based on the net present value of future cash proceeds expected to be received using discount rates that are derived from current market rates and reflect the level of interest risk in the covered loans.
Loans not covered under loss-share agreements: For variable-rate loans not covered under loss-share agreements that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values of fixed-rate loans not covered under loss-share agreements, including mortgages, commercial, agricultural and consumer loans, are estimated using a discounted cash flow analysis based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
FDIC loss-share indemnification asset: The fair value of the FDIC loss-share indemnification asset is based on the net present value of future cash flows expected to be received from the FDIC under the provisions of the loss-share agreements using a discount rate that is based on current market rates for the underlying covered loans. Current market rates are used in light of the uncertainty of the timing and receipt of the loss-share reimbursement from the FDIC.
Deposits: The fair values disclosed for demand deposits, both interest-bearing and noninterest-bearing, are, by definition, equal to the amount payable on demand at the reporting date. The fair values of certificates of deposit and individual retirement accounts are estimated using a discounted cash flow based on currently effective interest rates for similar types of accounts.
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Short-term borrowings: Short-term borrowings consist of treasury, tax and loan notes and securities sold under agreements to repurchase. The fair value of these short-term borrowings approximates the carrying value of the amounts reported in the Consolidated Balance Sheets for each respective account.
Federal Home Loan Bank advances: The fair value for Federal Home Loan Bank (“FHLB”) advances is determined by discounting the future cash flows using the current market rate.
Junior subordinated debentures: The fair value for the Company’s junior subordinated debentures is determined by discounting the future cash flows using the current market rate.
TLGP Senior Note: The fair value for the Company’s senior note guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (“TLGP”) is determined by discounting the future cash flows using the current market rate.
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Note K – Other Comprehensive Income
The components of other comprehensive income were as follows:
Other comprehensive income:
Unrealized holding gains on securities, net of tax expense of $4,932 and $3,356
Non-credit related portion of other-than-temporary impairment on securities, net of tax benefit of $4,013
Reclassification adjustment for gains realized in net income, net of tax expense of $2,002 and $840
Net change in unrealized losses on securities
Reclassification adjustment on derivative instruments for gains realized in net income, net of tax expense of $59 and $59
Net change in defined benefit pension and post-retirement benefit plans, net of tax expense of $42 and $49
Other comprehensive income (loss)
Comprehensive income
Unrealized holding gains on securities, net of tax expense of $14,009 and $5,498
Non-credit related portion of other-than-temporary impairment on securities, net of tax benefit of $5,807 and $4,465
Reclassification adjustment for gains realized in net income, net of tax expense of $2,150 and $1,798
Net change in unrealized gains (losses) on securities
Unrealized holding gains on derivative instruments, net of tax expense of $98
Reclassification adjustment for gains realized in net income, net of tax expense of $175 and $80
Net change in unrealized gains on derivative instruments
Net change in defined benefit pension and post-retirement benefit plans, net of tax expense of $127 and $146
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Note K – Other Comprehensive Income (continued)
The accumulated balances for each component of other comprehensive income, net of tax, were as follows:
Net unrealized gains on securities
Net non-credit related portion of other-than-temporary impairment on securities
Net unrealized gains on derivative instruments
Net unrecognized defined benefit pension and post-retirement benefit plans obligations
Total accumulated other comprehensive loss
Note L – Net Income Per Common Share
Basic and diluted net income per common share were as follows:
Basic
Net income applicable to common stock
Average common shares outstanding
Net income per common share - basic
Diluted
Effect of dilutive stock-based compensation
Average common shares outstanding - diluted
Net income per common share - diluted
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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 its acquisitions of Crescent Bank & Trust Company, American Trust Bank and the trust department of RBC Bank (USA) (each of which are described below) 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 relationship; 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.
Overview
Renasant Corporation owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. The Company offers a diversified range of financial and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and north central Mississippi, west and middle Tennessee, north and central Alabama and north Georgia.
On August 31, 2011, the Company acquired the Birmingham, Alabama-based trust department of RBC Bank (USA), which services clients in Alabama and Georgia. The transition from RBC Bank (USA) to Renasant for client accounts and personnel was completed on September 1, 2011. Under the terms of the transaction, RBC Bank (USA) transferred its approximately $680,000 in assets under management, comprised of personal and institutional clients with over 200 trust, custodial and escrow accounts, to a wholly-owned subsidiary, and Renasant Bank acquired all of the ownership interests in the subsidiary. In connection with the acquisition, the Company recognized a gain of $570. Acquisition costs related to the transaction of $326 were recognized in noninterest expense for the three and nine months ended September 30, 2011.
On February 4, 2011, the Bank acquired specified assets and assumed specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”), from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver for American Trust. American Trust operated, and the Bank acquired and retained, 3 branches in the northwest region of Georgia. The Bank acquired assets with a fair value of $247,505, including loans with a fair value of $74,399, and assumed liabilities with a fair value of $238,731, including deposits with a fair value of $223,007. At the acquisition date, approximately $73,657 of acquired loans were covered by loss-share agreements between the FDIC and the Bank. The acquisition of American Trust resulted in a pre-tax gain of $8,774. For more information regarding this transaction, please refer to Note B, “Mergers and Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 1, “Financial Statements.”
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On July 23, 2010, the Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the FDIC, as receiver for Crescent. Crescent operated, and the Bank acquired and retained, 11 branches in the northwest region of Georgia. The Bank acquired assets with a fair value of $959,307, including loans with a fair value of $371,100, and assumed liabilities with a fair value of $917,096, including deposits with a fair value of $890,103. At the acquisition date, approximately $361,472 of acquired loans and $50,168 of other real estate owned were covered by loss-share agreements between the FDIC and the Bank. For more information regarding this transaction, please refer to Note B, “FDIC-Assisted Acquisition of Certain Assets and Liabilities of Crescent Bank & Trust,” in the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Financial Condition
The Company’s total assets were $4,136,474 at September 30, 2011 as compared to $4,297,327 on December 31, 2010.
Cash and cash equivalents decreased to $235,317 at September 30, 2011 from $292,669 at December 31, 2010. Cash and cash equivalents represented 5.69% of total assets at September 30, 2011 compared to 6.81% of total assets at December 31, 2010.
Investments
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, for the periods presented:
Total investments
During the first nine months of 2011, we purchased $147,201 in investment securities. The purchases were primarily mortgage-backed securities and collateralized mortgage obligations (“CMOs”), which in the aggregate made up approximately 39.09% 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 approximately 31.39% and 29.52%, respectively, of the remainder of the securities purchased in the first nine months of 2011. The carrying value of securities sold during the first nine months of 2011 totaled $94,023, consisting of mortgage-backed securities and municipal securities. Maturities and calls of securities during the first nine months of 2011 totaled $178,047. At September 30, 2011, unrealized losses of $20,471 were recorded on investment securities with a carrying value of $24,051.
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The table below sets forth the balance of loans outstanding by loan type and the percentage of each loan type to the entire portfolio, as of the dates presented:
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, 2011, 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.
At September 30, 2011, loans increased $40,178 from December 31, 2010 which is primarily a result of the acquisition of American Trust. The loans acquired in the American Trust acquisition were, for the most part, covered under loss-share agreements with the FDIC. For loans covered under the loss-share agreements (referred to as “covered loans” or “loans covered under loss-share agreements”), the FDIC will reimburse the Bank 80% of the losses incurred on these loans.
The following table provides a breakdown of loans covered and not covered under a loss-share agreement as of the dates presented:
Real estate – construction:
Residential
Commercial
Condominiums
Total real estate – construction
Real estate – 1-4 family mortgage:
Primary
Home equity
Rental/investment
Land development
Total real estate – 1-4 family mortgage
Real estate – commercial mortgage:
Owner-occupied
Non-owner occupied
Total real estate – commercial mortgage
During the first nine months of 2011, loans in our Alabama markets increased $25,969, while loans in our Mississippi and Tennessee markets decreased $1,452 and $40,242, respectively, from December 31, 2010. Loans in our Georgia markets increased $55,903 at September 30, 2011 since December 31, 2010 due primarily to the American Trust acquisition.
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Mortgage loans held for sale were $24,739 at September 30, 2011 compared to $27,704 at December 31, 2010. Originations of mortgage loans to be sold totaled $293,974 for the first nine months of 2011 as compared to $366,241 for the same period in 2010. 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 mortgage loans in the secondary market.
The Company relies on deposits as its major source of funds. Total deposits were $3,342,355 at September 30, 2011 compared to $3,468,151 at December 31, 2010. Noninterest-bearing deposits were $493,130 at September 30, 2011 compared to $368,798 at December 31, 2010, while interest-bearing deposits were $2,849,225 at September 30, 2011 compared to $3,099,353 at December 31, 2010. The acquisition of American Trust increased noninterest-bearing and interest-bearing deposits by $9,766 and $11,793, respectively, at September 30, 2011 compared to December 31, 2010. Deposits in our Alabama, Tennessee and Mississippi markets decreased $41,422, $49,856 and $90,742, respectively, during the first nine months of 2011. Deposits in our Georgia markets increased $56,224 at September 30, 2011 since December 31, 2010 due to the American Trust acquisition.
Borrowed Funds
Total borrowings, which include federal funds purchased, treasury, tax and loan notes, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (“FHLB”), debt guaranteed by the FDIC under its Temporary Liquidity Guarantee Program and junior subordinated debentures, were $262,569 at September 30, 2011 compared to $316,436 at December 31, 2010. FHLB advances were $119,370 at September 30, 2011 compared to $175,119 at December 31, 2010. The Company assumed $15,020 in long-term FHLB advances in connection with the American Trust acquisition, all of which were repaid during the first quarter of 2011. The Company repaid $50,000 of long-term FHLB borrowings during the first quarter of 2011 and incurred prepayment penalties of $1,903.
Results of Operations
Three Months Ended September 30, 2011 as Compared to the Three Months Ended September 30, 2010
Net income for the three month period ended September 30, 2011 was $6,532, which represents a decrease of $13,019, or 66.59%, from net income of $19,551 for the three month period ended September 30, 2010. Basic and diluted earnings per share decreased $0.55 to $0.26 for the three month period ended September 30, 2011 as compared to $0.81 for the prior year. Net income for the three month period ended September 30, 2010 included a one-time gain of $42,211 recorded in connection with the acquisition of Crescent.
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 21.19% to $32,864 for the third quarter of 2011 compared to $27,117 for the same period in 2010. Net interest margin, the tax equivalent net yield on earning assets, increased to 3.92% for the third quarter of 2011 from 3.12% for the same period in 2010. Net interest margin and net interest income are influenced by several factors, primarily changes in 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:
Interest-earning assets:
Loans(1)
Securities:
Taxable(2)
Total interest-earning assets
Intangible assets
Interest-bearing liabilities:
Interest-bearing demand(3)
Savings deposits
Time deposits
Total interest-bearing deposits
Borrowed funds
Total interest-bearing liabilities
Noninterest-bearing deposits
Net interest income/net interest margin
Includes mortgage loans held for sale and shown net of unearned income.
U.S. Government and some U.S. Government Agency securities are tax-exempt in the states in which we operate.
Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.
The average balances of nonaccruing loans and securities 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.
Interest income, on a tax equivalent basis, was $43,432 for the third quarter of 2011 compared to $44,770 for the same period in 2010. The decrease in interest income was driven primarily by a decrease in the average balance of interest-earning assets offset by a slight increase in the yield on interest-earning assets. The tax equivalent yield on interest-earning assets increased 4 basis points in the third quarter of 2011 compared to the third quarter of 2010. The change in the mix of interest-earning assets from lower yielding interest-bearing cash balances to higher yielding loans further contributed to the increase in tax equivalent yield.
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The following table presents the percentage of total average earning assets, by type and yield, for the three months ended September 30 for each of the years presented:
Total earning assets
Interest expense was $9,066 for the third quarter of 2011, a decrease of $7,250, or 44.44%, as compared to the same period in 2010. The decrease in interest expense was due to the decrease in the cost of interest-bearing liabilities as a result of the declining interest rate environment and a change in the mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities. The cost of interest-bearing liabilities was 1.15% for the third quarter of 2011 as compared to 1.93% for the same period in 2010.
The following table presents the Company’s funding sources by type and cost for the three months ended September 30 for each of the years presented:
Noninterest-bearing demand
Interest-bearing demand
Savings
Other borrowed funds
Total deposits and borrowed funds
Noninterest Income
Noninterest income was $19,613 for the three months ended September 30, 2011, a decrease of $34,921 as compared to 2010. The gain in 2010 on the acquisition of Crescent is the primary factor in the decrease in noninterest income for the third quarter of 2011 compared to the same period in 2010.
Charges for deposit services, the primary contributor to noninterest income, were $4,797 and $5,771 for the third quarter of 2011 and 2010, respectively. Overdraft fees, the largest component of service charges on deposits, were $4,229 for the three month period ended September 30, 2011 compared to $5,196 for the same period in 2010.
Fees and commissions (which includes fees charged for both deposit services and loan services) increased 34.04% to $4,898 during the third quarter of 2011 as compared to $3,654 for the third quarter of 2010. Fees charged on loans include origination, underwriting, documentation and other administrative fees. Loan fees were $2,190 during the third quarter of 2011 as compared to $1,587 for the third quarter of 2010. With respect to fees related to deposit services, interchange fees on debit card transactions continue to be a strong source of noninterest income. For the third quarter of 2011, fees associated with debit card usage were $1,824, an increase of 46.62% as compared to $1,244 for the same period of 2010. The Durbin Debit Interchange Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which went into effect October 1, 2011, places restrictions on the rates charged for interchange fees on debit card transactions. Management believes these restrictions could have an adverse impact on these interchange fees, but is unable at this time to predict the extent or timing of such impact. The Company also provides specialized products and services to our customers through our Financial Services division. Specialized products include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Revenues generated from the sale of all of these products, which are included in the Consolidated Statements of Income in the account line “Fees and commissions,” were $374 for the third quarter of 2011 compared to $334 for the same period of 2010.
The trust department operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The trust department manages a number of trust accounts
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inclusive of personal and corporate benefit accounts, self-directed IRA’s, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. Trust revenue was $771 for the third quarter of 2011 compared to $562 for the same period in 2010. The market value of trust assets under management was $1,014,099 and $445,447 at September 30, 2011 and 2010, respectively. The increases in trust revenue and the market value of trust assets under management during the third quarter of 2011 are primarily attributable to the acquisition of the Birmingham, Alabama-based trust department of RBC Bank (USA).
Gains on sales of securities for the three months ended September 30, 2011 were $5,041, resulting from the sale of approximately $81,006 in mortgage-backed securities, compared to gains on sales of securities for the three months ended September 30, 2010 of $1,906, resulting from the sale of approximately $36,274 in securities. The Company did not record any other-than-temporary-impairment losses on securities for the three months ended September 30, 2011. For the three months ended September 30, 2010, the Company recognized net other-than-temporary-impairment losses of $2,915 related to investments in pooled trust preferred securities.
Gains on the sale of mortgage loans held for sale for the third quarter of 2011 were $1,371, a decrease of 22.72% from the third quarter of 2010. The decrease in gains on the sale of mortgage loans is attributable to higher volumes of loans sold during 2010 compared to 2011. Originations of mortgage loans to be sold totaled $108,322 for the third quarter of 2011 as compared to $151,856 for the same period in 2010.
Noninterest Expense
Noninterest expense was $38,129 and $39,571 for the third quarter of 2011 and 2010, respectively, a decrease of $1,442, or 3.64%.
On July 1, the Company announced its entrance into the Montgomery, Alabama banking market. On July 26, the Company announced its entrance into the Golden Triangle market of Starkville, Mississippi, which is home to Mississippi State University. On August 23, the Company announced its entrance into the Alabama market of Tuscaloosa, home of the University of Alabama. Expenses related to the operations of these locations, as well as those attributable to the acquisition of the Birmingham, Alabama-based trust department of RBC Bank (USA), totaled $424 for the third quarter of 2011 and are reflected in the discussion below.
Salaries and employee benefits increased $799, or 4.79%, to $17,493 during the third quarter of 2011 as compared to $16,694 for the third quarter of 2010. The operations of American Trust increased salaries and employee benefits $346 during the third quarter of 2011.
Data processing costs increased $224 to $1,927 for the third quarter of 2011 as compared to the third quarter of 2010. The increase in data processing costs is reflective of increased loan and deposit processing from growth in the number of loans and deposits resulting from the Crescent and American Trust conversions, which occurred in the first and second quarters of 2011, respectively.
Net occupancy and equipment expense for the third quarter of 2011 was $3,434, up $163 from the third quarter of 2010. This increase is attributable to occupancy costs associated with the operations of the Company’s recent banking expansions over the past twelve months partially offset by lower depreciation expense.
Expenses related to other real estate owned for the third quarter of 2011 were $6,336, an increase of $1,701 compared to the same period in 2010. Expenses on other real estate owned include write downs of the carrying value to fair value on certain pieces of property held in other real estate owned of $5,200 and $3,318 for the three months ended September 30, 2011 and 2010, respectively. Other real estate owned with a cost basis of $9,525 was sold during the three months ended September 30, 2011, resulting in a net loss of $578.
Professional fees include fees for legal and accounting services as well as fees we pay our directors. Professional fees were $1,004 and $913 for the third quarter of 2011 and 2010, respectively. The higher levels of professional fees are attributable to legal fees associated with loan workouts and foreclosure proceedings.
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Advertising and public relations expense was $1,305 for the third quarter of 2011 compared to $1,159 for the third quarter of 2010. This increase is attributable to advertising and marketing costs associated with our expansion into new markets.
Amortization of intangible assets decreased $154 to $351 for the third quarter of 2011 compared to $505 for the third quarter of 2010. This amortization relates to finite-lived intangible assets which are being amortized over the useful lives as determined at acquisition. These finite-lived intangible assets have remaining estimated useful lives ranging from one to fifteen years.
Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were $1,185 for the third quarter of 2011 as compared to $1,218 for the third quarter of 2010.
Other noninterest expense was $4,768 and $4,733 for the third quarter of 2011 and 2010, respectively.
Efficiency Ratio
2011
2010
70.64%
The efficiency ratio, shown above for the third quarter for each year, is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully taxable equivalent basis and noninterest income. The efficiency ratio for the third quarter of 2010 includes the $42,211 gain associated with the Crescent acquisition. We remain committed to aggressively managing our costs within the framework of our business model.
Income Taxes
Income tax expense for the third quarter of 2011 was $2,316 as compared to $11,029 for the third quarter of 2010. The effective tax rates for those periods were 26.18% and 36.06%, respectively. The higher effective tax rate for the third quarter of 2010 as compared to the same period in 2011 was attributable to higher levels of taxable income as a result of the Crescent acquisition.
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Nine Months Ended September 30, 2011 as Compared to the Nine Months Ended September 30, 2010
Net income for the nine month period ended September 30, 2011 was $19,842, a decrease of $7,112, or 26.39%, from net income of $26,954 for the same period in 2010. Basic and diluted earnings per share were $0.79 for the nine month period ended September 30, 2011, as compared to basic earnings per share of $1.22 and diluted earnings per share of $1.21 for the comparable period in 2010.
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 nine months ended September 30, 2011 and 2010:
U.S. Government and some U.S. Government Agency securities are tax-free in the states in which we operate.
The average balances of nonaccruing loans and securities are included in this table. 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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Net interest income increased 28.42% to $96,582 for the first nine months of 2011 compared to $75,207 for the same period in 2010. On a tax equivalent basis, net interest margin for the nine month period ending September 30, 2011 was 3.74% compared to 3.20% for the same period in 2010.
Interest income, on a tax equivalent basis, increased 7.05% to $134,094 for the first nine months of 2011 from $125,260 for the same period in 2010. The increase in interest income was driven primarily by an increase in the average balance of interest-earning assets from the FDIC-assisted acquisitions offset by a decline in the yield on interest-earning assets. The average balance of interest-earning assets increased $305,755 for the nine months ended September 30, 2011 as compared to the same period in 2010. The tax equivalent yield on earning assets decreased 13 basis points to 4.95% for the first nine months of 2011 compared to 5.08% for the same period in 2010. The tax equivalent yield on the investment portfolio was 4.10% for the first nine months of 2011, down 34 basis points from 4.44% in the corresponding period in 2010. The decline in yield on the investment portfolio was a result of the call or maturity of securities within the Company’s portfolio that had higher rates than the rates on the securities that the Company purchased with the proceeds. These rates were lower due to a generally lower interest rate environment.
The following table presents the percentage of total average earning assets, by type and yield, for the nine months ended September 30 for each of the years presented:
Interest expense decreased 28.91% to $32,926 for the nine months ended September 30, 2011 as compared to $46,315 for the same period in 2010. This decrease primarily resulted from reductions in the cost of deposits and in the volume of borrowed funds. The average balance of interest-bearing deposits, which had an average cost of 1.13%, increased $480,809 to $3,032,873 for the nine months ended September 30, 2011 as compared to $2,552,064, with an average cost of 1.76%, for the same period in 2010. The increase in the average balance of interest-bearing deposits is primarily attributable to the FDIC-assisted acquisitions. The average balance of borrowed funds decreased $208,517 for the nine months ended September 30, 2011 as compared to the same period in 2010. Overall, the cost of interest-bearing liabilities decreased 73 basis points to 1.33% for the first nine months of 2011 compared to 2.06% for the same period in 2010.
The following table presents the Company’s funding sources by type and cost for the nine months ended September 30 for each of the years presented:
Noninterest income was $54,712 for the nine month period ended September 30, 2011 compared to $81,362 for the same period in 2010, a decrease of $26,650, or 32.75%. The acquisition of American Trust resulted in a bargain purchase gain of $8,774 which is reflected in the noninterest income for nine months ended September 30, 2011, while the acquisition of Crescent resulted in a bargain purchase gain of $42,211 which is reflected in the noninterest income for the nine months ended September 30, 2010.
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Service charges on deposits were $14,759 and $16,222 for the first nine months of 2011 and 2010, respectively. Overdraft fees were $13,068 for the nine month period ended September 30, 2011 compared to $14,581 for the same period in 2010.
Fees and commissions were $13,584 for the nine month period ended September 30, 2011 compared to $10,784 for the same period in 2010. Fees charged for loan services were $5,530 for the first nine months of 2011 compared to $4,261 for the same period in 2010. For the first nine months of 2011, fees associated with debit card usage were $5,375, up 23.98% from $4,335 for the same period in 2010. Revenues generated from the sale of all specialized products by the Financial Services division totaled $1,308 for the first nine months of 2011 compared to $957 for the same period of 2010. Revenue generated by the trust department for managing accounts was $2,034 for the first nine months of 2011 as compared to $1,778 for the same period in 2010.
Income earned on insurance products was $2,462 and $2,492 for the nine months ended September 30, 2011 and 2010, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our client’s policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers. Contingency income, which is included in “Other noninterest income” in the Consolidated Statements of Income, was $345 and $264 for the nine months ended September 30, 2011 and 2010, respectively.
Gains on sales of securities available for sale for the nine months ended September 30, 2011 were $5,057, resulting from the sale of approximately $94,023 in securities, compared to gains on sales of securities available for sale for the nine months ended September 30, 2010 of $3,955, resulting from the sale of approximately $125,969 in securities. The Company recognized other-than-temporary-impairment losses of $262 and $3,075 related to investments in pooled trust preferred securities for the nine months ended September 30, 2011 and 2010, respectively.
Gains from sales of mortgage loans held for sale were $3,471 for the nine months ended September 30, 2011 compared to $4,097 for the same period in 2010.
Noninterest expense was $107,407 for the nine month period ended September 30, 2011 compared to $91,393 for the same period in 2010, an increase of $16,014, or 17.52%. The additional expense from the operations of the FDIC-assisted acquisitions is the primary reason for the increase in total noninterest expenses, and the components thereof, during the first nine months of 2011 compared to the same period in 2010.
Salaries and employee benefits for the nine month period ended September 30, 2011 were $49,903 compared to $42,943 for the same period in 2010.
Data processing costs for the nine month period ended September 30, 2011 were $5,372, an increase of $663 compared to $4,709 for the same period in 2010. Data processing costs for the nine months ended September 30, 2011 include expenses associated with increased loans and deposits processing associated with the Crescent and American Trust acquisitions.
Net occupancy and equipment expense for the nine month period ended September 30, 2011 increased $902 to $10,030 over the comparable period for the prior year.
Expenses related to other real estate owned for the first nine months of 2011 were $11,969 compared to $6,330 for the same period in 2010. Expenses on other real estate owned include write downs of the carrying value to fair value on certain pieces of property held in other real estate owned of $6,824 and $3,318 for the nine months ended September 30, 2011 and 2010, respectively. Other real estate owned with a cost basis of $34,759 was sold during the nine months ended September 30, 2011, resulting in a net loss of $2,414. In comparison, other real estate owned with a cost basis of $19,216 was sold during the nine months ended September 30, 2010, resulting in a net loss of $746.
Advertising and public relations expense was $3,737 for the nine months ended September 30, 2011 compared to $3,027 for the same period in 2010.
Amortization of intangible assets was $1,376 for the nine months ended September 30, 2011 compared to $1,451 for the nine months ended September 30, 2010.
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Communication expense was $4,024 for the nine months ended September 30, 2011 compared to $3,351 for the same period in 2010.
Total noninterest expenses for the first nine months of 2011 included $1,651 of acquisition-related expenses associated with the American Trust and RBC Bank (USA) trust division acquisitions and a prepayment penalty totaling $1,903 associated with the payoff of $50,000 of FHLB advances. In comparison, total noninterest expenses for the first nine months of 2010 included $1,955 of acquisition-related expenses associated with the Crescent acquisition and a prepayment penalty totaling $2,785 associated with the payoff of $148,000 of FHLB advances.
Noninterest expense as a percentage of average assets was 3.35% for the nine month period ended September 30, 2011 and 3.19% for the comparable period in 2010. The net overhead ratio was 1.79% and 0.38% for the first nine months of 2011 and 2010, respectively. Our efficiency ratio increased to 68.90% for the nine month period ended September 30, 2011 compared to 57.01% for the same period of 2010. The Company’s lower net overhead ratio and efficiency ratio primarily resulted from increases in noninterest income resulting from the $42,211 gain associated with the Crescent acquisition.
Income tax expense was $7,695 for the nine month period ended September 30, 2011 compared to $13,057 for the same period in 2010. The effective tax rates for the nine month periods ended September 30, 2011 and 2010 were 27.94% and 32.63%, respectively. The higher effective tax rate for the nine months ended September 30, 2010 as compared to the same period in 2011 was attributable to higher levels of taxable income as a result of the Crescent acquisition.
Risk Management
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading “Liquidity and Capital Resources.”
Credit Risk and Allowance 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 a quarterly analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under Accounting Standards Codification Topic (“ASC”) 450, “Contingencies.” Other considerations in establishing the allowance include the risk rating of individual credits, the size and diversity of the portfolio, economic conditions reflected within industry segments, the unemployment rate in our markets, loan segmentation, historical losses that are inherent in the loan portfolio and the results of periodic credit reviews by internal loan review and regulators.
The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for loan losses at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. Factors considered by management in determining the amount of provision for loan losses to charge to current operations include the internal risk rating of individual credits, historical and current trends in net charge-offs, trends in nonperforming loans, trends in past due loans, trends in the market values of underlying collateral securing loans and the current economic conditions in the market in which we operate.
Loans acquired in the Crescent and American Trust acquisitions were recorded, as of their respective acquisition dates, at fair value. The fair value of these loans represents the expected discounted cash flows to be received over the lives of the loans, taking into account the Company’s estimate of future credit losses on the loans. Because the fair value measurement incorporates an estimate of losses on acquired loans, these loans were excluded from the calculation of the allowance for loan losses and no provision for loan losses was recorded for these loans during the nine months ended September 30, 2011 or for the period from the acquisition date of these loans to December 31, 2010. The Company will continue to monitor future cash flows on these loans; to the extent future cash flows deteriorate below initial projections, the Company may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses.
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The table below reflects the activity in the allowance for loan losses, in thousands, for the periods presented:
Balance at beginning of period
Total charge-offs
Total recoveries
Net charge-offs
Balance at end of period
Net charge-offs to average loans (annualized)
Allowance for loan losses to:
Nonperforming loans
The following table provides further details of the Company’s net charge-offs (recoveries) of loans secured by real estate for the periods presented:
Total net-charge-offs of loans secured by real estate
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The following table quantifies the amount of the specific reserves component of the allowance for loan losses and the amount of the allowance determined by applying allowance factors to graded loans as of the dates presented:
Specific reserves for impaired loans
Allocated reserves for remaining portfolio
Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually past due 90 days on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection.
Nonaccruing securities available-for-sale consists of the Company’s investments in pooled trust preferred securities, each of which are on nonaccrual status.
The following table provides a detail of the Company’s nonperforming assets covered by loss-share agreements (“covered assets”) and not covered under loss-share agreements as of the dates presented:
Nonaccruing loans
Accruing loans past due 90 days or more
Total nonperforming loans
Total nonperforming loans and OREO
Nonaccruing securities available-for-sale, at fair value
Total nonperforming assets
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to total loans
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Due to the significant difference in the accounting for the loans and other real estate owned covered by loss-share agreements and loss mitigation offered under the loss-share agreements with the FDIC, the Company believes that excluding the covered assets from its asset quality measures provides a more meaningful presentation of the Company’s asset quality. Purchased impaired loans had evidence of deterioration in credit quality prior to acquisition, and thus the fair value of these loans as of the acquisition date included an estimate of credit losses. These loans, as well as acquired loans with no evidence of credit deterioration at acquisition, are accounted for on a pool basis, and these pools are considered to be performing. Purchased impaired loans were not classified as nonperforming assets at September 30, 2011 or December 31, 2010 as the loans are considered to be performing under ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). As a result, interest income, through the accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all purchased loans accounted for under ASC 310-30.
The asset quality measures surrounding the Company’s nonperforming loans and nonperforming assets discussed in the remainder of this section exclude covered assets relating to the Crescent and American Trust acquisitions.
The following table shows the principal amounts of nonperforming and restructured loans as of the dates presented. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current repayment terms of the loan have been reflected in the table below.
Restructured loans
Total nonperforming and restructured loans
Nonperforming loans to total loans – period end
The following table provides details of the Company’s nonperforming loans by loan category as of the dates presented:
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Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at September 30, 2011. Management also continually monitors past due loans for potential credit quality deterioration. Total loans past due 30-89 days were $16,588 at September 30, 2011 as compared to $21,520 at December 31, 2010 and $23,576 at September 30, 2010.
As shown above, restructured loans totaled $35,774 at September 30, 2011 as compared to $32,615 at December 31, 2010 and $34,012 at September 30, 2010. At September 30, 2011, total loans restructured that included an interest rate concession represented 69.97% of total restructured loans, while loans restructured by a concession in payment or terms represented the remainder. The following table provides details of the Company’s restructured loans by loan category as of the dates presented:
Total restructured loans
Paydowns
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Other real estate owned and repossessions consist of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included under the line item “Other real estate owned” in the Consolidated Statements of Income. Other real estate owned with a cost basis of $21,863 was sold during the nine months ended September 30, 2011, resulting in a net loss of $2,114.
The following table provides details of the Company’s other real estate owned and repossessions as of the dates presented:
Changes in the Company’s other real estate owned and repossessions were as follows:
Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Our market risk arises primarily from interest rate risk inherent in lending and deposit-taking activities. Management believes the most significant impact on the Company’s financial results stems from our ability to react to changes in interest rates. To that end, management actively monitors and manages our interest rate risk exposure.
We have an Asset/Liability Committee (“ALCO”) which is authorized by the Board of Directors to monitor our interest rate sensitivity and to make decisions relating to that process. The ALCO’s goal is to structure our asset-liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. We monitor the impact of changes in interest rates on our net interest income and economic value of equity (“EVE”) using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a more rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. The EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.
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The following rate shock analysis depicts the estimated impact on net interest income and EVE of immediate changes in interest rates at the specified levels at:
Change in Interest Rates(1)
(In Basis Points)
+200
+100
-100
On account of the present position of the target federal funds rate, the Company did not perform an analysis assuming a downward movement in rates of 200 bps.
The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios.
The percentage change in this column represents our EVE in a stable interest rate environment versus the EVE in the various rate scenarios.
The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. Thus, the measures do not reflect actions the ALCO may undertake in response to such changes in interest rates. The above results of the interest rate shock analysis are within the parameters set by the Board of Directors. The scenarios assume instantaneous movements in interest rates in increments of 100 and 200 basis points. With the present position of the target federal funds rate, the declining rate scenarios seem improbable. Furthermore, it has been the Federal Reserve’s policy to adjust the target federal funds rate incrementally over time. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results will differ from simulated results.
The Company utilizes interest rate contracts, including swaps, caps and/or floors, to mitigate exposure to interest rate risk and to facilitate the needs of its customers. Beginning in the first quarter of 2011, the Company began entering into derivative instruments not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At September 30, 2011, the Company had notional amounts of $27,248 on interest rate contracts with corporate customers and $32,348 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts.
The Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans. Under the interest rate lock commitments, interest rates for a mortgage loan are locked in with the customer for a period of time, typically thirty days. Once an interest rate lock commitment is entered into with a customer, the Company also enters into forward commitments to sell the residential mortgage loan to secondary market investors. As such, the Company does not incur risk if the interest rate lock commitment in the pipeline fails to close.
For more information about the Company’s derivative financial instruments, see Note I, “Derivative Instruments,” in the Notes to Consolidated Financial Statements of the Company in Item 1, “Financial Statements,” in this report.
Liquidity and Capital Resources
Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs.
Core deposits, which are deposits excluding time deposits, are a major source of funds used by the Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to
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assuring the Bank’s liquidity. Management continually monitors the liquidity and non-core dependency ratios to ensure compliance with ALCO targets.
Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At September 30, 2011, securities with a carrying value of approximately $333,613 were pledged to secure public fund deposits and as collateral for short-term borrowings as compared to $348,392 at December 31, 2010. Lower levels of public fund deposits at September 30, 2011 as compared to December 31, 2010 resulted in the decrease in the amount of pledged investment securities at September 30, 2011.
Other sources available for meeting liquidity needs include federal funds purchased and advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. There were no outstanding federal funds purchased at September 30, 2011 or December 31, 2010. Funds obtained from the FHLB are used primarily to match-fund real estate loans and other longer-term fixed rate loans in order to minimize interest rate risk. FHLB advances also may be used to meet day to day liquidity needs, primarily when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. At September 30, 2011, the balance of our outstanding advances with the FHLB was $119,370. The total amount of the remaining credit available to us from the FHLB at September 30, 2011 was $847,949. We also maintain lines of credit with other commercial banks totaling $85,000. These are unsecured lines of credit maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit at September 30, 2011 or December 31, 2010.
Our strategy in choosing funds is focused on attempting to mitigate interest rate risk, and thus we utilize funding sources that are commensurate with the interest rate risk associated with the assets. Accordingly, management targets growth of noninterest bearing deposits. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. For example, we could obtain time deposits based on our aggressiveness in pricing and length of term. We constantly monitor our funds position and evaluate the effect various funding sources have on our financial position.
Cash and cash equivalents were $235,317 at September 30, 2011 compared to $296,413 at September 30, 2010. Cash provided by investing activities for the nine months ended September 30, 2011 was $267,986 compared to $413,714 for the same period of 2010. The net cash proceeds received from the acquisition of American Trust were $148,443 for the nine months ended September 30, 2011, compared to the net cash proceeds received from the acquisition of Crescent of $337,127 for the nine months ended September 30, 2011. Purchases of investment securities were $147,201 for the nine months ended September 30, 2011 compared to $354,955 for the nine months ended September 30, 2010. Proceeds from the sale, maturity or call of securities within our investment portfolio were $277,127 for the nine months ended September 30, 2011 compared to $342,026 for the nine months ended September 30, 2010. The net cash paid for the RBC Bank (USA) trust division acquisition, which was completed on August 31, 2011, was $792.
Cash used in financing activities for the nine months ended September 30, 2011 was $430,078 compared to $328,785 for the same period of 2010. Cash provided from the acquisition of American Trust was partially used to reduce long-term debt by $70,729 for the nine months ended September 30, 2011. Cash provided from the acquisition of Crescent was primarily used to reduce our total borrowings by $318,595. The net proceeds to the Company from the issuance and sale of 3,925,000 common shares in a private placement, which was completed on July 23, 2010, were $51,402.
Restrictions on Cash, Bank Dividends, Loans or Advances
The Company’s liquidity and capital resources, as well as its ability to pay dividends to our shareholders, are substantially dependent on the ability of Renasant Bank to transfer funds to the Company in the form of dividends, loans and advances. Under Mississippi law, a Mississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the Mississippi Department of Banking and Consumer Finance. Accordingly, the approval of this supervisory authority is required prior to Renasant Bank paying dividends to the Company.
Federal Reserve regulations also limit the amount Renasant Bank may loan to the Company unless such loans are collateralized by specific obligations. At September 30, 2011, the maximum amount available for transfer from
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Renasant Bank to the Company in the form of loans was $40,045. There were no loans outstanding from Renasant Bank to the Company at September 30, 2011. These restrictions did not have any impact on the Company’s ability to meet its cash obligations in the first nine months of 2011, nor does management expect such restrictions to materially impact the Company’s ability to meet its currently-anticipated cash obligations.
Off-Balance Sheet Transactions
The Company enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to accommodate the financial needs of the Company’s customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent future cash requirements of the Company in that while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. The Company’s unfunded loan commitments and standby letters of credit outstanding at September 30, 2011 and December 31, 2010 were as follows:
Loan commitments
Standby letters of credit
The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed.
Market risk resulting from interest rate changes on particular off-balance sheet financial instruments may be offset by other on- or off-balance sheet transactions. Interest rate sensitivity is monitored by the Company for determining the net effect of potential changes in interest rates on the market value of both on- and off-balance sheet financial instruments.
Contractual Obligations
There have not been any material changes outside of the ordinary course of business to any of the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.
Shareholders’ Equity and Regulatory Matters
Shareholders’ Equity
Total shareholders’ equity of the Company at September 30, 2011 increased to $487,401 compared to $469,509 at December 31, 2010. The change in shareholders’ equity was attributable to earnings retention offset by dividends declared and changes in accumulated other comprehensive income.
On July 8, 2009, the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). The shelf registration statement, which the SEC declared effective on July 13, 2009, allows the Company to raise capital from time to time, up to an aggregate of $150,000, through the sale of common stock, preferred stock, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will be required to file with the SEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes as described in any prospectus supplement and could include the expansion of the Company’s banking, insurance and wealth management operations as well as other business opportunities.
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The following table sets forth the Company’s book value per share, tangible book value per share, capital ratio and tangible capital ratio as of the dates presented:
Book value per share
Tangible book value per share
Capital ratio
Tangible capital ratio
Regulatory Matters
Renasant Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Renasant Bank to maintain minimum balances and ratios. All banks are required to have core capital (Tier I) of at least 4% of risk-weighted assets, Tier I leverage of 4% of average assets, and total capital of 8% of risk-weighted assets (as such ratios are defined in Federal regulations). To be categorized as well capitalized, banks must maintain minimum Tier I leverage, Tier I risk-based and total risk-based ratios of 5%, 6%, and 10%, respectively. At September 30, 2011, Renasant Bank met all capital adequacy requirements to which it is subject.
At September 30, 2011, the most recent notification from the FDIC categorized Renasant Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The following table includes the capital ratios and capital amounts for the Company and the Bank at September 30, 2011:
Tier I Capital to Average Assets
Renasant Corporation
Renasant Bank
Tier I Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
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There have been no material changes in our market risk since December 31, 2010. For additional information regarding our market risk, see our Annual Report on Form 10-K for the year ended December 31, 2010.
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Information regarding risk factors appears in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The Company did not repurchase any shares of its outstanding stock during the three month period ended September 30, 2011.
Please refer to the information discussing restrictions on the Company’s ability to pay dividends under the heading “Liquidity and Capital Resources” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this report, which is incorporated by reference herein.
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ExhibitNumber
Description
Filed as exhibit 3.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 9, 2005 and incorporated herein by reference.
Filed as exhibit 3(ii) to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 21, 2011 and incorporated herein by reference.
The Company does not have any long-term debt instruments under which securities are authorized exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the Securities and Exchange Commission, upon their request, a copy of all long-term debt instruments.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Stuart R. Johnson
Executive Vice President and
Kevin D. Chapman
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