RENASANT CORPORATION (In Thousands, Except Share Data)
The following discussion and analysis of our financial condition as ofDecember 31, 2021 and 2020 and results of operations for each of the years then ended should be read together with the cautionary language regarding forward-looking statements at the beginning of this Annual Report on Form 10-K and our consolidated financial statements and related notes included under Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, as well as Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which provides a discussion of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K.
Performance Overview
Net income was$175,892 for 2021 compared to$83,651 for 2020. Basic and diluted earnings per share ("EPS") were$3.13 and$3.12 , respectively, for 2021 compared to$1.49 and$1.48 , respectively, for 2020. AtDecember 31, 2021 , total assets increased to$16,810,311 from$14,929,612 atDecember 31, 2020 . The changes in our financial condition and results of operations from 2020 to 2021 were driven by a number of factors, the most prominent of which are highlighted below: Financial Highlights - Net interest income decreased$2,796 to$424,001 for 2021 as
compared to
2020. The decrease from 2020 to 2021 was due to thecontinued decline in loan yields
due to the current rate environment, as well as changes in the mix of earning assets
during the year due to increased liquidity on the balance sheet, partially offset by a
decline in our cost of funds. The Company has continued to focus on lowering the cost
of funding through both growing noninterest-bearing deposits and aggressively lowering
interest rates on interest-bearing deposits.
- Net charge-offs as a percentage of average loans were 0.10% and 0.04% in 2021 and 2020,
respectively. The Company recorded a recovery of provision for credit losses on loans
of $1,700 in 2021 as compared to a provision for credit
losses of
decrease year over year is reflective of the continued economic improvement and stable
credit metrics.
- Noninterest income was $226,984 for 2021 compared to
noninterest income is primarily attributable to decreased mortgage production during
the year, partially offset by an increase in other fee income categories.
- Noninterest expense was $429,826 and $471,988 for 2021 and 2020, respectively. The
decrease in noninterest expense is primarily attributable to decreases in salaries and
employee benefits, which decreased partially due to the voluntary early retirement
program offered in 2020 and other expense initiatives. Salaries and employee benefits
for 2020 also included approximately $8,237 in expense related to 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. The Company also had a decrease in net occupancy and equipment in
2021 resulting from the branch efficiency initiatives implemented in late 2020.
- Loans, net of unearned income, were $10,020,914 at December 31, 2021 compared to
$10,933,647 atDecember 31, 2020 , which represents a
decrease of 8.35% from the
previous year. The balance of PPP loans decreased to $58,391 at
$1,128,703 atDecember 31, 2020 , while loans other than PPP
loans increased by
$157,579 , or 1.61%, fromDecember 31, 2020 . - Deposits totaled$13,905,724 atDecember 31, 2021 compared
to
31, 2020. Noninterest bearing deposits averaged $4,310,834 , or 33.15% of average
deposits, for 2021 compared to $3,391,619 , or 29.79% of average deposits, for 2020.
29--------------------------------------------------------------------------------
A historical look at key performance indicators is presented below.
2021 2020 2019
Diluted EPS $ 3.12 $ 1.48 $ 2.88
Diluted EPS Growth 110.81 % (48.61) % 3.23 %
Shareholders' equity to assets 13.15 % 14.29 % 15.86 %
Tangible shareholders' equity to tangible assets(1) 7.86 % 8.33 % 9.25 %
Return on Average Assets 1.11 % 0.58 % 1.30 %
Return on Average Tangible Assets(1) 1.21 % 0.66 % 1.46 %
Return on Average Shareholders' Equity 7.96 % 3.96 % 7.95 %
Return on Average Tangible Shareholders' Equity(1) 14.53 % 7.83 % 15.36 %
(1)These performance indicators are non-GAAP financial measures. A reconciliation of these financial measures from GAAP to non-GAAP as well as an explanation of why the Company provides these non-GAAP financial measures can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies and Estimates
Our financial statements are prepared using accounting estimates for various accounts. Wherever feasible, we utilize third-party information to provide management with estimates. Although independent third parties are engaged to assist us in the estimation process, management evaluates the results, challenges assumptions and considers other factors that could impact these estimates. We monitor the status of proposed and newly issued accounting standards to evaluate the impact (or potential impact) on our financial condition and results of operations or on the preparation of our financial statements. Our accounting policies, including the impact of newly issued accounting standards, are discussed in detail in Note 1, "Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. The following discussion supplements the discussion of our significant accounting policies in the financial statements.
Allowance for Credit Losses on Loans
The accounting estimate most important to the presentation of our financial statements relates to the allowance for credit losses and the related provision for credit losses. The allowance for credit losses is an estimate of expected losses inherent within the Company's loans held for investment portfolio and is maintained at a level believed adequate by management to absorb such expected credit losses, as prescribed by theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 326, "Financial Instruments - Credit Losses" ("ASC 326"). Management evaluates the adequacy of the allowance for credit losses on a quarterly basis. Please refer to the discussion under the heading "Loans and the Allowance for Credit Losses" in Note 1, "Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report for more information regarding the estimates and assumptions, and the uncertainties underlying such estimates and assumptions, involved in the calculation of the allowance for credit losses. Prior to the adoption of ASC 326 onJanuary 1, 2020 , the appropriate level of the allowance was based on an ongoing analysis of the loan portfolio and represented an amount that management deemed adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, "Contingencies" ("ASC 450"), in our loan portfolio. Collective impairment was calculated based on loans grouped by grade. Another component of the allowance was losses on loans assessed as impaired under ASC 310, "Receivables" ("ASC 310"). The balance of the loans determined to be impaired under ASC 310 and the related allowance was included in management's estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance was sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. While no one factor was dominant, each could cause actual loan losses to differ materially from originally estimated amounts. For more information about our loan policies and procedures for addressing credit risk, as well as for a discussion of the changes in the allowance for credit losses in 2020 and 2021, please refer to the disclosures in this Item under the heading "Risk Management - Credit Risk and Allowance for Credit Losses."
Business Combinations, Accounting for Purchased Loans
The Company accounts for its acquisitions under ASC 805, "Business
Combinations," which requires the use of the acquisition method of accounting.
For more information about the accounting for acquisitions, please refer to the
information under the heading "Business Combinations, Accounting for Purchased
Credit Deteriorated Loans and Related Assets" in Note 1, "Significant Accounting
Policies," in the Notes to Consolidated Financial Statements in Item 8,
Financial Statements and Supplementary Data, in this report.
30
--------------------------------------------------------------------------------
Prior to the adoption of ASC 326 on January 1, 2020 , in regards to a purchased
loan, no allowance for loan losses was recorded on the acquisition date because
the fair value measurements incorporated assumptions regarding credit risk. This
applied even to a purchased loan with evidence of credit deterioration since
origination pursuant to ASC 310-30, "Loans and Debt Securities Acquired with
Deteriorated Credit Quality" ("ASC 310-30"). Generally speaking, rather than
carry over an allowance for loan losses, as part of the acquisition we
established a "Day 1 Fair Value" of a purchased loan or pools of purchased loans
sharing common risk characteristics, which was equal to the outstanding balance
of a purchased loan or pool on the acquisition date less any credit and/or yield
discount applied against the purchased loan or pool of loans. In other words,
these loans or pools of loans were carried at values which represented our
estimate of their future cash flows. After the acquisition date, a purchased
loan or pool of loans either met or exceeded the performance expectations
established in determining the Day 1 Fair Values or deteriorated from such
expected performance which resulted in accelerated accretion or impairment
recognized through the provision for loan losses.
Additional details about loans acquired in connection with our acquisitions is
set forth below under the heading "Risk Management - Credit Risk and Allowance
for Credit Losses" and in Note 4, "Purchased Loans" in the Notes to Consolidated
Financial Statements in Item 8, Financial Statements and Supplementary Data, in
this report.
Financial Condition
The following discussion provides details regarding the changes in significant
balance sheet accounts at December 31, 2021 compared to December 31, 2020 . Total
assets were $16,810,311 at December 31, 2021 compared to $14,929,612 at
December 31, 2020 .
Securities
The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The securities portfolio also serves as an outlet to deploy excess liquidity rather than hold such excess funds as cash. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio atDecember 31 : 2021 2020 % of % of Balance Portfolio Balance Portfolio U.S. Treasury securities$ 3,010 0.11 %$ 7,079 0.53 % Obligations of otherU.S. Government agencies and corporations - - 1,009 0.08 Obligations of states and political subdivisions 426,751 15.23 305,201 22.72 Mortgage backed securities 2,313,167 82.54 955,549 71.12 Trust preferred securities - - 9,012 0.67 Other debt securities 59,513 2.12 65,607 4.88$ 2,802,441 100.00 %$ 1,343,457 100.00 % Allowance for credit losses - held to maturity securities (32) - Securities, net of allowance for credit losses$ 2,802,409 $ 1,343,457 During 2021, management determined that the Company held excess liquidity on the balance sheet, so we deployed a portion of our excess liquidity into the securities portfolio and purchased$2,160,069 in investment securities, with mortgage backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprising approximately 93% of such 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 issued by government sponsored entities. Obligations of state and political subdivisions made up the remainder of purchases in 2021. Other debt securities in our investment portfolio consist of corporate debt securities and issuances from theSmall Business Administration ("SBA"). The carrying value of securities sold during 2021 totaled$174,285 , resulting in a net gain of$2,170 , while proceeds from maturities and calls of securities during 2021 totaled$460,266 , which were primarily reinvested in the securities portfolio. During the year endedDecember 31, 2021 , the Company transferred, at fair value,$366,886 of securities from the available for sale portfolio to the held to maturity portfolio. The related net unrealized after tax gains of$2,048 remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of transfer. There were no held to maturity securities atDecember 31, 2020 . 31 -------------------------------------------------------------------------------- During 2020, we purchased$515,657 in investment securities, with mortgage backed securities and CMOs, in the aggregate, comprising approximately 73% of such purchases. Obligations of state and political subdivisions comprised approximately 23% of the purchases made in 2020. The carrying value of securities sold during 2020 totaled$44,860 resulting in a net gain of$46 . Proceeds from maturities and calls of securities during 2020 totaled$437,981 , which were primarily reinvested in the securities portfolio. The allowance for credit losses on held to maturity securities is evaluated on a quarterly basis in accordance with ASC 326. Expected credit losses on debt securities classified as held to maturity are measured on a collective basis by major security type. The estimates of expected credit losses are based on historical default rates, investment grades, current conditions, and reasonable and supportable forecasts about the future. AtDecember 31, 2021 the allowance for credit losses on held to maturity securities was$32 . AtDecember 31, 2021 , unrealized losses of$31,024 were recorded on available for sale investment securities with a carrying value of$1,925,018 . AtDecember 31, 2020 , unrealized losses of$3,215 were recorded on available for sale securities with a carrying value of$85,396 . The Company does not intend to sell any of the securities in an unrealized loss position, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for a period greater than twelve months, the Company is collecting principal and interest payments from the respective securities as scheduled. As such, the Company did not record any impairment for the years endedDecember 31, 2021 and 2020.
The following table sets forth the scheduled maturity distribution and weighted
average yield based on the amortized cost of the debt securities in our
investment portfolio as of
Amount Yield
Held to Maturity:
Obligations of states and political subdivisions
Maturing within one year$ 530 2.09 % Maturing after one year through five years 2,064 0.68 % Maturing after five years through ten years 18,368 1.16 % Maturing after ten years 246,678 1.79 % Residential mortgage backed securities not due at a single maturity date: Government agency MBS 60,507 1.35 % Government agency CMO 24,832 1.02 % Commercial mortgage backed securities not due at a single maturity date: Government agency MBS 1,855 5.96 % Government agency CMO 39,505 1.39 % Other debt securities not due at a single maturity date 22,049 3.04 % Available for Sale:U.S. Treasury securities Maturing within one year or less 3,007 0.92 %
Obligations of states and political subdivisions
Maturing within one year or less 5,516 5.47 % Maturing after one year through five years 40,253 3.37 % Maturing after five years through ten years 30,280 3.62 % Maturing after ten years 77,798 2.13 %
Other debt securities - corporate debt
Maturing after one year through five years 1,529 4.69 %
Maturing after five years through ten years 22,989 4.42 %
Residential mortgage backed securities not due at a single maturity
date:
Government agency MBS 967,497 1.65 %
Government agency CMO 1,008,514 0.95 %
Commercial mortgage backed securities not due at a single maturity
date:
Government agency MBS 14,717 4.56 %
Government agency CMO 216,859 1.45 %
Other debt securities not due at a single maturity date 11,997 3.60 %
$ 2,817,344 1.67 %
In the table above, weighted average yields on tax-exempt obligations 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. These yields
were calculated using coupon interest and adjusting for discount accretion and
premium amortization, where applicable.
32
--------------------------------------------------------------------------------For more information about the Company's securities, see Note 2, "Securities," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Loans Held for Sale Loans held for sale were$453,533 atDecember 31, 2021 compared to$417,771 atDecember 31, 2020 . Mortgage loans to be sold, which made up all of our loans held for sale atDecember 31, 2021 , 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 entities, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a "mandatory delivery" sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within 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
Loans, excluding loans held for sale, are the Company's most significant earning asset, comprising 59.61% and 73.23% of total assets atDecember 31, 2021 and 2020, respectively. The decrease in the percentage of our total earning assets that loans make up from 2020 to 2021 is a result of a material increase in the size of the investment securities portfolio in 2021, while loans also slightly declined from 2020 to 2021. This percentage will fluctuate based on a number of factors, including the extent of our loan growth and whether the Company has excess liquidity on its balance sheet.
The tables below set forth the balance of loans outstanding by loan type and the
percentage of loans, by category, to total loans at
December 31, 2021
Total Percentage of Total
Non Purchased Purchased Loans Loans
Commercial, financial, agricultural (1) $ 1,332,962 $ 90,308 $ 1,423,270 14.20 %
Lease financing, net of unearned discount 76,125 - 76,125 0.76 %
Real estate - construction:
Residential 300,988 1,287 302,275 3.02 %
Commercial 798,914 3,707 802,621 8.01 %
Total real estate - construction 1,099,902 4,994 1,104,896 11.03 %
Real estate - 1-4 family mortgage:
Primary 1,682,050 134,070 1,816,120 18.12 %
Home equity 423,108 51,496 474,604 4.74 %
Rental/investment 268,245 20,229 288,474 2.88 %
Land development 135,070 9,978 145,048 1.45 %
Total real estate - 1-4 family mortgage 2,508,473 215,773 2,724,246 27.19 %
Real estate - commercial mortgage:
Owner-occupied 1,329,219 234,132 1,563,351 15.60 %
Non-owner occupied 2,446,370 410,577 2,856,947 28.51 %
Land development 110,395 18,344 128,739 1.28 %
Total real estate - commercial mortgage 3,885,984 663,053 4,549,037 45.39 %
Installment loans to individuals 107,565 35,775 143,340 1.43 %
Total loans, net of unearned income $ 9,011,011 $ 1,009,903 $ 10,020,914 100.00 %
(1)Includes PPP loans of
33
--------------------------------------------------------------------------------
December 31, 2020
Total Percentage of Total
Non Purchased Purchased Loans Loans
Commercial, financial, agricultural (1) $ 2,360,471 $ 176,513 $ 2,536,984 23.20 %
Lease financing 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
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. AtDecember 31, 2021 and 2020, there were no concentrations of loans exceeding 10% of total loans other than loans disclosed in the table above. 34 -------------------------------------------------------------------------------- The following table sets forth loans held for investment, net of unearned income, outstanding atDecember 31, 2021 , which, based on remaining contractually-scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less. See "Risk Management - Credit Risk and Allowance for Credit Losses" in this Item 7 for information regarding the risk elements applicable to, and a summary of our loan loss experience with respect to, the loans in each of the categories listed below. After Five Years After One Year Through Fifteen After Fifteen One Year or Less Through Five Years Years Years Total Commercial, financial, agricultural (1) $ 808,617 $
497,453
1,856 46,845 27,424 - 76,125
Real estate - construction:
Residential 238,009 12,131 42,608 9,527 302,275
Commercial 382,935 361,256 58,430 - 802,621
Total real estate - construction 620,944 373,387 101,038 9,527 1,104,896
Real estate - 1-4 family mortgage:
Primary 214,471 355,825 905,189 340,635 1,816,120
Home equity 452,005 13,447 4,467 4,685 474,604
Rental/investment 61,728 196,758 29,833 155 288,474
Land development 108,547 35,179 1,322 - 145,048
Total real estate - 1-4 family
mortgage 836,751 601,209 940,811 345,475 2,724,246
Real estate - commercial mortgage:
Owner-occupied 351,908 761,202 442,794 7,447 1,563,351
Non-owner occupied 1,188,727 1,270,431 397,733 56 2,856,947
Land development 51,158 73,193 4,388 - 128,739
Total real estate - commercial
mortgage 1,591,793 2,104,826 844,915 7,503 4,549,037
Installment loans to individuals 35,826 63,094 43,212 1,208 143,340 Total loans, net of unearned income$ 3,895,787 $ 3,686,814$ 2,074,290 $ 364,023 $ 10,020,914
(1)Includes PPP loans of
35
--------------------------------------------------------------------------------
The following table sets forth the fixed and variable rate loans maturing or
scheduled to reprice after one year as of
Interest Sensitivity
Fixed Variable
Rate Rate
Commercial, financial, agricultural
-
Real estate - construction:
Residential 20,869 43,397
Commercial 174,787 244,899
Total real estate - construction 195,656 288,296
Real estate - 1-4 family mortgage:
Primary 657,603 944,046
Home equity 6,056 16,543
Rental/investment 216,030 10,716
Land development 32,205 4,296
Total real estate - 1-4 family mortgage 911,894 975,601 Real estate - commercial mortgage: Owner-occupied
1,089,096 122,347
Non-owner occupied 1,394,220 274,000
Land development 69,385 8,196
Total real estate - commercial mortgage 2,552,701 404,543 Installment loans to individuals
103,602 3,912
Total loans, net of unearned income
Deposits
Noninterest-Bearing Deposits to Total Deposits
2021 2020
33.93% 30.56%
The Company relies on deposits as its major source of funds. Total deposits were
$13,905,724 and $12,059,081 at December 31, 2021 and 2020, respectively.
Noninterest-bearing deposits were $4,718,124 and $3,685,048 at December 31, 2021
and 2020, respectively, while interest-bearing deposits were $9,187,600 and
$8,374,033 at December 31, 2021 and 2020, respectively.
The growth in noninterest-bearing deposits across the Company's footprint in
2021 was primarily driven by 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 increased to 33.93% of total deposits at December 31, 2021 , as compared
to 30.56% of total deposits at December 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. Public fund deposits may fluctuate as
competitive and market forces change because these deposits are obtained through
a bid process. Although the Company has focused on growing stable sources of
deposits to reduce reliance on public fund deposits, it
36
--------------------------------------------------------------------------------
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 at December 31, 2021 were $1,787,414 compared to $1,398,330 at
December 31, 2020 .
Deposits that are in excess of the FDIC insurance limit (or similar state
deposit insurance limits) and that are otherwise uninsured were $4,353,952 and
$3,348,376 at December 31, 2021 and 2020, respectively. The following table
shows the maturity of time deposits at December 31, 2021 that are in excess of
the FDIC insurance limit (or similar state deposit insurance limits) and that
are otherwise uninsured:
Three Months or Less $ 89,698
Over Three through Six Months 71,863
Over Six through Twelve Months 94,606
Over 12 Months 58,159
$ 314,326
Borrowed Funds
Total borrowings include federal funds purchased, securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank ("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 at December 31 :
2021 2020
Security repurchase agreements $ 13,947 $ 10,947
Federal funds purchased - 10,393
$ 13,947 $ 21,340
At December 31, 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 at December 31 :
2021 2020
Junior subordinated debentures 111,373 110,794 Subordinated notes
359,419 212,009
Total long-term debt $ 471,209 $ 474,970
Long-term FHLB borrowings are used to match-fund against large, fixed rate
commercial or real estate loans with long-term maturities, which helps mitigate
interest rate exposure when rates rise. During 2021, we used the proceeds of our
deposit growth and other sources of liquidity to substantially reduce our
long-term FHLB borrowings. At December 31, 2021 , all of our long-term FHLB
advances outstanding are scheduled to mature within twelve months or less. The
Company had $4,214,274 of availability on unused lines of credit with the FHLB
at December 31, 2021 compared to $3,784,520 at December 31, 2020 . The
weighted-average interest rates on outstanding advances at December 31, 2021 and
2020 were 1.86% and 0.05%, respectively.
On November 23, 2021 , the Company completed the public offering and sale of
$200,000 of its 3.00% fixed-to-floating rate subordinated notes due December 1,
2031 . The subordinated notes were sold at par, resulting in net proceeds, after
deducting underwriting discounts and offering expenses, of approximately
$197,000 . The Company intends to use the net proceeds from this offering for
general corporate purposes, which may include providing capital to support the
Company's organic growth or growth through strategic acquisitions, repaying
indebtedness, financing investments, capital expenditures or for investments in
Renasant Bank as regulatory capital.
37
--------------------------------------------------------------------------------
During October and December 2021 , respectively, the Company redeemed at par its
$15,000 6.50% fixed-to-floating rate subordinated notes and redeemed $30,000 of
its aggregate $60,000 5.00% fixed-to-floating rate subordinated notes, with the
remaining $30,000 of such notes to be redeemed in the first quarter of 2022.
The Company owns other subordinated notes, the proceeds of which have been used for general corporate purposes similar to those described above. 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.
For more information about the terms and conditions of the Company's junior subordinated debentures and subordinated notes, see Note 12, "Long-Term Debt," in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Results of Operations
Net Income
Net income for the year endedDecember 31, 2021 was$175,892 compared to net income of$83,651 for the year endedDecember 31, 2020 . Basic earnings per share for the year endedDecember 31, 2021 was$3.13 as compared to$1.49 for the year endedDecember 31, 2020 . Diluted earnings per share for the year endedDecember 31, 2021 was$3.12 as compared to$1.48 for the year endedDecember 31, 2020 . From time to time, the Company incurs expenses and charges in connection with certain transactions with respect to which management is unable to accurately predict when these expenses or charges will be incurred or, when incurred, the amount of such expenses or charges. The following table presents the impact of these expenses and charges 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, sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) and more frequent and rigorous branch cleaning. The mortgage servicing rights ("MSR") valuation adjustment and swap termination gains are discussed below under the "Noninterest Income" heading, and the debt prepayment penalty and restructuring charges are discussed below under the "Noninterest Expense" heading in this Item.
Twelve Months Ended
2021 2020
Impact to Impact to
Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS
MSR valuation adjustment $ (13,561) $ (10,522) $ (0.19) $ 11,726 $ 9,450 $ 0.17
Swap termination gains (4,676) (3,628) (0.06) - - -
COVID-19 related expenses 1,511 1,172 0.02 10,343 8,336 0.14
Restructuring charges 368 286 0.01 7,365 5,936 0.11
Swap termination charges - - - 2,040 1,644 0.03
Debt prepayment penalty 6,123 4,751 0.08 121 97 -
Note: Balances in the table above are shown to reflect impact to income if removed (i.e. negative balances for income items and positive balances for expense items).
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 65.49% of total net revenue in 2021. Total net revenue
consists of net interest income on a fully taxable equivalent basis and
noninterest income. The primary concerns in managing net interest income are the
volume, mix and repricing of assets and liabilities.
38
--------------------------------------------------------------------------------
Net interest income decreased 0.66% to $424,001 for 2021 compared to $426,797 in
2020. On a tax equivalent basis, net interest income decreased $2,962 to
$430,720 in 2021 as compared to $433,682 in 2020. Net interest margin was 3.07%
for 2021 as compared to 3.44% for 2020.
The following table sets forth the daily 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 on each such category for the years ended December 31,
2021 , 2020 and 2019:
2021 2020 2019
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans(1) $ 10,310,070 $ 427,296 4.15 % $ 10,593,556 $ 458,686 4.33 % $ 9,168,555 $ 487,240 5.31 %
Loans held for sale 454,727 12,632 2.78 % 361,391 12,191 3.37 % 358,735 18,171 5.07 %
Securities:
Taxable(2) 1,691,531 24,370 1.44 % 1,021,999 24,102 2.36 % 1,051,124 29,786 2.83 %
Tax-exempt 335,399 9,418 2.81 % 259,705 8,848 3.41 % 193,252 7,821 4.05 %
Total securities 2,026,930 33,788 1.67 % 1,281,704 32,950 2.57 % 1,244,376 37,607 3.02 %
Interest-bearing balances with banks 1,263,364 1,688 0.13 % 385,810 1,190 0.31 % 256,374 5,891 2.30 %
Total interest-earning assets 14,055,091 475,404 3.38 % 12,622,461 505,017 4.00 % 11,028,040 548,909 4.98 %
Cash and due from banks 199,705 201,815 179,991
Intangible assets 966,733 973,287 976,065
Other assets 684,457 705,886 691,890
Total assets $ 15,905,986 $ 14,503,449 $ 12,875,986
Liabilities and shareholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand(3) $ 6,177,944 $ 15,308 0.25 % $ 5,277,374 $ 23,995 0.45 % $ 4,754,201 $ 40,991 0.86 %
Savings deposits 976,616 698 0.07 % 764,146 758 0.10 % 647,271 1,258 0.19 %
Time deposits 1,539,763 12,970 0.84 % 1,952,213 29,263 1.50 % 2,320,775 39,746 1.71 %
Total interest-bearing deposits 8,694,323 28,976 0.33 % 7,993,733 54,016 0.68 % 7,722,247 81,995 1.06 %
Borrowed funds 470,993 15,708 3.34 % 765,769 17,319 2.26 % 405,975 16,928 4.17 %
Total interest-bearing liabilities 9,165,316 44,684 0.49 % 8,759,502 71,335 0.81 % 8,128,222 98,923 1.22 %
Noninterest-bearing deposits 4,310,834 3,391,619 2,463,436
Other liabilities 220,427 237,738 176,496
Shareholders' equity 2,209,409 2,114,590 2,107,832
Total liabilities and shareholders' equity $ 15,905,986 $ 14,503,449 $ 12,875,986
Net interest income/ net interest margin $ 430,720 3.07 % $ 433,682 3.44 % $ 449,986 4.08 %
(1)Shown net of unearned income.
(2)U.S. Government and some U.S. Government Agency securities are tax-exempt in
the states in which we operate.
(3)Interest-bearing demand deposits include interest-bearing transactional
accounts and money market deposits.
The daily average balances of nonaccruing assets are included in the foregoing
table. Interest income and weighted average yields on tax-exempt loans and
securities have been computed on a fully tax equivalent basis assuming a federal
tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax
benefit.
Net interest income and net interest margin are influenced by internal and
external factors. Internal factors include balance sheet changes in volume and
mix as well as loan and deposit 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 year due to increased liquidity on the balance sheet
were the largest contributing factors to the decrease in net interest margin.
The Company has continued to focus on lowering the cost of funding through
growing noninterest-bearing deposits and
39
--------------------------------------------------------------------------------aggressively lowering interest rates on interest-bearing deposits. The Company has also increased its purchases of investment securities and continues to evaluate options to mitigate the pressure on net interest margin.
The following table sets forth a summary of the changes in interest earned, on a
tax equivalent basis, and interest paid resulting from changes in volume and
rates for the Company for the years indicated. Information is provided in each
category with respect to changes attributable to (1) changes in volume (changes
in volume multiplied by prior yield/rate); (2) changes in yield/rate (changes in
yield/rate multiplied by prior volume); and (3) changes in both yield/rate and
volume (changes in yield/rate multiplied by changes in volume). The changes
attributable to the combined impact of yield/rate and volume have been allocated
on a pro-rata basis using the absolute ratio value of amounts calculated.
2021 Compared to 2020 2020 Compared to 2019
Volume Rate Net Volume Rate Net
Interest income:
Loans $ (17,322) $ (14,068) $ (31,390) $ 42,331 $ (70,885) $ (28,554)
Loans held for sale 2,802 (2,361) 441 134 (6,114) (5,980)
Securities:
Taxable 11,853 (11,585) 268 (806) (4,878) (5,684)
Tax-exempt 2,296 (1,726) 570 2,398 (1,371) 1,027
Interest-bearing balances with banks 1,479 (981) 498 2,026 (6,727) (4,701)
Total interest-earning assets 1,108 (30,721) (29,613) 46,083 (89,975) (43,892)
Interest expense:
Interest-bearing demand deposits 3,586 (12,273) (8,687) 4,108 (21,104) (16,996)
Savings deposits 181 (241) (60) 197 (697) (500)
Time deposits (5,305) (10,988) (16,293) (5,871) (4,612) (10,483)
Borrowed funds (8,092) 6,481 (1,611) 10,475 (10,084) 391
Total interest-bearing liabilities (9,630) (17,021) (26,651) 8,909 (36,497) (27,588)
Change in net interest income $ 10,738 $ (13,700) $ (2,962) $ 37,174 $ (53,478) $ (16,304)
The daily average balances of nonaccruing assets are included in the foregoing
table. Interest income and weighted average yields on tax-exempt loans and
securities have been computed on a fully tax equivalent basis assuming a federal
tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax
benefit.
Interest income, on a tax equivalent basis, was $475,404 for 2021 compared to
$505,017 for 2020, a decrease of $29,613 . The following table presents the
percentage of total average earning assets, by type and yield, for 2021 and
2020:
Percentage of Total Yield
2021 2020 2021 2020
Loans held for investment excluding PPP loans 70.16 % 77.13 % 4.08 % 4.47 %
Paycheck Protection Program loans 3.19 6.80 5.52 2.75
Loans held for sale 3.24 2.86 2.78 3.37
Securities 14.42 10.15 1.67 2.57
Interest-bearing balances with banks 8.99 3.06 0.13 0.31
Total earning assets 100.00 % 100.00 % 3.38 % 4.00 %
In 2021, interest income on loans held for investment, on a tax equivalent
basis, decreased $31,390 to $427,296 from $458,686 in 2020. Interest income on
loans held for investment decreased primarily due to the Federal Reserve
maintaining low interest rates since March 2020 . Interest income attributable to
PPP loans included in loan interest income for 2021 was $24,794 , which consisted
of $4,380 in interest income and $20,414 in accretion of net origination fees,
as compared to $23,605 for 2020, which consisted of $8,729 in interest income
and $14,876 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. When a PPP loan is forgiven in whole or in
part, as provided under the CARES Act, the Company recognizes 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 eight and six basis points, respectively, during 2021, and
reduced margin and loan yield five and 13 basis points, respectively, during
2020.
40
--------------------------------------------------------------------------------
The impact from interest income collected on problem loans and purchase
accounting adjustments on purchased loans to total interest income on loans,
loan yield and net interest margin is shown in the table below for the periods
presented:
Twelve months ended December 31,
2021 2020
Net interest income collected on problem loans $ 4,412 $ 1,011
Accretable yield recognized on purchased loans(1) 10,783 19,248
Total impact to interest income on loans $ 15,195 $ 20,259
Impact to total loan yield 0.15 % 0.18 %
Impact to net interest margin 0.11 % 0.16 %
(1)Includes additional interest income recognized in connection with the
acceleration of paydowns and payoffs from purchased loans of $5,293 and $8,077
for the twelve months ended December 31, 2021 and 2020, respectively, which
increased loan yield by 4 basis points and 7 basis points, respectively, for
2021 and 2020.
Interest income on loans held for sale, on a tax equivalent basis, increased
In 2021, investment income, on a tax equivalent basis, increased$838 to$33,788 from$32,950 in 2020. The following table presents the taxable equivalent yield on securities for the periods presented: Twelve
months ended
2021 2020
Taxable equivalent interest income on securities $ 33,788 $ 32,950
Average securities $ 2,026,930 $ 1,281,704
Taxable equivalent yield on securities 1.67 % 2.57 %
The decrease in yield on securities during 2021 was offset by security purchases
during the year as the Company deployed a portion of its excess liquidity into
the securities portfolio. The growth in the securities portfolio during 2021 led
to the growth in investment income, on a tax equivalent basis.
Interest expense was $44,684 in 2021 compared to $71,335 in 2020. 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 each of the years presented:
Percentage of Total Cost of Funds
2021 2020 2021 2020
Noninterest-bearing demand 32.00 % 27.91 % - % - %
Interest-bearing demand 45.84 43.43 0.25 0.45
Savings 7.25 6.29 0.07 0.10
Time deposits 11.42 16.07 0.84 1.50
Short-term borrowings 0.10 2.94 0.29 1.07
Long-term Federal Home Loan Bank advances 0.92 1.25 0.07 0.61
Subordinated notes 1.65 1.20 4.86 5.28
Other long-term borrowed funds 0.82 0.91 4.30 4.40
Total deposits and borrowed funds 100.00 % 100.00 % 0.33 % 0.59 %
Interest expense on deposits was $28,976 and $54,016 for 2021 and 2020,
respectively. The cost of total deposits was 0.22% and 0.47% for the years
ending December 31, 2021 and 2020, respectively. The cost of interest-bearing
deposits was 0.33% and 0.68% 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 continued its efforts to grow noninterest-bearing
deposits, with the growth in noninterest-bearing deposits during the year
primarily driven by client sentiment to maintain liquidity. Low cost deposits
continue to be the preferred choice of funding; however, the Company may rely on
wholesale borrowings when rates are advantageous.
41
--------------------------------------------------------------------------------
Interest expense on total borrowings was $15,708 and $17,319 for the years
ending December 31, 2021 and 2020, respectively, while the cost of total
borrowings was 3.34% and 2.26% for the years ended December 31, 2021 and 2020,
respectively. The decrease in interest expense is a result of lower average
borrowings. As previously mentioned, the Company also issued $200,000 of its
fixed-to-floating rate subordinated notes during the year and redeemed certain
tranches of subordinated notes.
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. For more
information about our outstanding subordinated notes and junior subordinated
debentures, see Note 12, "Long-Term Debt," in the Notes to Consolidated
Financial Statements in Item 8, Financial Statements and Supplementary Data, in
this report.
Noninterest Income
Noninterest Income to Average Assets
(Excludes securities gains/losses)
2021 2020
1.41% 1.62%
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 our revenue sources.
Noninterest income as a percentage of total net revenue was 34.51% and 35.20%
for 2021 and 2020, respectively. Noninterest income was $226,984 for the year
ended December 31, 2021 , a decrease of $8,548 , or 3.63%, as compared to $235,532
for 2020. The decrease during the year was driven by lower mortgage banking
production offset by increases in service charges and fees and commissions, as
well as income from other lines of business as more fully-explained below.
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 $36,569 and $31,326 for
the twelve months ended December 31, 2021 and 2020, respectively. Overdraft
fees, the largest component of service charges on deposits, increased to $19,140
for the twelve months ended December 31, 2021 compared to $18,597 for the same
period in 2020.
Fees and commissions increased to $15,732 in 2021 as compared to $13,043 in
2020. Fees and commissions include fees related to deposit services, such as ATM
fees and interchange fees on debit card transactions. Interchange fees on debit
card transactions, the largest component of fees and commissions, were $10,405
for the twelve months ended December 31, 2021 compared to $8,979 for the same
period in 2020.
Through Renasant Insurance , we offer a range of commercial and personal
insurance products through major insurance carriers. Income earned on insurance
products was $9,841 and $8,990 for the years ended December 31, 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 amount of claims paid by insurance carriers. Contingency income, which is
included in the "Other noninterest income" line item on the Consolidated
Statements of Income, was $1,063 and $934 for 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 $20,455 for 2021 compared to $16,504 for 2020. The market
value of assets under management or administration was $5,177,984 and $4,196,072
at December 31, 2021 and 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 $4,059,927 in 2021 and $4,479,421 in 2020. The decrease in
mortgage loan originations in 2021 was due to the changes in the mortgage
interest rate environment from the historically low rates in 2020. Mortgage
banking income was impacted in 2021 by a positive mortgage servicing rights
valuation adjustment of $13,561 and in 2020 by a negative mortgage servicing
rights valuation adjustment of $11,726 .
42
--------------------------------------------------------------------------------
The following table presents the components of mortgage banking income included
in noninterest income at
2021 2020
Gain on sales of loans, net(1) $ 82,399 $ 150,406
Fees, net 17,161 18,914
Mortgage servicing income, net (3,517) (7,095)
MSR valuation adjustment 13,561 (11,726)
Mortgage banking income, net $ 109,604 $ 150,499 (1) Gain on sales of loans, net includes pipeline fair value adjustments
During 2021, the Company terminated four interest rate swap contracts with
notional amounts of
Noninterest income for the twelve months endedDecember 31, 2021 includes the Company's net gains on sale of securities of$2,170 , as the Company sold securities with a carrying value$174,285 at the time of sale for net proceeds of$176,455 . Gains on sales of securities for the twelve months ended 2020 were$46 , resulting from the sale of approximately$44,860 in securities. For more information on securities sold in 2021 and 2020, see Note 2, "Securities," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. Bank-owned life insurance ("BOLI") income is derived from changes in the cash surrender value of the bank-owned life insurance policies and can fluctuate upon the collection of life insurance proceeds. BOLI income increased to$7,366 in 2021 as compared to$5,627 in 2020. Additionally, the Company purchased$50,000 in BOLI policies during 2021. In addition to the contingency income described above, other noninterest income includes income from our SBA banking division and other miscellaneous income and can fluctuate based on the claims experience in our Insurance agency, SBA production and recognition of other nonseasonal income items. Other noninterest income was$20,571 for 2021 compared to$9,497 for 2020. Noninterest Expense Noninterest Expense to Average Assets 2021 2020 2.70% 3.25% Noninterest expense was$429,826 and$471,988 for 2021 and 2020, respectively. As mentioned previously, the Company incurred expenses in connection with certain transactions with respect to which management is unable to accurately predict when these expenses will be incurred or, when incurred, the amount of such expenses. The following table presents these expenses for the periods presented: Twelve Months Ended December 31, 2021 2020 COVID-19 related expenses $ 1,511 $
10,343
Restructuring charges 368 7,365
Swap termination charges - 2,040
Debt prepayment penalty 6,123 121
The Company incurred a
Salaries and employee benefits is the largest component of noninterest expense and represented 65.29% and 64.07% of total noninterest expense atDecember 31, 2021 and 2020, respectively. During 2021, salaries and employee benefits decreased$21,761 , or 7.20%, to$280,627 as compared to$302,388 for 2020. The decrease in salaries and employee benefits is primarily due to the cost savings realized by the voluntary early retirement program offered during the fourth quarter of 2020 and other expense initiatives. Salaries and employee benefits for 2020 also includes approximately$8,237 in expense related to employee 43 --------------------------------------------------------------------------------
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.
Compensation expense recorded in connection with awards of restricted stock, which is included within salaries and employee benefits, was$9,415 and$9,910 for 2021 and 2020, respectively. A portion of the restricted stock awards in both years was subject to the satisfaction of performance-based conditions. Data processing costs increased$1,041 to$21,726 in 2021 from$20,685 in 2020, driven by continued enhancement to digital offerings and increases in transaction volume. 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 in 2021 was$46,837 , a decrease of$7,243 from$54,080 for 2020. The decrease in net 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 2021 were$253 , compared to$2,754 in 2020. Expenses on other real estate owned for 2021 include write downs of$306 of the carrying value to fair value on certain pieces of property held in other real estate owned compared to write downs of$2,160 in 2020. Other real estate owned with a cost basis of$6,166 was sold during 2021, resulting in a net gain of$176 , compared to other real estate owned with a cost basis of$8,415 sold during 2020 for a net gain of$23 . 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 regulation. Professional fees were$11,776 for 2021 as compared to$11,293 for 2020. Advertising and public relations expense was$12,203 for 2021, an increase of$1,881 compared to$10,322 for 2020. The increase is primarily attributable to an increase in sponsorship spending, as COVID-19 restrictions on public events were relaxed. Amortization of intangible assets totaled$6,042 for 2021 compared to$7,121 for 2020. 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 two years to eight years. Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were$8,869 for 2021 as compared to$8,866 for 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$35,002 for 2021 as compared to$44,953 for 2020. A negative provision (recovery) for unfunded commitments of$500 was recorded for 2021 and a positive provision for unfunded commitments of$9,200 was recorded in 2020. Efficiency Ratio Efficiency Ratio 2021 2020 Efficiency ratio (GAAP) 65.35% 70.53% Adjusted efficiency ratio (Non-GAAP) (1) 65.32% 64.00% (1) Adjusted efficiency ratio 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 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in this report. 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 which must be expended 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 expenses that (1) the Company does not consider to be part of its 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 expenses will be incurred or, when incurred, the amount of such expenses, such as expenses incurred in connection with our response to the COVID-19 pandemic, our MSR valuation adjustment, restructuring and swap termination charges and the provision for unfunded commitments. We remain committed to aggressively managing our costs within the framework of our 44 --------------------------------------------------------------------------------
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 2021 and 2020 was$46,935 and$19,840 , respectively. The effective tax rates for those years were 22.41% and 19.40%, respectively. For additional information regarding the Company's income taxes, please refer to in Note 15, "Income Taxes," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Risk Management
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading "Liquidity and Capital Resources."
Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments
COVID-19 Update. AtDecember 31, 2021 , the Company's credit quality metrics remained sound. 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, as well as a focus on those industries more highly impacted by the pandemic, primarily the hospitality and senior living industries. Under the now-expired loan deferral programs, any customer current on loan payments, taxes and insurance qualified for an initial 90-day deferral of principal and interest payments. A second 90-day deferral was available to borrowers that remained current on taxes and insurance through the first deferral period and also satisfied underwriting standards established by the Company that analyzed the ability of the borrower to service its loan in accordance with its existing terms in light of the impact of the COVID-19 pandemic on the borrower, its industry and the markets in which it operated. The Company's loan deferral program complies with the guidance set forth in the CARES Act and related guidance from theFDIC and other banking regulators. AtDecember 31, 2021 , the Company has discontinued its deferral program but had nine loans (not in thousands) on deferral with an aggregate balance of approximately$519 , or 0.01% of our loan portfolio (excluding PPP loans) by dollar value. In accordance with the applicable guidance, none of these loans were 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 a credit administration department, a 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 underwriting 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 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 are reviewed for approval by senior credit officers. For commercial and commercial real estate secured loans, internal 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. For more information about the Company's loan grades, see the information under the heading "Credit Quality" in Note 3, "Non Purchased Loans," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. 45 -------------------------------------------------------------------------------- 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 debtor; 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 described in the above paragraph), 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 loss is identified and reasonably quantified. Net charge-offs for 2021 were$10,273 , or 0.10% as a percentage of average loans, compared to net charge-offs of$3,852 , or 0.04% as a percentage of average loans, for 2020. The charge-offs in 2021 were fully reserved for in the Company's allowance for credit losses. Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans. The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Loan losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the adequacy of the allowance on a quarterly basis. Please refer to the information under the headings "Loans and the Allowance for Credit Losses" and "Business Combinations, Accounting for Purchased Credit Deteriorated Loans and Related Assets" in Note 1, "Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report for an in-depth discussion of our accounting policies and our methodology for determining the appropriate level of the allowance for credit losses. In addition to its quarterly analysis of the allowance for credit losses, on a regular basis, management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by officer, community bank and the Company as a whole.
The allowance for credit losses on loans was
2021 2020
Balance % of Total Balance % of Total
Commercial, financial, agricultural$ 33,922 14.20 %$ 39,031 23.20 % Lease financing 1,486 0.76 % 1,624 0.69 % Real estate - construction 16,419 11.03 % 16,047 7.85 %
Real estate - 1-4 family mortgage 32,356 27.19 % 32,165 24.68 %
Real estate - commercial mortgage 68,940 45.39 % 76,127 41.66 %
Installment loans to individuals 11,048 1.43 % 11,150 1.92 % Total$ 164,171 100.00 %$ 176,144 100.00 % The provision for credit losses on loans charged to operating expense is an amount that, 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) of$1,700 in total provision for credit losses on loans during 2021, as compared to a provision for credit losses on loans of$85,350 during 2020. The Company's allowance for credit loss model considers economic projections, primarily the national unemployment rate and GDP, over a reasonable and supportable period of two years. Based on the continual improvements in these forecasts over the last year, 46 -------------------------------------------------------------------------------- nominal loan growth excluding PPP loans and stable credit metrics, the Company's allowance model indicated that a release of the allowance for credit losses was appropriate during 2021. Provision for Credit Losses on Loans to Average Loans 2021 2020 (0.02)% 0.81%
The table below reflects the activity in the allowance for credit losses on
loans for the years ended
2021 2020
Balance at beginning of year$ 176,144
Impact of adoption of ASC 326 -
42,484
(Recovery of) provision for credit losses on loans (1,700)
85,350
Charge-offs
Commercial, financial, agricultural 7,087 3,577 Lease financing 13 168 Real estate - construction 52 716 Real estate - 1-4 family mortgage 1,164
1,167
Real estate - commercial mortgage 5,184
2,642
Installment loans to individuals 5,374
7,835
Total charge-offs 18,874
16,105
Recoveries
Commercial, financial, agricultural 1,470 1,263 Lease financing 49 11 Real estate - construction 13 31 Real estate - 1-4 family mortgage 1,498
838
Real estate - commercial mortgage 541
2,478
Installment loans to individuals 5,030 7,632 Total recoveries 8,601 12,253 Net charge-offs 10,273 3,852 Balance at end of year$ 164,171 $ 176,144 Net charge-offs to average loans 0.10 %
0.04 %
Net charge-offs to allowance for credit losses on loans 6.26 %
2.19 %
Allowance for credit losses on loans to:
Total loans 1.64 %
1.61 %
Total loans excluding PPP loans(1) 1.65 % 1.80 %
Nonperforming loans 323.14 % 317.55 %
Nonaccrual loans 332.57 % 342.56 %
(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 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, in this report.
47
--------------------------------------------------------------------------------
The table below reflects net charge-offs to daily average loans outstanding, by
loan category, during the years ended
2021 2020
Net Charge-offs to Net Charge-offs to
Net Charge-offs Average Loans Average Loans Net Charge-offs Average Loans Average Loans
Commercial, financial,
agricultural $ 5,617 $ 1,832,453 0.31% $ 2,314 $ 2,242,764 0.10%
Lease financing (36) 75,988 (0.05)% 157 83,571 0.19%
Real estate - construction 39 1,012,017 -% 685 816,311 0.08%
Real estate - 1-4 family
mortgage (334) 2,721,765 (0.01)% 329 2,785,018 0.01%
Real estate - commercial
mortgage 4,643 4,504,093 0.10% 164 4,388,743 -%
Installment loans to
individuals 344 163,754 0.21% 203 277,149 0.07%
Total $ 10,273 $ 10,310,070 0.10% $ 3,852 $ 10,593,556 0.04%
The following table provides further details of the Company's net charge-offs of
loans secured by real estate for the years ended
2021 2020
Real estate - construction:
Residential $ 39 $ 685
Commercial - -
Total real estate - construction 39 685
Real estate - 1-4 family mortgage:
Primary 30 883
Home equity (79) (87)
Rental/investment (193) 27
Land development (92) (494)
Total real estate - 1-4 family mortgage (334) 329
Real estate - commercial mortgage:
Owner-occupied (89) 1,257
Non-owner occupied 4,733 (1,115)
Land development (1) 22
Total real estate - commercial mortgage 4,643 164
Total net charge-offs of loans secured by real estate
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 loss on loans methodology described above to unfunded
commitments for each loan type. No credit loss estimate is reported for
off-balance-sheet credit exposures
48
--------------------------------------------------------------------------------
that are unconditionally cancellable by the Company. A roll-forward of the
allowance for credit losses on unfunded commitments is shown in the table below.
Year Ended December 31 ,
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)
(500) 9,200
Ending balance $ 20,035 $ 20,535
Nonperforming Assets. Nonperforming assets consist of nonperforming loans and
other real estate owned. Nonperforming loans are loans on which the accrual of
interest has stopped and loans that 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. 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 table provides details of the Company's nonperforming assets that are non purchased and those acquired as part of the Company's previous acquisitions as of the dates presented.
Non Purchased Purchased Total
December 31, 2021
Nonaccruing loans $ 30,751 $ 18,613 $ 49,364
Accruing loans past due 90 days or more 1,074 367 1,441
Total nonperforming loans 31,825 18,980 50,805
Other real estate owned 951 1,589 2,540
Total nonperforming assets $ 32,776 $ 20,569 $ 53,345
Nonperforming loans to total loans 0.51 %
Nonaccruing loans to total loans 0.49 %
Nonperforming assets to total assets 0.32 %
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 decreased
49
--------------------------------------------------------------------------------
The following table presents nonperforming loans by loan category at
2021 2020
Commercial, financial, agricultural $ 13,131 $ 16,668
Lease financing 11 48
Real estate - construction:
Residential - 497
Commercial - -
Total real estate - construction - 497
Real estate - 1-4 family mortgage:
Primary 19,533 16,317
Home equity 1,719 2,273
Rental/investment 1,595 1,526
Land development 257 345
Total real estate - 1-4 family mortgage 23,104 20,461
Real estate - commercial mortgage:
Owner-occupied 5,039 6,364
Non-owner occupied 8,535 10,204
Land development 470 572
Total real estate - commercial mortgage 14,044 17,140
Installment loans to individuals 515 656
Total nonperforming loans $ 50,805 $ 55,470
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 on loans at December 31, 2021 .
Management also continually monitors past due loans for potential credit quality
deterioration. Total loans 30-89 days past due on which interest was still
accruing were $27,604 at December 31, 2021 as compared to $26,286 at
December 31, 2020 .
Although not classified as nonperforming loans, another category of assets that
contribute to our credit risk is restructured loans. Restructured loans are
those for which concessions have been granted to the borrower due to a
deterioration of the borrower's financial condition 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 $20,259 at December 31, 2021 compared
to $20,448 at December 31, 2020 . At December 31, 2021 , loans restructured
through interest rate concessions represented 32% of total restructured loans,
while
50
--------------------------------------------------------------------------------
loans restructured by a concession in payment terms represented the remainder.
The following table provides further details of the Company's restructured loans
at December 31 for each of the years presented:
2021 2020
Commercial, financial, agricultural
Real estate - 1-4 family mortgage: Primary 11,750 9,460 Home equity 298 332 Rental/investment 350 432
Total real estate - 1-4 family mortgage 12,398 10,224 Real estate - commercial mortgage: Owner-occupied
5,407 6,838
Non-owner occupied 1,341 797
Land development 75 183
Total real estate - commercial mortgage 6,823 7,818 Installment loans to individuals
71 80
Total restructured loans $ 20,259 $ 20,448
Changes in the Company's restructured loans are set forth in the table below for
the periods presented.
2021 2020
Balance as of January 1 $ 20,448 $ 11,954 Additional loans with concessions 12,639 14,533 Reclassified as performing
366 428
Reductions due to:
Reclassified as nonperforming (4,390) (3,321)
Paid in full (7,586) (2,387)
Charge-offs (205) (3)
Principal paydowns (1,013) (756)
Balance as of December 31 $ 20,259 $ 20,448
The following table shows the principal amounts of nonperforming and
restructured loans as of December 31 of each year 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.
2021 2020
Nonaccruing loans $ 49,364 $ 51,420
Accruing loans past due 90 days or more 1,441 4,050
Total nonperforming loans 50,805 55,470
Restructured loans 20,259 20,448
Total nonperforming and restructured loans $ 71,064 $ 75,918
51--------------------------------------------------------------------------------
The following table provides details of the Company's other real estate owned as
of
2021 2020
Residential real estate
761 2,665
Residential land development 305 1,013 Commercial land development 1,215 2,115
Total other real estate owned
Changes in the Company's other real estate owned were as follows for the periods
presented:
2021 2020
Balance as of January 1 $ 5,972 $ 8,010
Transfers of loans 3,180 8,588
Impairments (306) (2,160)
Dispositions (6,166) (8,415)
Other (140) (51)
Balance as of December 31 $ 2,540 $ 5,972 We realized net gains of
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 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 (the "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 commencing January 1, 2022 , in each case as
compared to the result
52
--------------------------------------------------------------------------------
under rates present in the market on December 31, 2021 . The changes in interest
rates assume an instantaneous and parallel shift in the yield curve and do not
take into account changes in the slope of the yield curve.
Percentage Change In:
Economic Value Equity Earning at Risk (EAR)
(EVE) (Net Interest Income)
Immediate Change in Rates of: Static 1-12 Months 13-24 Months
+200 13.78% 18.39% 24.26%
+100 8.18% 9.35% 12.83%
The rate shock results for the EVE and net interest income simulations for the
next 24 months produce an asset sensitive position at December 31, 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 basis points. 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. 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, forward commitments, and interest rate lock commitments, as part of its ongoing efforts to mitigate its interest rate risk exposure. For more information about the Company's derivative financial instruments, see the "Off-Balance Sheet Transactions" section below and Note 14, "Derivative Instruments," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Liquidity and Capital Resources
Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Core deposits, which are deposits excluding time deposits 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 19.75% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. AtDecember 31, 2021 , securities with a carrying value of$629,174 were pledged to secure government, public, trust, and other deposits and as collateral for short-term borrowings and derivative instruments as compared to$614,610 atDecember 31, 2020 . Other sources available for meeting liquidity needs include federal funds purchased, security repurchase agreements and short-term and long-term advances from the FHLB. Interest is charged at the prevailing market rate on these borrowings. Federal funds are short term borrowings, generally overnight borrowings, between financial institutions, while security repurchase agreements represent funds received from customers, generally on an overnight or continuous basis, which are collateralized by investment securities owned or, at times, borrowed and re-hypothecated by the Company. There were no federal funds purchased outstanding atDecember 31, 2021 , and$10,393 were outstanding atDecember 31, 2020 . Security repurchase agreements were$13,947 atDecember 31, 2021 , as compared to$10,947 atDecember 31, 2020 . The Company had no short-term borrowings from the FHLB (i.e., advances with original maturities less than one year) atDecember 31, 2021 , and 2020. Long-term FHLB borrowings 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 borrowings compares favorably to the rates that we would be required to pay to attract deposits. AtDecember 31, 2021 , the balance of our outstanding long-term advances with the FHLB 53 -------------------------------------------------------------------------------- was$417 as compared to$152,167 atDecember 31, 2020 . The total amount of the remaining credit available to us from the FHLB atDecember 31, 2021 was$4,214,274 . We also maintain lines of credit with other commercial banks totaling$180,000 . These are unsecured, uncommitted lines of credit maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit atDecember 31, 2021 or 2020. Finally, we can access the capital markets to meet liquidity needs. The Company maintains a shelf registration statement with theSEC , which allows the Company to raise capital from time to time through the sale of common stock, preferred stock, debt securities, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will be required to file with theSEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used as described in any prospectus supplement and could include general corporate purposes, the expansion of the Company's banking, insurance and wealth management operations as well as other business opportunities. In 2021, we accessed the capital markets to generate liquidity in the form of subordinated notes and in prior years we have issued other subordinated notes and assumed subordinated notes as part of acquisitions. For more information about our subordinated notes, see Note 12, "Long-Term Debt" in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. 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 non-interest 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. 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 each of the years presented: Percentage of Total Cost of Funds 2021 2020 2021 2020 Noninterest-bearing demand 32.00 % 27.91 % - % - % Interest-bearing demand 45.84 43.43 0.25 0.45 Savings 7.25 6.29 0.07 0.10 Time deposits 11.42 16.07 0.84 1.50 Short-term borrowings 0.10 2.94 0.29 1.07 Long-term Federal Home Loan Bank advances 0.92 1.25 0.07 0.61 Subordinated notes 1.65 1.20 4.86 5.28 Other long-term borrowings 0.82 0.91 4.30 4.40 Total deposits and borrowed funds 100.00 % 100.00 % 0.33 % 0.59 % Cash and cash equivalents were$1,877,965 atDecember 31, 2021 , compared to$633,203 atDecember 31, 2020 . Cash used in investing activities for the year endedDecember 31, 2021 was$660,003 compared to$1,265,548 in 2020. Proceeds from the sale, maturity or call of securities within our investment portfolio were$636,721 for 2021 compared to$482,887 for 2020. These proceeds from the investment portfolio were primarily reinvested back into the securities portfolio. Purchases of investment securities were$2,160,069 for 2021 compared to$515,657 for 2020. Cash provided by financing activities for the year endedDecember 31, 2021 was$1,762,106 compared to$1,401,579 for the year endedDecember 31, 2020 . Overall deposits increased$1,846,643 for the year endedDecember 31, 2021 compared to an increase of$1,846,059 for the same period in 2020.
Restrictions on Bank Dividends, Loans and Advances
The Company's liquidity and capital resources, as well as its ability to pay dividends to our shareholders, are substantially dependent on the ability of the 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 the DBCF. In addition, theFDIC 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. 54 -------------------------------------------------------------------------------- In addition to theFDIC and DBCF restrictions on dividends payable by the Bank to the Company, theFederal Reserve provided guidance on the criteria that it will use to evaluate the request by a bank holding company to pay dividends in an aggregate amount that will exceed the company's earnings for the period in which the dividends will be paid, which did not apply to the Company in 2021 or 2020. For purposes of this analysis, "dividend" includes not only dividends on preferred and common equity but also dividends on debt underlying trust preferred securities and other Tier 1 capital instruments. TheFederal Reserve's criteria evaluates whether the holding company (1) has net income over the past four quarters sufficient to fully fund the proposed dividend (taking into account prior dividends paid during this period), (2) is considering stock repurchases or redemptions in the quarter, (3) does not have a concentration in commercial real estate and (4) is in good supervisory condition, based on its overall condition and its asset quality risk. A holding company not meeting these criteria will require more in-depth consultations with theFederal Reserve .Federal Reserve regulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. AtDecember 31, 2021 , the maximum amount available for transfer from the Bank to the Company in the form of loans was$169,716 . The Company maintains a line of credit collateralized by cash with the Bank totaling$3,070 . There were no amounts outstanding under this line of credit atDecember 31, 2021 .
None of these restrictions discussed above had any impact on the Company's ability to meet its cash obligations in 2021, nor does management expect such restrictions to materially impact the Company's ability to meet its currently-anticipated cash obligations.
Contractual Obligations
The following table presents, as ofDecember 31, 2021 , significant fixed and determinable contractual obligations to third parties by payment date. The Note Reference below refers to the applicable footnote in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. Payments Due In: One to Note Less Than Three Three to Over Five Reference One Year Years Five Years Years Total Lease liabilities(1) 24$ 8,402 $ 14,697 $ 10,693 $ 54,507 $ 88,299 Deposits without a stated maturity(2) 10 12,494,341 - - - 12,494,341 Time deposits(2) 10 1,089,198 272,292 48,721 1,172 1,411,383 Short-term borrowings 11 13,947 - - - 13,947 Federal Home Loan Bank advances 12 417 - - -
417
Junior subordinated debentures 12 - - - 111,373 111,373 Subordinated notes 12 - - 29,724 329,695 359,419 Total contractual obligations $
13,606,305
(1)Represents the undiscounted cash flows. (2)Excludes interest.
Off-Balance Sheet Commitments
The Company enters into loan commitments, standby letters of credit and derivative financial instruments in the normal course of its business. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management's credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent
future cash requirements of the Company. While the borrower has the ability to
draw upon these commitments at any time (assuming the borrower's compliance with
the terms
55
--------------------------------------------------------------------------------
of the loan commitment), these commitments often expire without being drawn
upon. The Company's unfunded loan commitments and standby letters of credit
outstanding at
2021 2020
Loan commitments $ 3,104,940 $ 2,749,988
Standby letters of credit 89,830 90,597
The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed.
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. AtDecember 31, 2021 , the Company had notional amounts of$185,447 on interest rate contracts with corporate customers and$185,447 in offsetting interest rate contracts with other financial institutions to mitigate the Company's rate exposure on its corporate customers' contracts. 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 residential mortgage loans and also enters into forward commitments to sell residential mortgage loans to secondary market investors. Finally, the Company 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 off-balance sheet transactions, see Note 14, "Derivative Instruments" and Note 19, "Commitments, Contingent Liabilities and Financial Instruments with Off-Balance Sheet Risk," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
Shareholders' Equity and Regulatory Matters
Total shareholders' equity of the Company was$2,209,853 and$2,132,733 atDecember 31, 2021 and 2020, respectively. Book value per share was$39.63 and$37.95 atDecember 31, 2021 and 2020, respectively. The growth in shareholders' equity was attributable to earnings retention offset by changes in accumulated other comprehensive income, share repurchases and dividends declared. InOctober 2021 , the Company's Board of Directors approved a stock repurchase program, authorizing the Company to repurchase up to$50,000 of its outstanding common stock, either in open market purchases or privately-negotiated transactions. The program will remain in effect until the earlier ofOctober 2022 or the repurchase of the entire amount of common stock authorized to be repurchased by the Board of Directors. The Company has junior subordinated debentures with a carrying value of$111,373 atDecember 31, 2021 , of which$107,782 are 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 amount of debentures we include in Tier 1 capital. 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 of another financial institution we exceed$15,000,000 in assets, or if we make any such 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
56
--------------------------------------------------------------------------------
2021, the Company issued
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: 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%
The following table includes the capital ratios and capital amounts for the Company and the Bank for the years presented:
Minimum Capital Requirement to beMinimum Capital Adequately Requirement to be Capitalized
(including the phase-in of
Actual Well Capitalized the Capital Conservation Buffer)
Amount Ratio Amount Ratio Amount Ratio
December 31, 2021
Renasant Corporation :
Tier 1 leverage ratio $ 1,422,077 9.15 % $ 777,289 5.00 % $ 621,831 4.00 %
Common equity tier 1 capital ratio 1,314,295 11.18 % 763,952 6.50 % 822,717 7.00 %
Tier 1 risk-based capital ratio 1,422,077 12.10 % 940,248 8.00 % 999,014 8.50 %
Total risk-based capital ratio 1,897,167 16.14 % 1,175,610 10.00 % 1,234,076 10.50 %
Renasant Bank:
Tier 1 leverage ratio $ 1,580,904 10.18 % $ 776,700 5.00 % $ 621,360 4.00 %
Common equity tier 1 capital ratio 1,580,904 13.46 % 763,713 6.50 % 822,460 7.00 %
Tier 1 risk-based capital ratio 1,580,904 13.46 % 939,954 8.00 % 998,702 8.50 %
Total risk-based capital ratio 1,697,163 14.44 % 1,174,943 10.00 % 1,233,690 10.50 %
December 31, 2020
Renasant Corporation :
Tier 1 leverage ratio $ 1,306,597 9.37 % $ 697,579 5.00 % $ 558,063 4.00 %
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 %
Renasant Bank:
Tier 1 leverage ratio $ 1,369,994 9.83 % $ 696,738 5.00 % $ 557,391 4.00 %
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 % 151,299 10.50 %
As previously disclosed, the Company adopted CECL as ofJanuary 1, 2020 . 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. 57 -------------------------------------------------------------------------------- For a detailed discussion of the capital adequacy guidelines applicable to the Company and the Bank, please refer to the information under the heading "Capital Adequacy Guidelines" in the "Supervision and Regulation-Supervision and Regulation ofRenasant Corporation " section and the "Supervision and Regulation-Supervision and Regulation ofRenasant Bank " section in Item 1, Business, in this report. 58
--------------------------------------------------------------------------------
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, return on average tangible shareholders' equity, return on average tangible assets, the ratio of tangible equity to tangible assets, the ratio of the allowance for credit losses on loans to total loans, excluding PPP loans (the "adjusted allowance ratio"), and an adjusted efficiency ratio. Other than the adjusted allowance ratio (which only excludes PPP loans), these non-GAAP financial measures adjust GAAP financial measures to exclude intangible assets and, with respect to the efficiency ratio, certain charges (such as, when applicable, COVID-19 related expenses, gains on sales of securities, debt prepayment penalties, restructuring charges, swap termination gains and charges and asset valuation adjustments) with respect to which the Company is unable to accurately predict when these charges 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 charges excluded when calculating non-GAAP financial measures. Management uses these non-GAAP financial measures (other than the adjusted allowance 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 these 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 intangible assets such as goodwill and the core deposit intangible and charges such as debt prepayment penalties, 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. Return on average tangible shareholders' equity and Return on
average tangible assets
2021 2020 2019
Net income (GAAP) $ 175,892 $
83,651
Amortization of intangibles 6,042 7,121 8,105 Tax effect of adjustment noted above (1) (1,354) (1,382) (1,807) Tangible net income (non-GAAP)$ 180,580 $
89,390
Average shareholders' equity (GAAP)$ 2,209,409 $
2,114,590
Intangibles 966,733 973,287 976,065 Average tangible shareholders' equity (non-GAAP)$ 1,242,676 $
1,141,303
Average total assets (GAAP)$ 15,905,986 $
14,503,449
Intangibles 966,733 973,287 976,065 Average tangible assets (non-GAAP)$ 14,939,253 $
13,530,162
Return on (average) shareholders' equity (GAAP) 7.96 % 3.96 % 7.95 % Effect of adjustment for intangible assets 6.57 % 3.87 % 7.41 % Return on average tangible shareholders' equity (non-GAAP) 14.53 % 7.83 % 15.36 % Return on (average) assets (GAAP) 1.11 % 0.58 % 1.30 % Effect of adjustment for intangible assets 0.10 % 0.08 % 0.16 % Return on average tangible assets (non-GAAP) 1.21 % 0.66 % 1.46 %
(1) Tax effect is calculated based on the respective periods' effective tax rate.
59
--------------------------------------------------------------------------------
Tangible common equity ratio (Tangible shareholders' equity to tangible assets)
2021 2020 2019
Actual shareholders' equity (GAAP) $ 2,209,853 $
2,132,733
Intangibles 963,781 969,823 976,943 Actual tangible shareholders' equity (non-GAAP)$ 1,246,072 $
1,162,910
Actual total assets (GAAP)$ 16,810,311 $
14,929,612
Intangibles 963,781 969,823 976,943 Actual tangible assets (non-GAAP)$ 15,846,530 $
13,959,789
Tangible Common Equity Ratio
Shareholders' equity to actual assets (GAAP) 13.15 % 14.29 % 15.86 %
Effect of adjustment for intangible assets 5.29 % 5.96 % 6.61 %
Tangible shareholders' equity to tangible
assets (non-GAAP) 7.86 % 8.33 % 9.25 %
Adjusted Efficiency Ratio
2021 2020
Interest income (fully tax equivalent basis)
Interest expense 44,684 71,335
Net interest income (fully tax equivalent basis)
Total noninterest income $ 226,984
Net gains on sales of securities 2,170 46
Swap termination gains 4,676 -
MSR valuation adjustment 13,561 (11,726)
Adjusted noninterest income $ 206,577
Total noninterest expense $ 429,826
Intangible amortization 6,042 7,121
Debt prepayment penalty 6,123 121
Restructuring charges 368 7,365
Swap termination charges - 2,040
COVID-19 related expenses 1,511 10,343
Provision (recovery) for unfunded commitments (500) 9,200
Adjusted noninterest expense $ 416,282
Efficiency Ratio (GAAP) 65.35 % 70.53 %
Adjusted Efficiency Ratio (non-GAAP) 65.32 % 64.00 %
60
--------------------------------------------------------------------------------
Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans
2021 2020
Total loans (GAAP) $ 10,020,914 $ 10,933,647
Less PPP loans 58,391 1,128,703
Adjusted total loans (non-GAAP) $ 9,962,523 $ 9,804,944
Allowance for Credit Losses on Loans $ 164,171 $ 176,144
ACL/Total loans (GAAP) 1.64 % 1.61 %
ACL/Total loans excluding PPP loans (non-GAAP) 1.65 % 1.80 %
None of the non-GAAP financial measures the Company has included in this
document is intended to be considered in isolation or as a substitute for any
measure prepared in accordance with GAAP. Readers of this Form 10-K should note
that, because there are no standard definitions for how to calculate the
non-GAAP financial measures that we use as well as the results, the Company's
calculations may not be comparable to similarly titled measures presented by
other companies. Also, there may be limits in the usefulness of these measures
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
