RENASANT CORPORATION (In Thousands, Except Share Data) The following discussion and analysis of our financial condition as ofDecember 31, 2020 and 2019 and results of operations for each of the years then ended should be read together with the cautionary language regarding forward-looking statements at the beginning of Part I of this Annual Report on Form 10-K and our consolidated financial statements and related notes included under Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, as well as Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which provides a discussion of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K. Performance Overview Net income was$83,651 for 2020 compared to$167,596 for 2019. Basic and diluted earnings per share ("EPS") were$1.49 and$1.48 , respectively, for 2020 compared to$2.89 and$2.88 , respectively, for 2019. AtDecember 31, 2020 , total assets increased to$14,929,612 from$13,400,618 atDecember 31, 2019 . The changes in our financial condition and results of operations from 2019 to 2020 were driven by a number of factors, the most prominent of which are highlighted below: Impact of and responses to COVID-19 - In response to the COVID-19 pandemic, the Company made
its branches accessible only by
appointment (with appointments generally being limited to services that required access
inside a branch). The Company reopened its branch lobbies to the public in October
2020, subject to capacity limitations, mask-wearing and social distancing requirements
designed to promote the safety of our clients and employees. The Company implemented
additional measures to minimize Company employees' exposure to COVID-19, such as
working remotely, reconfiguring work spaces to promote social distancing and adjusting
staff levels, all of which remain in place. The
Company incurred expenses of
2020 in connection with its response to the COVID-19 pandemic, primarily related to
employee overtime and other employee benefit costs as well as expenses associated with
supplying branches with protective equipment, sanitation supplies (such as floor
markings and cautionary signage for branches, face coverings and hand sanitizer) and
more frequent and rigorous branch cleaning. We expect that these elevated expenses will
continue into 2021 while challenges to growth persist
as
slowly recovers from the pandemic.
- The Company has been active in the Paycheck Protection Program ("PPP") and as of
December 31, 2020 , the balance of such loans included
in the Company's Consolidated
Balance Sheets was approximately $1,128,703 .
- In response to the economic environment caused by the COVID-19 pandemic, the Company
implemented a loan deferral program in the first quarter of 2020 to provide temporary
payment relief to both consumer and commercial customers. Any customer current on loan
payments, taxes and insurance is eligible for a 90-day deferral of principal and
interest payments. Principal and interest payments can be deferred for up to 180 days
on residential mortgage loans. A second deferral is available to customers that remain
current on taxes and insurance through the first deferral period and also satisfy
underwriting standards established by the Company. These standards analyze the ability
of the customer to service its loan in accordance with its existing terms in light of
the impact of the COVID-19 pandemic on the customer, its industry and the markets in
which it operates. The Company's loan deferral program complies with the guidance set
forth in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and
related guidance from the FDIC and other banking
regulators. At
Company had 906 loans (not in thousands) on deferral with an aggregate balance of
approximately $145,000 , or 1.5% of our loan portfolio (excluding PPP loans) by dollar
value. In accordance with the applicable guidance, none of these loans are considered
"restructured loans."
Financial Highlights
- Net interest income decreased 3.80% to $426,797 for
2020 as compared to
2019. The decrease from 2019 to 2020 was due to the decline in loan yields as a result
of the Federal Reserve's decision to cut interest rates in response to the COVID-19
pandemic, as well as changes in the mix of earning assets during the quarter due to
increased liquidity on the balance sheet, partially offset by a decline in our cost of
funds. The Company has continued to focus on lowering the cost of funding through both
growing noninterest-bearing deposits and aggressively lowering interest rates on
interest-bearing deposits.
- Net charge-offs as a percentage of average loans were 0.04% in 2020 and 2019. The
provision for credit losses was $86,850 (inclusive of
losses on deferred interest) for 2020 compared to
in provision expense year over year is attributable to the adoption of the current
expected credit loss model ("CECL") on January 1, 2020 and our response to the economic
uncertainty associated with the COVID-19 pandemic.
33
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- Noninterest income was
noninterest income is primarily attributable to the strong mortgage production due to the
current interest rate environment.
- Noninterest expense was
increase in noninterest expense is primarily attributable to increases in salaries and
employee benefits, which grew due to the strategic production hires the Company made
throughout its footprint during 2019 as well as increased mortgage commissions and
incentives related to the increased mortgage production during 2020. Salaries and employee
benefits for 2020 also includes approximately
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.
- Loans, net of unearned income, were
year. Excluding PPP loans of
2019. Noninterest bearing deposits averaged
2020 compared to
noninterest-bearing deposits across the Company's footprint during 2020 was driven by the
Company's PPP lending, other government stimulus and client sentiment to maintain
liquidity.
A historical look at key performance indicators is presented below.
2020 2019 2018
Diluted EPS $ 1.48 $ 2.88 $ 2.79
Diluted EPS Growth (48.61) % 3.23 % 42.35 %
Shareholders' equity to assets 14.29 % 15.86 % 15.80 %
Tangible shareholders' equity to tangible assets(1) 8.33 % 9.25 % 8.92 %
Return on Average Assets 0.58 %
1.30 % 1.32 %
Return on Average Tangible Assets(1) 0.66 %
1.46 % 1.47 %
Return on Average Shareholders' Equity 3.96 %
7.95 % 8.64 %
Return on Average Tangible Shareholders' Equity(1) 7.83 % 15.36 % 15.98 %
(1)These performance indicators are non-GAAP financial measures. A reconciliation of these financial measures from GAAP to non-GAAP as well as an explanation of why the Company provides these non-GAAP financial measures can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies Our financial statements are prepared using accounting estimates for various accounts. Wherever feasible, we utilize third-party information to provide management with estimates. Although independent third parties are engaged to assist us in the estimation process, management evaluates the results, challenges assumptions and considers other factors that could impact these estimates. We monitor the status of proposed and newly issued accounting standards to evaluate the impact (or potential impact) on our financial condition and results of operations or on the preparation of our financial statements. Our accounting policies, including the impact of newly issued accounting standards, are discussed in further detail in Note 1, "Significant Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. The following discussion details the accounting policies governing the significant estimates used in preparing our financial statements. Allowance for Credit Losses The accounting policy most important to the presentation of our financial statements relates to the allowance for credit losses and the related provision for credit losses. The allowance for credit losses is an estimate of expected losses inherent within the Company's loans held for investment portfolio and is maintained at a level believed adequate by management to absorb such expected credit losses, as prescribed by theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 326, "Financial Instruments - Credit Losses" ("ASC 326"). Management evaluates the adequacy of the allowance for credit losses on a quarterly basis. 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. 34 -------------------------------------------------------------------------------- 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 the Company's risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the markets in which the Company operates, 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 losses 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 estimating 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. •In determining the allowance for credit losses on loans evaluated on a collective basis, the Company categorizes loan pools based on loan type and/or risk rating. The Company uses two CECL models: (1) a loss rate model, based on average historical life-of-loan loss rates, which is used for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, and (2) for the C&I, Real Estate - Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool. The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit concentration, the nature and volume of the respective loan portfolio segments, and changes in lending or loan review staffing. External factors include current and reasonable and supportable forecasted economic conditions, the competitive environment 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 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 when the loan is 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. Prior to the adoption of ASC 326 onJanuary 1, 2020 , the appropriate level of the allowance was based on an ongoing analysis of the loan portfolio and represented an amount that management deemed adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, "Contingencies" ("ASC 450"), in our loan portfolio. Collective impairment was calculated based on loans grouped by grade. Another component of the allowance was losses on loans assessed as impaired under ASC 310, "Receivables" ("ASC 310"). The balance of the loans determined to be impaired under ASC 310 and the related allowance was included in management's estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance was sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. While no one factor was dominant, each could cause actual loan losses to differ materially from originally estimated amounts. 35 -------------------------------------------------------------------------------- For more information about our loan policies and procedures for addressing credit risk, please refer to the disclosures in this Item under the heading "Risk Management - Credit Risk and Allowance for Credit Losses." Business Combinations, Accounting for Purchased LoansThe Company accounts for its acquisitions under ASC 805, "Business Combinations," which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, liabilities assumed and non-controlling interest in the acquired company are recorded at fair value and recognized separately from goodwill. For a purchased asset that the Company has the intent of holding for investment, ASC 326 requires the Company to determine whether the asset has experienced more-than-insignificant deterioration in credit quality since origination. Assets that have experienced more-than insignificant deterioration are referred to as purchased credit deteriorated ("PCD") assets. ASC 326 provides for special initial recognition of PCD assets, commonly referred to as the "gross-up" approach, whereas the allowance for credit losses is recognized by adding it to the fair value to arrive at the Day 1 amortized cost basis. After initial recognition, the accounting for PCD assets will generally follow the credit loss model that applies to that type of asset. Non-PCD assets record the Day 1 allowance for credit losses through earnings on the date of purchase. The Company will accrete or amortize as interest income the fair value discounts on both PCD and non-PCD assets over the life of the asset. Prior to the adoption of ASC 326 onJanuary 1, 2020 , in regards to a purchased loan, no allowance for loan losses was recorded on the acquisition date because the fair value measurements incorporated assumptions regarding credit risk. This applied even to a purchased loan with evidence of credit deterioration since origination pursuant to ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Generally speaking, rather than carry over an allowance for loan losses, as part of the acquisition we established a "Day 1 Fair Value" of a purchased loan or pools of purchased loans sharing common risk characteristics, which was equal to the outstanding balance of a purchased loan or pool on the acquisition date less any credit and/or yield discount applied against the purchased loan or pool of loans. In other words, these loans or pools of loans were carried at values which represented our estimate of their future cash flows. After the acquisition date, a purchased loan or pool of loans either met or exceeded the performance expectations established in determining the Day 1 Fair Values or deteriorate from such expected performance which resulted in accelerated accretion or impairment recognized through the provision for loan losses. Additional details about our loans acquired in connection with our acquisitions is set forth below under the heading "Risk Management - Credit Risk and Allowance for Credit Losses" and in Note 4, "Purchased Loans" in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. Financial Condition The following discussion provides details regarding the changes in significant balance sheet accounts atDecember 31, 2020 compared toDecember 31, 2019 . Total assets were$14,929,612 atDecember 31, 2020 compared to$13,400,618 atDecember 31, 2019 . Securities The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio, atDecember 31 : 2020 2019 % of % of Balance Portfolio Balance Portfolio U.S. Treasury securities$ 7,079 0.53 %$ 499 0.04 % Obligations of otherU.S. Government agencies and corporations 1,009 0.08 2,531 0.20 Obligations of states and political subdivisions 305,201 22.72 223,131 17.29 Mortgage backed securities 955,549 71.13 998,101 77.33 Trust preferred securities 9,012 0.67 9,986 0.77 Other debt securities 65,607 4.88 56,365 4.37$ 1,343,457 100.01 %$ 1,290,613 100.00 % 36 -------------------------------------------------------------------------------- During 2020, we purchased$515,657 in investment securities, with mortgage backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprising approximately 73% of such purchases. CMOs are included in the "Mortgage backed securities" line item in the above table. The mortgage backed securities and CMOs held in our investment portfolio are issued by government sponsored entities. Obligations of state and political subdivisions comprised approximately 23% of purchases made during 2020. Other debt securities in our investment portfolio consist of corporate debt securities and issuances from theSmall Business Administration ("SBA"). The carrying value of securities sold during 2020 totaled$44,860 , resulting in a net gain of$46 , while proceeds from maturities and calls of securities during 2020 totaled$437,981 , which were primarily reinvested in the securities portfolio. During 2019, we purchased$492,018 in investment securities, with mortgage backed securities and CMOs, in the aggregate, comprising approximately 79% of such purchases. Obligations of state and political subdivisions comprised approximately 17% of the purchases made in 2019. The carrying value of securities sold during 2019 totaled$212,137 resulting in a net gain of$348 . Proceeds from maturities and calls of securities during 2019 totaled$262,287 , which were primarily reinvested in the securities portfolio. AtDecember 31, 2020 , unrealized losses of$3,215 were recorded on available for sale investment securities with a carrying value of$85,396 . AtDecember 31, 2019 , unrealized losses of$4,878 were recorded on available for sale securities with a carrying value of$364,723 . The Company does not intend to sell any of the securities in an unrealized loss position, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for a period greater than twelve months, the Company is collecting principal and interest payments from the respective securities as scheduled. As such, the Company did not record any impairment for the years endedDecember 31, 2020 and 2019 (determined in accordance with the accounting standards in effect prior to the Company's adoption of CECL). The following table sets forth the scheduled maturity distribution and weighted average yield based on the amortized cost of the debt securities in our investment portfolio as ofDecember 31, 2020 . Amount Yield Available for Sale:U.S. Treasury securities Maturing within one year or less$ 4,012 0.75 % Maturing after one year through five years 3,035 0.92 %
Obligations of other
Maturing within one year or less 1,003 1.48 %
Obligations of states and political subdivisions
Maturing within one year or less 4,423 3.65 % Maturing after one year through five years 40,851 3.43 % Maturing after five years through ten years 42,046 3.67 % Maturing after ten years 203,911 2.38 %
Trust preferred securities
Maturing after ten years 12,013 0.82 %
Other debt securities - corporate debt
Maturing after one year through five years 2,057 3.29 %
Maturing after five years through ten years 32,291 4.21 %
Residential mortgage backed securities not due at a single maturity
date:
Government agency MBS 581,105 2.26 %
Government agency CMO 218,373 1.68 %
Commercial mortgage backed securities not due at a single maturity
date:
Government agency MBS 29,053 3.75 %
Government agency CMO 99,377 3.85 %
Other debt securities not due at a single maturity date 28,423 3.59 %
$ 1,301,973 2.57 %
In the table above, weighted average yields on tax-exempt obligations have been
computed on a fully tax equivalent basis assuming a federal tax rate of 21% and
a state tax rate of 4.45%, which is net of federal tax benefit.
For more information about the Company's trust preferred securities, see Note 2, "Securities," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.
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Loans Held for Sale
Loans held for sale were $417,771 at December 31, 2020 compared to $318,272 at
December 31, 2019 . 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 entities, and the Company is obligated to sell the mortgages to such
investors only if the mortgages are closed and funded. The risk we assume is
conditioned upon loan underwriting and market conditions in the national
mortgage market. Under a "mandatory delivery" sales agreement, the Company
commits to deliver a certain principal amount of mortgage loans to an investor
at a specified price and delivery date. Penalties are paid to the investor if we
fail to satisfy the contract. Gains and losses are realized at the time
consideration is received and all other criteria for sales treatment have been
met. These loans are typically sold within 30-40 days after the loan is funded.
Although loan fees and some interest income are derived from mortgage loans held
for sale, the main source of income is gains from the sale of these loans in the
secondary market.
Loans
Loans, excluding loans held for sale, are the Company's most significant earning
asset, comprising 73.23% and 72.31% of total assets at December 31, 2020 and
2019, respectively. The tables below set forth the balance of loans outstanding
by loan type and the percentage of loans, by category, to total loans at
December 31 :
December 31, 2020
Total Percentage of Total
Non Purchased Purchased Loans Loans
Commercial, financial, agricultural (1) $ 2,360,471 $ 176,513 $ 2,536,984 23.20 %
Lease financing 75,862 - 75,862 0.69 %
Real estate - construction:
Residential 243,814 2,859 246,673 2.26 %
Commercial 583,338 28,093 611,431 5.59 %
Total real estate - construction 827,152 30,952 858,104 7.85 %
Real estate - 1-4 family mortgage:
Primary 1,536,181 214,770 1,750,951 16.01 %
Home equity 432,768 80,392 513,160 4.69 %
Rental/investment 264,436 31,928 296,364 2.71 %
Land development 123,179 14,654 137,833 1.26 %
Total real estate - 1-4 family mortgage 2,356,564 341,744 2,698,308 24.68 %
Real estate - commercial mortgage:
Owner-occupied 1,334,765 323,041 1,657,806 15.16 %
Non-owner occupied 2,194,739 552,728 2,747,467 25.13 %
Land development 120,125 29,454 149,579 1.37 %
Total real estate - commercial mortgage 3,649,629 905,223 4,554,852 41.66 %
Installment loans to individuals 149,862 59,675 209,537 1.92 %
Total loans, net of unearned income $ 9,419,540 $ 1,514,107 $ 10,933,647 100.00 %
(1)Includes PPP loans of
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December 31, 2019
Total Percentage of Total
Non Purchased Purchased Loans Loans
Commercial, financial, agricultural $ 1,052,353 $ 315,619 $ 1,367,972 14.12 %
Lease financing 81,875 - 81,875 0.84 %
Real estate - construction:
Residential 272,643 16,407 289,050 2.98 %
Commercial 502,258 35,175 537,433 5.55 %
Total real estate - construction 774,901 51,582 826,483 8.53 %
Real estate - 1-4 family mortgage:
Primary 1,449,219 332,729 1,781,948 18.39 %
Home equity 456,265 117,275 573,540 5.92 %
Rental/investment 291,931 43,169 335,100 3.46 %
Land development 152,711 23,314 176,025 1.82 %
Total real estate - 1-4 family mortgage 2,350,126 516,487 2,866,613 29.59 %
Real estate - commercial mortgage:
Owner-occupied 1,209,204 428,077 1,637,281 16.90 %
Non-owner occupied 1,803,587 647,308 2,450,895 25.29 %
Land development 116,085 40,004 156,089 1.61 %
Total real estate - commercial mortgage 3,128,876 1,115,389 4,244,265 43.80 %
Installment loans to individuals 199,843 102,587 302,430 3.12 %
Total loans, net of unearned income $ 7,587,974 $ 2,101,664 $ 9,689,638 100.00 %
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. At December 31, 2020 , there
were no concentrations of loans exceeding 10% of total loans other than loans
disclosed in the table above.
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The following table sets forth loans held for investment, net of unearned
income, outstanding at December 31, 2020 , which, based on remaining
contractually-scheduled repayments of principal, are due in the periods
indicated. Loans with balloon payments and longer amortizations are often
repriced and extended beyond the initial maturity when credit conditions remain
satisfactory. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported below as due in one year or less.
See "Risk Management - Credit Risk and Allowance for Credit Losses" in this
Item 7 for information regarding the risk elements applicable to, and a summary
of our loan loss experience with respect to, the loans in each of the categories
listed below.
After Five Years
After One Year Through Fifteen After Fifteen
One Year or Less Through Five Years Years Years Total
Commercial, financial,
agricultural (1) $ 797,384 $ 1,632,374 $ 106,879 $ 347 $ 2,536,984
Lease financing, net of unearned
income 5,985 50,033 19,844 - 75,862
Real estate - construction:
Residential 195,999 4,099 33,684 12,891 246,673
Commercial 418,800 151,517 41,114 - 611,431
Total real estate - construction 614,799 155,616 74,798 12,891 858,104
Real estate - 1-4 family mortgage:
Primary 189,038 416,288 808,805 336,820 1,750,951
Home equity 480,757 19,633 6,956 5,814 513,160
Rental/investment 68,715 198,744 28,644 261 296,364
Land development 113,126 23,840 867 - 137,833
Total real estate - 1-4 family
mortgage 851,636 658,505 845,272 342,895 2,698,308
Real estate - commercial mortgage:
Owner-occupied 341,669 859,220 454,948 1,969 1,657,806
Non-owner occupied 1,026,615 1,347,536 373,242 74 2,747,467
Land development 65,838 80,142 3,599 - 149,579
Total real estate - commercial
mortgage 1,434,122 2,286,898 831,789 2,043 4,554,852
Installment loans to individuals 35,319 71,206 101,541 1,471 209,537 Total loans, net of unearned income$ 3,739,245 $ 4,854,632$ 1,980,123 $ 359,647 $ 10,933,647
(1)Includes PPP loans of
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The following table sets forth the fixed and variable rate loans maturing or
scheduled to reprice after one year as of
Interest Sensitivity
Fixed Variable
Rate Rate
Commercial, financial, agricultural
-
Real estate - construction:
Residential 11,276 39,398
Commercial 125,402 67,229
Total real estate - construction 136,678 106,627
Real estate - 1-4 family mortgage:
Primary 482,888 1,079,025
Home equity 6,699 25,703
Rental/investment 215,757 11,892
Land development 21,870 2,837
Total real estate - 1-4 family mortgage 727,214 1,119,457 Real estate - commercial mortgage: Owner-occupied
1,181,283 134,854
Non-owner occupied 1,422,919 297,933
Land development 64,680 19,061
Total real estate - commercial mortgage 2,668,882 451,848 Installment loans to individuals
169,538 4,682
Total loans, net of unearned income
Deposits
Noninterest-Bearing Deposits to Total Deposits
2020 2019
30.56% 24.99%
The Company relies on deposits as its major source of funds. Total deposits were
$12,059,081 and $10,213,168 at December 31, 2020 and 2019, respectively.
Noninterest-bearing deposits were $3,685,048 and $2,551,770 at December 31, 2020
and 2019, respectively, while interest-bearing deposits were $8,374,033 and
$7,661,398 at December 31, 2020 and 2019, respectively. The growth in
noninterest-bearing deposits across the Company's footprint during 2020 was
driven by the Company's PPP lending, other government stimulus and client
sentiment to maintain liquidity.
Management continues to focus on growing and maintaining a stable source of
funding, specifically noninterest-bearing deposits and other core deposits.
Non-interest bearing deposits increased to 30.56% of total deposits at
December 31, 2020 , as compared to 24.99% of total deposits at December 31, 2019 .
Under certain circumstances, however, management may elect to acquire non-core
deposits in the form of time deposits or public fund deposits (which are
deposits of counties, municipalities or other political subdivisions). The
source of funds that we select depends on the terms and how those terms assist
us in mitigating interest rate risk, maintaining our liquidity position and
managing our net interest margin. Accordingly, funds are acquired to meet
anticipated funding needs at the rate and with other terms that, in management's
view, best address our interest rate risk, liquidity and net interest margin
parameters.
Public fund deposits may be readily obtained based on the Company's pricing bid
in comparison with competitors. Since 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 core deposits to
reduce reliance on public fund deposits, we participate in the bidding process
for these deposits when pricing and other terms make it reasonable under the
circumstances given market conditions or when management perceives that other
factors, such as the public entity's use of our treasury management or
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other products and services, make such participation advisable. Our public fund
transaction accounts are principally obtained from municipalities including
school boards and utilities. Public fund deposits at December 31, 2020 were
$1,398,330 compared to $1,367,827 at December 31, 2019 .
Deposits that are in excess of the FDIC insurance limit (or similar state
deposit insurance limits) and that are otherwise uninsured were $3,348,376 and
$2,444,774 at December 31, 2020 and 2019, respectively. The following table
shows the maturity of time deposits at December 31, 2020 that are in excess of
the FDIC insurance limit (or similar state deposit insurance limits) and that
are otherwise uninsured:
Three Months or Less $ 116,417
Over Three through Six Months 50,202
Over Six through Twelve Months 132,184
Over 12 Months 108,959
$ 407,762
Borrowed Funds
Total borrowings include federal funds purchased, securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank ("FHLB"),
subordinated notes and junior subordinated debentures and are classified on the
Consolidated Balance Sheets as either short-term borrowings or long-term debt.
Short-term borrowings have original maturities less than one year and typically
include federal funds purchased, securities sold under agreements to repurchase,
and short-term FHLB advances. During 2020, we used the proceeds of our deposit
growth and other sources of liquidity to substantially reduce our short-term
borrowings. The following table presents our short-term borrowings by type at
December 31 :
2020 2019
Balance Balance
Security repurchase agreements $ 10,947 $ 9,091
Federal funds purchased 10,393 -
Short-term borrowings from the FHLB - 480,000
$ 21,340 $ 489,091
At December 31, 2020 , long-term debt consists of long-term FHLB advances, our
junior subordinated debentures and our subordinated notes. The following table
presents our long-term debt by type at December 31 :
2020 2019
Balance Balance
Long-term FHLB advances $ 152,167 $ 152,337
Junior subordinated debentures 110,794 110,215
Subordinated notes 212,009 113,955
$ 474,970 $ 376,507
Long-term FHLB borrowings are used to match-fund against large, fixed rate
commercial or real estate loans with long-term maturities, which helps mitigate
interest rate exposure when rates rise. In the fourth quarter of 2019, however,
as interest rates declined following the Federal Reserve's interest rate cuts,
we used long-term FHLB borrowings as a source of liquidity in lieu of
higher-costing deposits, which had not repriced as quickly following the
interest rate cuts. At December 31, 2020 , there were $100 in long-term FHLB
advances outstanding scheduled to mature within twelve months or less. The
Company had $3,784,520 of availability on unused lines of credit with the FHLB
at December 31, 2020 compared to $3,159,942 at December 31, 2019 . The
weighted-average interest rates on outstanding advances at December 31, 2020 and
2019 were 0.05% and 1.53%, respectively.
On September 3, 2020 , the Company completed the public offering and sale of
$100,000 of its 4.50% fixed-to-floating rate subordinated notes due September 1,
2035 . The subordinated notes were sold at par, resulting in net proceeds, after
deducting underwriting discounts and offering expenses, of approximately
$98,266 . The Company intends to use the net proceeds from this offering for
general corporate purposes, which may include providing capital to support the
Company's organic growth or
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growth through strategic acquisitions, repaying indebtedness, financing
investments, capital expenditures or for investments in Renasant Bank as
regulatory capital.
The Company owns other subordinated notes, the proceeds of which have been used
for general corporate purposes similar to those described above. The
subordinated notes qualify as Tier 2 capital under the current regulatory
guidelines.
The Company owns the outstanding common securities of business trusts that
issued corporation-obligated mandatorily redeemable preferred capital securities
to third-party investors. The trusts used the proceeds from the issuance of
their preferred capital securities and common securities (collectively referred
to as "capital securities") to buy floating rate junior subordinated debentures
issued by the Company (or by companies that the Company subsequently acquired).
The debentures are the trusts' only assets and interest payments from the
debentures finance the distributions paid on the capital securities.
For more information about the terms and conditions of the Company's junior
subordinated debentures and subordinated notes, see Note 12, "Long-Term Debt,"
in the Notes to the Consolidated Financial Statements in Item 8, Financial
Statements and Supplementary Data, in this report.
Results of Operations
Net Income
Net income for the year ended December 31, 2020 was $83,651 compared to net
income of $167,596 for the year ended December 31, 2019 . Basic earnings per
share for the year ended December 31, 2020 was $1.49 as compared to $2.89 for
the year ended December 31, 2019 . Diluted earnings per share for the year ended
December 31, 2020 was $1.48 as compared to $2.88 for the year ended December 31,
2019 .
From time to time, the Company incurs expenses and charges in connection with
certain transactions with respect to which management is unable to accurately
predict when these expenses or charges will be incurred or, when incurred, the
amount of such expenses or charges. The following table presents the impact of
these expenses and charges on reported EPS for the dates presented. The
"COVID-19 related expenses" line item in the table below primarily consists of
(a) employee overtime and employee benefit accruals directly related to the
Company's response to both the COVID-19 pandemic itself and federal legislation
enacted to address the pandemic, such as the CARES Act, and (b) expenses
associated with supplying branches with protective equipment, sanitation
supplies (such as floor markings and cautionary signage for branches, face
coverings and hand sanitizer) and more frequent and rigorous branch cleaning.
The mortgage servicing rights ("MSR") valuation adjustment is discussed below
under the "Noninterest Income" heading and the restructuring charges and swap
termination charges are discussed below under the "Noninterest Expense" heading
in this Item.
Twelve Months Ended
2020 2019
Impact to Impact to
Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS MSR valuation adjustment
$ 11,726 $ 9,450
10,343 8,336 0.14 - - -
Restructuring charges 7,365 5,936 0.11 - - -
Swap termination charges 2,040 1,644 0.03 - - -
Debt prepayment penalty 121 97 - 54 41 -
Merger and conversion expenses - - - 279 216 -
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 64.80% of total net revenue in 2020. Total net revenue
consists of net interest income on a fully taxable equivalent basis and
noninterest income. The primary concerns in managing net interest income are the
volume, mix and repricing of assets and liabilities.
Net interest income decreased 3.80% to $426,797 for 2020 compared to $443,657 in
2019. On a tax equivalent basis, net interest income decreased $16,304 to
$433,682 in 2020 as compared to $449,986 in 2019. Net interest margin was 3.44%
for 2020 as compared to 4.08% for 2019.
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The following table sets forth the daily average balance sheet data, including
all major categories of interest-earning assets and interest-bearing
liabilities, together with the interest earned or interest paid and the average
yield or average rate on each such category for the years ended December 31,
2020 , 2019 and 2018:
2020 2019 2018
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans:
Non purchased(1) $ 7,927,817 $ 333,296 4.20 % $ 6,784,132 $ 337,672 4.98 % $ 6,019,177 $ 286,643 4.76 %
Purchased 1,807,354 101,785 5.63 % 2,384,423 149,568 6.27 % 2,162,410 132,199 6.11 %
Paycheck Protection Program 858,385 23,605 2.75 % - - - % - - - %
Total Loans 10,593,556 458,686 4.33 % 9,168,555 487,240 5.31 % 8,181,587 418,842 5.12 %
Loans held for sale 361,391 12,191 3.37 % 358,735 18,171 5.07 % 270,270 12,892 4.77 %
Securities:
Taxable(2) 1,021,999 24,102 2.36 % 1,051,124 29,786 2.83 % 844,692 23,713 2.81 %
Tax-exempt 259,705 8,848 3.41 % 193,252 7,821 4.05 % 217,190 9,232 4.25 %
Total securities 1,281,704 32,950 2.57 % 1,244,376 37,607 3.02 % 1,061,882 32,945 3.10 %
Interest-bearing balances with banks 385,810 1,190 0.31 % 256,374 5,891 2.30 % 148,677 3,076 2.07 %
Total interest-earning assets 12,622,461 505,017 4.00 % 11,028,040 548,909 4.98 % 9,662,416 467,755 4.84 %
Cash and due from banks 201,815 179,991 163,286
Intangible assets 973,287 976,065 747,008
Other assets 705,886 691,890 531,857
Total assets $ 14,503,449 $ 12,875,986 $ 11,104,567
Liabilities and shareholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand(3) $ 5,277,374 $ 23,995 0.45 % $ 4,754,201 $ 40,991 0.86 % $ 4,246,585 $ 23,678 0.56 %
Savings deposits 764,146 758 0.10 % 647,271 1,258 0.19 % 596,990 868 0.15 %
Time deposits 1,952,213 29,263 1.50 % 2,320,775 39,746 1.71 % 2,040,675 25,214 1.24 %
Total interest-bearing deposits 7,993,733 54,016 0.68 % 7,722,247 81,995 1.06 % 6,884,250 49,760 0.72 %
Borrowed funds 765,769 17,319 2.26 % 405,975 16,928 4.17 % 388,077 15,569 4.01 %
Total interest-bearing liabilities 8,759,502 71,335 0.81 % 8,128,222 98,923 1.22 % 7,272,327 65,329 0.90 %
Noninterest-bearing deposits 3,391,619 2,463,436 2,036,754
Other liabilities 237,738 176,496 94,152
Shareholders' equity 2,114,590 2,107,832 1,701,334
Total liabilities and shareholders' equity $ 14,503,449 $ 12,875,986 $ 11,104,567
Net interest income/ net interest margin $ 433,682 3.44 % $ 449,986 4.08 % $ 402,426 4.16 %
(1)Shown net of unearned income.
(2)U.S. Government and some U.S. Government Agency securities are tax-exempt in
the states in which we operate.
(3)Interest-bearing demand deposits include interest-bearing transactional
accounts and money market deposits.
The daily average balances of nonaccruing assets are included in the foregoing
table. Interest income and weighted average yields on tax-exempt loans and
securities have been computed on a fully tax equivalent basis assuming a federal
tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax
benefit.
Net interest income and net interest margin are influenced by internal and
external factors. Internal factors include balance sheet changes in volume and
mix as well as loan and deposit pricing decisions. External factors include
changes in market interest rates, competition and the shape of the interest rate
yield curve. As discussed in more detail below, the decline in loan yields as a
result of the Federal Reserve's decision to cut interest rates in response to
the COVID-19 pandemic, as well as changes in the mix of earning assets during
the year due to increased liquidity on the balance sheet, were the largest
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contributing factors to the decrease in net interest income. The Company has
continued to focus on lowering the cost of funding through growing
noninterest-bearing deposits and aggressively lowering interest rates on
interest-bearing deposits.
The following table sets forth a summary of the changes in interest earned, on a
tax equivalent basis, and interest paid resulting from changes in volume and
rates for the Company for the years indicated. Information is provided in each
category with respect to changes attributable to (1) changes in volume (changes
in volume multiplied by prior yield/rate); (2) changes in yield/rate (changes in
yield/rate multiplied by prior volume); and (3) changes in both yield/rate and
volume (changes in yield/rate multiplied by changes in volume). The changes
attributable to the combined impact of yield/rate and volume have been allocated
on a pro-rata basis using the absolute ratio value of amounts calculated.
2020 Compared to 2019 2019 Compared to 2018
Volume Rate Net Volume Rate Net
Interest income:
Loans:
Not purchased $ 52,323 $ (56,699) $ (4,376) $ 37,643 $ 13,386 $ 51,029
Purchased (33,597) (14,186) (47,783) 13,855 3,514 17,369
Paycheck Protection Program 23,605 - 23,605 - - -
Loans held for sale 134 (6,114) (5,980) 4,068 1,211 5,279
Securities:
Taxable (806) (4,878) (5,684) 5,848 225 6,073
Tax-exempt 2,398 (1,371) 1,027 (984) (427) (1,411)
Interest-bearing balances with banks 2,026 (6,727) (4,701) 2,442 373 2,815
Total interest-earning assets 46,083 (89,975) (43,892) 62,872 18,282 81,154
Interest expense:
Interest-bearing demand deposits 4,108 (21,104) (16,996) 3,108 14,205 17,313
Savings deposits 197 (697) (500) 78 312 390
Time deposits (5,871) (4,612) (10,483) 3,811 10,721 14,532
Borrowed funds 10,475 (10,084) 391 733 626 1,359
Total interest-bearing liabilities 8,909 (36,497) (27,588) 7,730 25,864 33,594
Change in net interest income $ 37,174 $ (53,478) The daily average balances of nonaccruing assets are included in the foregoing table. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit. Interest income, on a tax equivalent basis, was$505,017 for 2020 compared to$548,909 for 2019, a decrease of$43,892 . The following table presents the percentage of total average earning assets, by type and yield, for 2020 and 2019: Percentage of Total Yield 2020 2019 2020 2019 Loans held for investment excluding PPP loans 77.13 % 83.15 % 4.47 % 5.31 % Paycheck Protection Program 6.80 - 2.75 - Loans held for sale 2.86 3.25 3.37 5.07 Securities 10.15 11.28 2.57 3.02 Interest-bearing balances with banks 3.06 2.32 0.31 2.30 Total earning assets 100.00 % 100.00 % 4.00 % 4.98 % In 2020, interest income on loans held for investment, on a tax equivalent basis, decreased$28,554 to$458,686 from$487,240 in 2019. Interest income on loans held for investment decreased primarily due to decreases in loan yields in response to theFederal Reserve's rate cuts and the funding of PPP loans during the year, which by law bear a fixed interest rate of 1.0%, significantly lower than the yield on loans originated in the ordinary course of business. During 2020, interest income attributable to PPP loans included in loan interest income was$23,605 , which consisted of$8,729 in interest income and$14,876 in accretion of net origination fees. The PPP origination fees, net of agent fees paid and other origination costs, are being accreted into interest income over the life of the loan. 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 45 -------------------------------------------------------------------------------- of such loan as of the date of the final forgiveness determination. PPP loans reduced margin and loan yield by 5 basis points and 13 basis points, respectively, during 2020. Interest income on loans held for sale, on a tax equivalent basis, decreased$5,980 to$12,191 in 2020 from$18,171 in 2019. This decrease is primarily due to the decline in interest rates in 2020, as well as the impact of the portfolio of non-mortgage consumer loans that was classified as held for sale until the third quarter of 2019 when the portfolio was reclassified to loans held for investment. The transfer of the higher earning assets out of loans held for sale coupled with the lower rates earned on mortgage loans held for sale during 2020 accounts for the decrease in interest income on loans held for sale from 2019. The following table presents reported taxable equivalent yield on loans for the periods presented: Twelve months ended December 31, 2020 2019 Taxable equivalent interest income on loans $ 470,877$ 505,411 Average loans, including loans held for sale$ 10,954,947 $ 9,527,290 Loan yield 4.30 % 5.30 % The impact from interest income collected on problem loans and purchase accounting adjustments on purchased loans to total interest income on loans, loan yield and net interest margin is shown in the table below for the periods presented: Twelve months ended December 31, 2020 2019 Net interest income collected on problem loans $ 1,011$ 4,042 Accretable yield recognized on purchased loans(1) 19,248 27,227 Total impact to interest income on loans$ 20,259 $ 31,269 Impact to total loan yield 0.18 % 0.33 % Impact to net interest margin 0.16 % 0.28 % (1)Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of$8,077 and$14,635 for the twelve months endedDecember 31, 2020 and 2019, respectively, which increased loan yield by 7 basis points and 15 basis points, respectively, for 2020 and 2019. In 2020, investment income, on a tax equivalent basis, decreased$4,657 to$32,950 from$37,607 in 2019. The following table presents the taxable equivalent yield on securities for the periods presented: Twelve
months ended
2020 2019
Taxable equivalent interest income on securities $ 32,950 $ 37,607
Average securities $ 1,281,704 $ 1,244,376
Taxable equivalent yield on securities 2.57 % 3.02 %
Although the average balance in the investment portfolio slightly increased in
2020 as compared to 2019, the tax equivalent yield on securities was down, and
as a result, investment income, on a tax equivalent basis, decreased in 2020.
The decrease in taxable equivalent yield on securities was a result of an
increase in premium amortization caused by the increase in prepayment speeds
experienced in the Company's mortgage backed securities portfolio given the
current interest rate environment.
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Interest expense was $71,335 in 2020 compared to $98,923 in 2019. The following
table presents, by type, the Company's funding sources, which consist of total
average deposits and borrowed funds, and the total cost of each funding source
for each of the years presented:
Percentage of Total Cost of Funds
2020 2019 2020 2019
Noninterest-bearing demand 27.91 % 23.26 % - % - %
Interest-bearing demand 43.43 44.89 0.45 0.86
Savings 6.29 6.11 0.10 0.19
Time deposits 16.07 21.91 1.50 1.71
Short-term borrowings 2.94 1.17 1.07 2.43
Long-term Federal Home Loan Bank advances 1.25 0.35 0.61 1.51
Subordinated notes 1.20 1.27 5.28 6.24
Other long-term borrowed funds 0.91 1.04 4.40 4.48
Total deposits and borrowed funds 100.00 % 100.00 % 0.59 % 0.93 %
Interest expense on deposits was $54,016 and $81,995 for 2020 and 2019,
respectively. The cost of total deposits was 0.47% and 0.81% for the years
ending December 31, 2020 and 2019, respectively. The cost of interest-bearing
deposits was 0.68% and 1.06% for the same periods. The decrease in both deposit
expense and cost is attributable to the Company's efforts to reduce deposit
rates in order to mitigate the effect of the Federal Reserve's rate cuts on the
Company's loan yields. During 2020, the Company continued its efforts to grow
non-interest bearing deposits, with the growth in non-interest bearing deposits
during the year being primarily driven by the Company's PPP lending, other
government stimulus and client sentiment. Low cost deposits continue to be the
preferred choice of funding; however, the Company may rely on wholesale
borrowings when rates are advantageous.
Interest expense on total borrowings was $17,319 and $16,928 for the years
ending December 31, 2020 and 2019, respectively, while the cost of total
borrowings was 2.26% and 4.17% for the years ended December 31, 2020 and 2019,
respectively. The increase in interest expense as a result of higher average
borrowings was offset by lower interest rates charged on our FHLB advances
during 2020. As previously mentioned, the Company also issued $100,000 of its
fixed-to-floating rate subordinated notes during the year.
A more detailed discussion of the cost of our funding sources is set forth below
under the heading "Liquidity and Capital Resources" in this item. For more
information about our outstanding subordinated notes and junior subordinated
debentures, see Note 12, "Long-Term Debt," in the Notes to Consolidated
Financial Statements in Item 8, Financial Statements and Supplementary Data, in
this report.
Noninterest Income
Noninterest Income to Average Assets
(Excludes securities gains/losses)
2020 2019
1.62% 1.19%
Total noninterest income includes fees generated from deposit services and other
fees and commissions, income from our insurance, wealth management and mortgage
banking operations, realized gains on the sale of securities and all other
noninterest income. Our focus is to develop and enhance our products that
generate noninterest income in order to diversify our revenue sources.
Noninterest income as a percentage of total net revenues was 35.20% and 25.41%
for 2020 and 2019, respectively. Noninterest income was $235,532 for the year
ended December 31, 2020 , an increase of $82,278 , or 53.69%, as compared to
$153,254 for 2019. The increase during the year was driven by strong mortgage
banking production due to the historically low mortgage interest rates.
Service charges on deposit accounts include maintenance fees on accounts, per
item charges, account enhancement charges for additional packaged benefits and
overdraft fees. Service charges on deposit accounts were $31,326 and $35,972 for
the twelve months ended December 31, 2020 and 2019, respectively. Overdraft
fees, the largest component of service charges on deposits, decreased to $18,597
for the twelve months ended December 31, 2020 compared to $23,097 for the same
period in 2019. Management believes the decrease in 2020 relative to 2019 can be
attributed to excess customer liquidity driven by the various government
stimulus programs initiated in response to the COVID-19 pandemic as well as an
overall decrease in consumer
47
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spending as shelter-in-place orders and similar government restrictions were
imposed across the country due to the COVID-19 pandemic.
Fees and commissions decreased to $13,043 in 2020 as compared to $19,430 for the
same period in 2019. Fees and commissions include fees related to deposit
services, such as ATM fees and interchange fees on debit card transactions.
Interchange fees on debit card transactions, the largest component of fees and
commissions, were $8,979 for the twelve months ended December 31, 2020 compared
to $15,352 for the same period in 2019. Effective July 1, 2019 , we became
subject to the limitations on interchange fees imposed pursuant to the Durbin
Amendment. The Durbin Amendment limitations reduced interchange fees by
approximately $12,000 during 2020 and $6,000 over the last half of 2019.
Through Renasant Insurance , we offer a range of commercial and personal
insurance products through major insurance carriers. Income earned on insurance
products was $8,990 and $8,919 for the years ended December 31, 2020 and 2019,
respectively. Contingency income is a bonus received from the insurance
underwriters and is based both on commission income and claims experience on our
clients' policies during the previous year. Increases and decreases in
contingency income are reflective of corresponding increases and decreases in
the amount of claims paid by insurance carriers. Contingency income, which is
included in the "Other noninterest income" line item on the Consolidated
Statements of Income, was $934 and $828 for 2020 and 2019, 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 $16,504 for 2020 compared to $14,433 for 2019. The market
value of assets under management or administration was $4,196,072 and $3,888,253
at December 31, 2020 and 2019, respectively.
Mortgage banking income is derived from the origination and sale of mortgage
loans and the servicing of mortgage loans that the Company has sold but retained
the right to service. Although loan fees and some interest income are derived
from mortgage loans held for sale, the main source of income is gains from the
sale of these loans in the secondary market. Originations of mortgage loans to
be sold totaled $4,479,421 in 2020 and $2,381,178 in 2019. The increase in
mortgage loan originations is due to the current interest rate environment.
Mortgage banking income, was negatively impacted during 2020 and 2019 by a
mortgage servicing rights valuation adjustment of $11,726 and $1,836 , as actual
prepayment speeds of the mortgages the Company serviced exceeded the Company's
estimates of prepayment speeds.
The following table presents the components of mortgage banking income included
in noninterest income at December 31 :
2020 2019
Gain on sales of loans, net $ 150,406 $ 45,854
Fees, net 18,914 11,385
Mortgage servicing income, net (7,095) 2,493
MSR valuation adjustment (11,726) (1,836)
Mortgage banking income, net $ 150,499 $ 57,896
Noninterest income for the twelve months ended December 31, 2020 includes the
Company's net gains on sale of securities of $46 , as the Company sold securities
with a carrying value $44,860 at the time of sale for net proceeds of $44,906 .
Gains on sales of securities for the twelve months ended 2019 were $348 ,
resulting from the sale of approximately $212,137 in securities. For more
information on securities sold during the two year period ended December 31,
2020 , see Note 2, "Securities," in the Notes to Consolidated Financial
Statements in Item 8, Financial Statements and Supplementary Data, in this
report.
Bank-owned life insurance ("BOLI") income is derived from changes in the cash
surrender value of the bank-owned life insurance policies and can fluctuate upon
the collection of death benefit proceeds. BOLI income decreased to $5,627 in
2020 as compared to $6,109 for the same period in 2019.
In addition to the contingency income described above, other noninterest income
includes income from our SBA banking division, and other miscellaneous income
and can fluctuate based on the claims experience in our Insurance agency, SBA
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production and recognition of other nonseasonal income items. Other noninterest
income was
Noninterest Expense to Average Assets
2020 2019
3.25% 2.91%
Noninterest expense was $471,988 and $374,174 for 2020 and 2019, respectively.
As mentioned previously, the Company incurred expenses in connection with
certain transactions with respect to which management is unable to accurately
predict when these expenses will be incurred or, when incurred, the amount of
such expenses. The following table presents these expenses for the periods
presented:
Twelve Months Ended December 31,
2020 2019
COVID-19 related expenses $ 10,343 $ -
Restructuring charges 7,365 -
Swap termination charges 2,040 -
Debt prepayment penalty 121 54
Merger and conversion expenses - 279
As part of a continued focus on efficiency, the Company initiated a system-wide branch evaluation effort and offered a voluntary early retirement window program. The Company incurred$7,365 in restructuring charges related to these initiatives, which are expected to allow for a more efficient use of the Company's workforce and branch network moving forward. The Company also incurred a$2,040 charge to terminate two swaps, which will reduce interest expense over the remaining terms of the swaps, which were originally scheduled to mature inJune 2022 and 2023. Salaries and employee benefits is the largest component of noninterest expense and represented 64.07% and 67.02% of total noninterest expense atDecember 31, 2020 and 2019, respectively. During 2020, salaries and employee benefits increased$51,604 , or 20.58%, to$302,388 as compared to$250,784 for 2019. The increase in salaries and employee benefits is primarily due to the strategic production hires the Company made throughout its footprint during 2019, as well as increased mortgage commissions and incentives related to the increased mortgage production during 2020. Salaries and employee benefits for 2020 also includes approximately$8,237 in expense related to employee overtime and employee benefit accruals directly related to the Company's response to both the COVID-19 pandemic itself and federal legislation enacted to address the pandemic, such as the CARES Act. Compensation expense recorded in connection with awards of restricted stock, which is included within salaries and employee benefits, was$9,910 and$9,456 for 2020 and 2019, respectively. A portion of the restricted stock awards in both years was subject to the satisfaction of performance-based conditions. Data processing costs increased$1,006 to$20,685 in 2020 from$19,679 in 2019. The Company continues to examine new and existing contracts to negotiate favorable terms to offset the increased variable cost components of our data processing costs, such as new accounts and increased transaction volume. Net occupancy and equipment expense in 2020 was$54,080 , an increase of$4,527 , compared to$49,553 for 2019. Aside from the increase attributable to the additional locations added during 2019, the increase in net occupancy and equipment expense is also attributable to investments in our IT infrastructure in response to banking and governmental regulation and increased global risk from cyber security breaches. Expenses related to other real estate owned for 2020 were$2,754 , compared to$2,013 in 2019. Expenses on other real estate owned for 2020 include write downs of$2,160 of the carrying value to fair value on certain pieces of property held in other real estate owned compared to write downs of$1,265 in 2019. Other real estate owned with a cost basis of$8,415 was sold during 2020, resulting in a net gain of$23 , compared to other real estate owned with a cost basis of$6,498 sold during 2019 for a net loss of$94 . Professional fees include fees for legal and accounting services, such as routine litigation matters, external audit services as well as assistance in complying with newly-enacted and existing banking and governmental regulation. Professional fees were$11,293 for 2020 as compared to$10,166 for 2019. 49 -------------------------------------------------------------------------------- Advertising and public relations expense was$10,322 for 2020, a decrease of$1,285 compared to$11,607 for 2019. The decrease is primarily attributable to a reduction in sponsorship spending, as the COVID-19 pandemic has limited sporting and other public events. Amortization of intangible assets totaled$7,121 for 2020 compared to$8,105 for 2019. This amortization relates to finite-lived intangible assets which are being amortized over the useful lives as determined at acquisition. These finite-lived intangible assets have remaining estimated useful lives ranging from approximately 2 months to approximately 9 years. Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were$8,866 for 2020 as compared to$8,858 for 2019. 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$44,953 for 2020 as compared to$13,076 for 2019. The provision for unfunded commitments was$9,200 for 2020. No such provision was included in other noninterest expense for 2019. Also included in noninterest expense for 2020 were$2,106 in expenses incurred to supply our branches with protective equipment, sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) and more frequent and rigorous branch cleaning in response to the COVID-19 pandemic. Efficiency Ratio Efficiency Ratio 2020 2019 Efficiency ratio (GAAP) 70.53% 62.03% Adjusted efficiency ratio (Non-GAAP) (1) 64.00% 60.48% (1) Adjusted efficiency ratio is a non-GAAP financial measure. A reconciliation of this financial measure from GAAP to non-GAAP as well as an explanation of why the Company provides non-GAAP financial measures can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in this report. The efficiency ratio is a measure of productivity in the banking industry. (This ratio is a measure of our ability to turn expenses into revenue. That is, the ratio is designed to reflect the percentage ofone dollar which must be expended to generate a dollar of revenue.) The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. The table above shows the impact on the efficiency ratio of expenses that (1) the Company does not consider to be part of its core operating activities, such as amortization of intangibles, or (2) the Company incurred in connection with certain transactions where management is unable to accurately predict the timing of when these expenses will be incurred or, when incurred, the amount of such expenses, such as expenses incurred in connection with our response to the COVID-19 pandemic, our MSR valuation adjustment, restructuring and swap termination charges and the provision for unfunded commitments. We remain committed to aggressively managing our costs within the framework of our 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 2020 and 2019 was$19,840 and$48,091 , respectively. The effective tax rates for those years were 19.40% and 22.30%, respectively. For additional information regarding the Company's income taxes, please refer to in Note 15, "Income Taxes," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. 50 -------------------------------------------------------------------------------- Risk Management The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading "Liquidity and Capital Resources." Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments COVID-19 Update. AtDecember 31, 2020 , the Company's credit quality metrics remained strong. The Company is continuing to monitor all asset categories given that any category or borrower could be negatively impacted by the pandemic, with enhanced monitoring of loans remaining on deferral as well as a focus on those industries more highly impacted by the pandemic, primarily the hospitality and healthcare industries. In addition, in response to the current economic environment caused by the COVID-19 pandemic, the Company implemented a loan deferral program in the first quarter of 2020 to provide temporary payment relief to the Company's borrowers - both consumer and commercial clients. Under these programs, a qualified borrower can defer principal and interest payments for up to 90 days. Principal and interest payments can be deferred for up to 180 days on residential mortgage loans. To qualify, the borrower must have been current on loan payments, taxes and insurance at the time of the borrower's application for payment deferral. A second deferral is available to borrowers that remained current on taxes and insurance through the first deferral period and also satisfy underwriting standards established by the Company that analyze the ability of the customer to service its loan in accordance with its existing terms in light of the impact of the COVID-19 pandemic on the customer, its industry and the markets in which it operates. The Company's loan deferral program complies with the guidance set forth in the CARES Act and related guidance from theFDIC and other banking regulators. AtDecember 31, 2020 , the Company had 906 loans (not in thousands) on deferral with an aggregate balance of approximately$145,000 , or 1.5% of our loan portfolio (excluding PPP loans) by dollar value. In accordance with the applicable guidance, none of these loans were considered "restructured loans" and thus are not included in the discussion of our restructured loans below. The Company's credit quality in future quarters may be impacted by both external and internal factors related to the pandemic in addition to those factors that traditionally affect credit quality. External factors outside the Company's control include items such as the pace at which the COVID-19 vaccine is administered to residents in the Company's markets andthe United States generally, federal, state and local government measures, the re-imposition of "shelter-in-place" orders, and the economic impact of government programs, including additional fiscal stimulus and the re-opening of the Paycheck Protection Program. Internal factors that will potentially impact credit quality include items such as the Company's loan deferral programs, involvement in government offered programs and the related financial impact of these programs. The impact of each of these items are unknown at this time and could materially and adversely impact future credit quality. Management of Credit Risk. Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. Credit risk is monitored and managed on an ongoing basis by a credit administration department, a problem asset resolution committee and the Board of Directors Credit Review Committee. Oversight of the Company's lending operations (including adherence to our policies and procedures governing the loan 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 are reviewed for approval by senior credit officers. For commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration and loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 rated loans having the least credit risk. For more information about the Company's 51 -------------------------------------------------------------------------------- loan grades, see the information under the heading "Credit Quality" in Note 3, "Non Purchased Loans," in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report. Management's problem asset resolution committee and the Board of Directors' Credit Review Committee monitor loans that are past due or those that have been downgraded and placed on the Company's internal watch list due to a decline in the collateral value or cash flow of the debtor; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality. When the ultimate collectability of a loan's principal is in doubt, wholly or partially, the loan is placed on nonaccrual. After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals described in the above paragraph), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors' Credit Review Committee for charge-off approval. These charge-offs reduce the allowance for credit losses on loans. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. The Company's practice is to charge off estimated losses as soon as such loss is identified and reasonably quantified. Net charge-offs for 2020 were$3,852 , or 0.04% as a percentage of average loans, compared to net charge-offs of$3,914 , or 0.04% as a percentage of average loans, for 2019. The charge-offs in 2020 were fully reserved for in the Company's allowance for credit losses. Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans. OnJanuary 1, 2020 , the Company began calculating the allowance for credit losses under CECL. As of the date of adoption, the Company increased the allowance for credit losses on loans by$42,484 and the reserve for unfunded commitments by$10,389 . The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Loan losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the adequacy of the allowance on a quarterly basis. Please refer to the information in the "Critical Accounting Policies" section above under the headings "Allowance for Credit Losses" and "Business Combinations, Accounting for Purchased Loans" for an in-depth discussion of our accounting policies and our methodology for determining the appropriate level of the allowance for credit losses. In addition to its quarterly analysis of the allowance for credit losses, on a regular basis, management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by officer, community bank and the Company as a whole. The allowance for credit losses on loans was$176,144 and$52,162 atDecember 31, 2020 and 2019, respectively. The following table presents the allocation of the allowance for credit losses on loans and the percentage of each loan category to total loans atDecember 31 for each of the years presented. 2020 2019 Balance % of Total Balance % of Total Commercial, financial, agricultural$ 39,031 23.20 %$ 10,658 14.12 % Lease financing 1,624 0.69 % 910 0.84 % Real estate - construction 16,047 7.85 % 5,029 8.53 %
Real estate - 1-4 family mortgage 32,165 24.68 % 9,814 29.59 %
Real estate - commercial mortgage 76,127 41.66 % 24,990 43.80 %
Installment loans to individuals 11,150 1.92 % 761 3.12 % Total$ 176,144 100.00 %$ 52,162 100.00 % The provision for credit losses on loans charged to operating expense is an amount that, in the judgment of management, is necessary to maintain the allowance for credit losses on loans at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The provision for credit losses on loans was$85,350 and$7,050 for 2020 and 2019, respectively. The provision recorded during 2020 was primarily driven by the current and future economic uncertainty caused by the COVID-19 pandemic, including the current projections of an improving but continued elevated national unemployment rate 52 -------------------------------------------------------------------------------- into 2021 and 2022 and nominal GDP growth relative to pre-pandemic levels. The Company also factored into its estimate the potential benefit and risk of the government programs implemented through the CARES Act and the internal loan deferral program offered to qualified customers. The Company utilized a two year reasonable and supportable forecast range during the current period. The Company continues its heightened monitoring efforts with respect to loans in certain industries the Company currently believes pose a greater risk in the current environment (i.e., hospitality and healthcare). In addition, the Company will continue to monitor the performance of all portfolios, the severity and duration of the pandemic and potential subsequent recovery of the economic environment. Although the Company made an accounting policy election to exclude accrued interest from the amortized cost of loans and therefore the allowance calculation, the Company recorded$1,500 in provision for credit losses to establish an allowance for the interest deferred as part of the loan deferral program. Provision for Credit Losses on Loans to Average Loans 2020 2019 0.81% 0.08%
The table below reflects the activity in the allowance for credit losses on
loans for the years ended
2020 2019
Balance at beginning of year $ 52,162 $ 49,026
Impact of adoption of ASC 326 42,484 -
Provision for credit losses on loans 85,350 7,050
Charge-offs
Commercial, financial, agricultural 3,577 2,681
Lease financing 168 278
Real estate - construction 716 -
Real estate - 1-4 family mortgage 1,167 1,602
Real estate - commercial mortgage 2,642 1,490
Installment loans to individuals 7,835 7,427
Total charge-offs 16,105 13,478
Recoveries
Commercial, financial, agricultural 1,263 1,428
Lease financing 11 7
Real estate - construction 31 21
Real estate - 1-4 family mortgage 838 712
Real estate - commercial mortgage 2,478 689
Installment loans to individuals 7,632 6,707
Total recoveries 12,253 9,564
Net charge-offs 3,852 3,914
Balance at end of year $ 176,144 $ 52,162
Net charge-offs to average loans 0.04 % 0.04 %
Net charge-offs to allowance for credit losses on loans 2.19 % 7.50 %
Allowance for credit losses on loans to:
Total loans 1.61 % 0.54 %
Total loans excluding PPP loans(1) 1.80 % 0.54 %
Nonperforming loans 317.55 % 143.61 %
Nonaccrual loans 342.56 % 182.72 %
(1) Allowance for credit losses on loans to total loans excluding PPP loans is a
non-GAAP financial measure. A reconciliation of this financial measure from GAAP
to non-GAAP as well as an explanation of why the Company provides non-GAAP
financial measures can be found under the "Non-GAAP Financial Measures" heading
at the end of this Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, in this report.
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The table below reflects net charge-offs to daily average loans outstanding, by
loan category, during the period for the years ended
2020 2019
Net Charge-offs to Net Charge-offs to
Net Charge-offs Average Loans Average Loans Net Charge-offs Average Loans Average Loans
Commercial, financial,
agricultural $ 2,314 $ 2,242,764 0.10% $ 1,253 $ 1,313,228 0.10%
Lease financing 157 83,571 0.19% 271 63,078 0.43%
Real estate - construction 685 816,311 0.08% (21) 774,053 -%
Real estate - 1-4 family
mortgage 329 2,785,018 0.01% 890 2,782,614 0.03%
Real estate - commercial
mortgage 164 4,388,743 -% 801 4,038,568 0.02%
Installment loans to
individuals 203 277,149 0.07% 720 197,014 0.37%
Total $ 3,852 $ 10,593,556 0.04% $ 3,914 $ 9,168,555 0.04%
The following table provides further details of the Company's net charge-offs of
loans secured by real estate for the years ended
2020 2019
Real estate - construction:
Residential $ 685 $ (21)
Commercial - -
Total real estate - construction 685 (21)
Real estate - 1-4 family mortgage:
Primary 883 917
Home equity (87) 121
Rental/investment 27 79
Land development (494) (227)
Total real estate - 1-4 family mortgage 329 890
Real estate - commercial mortgage:
Owner-occupied 1,257 474
Non-owner occupied (1,115) 372
Land development 22 (45)
Total real estate - commercial mortgage 164 801
Total net charge-offs of loans secured by real estate
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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. Just as with the
allowance for credit losses, the Company began calculating the reserve for
unfunded commitments under CECL on January 1, 2020 , with the impact of CECL
adoption on the reserve described in the table below. Management estimates the
amount of expected losses on unfunded loan commitments by calculating a
likelihood of funding over the contractual period for exposures that are not
unconditionally cancellable by the Company and applying the loss factors used in
the allowance for credit loss on loans methodology described above to unfunded
commitments for each loan type. No credit loss estimate is reported for
off-balance-sheet credit exposures 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.
December 31, 2020
Allowance for credit losses on unfunded loan commitments:
Beginning balance $ 946
Impact of the adoption of ASC 326 10,389
Provision for credit losses on unfunded loan commitments (included in other noninterest expense) 9,200 Ending balance$ 20,535 Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are loans on which the accrual of interest has stopped and loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the problem asset resolution committee and our loan review staff closely monitor loans that are considered to be nonperforming. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for credit losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in "Other real estate owned" in the Consolidated Statements of Income. 55 -------------------------------------------------------------------------------- The following table provides details of the Company's nonperforming assets that are non purchased and nonperforming assets that have been purchased in one of the Company's previous acquisitions as of the dates presented. Non Purchased Purchased Total December 31, 2020 Nonaccruing loans$ 20,369 $ 31,051 $ 51,420 Accruing loans past due 90 days or more 3,783 267 4,050 Total nonperforming loans 24,152 31,318 55,470 Other real estate owned 2,045 3,927 5,972 Total nonperforming assets$ 26,197 $ 35,245 $ 61,442 Nonperforming loans to total loans 0.51 % Nonaccruing loans to total loans 0.47 % Nonperforming assets to total assets 0.41 % December 31, 2019 Nonaccruing loans$ 21,509 $ 7,038 $ 28,547 Accruing loans past due 90 days or more 3,458 4,317 7,775 Total nonperforming loans 24,967 11,355 36,322 Other real estate owned 2,762 5,248 8,010 Total nonperforming assets$ 27,729 $ 16,603 $ 44,332 Nonperforming loans to total loans 0.37 % Nonaccruing loans to total loans 0.29 % Nonperforming assets to total assets 0.33 % The level of nonperforming loans increased$19,148 fromDecember 31, 2019 , while OREO decreased$2,038 during the same period. The implementation of CECL, which requires purchased credit deteriorated loans to be classified as nonaccrual based on performance, contributed$3,338 to the increase in nonaccruing loans. 56 --------------------------------------------------------------------------------
The following table presents nonperforming loans by loan category at
2020 2019
Commercial, financial, agricultural $ 16,668 $ 8,458
Lease financing 48 226
Real estate - construction:
Residential 497 -
Total real estate - construction 497 -
Real estate - 1-4 family mortgage:
Primary 16,317 14,270
Home equity 2,273 2,328
Rental/investment 1,526 1,958
Land development 345 367
Total real estate - 1-4 family mortgage 20,461 18,923
Real estate - commercial mortgage:
Owner-occupied 6,364 4,526
Non-owner occupied 10,204 2,459
Land development 572 1,109
Total real estate - commercial mortgage 17,140 8,094
Installment loans to individuals 656 621
Total nonperforming loans $ 55,470 $ 36,322
Although nonperforming loans have increased during the current year, coverage
ratios have increased as a result of the increase in the allowance for credit
losses discussed above.
Management has evaluated the aforementioned loans and other loans classified as
nonperforming and believes that all nonperforming loans have been adequately
reserved for in the allowance for credit losses on loans at December 31, 2020 .
Management also continually monitors past due loans for potential credit quality
deterioration. Total loans 30-89 days past due on which interest was still
accruing were $26,286 at December 31, 2020 as compared to $37,668 at
December 31, 2019 .
Although not classified as nonperforming loans, another category of assets that
contribute to our credit risk is restructured loans. Restructured loans are
those for which concessions have been granted to the borrower due to a
deterioration of the borrower's financial condition and are performing in
accordance with the new terms. Such concessions may include reduction in
interest rates or deferral of interest or principal payments. In evaluating
whether to restructure a loan, management analyzes the long-term financial
condition of the borrower, including guarantor and collateral support, to
determine whether the proposed concessions will increase the likelihood of
repayment of principal and interest. Restructured loans that are not performing
in accordance with their restructured terms that are either contractually 90
days past due or placed on nonaccrual status are reported as nonperforming
loans.
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As shown below, restructured loans totaled $20,448 at December 31, 2020 compared
to $11,954 at December 31, 2019 . At December 31, 2020 , loans restructured
through interest rate concessions represented 37% 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 at December 31 for each of the years presented:
2020 2019
Commercial, financial, agricultural
Real estate - 1-4 family mortgage: Primary 9,460 6,987 Home equity 332 213 Rental/investment 432 596
Total real estate - 1-4 family mortgage 10,224 7,796 Real estate - commercial mortgage: Owner-occupied
6,838 3,096
Non-owner occupied 797 503
Land development 183 36
Total real estate - commercial mortgage 7,818 3,635 Installment loans to individuals
80 -
Total restructured loans $ 20,448 $ 11,954
Changes in the Company's restructured loans are set forth in the table below for
the periods presented.
2020 2019
Balance as of January 1 $ 11,954 $ 12,820
Additional loans with concessions 14,533 3,829
Reclassified as performing 428
2,183
Reductions due to: Reclassified as nonperforming (3,321) (2,772) Paid in full (2,387) (951) Charge-offs (3) (101) Principal paydowns (756) (678) Measurement period adjustment on recently acquired loans - (2,376) Balance as of December 31$ 20,448 $ 11,954 The following table shows the principal amounts of nonperforming and restructured loans as ofDecember 31 of each year presented. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower's ability to comply with the current repayment terms of the loan have been reflected in the table below. 2020 2019 Nonaccruing loans$ 51,420 $ 28,547 Accruing loans past due 90 days or more 4,050 7,775 Total nonperforming loans 55,470 36,322 Restructured loans 20,448 11,954 Total nonperforming and restructured loans$ 75,918 $ 48,276 58
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The following table provides details of the Company's other real estate owned as
of
2020 2019
Residential real estate
2,665 3,654
Residential land development 1,013 899 Commercial land development 2,115 2,152
Total other real estate owned
Changes in the Company's other real estate owned were as follows for the periods
presented:
2020 2019
Balance as of January 1 $ 8,010 $ 11,040
Transfers of loans 8,588 4,764
Impairments (2,160) (1,265)
Dispositions (8,415) (6,498)
Other (51) (31)
Balance as of December 31 $ 5,972 $ 8,010
We realized net gains of $23 and net losses of $94 on dispositions of other real
estate owned during 2020 and 2019, respectively.
Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The majority of assets and liabilities of a financial institution are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets and inventories. Our
market risk arises primarily from interest rate risk inherent in lending and
deposit-taking activities. Management believes a significant impact on the
Company's financial results stems from our ability to react to changes in
interest rates. A sudden and substantial change in interest rates may adversely
impact our earnings because the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent or on the same basis.
Because of the impact of interest rate fluctuations on our profitability, the
Board of Directors and management actively monitor and manage our interest rate
risk exposure. We have an Asset/Liability Committee (the "ALCO") that is
authorized by the Board of Directors to monitor our interest rate sensitivity
and to make decisions relating to that process. The ALCO's goal is to structure
our asset/liability composition to maximize net interest income while managing
interest rate risk so as to minimize the adverse impact of changes in interest
rates on net interest income and capital. The ALCO uses an asset/liability model
as the primary quantitative tool in measuring the amount of interest rate risk
associated with changing market rates. The model is used to perform both net
interest income forecast simulations for multiple year horizons and economic
value of equity ("EVE") analyses, each under various interest rate scenarios,
which could impact the results presented in the table below.
Net interest income simulations measure the short and medium-term earnings
exposure from changes in market interest rates in a rigorous and explicit
fashion. Our current financial position is combined with assumptions regarding
future business to calculate net interest income under various hypothetical rate
scenarios. EVE measures our long-term earnings exposure from changes in market
rates of interest. EVE is defined as the present value of assets minus the
present value of liabilities at a point in time for a given set of market rate
assumptions. An increase in EVE due to a specified rate change indicates an
improvement in the long-term earnings capacity of the balance sheet assuming
that the rate change remains in effect over the life of the current balance
sheet.
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The following table presents the projected impact of a change in interest rates
on (1) static EVE and (2) earnings at risk (that is, net interest income) for
the 1-12 and 13-24 month periods commencing January 1, 2021 , in each case as
compared to the result under rates present in the market on December 31, 2020 .
The changes in interest rates assume an instantaneous and parallel shift in the
yield curve and do not take into account changes in the slope of the yield
curve.
Percentage Change In:
Economic Value Equity Earning at Risk (EAR)
(EVE) (Net Interest Income)
Immediate Change in Rates of: Static 1-12 Months 13-24 Months
+200 18.54% 13.66% 20.69%
+100 10.14% 6.85% 10.60%
The rate shock results for the EVE and net interest income simulations for the
next 24 months produce an asset sensitive position at December 31, 2020 and are
all within the parameters set by the Board of Directors.
The preceding measures assume no change in the size or asset/liability
compositions of the balance sheet, and they do not reflect future actions the
ALCO may undertake in response to such changes in interest rates.
The scenarios assume instantaneous movements in interest rates in increments of
plus 100 and 200 basis points. As interest rates are adjusted over a period of
time, it is our strategy to proactively change the volume and mix of our balance
sheet in order to mitigate our interest rate risk. The computation of the
prospective effects of hypothetical interest rate changes requires numerous
assumptions including asset prepayment speeds, the impact of competitive factors
on our pricing of loans and deposits, how responsive our deposit repricing is to
the change in market rates and the expected life of non-maturity deposits. These
business assumptions are based upon our experience, business plans and published
industry experience. Such assumptions may not necessarily reflect the manner or
timing in which cash flows, asset yields and liability costs respond to changes
in market rates. Because these assumptions are inherently uncertain, actual
results will differ from simulated results.
The Company utilizes derivative financial instruments, including interest rate
contracts such as swaps, caps and/or floors, forward commitments, and interest
rate lock commitments, as part of its ongoing efforts to mitigate its interest
rate risk exposure. For more information about the Company's derivative
financial instruments, see the "Off-Balance Sheet Transactions" section below
and Note 14, "Derivative Instruments," in the Notes to Consolidated Financial
Statements in Item 8, Financial Statements and Supplementary Data, in this
report.
Liquidity and Capital Resources
Liquidity management is the ability to meet the cash flow requirements of
customers who may be either depositors wishing to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs.
Core deposits, which are deposits excluding time deposits greater than $250,000 ,
are the major source of funds used by the Bank to meet cash flow needs.
Maintaining the ability to acquire these funds as needed in a variety of markets
is the key to assuring the Bank's liquidity. Management continually monitors the
Bank's liquidity and non-core dependency ratios to ensure compliance with
targets established by the Asset/Liability Management Committee.
Our investment portfolio is another alternative for meeting liquidity needs.
These assets generally have readily available markets that offer conversions to
cash as needed. Within the next twelve months the securities portfolio is
forecasted to generate cash flow through principal payments and maturities equal
to 23.82% of the carrying value of the total securities portfolio. Securities
within our investment portfolio are also used to secure certain deposit types
and short-term borrowings. At December 31, 2020 , securities with a carrying
value of $614,610 were pledged to secure government, public, trust, and other
deposits and as collateral for short-term borrowings and derivative instruments
as compared to $444,603 at December 31, 2019 .
Other sources available for meeting liquidity needs include federal funds
purchased, security repurchase agreements and short-term and long-term advances
from the FHLB. Interest is charged at the prevailing market rate on these
borrowings. Federal funds are short term borrowings, generally overnight
borrowings, between financial institutions, while security repurchase agreements
represent funds received from customers, generally on an overnight or continuous
basis, which are collateralized by investment securities owned or, at times,
borrowed and re-hypothecated by the Company. There were $10,393 in federal funds
purchased outstanding at December 31, 2020 , while none were outstanding at
December 31, 2019 . Security repurchase agreements were $10,947 at December 31,
2020 , as compared to $9,091 at December 31, 2019 . The Company had no short-term
borrowings from the FHLB (i.e., advances with original maturities less than one
year) at December 31, 2020 , as compared to $480,000 at December 31, 2019 .
Long-term FHLB borrowings are used to match-fund fixed rate loans in order to
minimize interest rate risk and also are used to meet day-to-day liquidity
needs, particularly when the cost of such borrowings compares favorably to the
rates that we would be required to pay to attract deposits. At December 31,
2020 , the balance of our
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outstanding long-term advances with the FHLB was $152,167 as compared to
$152,337 at December 31, 2019 . The total amount of the remaining credit
available to us from the FHLB at December 31, 2020 was $3,784,520 . We also
maintain lines of credit with other commercial banks totaling $180,000 . These
are unsecured, uncommitted lines of credit maturing at various times within the
next twelve months. There were no amounts outstanding under these lines of
credit at December 31, 2020 or 2019.
In 2016 and 2020, we accessed the capital markets to generate liquidity in the
form of subordinated notes. Additionally, as part of previous acquisitions in
2017, the Company assumed other subordinated notes. For more information about
our 2020 offering of subordinated notes and the details of our other
subordinated notes, see Note 12, "Long-Term Debt" in the Notes to Consolidated
Financial Statements in Item 8, Financial Statements and Supplementary Data, in
this report.
Our strategy in choosing funds is focused on minimizing cost in the context of
our balance sheet composition and interest rate risk position. Accordingly,
management targets growth of non-interest bearing deposits. While we do not
control the types of deposit instruments our clients choose, we do influence
those choices with the rates and the deposit specials we offer. We constantly
monitor our funds position and evaluate the effect that various funding sources
have on our financial position. The following table presents, by type, the
Company's funding sources, which consist of total average deposits and borrowed
funds, and the total cost of each funding source for each of the years
presented:
Percentage of Total Cost of Funds
2020 2019 2020 2019
Noninterest-bearing demand 27.91 % 23.26 % - % - %
Interest-bearing demand 43.43 44.89 0.45 0.86
Savings 6.29 6.11 0.10 0.19
Time deposits 16.07 21.91 1.50 1.71
Short-term borrowings 2.94 1.17 1.07 2.43
Long-term Federal Home Loan Bank advances 1.25 0.35 0.61 1.51
Subordinated notes 1.20 1.27 5.28 6.24
Other long-term borrowings 0.91 1.04 4.40 4.48
Total deposits and borrowed funds 100.00 % 100.00 % 0.59 % 0.93 %
Cash and cash equivalents were $633,203 at December 31, 2020 , compared to
$414,930 at December 31, 2019 . Cash used in investing activities for the year
ended December 31, 2020 was $1,265,548 compared to $505,910 in 2019. Proceeds
from the sale, maturity or call of securities within our investment portfolio
were $482,887 for 2020 compared to $474,772 for 2019. These proceeds from the
investment portfolio were primarily reinvested back into the securities
portfolio. Purchases of investment securities were $515,657 for 2020 compared to
$492,018 for 2019.
Cash provided by financing activities for the year ended December 31, 2020 was
$1,401,579 compared to $188,106 for the year ended December 31, 2019 . Overall
deposits increased $1,846,059 for the year ended December 31, 2020 compared to
an increase of $85,925 for the same period in 2019.
Restrictions on Bank Dividends, Loans and Advances
The Company's liquidity and capital resources, as well as its ability to pay
dividends to our shareholders, are substantially dependent on the ability of the
Bank to transfer funds to the Company in the form of dividends, loans and
advances. Under Mississippi law, a Mississippi bank may not pay dividends unless
its earned surplus is in excess of three times capital stock. A Mississippi bank
with earned surplus in excess of three times capital stock may pay a dividend,
subject to the approval of the DBCF. In addition, the FDIC has the authority to
prohibit the Bank from engaging in business practices that the FDIC 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 the FDIC may be required.
In addition to the FDIC and DBCF restrictions on dividends payable by the Bank
to the Company, in July 2020 the Federal Reserve provided guidance regarding the
criteria that it will use to evaluate the request by a bank holding company to
pay dividends in an aggregate amount that will exceed the company's earnings for
the period in which the dividends will be paid. For purposes of this analysis,
"dividend" includes not only dividends on preferred and common equity but also
dividends on debt underlying trust preferred securities and other Tier 1 capital
instruments. The Federal Reserve's criteria evaluates whether the holding
company (1) has net income over the past four quarters sufficient to fully fund
the proposed dividend (taking into account prior dividends paid during this
period), (2) is considering stock repurchases or redemptions in the quarter, (3)
does not
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have a concentration in commercial real estate and (4) is in good supervisory
condition, based on its overall condition and its asset quality risk. A holding
company not meeting these criteria will require more in-depth consultations with
the Federal Reserve . The Company's dividends for the fourth quarter of 2020 did
not exceed the Company's earnings for such quarter.
Federal Reserve regulations also limit the amount the Bank may loan to the
Company unless such loans are collateralized by specific obligations. At
December 31, 2020 , the maximum amount available for transfer from the Bank to
the Company in the form of loans was $150,478 . The Company maintains a line of
credit collateralized by cash with the Bank totaling $3,070 . There were no
amounts outstanding under this line of credit at December 31, 2020 . These
restrictions did not have any impact on the Company's ability to meet its cash
obligations in 2020, nor does management expect such restrictions to materially
impact the Company's ability to meet its currently-anticipated cash obligations.
Off-Balance Sheet Transactions
The Company enters into loan commitments, standby letters of credit and
derivative financial instruments in the normal course of its business. Loan
commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. Both
arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to the Company's normal credit policies.
Collateral (e.g., securities, receivables, inventory, equipment, etc.) is
obtained based on management's credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent
future cash requirements of the Company. While the borrower has the ability to
draw upon these commitments at any time (assuming the borrower's compliance with
the terms of the loan commitment), these commitments often expire without being
drawn upon. The Company's unfunded loan commitments and standby letters of
credit outstanding at December 31, 2020 and 2019 were as follows:
2020 2019
Loan commitments $ 2,749,988 $ 2,324,262
Standby letters of credit 90,597 94,824
The Company closely monitors the amount of remaining future commitments to
borrowers in light of prevailing economic conditions and adjusts these
commitments as necessary. The Company will continue this process as new
commitments are entered into or existing commitments are renewed.
The Company utilizes derivative financial instruments, including interest rate
contracts such as swaps, caps and/or floors, as part of its ongoing efforts to
mitigate its interest rate risk exposure and to facilitate the needs of its
customers. The Company enters into derivative instruments that are not
designated as hedging instruments to help its commercial customers manage their
exposure to interest rate fluctuations. To mitigate the interest rate risk
associated with these customer contracts, the Company enters into an offsetting
derivative contract position with other financial institutions. The Company
manages its credit risk, or potential risk of default by its commercial
customers, through credit limit approval and monitoring procedures. At
December 31, 2020 , the Company had notional amounts of $222,933 on interest rate
contracts with corporate customers and $222,933 in offsetting interest rate
contracts with other financial institutions to mitigate the Company's rate
exposure on its corporate customers' contracts.
Additionally, the Company enters into interest rate lock commitments with its
customers to mitigate the interest rate risk associated with the commitments to
fund fixed-rate residential mortgage loans and also enters into forward
commitments to sell residential mortgage loans to secondary market investors.
The Company also enters into forward interest rate swap contracts on its FHLB
borrowings and its junior subordinated debentures that are accounted for as cash
flow hedges. Under each of these contracts, the Company pays a fixed rate of
interest and receives a variable rate of interest based on the three-month or
one-month LIBOR plus a predetermined spread. The Company entered into an
interest rate swap contract on its subordinated notes that is accounted for as a
fair value hedge. Under this contract, the Company pays a variable rate of
interest based on the three-month LIBOR plus a predetermined spread and receives
a fixed rate of interest.
For more information about the Company's off-balance sheet transactions, see
Note 14, "Derivative Instruments" and Note 20, "Commitments, Contingent
Liabilities and Financial Instruments with Off-Balance Sheet Risk," in the Notes
to Consolidated Financial Statements in Item 8, Financial Statements and
Supplementary Data, in this report.
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Contractual Obligations
The following table presents, as of December 31, 2020 , significant fixed and
determinable contractual obligations to third parties by payment date. The Note
Reference below refers to the applicable footnote in the Notes to Consolidated
Financial Statements in Item 8, Financial Statements and Supplementary Data, in
this report.
Payments Due In:
One to
Note Less Than Three Three to Over Five
Reference One Year Years Five Years Years Total
Lease liabilities(1) 25 $ 8,607 $ 15,516 $ 12,646 $ 54,106 $ 90,875
Deposits without a stated maturity(2) 10 10,363,193 - - - 10,363,193
Time deposits(2) 10 1,228,457 415,997 45,008 6,426 1,695,888
Short-term borrowings 11 21,340 - - - 21,340
Federal Home Loan Bank advances 12 100 451 - 151,616 152,167
Junior subordinated debentures 12 - - - 110,794 110,794 Subordinated notes 12 - - - 212,009 212,009 Total contractual obligations $
11,621,697
(1)Represents the undiscounted cash flows. (2)Excludes interest. Shareholders' Equity and Regulatory Matters Total shareholders' equity of the Company was$2,132,733 and$2,125,689 atDecember 31, 2020 and 2019, respectively. Book value per share was$37.95 and$37.39 atDecember 31, 2020 and 2019, respectively. The growth in shareholders' equity year over year is attributable to increases in accumulated other comprehensive income, offset by the day one impact of our adoption of CECL, an increased provision for credit losses during the year offsetting a portion of our earnings in 2020 while maintaining dividends and the repurchasing of common stock through the stock repurchase program during the first quarter of 2020. The Company maintains a shelf registration statement with theSEC . 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, debt securities, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will be required to file with theSEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes as described in any prospectus supplement and could include the expansion of the Company's banking, insurance and wealth management operations as well as other business opportunities. InOctober 2020 , the Company's Board of Directors approved a stock repurchase program, authorizing the Company to repurchase up to$50,000 of its outstanding common stock, either in open market purchases or privately-negotiated transactions. The program will remain in effect until the earlier ofOctober 2021 or the repurchase of the entire amount of common stock authorized to be repurchased by the Board of Directors. The Company has junior subordinated debentures with a carrying value of$110,794 atDecember 31, 2020 , of which$107,203 are included in the Company's Tier 1 capital.Federal Reserve guidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the amount of debentures we include in Tier 1 capital. Although our existing junior subordinated debentures are currently unaffected by theseFederal Reserve guidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition we exceed$15,000,000 in assets, or if we make any acquisition after we have exceeded$15,000,000 in assets, we will lose Tier 1 treatment of our junior subordinated debentures. The Company has subordinated notes with a carrying value of$212,009 atDecember 31, 2020 , of which$212,106 are included in the Company's Tier 2 capital. As previously discussed in the "Financial Condition" section above, inSeptember 2020 , the Company issued$100,000 of its 4.50% fixed-to-floating rate subordinated notes dueSeptember 1, 2035 . 63 -------------------------------------------------------------------------------- TheFederal Reserve , theFDIC and theOffice of the Comptroller of the Currency have issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications: Tier 1 Capital to Tier 1 Capital to
Total Capital to
Average Assets Common Equity Tier 1 to Risk - Weighted Risk - Weighted
Capital Tiers (Leverage) Risk - Weighted Assets Assets Assets
Well capitalized 5% or above 6.5% or above 8% or above 10% or above
Adequately capitalized 4% or above 4.5% or above 6% or above 8% or above
Undercapitalized Less than 4% Less than 4.5% Less than 6% Less than 8%
Significantly undercapitalized Less than 3% Less than 3% Less than 4% Less than 6%
Critically undercapitalized Tangible Equity / Total Assets less than 2%
The following table includes the capital ratios and capital amounts for the Company and the Bank for the years presented:
Minimum Capital Requirement to beMinimum Capital Adequately Requirement to be Capitalized
(including the phase-in of
Actual Well Capitalized the Capital Conservation Buffer)
Amount Ratio Amount Ratio Amount Ratio
December 31, 2020
Renasant Corporation :
Tier 1 leverage ratio $ 1,306,597 9.37 % $ 697,579 5.00 % $ 558,063 4.00 %
Common equity tier 1 capital ratio 1,199,394 10.93 % 713,086 6.50 % 767,939 7.00 %
Tier 1 risk-based capital ratio 1,306,597 11.91 % 877,644 8.00 % 932,497 8.50 %
Total risk-based capital ratio 1,653,694 15.07 % 1,097,055 10.00 % 1,151,908 10.50 %
Renasant Bank:
Tier 1 leverage ratio $ 1,369,994 9.83 % $ 696,738 5.00 % $ 557,391 4.00 %
Common equity tier 1 capital ratio 1,369,994 12.49 % 712,709 6.50 % 767,533 7.00 %
Tier 1 risk-based capital ratio 1,369,994 12.49 % 877,181 8.00 % 932,004 8.50 %
Total risk-based capital ratio 1,504,985 13.73 % 1,096,476 10.00 % 151,299 10.50 %
December 31, 2019
Renasant Corporation :
Tier 1 leverage ratio $ 1,262,588 10.37 % $ 608,668 5.00 % $ 486,934 4.00 %
Common equity tier 1 capital ratio 1,156,828 11.12 % 676,106 6.50 % 728,114 7.00 %
Tier 1 risk-based capital ratio 1,262,588 12.14 % 832,131 8.00 % 884,139 8.50 %
Total risk-based capital ratio 1,432,949 13.78 % 1,040,163 10.00 % 1,092,171 10.50 %
Renasant Bank:
Tier 1 leverage ratio $ 1,331,809 10.95 % $ 607,907 5.00 % $ 486,326 4.00 %
Common equity tier 1 capital ratio 1,331,809 12.81 % 675,581 6.50 % 727,548 7.00 %
Tier 1 risk-based capital ratio 1,331,809 12.81 % 831,484 8.00 % 883,452 8.50 %
Total risk-based capital ratio 1,388,553 13.36 % 1,039,355 10.00 % 1,091,323 10.50 %
As previously disclosed, the Company adopted CECL as ofJanuary 1, 2020 . The Company has elected to take advantage of transitional relief offered by theFederal Reserve andFDIC to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transitional period to phase out the capital benefit provided by the two-year delay. For a detailed discussion of the capital adequacy guidelines applicable to the Company and the Bank, please refer to the information under the heading "Capital Adequacy Guidelines" in the "Supervision and Regulation-Supervision and Regulation 64 --------------------------------------------------------------------------------
of
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Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted
accounting principles in the United States of America ("GAAP"), this document
contains certain non-GAAP financial measures, namely, return on average tangible
shareholders' equity, return on average tangible assets, the ratio of tangible
equity to tangible assets, the allowance for credit losses on loans to total
loans, excluding PPP loans (the "adjusted allowance ratio") and an adjusted
efficiency ratio. Other than the adjusted allowance ratio (which only excludes
PPP loans), these non-GAAP financial measures adjust GAAP financial measures to
exclude intangible assets and certain charges (such as, when applicable,
COVID-19 related expenses, merger and conversion expenses, debt prepayment
penalties, restructuring charges, swap termination charges and asset valuation
adjustments) with respect to which the Company is unable to accurately predict
when these charges will be incurred or, when incurred, the amount thereof. With
respect to COVID-19 related expenses in particular, management added these
expenses as a charge to exclude when calculating non-GAAP financial measures
because the expenses included within this line item are readily quantifiable and
possess the same characteristics with respect to management's inability to
accurately predict the timing or amount thereof as the other charges excluded
when calculating non-GAAP financial measures. Management uses these non-GAAP
financial measures (other than the adjusted allowance ratio) when evaluating
capital utilization and adequacy, while it uses the adjusted allowance ratio to
determine the adequacy of our allowance with respect to loans not fully
guaranteed by the SBA. In addition, the Company believes that these non-GAAP
financial measures facilitate the making of period-to-period comparisons and are
meaningful indicators of its operating performance, particularly because these
measures are widely used by industry analysts for companies with merger and
acquisition activities. Also, because intangible assets such as goodwill and the
core deposit intangible and charges such as merger and conversion expenses,
restructuring charges and COVID-19 related expenses can vary extensively from
company to company and, as to intangible assets, are excluded from the
calculation of a financial institution's regulatory capital, the Company
believes that the presentation of this non-GAAP financial information allows
readers to more easily compare the Company's results to information provided in
other regulatory reports and the results of other companies. The reconciliations
from GAAP to non-GAAP for these financial measures are below.
Return on average tangible shareholders' equity and Return on average tangible assets
2020 2019 2018
Net income (GAAP) $ 83,651 $ 167,596 $ 146,920
Amortization of intangibles 7,121 8,105 7,179
Tax effect of adjustment noted above (1) (1,382) (1,807) (1,588)
Tangible net income (non-GAAP) $ 89,390 Average shareholders' equity (GAAP)$ 2,114,590
Intangibles 973,287 976,065 747,008
Average tangible shareholders' equity (non-GAAP)
Average total assets (GAAP)$ 14,503,449
Intangibles 973,287 976,065 747,008 Average tangible assets (non-GAAP)$ 13,530,162
Return on (average) shareholders' equity (GAAP) 3.96 % 7.95 % 8.64 % Effect of adjustment for intangible assets 3.87 % 7.41 % 7.34 % Return on average tangible shareholders' equity (non-GAAP) 7.83 % 15.36 % 15.98 % Return on (average) assets (GAAP) 0.58 % 1.30 % 1.32 % Effect of adjustment for intangible assets 0.08 % 0.16 % 0.15 % Return on average tangible assets (non-GAAP) 0.66 % 1.46 % 1.47 %
(1) Tax effect is calculated based on the respective periods' effective tax rate.
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Tangible common equity ratio (Tangible shareholders' equity to tangible assets)
2020 2019 2018
Actual shareholders' equity (GAAP) $ 2,132,733 $
2,125,689
Intangibles 969,823 976,943 977,793 Actual tangible shareholders' equity (non-GAAP)$ 1,162,910 $
1,148,746
Actual total assets (GAAP)$ 14,929,612 $
13,400,618
Intangibles 969,823 976,943 977,793 Actual tangible assets (non-GAAP)$ 13,959,789 $
12,423,675
Tangible Common Equity Ratio
Shareholders' equity to actual assets (GAAP) 14.29 % 15.86 % 15.80 %
Effect of adjustment for intangible assets 5.96 % 6.61 % 6.88 %
Tangible shareholders' equity to tangible
assets (non-GAAP) 8.33 % 9.25 % 8.92 %
Adjusted Efficiency Ratio
2020 2019
Interest income (fully tax equivalent basis)
Interest expense 71,335 98,923
Net interest income (fully tax equivalent basis)
Total noninterest income $ 235,532
Net gains on sales of securities 46 348
MSR valuation adjustment (11,726) (1,836)
Adjusted noninterest income $ 247,212
Total noninterest expense $ 471,988
Intangible amortization 7,121 8,105
Merger and conversion related expenses - 279
Debt prepayment penalty 121 54
Restructuring charges 7,365 -
Swap termination charges 2,040 -
COVID-19 related expenses 10,343 -
Provision for unfunded commitments 9,200 -
Adjusted noninterest expense $ 435,798
Efficiency Ratio (GAAP) 70.53 % 62.03 %
Adjusted Efficiency Ratio (non-GAAP) 64.00 % 60.48 %
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Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans
2020
Total loans (GAAP) $ 10,933,647
Less PPP loans 1,128,703
Adjusted total loans (non-GAAP) $ 9,804,944
Allowance for Credit Losses on Loans $ 176,144
ACL/Total loans (GAAP) 1.61 %
ACL/Total loans excluding PPP loans (non-GAAP) 1.80 %
None of the non-GAAP financial measures the Company has included in this document is intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Readers of this Form 10-K should note that, because there are no standard definitions for how to calculate the non-GAAP financial measures that we use as well as the results, the Company's calculations may not be comparable to similarly titled measures presented by other companies. Also, there may be limits in the usefulness of these measures to readers of this document. As a result, the Company encourages readers to consider its consolidated financial statements and footnotes thereto in their entirety and not to rely on any single financial measure.
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