RENASANT CORPORATION (In Thousands, Except Share Data)
This Form 10-Q may contain or incorporate by reference statements regardingRenasant Corporation (referred to herein as the "Company", "we", "our", or "us") that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "projects," "anticipates," "intends," "estimates," "plans," "potential," "possible," "may increase," "may fluctuate," "will likely result," and similar expressions, or future or conditional verbs such as "will," "should," "would" and "could," are generally forward-looking in nature and not historical facts. Forward-looking statements include information about the Company's future financial performance, business strategy, projected plans and objectives and are based on the current beliefs and expectations of management. The Company's management believes these forward-looking statements are reasonable, but they are all inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ from those indicated or implied in the forward-looking statements, and such differences may be material. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and, accordingly, investors should not place undue reliance on these forward-looking statements, which speak only as of the date they are made. Important factors currently known to management that could cause our actual results to differ materially from those in forward-looking statements include the following: (i) the Company's ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses, grow the acquired operations and realize the cost savings expected from an acquisition to the extent and in the timeframe anticipated by management; (ii) the effect of economic conditions and interest rates on a national, regional or international basis; (iii) timing and success of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (iv) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries; (v) the financial resources of, and products available from, competitors; (vi) changes in laws and regulations as well as changes in accounting standards; (vii) changes in policy by regulatory agencies; (viii) changes in the securities and foreign exchange markets; (ix) the Company's potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (x) changes in the quality or composition of the Company's loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers; (xi) an insufficient allowance for credit losses as a result of inaccurate assumptions; (xii) general economic, market or business conditions, including the impact of inflation and changes in monetary policy by theFederal Reserve Board ; (xiii) changes in demand for loan products and financial services; (xiv) concentration of credit exposure; (xv) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; (xvi) increased cybersecurity risk, including potential network breaches, business disruptions or financial losses; (xvii) civil unrest, natural disasters, epidemics (including the re-emergence of the COVID-19 pandemic) and other catastrophic events in the Company's geographic area; (xviii) the impact, extent and timing of technological changes; and (xix) other circumstances, many of which are beyond management's control. Management believes that the assumptions underlying the Company's forward-looking statements are reasonable, but any of the assumptions could prove to be inaccurate. The Company undertakes no obligation, and specifically disclaims any obligation, to update or revise forward-looking statements, whether as a result of new information or to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by federal securities laws. Financial Condition
The following discussion provides details regarding the changes in significant
balance sheet accounts at
Assets
Total assets were
Investments
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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
certain types of borrowings. The securities portfolio also serves as an outlet
to deploy excess liquidity and generate interest income 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 as of the dates presented:
June 30, 2022 December 31, 2021
Percentage of Percentage of
Balance Portfolio Balance Portfolio
U.S. Treasury securities $ - - % $ 3,010 0.11 %
Obligations of other U.S. Government
agencies and corporations 144,482 4.79 - -
Obligations of states and political
subdivisions 443,407 14.70 426,751 15.23
Mortgage-backed securities 2,290,329 75.91 2,313,167 82.54
Other debt securities 138,918 4.60 59,513 2.12
$ 3,017,136 100.00 % $ 2,802,441 100.00 %
Allowance for credit losses - held to
maturity securities (32) (32)
Securities, net of allowance for credit
losses $ 3,017,104 $ 2,802,409
During the six months ended June 30, 2022 , we deployed a portion of our excess
liquidity into the securities portfolio and purchased $701,555 in investment
securities. Mortgage-backed securities and collateralized mortgage obligations
("CMOs"), in the aggregate, comprised approximately 60% of these purchases. CMOs
are included in the "Mortgage-backed securities" line item in the above table.
The mortgage-backed securities and CMOs held in our investment portfolio are
primarily issued by government sponsored entities. Obligations of other U.S.
Government agencies and corporations comprised approximately 21% of purchases
made during the first six months of 2022. Obligations of state and political
subdivisions comprised approximately 6% of purchases made during the first six
months of 2022. Other debt securities in our investment portfolio, consisting of
corporate debt securities, issuances from the Small Business Administration
("SBA") and subordinated debt issuances, comprised the remaining approximately
13% of purchases made during the first six months of 2022.
Rising interest rates in the first half of 2022 had a negative impact on the
value of our securities portfolio resulting in a fair market value adjustment of
our available for sale securities of $211,161 , which contributed to our
accumulated other comprehensive loss.
Proceeds from maturities, calls and principal payments on securities during the
first six months of 2022 totaled $266,656 . The Company did not sell any
securities during the first six months of 2022. Proceeds from the maturities,
calls and principal payments on securities during the first six months of 2021
totaled $195,114 . The Company sold municipal securities, residential mortgage
backed securities and trust preferred securities with a carrying value of
$154,034 at the time of sale for net proceeds of $155,391 , resulting in a net
gain on sale of $1,357 during the first six months of 2021.
For more information about the Company's security portfolio, see Note 2, "Securities," in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements, in this report.
Loans Held for Sale
Loans held for sale, which consist of residential mortgage loans being held until they are sold in the secondary market, were$196,598 atJune 30, 2022 , as compared to$453,533 atDecember 31, 2021 . Mortgage loans to be sold are sold either on a "best efforts" basis or under a mandatory delivery sales agreement. Under a "best efforts" sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. Our standard practice is to sell the loans within 30-40 days after the loan is funded. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.
Loans
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Total loans, excluding loans held for sale, were $10,603,744 at June 30, 2022
and $10,020,914 at December 31, 2021 . Non purchased loans totaled $9,692,116 at
June 30, 2022 compared to $9,011,011 at December 31, 2021 . Loans purchased in
previous acquisitions totaled $911,628 and $1,009,903 at June 30, 2022 and
December 31, 2021 , respectively.
The tables below set forth the balance of loans outstanding, net of unearned
income and excluding loans held for sale, by loan type and the percentage of
each loan type to total loans as of the dates presented:
June 30, 2022
Total Percentage of
Non Purchased Purchased Loans Total Loans
Commercial, financial, agricultural (1) $ 1,405,642 $ 91,630 $ 1,497,272 14.12 %
Lease financing, net of unearned income 101,350 - 101,350 0.96
Real estate - construction:
Residential 319,287 1,254 320,541 3.02
Commercial 801,830 3,992 805,822 7.60
Total real estate - construction 1,121,117 5,246 1,126,363 10.62
Real estate - 1-4 family mortgage:
Primary 1,976,535 108,543 2,085,078 19.66
Home equity 443,045 45,003 488,048 4.60
Rental/investment 279,621 17,915 297,536 2.81
Land development 150,474 8,947 159,421 1.50
Total real estate - 1-4 family mortgage 2,849,675 180,408 3,030,083 28.57
Real estate - commercial mortgage:
Owner-occupied 1,323,106 210,086 1,533,192 14.46
Non-owner occupied 2,674,678 382,848 3,057,526 28.83
Land development 112,887 13,908 126,795 1.20
Total real estate - commercial mortgage 4,110,671 606,842 4,717,513 44.49
Installment loans to individuals 103,661 27,502 131,163 1.24
Total loans, net of unearned income $ 9,692,116 $ 911,628 $ 10,603,744 100.00 %
(1)Includes Paycheck Protection Program ("PPP") loans of
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December 31, 2021
Total Percentage of
Non Purchased Purchased Loans Total Loans
Commercial, financial, agricultural (1) $ 1,332,962 $ 90,308 $ 1,423,270 14.20 %
Lease financing, net of unearned income 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
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. AtJune 30, 2022 , there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans separate from the categories listed above.
Deposits
The Company relies on deposits as its major source of funds. Total deposits were$13,763,929 and$13,905,724 atJune 30, 2022 andDecember 31, 2021 , respectively. Noninterest-bearing deposits were$4,741,397 and$4,718,124 atJune 30, 2022 andDecember 31, 2021 , respectively, while interest-bearing deposits were$9,022,532 and$9,187,600 atJune 30, 2022 andDecember 31, 2021 , respectively. Management continues to focus on growing and maintaining a stable source of funding, specifically noninterest-bearing deposits and other core deposits (that is, deposits excluding time deposits greater than$250,000 ). Noninterest bearing deposits represented 34.45% of total deposits atJune 30, 2022 , as compared to 33.93% of total deposits atDecember 31, 2021 . Under certain circumstances, management may elect to acquire non-core deposits (in the form of time deposits) or public fund deposits (which are deposits of counties, municipalities or other political subdivisions). The source of funds that we select depends on the terms and how those terms assist us in mitigating interest rate risk, maintaining our liquidity position and managing our net interest margin. Accordingly, funds are acquired to meet anticipated funding needs at the rate and with other terms that, in management's view, best address our interest rate risk, liquidity and net interest margin parameters. Public fund deposits may be readily obtained based on the Company's pricing bid in comparison with competitors. Because public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. Although the Company has focused on growing stable sources of deposits to reduce reliance on public fund deposits, it participates in the bidding process for public fund deposits when pricing and other terms make it reasonable given market conditions or when management perceives that other factors, such as the public entity's use of our treasury management or other products and services, make such participation advisable. Our public fund transaction accounts are principally obtained from public universities and municipalities, including school boards and utilities. Public fund deposits were$1,805,729 and$1,787,414 atJune 30, 2022 andDecember 31, 2021 , respectively, and represented 13.12% and 12.85% of total deposits as ofJune 30, 2022 andDecember 31, 2021 , respectively. 56 -------------------------------------------------------------------------------- Table of Contents Borrowed Funds Total borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the FHLB, subordinated notes and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include federal funds purchased, securities sold under agreements to repurchase, and short-term FHLB advances. The following table presents our short-term borrowings by type as of the dates presented:June 30, 2022 December 31, 2021
Security repurchase agreements
13,947
Short-term borrowings from the FHLB 100,000
-
$ 112,642 $ 13,947
The Company has hedged the interest rate risk associated with the short-term
borrowings from the FHLB using an interest rate swap, which became effective in
March 2022 , in which the Company pays a fixed rate of interest. The effect of
this interest rate hedge was to significantly reduce the cost to the Company of
borrowing from the FHLB, and so the Company elected to take advantage of the
availability of this low-cost funding in the first quarter of 2022.
Long-term debt typically consists of long-term FHLB advances, our junior subordinated debentures and our subordinated notes. The following table presents our long-term debt by type as of the dates presented:
June 30, 2022 December 31, 2021
Long-term FHLB advances $ - $ 417
Junior subordinated debentures 111,662 111,373
Subordinated notes 319,891 359,419
$ 431,553 $ 471,209
Long-term funds obtained from the FHLB are used to match-fund fixed rate loans
in order to minimize interest rate risk and to meet day-to-day liquidity needs,
particularly when the cost of such borrowing compares favorably to the rates
that we would be required to pay to attract deposits. The Company had $4,037,666
of availability on unused lines of credit with the FHLB at June 30, 2022 , as
compared to $4,214,274 at December 31, 2021 .
The Company has issued subordinated notes, the proceeds of which have been used
for general corporate purposes, including providing capital to support the
Company's growth organically or through strategic acquisitions, repaying
indebtedness and financing investments and capital expenditures, and for
investments in
On
The Company owns the outstanding common securities of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts used the proceeds from the issuance of their preferred capital securities and common securities (collectively referred to as "capital securities") to buy floating rate junior subordinated debentures issued by the Company (or by companies that the Company subsequently acquired). The debentures are the trusts' only assets and interest payments from the debentures finance the distributions paid on the capital securities.
Results of Operations
Net Income
Net income for the second quarter of 2022 was$39,678 compared to net income of$40,867 for the second quarter of 2021. Basic and diluted earnings per share ("EPS") for the second quarter of 2022 were$0.71 as compared to basic and diluted EPS of$0.73 and$0.72 , respectively, for the second quarter of 2021. Net income for the six months endedJune 30, 2022 , was$73,225 compared to net income of$98,775 for the same period in 2021. Basic and diluted EPS were$1.31 and$1.30 , respectively, for the first six months of 2022 as compared to$1.75 for the first six months of 2021.
From time to time, the Company incurs expenses and charges or recognizes valuation adjustments in connection with certain transactions with respect to which management is unable to accurately predict when these items will be incurred or, when
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incurred, the amount of such items. The following table presents the impact of
these items on reported EPS for the dates presented. The "COVID-19 related
expenses" line item in the table below primarily consists of (a) employee
overtime and employee benefit accruals directly related to the Company's
response to both the COVID-19 pandemic itself and federal legislation enacted to
address the pandemic, such as the CARES Act, and (b) expenses associated with
supplying branches with protective equipment and sanitation supplies (such as
floor markings and cautionary signage for branches, face coverings and hand
sanitizer) as well as more frequent and rigorous branch cleaning.
Three Months Ended
June 30, 2022 June 30, 2021
Impact to Impact to
Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS
Restructuring charges $ 1,187 $ 932 $ 0.01 $ 15 $ 12 $ -
COVID-19 related expenses - - - 370 289 0.01
Six Months Ended
June 30, 2022 June 30, 2021
Impact to Impact to
Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS
Merger and conversion expenses $ 687 $ 547 $ 0.01 $ - $ - $ -
MSR valuation adjustment - - - (13,561) (10,549) (0.19)
Restructuring charges 732 583 0.01 307 239 -
COVID-19 related expenses - - - 1,154 898 0.02
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 75.60% of total revenue (i.e., net interest income on a fully
taxable equivalent basis and noninterest income) for the second quarter of 2022.
The primary concerns in managing net interest income are the volume, mix and
repricing of assets and liabilities.
Net interest income was $113,515 and $213,144 for the three and six months ended
June 30, 2022 , as compared to $109,579 and $219,227 for the same periods in
2021. On a tax equivalent basis, net interest income was $115,321 and $216,704
for the three and six months ended June 30, 2022 , as compared to $111,205 and
$222,469 same periods in 2021.
The following tables set forth average balance sheet data, including all major
categories of interest-earning assets and interest-bearing liabilities, together
with the interest earned or interest paid and the average yield or average rate
paid on each such category on a tax-equivalent basis for the periods presented:
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Three Months Ended June 30,
2022 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans held for investment $ 10,477,036 $ 107,612 4.12 % $ 10,478,121 $ 110,785 4.24 %
Loans held for sale 227,435 2,586 4.55 461,752 3,604 3.12
Securities:
Taxable 2,684,624 10,355 1.54 1,503,605 5,549 1.48
Tax-exempt(1) 451,878 2,719 2.41 317,824 2,333 2.94
Interest-bearing balances with banks 1,004,226 1,954 0.78 1,227,962 346 0.11
Total interest-earning assets 14,845,199 125,226 3.38 13,989,264 122,617 3.51 Cash and due from banks 206,882 195,982 Intangible assets 968,441 967,430 Other assets 610,768 678,342 Total assets$ 16,631,290 $ 15,831,018 Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2)$ 6,571,905 $ 3,598 0.22 %$ 6,109,956 $ 4,069 0.27 % Savings deposits 1,137,607 147 0.05 969,982 185 0.08 Time deposits 1,303,735 1,273 0.39 1,564,448 3,415 0.88 Total interest-bearing deposits 9,013,247 5,018 0.22 8,644,386 7,669 0.36 Borrowed funds 543,728 4,887 3.60 483,081 3,743 3.11 Total interest-bearing liabilities 9,556,975 9,905 0.42 9,127,467 11,412 0.50 Noninterest-bearing deposits 4,714,161 4,271,464 Other liabilities 182,617 218,344 Shareholders' equity 2,177,537 2,213,743 Total liabilities and shareholders' equity$ 16,631,290 $ 15,831,018 Net interest income/net interest margin$ 115,321 3.11 %$ 111,205
3.19 %
(1)
(2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.
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Six Months Ended June 30,
2022 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans held for investment $ 10,293,949 $ 204,613 4.00 % $ 10,640,556 $ 223,856 4.24 %
Loans held for sale 278,722 5,449 3.91 434,075 6,604 3.05
Securities:
Taxable 2,592,645 19,137 1.48 1,284,692 10,389 1.62
Tax-exempt(1) 445,154 5,354 2.41 312,084 4,617 2.96
Interest-bearing balances with banks 1,233,241 2,618 0.43 1,002,564 529 0.11
Total interest-earning assets 14,843,711 237,171 3.21 13,673,971 245,995 3.62 Cash and due from banks 206,559 200,906 Intangible assets 966,956 968,215 Other assets 647,254 674,262 Total assets$ 16,664,480 $ 15,517,354 Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2)$ 6,603,986 $ 7,245 0.22 %$ 6,008,093 $ 8,002 0.27 % Savings deposits 1,117,724 286 0.05 926,370 354 0.08 Time deposits 1,339,022 3,124 0.47 1,610,113 7,593 0.95 Total interest-bearing deposits 9,060,732 10,655 0.24 8,544,576 15,949 0.38 Borrowed funds 514,940 9,812 3.82 483,494 7,577 3.16 Total interest-bearing liabilities 9,575,672 20,467 0.43 9,028,070 23,526 0.53 Noninterest-bearing deposits 4,683,446 4,066,943 Other liabilities 191,938 229,257 Shareholders' equity 2,213,424 2,193,084 Total liabilities and shareholders' equity$ 16,664,480 $ 15,517,354 Net interest income/net interest margin$ 216,704 2.94 %$ 222,469
3.28 %
(1)U.S. Government and someU.S. Government Agency securities are tax-exempt in the states in which the Company operates. (2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits. The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. As discussed in more detail below, the decline in loan yields due to the low interest rate environment during the past year as well as changes in the mix of earning assets over the past year due to increased liquidity on the balance sheet were the largest contributing factors to the decrease in net interest margin and net interest income for the six months endedJune 30, 2022 , as compared to the same period in 2021. The Company has continued to focus on lowering the cost of funding through growing noninterest-bearing deposits and aggressively lowering interest rates on interest-bearing deposits. During the first half of 2022, the Company also increased its purchases of investment securities in order to mitigate the pressure on net interest margin. The following tables set forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three and six months endedJune 30, 2022 , as compared to the same 60 -------------------------------------------------------------------------------- Table of Contents periods in 2021 (the changes attributable to the combined impact of yield/rate and volume have been allocated on a pro-rata basis using the absolute value of amounts calculated): Three Months
Ended
Three Months Ended
Volume Rate Net
Interest income:
Loans held for investment $ (12) $ (3,161) $ (3,173)
Loans held for sale (2,264) 1,246 (1,018)
Securities:
Taxable 4,560 246 4,806
Tax-exempt 858 (472) 386
Interest-bearing balances with banks (74) 1,682 1,608
Total interest-earning assets 3,068 (459) 2,609
Interest expense:
Interest-bearing demand deposits 291 (762) (471)
Savings deposits 28 (66) (38)
Time deposits (496) (1,646) (2,142)
Borrowed funds 507 637 1,144
Total interest-bearing liabilities 330 (1,837) (1,507)
Change in net interest income $ 2,738
Six months
ended
Months Ended
Volume Rate Net
Interest income:
Loans held for investment $ (7,054) $ (12,189) $ (19,243)
Loans held for sale (2,721) 1,566 (1,155)
Securities:
Taxable 9,713 (965) 8,748
Tax-exempt 1,703 (966) 737
Interest-bearing balances with banks 147 1,941 2,088
Total interest-earning assets 1,788 (10,613) (8,825)
Interest expense:
Interest-bearing demand deposits 743 (1,500) (757)
Savings deposits 64 (132) (68)
Time deposits (1,116) (3,353) (4,469)
Borrowed funds 518 1,716 2,234
Total interest-bearing liabilities 209 (3,269) (3,060)
Change in net interest income $ 1,579 Interest income, on a tax equivalent basis, was$125,226 and$237,171 , respectively, for the three and six months endedJune 30, 2022 , as compared to$122,617 and$245,995 , for the same periods in 2021. The decrease in interest income, on a tax equivalent basis, for the first half of 2022 as compared to the first half of 2021 is due primarily to theFederal Reserve maintaining low interest rates fromMarch 2020 until the first rate increase inMarch 2022 and changes in the mix of earning assets during the year due to increased liquidity on the balance sheet. The increase in interest income, on a tax equivalent basis, for the second quarter of 2022 as compared to the second quarter of 2021 is due primarily to continued loan growth as well as the additional interest rate increases by theFederal Reserve sinceMarch 2022 .
The following table presents the percentage of total average earning assets, by type and yield, for the periods presented:
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Percentage of Total Average Earning Assets Yield
Three Months Ended Three Months Ended
June 30, June 30,
2022 2021 2022 2021
Loans held for investment, excl. PPP 70.52 % 70.41 % 4.12 % 4.10 %
Paycheck Protection Program 0.05 4.49 3.76 6.46
Loans held for sale 1.53 3.30 4.55 3.12
Securities 21.13 13.02 1.67 1.73
Other 6.77 8.78 0.78 0.11
Total earning assets 100.00 % 100.00 % 3.38 % 3.51 %
Percentage of Total Average Earning Assets Yield
Six Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Loans held for investment excl. PPP 69.19 % 71.91 % 4.00 % 4.16 %
Paycheck Protection Program 0.16 5.90 5.92 5.20
Loans held for sale 1.88 3.17 3.91 3.05
Securities 20.47 11.68 1.61 1.88
Interest-bearing balances with banks 8.30 7.34 0.43 0.11
Total earning assets 100.00 % 100.00 % 3.21 % 3.62 %
For the second quarter of 2022, interest income on loans held for investment, on
a tax equivalent basis, decreased $3,173 to $107,612 from $110,785 for the same
period in 2021. For the six months ended June 30, 2022 , interest income on loans
held for investment, on a tax equivalent basis, decreased $19,243 to $204,613
from $223,856 in the same period in 2021. Although the Federal Reserve began to
raise interest rates in March 2022 , these rate increases did not impact the
Company's loan pricing soon enough to offset the effects of the Federal Reserve
maintaining low interest rates since March 2020 , thereby resulting in the
decrease in interest income on loans held for investment for the quarterly and
year-to-date periods in 2022 as compared to the corresponding periods in 2021.
Interest income attributable to PPP loans included in loan interest income for
the three months ended June 30, 2022 , was $74 , which consisted of $19 in
interest income and $55 in accretion of net origination fees, as compared to
$10,120 for the three months ended June 30, 2021 , which consisted of $1,524 in
interest income and $8,596 in accretion of net origination fees. Interest income
attributable to PPP loans included in loan interest income for the six months
ended June 30, 2022 , was $693 , which consisted of $113 in interest income and
$580 in accretion of net origination fees, as compared to $20,807 for the six
months ended June 30, 2021 , which consisted of $3,916 in interest income and
$16,891 in accretion of net origination fees. The PPP origination fees, net of
agent fees paid and other origination costs, are being accreted into interest
income over the life of the loan. If a PPP loan is forgiven in whole or in part,
as provided under the CARES Act, the Company will recognize the non-accreted
portion of the net origination fee attributable to the forgiven portion of such
loan as of the date of the final forgiveness determination. PPP loans did not
impact margin or loan yield during the three or six months ended June 30, 2022 .
PPP loans increased margin and loan yield by 15 basis points and 14 basis
points, respectively, in the second quarter of 2021, and 12 basis points and
eight basis points, respectively, in the first half of 2021.
The impact from interest income collected on problem loans and purchase accounting adjustments on loans to total interest income on loans held for investment, loan yield and net interest margin is shown in the following table for the periods presented.
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net interest income collected on problem
loans $ 2,276 $ 1,339 $ 2,710 $ 3,519
Accretable yield recognized on purchased
loans(1) 2,021 2,638 3,256 5,726
Total impact to interest income on loans
$ 5,966 $ 9,245 Impact to loan yield 0.16 % 0.15 % 0.12 % 0.18 % Impact to net interest margin 0.12 % 0.11 % 0.08 % 0.14 % (1)Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of$1,183 and$1,224 , for the second quarter of 2022 and 2021, respectively. The impact was$1,556 and$2,496 for the six months endedJune 30, 2022 and 2021, respectively. This additional interest income increased total loan yield by five basis points for both the second quarter of 2022 and 2021, while increasing net interest margin by three and four basis points for the same respective periods. For the six months endedJune 30, 2022 and 2021, the additional interest income increased total loan yields by three basis points and five basis points, respectively, while increasing net interest margin by two basis points and four basis points, respectively. For the second quarter of 2022, interest income on loans held for sale (consisting of mortgage loans held for sale) decreased$1,018 to$2,586 from$3,604 for the same period in 2021. For the six months endedJune 30, 2022 , interest income on loans held for sale (consisting of mortgage loans held for sale), decreased$1,155 to$5,449 from$6,604 for the same period in 2021. Investment income, on a tax equivalent basis, increased$5,192 to$13,074 for the second quarter of 2022 from$7,882 for the second quarter of 2021. Investment income, on a tax equivalent basis, increased$9,485 to$24,491 for the six months endedJune 30, 2022 from$15,006 for the same period in 2021. The tax equivalent yield on the investment portfolio for the second quarter of 2022 was 1.67%, down 6 basis points from 1.73% for the same period in 2021. The tax equivalent yield on the investment portfolio for the six months endedJune 30, 2022 was 1.61%, down 27 basis points from 1.88% in the same period in 2021. The decrease in taxable equivalent yield on securities was a result of the low interest rate environment over the period. The growth in the Company's investment securities portfolio during the year offset the loss of investment income due to lower yield on securities.
Interest expense was
The following tables present, by type, the Company's funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
Percentage of Total Average Deposits and
Borrowed Funds Cost of Funds
Three Months Ended Three Months Ended
June 30, June 30,
2022 2021 2022 2021
Noninterest-bearing demand 33.03 % 31.88 % - % - %
Interest-bearing demand 46.05 45.59 0.22 0.27
Savings 7.97 7.24 0.05 0.08
Time deposits 9.14 11.68 0.39 0.88
Short term borrowings 0.78 0.10 0.69 0.31
Long-term Federal Home Loan Bank advances - 1.13 1.88 0.04
Subordinated notes 2.25 1.54 4.36 4.96
Other borrowed funds 0.78 0.84 4.33 4.21
Total deposits and borrowed funds 100.00 % 100.00 % 0.28 % 0.34 %
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Percentage of Total Average Deposits and
Borrowed Funds Cost of Funds
Six Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Noninterest-bearing demand 32.85 % 31.06 % - % - %
Interest-bearing demand 46.31 45.88 0.22 0.27
Savings 7.84 7.07 0.05 0.08
Time deposits 9.39 12.30 0.47 0.95
Short-term borrowings 0.49 0.10 0.65 0.31
Long-term Federal Home Loan Bank advances - 1.16 1.87 0.04
Subordinated notes 2.34 1.58 4.31 5.06
Other long term borrowings 0.78 0.85 4.37 4.22
Total deposits and borrowed funds 100.00 % 100.00 % 0.29 % 0.36 %
Interest expense on deposits was $5,018 and $7,669 for the three months ended
June 30, 2022 and 2021, respectively. The cost of total deposits was 0.15% and
0.24% for the same respective periods. Interest expense on deposits was $10,655
and $15,949 for the six months ended June 30, 2022 and 2021, respectively, and
the cost of total deposits was 0.16% and 0.26% 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 repriced in a low interest rate
environment. The Company expects that the rising rate environment will limit its
ability to achieve further reductions in deposit interest rates in future
periods and in fact may result in increased deposit costs. During 2022, the
Company has continued its efforts to grow and maintain non-interest bearing
deposits, and such deposits represent 34.45% of total deposits at June 30, 2022
compared to 33.93% of total deposits at December 31, 2021 . Low cost deposits
continue to be the preferred choice of funding; however, the Company may rely on
wholesale borrowings when rates are advantageous.
Interest expense on total borrowings was $4,887 and $3,743 for the three months
ended June 30, 2022 and 2021, respectively. Interest expense on total borrowings
was $9,812 and $7,577 for the six months ended June 30, 2022 and 2021,
respectively. The increase in interest expense is a result of higher average
borrowings, primarily due to the Company's issuance of $200,000 of subordinated
notes in November 2021 and $100,000 in short-term advances from the FHLB in
March 2022 .
A more detailed discussion of the cost of our funding sources is set forth below under the heading "Liquidity and Capital Resources" in this Item.
Noninterest Income
Noninterest Income to Average Assets
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
0.90% 1.21% 0.90% 1.67%
Total noninterest income includes fees generated from deposit services and other
fees and commissions, income from our insurance, wealth management and mortgage
banking operations, realized gains on the sale of securities and all other
noninterest income. Our focus is to develop and enhance our products that
generate noninterest income in order to diversify revenue sources. Noninterest
income was $37,214 for the second quarter of 2022 as compared to $47,610 for the
same period in 2021. Noninterest income was $74,672 for the six months ended
June 30, 2022 as compared to $128,647 for the same period in 2021. This decrease
is primarily due to the reduction in mortgage banking income during the first
half of 2022 (discussed in more detail below) as compared to record production
during the first half of 2021.
Service charges on deposit accounts include maintenance fees on accounts, per
item charges, account enhancement charges for additional packaged benefits and
overdraft fees (which encompasses traditional overdraft fees as well as
non-sufficient funds fees). Service charges on deposit accounts were $9,734 and
$9,458 for the second quarter of 2022 and 2021, respectively, and $19,296 and
$17,481 for the six months ended June 30, 2022 and 2021, respectively. Overdraft
fees, the largest component of service charges on deposits, were $5,249 for the
three months ended June 30, 2022 , as compared to $4,998 for the same period in
2021. These fees were $10,428 for the six months ended June 30, 2022 compared to
$8,954 for the same period in 2021. The Company recently announced its plans to
eliminate consumer non-sufficient funds fees as well as transfer fees to linked
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customer accounts. These changes will take effect January 1, 2023 . The fees to
be eliminated totaled approximately $1,300 and $2,600 for the three and six
months ended June 30, 2022 , respectively.
Fees and commissions were $4,668 during the second quarter of 2022 as compared
to $4,110 for the same period in 2021, and were $8,650 for the first six months
of 2022 as compared to $8,010 for the same period in 2021. Fees and commissions
include fees related to deposit services, such as ATM fees and interchange fees
on debit card transactions. For the second quarter of 2022, interchange fees
were $2,646 as compared to $2,823 for the same period in 2021. Interchange fees
were $5,078 for the six months ended June 30, 2022 as compared to $5,215 for the
same period in 2021.
Through Renasant Insurance , we offer a range of commercial and personal
insurance products through major insurance carriers. Income earned on insurance
products was $2,591 and $2,422 for the three months ended June 30, 2022 and
2021, respectively, and was $5,145 and $4,659 for the six months ended June 30,
2022 and 2021, respectively. Contingency income is a bonus received from the
insurance underwriters and is based both on commission income and claims
experience on our clients' policies during the previous year. Increases and
decreases in contingency income are reflective of corresponding increases and
decreases in the number of claims paid by insurance carriers. Contingency
income, which is included in "Other noninterest income" in the Consolidated
Statements of Income, was $15 and $47 for the three months ended June 30, 2022
and 2021, respectively, and $549 and $1,053 for the six months ended June 30,
2022 and 2021, respectively.
Our Wealth Management segment has two primary divisions: Trust and Financial
Services. The Trust division operates on a custodial basis, which includes
administration of benefit plans, as well as accounting and money management for
trust accounts. The division manages a number of trust accounts inclusive of
personal and corporate benefit accounts, IRAs, and custodial accounts. Fees for
managing these accounts are based on changes in market values of the assets
under management in the account, with the amount of the fee depending on the
type of account. The Financial Services division provides specialized products
and services to our customers, which include fixed and variable annuities,
mutual funds, and stocks offered through a third party provider. Wealth
Management revenue was $5,711 for the second quarter of 2022 compared to $5,019
for the same period in 2021, and was $11,635 for the six months ended June 30,
2022 compared to $9,811 for the same period in 2021. The market value of assets
under management or administration was $5,084,867 and $4,560,891 at June 30,
2022 and June 30, 2021 , 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 $481,568 in the second quarter of 2022 compared to $1,079,474
for the same period in 2021. Mortgage loan originations totaled $1,076,613 in
the six months ended June 30, 2022 compared to $2,222,822 for the same period in
2021. During the first half of 2022 mortgage loan originations continued to
normalize and trend toward pre-pandemic levels while margins on the sale of
loans in the secondary market compressed as interest rates rose and housing
inventories remained below demand. Mortgage banking income was $8,316 and
$20,853 for the three months ended June 30, 2022 and 2021, respectively, and was
$17,949 for the first six months ended June 30, 2022 compared to $71,586 for the
same period in 2021. The table below presents the components of mortgage banking
income included in noninterest income for the periods presented.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Gain on sales of loans, net (1)
$ 9,537 $ 51,482 Fees, net 3,064 4,519 6,117 9,421 Mortgage servicing gain (loss), net 1,762 (1,247) 2,295 (2,878) MSR valuation adjustment - - - 13,561 Mortgage banking income, net$ 8,316 $ 20,853
(1) Gain on sales of loans, net includes pipeline fair value adjustments
Bank-owned life insurance ("BOLI") income is derived from changes in the cash
surrender value of the bank-owned life insurance policies and proceeds received
upon the death of covered individuals. BOLI income was $2,331 for the three
months ended June 30, 2022 as compared to $1,644 for the same period in 2021,
and $4,484 for the six months ended June 30, 2022 as compared to $3,716 for the
same period in 2021. The Company purchased an additional $80,000 in BOLI
policies during the first quarter of 2022.
Other noninterest income was $3,863 and $4,104 for the three months ended June
30, 2022 and 2021, respectively, and was $7,513 and $12,027 for the six months
ended June 30, 2022 and 2021, respectively. Other noninterest income includes
income
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from our SBA banking division and other miscellaneous income and can fluctuate
based on production in our SBA banking division and recognition of other
seasonal income items.
Noninterest Expense
Noninterest Expense to Average Assets
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
2.37% 2.76% 2.33% 2.92%
Noninterest expense was $98,194 and $108,777 for the second quarter of 2022 and
2021, respectively, and was $192,299 and $224,712 for the six months ended June
30, 2022 and 2021, respectively.
Salaries and employee benefits decreased $4,713 to $65,580 for the second
quarter of 2022 as compared to $70,293 for the same period in 2021. Salaries and
employee benefits decreased $21,170 to $127,819 for the six months ended June
30, 2022 as compared to $148,989 for the same period in 2021. The decrease in
salaries and employee benefits is primarily due to a decrease in mortgage
commissions and incentives, driven by the decrease in mortgage production
described above.
Data processing costs decreased to $3,590 in the second quarter of 2022 from
$5,652 for the same period in 2021 and were $7,853 for the six months ended June
30, 2022 as compared to $11,103 for the same period in 2021. The decline in the
first half of 2022 as compared to the same period in 2021 is primarily due to
the Company's renegotiation of certain vendor contracts. The Company continues
to examine new and existing contracts to negotiate favorable terms to offset the
increased variable cost components of our data processing costs, such as new
accounts and increased transaction volume.
Net occupancy and equipment expense for the second quarter of 2022 was $11,155 ,
down from $11,374 for the same period in 2021. These expenses for the first six
months of 2022 were $22,431 , down from $23,912 for the same period in 2021. The
decrease in occupancy and equipment expense is primarily attributable to the
restructuring and non-renewal or termination of certain branch leases.
For the second quarter of 2022 the Company experienced a net gain of $187 in
other real estate expense as compared to expenses of $104 for the same period in
2021. The net gain was $428 for the first six months of 2022 as compared to
expenses of $145 for the same period in 2021. Expenses on other real estate
owned included write downs of the carrying value to fair value on certain pieces
of property held in other real estate owned of $51 and $117 for the first six
months of 2022 and 2021, respectively. For the six months ended June 30, 2022
and 2021, other real estate owned with a cost basis of $967 and $3,328 ,
respectively, was sold, resulting in a net gain of $557 and $50 , respectively.
Professional fees include fees for legal and accounting services, such as
routine litigation matters, external audit services as well as assistance in
complying with newly-enacted and existing banking and governmental regulations.
Professional fees were $2,778 for the second quarter of 2022 as compared to
$2,674 for the same period in 2021, and $5,929 for the six months ended June 30,
2022 as compared to $5,595 for the same period in 2021.
Advertising and public relations expense was $3,406 for the second quarter of
2022 as compared to $3,100 for the same period in 2021, and $7,465 for the six
months ended June 30, 2022 as compared to $6,352 for the same period in 2021.
The Company contributed during the six months ended June 30, 2022 approximately
$1,350 to charitable organizations throughout Mississippi , Georgia and Alabama ,
which contributions are included in our advertising and public relations
expense, for which it received a dollar for dollar tax credit.
Amortization of intangible assets totaled $1,310 and $1,539 for the second
quarter of 2022 and 2021, respectively, and $2,676 and $3,137 for the six months
ended June 30, 2022 and 2021, respectively. This amortization relates to
finite-lived intangible assets which are being amortized over the useful lives
as determined at acquisition. These finite-lived intangible assets have
remaining estimated useful lives ranging from approximately 1 year to 7 years.
Communication expenses, those expenses incurred for communication to clients and
between employees, were $1,904 for the second quarter of 2022 as compared to
$2,291 for the same period in 2021. Communication expenses were $3,931 for the
six months ended June 30, 2022 as compared to $4,583 for the same period in
2021.
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 $7,471 and $13,204 for the three and six months ended
June 30, 2022 as compared to $11,735 and $20,589 for the same periods in 2021.
There was a provision for unfunded commitments of $450 for the second quarter of
2022 and a recovery of provision
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for unfunded commitments of $100 for the six months ended June 30, 2022 . There
was no provision for unfunded commitments recorded for the same periods in 2021.
Efficiency Ratio
Efficiency Ratio
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Efficiency ratio (GAAP) 64.37 % 68.49 % 66.00 % 64.00 %
Adjusted efficiency ratio (Non-GAAP)(1) 62.44 % 67.28 % 64.63 % 65.47 %
(1)A reconciliation of this financial measure from GAAP to non-GAAP can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
The efficiency ratio is a measure of productivity in the banking industry. (This ratio is a measure of our ability to turn expenses into revenue. That is, the ratio is designed to reflect the percentage ofone dollar that we must expend to generate a dollar of revenue.) The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. The table above shows the impact on the efficiency ratio of items that (1) the Company does not consider to be part of 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 items will be incurred or, when incurred, the amount of such items, such as, for the second quarter of 2022, restructuring benefits and a recovery of a portion of the reserve for unfunded commitments. We remain committed to aggressively managing our costs within the framework of our business model. Our goal is to improve the efficiency ratio over time from currently reported levels as a result of revenue growth while at the same time controlling noninterest expenses.
Income Taxes
Income tax expense for the second quarter of 2022 and 2021 was$10,857 and$7,545 , respectively, and$18,792 and$24,387 for the six months endedJune 30, 2022 and 2021, respectively. The Company recognized tax credits of approximately$1,350 in the first half of 2022 as mentioned above in the advertising and public relations discussion as compared to the one-time state tax credit of$3,460 that reduced income taxes for the first half of 2021.
Risk Management
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit risk and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading "Liquidity and Capital Resources."
Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments
Management of Credit Risk. Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. Credit risk is monitored and managed on an ongoing basis by our credit administration department, our problem asset resolution committee and the Board of Directors Credit Review Committee. Oversight of the Company's lending operations (including adherence to our policies and procedures governing the loan approval and monitoring process), credit quality and loss mitigation are major concerns of credit administration and these committees. The Company's central appraisal review department reviews and approves third-party appraisals obtained by the Company on real estate collateral and monitors loan maturities to ensure updated appraisals are obtained. This department is managed by aState Certified General Real Estate Appraiser and employs three additionalState Certified General Real Estate Appraisers and four real estate evaluators. In addition, we maintain a loan review staff to independently monitor loan quality and lending practices. Loan review personnel monitor and, if necessary, adjust the grades assigned to loans through periodic examination, focusing their review on commercial and real estate loans rather than consumer and small balance consumer mortgage loans, such as 1-4 family mortgage loans. In compliance with loan policy, the lending staff is given lending limits based on their knowledge and experience. In addition, each lending officer's prior performance is evaluated for credit quality and compliance as a tool for establishing and enhancing lending limits. Before funds are advanced on consumer and commercial loans below certain dollar thresholds, loans are reviewed and scored using centralized underwriting methodologies. Loan quality, or "risk-rating," grades are assigned based upon certain factors, which include the scoring of the loans. This information is used to assist management in monitoring credit quality. Loan requests of amounts greater than an officer's lending limit are reviewed for approval by senior credit officers. 67 -------------------------------------------------------------------------------- Table of Contents For loans with a commercial purpose, risk-rating grades are assigned by lending, credit administration and loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 rated loans having the least credit risk. Management's problem asset resolution committee and the Board of Directors' Credit Review Committee monitor loans that are past due or those that have been downgraded to criticized due to a decline in the collateral value or cash flow of the borrower. This information is used to assist management in monitoring credit quality. When the ultimate collectability of a loan's principal is in doubt, wholly or partially, the loan is placed on nonaccrual. After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals as described above), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. Any remaining balance is charged-off, which reduces 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 management believes the uncollectability of a loan balance is confirmed and such losses are reasonably quantified. Net charge-offs for the first six months of 2022 were$3,188 , or 0.06% of average loans (annualized), compared to net charge-offs of$3,790 , or 0.07% of average loans (annualized), for the same period in 2021. The charge-offs were fully reserved for in the Company's allowance for credit losses on loans. Subsequent recoveries, if any, are credited to the allowance for credit losses on loans. Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans. The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including loans evaluated on a collective (pooled) basis and those evaluated on an individual basis as set forth in ASC 326. The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company's loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company's process for the estimation of expected credit losses. Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories, and other factors, including our risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and change in GDP in the national and local economies as well as trends in the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit loss in those future periods. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a collective or pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. •The allowance for credit losses for loans that share similar risk characteristics with other loans is calculated on a collective (or pooled) basis, where such loans are segregated into loan portfolio segments. In determining the allowance for credit losses on loans evaluated on a collective basis, the Company further categorizes the loan segments based on risk rating. The Company uses two CECL models: (1) for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, the Company uses a loss rate model, based on average historical life-of-loan loss rates, and (2) for theCommercial, Real Estate - Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool. The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit 68 -------------------------------------------------------------------------------- Table of Contents concentration and the nature and volume of the respective loan portfolio segments. External factors include current and reasonable and supportable forecasted economic conditions and changes in collateral values. These factors are used to adjust the historical loss rates (as described above) to ensure that they reflect management's expectation of future conditions based on a reasonable and supportable forecast period. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the models immediately revert back to the historical loss rates adjusted for qualitative factors related to current conditions. •For loans that do not share similar risk characteristics with other loans, an individual analysis is performed to determine the expected credit loss. If the respective loan is collateral dependent (that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral), the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of collateral is initially based on external appraisals. Generally, collateral values for loans for which measurement of expected losses is dependent on the fair value of such collateral are updated every twelve months, either from external third parties or in-house certified appraisers. Third-party appraisals are obtained from a pre-approved list of independent, third-party, local appraisal firms. The fair value of the collateral derived from the external appraisal is then adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. Other acceptable methods for determining the expected credit losses for individually evaluated loans (typically used for loans that are not collateral dependent) is a discounted cash flow approach or, if applicable, an observable market price. Once the expected credit loss amount is determined, an allowance equal to such expected credit loss is included in the allowance for credit losses. In addition to its quarterly analysis of the allowance for credit losses, on a regular basis management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans, among others. Also, management reviews past due ratios by officer, community bank and the Company as a whole. The following table presents the allocation of the allowance for credit losses on loans by loan category and the percentage of loans in each category to total loans as of the dates presented: June 30, 2022 December 31, 2021 June 30, 2021 Balance % of Total Balance % of Total Balance % of Total Commercial, financial, agricultural$ 30,193 14.12 %$ 33,922 14.20 %$ 36,994 16.11 % Lease financing 1,802 0.96 % 1,486 0.76 % 1,511 0.73 % Real estate - construction 17,290 10.62 % 16,419 11.03 % 15,729 10.36 % Real estate - 1-4 family mortgage 41,910 28.57 % 32,356 27.19 % 31,303 26.62 % Real estate - commercial mortgage 64,373 44.49 % 68,940 45.39 % 74,893 44.63 % Installment loans to individuals 10,563 1.24 % 11,048 1.43 % 11,924 1.55 % Total$ 166,131 100.00 %$ 164,171 100.00 %$ 172,354 100.00 % The provision for credit losses on loans charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses on loans at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The Company recorded a provision for credit losses of$2,000 in the second quarter of 2022 and$3,500 in the first half of 2022, as compared to no provision for credit losses recorded in the first half of 2021. The Company's allowance for credit losses model considers economic projections, primarily the national unemployment rate and GDP, over a reasonable and supportable period of two years. The provision activity during the current quarter was primarily driven by strong loan growth during the quarter and slight deterioration in the economic forecast during the quarter.
The table below reflects the activity in the allowance for credit losses on loans for the periods presented:
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Balance at beginning of period $ 166,468 $ 173,106 $ 164,171 $ 176,144
Impact of PCD loans acquired during the period - - 1,648 -
Charge-offs
Commercial, financial, agricultural 2,239 1,184 4,341 4,682 Lease financing - - 7 - Real estate - construction - - - 52 Real estate - 1-4 family mortgage 161 152 324 253 Real estate - commercial mortgage 708 171 714 232 Installment loans to individuals 850 1,347 1,629 3,005 Total charge-offs 3,958 2,854 7,015 8,224
Recoveries
Commercial, financial, agricultural 431 233 1,567 522 Lease financing 11 14 23 25 Real estate - construction - - - 13 Real estate - 1-4 family mortgage 169 401 347 662 Real estate - commercial mortgage 192 143 347 314 Installment loans to individuals 818 1,311 1,543 2,898 Total recoveries 1,621 2,102 3,827 4,434 Net charge-offs 2,337 752 3,188 3,790 Provision for credit losses on loans 2,000 - 3,500 - Balance at end of period$ 166,131 $ 172,354 $ 166,131 $ 172,354 Net charge-offs (annualized) to average loans 0.09 % 0.03 % 0.06 % 0.07 %
Net charge-offs to allowance for credit losses on loans 1.41 %
0.44 % 1.92 % 2.20 %
Allowance for credit losses on loans to:
Total loans 1.57 % 1.70 %
Total loans excluding PPP loans(1) 1.57 % 1.74 %
Nonperforming loans 373.21 % 304.86 %
Nonaccrual loans 378.46 % 314.57 %
(1) Allowance for credit losses on loans to total loans excluding PPP loans is a
non-GAAP financial measure. A reconciliation of this financial measure from GAAP
to non-GAAP as well as an explanation of why the Company provides non-GAAP
financial measures can be found under the "Non-GAAP Financial Measures" heading
at the end of this Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations
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Table of Contents The table below reflects annualized net charge-offs to daily average loans outstanding, by loan category, during the periods presented:
Six Months Ended
June 30, 2022 June 30, 2021
Annualized Net Annualized Net
Charge-offs to Average Charge-offs to Average
Net Charge-offs Average Loans Loans Net Charge-offs Average Loans Loans
Commercial, financial,
agricultural $ 2,774 $ 1,457,164 0.38% $ 4,160 $ 2,208,424 0.38%
Lease financing (16) 89,479 (0.04) (25) 75,159 (0.07)%
Real estate - construction - 1,114,992 - 39 946,497 0.01%
Real estate - 1-4 family
mortgage (23) 2,894,206 - (409) 2,687,224 (0.03)%
Real estate - commercial
mortgage 367 4,601,353 0.02 (82) 4,545,471 -%
Installment loans to
individuals 86 136,755 0.13 107 177,781 0.12%
Total $ 3,188 $ 10,293,949 0.06% $ 3,790 $ 10,640,556 0.07%
The following table provides further details of the Company's net charge-offs of loans secured by real estate for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Real estate - construction:
Residential $ - $ - $ - $ 39
Total real estate - construction - - - 39
Real estate - 1-4 family mortgage:
Primary 95 21 157 (58)
Home equity (70) 29 (48) (63)
Rental/investment (19) (232) (21) (199)
Land development (14) (67) (111) (89)
Total real estate - 1-4 family mortgage (8) (249) (23) (409)
Real estate - commercial mortgage:
Owner-occupied 675 43 526 (116)
Non-owner occupied (2) (15) (2) 10
Land development (157) - (157) 24
Total real estate - commercial mortgage 516 28 367 (82)
Total net charge-offs of loans secured by real estate
$ (221) $ 344 $ (452) Allowance for Credit Losses on Unfunded Commitments; Provision for Credit Losses on Unfunded Commitments. The Company maintains a separate allowance for credit losses on unfunded loan commitments, which is included in the "Other liabilities" line item on the Consolidated Balance Sheets. Management estimates the amount of expected losses on unfunded loan commitments by calculating a likelihood of funding over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the allowance for credit losses on loans methodology described above to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company. A roll-forward of the allowance for credit losses on unfunded commitments is shown in the tables below. 71 -------------------------------------------------------------------------------- Table of Contents Three Months EndedJune 30 ,
2022 2021 Allowance for credit losses on unfunded loan commitments: Beginning balance
$
19,485
Provision for credit losses on unfunded loan commitments (included in other noninterest expense) 450 - Ending balance$ 19,935 $ 20,535 Six Months EndedJune 30 ,
2022 2021 Allowance for credit losses on unfunded loan commitments: Beginning balance
$
20,035
(Recovery of) provision for credit losses on unfunded loan commitments (included in other noninterest expense)
(100) - Ending balance$ 19,935 $ 20,535 Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the problem asset resolution committee and our loan review staff closely monitor loans that are considered to be nonperforming. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for credit losses on loans. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in "Other real estate owned" in the Consolidated Statements of Income.
The following tables provide details of the Company's non purchased and purchased nonperforming assets as of the dates presented.
Non Purchased Purchased Total
June 30, 2022
Nonaccruing loans $ 32,284 $ 11,613 $ 43,897
Accruing loans past due 90 days or more 479 138 617
Total nonperforming loans 32,763 11,751 44,514
Other real estate owned 1,332 1,475 2,807
Total nonperforming assets $ 34,095 $ 13,226 $ 47,321
Nonperforming loans to total loans 0.42 %
Nonaccruing loans to total loans 0.41 %
Nonperforming assets to total assets 0.28 %
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 %
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The level of nonperforming loans decreased
The following table presents nonperforming loans by loan category as of the
dates presented:
June 30, June 30,
2022 December 31, 2021 2021
Commercial, financial, agricultural $ 6,199 $ 13,131 $ 15,576
Lease financing - 11 -
Real estate - 1-4 family mortgage:
Primary 22,440 19,533 15,355
Home equity 2,082 1,719 2,038
Rental/investment 1,034 1,595 854
Land development 598 257 201
Total real estate - 1-4 family mortgage 26,154 23,104 18,448
Real estate - commercial mortgage: Owner-occupied 5,991 5,039 4,794 Non-owner occupied 5,630 8,535 16,424 Land development 186 470 576 Total real estate - commercial mortgage 11,807 14,044
21,794
Installment loans to individuals 354 515 718 Total nonperforming loans$ 44,514 $ 50,805$ 56,536 Total nonperforming loans as a percentage of total loans were 0.42% as ofJune 30, 2022 as compared to 0.51% and 0.56% as ofDecember 31, 2021 andJune 30, 2021 , respectively. The Company's coverage ratio, or its allowance for credit losses on loans as a percentage of nonperforming loans, was 373.21% as ofJune 30, 2022 as compared to 323.14% as ofDecember 31, 2021 and 304.86% as ofJune 30, 2021 . 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 atJune 30, 2022 . Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due but still accruing interest were$16,910 atJune 30, 2022 as compared to$27,604 atDecember 31, 2021 and$15,076 atJune 30, 2021 . Although not classified as nonperforming loans, restructured loans are another category of assets that contribute to our credit risk. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower's financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. As shown below, restructured loans totaled$30,026 atJune 30, 2022 as compared to$20,259 atDecember 31, 2021 and$24,710 atJune 30, 2021 . AtJune 30, 2022 , loans restructured through interest rate concessions represented 34% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company's restructured loans in compliance with their modified terms as of the dates presented: 73
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June 30, June 30,
2022 December 31, 2021 2021
Commercial, financial, agricultural $ 5,588 $ 967 $ 6,523
Real estate - 1-4 family mortgage:
Primary 12,057 11,750 10,183
Home equity 170 298 299
Rental/investment 307 350 420
Land development 93 - -
Total real estate - 1-4 family mortgage 12,627 12,398 10,902
Real estate - commercial mortgage:
Owner-occupied 3,806 5,407 5,633
Non-owner occupied 7,865 1,341 1,575
Land development 73 75 -
Total real estate - commercial mortgage 11,744 6,823 7,208
Installment loans to individuals 67 71 77
Total restructured loans in compliance with modified
terms $ 30,026 $ 20,259 $ 24,710 Changes in the Company's restructured loans are set forth in the table below:
2022 2021
Balance at January 1, $ 20,259 $ 20,448 Additional advances or loans with concessions 8,700 9,101 Reclassified as performing restructured loan 5,181
35
Reductions due to:
Reclassified as nonperforming (1,500) (2,649)
Paid in full (2,267) (1,650)
Charge-offs - (205)
Paydowns (347) (370)
Balance at June 30, $ 30,026 $ 24,710
The following table shows the principal amounts of nonperforming and
restructured loans as of the dates presented. All loans where information exists
about possible credit problems that would cause us to have serious doubts about
the borrower's ability to comply with the current repayment terms of the loan
have been reflected in the table below.
June 30, June 30,
2022 December 31, 2021 2021
Nonaccruing loans $ 43,897 $ 49,364 $ 54,791
Accruing loans past due 90 days or more 617 1,441 1,745
Total nonperforming loans 44,514 50,805 56,536
Restructured loans in compliance with modified terms 30,026 20,259 24,710
Total nonperforming and restructured loans $ 74,540 $
71,064
The following table provides details of the Company's other real estate owned as of the dates presented:
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June 30, June 30,
2022 December 31, 2021 2021
Residential real estate $ 1,251 $ 259 $ 261
Commercial real estate 101 761 2,596
Residential land development 261 305 341
Commercial land development 1,194 1,215
1,741
Total other real estate owned$ 2,807 $ 2,540 $
4,939
Changes in the Company's other real estate owned were as follows:
2022 2021
Balance at January 1, $ 2,540 $ 5,972
Transfers of loans 1,284 2,503
Impairments (51) (117)
Dispositions (967) (3,328)
Other 1 (91)
Balance at June 30, $ 2,807 $ 4,939
Other real estate owned with a cost basis of $967 was sold during the six months
ended June 30, 2022 , resulting in a net gain of $557 , while other real estate
owned with a cost basis of $3,328 was sold during the six months ended June 30,
2021 , resulting in a net gain of $50 .
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 ("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 July 1, 2022 , in each case as
compared to the result under rates present in the market on June 30, 2022 . The
changes in interest rates assume an instantaneous and parallel shift in the
yield curve and do not account for changes in the slope of the yield curve.
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Percentage Change In:
Economic Value Equity
Immediate Change in Rates of (in basis (EVE) Earning at Risk (Net Interest Income)
points): Static 1-12 Months 13-24 Months
+400 8.39% 24.23% 31.03%
+300 6.74% 18.30% 23.43%
+200 4.99% 12.40% 15.62%
+100 2.96% 6.40% 7.86%
-100 (8.47)% (11.51)% (14.65)%
The rate shock results for the net interest income simulations for the next 24
months produce an asset sensitive position at June 30, 2022 . 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, 200, 300 and 400 and minus 100 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; however, such assumptions may
not necessarily reflect the manner or timing in which cash flows, asset yields
and liability costs respond to changes in market rates. Because these
assumptions are inherently uncertain, actual results will differ from simulated
results.
The Company utilizes derivative financial instruments, including interest rate
contracts such as swaps, collars, 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
derivatives, see the information under the heading "Loan Commitments and Other
Off-Balance Sheet Arrangements" in the Liquidity and Capital Resources section
below and Note 10, "Derivative Instruments," in the Notes to Consolidated
Financial Statements of the Company in Item 1, Financial Statements.
Liquidity and Capital Resources
Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Core deposits, which are deposits excluding time deposits greater than$250,000 , are the major source of funds used by the Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring the Bank's liquidity. Management continually monitors the Bank's liquidity and non-core dependency ratios to ensure compliance with targets established by the ALCO. Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Within the next twelve months, the securities portfolio is forecasted to generate cash flow through principal payments and maturities equal to approximately 14.76% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types, short-term borrowings and derivative instruments. AtJune 30, 2022 , securities with a carrying value of$719,847 were pledged to secure public fund deposits and as collateral for short-term borrowings and derivative instruments as compared to securities with a carrying value of$629,174 similarly pledged atDecember 31, 2021 . Other sources available for meeting liquidity needs include federal funds purchased and short-term and long-term advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. There were$100,000 in short-term borrowings from the FHLB atJune 30, 2022 , as compared to no such borrowings atDecember 31, 2021 . Long-term funds obtained from the FHLB are used to match-fund fixed rate loans in order to minimize interest rate risk and also are used to meet day-to-day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. AtJune 30, 2022 , there were no outstanding long-term advances with the FHLB as compared to$417 atDecember 31, 2021 . The total amount of the remaining credit available to us from the FHLB atJune 30, 2022 was$4,037,666 . We also maintain lines of credit with other commercial banks totaling$180,000 . These are unsecured lines of credit with the majority maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit atJune 30, 2022 orDecember 31, 2021 . 76 -------------------------------------------------------------------------------- Table of Contents Finally, we can access the capital markets to meet liquidity needs, as we did in 2016, 2020 and 2021 in the form of subordinated notes. The Company maintains a shelf registration statement with theSecurities and Exchange Commission ("SEC"). The shelf registration statement, which was effective upon filing, allows the Company to raise capital from time to time through the sale of common stock, preferred stock, depositary shares, debt securities, rights, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will file with theSEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes or as otherwise described in the prospectus supplement applicable to the offering and could include the expansion of the Company's banking, insurance and wealth management operations as well as other business opportunities. The carrying value of the subordinated notes, net of unamortized debt issuance costs, was$319,891 atJune 30, 2022 . We redeemed$30,000 of subordinated notes in the first quarter of 2022.
The following table presents, by type, the Company's funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
Percentage of Total Average Deposits and
Borrowed Funds Cost of Funds
Six Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Noninterest-bearing demand 32.85 % 31.06 % - % - %
Interest-bearing demand 46.31 45.88 0.22 0.27
Savings 7.84 7.07 0.05 0.08
Time deposits 9.39 12.30 0.47 0.95
Short-term borrowings 0.49 0.10 0.65 0.31
Long-term Federal Home Loan Bank advances - 1.16 1.87 0.04
Subordinated notes 2.34 1.58 4.31 5.06
Other borrowed funds 0.78 0.85 4.37 4.22
Total deposits and borrowed funds 100.00 % 100.00 % 0.29 % 0.36 %
Our strategy in choosing funds is focused on minimizing cost in the context of
our balance sheet composition and interest rate risk position. Accordingly,
management targets growth of noninterest-bearing deposits. While we do not
control the types of deposit instruments our clients choose, we do influence
those choices with the rates and the deposit specials we offer. We constantly
monitor our funds position and evaluate the effect that various funding sources
have on our financial position.
Cash and cash equivalents were $1,010,468 at June 30, 2022 , as compared to
$1,605,488 at June 30, 2021 . Cash used in investing activities for the six
months ended June 30, 2022 was $1,087,213 , as compared to cash used in investing
activities of $100,321 for the six months ended June 30, 2021 . Proceeds from the
sale, maturity or call of securities within our investment portfolio were
$266,656 for the six months ended June 30, 2022 , as compared to $350,505 for the
same period in 2021. These proceeds were primarily reinvested into the
investment portfolio. Purchases of investment securities were $701,555 for the
first six months of 2022, as compared to $1,190,400 for the same period in 2021.
Cash used in financing activities for the six months ended June 30, 2022 was
$129,990 , as compared to cash provided by financing activities of $1,023,026 for
the same period in 2021. Deposits decreased $141,795 and increased $1,056,270
for the six months ended June 30, 2022 and 2021, respectively.
Restrictions on Bank Dividends, Loans and Advances
The Company's liquidity and capital resources, as well as its ability to pay dividends to its shareholders, are substantially dependent on the ability ofRenasant Bank to transfer funds to the Company in the form of dividends, loans and advances. UnderMississippi law, aMississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. AMississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of theMississippi Department of Banking and Consumer Finance (the "DBCF"). In addition, theFDIC also has the authority to prohibit the Bank from engaging in business practices that theFDIC considers to be unsafe or unsound, which, depending on the financial condition of the bank, could include the payment of dividends. Accordingly, the approval of the DBCF is required prior to the Bank paying dividends to the Company, and under certain circumstances the approval of theFDIC may be required. 77 -------------------------------------------------------------------------------- Table of ContentsFederal Reserve regulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. AtJune 30, 2022 , the maximum amount available for transfer from the Bank to the Company in the form of loans was$174,397 . The Company maintains a$3,000 line of credit collateralized by cash with the Bank. There were no amounts outstanding under this line of credit atJune 30, 2022 . These restrictions did not have any impact on the Company's ability to meet its cash obligations in the six months endedJune 30, 2022 , nor does management expect such restrictions to materially impact the Company's ability to meet its currently-anticipated cash obligations.
Loan Commitments and Other Off-Balance Sheet Arrangements
The Company enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies, including establishing a provision for credit losses on unfunded commitments. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management's credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent future cash requirements of the Company in that while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. The Company's unfunded loan commitments and standby letters of credit outstanding were as follows as of the dates presented:
June 30, 2022 December 31, 2021
Loan commitments $ 3,547,240 $ 3,104,940
Standby letters of credit 86,628 89,830
The Company closely monitors the amount of remaining future commitments to
borrowers in light of prevailing economic conditions and adjusts these
commitments and the provision related thereto as necessary. The Company will
continue this process as new commitments are entered into or existing
commitments are renewed. For a more detailed discussion related to the allowance
and provision for credit losses on unfunded loan commitments, refer to the "Risk
Management" section above.
The Company utilizes derivative financial instruments, including interest rate
contracts such as swaps, collars, 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. At June 30,
2022 , the Company had notional amounts of $197,253 on interest rate contracts
with corporate customers and $197,253 in offsetting interest rate contracts with
other financial institutions to mitigate the Company's rate exposure on its
corporate customers' contracts and certain fixed rate loans.
Additionally, the Company enters into interest rate lock commitments with its
customers to mitigate the interest rate risk associated with the commitments to
fund fixed-rate and adjustable rate residential mortgage loans and also enters
into forward commitments to sell residential mortgage loans to secondary market
investors.
The Company also enters into forward interest rate swap contracts on its FHLB
borrowings and its junior subordinated debentures that are accounted for as cash
flow hedges. Under each of these contracts, the Company pays a fixed rate of
interest and receives a variable rate of interest based on the three-month or
one-month LIBOR plus a predetermined spread. Additionally, the Company entered
into an interest rate collar on forecasted borrowings, which is accounted for as
a cash flow hedge. The collar hedging strategy stabilized interest rate
fluctuation by setting both a floor and a cap. The Company entered into an
interest rate swap contract on its subordinated notes that is accounted for as a
fair value hedge. Under this contract, the Company pays a variable rate of
interest based on the three-month LIBOR plus a predetermined spread and receives
a fixed rate of interest.
For more information about the Company's derivatives, see Note 10, "Derivative
Instruments," in the Notes to Consolidated Financial Statements of the Company
in Item 1, Financial Statements.
78
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Shareholders' Equity and Regulatory Matters
Total shareholders' equity of the Company was $2,116,877 at June 30, 2022
compared to $2,209,853 at December 31, 2021 . Book value per share was $37.85 and
$39.63 at June 30, 2022 and December 31, 2021 , respectively. The decrease in
shareholders' equity was attributable to changes in accumulated other
comprehensive income and dividends declared, partially offset by current period
earnings.
On October 26, 2021 , the Company's Board of Directors approved a new 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 new repurchase program will remain in
effect for one year or, if earlier, the repurchase of the entire amount of
common stock authorized to be repurchased. The Company did not repurchase any of
its common stock under the stock repurchase plan in the first six months of
2022.
The Company has junior subordinated debentures with a carrying value of $111,662
at June 30, 2022 , of which $108,071 is included in the Company's Tier 1 capital.
Federal Reserve guidelines limit the amount of securities that, similar to our
junior subordinated debentures, are includable in Tier 1 capital, but these
guidelines did not impact the debentures we include in Tier 1 capital at
June 30, 2022 . Although our existing junior subordinated debentures are
currently unaffected by these Federal 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 a
financial institution we exceed $15,000,000 in assets, or if we make any
acquisition of a financial institution 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 par value of
TheFederal Reserve , theFDIC and theOffice of the Comptroller of the Currency have issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications: 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%
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The following table provides the capital and risk-based capital and leverage
ratios for the Company and for
Minimum Capital Requirement to beMinimum Capital Adequately Requirement to be Capitalized
(including the Capital
Actual Well Capitalized Conservation Buffer)
Amount Ratio Amount Ratio Amount Ratio
June 30, 2022
Renasant Corporation :
Risk-based capital ratios:
Common equity tier 1 capital ratio $ 1,347,681 10.74 % $ 816,007 6.50 % $ 878,777 7.00 %
Tier 1 risk-based capital ratio 1,455,752 11.60 % 1,004,317 8.00 % 1,067,087 8.50 %
Total risk-based capital ratio 1,925,190 15.34 % 1,255,396 10.00 % 1,318,166 10.50 %
Leverage capital ratios:
Tier 1 leverage ratio 1,455,752 9.16 % 794,994 5.00 % 635,995 4.00 %
Renasant Bank:
Risk-based capital ratios:
Common equity tier 1 capital ratio $ 1,609,983 12.81 % $ 817,188 6.50 % $ 880,049 7.00 %
Tier 1 risk-based capital ratio 1,609,983 12.81 % 1,005,770 8.00 % 1,068,630 8.50 %
Total risk-based capital ratio 1,743,970 13.87 % 1,257,212 10.00 % 1,320,073 10.50 %
Leverage capital ratios:
Tier 1 leverage ratio 1,609,983 10.13 % 794,691 5.00 % 635,753 4.00 %
December 31, 2021
Renasant Corporation :
Risk-based capital ratios:
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 %
Leverage capital ratios:
Tier 1 leverage ratio 1,422,077 9.15 % 777,289 5.00 % 621,831 4.00 %
Renasant Bank:
Risk-based capital ratios:
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 %
Leverage capital ratios:
Tier 1 leverage ratio 1,580,904 10.18 % 776,700 5.00 % 621,360 4.00 %
The Company elected to take advantage of transitional relief offered by the
Federal Reserve and FDIC 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. The three-year transitional
period began on January 1, 2022 .
For more information regarding the capital adequacy guidelines applicable to the
Company and Renasant Bank , please refer to Note 15, "Regulatory Matters," in the
Notes to the Consolidated Financial Statements of the Company in Item 1,
Financial Statements.
Critical Accounting Estimates
We have identified certain accounting estimates that involve significant judgment and estimates which can have a material impact on our financial condition or results of operations. Our accounting policies are more fully described in Note 1,
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"Significant Accounting Policies," in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onFebruary 25, 2022 . Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. The critical accounting estimates that we believe to be the most critical in preparing our consolidated financial statements relate to allowance for credit losses and acquisition accounting, which are described under "Critical Accounting Policies and Estimates" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . SinceDecember 31, 2021 , there have been no material changes in these critical accounting estimates.
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), this document contains certain non-GAAP financial measures, namely, an adjusted efficiency ratio and the allowance for credit losses on loans to total loans, excluding PPP loans (the "adjusted allowance ratio"). The adjusted allowance ratio only excludes PPP loans; the adjusted efficiency ratio adjusts GAAP financial measures to exclude the amortization of intangible assets and certain items (such as, among others, merger and conversion related expenses, COVID-19 related expenses, restructuring benefit, and a recovery of a portion of the reserve for unfunded commitments, gains on sales of securities and asset valuation adjustments) with respect to which the Company is unable to accurately predict when these items will be incurred or, when incurred, the amount thereof. With respect to COVID-19 related expenses in particular, management added these expenses as a charge to exclude when calculating non-GAAP financial measures because the expenses included within this line item are readily quantifiable and possess the same characteristics with respect to management's inability to accurately predict the timing or amount thereof as the other items excluded when calculating non-GAAP financial measures. Management uses the adjusted efficiency ratio when evaluating capital utilization and adequacy, while it uses the adjusted allowance ratio to determine the adequacy of our allowance with respect to loans not fully guaranteed by theU.S. Small Business Administration . In addition, the Company believes that non-GAAP financial measures facilitate the making of period-to-period comparisons and are meaningful indicators of its operating performance, particularly because these measures are widely used by industry analysts for companies with merger and acquisition activities. Also, because the amortization of intangible assets and items such as restructuring charges and COVID-19 related expenses can vary extensively from company to company and, as to intangible assets, are excluded from the calculation of a financial institution's regulatory capital, the Company believes that the presentation of this non-GAAP financial information allows readers to more easily compare the Company's results to information provided in other regulatory reports and the results of other companies. The reconciliations from GAAP to non-GAAP for these financial measures are below. 81
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Adjusted Efficiency Ratio
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Interest income (fully tax equivalent basis) $ 125,226 $ 122,617 $ 237,171 $ 245,995
Interest expense 9,905 11,412 20,467 23,526
Net interest income (fully tax equivalent
basis) 115,321 111,205 216,704 222,469
Total noninterest income 37,214 47,610 74,672 128,647
Net gains on sales of securities - - - 1,357
MSR valuation adjustment - - - 13,561
Adjusted noninterest income 37,214 47,610 74,672 113,729
Total noninterest expense 98,194 108,777 192,299 224,712
Intangible amortization 1,310 1,539 2,676 3,137
Merger and conversion related expenses - - 687 -
Restructuring (benefit) charges 1,187 15 732 307
COVID-19 related expenses - 370 - 1,155
Recovery of unfunded commitments 450 - (100) -
Adjusted noninterest expense 95,247 106,853 188,304 220,113
Efficiency Ratio (GAAP) 64.37 % 68.49 % 66.00 % 64.00 %
Adjusted Efficiency Ratio (non-GAAP) 62.44 % 67.28 % 64.63 % 65.47 %
Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans
June 30, 2022 December 31, 2021
Total loans (GAAP) $ 10,603,744 $ 10,020,914
Less PPP loans 7,383 58,391
Adjusted total loans (non-GAAP) $ 10,596,361 Allowance for Credit Losses on Loans$ 166,131 $ 164,171 ACL/Total loans (GAAP) 1.57 % 1.64 % ACL/Total loans excluding PPP loans (non-GAAP) 1.57 % 1.65 % The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Readers of this Form 10-Q should note that, because there are no standard definitions for the calculations as well as the results, the Company's calculations may not be comparable to a similarly-titled measure presented by other companies. Also, there may be limits in the usefulness of this measure to readers of this document. As a result, the Company encourages readers to consider its consolidated financial statements and footnotes thereto in their entirety and not to rely on any single financial measure.
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