(In Thousands, Except Share Data) This Form 10-Q may contain or incorporate by reference statements regardingRenasant Corporation (referred to herein as the "Company", "we", "our", or "us") that 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. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "projects," "anticipates," "intends," "estimates," "plans," "potential," "possible," "may increase," "may fluctuate," "will likely result," and similar expressions, or future or conditional verbs such as "will," "should," "would" and "could," are generally forward-looking in nature and not historical facts. Forward-looking statements include information about the Company's future financial performance, business strategy, projected plans and objectives and are based on the current beliefs and expectations of management. The Company's management believes these forward-looking statements are reasonable, but they are all inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ from those indicated or implied in the forward-looking statements, and such differences may be material. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and, accordingly, investors should not place undue reliance on these forward-looking statements, which speak only as of the date they are made. Important factors currently known to management that could cause our actual results to differ materially from those in forward-looking statements include the following: (i) the continued impact of the COVID-19 pandemic and related governmental response measures on theU.S. economy and the economies of the markets in which we operate; (ii) the Company's ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses, grow the acquired operations and realize the cost savings expected from an acquisition to the extent and in the timeframe anticipated by management; (iii) the effect of economic conditions and interest rates on a national, regional or international basis; (iv) timing and success of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (v) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries; (vi) the financial resources of, and products available from, competitors; (vii) changes in laws and regulations as well as changes in accounting standards; (viii) changes in policy by regulatory agencies; (ix) changes in the securities and foreign exchange markets; (x) the Company's potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (xi) 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; (xii) an insufficient allowance for credit losses as a result of inaccurate assumptions; (xiii) general economic, market or business conditions, including the impact of inflation; (xiv) changes in demand for loan products and financial services; (xv) concentration of credit exposure; (xvi) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; (xvii) increased cybersecurity risk, including potential network breaches, business disruptions or financial losses; (xviii) civil unrest, natural disasters, epidemics and other catastrophic events in the Company's geographic area; (xix) the impact, extent and timing of technological changes; and (xx) other circumstances, many of which are beyond management's control. Management believes that the assumptions underlying the Company's forward-looking statements are reasonable, but any of the assumptions could prove to be inaccurate. The Company undertakes no obligation, and specifically disclaims any obligation, to update or revise forward-looking statements, whether as a result of new information or to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by federal securities laws. Financial Condition The following discussion provides details regarding the changes in significant balance sheet accounts atSeptember 30, 2021 compared toDecember 31, 2020 . Assets Total assets were$16,155,550 atSeptember 30, 2021 compared to$14,929,612 atDecember 31, 2020 . Investments The securities portfolio is a liquid source of interest income that also can be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio, all of which are classified as 53 -------------------------------------------------------------------------------- Table of Contents available for sale, by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented: September 30, 2021 December 31, 2020 Percentage of Percentage of Balance Portfolio Balance Portfolio U.S. Treasury securities $ 3,024 0.12 % $ 7,079 0.53 % Obligations of otherU.S. Government agencies and corporations - - 1,009 0.08 Obligations of states and political subdivisions 378,981 14.89 305,201 22.72 Mortgage-backed securities 2,108,671 82.87 955,549 71.12 Trust preferred securities - - 9,012 0.67 Other debt securities 53,967 2.12 65,607 4.88$ 2,544,643 100.00 %$ 1,343,457 100.00 % During the nine months endedSeptember 30, 2021 , we deployed a portion of our excess liquidity into the securities portfolio and purchased$1,743,105 in investment securities. Mortgage-backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprised approximately 94% of these 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. Obligations of state and political subdivisions comprised approximately 6% of purchases made during the first nine months of 2021. Proceeds from maturities, calls and principal payments on securities during the first nine months of 2021 totaled$329,520 . The Company sold municipal securities, residential mortgage backed securities, trust preferred securities, and other debt securities with a carrying value of$174,285 at the time of sale for net proceeds of$176,406 , resulting in a net gain on sale of$2,121 during the first nine months of 2021. Proceeds from the maturities, calls and principal payments on securities during the first nine months of 2020 totaled$314,363 . The Company sold municipal securities and residential mortgage backed securities with a carrying value of$8,742 at the time of sale for net proceeds of$8,773 , resulting in net gain on sale of$31 during the first nine months of 2020. For more information about the Company's security portfolio, see Note 2, "Securities," in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements, in this report. Loans Held for Sale Loans held for sale, which consist of residential mortgage loans being held until they are sold in the secondary market, were$452,869 atSeptember 30, 2021 , as compared to$417,771 atDecember 31, 2020 . Mortgage loans to be sold are sold either on a "best efforts" basis or under a mandatory delivery sales agreement. Under a "best efforts" sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. Our standard practice is to sell the loans within 30-40 days after the loan is funded. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market. Loans Total loans, excluding loans held for sale, were$10,016,824 atSeptember 30, 2021 and$10,933,647 atDecember 31, 2020 . Non purchased loans totaled$8,875,880 atSeptember 30, 2021 compared to$9,419,540 atDecember 31, 2020 . Loans purchased in previous acquisitions totaled$1,140,944 and$1,514,107 atSeptember 30, 2021 andDecember 31, 2020 , respectively. The tables below set forth the balance of loans outstanding, net of unearned income and excluding loans held for sale, by loan type and the percentage of each loan type to total loans as of the dates presented: 54
--------------------------------------------------------------------------------
Table of Contents September 30, 2021 Total Percentage of Non Purchased Purchased Loans Total Loans Commercial, financial, agricultural (1)$ 1,321,569 $ 114,450 $ 1,436,019 14.34 % Lease financing, net of unearned income 79,215 - 79,215 0.79 Real estate - construction: Residential 306,537 1,288 307,825 3.07 Commercial 779,766 3,705 783,471 7.82 Total real estate - construction 1,086,303 4,993 1,091,296 10.89 Real estate - 1-4 family mortgage: Primary 1,657,195 150,944 1,808,139 18.05 Home equity 424,860 56,692 481,552 4.81 Rental/investment 268,609 22,507 291,116 2.91 Land development 133,732 10,204 143,936 1.44 Total real estate - 1-4 family mortgage 2,484,396 240,347 2,724,743 27.21 Real estate - commercial mortgage: Owner-occupied 1,365,288 264,939 1,630,227 16.27 Non-owner occupied 2,323,135 456,102 2,779,237 27.74 Land development 106,475 19,791 126,266 1.26 Total real estate - commercial mortgage 3,794,898 740,832 4,535,730 45.27 Installment loans to individuals 109,499 40,322 149,821 1.50 Total loans, net of unearned income$ 8,875,880 $ 1,140,944 $ 10,016,824 100.00 % (1)Includes Paycheck Protection Program ("PPP") loans of$67,462 as ofSeptember 30, 2021 . December 31, 2020 Total Percentage of Non Purchased Purchased Loans Total Loans Commercial, financial, agricultural (1)$ 2,360,471 $ 176,513 $ 2,536,984 23.20 % Lease financing, net of unearned income 75,862 - 75,862 0.69 Real estate - construction: Residential 243,814 2,859 246,673 2.26 Commercial 583,338 28,093 611,431 5.59 Total real estate - construction 827,152 30,952 858,104 7.85 Real estate - 1-4 family mortgage: Primary 1,536,181 214,770 1,750,951 16.02 Home equity 432,768 80,392 513,160 4.69 Rental/investment 264,436 31,928 296,364 2.71 Land development 123,179 14,654 137,833 1.26 Total real estate - 1-4 family mortgage 2,356,564 341,744 2,698,308 24.68 Real estate - commercial mortgage: Owner-occupied 1,334,765 323,041 1,657,806 15.16 Non-owner occupied 2,194,739 552,728 2,747,467 25.13 Land development 120,125 29,454 149,579 1.37 Total real estate - commercial mortgage 3,649,629 905,223 4,554,852 41.66 Installment loans to individuals 149,862 59,675 209,537 1.92 Total loans, net of unearned income$ 9,419,540 $ 1,514,107 $ 10,933,647 100.00 %
(1)Includes PPP loans of
55 -------------------------------------------------------------------------------- Table of Contents Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. AtSeptember 30, 2021 , 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. Deposits The Company relies on deposits as its major source of funds. Total deposits were$13,254,829 and$12,059,081 atSeptember 30, 2021 andDecember 31, 2020 , respectively. Noninterest-bearing deposits were$4,492,650 and$3,685,048 atSeptember 30, 2021 andDecember 31, 2020 , respectively, while interest-bearing deposits were$8,762,179 and$8,374,033 atSeptember 30, 2021 andDecember 31, 2020 , respectively. The growth in noninterest-bearing deposits across the Company's footprint during the current year has been driven by government stimulus payments and client sentiment to maintain liquidity. Management continues to focus on growing and maintaining a stable source of funding, specifically noninterest-bearing deposits and other core deposits (that is, deposits excluding time deposits greater than$250,000 ). Noninterest bearing deposits represented 33.89% of total deposits atSeptember 30, 2021 , as compared to 30.56% of total deposits atDecember 31, 2020 . Under certain circumstances, however, management may elect to acquire non-core deposits (in the form of time deposits) or public fund deposits (which are deposits of counties, municipalities or other political subdivisions). The source of funds that we select depends on the terms and how those terms assist us in mitigating interest rate risk, maintaining our liquidity position and managing our net interest margin. Accordingly, funds are acquired to meet anticipated funding needs at the rate and with other terms that, in management's view, best address our interest rate risk, liquidity and net interest margin parameters. Public fund deposits may be readily obtained based on the Company's pricing bid in comparison with competitors. Because public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. Although the Company has focused on growing stable sources of deposits to reduce reliance on public fund deposits, it participates in the bidding process for public fund deposits when pricing and other terms make it reasonable given market conditions or when management perceives that other factors, such as the public entity's use of our treasury management or other products and services, make such participation advisable. Our public fund transaction accounts are principally obtained from public universities and municipalities, including school boards and utilities. Public fund deposits were$1,534,547 and$1,398,330 atSeptember 30, 2021 andDecember 31, 2020 , respectively. Borrowed Funds Total borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the FHLB, subordinated notes and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include federal funds purchased, securities sold under agreements to repurchase, and short-term FHLB advances. The following table presents our short-term borrowings by type as of the dates presented:September 30, 2021 December
31, 2020
Security repurchase agreements $ 11,253 $
10,947 Federal funds purchased - 10,393 $ 11,253 $ 21,340 AtSeptember 30, 2021 , long-term debt consists of long-term FHLB advances, our junior subordinated debentures and our subordinated notes. The following table presents our long-term debt by type as of the dates presented: September 30, 2021 December 31, 2020
Long-term FHLB advances $ 150,425 $ 152,167 Junior subordinated debentures
111,228 110,794 Subordinated notes 207,210 212,009 $ 468,863 $ 474,970 Long-term funds obtained from the FHLB are used to match-fund fixed rate loans in order to minimize interest rate risk and to meet day-to-day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. AtSeptember 30, 2021 , there were no outstanding long-term FHLB advances scheduled to 56 -------------------------------------------------------------------------------- Table of Contents mature within twelve months or less. The Company had$3,977,848 of availability on unused lines of credit with the FHLB atSeptember 30, 2021 , as compared to$3,784,520 atDecember 31, 2020 . The Company has issued subordinated notes, the proceeds of which have been used for general corporate purposes, including providing capital to support the Company's growth organically or through strategic acquisitions, repaying indebtedness and financing investments and capital expenditures, and for investments inRenasant Bank (the "Bank") as regulatory capital. The subordinated notes qualify as Tier 2 capital under the current regulatory guidelines. The Company owns the outstanding common securities of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts used the proceeds from the issuance of their preferred capital securities and common securities (collectively referred to as "capital securities") to buy floating rate junior subordinated debentures issued by the Company (or by companies that the Company subsequently acquired). The debentures are the trusts' only assets and interest payments from the debentures finance the distributions paid on the capital securities. Results of Operations Net Income Net income for the third quarter of 2021 was$40,063 compared to net income of$29,992 for the third quarter of 2020. Basic and diluted earnings per share ("EPS") for the third quarter of 2021 were$0.71 as compared to basic and diluted EPS of$0.53 for the third quarter of 2020. Net income for the nine months endedSeptember 30, 2021 was$138,838 compared to net income of$52,130 for the same period in 2020. Basic and diluted EPS were$2.47 and$2.46 for the first nine months of 2021, respectively, as compared to$0.93 and$0.92 for the first nine months of 2020, respectively. From time to time, the Company incurs expenses and charges or recognizes valuation adjustments in connection with certain transactions with respect to which management is unable to accurately predict when these items will be incurred or, when incurred, the amount of such items. The following table presents the impact of these items on reported EPS for the dates presented. The "COVID-19 related expenses" line item in the table below primarily consists of (a) employee overtime and employee benefit accruals directly related to the Company's response to both the COVID-19 pandemic itself and federal legislation enacted to address the pandemic, such as the CARES Act, and (b) expenses associated with supplying branches with protective equipment and sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) as well as more frequent and rigorous branch cleaning. Three Months Ended September 30, 2021 September 30, 2020 Impact to Impact to Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS
Debt prepayment penalty $ - $ - $ -$ 28 $ 22 $ - MSR valuation adjustment - - - (828) (650) (0.01) COVID-19 related expenses 323 253 - 570 448 0.01 Nine Months Ended September 30, 2021 September 30, 2020 Impact to Impact to Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS Debt prepayment penalties $ - $ - $ -$ 118 $ 94 $ - MSR valuation adjustment (13,561) (10,564) (0.19) 13,694 10,916 0.19 Restructuring charges 307 239 - - - - COVID-19 related expenses 1,478 1,151 0.02 9,730 7,758 0.14 Net Interest Income Net interest income, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of our net income, comprising 67.41% of total revenue (i.e., net interest income on a fully taxable equivalent basis and noninterest income) for the third quarter of 2021 and 64.61% of total revenue for the first nine months of 2021. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities. 57 -------------------------------------------------------------------------------- Table of Contents Net interest income was$103,292 and$322,519 for the three and nine months endedSeptember 30, 2021 , respectively, as compared to$106,286 and$318,670 for the same respective periods in 2020. On a tax equivalent basis, net interest income was$105,002 and$327,471 for the three and nine months endedSeptember 30, 2021 , respectively, as compared to$107,885 and$323,659 for the same respective periods in 2020. The following tables set forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented: Three Months Ended September 30, 2021 2020 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Interest-earning assets: Loans held for investment: Non purchased$ 8,690,443 $ 84,427 3.86 %$ 8,012,741 $ 81,281 4.04 % Purchased 1,200,429 15,840 5.24 1,723,714 24,034 5.55 Paycheck Protection Program 126,870 3,503 10.95 1,305,229 7,449
2.27
Total loans held for investment 10,017,742 103,770 4.11 11,041,684 112,764 4.06 Loans held for sale 451,586 2,376 2.13 378,225 3,144 3.31 Securities: Taxable(1) 1,942,647 6,688 1.38 1,003,886 5,473 2.17 Tax-exempt 324,219 2,297 2.83 265,679 2,205 3.30 Interest-bearing balances with banks 1,520,227 592 0.15 344,948 91
0.10
Total interest-earning assets 14,256,421 115,723 3.23 13,034,422 123,677 3.77 Cash and due from banks 195,095 210,278 Intangible assets 965,960 972,394 Other assets 712,673 711,065 Total assets$ 16,130,149 $ 14,928,159 Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2)$ 6,231,718 $ 3,821 0.24 %$ 5,405,085 $ 4,839 0.36 % Savings deposits 1,006,847 192 0.08 796,841 167 0.08 Time deposits 1,506,192 2,959 0.78 1,907,918 6,804 1.42 Total interest-bearing deposits 8,744,757 6,972 0.32 8,109,844 11,810 0.58 Borrowed funds 482,709 3,749 3.08 719,800 3,982 2.20 Total interest-bearing liabilities 9,227,466 10,721 0.46 8,829,644 15,792 0.71 Noninterest-bearing deposits 4,470,262 3,723,059 Other liabilities 212,990 255,956 Shareholders' equity 2,219,431 2,119,500 Total liabilities and shareholders' equity$ 16,130,149 $ 14,928,159 Net interest income/net interest margin$ 105,002 2.93 %$ 107,885
3.29 %
(1)U.S. Government and someU.S. Government Agency securities are tax-exempt in the states in which the Company operates. (2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits. 58
--------------------------------------------------------------------------------
Table of Contents Nine Months Ended September 30, 2021 2020 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Interest-earning assets: Loans held for investment: Non purchased$ 8,525,359 $ 249,128 3.91 %$ 7,847,197 $ 251,671 4.28 % Purchased 1,327,434 54,187 5.46 1,877,449 80,226 5.71 Paycheck Protection Program 578,643 24,310 5.62 725,891 13,335
2.45
Total loans held for investment 10,431,436 327,625 4.20 10,450,537 345,232 4.41 Loans held for sale 439,954 8,980 2.73 351,975 9,108 3.46 Securities: Taxable(1) 1,505,611 17,077 1.51 1,034,189 19,148 2.47 Tax-exempt 316,159 6,915 2.92 251,744 6,609 3.51 Interest-bearing balances with banks 1,176,378 1,121 0.13 387,116 1,098
0.38
Total interest-earning assets 13,869,538 361,718 3.49 12,475,561 381,195 4.08 Cash and due from banks 198,955 203,582 Intangible assets 967,458 974,182 Other assets 687,159 717,628 Total assets$ 15,723,110 $ 14,370,953 Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2)$ 6,083,179 $ 11,821 0.26 %$ 5,166,393 $ 19,616 0.51 % Savings deposits 953,391 547 0.08 741,933 592 0.11 Time deposits 1,575,220 10,552 0.90 2,019,173 23,967 1.59 Total interest-bearing deposits 8,611,790 22,920 0.36 7,927,499 44,175 0.74 Borrowed funds 483,230 11,327 3.13 849,494 13,361 2.10 Total interest-bearing liabilities 9,095,020 34,247 0.50 8,776,993 57,536 0.88 Noninterest-bearing deposits 4,202,364 3,251,612 Other liabilities 223,796 233,730 Shareholders' equity 2,201,930 2,108,618 Total liabilities and shareholders' equity$ 15,723,110 $ 14,370,953 Net interest income/net interest margin$ 327,471 3.16 %$ 323,659
3.47 %
(1)U.S. Government and someU.S. Government Agency securities are tax-exempt in the states in which the Company operates. (2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits. The average balances of nonaccruing assets are included in the tables 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 21% and a state tax rate of 4.45%, which is net of federal tax benefit. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. As discussed in more detail below, the decline in loan yields due to the current low interest rate environment as well as changes in the mix of earning assets during the quarter due to increased liquidity on the balance sheet were the largest contributing factors to the decrease in net interest margin for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020. The Company has continued to focus on lowering the cost of funding through growing noninterest-bearing deposits and aggressively lowering interest rates on interest-bearing deposits. The 59 -------------------------------------------------------------------------------- Table of Contents Company has also increased its purchases of investment securities and continues to evaluate options to mitigate the pressure on net interest margin. The following tables set forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for both the three and nine months endedSeptember 30, 2021 , as compared to the same respective periods in 2020 (the changes attributable to the combined impact of yield/rate and volume have been allocated on a pro-rata basis using the absolute value of amounts calculated): 60
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended
Three
Months Ended
Volume Rate Net Interest income: Loans held for investment: Non purchased$ 6,821 $ (3,675) $ 3,146 Purchased (6,947) (1,247) (8,194) Paycheck Protection Program (11,665) 7,719 (3,946) Loans held for sale 521 (1,289) (768) Securities: Taxable 3,756 (2,541) 1,215 Tax-exempt 438 (346) 92 Interest-bearing balances with banks 441 60 501 Total interest-earning assets (6,635) (1,319) (7,954) Interest expense: Interest-bearing demand deposits 671 (1,689) (1,018) Savings deposits 41 (16) 25 Time deposits (1,225) (2,620) (3,845) Borrowed funds (1,548) 1,315 (233) Total interest-bearing liabilities (2,061) (3,010) (5,071) Change in net interest income$ (4,574)
Nine months ended
Nine
Months Ended
Volume Rate Net Interest income: Loans held for investment: Non purchased$ 20,693 $ (23,236) $ (2,543) Purchased (22,646) (3,393) (26,039) Paycheck Protection Program (3,182) 14,157 10,975 Loans held for sale 2,010 (2,138) (128) Securities: Taxable 6,914 (8,985) (2,071) Tax-exempt 1,528 (1,222) 306 Interest-bearing balances with banks 1,118 (1,095) 23 Total interest-earning assets 6,435 (25,912) (19,477) Interest expense: Interest-bearing demand deposits 3,025 (10,820) (7,795) Savings deposits 146 (191) (45) Time deposits (4,506) (8,909) (13,415) Borrowed funds (7,090) 5,056 (2,034) Total interest-bearing liabilities (8,425) (14,864) (23,289) Change in net interest income$ 14,860
Interest income, on a tax equivalent basis, was$115,723 and$361,718 , respectively, for the three and nine months endedSeptember 30, 2021 , as compared to$123,677 and$381,195 , respectively, for the same periods in 2020. This decrease in interest income, on a tax equivalent basis, is due primarily to theFederal Reserve maintaining low interest rates sinceMarch 2020 and changes in the mix of earning assets during the year due to increased liquidity on the balance sheet. The following tables present the percentage of total average earning assets, by type and yield, for the periods presented: 61
--------------------------------------------------------------------------------
Table of Contents Percentage of Total Average Earning Assets Yield Three Months Ended Three Months Ended September 30, September 30, 2021 2020 2021 2020 Loans held for investment, excl. PPP 69.38 % 74.70 % 4.02 % 4.30 % Paycheck Protection Program 0.89 10.01 10.95 2.27 Loans held for sale 3.17 2.90 2.13 3.31 Securities 15.90 9.74 1.59 2.41 Other 10.66 2.65 0.15 0.10 Total earning assets 100.00 % 100.00 % 3.23 % 3.77 % Percentage of Total Average Earning Assets Yield Nine Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Loans held for investment excl. PPP 71.04 % 77.95 % 4.12 % 4.56 % Paycheck Protection Program 4.17 5.82 5.62 2.45 Loans held for sale 3.17 2.82 2.73 3.46 Securities 13.14 10.31 1.76 2.68 Interest-bearing balances with banks 8.48 3.10 0.13 0.38 Total earning assets 100.00 % 100.00 % 3.49 % 4.08 % For the third quarter of 2021, interest income on loans held for investment, on a tax equivalent basis, decreased$8,994 to$103,770 from$112,764 for the same period in 2020. For the nine months endedSeptember 30, 2021 , interest income on loans held for investment, on a tax equivalent basis, decreased$17,607 to$327,625 from$345,232 for the same period in 2020. Interest income on loans held for investment decreased primarily due to theFederal Reserve maintaining low interest rates sinceMarch 2020 . Interest income attributable to PPP loans included in loan interest income for the three months endedSeptember 30, 2021 , was$3,503 , which consisted of$306 in interest income and$3,197 in accretion of net origination fees, as compared to$7,449 for the three months endedSeptember 30, 2020 , which consisted of$3,262 in interest income and$4,187 in accretion of net origination fees. Interest income attributable to PPP loans included in loan interest income for the nine months endedSeptember 30, 2021 , was$24,310 , which consisted of$4,222 in interest income and$20,088 in accretion of net origination fees, as compared to$13,335 for the nine months endedSeptember 30, 2020 , which consisted of$5,586 in interest income and$7,749 in accretion of net origination fees. The PPP origination fees, net of agent fees paid and other origination costs, are being accreted into interest income over the life of the loan. If a PPP loan is forgiven in whole or in part, as provided under the CARES Act, the Company will recognize the non-accreted portion of the net origination fee attributable to the forgiven portion of such loan as of the date of the final forgiveness determination. PPP loans increased margin and loan yield by 7 basis points and 9 basis points, respectively, during the third quarter of 2021, and 11 basis points and 8 basis points, respectively, in the first nine months of 2021. PPP loans reduced margin and loan yield by 12 basis points and 23 basis points, respectively, in the third quarter of 2020 and 6 basis points and 14 basis points, respectively, in the first nine months of 2020. The impact from interest income collected on problem loans and purchase accounting adjustments on loans to total interest income on loans held for investment, loan yield and net interest margin is shown in the following table for the periods presented. 62
--------------------------------------------------------------------------------
Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net interest income collected on problem loans$ 316 $ 282 $ 3,835 $ 884 Accretable yield recognized on purchased loans(1) 2,871 4,949 8,597 15,118
Total impact to interest income on loans
$ 12,432 $ 16,002 Impact to loan yield 0.13 % 0.18 % 0.16 % 0.20 % Impact to net interest margin 0.09 % 0.16 % 0.12 % 0.17 % (1)Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of$1,649 and$2,286 , for the third quarter of 2021 and 2020, respectively. The impact was$4,145 and$6,205 for the nine months endedSeptember 30, 2021 and 2020, respectively. This additional interest income increased total loan yield by 7 basis points and 8 basis points for the third quarter of 2021 and 2020, respectively, while increasing net interest margin by 5 and 7 basis points for the same respective periods. For the nine months endedSeptember 30, 2021 and 2020, the additional interest income increased total loan yields by 5 basis points and 8 basis points, respectively, while increasing net interest margin by 4 basis points and 7 basis points, respectively. For the third quarter of 2021, interest income on loans held for sale (consisting of mortgage loans held for sale), on a tax equivalent basis, decreased$768 to$2,376 from$3,144 for the same period in 2020. For the nine months endedSeptember 30, 2021 , interest income on loans held for sale (consisting of mortgage loans held for sale), on a tax equivalent basis, decreased$128 to$8,980 from$9,108 for the same period in 2020. Investment income, on a tax equivalent basis, increased$1,307 to$8,985 for the third quarter of 2021 from$7,678 for the third quarter of 2020. Investment income, on a tax equivalent basis, decreased$1,765 to$23,992 for the nine months endedSeptember 30, 2021 from$25,757 for the same period in 2020. The tax equivalent yield on the investment portfolio for the third quarter of 2021 was 1.59%, down 82 basis points from 2.41% for the same period in 2020. The tax equivalent yield on the investment portfolio for the nine months endedSeptember 30, 2021 was 1.76%, down 92 basis points from 2.68% for the same period in 2020. The decrease in taxable equivalent yield on securities was a result of the current interest rate environment. The growth in the Company's investment securities portfolio during the year has helped offset the loss of investment income due to lower yield on securities. Interest expense was$10,721 for the third quarter of 2021 as compared to$15,792 for the same period in 2020. Interest expense for the nine months endedSeptember 30, 2021 was$34,247 as compared to$57,536 for the same period in 2020. The following tables present, by type, the Company's funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented: Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Three Months Ended Three Months Ended September 30, September 30, 2021 2020 2021 2020 Noninterest-bearing demand 32.64 % 29.66 % - % - % Interest-bearing demand 45.49 43.06 0.24 0.36 Savings 7.35 6.35 0.08 0.08 Time deposits 11.00 15.20 0.78 1.42 Short term borrowings 0.09 2.49 0.29 0.95 Long-term Federal Home Loan Bank advances 1.10 1.21 0.01 0.16 Subordinated notes 1.52 1.15 4.79 5.46 Other borrowed funds 0.81 0.88 4.36 4.32 Total deposits and borrowed funds 100.00 % 100.00 % 0.31 % 0.50 % 63
--------------------------------------------------------------------------------
Table of Contents Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Nine Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Noninterest-bearing demand 31.60 % 27.03 % - % - % Interest-bearing demand 45.75 42.95 0.26 0.51 Savings 7.17 6.17 0.08 0.11 Time deposits 11.85 16.79 0.90 1.59 Short-term borrowings 0.10 3.85 0.30 1.02 Long-term Federal Home Loan Bank advances 1.14 1.27 0.03 0.80 Subordinated notes 1.56 1.03 4.97 5.54 Other long term borrowings 0.83 0.91 4.27 4.56 Total deposits and borrowed funds 100.00 % 100.00 % 0.34 % 0.64 % Interest expense on deposits was$6,972 and$11,810 for the three months endedSeptember 30, 2021 and 2020, respectively. The cost of total deposits was 0.21% and 0.40% for the same respective periods. Interest expense on deposits was$22,920 and$44,175 for the nine months endedSeptember 30, 2021 and 2020, respectively, and the cost of total deposits was 0.24% and 0.53% for the same respective periods. The decrease in both deposit expense and cost is attributable to the Company's efforts to reduce deposit rates as they reprice in the current low interest rate environment. During 2021, the Company has continued its efforts to grow non-interest bearing deposits, and such deposits represent 33.89% of total deposits atSeptember 30, 2021 compared to 30.56% of total deposits atDecember 31, 2020 . The growth in non-interest bearing deposits during the year to date has been primarily driven by government stimulus payments and client sentiment. Low cost deposits continue to be the preferred choice of funding; however, the Company may rely on wholesale borrowings when rates are advantageous. Interest expense on total borrowings was$3,749 and$3,982 for the three months endedSeptember 30, 2021 and 2020, respectively. Interest expense on total borrowings was$11,327 and$13,361 for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in interest expense is a result of lower average borrowings. A more detailed discussion of the cost of our funding sources is set forth below under the heading "Liquidity and Capital Resources" in this Item. Noninterest Income Noninterest Income to Average Assets Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 1.25% 1.89% 1.53% 1.60% Total noninterest income includes fees generated from deposit services and other fees and commissions, income from our insurance, wealth management and mortgage banking operations, realized gains on the sale of securities and all other noninterest income. Our focus is to develop and enhance our products that generate noninterest income in order to diversify revenue sources. Noninterest income was$50,755 for the third quarter of 2021 as compared to$70,928 for the same period in 2020. Noninterest income was$179,402 for the nine months endedSeptember 30, 2021 as compared to$172,668 for the same period in 2020. During the third quarter of 2021, with the exception of mortgage banking operations, all categories of noninterest income increased when compared to the prior period as market activity began to rebound with the lifting of pandemic-related restrictions across our footprint. Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. Service charges on deposit accounts were$9,337 and$7,486 for the third quarter of 2021 and 2020, respectively, and$26,818 and$23,388 for the nine months endedSeptember 30, 2021 and 2020, respectively. Overdraft fees, the largest component of service charges on deposits, were$4,876 for the three months endedSeptember 30, 2021 , as compared to$4,299 for the same period in 2020. These fees were$13,830 for the nine months endedSeptember 30, 2021 compared to$13,935 for the same period in 2020. Fees and commissions were$3,837 during the third quarter of 2021 as compared to$3,402 for the same period in 2020, and were$11,847 for the first nine months of 2021 as compared to$9,427 for the same period in 2020. Fees and commissions 64 -------------------------------------------------------------------------------- Table of Contents include fees related to deposit services, such as ATM fees and interchange fees on debit card transactions. For the third quarter of 2021, interchange fees were$2,685 as compared to$2,323 for the same period in 2020. Interchange fees were$7,901 for the nine months endedSeptember 30, 2021 as compared to$6,534 for the same period in 2020. ThroughRenasant Insurance , we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was$2,829 and$2,681 for the three months endedSeptember 30, 2021 and 2020, respectively, and was$7,488 and$6,797 for the nine months endedSeptember 30, 2021 and 2020, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our clients' policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the number of claims paid by insurance carriers. Contingency income, which is included in "Other noninterest income" in the Consolidated Statements of Income, was$4 and$8 for the three months endedSeptember 30, 2021 and 2020, respectively, and$1,057 and$926 for the nine months endedSeptember 30, 2021 and 2020, respectively. Our Wealth Management segment has two primary divisions: Trust and Financial Services. The Trust division operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The division manages a number of trust accounts inclusive of personal and corporate benefit accounts, IRAs, 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. The Financial Services division provides specialized products and services to our customers, which include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was$5,371 for the third quarter of 2021 compared to$4,364 for the same period in 2020 and was$15,182 for the nine months endedSeptember 30, 2021 compared to$12,190 for the same period in 2020. The market value of assets under management or administration was$4,687,357 and$3,890,374 atSeptember 30, 2021 andSeptember 30, 2020 , respectively. Mortgage banking income is derived from the origination and sale of mortgage loans and the servicing of mortgage loans that the Company has sold but retained the right to service. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market. Originations of mortgage loans to be sold totaled$966,651 in the third quarter of 2021 compared to$1,253,742 for the same period in 2020. Mortgage loan originations totaled$3,189,474 in the nine months endedSeptember 30, 2021 compared to$3,277,576 for the same period in 2020. While mortgage loan originations remain elevated compared to pre-pandemic levels, margins have compressed as the interest rate environment has begun to rise and housing inventories are below demand. Mortgage banking income was$23,292 and$49,714 for the three months endedSeptember 30, 2021 and 2020, respectively, and was$94,878 for the first nine months endedSeptember 30, 2021 compared to$110,739 for the same period in 2020. The table below presents the components of mortgage banking income included in noninterest income for the periods presented. Three Months Ended September 30,
Nine Months Ended
2021 2020 2021 2020
Gain on sales of loans, net (1)
$ 71,598 $ 114,327 Fees, net 3,420 5,367 12,841 13,597 Mortgage servicing loss, net (244) (2,466) (3,122) (3,491) MSR valuation adjustment - 828 13,561 (13,694) Mortgage banking income, net$ 23,292 $ 49,714 $ 94,878 $ 110,739 (1) Gain on sales of loans, net includes pipeline fair value adjustments Bank-owned life insurance ("BOLI") income is derived from changes in the cash surrender value of the bank-owned life insurance policies and proceeds received upon the death of covered individuals. BOLI income was$1,602 for the three months endedSeptember 30, 2021 as compared to$1,267 for the same period in 2020, and$5,318 for the first nine months ofSeptember 30, 2021 as compared to$3,759 for the same period in 2020. The increase is primarily due to the$1,222 of life insurance proceeds received during the first nine months of 2021. There were no life insurance proceeds received during the nine months endedSeptember 30, 2020 . Additionally, the Company purchased$50,000 in BOLI policies during the first nine months of 2021. Other noninterest income was$3,723 and$2,014 for the three months endedSeptember 30, 2021 and 2020, respectively, and was$15,750 and$6,337 for the nine months endedSeptember 30, 2021 and 2020, respectively. Other noninterest income includes income from our SBA banking division and other miscellaneous income and can fluctuate based on production in our SBA banking division and recognition of other seasonal income items. In the first nine months of 2021, the Company entered 65 -------------------------------------------------------------------------------- Table of Contents into a referral relationship with a third party to utilize its technology platform to originate PPP loans under the latest round of funding. The Company earned$3,734 of PPP referral fees from its partner during the nine months endedSeptember 30, 2021 . Noninterest Expense Noninterest Expense to Average Assets Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 2.56% 3.10% 2.80% 3.25% Noninterest expense was$103,999 and$116,510 for the third quarter of 2021 and 2020, respectively, and was$328,711 and$349,836 for the nine months endedSeptember 30, 2021 and 2020, respectively. Salaries and employee benefits decreased$6,291 to$69,115 for the third quarter of 2021 as compared to$75,406 for the same period in 2020. Salaries and employee benefits decreased$9,852 to$218,104 for the nine months endedSeptember 30, 2021 as compared to$227,956 for the same period in 2020. The decrease in salaries and employee benefits is primarily due to a decrease in incentive expenses recognized for the nine months endedSeptember 30, 2021 and the cost savings realized by the voluntary early retirement program offered during the fourth quarter of 2020. Data processing costs increased to$5,277 in the third quarter of 2021 from$5,259 for the same period in 2020 and were$16,380 for the nine months endedSeptember 30, 2021 as compared to$15,312 for the same period in 2020. The Company continues to examine new and existing contracts to negotiate favorable terms to offset the increased variable cost components of our data processing costs, such as new accounts and increased transaction volume. Net occupancy and equipment expense for the third quarter of 2021 was$11,748 , down from$13,296 for the same period in 2020. These expenses for the first nine months of 2021 were$35,660 , down from$40,927 for the same period in 2020. The decrease in occupancy and equipment expense is primarily attributable to the restructuring and non-renewal of certain branch leases. Expenses related to other real estate owned for the third quarter of 2021 were$168 as compared to$1,033 for the same period in 2020 and were$313 and$2,071 , respectively, for the first nine months of 2021 and 2020. Expenses on other real estate owned included write downs of the carrying value to fair value on certain pieces of property held in other real estate owned of$290 and$1,647 for the first nine months of 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020, other real estate owned with a cost basis of$4,007 and$6,047 , respectively, was sold, resulting in a net gain of$74 and net loss of$27 , respectively. Professional fees include fees for legal and accounting services, such as routine litigation matters, external audit services as well as assistance in complying with newly-enacted and existing banking and governmental regulations. Professional fees were$2,972 for the third quarter of 2021 as compared to$3,197 for the same period in 2020 and$8,566 for the nine months endedSeptember 30, 2021 as compared to$8,355 for the same period in 2020. Advertising and public relations expense was$2,922 for the third quarter of 2021 as compared to$2,240 for the same period in 2020, and$9,274 for the nine months endedSeptember 30, 2021 compared to$8,560 for the same period in 2020. Amortization of intangible assets totaled$1,481 and$1,733 for the third quarter of 2021 and 2020, respectively, and$4,618 and$5,462 for the nine months endedSeptember 30, 2021 and 2020, respectively. 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 approximately 2 years to 8 years. Communication expenses, those expenses incurred for communication to clients and between employees, were$2,198 for the third quarter of 2021 as compared to$2,319 for the same period in 2020. Communication expenses were$6,781 for the nine months endedSeptember 30, 2021 as compared to$6,698 for the same period in 2020. Other noninterest expense includes the provision for unfunded commitments, business development and travel expenses, other discretionary expenses, loan fees expense and other miscellaneous fees and operating expenses. Other noninterest expense was$8,118 and$28,708 for the three and nine months endedSeptember 30, 2021 as compared to$11,999 and$34,377 for the same periods in 2020. During the third quarter of 2021 there was a recovery of provision for unfunded commitments of$200 . The provision for unfunded commitments was$2,700 and$8,700 for the three and nine months endedSeptember 30, 2020 . Efficiency Ratio 66
--------------------------------------------------------------------------------
Table of Contents Efficiency Ratio Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Efficiency ratio (GAAP) 66.77 % 65.16 % 64.85 % 70.49 % Adjusted efficiency ratio (Non-GAAP)(1) 66.06 % 62.63 % 65.66 % 63.89 % (1)A reconciliation of this financial measure from GAAP to non-GAAP can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. The efficiency ratio is a measure of productivity in the banking industry. (This ratio is a measure of our ability to turn expenses into revenue. That is, the ratio is designed to reflect the percentage ofone dollar that we must expend to generate a dollar of revenue.) The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. The table above shows the impact on the efficiency ratio of items that (1) the Company does not consider to be part of our core operating activities, such as amortization of intangibles, or (2) the Company incurred in connection with certain transactions where management is unable to accurately predict the timing of when these items will be incurred or, when incurred, the amount of such items, such as expenses or recoveries incurred in connection with our response to the COVID-19 pandemic, our MSR valuation adjustment and the provision for unfunded commitments. We remain committed to aggressively managing our costs within the framework of our business model. Our goal is to improve the efficiency ratio over time from currently reported levels as a result of revenue growth while at the same time controlling noninterest expenses. Income Taxes Income tax expense for the third quarter of 2021 and 2020 was$11,185 and$7,612 , respectively. The effective tax rates for those periods were 21.84% and 21.58%, respectively. Income tax expense for the nine months endedSeptember 30, 2021 and 2020 was$35,572 and$13,022 , respectively. The effective tax rates for those periods were 22.10% and 20.28%, respectively. In the second quarter of 2021 the Company received a benefit from a one-time state tax credit investment. The investment of$3,112 was fully amortized in other noninterest expense and the credit of$3,460 reduced income taxes for the second quarter of 2021.
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 risk 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 Credit Losses on Loans and Unfunded Commitments COVID-19 Update. AtSeptember 30, 2021 , the Company's credit quality metrics remained stable. The Company is continuing to monitor all asset categories given that any category or borrower could be negatively impacted by the pandemic, with enhanced monitoring of loans remaining on deferral under the Company's loan deferral programs implemented in 2020 and described in more detail in the section entitled "Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as well as a focus on those industries more highly impacted by the pandemic, primarily the hospitality and senior living industries. AtSeptember 30, 2021 , the Company had 41 loans (not in thousands) on deferral with an aggregate balance of approximately$3,360 , or 0.04% of our loan portfolio (excluding PPP loans) by dollar value. In accordance with the applicable guidance, none of these loans are considered "restructured loans" and thus are not included in the discussion of our restructured loans below. Management of Credit Risk. Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. Credit risk is monitored and managed on an ongoing basis by our credit administration department, our problem asset resolution committee and the Board of Directors Credit Review Committee. Oversight of the Company's lending operations (including adherence to our policies and procedures governing the loan approval and monitoring process), credit quality and loss mitigation are major concerns of credit administration and these committees. The Company's central appraisal review department reviews and approves third-party appraisals obtained by the Company on real estate collateral and monitors loan maturities to ensure updated appraisals are obtained. This department is managed by aState Certified General Real Estate Appraiser and employs three additionalState Certified General Real Estate Appraisers and four real estate evaluators. In addition, we maintain a loan review staff to independently monitor loan quality and lending practices. Loan review personnel monitor and, if necessary, adjust the grades assigned to loans through periodic examination, focusing their review on 67 -------------------------------------------------------------------------------- Table of Contents commercial and real estate loans rather than consumer and small balance consumer mortgage loans, such as 1-4 family mortgage loans. In compliance with loan policy, the lending staff is given lending limits based on their knowledge and experience. In addition, each lending officer's prior performance is evaluated for credit quality and compliance as a tool for establishing and enhancing lending limits. Before funds are advanced on consumer and commercial loans below certain dollar thresholds, loans are reviewed and scored using centralized underwriting methodologies. Loan quality, or "risk-rating," grades are assigned based upon certain factors, which include the scoring of the loans. This information is used to assist management in monitoring credit quality. Loan requests of amounts greater than an officer's lending limit are reviewed for approval by senior credit officers. For loans with a commercial purpose, risk-rating grades are assigned by lending, credit administration and loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 rated loans having the least credit risk. Management's problem asset resolution committee and the Board of Directors' Credit Review Committee monitor loans that are past due or those that have been downgraded and placed on the Company's internal watch list due to a decline in the collateral value or cash flow of the borrower; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality. When the ultimate collectability of a loan's principal is in doubt, wholly or partially, the loan is placed on nonaccrual. After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals as described above), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors' Credit Review Committee for charge-off approval. These charge-offs reduce the allowance for credit losses on loans. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. The Company's practice is to charge off estimated losses as soon as such losses are identified and reasonably quantified. Net charge-offs for the first nine months of 2021 were$4,906 , or 0.06% of average loans (annualized), compared to net charge-offs of$2,898 , or 0.04% of average loans (annualized), for the same period in 2020. The charge-offs were fully reserved for in the Company's allowance for credit losses on loans. Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans. The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Loan losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the adequacy of the allowance on a quarterly basis. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including loans evaluated on a collective (pooled) basis and those evaluated on an individual basis as set forth in ASC 326. The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company's loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company's process for the estimation of expected credit losses. Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories, and other factors, including our risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the national and local economies as well as trends in the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit loss in those future periods. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a collective or pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans.
•The allowance for credit losses for loans that share similar risk characteristics with other loans is calculated on a collective (or pooled) basis, where such loans are segregated into loan portfolio segments based upon similarity of credit risk. In
68 -------------------------------------------------------------------------------- Table of Contents determining the allowance for credit losses on loans evaluated on a collective basis, the Company categorizes loan pools based on loan type and/or risk rating. The Company uses two CECL models: (1) a loss rate model, based on average historical life-of-loan loss rates, is used for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, and (2) for theCommercial, Real Estate - Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool. The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit concentration and the nature and volume of the respective loan portfolio segments. External factors include current and reasonable and supportable forecasted economic conditions and changes in collateral values. These factors are used to adjust the historical loss rates (as described above) to ensure that they reflect management's expectation of future conditions based on a reasonable and supportable forecast period. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the models immediately revert back to the historical loss rates adjusted for qualitative factors related to current conditions. •For loans that do not share similar risk characteristics with other loans, an individual analysis is performed to determine the expected credit loss. If the respective loan is collateral dependent (that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral), the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of collateral is initially based on external appraisals. Generally, collateral values for loans for which measurement of expected losses is dependent on the fair value of such collateral are updated every twelve months, either from external third parties or in-house certified appraisers. Third-party appraisals are obtained from a pre-approved list of independent, third-party, local appraisal firms. The fair value of the collateral derived from the external appraisal is then adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. Other acceptable methods for determining the expected credit losses for individually evaluated loans (typically used for loans that are not collateral dependent) is a discounted cash flow approach or, if applicable, an observable market price. Once the expected credit loss amount is determined, an allowance equal to such expected credit loss is included in the allowance for credit losses. In addition to its quarterly analysis of the allowance for credit losses, on a regular basis management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans, among others. Also, management reviews past due ratios by officer, community bank and the Company as a whole. The following table presents the allocation of the allowance for credit losses on loans by loan category and the percentage of loans in each category to total loans as of the dates presented: September 30, 2021 December 31, 2020 September 30, 2020 Balance % of Total Balance % of Total Balance % of Total Commercial, financial, agricultural$ 34,977 14.34 %$ 39,031 23.20 %$ 38,195 23.89 % Lease financing 1,570 0.79 % 1,624 0.69 % 1,832 0.75 % Real estate - construction 16,169 10.89 % 16,047 7.85 % 13,819 6.98 % Real estate - 1-4 family mortgage 32,181 27.21 % 32,165 24.68 % 32,705 24.89 % Real estate - commercial mortgage 73,895 45.27 % 76,127 41.66 % 70,582 41.30 % Installment loans to individuals 11,246 1.50 % 11,150 1.92 % 10,965 2.19 % Total$ 170,038 100.00 %$ 176,144 100.00 %$ 168,098 100.00 % The provision for credit losses on loans charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses on loans at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The Company recorded a negative provision (recovery) for credit losses of$1,200 during the 69 -------------------------------------------------------------------------------- Table of Contents third quarter and first nine months of 2021, as compared to a provision for credit losses on loans of$23,100 in the third quarter of 2020 and$76,350 in the first nine months of 2020. The Company's allowance for credit loss model considers economic projections, primarily the national unemployment rate and GDP, over a reasonable and supportable period of two years. Based on the continual improvements in these forecasts over the last few quarters, the Company's allowance model indicated that a release of$1,200 of the allowance for credit losses was appropriate during the third quarter of 2021. The table below reflects the activity in the allowance for credit losses on loans for the periods presented: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Balance at beginning of period$ 172,354 $ 145,387 $ 176,144 $ 52,162 Impact of the adoption of ASC 326 - - - 42,484
Charge-offs
Commercial, financial, agricultural 1,225 420 5,907 1,969 Lease financing 13 168 13 168 Real estate - construction - 136 52 668 Real estate - 1-4 family mortgage 276 720 529 1,083 Real estate - commercial mortgage 184 553 416 2,600 Installment loans to individuals 1,281 1,579 4,286 6,003 Total charge-offs 2,979 3,576 11,203 12,491
Recoveries
Commercial, financial, agricultural 418 698 940 996 Lease financing 11 1 36 11 Real estate - construction - 31 13 31 Real estate - 1-4 family mortgage 193 152 855 288 Real estate - commercial mortgage 190 711 504 2,451 Installment loans to individuals 1,051 1,594 3,949 5,816 Total recoveries 1,863 3,187 6,297 9,593 Net charge-offs 1,116 389 4,906 2,898 Provision for credit losses on loans (1,200) 23,100 (1,200) 76,350 Balance at end of period$ 170,038 $ 168,098 $ 170,038 $ 168,098 Net charge-offs (annualized) to average loans 0.04 % 0.01 % 0.06 % 0.04 % Net charge-offs to allowance for credit losses on loans 0.66 % 0.23 % 2.89 % 1.72 % Allowance for credit losses on loans to: Total loans 1.70 % 1.52 % Total loans excluding PPP loans(1) 1.71 % 1.72 % Nonperforming loans 299.68 % 367.05 % Nonaccrual loans 304.96 % 385.09 % (1) Allowance for credit losses on loans to total loans excluding PPP loans is a non-GAAP financial measure. A reconciliation of this financial measure from GAAP to non-GAAP as well as an explanation of why the Company provides non-GAAP financial measures can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations 70
--------------------------------------------------------------------------------
Table of Contents The table below reflects annualized net charge-offs to daily average loans outstanding, by loan category, during the periods presented:
Nine Months Ended September 30, 2021 September 30, 2020 Annualized Net Annualized Net Charge-offs to Average Charge-offs to Average Net Charge-offs Average Loans Loans Net Charge-offs Average Loans Loans Commercial, financial, agricultural $ 4,967 $ 1,968,541 0.34% $ 973 $ 2,109,787 0.06% Lease financing (23) 75,620 (0.04) 157 83,844 0.25 Real estate - construction 39 986,337 0.01 637 818,779 0.10 Real estate - 1-4 family mortgage (326) 2,711,619 (0.02) 795 2,808,646 0.04 Real estate - commercial mortgage (88) 4,519,793 - 149 4,335,604 - Installment loans to individuals 337 169,526 0.27 187 293,877 0.08 Total $ 4,906 $ 10,431,436 0.06% $ 2,898 $ 10,450,537 0.04%
The following table provides further details of the Company's net charge-offs (recoveries) of loans secured by real estate for the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Real estate - construction: Residential $ -$ 105 $ 39 $ 637 Total real estate - construction - 105 39 637 Real estate - 1-4 family mortgage: Primary 115 661 57 921 Home equity (46) (29) (109) (51) Rental/investment 7 (8) (192) 20 Land development 7 (56) (82) (95) Total real estate - 1-4 family mortgage 83 568 (326) 795 Real estate - commercial mortgage: Owner-occupied 18 (190) (98) 1,224 Non-owner occupied (24) 33 (14) (1,097) Land development - (1) 24 22 Total real estate - commercial mortgage (6) (158) (88) 149
Total net charge-offs of loans secured by real estate
$ 515 $ (375) $ 1,581 Allowance for Credit Losses on Unfunded Commitments; Provision for Credit Losses on Unfunded Commitments. The Company maintains a separate allowance for credit losses on unfunded loan commitments, which is included in the "Other liabilities" line item on the Consolidated Balance Sheets. Management estimates the amount of expected losses on unfunded loan commitments by calculating a likelihood of funding over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the allowance for credit losses on loans methodology described above to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company. A roll-forward of the allowance for credit losses on unfunded commitments is shown in the tables below. 71 -------------------------------------------------------------------------------- Table of Contents Three Months EndedSeptember 30 ,
2021 2020 Allowance for credit losses on unfunded loan commitments: Beginning balance
$
20,535
(Recovery of) provision for credit losses on unfunded loan commitments (included in other noninterest expense)
(200) 2,700 Ending balance $
20,335
Nine Months EndedSeptember 30 ,
2021 2020 Allowance for credit losses on unfunded loan commitments: Beginning balance
$ 20,535 $ 946 Impact of the adoption of ASC 326
- 10,389 (Recovery of) provision for credit losses on unfunded loan commitments (included in other noninterest expense)
(200) 8,700 Ending balance$ 20,335 $ 20,035 Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due 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. Management, the problem asset resolution committee and our loan review staff closely monitor loans that are considered to be nonperforming. Other real estate owned consists 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 credit losses on loans. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in "Other real estate owned" in the Consolidated Statements of Income.
The following tables provide details of the Company's non purchased and purchased nonperforming assets as of the dates presented.
72
--------------------------------------------------------------------------------
Table of Contents Non Purchased Purchased TotalSeptember 30, 2021 Nonaccruing loans$ 29,266 $ 26,492 $ 55,758 Accruing loans past due 90 days or more 908 74 982 Total nonperforming loans 30,174 26,566 56,740 Other real estate owned 2,252 2,453 4,705 Total nonperforming assets$ 32,426 $ 29,019 $ 61,445 Nonperforming loans to total loans 0.57 % Nonaccruing loans to total loans 0.56 % Nonperforming assets to total assets 0.38 % December 31, 2020 Nonaccruing loans$ 20,369 $ 31,051 $ 51,420 Accruing loans past due 90 days or more 3,783 267 4,050 Total nonperforming loans 24,152 31,318 55,470 Other real estate owned 2,045 3,927 5,972 Total nonperforming assets$ 26,197 $ 35,245 $ 61,442 Nonperforming loans to total loans 0.51 % Nonaccruing loans to total loans 0.47 % Nonperforming assets to total assets
0.41 %
The level of nonperforming loans increased$1,270 fromDecember 31, 2020 toSeptember 30, 2021 , while OREO decreased$1,267 during the same period. The following table presents nonperforming loans by loan category as of the dates presented: September 30, September 30, 2021 December 31, 2020 2020 Commercial, financial, agricultural$ 16,027 $ 16,668$ 17,422 Lease financing 11 48 - Real estate - construction: Residential - 497 - Commercial - - - Total real estate - construction - 497 - Real estate - 1-4 family mortgage: Primary 17,378 16,317 15,583 Home equity 2,041 2,273 1,949 Rental/investment 1,016 1,526 1,284 Land development 243 345 395 Total real estate - 1-4 family mortgage 20,678 20,461 19,211 Real estate - commercial mortgage: Owner-occupied 5,732 6,364 6,805 Non-owner occupied 13,412 10,204 1,201 Land development 366 572 519 Total real estate - commercial mortgage 19,510 17,140 8,525 Installment loans to individuals 514 656 638 Total nonperforming loans$ 56,740 $ 55,470$ 45,796 73
-------------------------------------------------------------------------------- Table of Contents Total nonperforming loans as a percentage of total loans were 0.57% as ofSeptember 30, 2021 as compared to 0.51% and 0.41% as ofDecember 31, 2020 andSeptember 30, 2020 , respectively. The Company's coverage ratio, or its allowance for credit losses on loans as a percentage of nonperforming loans, was 299.68% as ofSeptember 30, 2021 as compared to 317.55% as ofDecember 31, 2020 and 367.05% as ofSeptember 30, 2020 . 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 credit losses atSeptember 30, 2021 . Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due but still accruing interest were$14,806 atSeptember 30, 2021 as compared to$26,286 atDecember 31, 2020 and$16,644 atSeptember 30, 2020 . Although not classified as nonperforming loans, restructured loans are another category of assets that contribute to our credit risk. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower's financial condition and are performing in accordance with the new terms. 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. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. As shown below, restructured loans totaled$20,183 atSeptember 30, 2021 as compared to$20,448 atDecember 31, 2020 and$20,322 atSeptember 30, 2020 . AtSeptember 30, 2021 , loans restructured through interest rate concessions represented 34% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company's restructured loans in compliance with their modified terms as of the dates presented: September 30, September 30, 2021 December 31, 2020 2020 Commercial, financial, agricultural$ 1,062 $ 2,326$ 2,417 Real estate - 1-4 family mortgage: Primary 11,415 9,460 8,359 Home equity 299 332 333 Rental/investment 354 432 724 Total real estate - 1-4 family mortgage 12,068 10,224 9,416 Real estate - commercial mortgage: Owner-occupied 5,546 6,838 6,854 Non-owner occupied 1,357 797 1,355 Land development 76 183 186 Total real estate - commercial mortgage 6,979 7,818 8,395 Installment loans to individuals 74 80 94 Total restructured loans in compliance with modified terms$ 20,183 $ 20,448$ 20,322
Changes in the Company's restructured loans are set forth in the table below:
74
--------------------------------------------------------------------------------
Table of Contents
2021 2020 Balance at January 1,$ 20,448 $ 11,954
Additional advances or loans with concessions 10,852 12,946 Reclassified as performing restructured loan 150
428 Reductions due to: Reclassified as nonperforming (2,855) (2,999) Paid in full (7,341) (1,360) Charge-offs (205) (3) Paydowns (866) (644) Balance at September 30,$ 20,183 $ 20,322 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. September 30, September 30, 2021 December 31, 2020 2020 Nonaccruing loans$ 55,758 $ 51,420$ 43,652 Accruing loans past due 90 days or more 982 4,050 2,144 Total nonperforming loans 56,740 55,470 45,796 Restructured loans in compliance with modified terms 20,183 20,448 20,322 Total nonperforming and restructured loans$ 76,923 $ 75,918$ 66,118 The following table provides details of the Company's other real estate owned as of the dates presented: September 30, September 30, 2021 December 31, 2020 2020 Residential real estate $ 503 $ 179$ 1,870 Commercial real estate 2,671 2,665 2,403 Residential land development 315 1,013
1,669
Commercial land development 1,216 2,115
2,211
Total other real estate owned$ 4,705 $ 5,972
Changes in the Company's other real estate owned were as follows:
2021 2020 Balance at January 1,$ 5,972 $ 8,010 Transfers of loans 3,171 7,887 Impairments (290) (1,647) Dispositions (4,007) (6,047) Other (141) (50) Balance at September 30,$ 4,705 $ 8,153 Other real estate owned with a cost basis of$4,007 was sold during the nine months endedSeptember 30, 2021 , resulting in a net gain of$74 , while other real estate owned with a cost basis of$6,047 was sold during the nine months endedSeptember 30, 2020 , resulting in a net loss of$27 . 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 a significant impact on the Company's financial results stems from 75 -------------------------------------------------------------------------------- Table of Contents our ability to react to changes 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. Because of the impact of interest rate fluctuations on our profitability, the Board of Directors and management actively monitor and manage our interest rate risk exposure. We have an Asset/Liability Committee ("ALCO") that 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. The ALCO uses an asset/liability model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model is used to perform both net interest income forecast simulations for multiple year horizons and economic value of equity ("EVE") analyses, each under various interest rate scenarios, which could impact the results presented in the table below. Net interest income simulations measure the short and medium-term earnings exposure from changes in market interest rates in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. 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 for a given set of market rate assumptions. An increase in EVE due to a specified rate change indicates an improvement 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. The following table presents the projected impact of a change in interest rates on (1) static EVE and (2) earnings at risk (that is, net interest income) for the 1-12 and 13-24 month periods commencingOctober 1, 2021 , in each case as compared to the result under rates present in the market onSeptember 30, 2021 . The changes in interest rates assume an instantaneous and parallel shift in the yield curve and do not account for changes in the slope of the yield curve. Percentage Change In: Economic Value Equity Immediate Change in Rates of (in basis (EVE) Earning at Risk (Net Interest Income) points): Static 1-12 Months 13-24 Months +200 11.83% 16.87% 22.94% +100 7.20% 8.57% 12.20% The rate shock results for the net interest income simulations for the next twenty-four months produce an asset sensitive position atSeptember 30, 2021 and are all within the parameters set by the Board of Directors. The preceding measures assume no change in the size or asset/liability compositions of the balance sheet, and they do not reflect future actions the ALCO may undertake in response to such changes in interest rates. The scenarios assume instantaneous movements in interest rates in increments of plus 100 and 200. 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, including asset prepayment speeds, the impact of competitive factors on our pricing of loans and deposits, how responsive our deposit repricing is to the change in market rates and the expected life of non-maturity deposits. These business assumptions are based upon our experience, business plans and published industry experience; however, such assumptions may not necessarily reflect the manner or timing in which cash flows, asset yields and liability costs respond to changes in market rates. Because these assumptions are inherently uncertain, actual results will differ from simulated results. The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company enters 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 with other financial institutions. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. AtSeptember 30, 2021 , the Company had notional amounts of$190,200 on interest rate contracts with corporate customers and$190,200 in offsetting interest rate contracts with other financial institutions to mitigate the Company's rate exposure on its corporate customers' contracts and certain fixed rate loans. 76 -------------------------------------------------------------------------------- Table of Contents Additionally, 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 and adjustable rate residential mortgage loans and also enters into forward commitments to sell residential mortgage loans to secondary market investors. The Company also enters into forward interest rate swap contracts on its FHLB borrowings and its junior subordinated debentures that are accounted for as cash flow hedges. Under each of these contracts, the Company pays a fixed rate of interest and receives a variable rate of interest based on the three-month or one-month LIBOR plus a predetermined spread. The Company entered into an interest rate swap contract on its subordinated notes that is accounted for as a fair value hedge. Under this contract, the Company pays a variable rate of interest based on the three-month LIBOR plus a predetermined spread and receives a fixed rate of interest. For more information about the Company's derivatives, see Note 10, "Derivative Instruments," in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements.
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 greater than$250,000 , are the 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 assuring the Bank's liquidity. Management continually monitors the Bank's liquidity and non-core dependency ratios to ensure compliance with targets established by the Asset/Liability Management Committee. Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Within the next twelve months, the securities portfolio is forecasted to generate cash flow through principal payments and maturities equal to approximately 18.85% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types, short-term borrowings and derivative instruments. AtSeptember 30, 2021 , securities with a carrying value of$557,463 were pledged to secure public fund deposits and as collateral for short-term borrowings and derivative instruments as compared to securities with a carrying value of$614,610 similarly pledged atDecember 31, 2020 . Other sources available for meeting liquidity needs include federal funds purchased and short-term and long-term advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. There were no short-term borrowings from the FHLB atSeptember 30, 2021 orDecember 31, 2020 . Long-term funds obtained from the FHLB are used to match-fund fixed rate loans in order to minimize interest rate risk and also are used to meet day-to-day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. AtSeptember 30, 2021 , the balance of our outstanding long-term advances with the FHLB was$150,425 compared to$152,167 atDecember 31, 2020 . The total amount of the remaining credit available to us from the FHLB atSeptember 30, 2021 was$3,977,848 . We also maintain lines of credit with other commercial banks totaling$180,000 . These are unsecured lines of credit with the majority maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit atSeptember 30, 2021 orDecember 31, 2020 . In 2016 and 2020, we accessed the capital markets to generate liquidity in the form of subordinated notes. In addition, we assumed subordinated notes in connection with our acquisition ofMetropolitan BancGroup, Inc. in 2017. The carrying value of the subordinated notes, net of unamortized debt issuance costs, was$207,210 atSeptember 30, 2021 .
The following table presents, by type, the Company's funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
77
--------------------------------------------------------------------------------
Table of Contents Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Nine Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Noninterest-bearing demand 31.60 % 27.03 % - % - % Interest-bearing demand 45.75 42.95 0.26 0.51 Savings 7.17 6.17 0.08 0.11 Time deposits 11.85 16.79 0.90 1.59 Short-term borrowings 0.10 3.85 0.30 1.02 Long-term Federal Home Loan Bank advances 1.14 1.27 0.03 0.80 Subordinated notes 1.56 1.03 4.97 5.54 Other borrowed funds 0.83 0.91 4.27 4.56 Total deposits and borrowed funds 100.00 % 100.00 % 0.34 % 0.64 % Our strategy in choosing funds is focused on minimizing cost in the context of our balance sheet composition and interest rate risk position. 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. We constantly monitor our funds position and evaluate the effect that various funding sources have on our financial position. Cash and cash equivalents were$1,476,141 atSeptember 30, 2021 , as compared to$414,105 atSeptember 30, 2020 . Cash used in investing activities for the nine months endedSeptember 30, 2021 was$372,260 , as compared to cash used in investing activities of$1,355,398 for the nine months endedSeptember 30, 2020 . Proceeds from the sale, maturity or call of securities within our investment portfolio were$505,926 for the nine months endedSeptember 30, 2021 , as compared to$323,136 for the same period in 2020. These proceeds were primarily reinvested into the investment portfolio. Purchases of investment securities were$1,743,105 for the first nine months of 2021, as compared to$304,955 for the same period in 2020. Cash provided by financing activities for the nine months endedSeptember 30, 2021 was$1,125,027 , as compared to$1,310,528 for the same period in 2020. Deposits increased$1,195,748 and$1,721,118 for the nine months endedSeptember 30, 2021 and 2020, respectively. Restrictions on Bank Dividends, Loans and AdvancesThe Company's liquidity and capital resources, as well as its ability to pay dividends to its shareholders, are substantially dependent on the ability of theRenasant Bank to transfer funds to the Company in the form of dividends, loans and advances. UnderMississippi law, aMississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. AMississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of theMississippi Department of Banking and Consumer Finance (the "DBCF"). In addition, theFDIC also has the authority to prohibit the Bank from engaging in business practices that theFDIC considers to be unsafe or unsound, which, depending on the financial condition of the bank, could include the payment of dividends. Accordingly, the approval of the DBCF is required prior to the Bank paying dividends to the Company, and under certain circumstances the approval of theFDIC may be required.Federal Reserve regulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. AtSeptember 30, 2021 , the maximum amount available for transfer from the Bank to the Company in the form of loans was$157,470 . The Company maintains a$3,000 line of credit collateralized by cash with the Bank. There were no amounts outstanding under this line of credit atSeptember 30, 2021 . These restrictions did not have any impact on the Company's ability to meet its cash obligations in the nine months endedSeptember 30, 2021 , nor does management expect such restrictions to materially impact the Company's ability to meet its currently-anticipated cash obligations. Potential Demands on Liquidity from Off-Balance Sheet ArrangementsThe 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 78 -------------------------------------------------------------------------------- Table of Contents policies, including establishing a provision for credit losses on unfunded commitments. 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 were as follows as of the dates presented: September 30, 2021 December 31, 2020 Loan commitments $ 3,058,740$ 2,749,988 Standby letters of credit 95,201 90,597 The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments and the provision related thereto as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed. For a more detailed discussion related to the allowance and provision for credit losses on unfunded loan commitments, refer to the "Risk Management" section above.
Shareholders' Equity and Regulatory Matters
Total shareholders' equity of the Company was$2,203,944 atSeptember 30, 2021 compared to$2,132,733 atDecember 31, 2020 . Book value per share was$39.53 and$37.95 atSeptember 30, 2021 andDecember 31, 2020 , respectively. The growth in shareholders' equity was attributable to earnings retention offset by changes in accumulated other comprehensive income and dividends declared. The Company maintains a shelf registration statement with theSecurities and Exchange Commission ("SEC"). The shelf registration statement, which was effective upon filing, allows the Company to raise capital from time to time through the sale of common stock, preferred stock, depositary shares, debt securities, rights, 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 file with theSEC 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 or as otherwise described in the prospectus supplement applicable to the offering and could include the expansion of the Company's banking, insurance and wealth management operations as well as other business opportunities.
The Company repurchased
OnOctober 26, 2021 , the Company's Board of Directors approved a new stock repurchase program (the previous program having just expired), authorizing the Company to repurchase up to$50,000 of its outstanding common stock, either in open market purchases or privately-negotiated transactions. The new repurchase program will remain in effect for one year or, if earlier, the repurchase of the entire amount of common stock authorized to be repurchased. The Company has junior subordinated debentures with a carrying value of$111,228 atSeptember 30, 2021 , of which$107,637 is included in the Company's Tier 1 capital.Federal Reserve guidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the debentures we include in Tier 1 capital atSeptember 30, 2021 . Although our existing junior subordinated debentures are currently unaffected by theseFederal Reserve guidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition we exceed$15,000,000 in assets, or if we make any acquisition after we have exceeded$15,000,000 in assets, we will lose Tier 1 treatment of our junior subordinated debentures.
The Company has subordinated notes with a carrying value of
TheFederal Reserve , theFDIC and theOffice of the Comptroller of the Currency have issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications: 79
--------------------------------------------------------------------------------
Table of Contents Tier 1 Capital to Tier 1 Capital to Total Capital to Average Assets
Common Equity Tier 1 to Risk - Weighted Risk - Weighted Capital Tiers (Leverage) Risk - Weighted Assets Assets Assets Well capitalized 5% or above 6.5% or above 8% or above 10% or above Adequately capitalized 4% or above 4.5% or above 6% or above 8% or above Undercapitalized Less than 4% Less than 4.5% Less than 6% Less than 8% Significantly undercapitalized Less than 3% Less than 3% Less than 4% Less than 6% Critically undercapitalized Tangible Equity / Total Assets less than 2% 80
-------------------------------------------------------------------------------- Table of Contents The following table provides the capital and risk-based capital and leverage ratios for the Company and forRenasant Bank as of the dates presented:Minimum Capital Requirement to beMinimum Capital Adequately Requirement to be Capitalized
(including the Capital
Actual Well Capitalized Conservation Buffer) Amount Ratio Amount Ratio Amount RatioSeptember 30, 2021 Renasant Corporation : Risk-based capital ratios: Common equity tier 1 capital ratio$ 1,287,684 11.02 %$ 759,458 6.50 % $ 817,878 7.00 % Tier 1 risk-based capital ratio 1,395,321 11.94 % 934,717 8.00 % 993,137 8.50 % Total risk-based capital ratio 1,712,500 14.66 % 1,168,397 10.00 % 1,226,816 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,395,321 9.18 % 759,755 5.00 % 607,804 4.00 % Renasant Bank: Risk-based capital ratios: Common equity tier 1 capital ratio$ 1,454,879 12.45 %$ 759,370 6.50 % $ 817,783 7.00 % Tier 1 risk-based capital ratio 1,454,879 12.45 % 934,609 8.00 % 993,022 8.50 % Total risk-based capital ratio 1,574,697 13.48 % 1,168,261 10.00 % 1,226,674 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,454,879 9.58 % 758,964 5.00 % 607,171 4.00 % December 31, 2020Renasant Corporation : Risk-based capital ratios: Common equity tier 1 capital ratio$ 1,199,394 10.93 %$ 713,086 6.50 % $ 767,939 7.00 % Tier 1 risk-based capital ratio 1,306,597 11.91 % 877,644 8.00 % 932,497 8.50 % Total risk-based capital ratio 1,653,694 15.07 % 1,097,055 10.00 % 1,151,908 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,306,597 9.37 % 697,579 5.00 % 558,063 4.00 % Renasant Bank: Risk-based capital ratios: Common equity tier 1 capital ratio$ 1,369,994 12.49 %$ 712,709 6.50 % $ 767,533 7.00 % Tier 1 risk-based capital ratio 1,369,994 12.49 % 877,181 8.00 % 932,004 8.50 % Total risk-based capital ratio 1,504,985 13.73 % 1,096,476 10.00 % 1,151,299 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,369,994 9.83 % 696,738 5.00 % 557,391 4.00 % The Company has elected to take advantage of transitional relief offered by theFederal Reserve andFDIC to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transitional period to phase out the capital benefit provided by the two-year delay. For more information regarding the capital adequacy guidelines applicable to the Company andRenasant Bank , please refer to Note 15, "Regulatory Matters," in the Notes to the Consolidated Financial Statements of the Company in Item 1, Financial Statements. 81 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures In addition to results presented in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), this document contains certain non-GAAP financial measures, namely, an adjusted efficiency ratio and the allowance for credit losses on loans to total loans, excluding PPP loans (the "adjusted allowance ratio"). The adjusted allowance ratio only excludes PPP loans; the adjusted efficiency ratio adjusts GAAP financial measures to exclude the amortization of intangible assets and certain items (such as, when applicable, COVID-19 related expenses, debt prepayment penalties, restructuring charges, provision for unfunded commitments, gains on sales of securities and asset valuation adjustments) with respect to which the Company is unable to accurately predict when these items will be incurred or, when incurred, the amount thereof. With respect to COVID-19 related expenses in particular, management added these expenses as a charge to exclude when calculating non-GAAP financial measures because the expenses included within this line item are readily quantifiable and possess the same characteristics with respect to management's inability to accurately predict the timing or amount thereof as the other items excluded when calculating non-GAAP financial measures. Management uses the adjusted efficiency ratio when evaluating capital utilization and adequacy, while it uses the adjusted allowance ratio to determine the adequacy of our allowance with respect to loans not fully guaranteed by theU.S. Small Business Administration . In addition, the Company believes that non-GAAP financial measures facilitate the making of period-to-period comparisons and are meaningful indicators of its operating performance, particularly because these measures are widely used by industry analysts for companies with merger and acquisition activities. Also, because the amortization of intangible assets and items such as restructuring charges and COVID-19 related expenses can vary extensively from company to company and, as to intangible assets, are excluded from the calculation of a financial institution's regulatory capital, the Company believes that the presentation of this non-GAAP financial information allows readers to more easily compare the Company's results to information provided in other regulatory reports and the results of other companies. The reconciliations from GAAP to non-GAAP for these financial measures are below. Adjusted Efficiency Ratio Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Interest income (fully tax equivalent basis)$ 115,723 $ 123,677 $ 361,718 $ 381,195 Interest expense 10,721 15,792 34,247 57,536 Net interest income (fully tax equivalent basis) 105,002 107,885 327,471 323,659 Total noninterest income 50,755 70,928 179,402 172,668 Net gains on sales of securities 764 - 2,121 31 MSR valuation adjustment - 828 13,561 (13,694) Adjusted noninterest income 49,991 70,100 163,720 186,331 Total noninterest expense 103,999 116,510 328,711 349,836 Intangible amortization 1,481 1,733 4,618 5,462 Debt prepayment penalty - 28 - 118 Restructuring charges - - 307 - COVID-19 related expenses 323 570 1,478 9,730 Provision for unfunded commitments (200) 2,700 (200) 8,700 Adjusted noninterest expense 102,395 111,479 322,508 325,826 Efficiency Ratio (GAAP) 66.77 % 65.16 % 64.85 % 70.49 % Adjusted Efficiency Ratio (non-GAAP) 66.06 % 62.63 % 65.66 % 63.89 % 82
--------------------------------------------------------------------------------
Table of Contents
Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans September 30, 2021 December 31, 2020 Total loans (GAAP)$ 10,016,824 $ 10,933,647 Less PPP loans 67,462 1,128,703 Adjusted total loans (non-GAAP)$ 9,949,362
Allowance for Credit Losses on Loans $ 170,038 $ 176,144 ACL/Total loans (GAAP) 1.70 % 1.61 % ACL/Total loans excluding PPP loans (non-GAAP) 1.71 % 1.80 % The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Readers of this Form 10-Q should note that, because there are no standard definitions for the calculations as well as the results, the Company's calculations may not be comparable to a similarly-titled measure presented by other companies. Also, there may be limits in the usefulness of this measure to readers of this document. As a result, the Company encourages readers to consider its consolidated financial statements and footnotes thereto in their entirety and not to rely on any single financial measure.
© Edgar Online, source