RENASANT CORPORATION (In Thousands, Except Share Data) This Form 10-Q may contain or incorporate by reference statements regardingRenasant Corporation (referred to herein as the "Company", "we", "our", or "us") that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "projects," "anticipates," "intends," "estimates," "plans," "potential," "possible," "may increase," "may fluctuate," "will likely result," and similar expressions, or future or conditional verbs such as "will," "should," "would" and "could," are generally forward-looking in nature and not historical facts. Forward-looking statements include information about the Company's future financial performance, business strategy, projected plans and objectives and are based on the current beliefs and expectations of management. The Company's management believes these forward-looking statements are reasonable, but they are all inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ from those indicated or implied in the forward-looking statements, and such differences may be material. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and, accordingly, investors should not place undue reliance on these forward-looking statements, which speak only as of the date they are made. Important factors currently known to management that could cause our actual results to differ materially from those in forward-looking statements include the following: (i) the continued impact of the COVID-19 pandemic and related governmental response measures on theU.S. economy and the economies of the markets in which we operate; (ii) the Company's ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses, grow the acquired operations and realize the cost savings expected from an acquisition to the extent and in the timeframe anticipated by management; (iii) the effect of economic conditions and interest rates on a national, regional or international basis; (iv) timing and success of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (v) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries; (vi) the financial resources of, and products available from, competitors; (vii) changes in laws and regulations as well as changes in accounting standards; (viii) changes in policy by regulatory agencies; (ix) changes in the securities and foreign exchange markets; (x) the Company's potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (xi) changes in the quality or composition of the Company's loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers; (xii) an insufficient allowance for credit losses as a result of inaccurate assumptions; (xiii) general economic, market or business conditions, including the impact of inflation; (xiv) changes in demand for loan products and financial services; (xv) concentration of credit exposure; (xvi) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; (xvii) increased cybersecurity risk, including potential network breaches, business disruptions or financial losses; (xviii) civil unrest, natural disasters, epidemics and other catastrophic events in the Company's geographic area; (xix) the impact, extent and timing of technological changes; and (xx) other circumstances, many of which are beyond management's control. Management believes that the assumptions underlying the Company's forward-looking statements are reasonable, but any of the assumptions could prove to be inaccurate. The Company undertakes no obligation, and specifically disclaims any obligation, to update or revise forward-looking statements, whether as a result of new information or to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by federal securities laws. Financial Condition The following discussion provides details regarding the changes in significant balance sheet accounts atJune 30, 2021 compared toDecember 31, 2020 . Assets Total assets were$16,022,386 atJune 30, 2021 compared to$14,929,612 atDecember 31, 2020 . Investments The securities portfolio is a liquid source of interest income that also can be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio, all of which are classified as 54 -------------------------------------------------------------------------------- Table of Contents available for sale, by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented: June 30, 2021 December 31, 2020 Percentage of Percentage of Balance Portfolio Balance Portfolio U.S. Treasury securities$ 3,037 0.14 % $ 7,079 0.53 % Obligations of otherU.S. Government agencies and corporations - - 1,009 0.08 Obligations of states and political subdivisions 325,520 15.04 305,201 22.72 Mortgage-backed securities 1,772,547 81.92 955,549 71.12 Trust preferred securities - - 9,012 0.67 Other debt securities 62,716 2.90 65,607 4.88$ 2,163,820 100.00 %$ 1,343,457 100.00 % During the six months endedJune 30, 2021 , we deployed a portion of our excess liquidity into the securities portfolio and purchased$1,190,400 in investment securities. Mortgage-backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprised approximately 97% of these purchases. CMOs are included in the "Mortgage-backed securities" line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. Obligations of state and political subdivisions comprised approximately 3% of purchases made during the first six months of 2021. Proceeds from maturities, calls and principal payments on securities during the first six months of 2021 totaled$195,114 . The Company sold municipal securities, residential mortgage backed securities, and trust preferred securities with a carrying value of$154,034 at the time of sale for net proceeds of$155,391 , resulting in a net gain on sale of$1,357 during the first six months of 2021. Proceeds from the maturities, calls and principal payments on securities during the first six months of 2020 totaled$183,807 . The Company sold municipal securities and residential mortgage backed securities with a carrying value of$8,742 at the time of sale for net proceeds of$8,773 , resulting in net gain on sale of$31 during the first six months of 2020. For more information about the Company's security portfolio, see Note 2, "Securities," in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements, in this report. Loans Held for Sale Loans held for sale, which consist of residential mortgage loans being held until they are sold in the secondary market, were$448,959 atJune 30, 2021 , as compared to$417,771 atDecember 31, 2020 . Mortgage loans to be sold are sold either on a "best efforts" basis or under a mandatory delivery sales agreement. Under a "best efforts" sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. Our standard practice is to sell the loans within 30-40 days after the loan is funded. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market. Loans Total loans, excluding loans held for sale, were$10,149,242 atJune 30, 2021 and$10,933,647 atDecember 31, 2020 . Non purchased loans totaled$8,892,544 atJune 30, 2021 compared to$9,419,540 atDecember 31, 2020 . Loans purchased in previous acquisitions totaled$1,256,698 and$1,514,107 atJune 30, 2021 andDecember 31, 2020 , respectively. The tables below set forth the balance of loans outstanding, net of unearned income and excluding loans held for sale, by loan type and the percentage of each loan type to total loans as of the dates presented: 55
--------------------------------------------------------------------------------
Table of Contents
June 30, 2021
Total Percentage of
Non Purchased Purchased Loans Total Loans
Commercial, financial, agricultural (1) $ 1,509,908 $ 124,725 $ 1,634,633 16.11 %
Lease financing, net of unearned income 74,003 - 74,003 0.73
Real estate - construction:
Residential 274,599 2,564 277,163 2.73
Commercial 764,014 10,182 774,196 7.63
Total real estate - construction 1,038,613 12,746 1,051,359 10.36
Real estate - 1-4 family mortgage:
Primary 1,623,987 166,535 1,790,522 17.64
Home equity 426,845 63,088 489,933 4.83
Rental/investment 271,397 25,944 297,341 2.93
Land development 113,345 10,950 124,295 1.22
Total real estate - 1-4 family mortgage 2,435,574 266,517 2,702,091 26.62
Real estate - commercial mortgage:
Owner-occupied 1,373,150 290,041 1,663,191 16.39
Non-owner occupied 2,249,112 492,917 2,742,029 27.01
Land development 101,047 23,902 124,949 1.23
Total real estate - commercial mortgage 3,723,309 806,860 4,530,169 44.63
Installment loans to individuals 111,137 45,850 156,987 1.55
Total loans, net of unearned income $ 8,892,544 $ 1,256,698 $ 10,149,242 100.00 %
(1)Includes Paycheck Protection Program ("PPP") loans of $246,931 as of June 30,
2021 .
December 31, 2020
Total Percentage of
Non Purchased Purchased Loans Total Loans
Commercial, financial, agricultural (1) $ 2,360,471 $ 176,513 $ 2,536,984 23.20 %
Lease financing, net of unearned income 75,862 - 75,862 0.69
Real estate - construction:
Residential 243,814 2,859 246,673 2.26
Commercial 583,338 28,093 611,431 5.59
Total real estate - construction 827,152 30,952 858,104 7.85
Real estate - 1-4 family mortgage:
Primary 1,536,181 214,770 1,750,951 16.02
Home equity 432,768 80,392 513,160 4.69
Rental/investment 264,436 31,928 296,364 2.71
Land development 123,179 14,654 137,833 1.26
Total real estate - 1-4 family mortgage 2,356,564 341,744 2,698,308 24.68
Real estate - commercial mortgage:
Owner-occupied 1,334,765 323,041 1,657,806 15.16
Non-owner occupied 2,194,739 552,728 2,747,467 25.13
Land development 120,125 29,454 149,579 1.37
Total real estate - commercial mortgage 3,649,629 905,223 4,554,852 41.66
Installment loans to individuals 149,862 59,675 209,537 1.92
Total loans, net of unearned income $ 9,419,540 $ 1,514,107 $ 10,933,647 100.00 %
(1)Includes PPP loans of
56
--------------------------------------------------------------------------------
Table of Contents
Loan concentrations are considered to exist when there are amounts loaned to a
number of borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. At June 30, 2021 , there were
no concentrations of loans exceeding 10% of total loans which are not disclosed
as a category of loans separate from the categories listed above.
Deposits
The Company relies on deposits as its major source of funds. Total deposits were
$13,115,351 and $12,059,081 at June 30, 2021 and December 31, 2020 ,
respectively. Noninterest-bearing deposits were $4,349,135 and $3,685,048 at
June 30, 2021 and December 31, 2020 , respectively, while interest-bearing
deposits were $8,766,216 and $8,374,033 at June 30, 2021 and December 31, 2020 ,
respectively.
The growth in noninterest-bearing deposits across the Company's footprint during
the current year has been driven by government stimulus payments and client
sentiment to maintain liquidity. Management continues to focus on growing and
maintaining a stable source of funding, specifically noninterest-bearing
deposits and other core deposits (that is, deposits excluding time deposits
greater than $250,000 ). Noninterest bearing deposits represented 33.16% of total
deposits at June 30, 2021 , as compared to 30.56% of total deposits at
December 31, 2020 . Under certain circumstances, however, management may elect to
acquire non-core deposits in the form of time deposits or public fund deposits
(which are deposits of counties, municipalities or other political
subdivisions). The source of funds that we select depends on the terms and how
those terms assist us in mitigating interest rate risk, maintaining our
liquidity position and managing our net interest margin. Accordingly, funds are
acquired to meet anticipated funding needs at the rate and with other terms
that, in management's view, best address our interest rate risk, liquidity and
net interest margin parameters.
Public fund deposits may be readily obtained based on the Company's pricing bid
in comparison with competitors. Because public fund deposits are obtained
through a bid process, these deposit balances may fluctuate as competitive and
market forces change. Although the Company has focused on growing stable sources
of deposits to reduce reliance on public fund deposits, it participates in the
bidding process for public fund deposits when pricing and other terms make it
reasonable given market conditions or when management perceives that other
factors, such as the public entity's use of our treasury management or other
products and services, make such participation advisable. Our public fund
transaction accounts are principally obtained from public universities and
municipalities, including school boards and utilities. Public fund deposits were
$1,563,608 and $1,398,330 at June 30, 2021 and December 31, 2020 , respectively.
Borrowed Funds
Total borrowings include federal funds purchased, securities sold under
agreements to repurchase, advances from the FHLB, subordinated notes and junior
subordinated debentures and are classified on the Consolidated Balance Sheets as
either short-term borrowings or long-term debt. Short-term borrowings have
original maturities less than one year and typically include federal funds
purchased, securities sold under agreements to repurchase, and short-term FHLB
advances. The following table presents our short-term borrowings by type as of
the dates presented:
June 30, 2021 December 31 , 2020
Security repurchase agreements
Federal funds purchased - 10,393
$ 14,933 $ 21,340
At June 30, 2021 , long-term debt consists of long-term FHLB advances, our junior
subordinated debentures and our subordinated notes. The following table presents
our long-term debt by type as of the dates presented:
June 30, 2021 December 31, 2020
Long-term FHLB advances
110,794
Subordinated notes 207,889 212,009
$ 469,406 $ 474,970
Long-term funds obtained from the FHLB are used to match-fund fixed rate loans
in order to minimize interest rate risk and also are used to meet day-to-day
liquidity needs, particularly when the cost of such borrowing compares favorably
to the rates that we would be required to pay to attract deposits. At June 30,
2021 , there were no outstanding long-term FHLB advances
57
--------------------------------------------------------------------------------
Table of Contents
scheduled to mature within twelve months or less. The Company had $3,864,732 of
availability on unused lines of credit with the FHLB at June 30, 2021 , as
compared to $3,784,520 at December 31, 2020 .
The Company has issued subordinated notes, the proceeds of which have been used
for general corporate purposes, including providing capital to support the
Company's growth organically or through strategic acquisitions, repaying
indebtedness and financing investments and capital expenditures, and for
investments in Renasant Bank (the "Bank") as regulatory capital. The
subordinated notes qualify as Tier 2 capital under the current regulatory
guidelines.
The Company owns the outstanding common securities of business trusts that
issued corporation-obligated mandatorily redeemable preferred capital securities
to third-party investors. The trusts used the proceeds from the issuance of
their preferred capital securities and common securities (collectively referred
to as "capital securities") to buy floating rate junior subordinated debentures
issued by the Company (or by companies that the Company subsequently acquired).
The debentures are the trusts' only assets and interest payments from the
debentures finance the distributions paid on the capital securities.
Results of Operations
Net Income
Net income for the second quarter of 2021 was $40,867 compared to net income of
$20,130 for the second quarter of 2020. Basic and diluted earnings per share
("EPS") for the second quarter of 2021 were $0.73 and $0.72 , respectively, as
compared to basic and diluted EPS of $0.36 for the second quarter of 2020. Net
income for the six months ended June 30, 2021 , was $98,775 compared to net
income of $22,138 for the same period in 2020. Basic and diluted EPS were $1.75
for the first six months of 2021 as compared to $0.39 for the first six months
of 2020. As discussed in more detail below, our net income was significantly
impacted by mortgage banking income, including an adjustment to the valuation of
our mortgage servicing rights ("MSR"), and the absence of a provision for credit
losses expense in the second quarter of 2021.
From time to time, the Company incurs expenses and charges or recognizes
valuation adjustments in connection with certain transactions with respect to
which management is unable to accurately predict when these items will be
incurred or, when incurred, the amount of such items. The following table
presents the impact of these items on reported EPS for the dates presented. The
"COVID-19 related expenses" line item in the table below primarily consists of
(a) employee overtime and employee benefit accruals directly related to the
Company's response to both the COVID-19 pandemic itself and federal legislation
enacted to address the pandemic, such as the CARES Act, and (b) expenses
associated with supplying branches with protective equipment and sanitation
supplies (such as floor markings and cautionary signage for branches, face
coverings and hand sanitizer) as well as more frequent and rigorous branch
cleaning.
Three Months Ended
June 30, 2021 June 30, 2020
Impact to Impact to
Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS
MSR valuation adjustment $ - $ - $ - $ 4,951 $ 4,047 $ 0.07
Restructuring charges 15 12 - - - -
COVID-19 related expenses 370 289 0.01 6,257 5,113 0.09
Six Months Ended
June 30, 2021 June 30, 2020
Impact to Impact to
Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS
MSR valuation adjustment $ (13,561) $ (10,549) $ (0.19) $ 14,522 $ 11,835 $ 0.21
Restructuring charges 307 239 - - - -
COVID-19 related expenses 1,154 898 0.02 9,160 7,465 0.13
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 70.02% of total revenue (i.e., net interest income on a fully
taxable equivalent basis and noninterest income) for the second quarter of 2021
and 63.36% of total revenue for the first six months of 2021. The primary
concerns in managing net interest income are the volume, mix and repricing of
assets and liabilities.
58
--------------------------------------------------------------------------------
Table of Contents
Net interest income was $109,579 and $219,227 for the three and six months ended
June 30, 2021 , respectively, as compared to $105,782 and $212,384 for the same
respective periods in 2020. On a tax equivalent basis, net interest income was
$111,205 and $222,469 for the three and six months ended June 30, 2021 ,
respectively, as compared to $107,457 and $215,773 for the same respective
periods in 2020.
The following tables set forth average balance sheet data, including all major
categories of interest-earning assets and interest-bearing liabilities, together
with the interest earned or interest paid and the average yield or average rate
paid on each such category for the periods presented:
Three Months Ended June 30,
2021 2020
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans held for investment:
Non purchased $ 8,521,028 $ 82,774 3.90 % $ 7,872,371 $ 81,836 4.18 %
Purchased 1,328,631 17,891 5.40 1,877,698 26,005 5.57
Paycheck Protection Program 628,462 10,120 6.46 866,078 5,886 2.73
Total loans held for investment 10,478,121 110,785 4.24 10,616,147 113,727 4.31
Loans held for sale 461,752 3,604 3.12 340,582 2,976 3.51
Securities:
Taxable(1) 1,503,605 5,549 1.48 1,031,740 6,386 2.49
Tax-exempt 317,824 2,333 2.94 263,799 2,346 3.58
Interest-bearing balances with banks 1,227,962 346 0.11 524,376 195 0.15
Total interest-earning assets 13,989,264 122,617 3.51 12,776,644 125,630 3.95 Cash and due from banks 195,982 214,079 Intangible assets 967,430 974,237 Other assets 678,342 741,067 Total assets$ 15,831,018 $ 14,706,027 Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2)$ 6,109,956 $ 4,069 0.27 %$ 5,151,713 $ 5,524 0.43 % Savings deposits 969,982 185 0.08 747,173 173 0.09 Time deposits 1,564,448 3,415 0.88 2,034,149 8,174 1.62 Total interest-bearing deposits 8,644,386 7,669 0.36 7,933,035 13,871 0.70 Borrowed funds 483,081 3,743 3.11 1,000,789 4,302 1.73 Total interest-bearing liabilities 9,127,467 11,412 0.50 8,933,824 18,173 0.82 Noninterest-bearing deposits 4,271,464 3,439,634 Other liabilities 218,344 231,477 Shareholders' equity 2,213,743 2,101,092 Total liabilities and shareholders' equity$ 15,831,018 $ 14,706,027 Net interest income/net interest margin$ 111,205 3.19 %$ 107,457
3.38 %
(1)U.S. Government and someU.S. Government Agency securities are tax-exempt in the states in which the Company operates. (2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits. 59
--------------------------------------------------------------------------------
Table of Contents
Six Months Ended June 30,
2021 2020
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Loans held for investment:
Non purchased $ 8,441,910 $ 164,702 3.93 % $ 7,763,516 $ 170,390 4.41 %
Purchased 1,391,634 38,347 5.55 1,955,161 56,192 5.78
Paycheck Protection Program 807,012 20,807 5.20 433,039 5,886 2.73
Total loans held for investment 10,640,556 223,856 4.24 10,151,716 232,468 4.61
Loans held for sale 434,075 6,604 3.05 338,706 5,964 3.54
Securities:
Taxable(1) 1,284,692 10,389 1.62 1,049,507 13,675 2.62
Tax-exempt 312,084 4,617 2.96 244,700 4,404 3.62
Interest-bearing balances with banks 1,002,564 529 0.11 408,432 1,006 0.50
Total interest-earning assets 13,673,971 245,995 3.62 12,193,061 257,517 4.25 Cash and due from banks 200,906 200,198 Intangible assets 968,215 975,085 Other assets 674,262 720,945 Total assets$ 15,517,354 $ 14,089,289 Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2)$ 6,008,093 $ 8,002 0.27 %$ 5,045,735 $ 14,777 0.59 % Savings deposits 926,370 354 0.08 714,177 426 0.12 Time deposits 1,610,113 7,593 0.95 2,075,412 17,163 1.66 Total interest-bearing deposits 8,544,576 15,949 0.38 7,835,324 32,366 0.83 Borrowed funds 483,494 7,577 3.16 915,054 9,378 2.06 Total interest-bearing liabilities 9,028,070 23,526 0.53 8,750,378 41,744 0.96 Noninterest-bearing deposits 4,066,943 3,013,298 Other liabilities 229,257 222,495 Shareholders' equity 2,193,084 2,103,118 Total liabilities and shareholders' equity$ 15,517,354 $ 14,089,289 Net interest income/net interest margin$ 222,469 3.28 %$ 215,773
3.56 %
(1)U.S. Government and someU.S. Government Agency securities are tax-exempt in the states in which the Company operates. (2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits. The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. As discussed in more detail below, the decline in loan yields due to the current low interest rate environment as well as changes in the mix of earning assets during the quarter due to increased liquidity on the balance sheet were the largest contributing factors to the decrease in net interest margin for the three and six months endedJune 30, 2021 , as compared to the same periods in 2020. The Company has continued to focus on lowering the cost of funding through growing noninterest-bearing deposits and aggressively lowering interest rates on interest-bearing deposits. 60 -------------------------------------------------------------------------------- Table of Contents The following tables set forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for both the three and six months endedJune 30, 2021 , as compared to the same respective periods in 2020 (the changes attributable to the combined impact of yield/rate and volume have been allocated on a pro-rata basis using the absolute value of amounts calculated): Three Months
Ended
Three Months Ended June 30, 2020
Volume Rate Net
Interest income:
Loans held for investment:
Non purchased $ 6,642 $ (5,704) $ 938
Purchased (7,355) (759) (8,114)
Paycheck Protection Program (1,986) 6,220 4,234
Loans held for sale 984 (356) 628
Securities:
Taxable 2,315 (3,152) (837)
Tax-exempt 443 (456) (13)
Interest-bearing balances with banks 210 (59) 151
Total interest-earning assets 1,253 (4,266) (3,013)
Interest expense:
Interest-bearing demand deposits 906 (2,361) (1,455)
Savings deposits 46 (34) 12
Time deposits (1,594) (3,165) (4,759)
Borrowed funds (2,928) 2,369 (559)
Total interest-bearing liabilities (3,570) (3,191) (6,761)
Change in net interest income $ 4,823
Six months ended
Months Ended
Volume Rate Net
Interest income:
Loans held for investment:
Non purchased $ 14,008 $ (19,696) $ (5,688)
Purchased (15,683) (2,162) (17,845)
Paycheck Protection Program 7,298 7,623 14,921
Loans held for sale 1,542 (902) 640
Securities:
Taxable 2,652 (5,938) (3,286)
Tax-exempt 1,094 (881) 213
Interest-bearing balances with banks 718 (1,195) (477)
Total interest-earning assets 11,629 (23,151) (11,522)
Interest expense:
Interest-bearing demand deposits 2,415 (9,190) (6,775)
Savings deposits 105 (177) (72)
Time deposits (3,291) (6,279) (9,570)
Borrowed funds (5,542) 3,741 (1,801)
Total interest-bearing liabilities (6,313) (11,905) (18,218)
Change in net interest income $ 17,942 Interest income, on a tax equivalent basis, was$122,617 and$245,995 , respectively, for the three and six months endedJune 30, 2021 , as compared to$125,630 and$257,517 , respectively, for the same periods in 2020. This decrease in interest income, 61 -------------------------------------------------------------------------------- Table of Contents on a tax equivalent basis, is due primarily to theFederal Reserve maintaining low interest rates sinceMarch 2020 and changes in the mix of earning assets during the quarter due to increased liquidity on the balance sheet. The following tables present the percentage of total average earning assets, by type and yield, for the periods presented: Percentage of Total Average Earning Assets Yield Three Months Ended Three Months Ended June 30, June 30, 2021 2020 2021 2020 Loans held for investment, excl. PPP 70.41 % 76.31 % 4.10 % 4.45 % Paycheck Protection Program 4.49 6.78 6.46 2.73 Loans held for sale 3.30 2.67 3.12 3.51 Securities 13.02 10.14 1.73 2.71 Other 8.78 4.10 0.11 0.15 Total earning assets 100.00 % 100.00 % 3.51 % 3.95 % Percentage of Total Average Earning Assets Yield Six Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Loans held for investment excl. PPP 71.91 % 79.71 % 4.16 % 4.69 % Paycheck Protection Program 5.90 3.55 5.20 2.73 Loans held for sale 3.17 2.78 3.05 3.54 Securities 11.68 10.61 1.88 2.81 Interest-bearing balances with banks 7.34 3.35 0.11 0.50 Total earning assets 100.00 % 100.00 % 3.62 % 4.25 % For the second quarter of 2021, interest income on loans held for investment, on a tax equivalent basis, decreased$2,942 to$110,785 from$113,727 in the same period in 2020. For the six months endedJune 30, 2021 , interest income on loans held for investment, on a tax equivalent basis, decreased$8,612 to$223,856 from$232,468 in the same period in 2020. Interest income on loans held for investment decreased primarily due to theFederal Reserve maintaining low interest rates sinceMarch 2020 . Interest income attributable to PPP loans included in loan interest income for the three months endedJune 30, 2021 , was$10,120 , which consisted of$1,524 in interest income and$8,596 in accretion of net origination fees, as compared to$5,889 for the three months endedJune 30, 2020 , which consisted of$2,324 in interest income and$3,565 in accretion of net origination fees. Interest income attributable to PPP loans included in loan interest income for the six months endedJune 30, 2021 , was$20,807 , which consisted of$3,916 in interest income and$16,891 in accretion of net origination fees, as compared to$5,889 for the six months endedJune 30, 2020 , which consisted of$2,324 in interest income and$3,565 in accretion of net origination fees. The PPP origination fees, net of agent fees paid and other origination costs, are being accreted into interest income over the life of the loan. If a PPP loan is forgiven in whole or in part, as provided under the CARES Act, the Company will recognize the non-accreted portion of the net origination fee attributable to the forgiven portion of such loan as of the date of the final forgiveness determination. PPP loans increased margin and loan yield by 15 basis points and 14 basis points, respectively, during the second quarter of 2021, and 12 basis points and eight basis points, respectively, in the first half of 2021. PPP loans reduced margin and loan yield by five basis points and 14 basis points, respectively, in the second quarter of 2020 and three basis points and eight basis points, respectively, in the first half of 2020. The impact from interest income collected on problem loans and purchase accounting adjustments on loans to total interest income on loans held for investment, loan yield and net interest margin is shown in the following table for the periods presented. 62
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net interest income collected on problem
loans $ 1,339 $ 384 $ 3,519 $ 602
Accretable yield recognized on purchased
loans(1) 2,638 4,700 5,726 10,169
Total impact to interest income on loans
$ 9,245 $ 10,771 Impact to loan yield 0.15 % 0.19 % 0.18 % 0.21 % Impact to net interest margin 0.11 % 0.16 % 0.14 % 0.18 % (1)Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of$1,224 and$1,731 , for the second quarter of 2021 and 2020, respectively. The impact was$2,496 and$3,919 for the six months endedJune 30, 2021 and 2020, respectively. This additional interest income increased total loan yield by five basis points and six basis points for the second quarter of 2021 and 2020, respectively, while increasing net interest margin by four and five basis points for the same respective periods. For the six months endedJune 30, 2021 and 2020, the additional interest income increased total loan yields by five basis points and eight basis points, respectively, while increasing net interest margin by four basis points and six basis points, respectively. For the second quarter of 2021, interest income on loans held for sale (consisting of mortgage loans held for sale), on a tax equivalent basis, increased$628 to$3,604 from$2,976 in the same period in 2020. For the six months endedJune 30, 2021 , interest income on loans held for sale (consisting of mortgage loans held for sale), on a tax equivalent basis, increased$640 to$6,604 from$5,964 for the same period in 2020. Investment income, on a tax equivalent basis, decreased$850 to$7,882 for the second quarter of 2021 from$8,732 for the second quarter of 2020. Investment income, on a tax equivalent basis, decreased$3,073 to$15,006 for the six months endedJune 30, 2021 from$18,079 for the same period in 2020. The tax equivalent yield on the investment portfolio for the second quarter of 2021 was 1.73%, down 98 basis points from 2.71% for the same period in 2020. The tax equivalent yield on the investment portfolio for the six months endedJune 30, 2021 was 1.88%, down 93 basis points from 2.81% in the same period in 2020. The decrease in taxable equivalent yield on securities was a result of the current interest rate environment. Interest expense was$11,412 for the second quarter of 2021 as compared to$18,173 for the same period in 2020. Interest expense for the six months endedJune 30, 2021 was$23,526 as compared to$41,744 for the same period in 2020. The following tables present, by type, the Company's funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented: Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Three Months Ended Three Months Ended June 30, June 30, 2021 2020 2021 2020 Noninterest-bearing demand 31.88 % 27.80 % - % - % Interest-bearing demand 45.59 41.64 0.27 0.43 Savings 7.24 6.04 0.08 0.09 Time deposits 11.68 16.44 0.88 1.62 Short term borrowings 0.10 5.04 0.31 0.75 Long-term Federal Home Loan Bank advances 1.13 1.23 0.04 0.84 Subordinated notes 1.54 0.92 4.96 5.60 Other borrowed funds 0.84 0.89 4.21 4.52 Total deposits and borrowed funds 100.00 % 100.00 % 0.34 % 0.59 % 63
--------------------------------------------------------------------------------
Table of Contents
Percentage of Total Average Deposits and
Borrowed Funds Cost of Funds
Six Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Noninterest-bearing demand 31.06 % 25.62 % - % - %
Interest-bearing demand 45.88 42.89 0.27 0.59
Savings 7.07 6.07 0.08 0.12
Time deposits 12.30 17.64 0.95 1.66
Short-term borrowings 0.10 4.58 0.31 1.04
Long-term Federal Home Loan Bank advances 1.16 1.29 0.04 1.13
Subordinated notes 1.58 0.97 5.06 5.60
Other long term borrowings 0.85 0.94 4.22 4.69
Total deposits and borrowed funds 100.00 % 100.00 % 0.36 % 0.71 %
Interest expense on deposits was $7,669 and $13,871 for the three months ended
June 30, 2021 and 2020, respectively. The cost of total deposits was 0.24% and
0.49% for the same respective periods. Interest expense on deposits was $15,949
and $32,366 for the six months ended June 30, 2021 and 2020, respectively, and
the cost of total deposits was 0.26% and 0.60% for the same respective periods.
The decrease in both deposit expense and cost is attributable to the Company's
efforts to reduce deposit rates as they reprice in the current low interest rate
environment. During 2021, the Company has continued its efforts to grow
non-interest bearing deposits, and such deposits represent 33.16% of total
deposits at June 30, 2021 compared to 30.56% of total deposits at December 31,
2020 . The growth in non-interest bearing deposits during the year to date has
been primarily driven by government stimulus payments and client sentiment. Low
cost deposits continue to be the preferred choice of funding; however, the
Company may rely on wholesale borrowings when rates are advantageous.
Interest expense on total borrowings was $3,743 and $4,302 for the three months
ended June 30, 2021 and 2020, respectively. Interest expense on total borrowings
was $7,577 and $9,378 for the six months ended June 30, 2021 and 2020,
respectively. The decrease in interest expense is a result of lower average
borrowings.
A more detailed discussion of the cost of our funding sources is set forth below
under the heading "Liquidity and Capital Resources" in this Item.
Noninterest Income
Noninterest Income to Average Assets
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
1.21% 1.75% 1.67% 1.45%
Total noninterest income includes fees generated from deposit services and other
fees and commissions, income from our insurance, wealth management and mortgage
banking operations, realized gains on the sale of securities and all other
noninterest income. Our focus is to develop and enhance our products that
generate noninterest income in order to diversify revenue sources. Noninterest
income was $47,610 for the second quarter of 2021 as compared to $64,170 for the
same period in 2020. Noninterest income was $128,647 for the six months ended
June 30, 2021 as compared to $101,740 for the same period in 2020. During the
second quarter of 2021, with the exception of mortgage banking operations, all
categories of noninterest income increased when compared to the prior period as
market activity returned to normal conditions with the lifting of
pandemic-related restrictions across our footprint.
Service charges on deposit accounts include maintenance fees on accounts, per
item charges, account enhancement charges for additional packaged benefits and
overdraft fees. Service charges on deposit accounts were $9,458 and $6,832 for
the second quarter of 2021 and 2020, respectively, and $17,481 and $15,902 for
the six months ended June 30, 2021 and 2020, respectively. Overdraft fees, the
largest component of service charges on deposits, were $4,998 for the three
months ended June 30, 2021 , as compared to $3,740 for the same period in 2020.
These fees were $8,954 for the six months ended June 30, 2021 compared to $9,636
for the same period in 2020.
Fees and commissions were $4,110 during the second quarter of 2021 as compared
to $2,971 for the same period in 2020, and were $8,010 for the first six months
of 2021 as compared to $6,025 for the same period in 2020. Fees and commissions
include
64
--------------------------------------------------------------------------------
Table of Contents
fees related to deposit services, such as ATM fees and interchange fees on debit
card transactions. For the second quarter of 2021, interchange fees were $2,823
as compared to $2,158 for the same period in 2020. Interchange fees were $5,215
for the six months ended June 30, 2021 as compared to $4,212 for the same period
in 2020.
Through Renasant Insurance , we offer a range of commercial and personal
insurance products through major insurance carriers. Income earned on insurance
products was $2,422 and $2,125 for the three months ended June 30, 2021 and
2020, respectively, and was $4,659 and $4,116 for the six months ended June 30,
2021 and 2020, respectively. Contingency income is a bonus received from the
insurance underwriters and is based both on commission income and claims
experience on our clients' policies during the previous year. Increases and
decreases in contingency income are reflective of corresponding increases and
decreases in the number of claims paid by insurance carriers. Contingency
income, which is included in "Other noninterest income" in the Consolidated
Statements of Income, was $47 and $25 for the three months ended June 30, 2021
and 2020, respectively, and $1,053 and $918 for the six months ended June 30,
2021 and 2020, respectively.
Our Wealth Management segment has two primary divisions: Trust and Financial
Services. The Trust division operates on a custodial basis which includes
administration of benefit plans, as well as accounting and money management for
trust accounts. The division manages a number of trust accounts inclusive of
personal and corporate benefit accounts, IRAs, and custodial accounts. Fees for
managing these accounts are based on changes in market values of the assets
under management in the account, with the amount of the fee depending on the
type of account. The Financial Services division provides specialized products
and services to our customers, which include fixed and variable annuities,
mutual funds, and stocks offered through a third party provider. Wealth
Management revenue was $5,019 for the second quarter of 2021 compared to $3,824
for the same period in 2020 and was $9,811 for the six months ended June 30,
2021 compared to $7,826 for the same period in 2020. The market value of assets
under management or administration was $4,560,891 and $3,806,023 at June 30,
2021 and June 30, 2020 , respectively.
Mortgage banking income is derived from the origination and sale of mortgage
loans and the servicing of mortgage loans that the Company has sold but retained
the right to service. Although loan fees and some interest income are derived
from mortgage loans held for sale, the main source of income is gains from the
sale of these loans in the secondary market. Originations of mortgage loans to
be sold totaled $1,079,474 in the second quarter of 2021 compared to $1,308,074
for the same period in 2020. Mortgage loan originations totaled $2,222,822 in
the six months ended June 30, 2021 compared to $2,023,834 for the same period in
2020. While mortgage loan originations remain elevated compared to pre-pandemic
levels, margins have compressed as the interest rate environment has begun to
rise and housing inventories are below demand. Mortgage banking income was
$20,853 and $45,490 for the three months ended June 30, 2021 and 2020,
respectively, and was $71,586 for the first six months ended June 30, 2021
compared to $61,025 for the same period in 2020. The table below presents the
components of mortgage banking income included in noninterest income for the
periods presented.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Gain on sales of loans, net $ 17,581 $ 46,560 $ 51,482 $ 68,342
Fees, net 4,519 5,309 9,421 8,228
Mortgage servicing loss, net (1,247) (1,428) (2,878) (1,023)
MSR valuation adjustment - (4,951) 13,561 (14,522)
Mortgage banking income, net $ 20,853 $ 45,490
Bank-owned life insurance ("BOLI") income is derived from changes in the cash
surrender value of the bank-owned life insurance policies and proceeds received
upon the death of covered individuals. BOLI income was $1,644 for the three
months ended June 30, 2021 as compared to $1,329 for the same period in 2020,
and $3,716 for the first six months of June 30, 2021 as compared to $2,492 for
the same period in 2020. The increase is primarily due to the $1,222 of life
insurance proceeds received during the first six months of 2021. There were no
life insurance proceeds received during the six months ended June 30, 2020 .
Other noninterest income was $4,104 and $1,568 for the three months ended June
30, 2021 and 2020, respectively, and was $12,027 and $4,323 for the six months
ended June 30, 2021 and 2020, respectively. Other noninterest income includes
income from our SBA banking division and other miscellaneous income and can
fluctuate based on production in our SBA banking division and recognition of
other seasonal income items. In the first six months of 2021, the Company
entered into a referral relationship with a third party to utilize its
technology platform to originate PPP loans under the latest round of funding.
The Company earned $3,734 of PPP referral fees from its partner during the six
months ended June 30, 2021 .
Noninterest Expense
65--------------------------------------------------------------------------------
Table of Contents
Noninterest Expense to Average Assets
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
2.76% 3.24% 2.92% 3.33%
Noninterest expense was $108,777 and $118,285 for the second quarter of 2021 and
2020, respectively, and was $224,712 and $233,326 for the six months ended June
30, 2021 and 2020, respectively. The decrease in noninterest expense for both
the three and six month periods ending June 30, 2021 , as compared to the
corresponding periods in 2020, was largely a result of declines in salary and
employee benefits and net occupancy and equipment expenses.
Salaries and employee benefits decreased $9,068 to $70,293 for the second
quarter of 2021 as compared to $79,361 for the same period in 2020. Salaries and
employee benefits decreased $3,561 to $148,989 for the six months ended June 30,
2021 as compared to $152,550 for the same period in 2020. The decrease in
salaries and employee benefits is primarily due to a decrease in incentive
expenses recognized for the six months ended June 30, 2021 and the cost savings
realized by the voluntary early retirement program offered during the fourth
quarter of 2020.
Data processing costs increased to $5,652 in the second quarter of 2021 from
$5,047 for the same period in 2020 and were $11,103 for the six months ended
June 30, 2021 as compared to $10,053 for the same period in 2020. The Company
continues to examine new and existing contracts to negotiate favorable terms to
offset the increased variable cost components of our data processing costs, such
as new accounts and increased transaction volume.
Net occupancy and equipment expense for the second quarter of 2021 was $11,374 ,
down from $13,511 for the same period in 2020. These expenses for the first six
months of 2021 were $23,912 , down from $27,631 for the same period in 2020. The
decrease in occupancy and equipment expense is primarily attributable to the
restructuring and non-renewal of certain branch leases.
Expenses related to other real estate owned for the second quarter of 2021 were
$104 as compared to $620 for the same period in 2020 and were $145 and $1,038 ,
respectively, for the first six months of 2021 and 2020. Expenses on other real
estate owned included write downs of the carrying value to fair value on certain
pieces of property held in other real estate owned of $117 and $827 for the
first six months of 2021 and 2020, respectively. For the six months ended June
30, 2021 and 2020, other real estate owned with a cost basis of $3,328 and
$2,317 , respectively, was sold, resulting in a net gain of $50 and $89 ,
respectively.
Professional fees include fees for legal and accounting services, such as
routine litigation matters, external audit services as well as assistance in
complying with newly-enacted and existing banking and governmental regulations.
Professional fees were $2,674 for the second quarter of 2021 as compared to
$2,517 for the same period in 2020 and $5,595 for the six months ended June 30,
2021 as compared to $5,159 for the same period in 2020.
Advertising and public relations expense was $3,100 for the second quarter of
2021 as compared to $2,920 for the same period in 2020, and $6,352 for the six
months ended June 30, 2021 compared to $6,320 for the same period in 2020.
Amortization of intangible assets totaled $1,539 and $1,834 for the second
quarter of 2021 and 2020, respectively, and $3,137 and $3,729 for the six months
ended June 30, 2021 and 2020, respectively. This amortization relates to
finite-lived intangible assets which are being amortized over the useful lives
as determined at acquisition. These finite-lived intangible assets have
remaining estimated useful lives ranging from approximately 2 years to 8 years.
Communication expenses, those expenses incurred for communication to clients and
between employees, were $2,291 for the second quarter of 2021 as compared to
$2,181 for the same period in 2020. Communication expenses were $4,583 for the
six months ended June 30, 2021 as compared to $4,379 for the same period in
2020.
Other noninterest expense includes the provision for unfunded commitments,
business development and travel expenses, other discretionary expenses, loan
fees expense and other miscellaneous fees and operating expenses. Other
noninterest expense was $11,735 and $20,589 for the three and six months ended
June 30, 2021 as compared to $10,204 and $22,377 for the same periods in 2020.
The provision for unfunded commitments was $2,600 and $6,000 for the three and
six months ended June 30, 2020 . There was no provision recorded for unfunded
commitments recorded for the same periods in 2021.
Efficiency Ratio
66--------------------------------------------------------------------------------
Table of Contents
Efficiency Ratio
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Efficiency ratio (GAAP) 68.49 % 68.92 % 64.00 % 73.49 %
Adjusted efficiency ratio (Non-GAAP)(1) 67.28 % 60.89 % 65.47 % 64.56 %
(1)A reconciliation of this financial measure from GAAP to non-GAAP can be found
under the "Non-GAAP Financial Measures" heading at the end of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The efficiency ratio is a measure of productivity in the banking industry. (This
ratio is a measure of our ability to turn expenses into revenue. That is, the
ratio is designed to reflect the percentage of one dollar that we must expend to
generate a dollar of revenue.) The Company calculates this ratio by dividing
noninterest expense by the sum of net interest income on a fully tax equivalent
basis and noninterest income. The table above shows the impact on the efficiency
ratio of items that (1) the Company does not consider to be part of our core
operating activities, such as amortization of intangibles, or (2) the Company
incurred in connection with certain transactions where management is unable to
accurately predict the timing of when these items will be incurred or, when
incurred, the amount of such items, such as expenses or recoveries incurred in
connection with our response to the COVID-19 pandemic, our MSR valuation
adjustment and the provision for unfunded commitments. We remain committed to
aggressively managing our costs within the framework of our business model. Our
goal is to improve the efficiency ratio over time from currently reported levels
as a result of revenue growth while at the same time controlling noninterest
expenses.
Income Taxes
Income tax expense for the second quarter of 2021 and 2020 was $7,545 and
$4,637 , respectively. The effective tax rates for those periods were 21.62% and
18.72%, respectively. Income tax expenses for the six months ended June 30, 2021
and 2020 were $24,387 and $5,410 , respectively. The effective tax rates for
those periods were 22.21% and 19.64%, respectively. In the second quarter of
2021 the Company received a benefit from a one-time state tax credit investment.
The investment of $3,112 was fully amortized in other noninterest expense and
the credit of $3,460 reduced income taxes for the second quarter of 2021.
Risk Management
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit risk and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading "Liquidity and Capital Resources." Credit Risk and Allowance for Credit Losses on Loans and Unfunded Commitments COVID-19 Update. AtJune 30, 2021 , the Company's credit quality metrics remained stable. The Company is continuing to monitor all asset categories given that any category or borrower could be negatively impacted by the pandemic, with enhanced monitoring of loans remaining on deferral as well as a focus on those industries more highly impacted by the pandemic, primarily the hospitality and senior living industries. To provide necessary relief to the Company's borrowers - both consumer and commercial clients - in 2020 the Company established loan deferral programs allowing qualified clients to defer principal and interest payments for up to 90 days. A second 90-day deferral was available to borrowers that remained current on taxes and insurance and also satisfied underwriting standards established by the Company that analyzed the ability of the borrower to service its loan in accordance with its existing terms in light of the impact of the COVID-19 pandemic on the borrower, its industry and the markets in which it operated. The Company has discontinued its deferral programs as economic conditions in the Company's markets have improved to the extent that management viewed a broad deferral program as no longer necessary. AtJune 30, 2021 , the Company had 141 loans (not in thousands) on deferral with an aggregate balance of approximately$20,600 , or 0.21% of our loan portfolio (excluding PPP loans) by dollar value. In accordance with the applicable guidance, none of these loans are considered "restructured loans" and thus are not included in the discussion of our restructured loans below. 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 spread of variants of COVID-19, the pace at which the COVID-19 vaccine is administered to residents in the Company's markets andthe United States generally, the effectiveness of vaccinations on COVID-19 variants, 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. Internal factors that will potentially impact credit quality include items such as the performance of the Company's loans that remain on deferral, involvement in government offered programs and the related 67 -------------------------------------------------------------------------------- Table of Contents 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 of amounts greater than an officer's lending limit are reviewed for approval by senior credit officers. For loans with a commercial purpose, risk-rating grades are assigned by lending, credit administration and loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 rated loans having the least credit risk. Management's problem asset resolution committee and the Board of Directors' Credit Review Committee monitor loans that are past due or those that have been downgraded and placed on the Company's internal watch list due to a decline in the collateral value or cash flow of the borrower; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality. When the ultimate collectability of a loan's principal is in doubt, wholly or partially, the loan is placed on nonaccrual. After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals as described above), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors' Credit Review Committee for charge-off approval. These charge-offs reduce the allowance for credit losses on loans. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. The Company's practice is to charge off estimated losses as soon as such losses are identified and reasonably quantified. Net charge-offs for the first six months of 2021 were$3,790 , or 0.07% of average loans (annualized), compared to net charge-offs of$2,509 , or 0.05% of average loans (annualized), for the same period in 2020. The charge-offs were fully reserved for in the Company's allowance for credit losses on loans. Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans. The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Loan losses are charged against the allowance for credit losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the adequacy of the allowance on a quarterly basis. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including loans evaluated on a collective (pooled) basis and those evaluated on an individual basis as set forth in ASC 326. The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company's loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company's process for the estimation of expected credit losses. Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories, and other factors, including our risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the national and local economies as well as trends in 68 -------------------------------------------------------------------------------- Table of Contents the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit loss in those future periods. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a collective or pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. •The allowance for credit losses for loans that share similar risk characteristics with other loans is calculated on a collective (or pooled) basis, where such loans are segregated into loan portfolio segments based upon similarity of credit risk. In determining the allowance for credit losses on loans evaluated on a collective basis, the Company categorizes loan pools based on loan type and/or risk rating. The Company uses two CECL models: (1) a loss rate model, based on average historical life-of-loan loss rates, is used for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, and (2) for theCommercial, Real Estate - Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool. The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit concentration and the nature and volume of the respective loan portfolio segments. External factors include current and reasonable and supportable forecasted economic conditions and changes in collateral values. These factors are used to adjust the historical loss rates (as described above) to ensure that they reflect management's expectation of future conditions based on a reasonable and supportable forecast period. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the models immediately revert back to the historical loss rates adjusted for qualitative factors related to current conditions. •For loans that do not share similar risk characteristics with other loans, an individual analysis is performed to determine the expected credit loss. If the respective loan is collateral dependent (that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral), the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of collateral is initially based on external appraisals. Generally, collateral values for loans for which measurement of expected losses is dependent on the fair value of such collateral are updated every twelve months, either from external third parties or in-house certified appraisers. Third-party appraisals are obtained from a pre-approved list of independent, third-party, local appraisal firms. The fair value of the collateral derived from the external appraisal is then adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. Other acceptable methods for determining the expected credit losses for individually evaluated loans (typically used for loans that are not collateral dependent) is a discounted cash flow approach or, if applicable, an observable market price. Once the expected credit loss amount is determined, an allowance equal to such expected credit loss is included in the allowance for credit losses. In addition to its quarterly analysis of the allowance for credit losses, on a regular basis management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans, among others. Also, management reviews past due ratios by officer, community bank and the Company as a whole. The following table presents the allocation of the allowance for credit losses on loans by loan category and the percentage of loans in each category to total loans as of the dates presented: 69
--------------------------------------------------------------------------------
Table of Contents
June 30, 2021 December 31, 2020 June 30, 2020
Balance % of Total Balance % of Total Balance % of Total
Commercial, financial,
agricultural $ 36,994 16.11 % $ 39,031 23.20 % $ 30,685 24.02 %
Lease financing 1,511 0.73 % 1,624 0.69 % 1,812 0.73 %
Real estate - construction 15,729 10.36 % 16,047 7.85 % 12,538 7.19 %
Real estate - 1-4 family
mortgage 31,303 26.62 % 32,165 24.68 % 29,401 25.36 %
Real estate - commercial
mortgage 74,893 44.63 % 76,127 41.66 % 60,061 40.11 %
Installment loans to
individuals 11,924 1.55 % 11,150 1.92 % 10,890 2.59 %
Total $ 172,354 100.00 % $ 176,144 100.00 % $ 145,387 100.00 %
The provision for credit losses on loans charged to operating expense is an
amount which, in the judgment of management, is necessary to maintain the
allowance for credit losses on loans at a level that is believed to be adequate
to meet the inherent risks of losses in our loan portfolio. The Company did not
record a provision for credit losses during the second quarter or first half of
2021, as compared to a provision for credit losses on loans of $26,900 in the
second quarter of 2020 and $53,250 in the first half of 2020. The Company's
allowance for credit loss model considers economic projections, primarily the
national unemployment rate and GDP, over a reasonable and supportable period of
two years. Based on the continual improvements in these forecasts over the last
few quarters, the Company determined that additional provisioning during the
first half of 2021 was not necessary.
70--------------------------------------------------------------------------------
Table of Contents The table below reflects the activity in the allowance for credit losses on loans for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Balance at beginning of period $ 173,106 $ 120,185 $ 176,144 $ 52,162
Impact of the adoption of ASC 326 - - - 42,484
Charge-offs
Commercial, financial, agricultural 1,184 1,156 4,682 1,549 Lease financing - - - - Real estate - construction - 532 52 532 Real estate - 1-4 family mortgage 152 142 253 363 Real estate - commercial mortgage 171 - 232 2,047 Installment loans to individuals 1,347 1,736 3,005 4,424 Total charge-offs 2,854 3,566 8,224 8,915
Recoveries
Commercial, financial, agricultural 233 108 522 298 Lease financing 14 5 25 10 Real estate - construction - - 13 - Real estate - 1-4 family mortgage 401 48 662 136 Real estate - commercial mortgage 143 41 314 1,740 Installment loans to individuals 1,311 1,666 2,898 4,222 Total recoveries 2,102 1,868 4,434 6,406 Net charge-offs 752 1,698 3,790 2,509 Provision for credit losses on loans - 26,900 - 53,250 Balance at end of period$ 172,354 $ 145,387 $ 172,354 $ 145,387 Net charge-offs (annualized) to average loans 0.03 % 0.06 % 0.07 % 0.05 % Net charge-offs to allowance for credit losses on loans 0.44 % 1.17 % 2.20 % 1.73 % Allowance for credit losses on loans to: Total loans 1.70 % 1.32 % Total loans excluding PPP loans(1) 1.74 % 1.50 % Nonperforming loans 304.86 % 329.65 % Nonaccrual loans 314.57 % 383.08 % (1) Allowance for credit losses on loans to total loans excluding PPP loans is a non-GAAP financial measure. A reconciliation of this financial measure from GAAP to non-GAAP as well as an explanation of why the Company provides non-GAAP financial measures can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects annualized net charge-offs to daily average loans outstanding, by loan category, during the periods presented:
71--------------------------------------------------------------------------------
Table of Contents
Six Months Ended
June 30, 2021 June 30, 2020
Annualized Net Annualized Net
Charge-offs to Average Charge-offs to Average
Net Charge-offs Average Loans Loans Net Charge-offs Average Loans Loans
Commercial, financial,
agricultural $ 4,160 $ 2,208,424 0.38% $ 1,251 $ 1,828,975 0.14%
Lease financing (25) 75,159 (0.07) (10) 82,682 (0.02)Real estate - construction 39 946,497 0.01 532 817,725 0.13 Real estate - 1-4 family mortgage (409) 2,687,224 (0.03) 227 2,831,783 0.02 Real estate - commercial mortgage (82) 4,545,471 - 307 4,281,991 0.01 Installment loans to individuals 107 177,781 0.12 202 308,560 0.13 Total $ 3,790 $ 10,640,556 0.07% $ 2,509 $ 10,151,716 0.05%
The following table provides further details of the Company's net charge-offs (recoveries) of loans secured by real estate for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Real estate - construction:
Residential $ - Total real estate - construction - 532 39 532 Real estate - 1-4 family mortgage: Primary 21 109 (58) 260 Home equity 29 (11) (63) (22) Rental/investment (232) - (199) 28 Land development (67) (4) (89) (39) Total real estate - 1-4 family mortgage (249) 94 (409) 227 Real estate - commercial mortgage: Owner-occupied 43 (29) (116) 1,414 Non-owner occupied (15) (12) 10 (1,130) Land development - - 24 23 Total real estate - commercial mortgage 28 (41) (82) 307
Total net charge-offs of loans secured by real estate
Allowance for Credit Losses on Unfunded Commitments; Provision for Credit Losses
on Unfunded Commitments. The Company maintains a separate allowance for credit
losses on unfunded loan commitments, which is included in the "Other
liabilities" line item on the Consolidated Balance Sheets. Management estimates
the amount of expected losses on unfunded loan commitments by calculating a
likelihood of funding over the contractual period for exposures that are not
unconditionally cancellable by the Company and applying the loss factors used in
the allowance for credit losses on loans methodology described above to unfunded
commitments for each loan type. No credit loss estimate is reported for
off-balance-sheet credit exposures that are unconditionally cancellable by the
Company. A roll-forward of the allowance for credit losses on unfunded
commitments is shown in the tables below.
72
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended June 30 , 2021 2020 Allowance for credit losses on unfunded loan commitments: Beginning balance
$
20,535
Provision for credit losses on unfunded loan commitments (included in other noninterest expense) - 2,600 Ending balance$ 20,535 $ 17,335 Six Months EndedJune 30 ,
2021 2020 Allowance for credit losses on unfunded loan commitments: Beginning balance
$ 20,535 $ 946 Impact of the adoption of ASC 326 - 10,389 Provision for credit losses on unfunded loan commitments (included in other noninterest expense) - 6,000 Ending balance$ 20,535 $ 17,335 Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the problem asset resolution committee and our loan review staff closely monitor loans that are considered to be nonperforming. Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for credit losses on loans. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in "Other real estate owned" in the Consolidated Statements of Income.
The following tables provide details of the Company's non purchased and purchased nonperforming assets as of the dates presented.
Non Purchased Purchased Total
June 30, 2021
Nonaccruing loans $ 27,101 $ 27,690 $ 54,791
Accruing loans past due 90 days or more 800 945 1,745
Total nonperforming loans 27,901 28,635 56,536
Other real estate owned 1,675 3,264 4,939
Total nonperforming assets $ 29,576 $ 31,899 $ 61,475
Nonperforming loans to total loans 0.56 %
Nonaccruing loans to total loans 0.54 %
Nonperforming assets to total assets 0.38 %
December 31, 2020
Nonaccruing loans $ 20,369 $ 31,051 $ 51,420
Accruing loans past due 90 days or more 3,783 267 4,050
Total nonperforming loans 24,152 31,318 55,470
Other real estate owned 2,045 3,927 5,972
Total nonperforming assets $ 26,197 $ 35,245 $ 61,442
Nonperforming loans to total loans 0.51 %
Nonaccruing loans to total loans 0.47 %
Nonperforming assets to total assets 0.41 %
73--------------------------------------------------------------------------------
Table of Contents
The level of nonperforming loans increased
June 30 ,June 30, 2021 December 31, 2020
2020
Commercial, financial, agricultural$ 15,576 $ 16,668$ 10,526 Lease financing - 48 151 Real estate - construction: Residential - 497 - Commercial - - - Total real estate - construction - 497 - Real estate - 1-4 family mortgage: Primary 15,355 16,317 17,077 Home equity 2,038 2,273 2,219 Rental/investment 854 1,526 1,596 Land development 201 345 426 Total real estate - 1-4 family mortgage 18,448 20,461
21,318
Real estate - commercial mortgage: Owner-occupied 4,794 6,364 8,695 Non-owner occupied 16,424 10,204 2,126 Land development 576 572 609 Total real estate - commercial mortgage 21,794 17,140
11,430
Installment loans to individuals 718 656 678 Total nonperforming loans$ 56,536 $ 55,470$ 44,103 Total nonperforming loans as a percentage of total loans were 0.56% as ofJune 30, 2021 as compared to 0.51% and 0.40% as ofDecember 31, 2020 andJune 30, 2020 , respectively. The Company's coverage ratio, or its allowance for credit losses on loans as a percentage of nonperforming loans, was 304.85% as ofJune 30, 2021 as compared to 317.55% as ofDecember 31, 2020 and 329.65% as ofJune 30, 2020 . Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for credit losses atJune 30, 2021 . Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due but still accruing interest were$15,076 atJune 30, 2021 as compared to$26,286 atDecember 31, 2020 and$9,675 atJune 30, 2020 . Although not classified as nonperforming loans, restructured loans are another category of assets that contribute to our credit risk. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower's financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. As shown below, restructured loans totaled$24,710 atJune 30, 2021 as compared to$20,448 atDecember 31, 2020 and$18,078 atJune 30, 2020 . AtJune 30, 2021 , loans restructured through interest rate concessions represented 26% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company's restructured loans in compliance with their modified terms as of the dates presented: 74
--------------------------------------------------------------------------------
Table of Contents
June 30, June 30,
2021 December 31, 2020 2020
Commercial, financial, agricultural $ 6,523 $ 2,326 $ 3,286
Real estate - 1-4 family mortgage:
Primary 10,183 9,460 8,680
Home equity 299 332 374
Rental/investment 420 432 696
Total real estate - 1-4 family mortgage 10,902 10,224 9,750
Real estate - commercial mortgage:
Owner-occupied 5,633 6,838 3,679
Non-owner occupied 1,575 797 1,077
Land development - 183 189
Total real estate - commercial mortgage 7,208 7,818 4,945
Installment loans to individuals 77 80 97
Total restructured loans in compliance with modified
terms $ 24,710 $ 20,448 $ 18,078 Changes in the Company's restructured loans are set forth in the table below:
2021 2020
Balance at January 1, $ 20,448 $ 11,954 Additional advances or loans with concessions 9,101 9,105 Reclassified as performing restructured loan 35
188
Reductions due to:
Reclassified as nonperforming (2,649) (2,539)
Paid in full (1,650) (422)
Charge-offs (205) (3)
Paydowns (370) (205)
Balance at June 30, $ 24,710 $ 18,078
The following table shows the principal amounts of nonperforming and
restructured loans as of the dates presented. All loans where information exists
about possible credit problems that would cause us to have serious doubts about
the borrower's ability to comply with the current repayment terms of the loan
have been reflected in the table below.
June 30, June 30,
2021 December 31, 2020 2020
Nonaccruing loans $ 54,791 $ 51,420 $ 37,952
Accruing loans past due 90 days or more 1,745 4,050 6,151
Total nonperforming loans 56,536 55,470 44,103
Restructured loans in compliance with modified terms 24,710 20,448 18,078
Total nonperforming and restructured loans $ 81,246 $
75,918
The following table provides details of the Company's other real estate owned as of the dates presented:
75--------------------------------------------------------------------------------
Table of Contents
June 30, June 30,
2021 December 31, 2020 2020
Residential real estate $ 261 $ 179 $ 901
Commercial real estate 2,596 2,665 2,514
Residential land development 341 1,013 3,040
Commercial land development 1,741 2,115
2,670
Total other real estate owned$ 4,939 $ 5,972 $
9,125
Changes in the Company's other real estate owned were as follows:
2021 2020
Balance at January 1, $ 5,972 $ 8,010
Transfers of loans 2,503 4,259
Impairments (117) (827)
Dispositions (3,328) (2,317)
Other (91) -
Balance at June 30, $ 4,939 $ 9,125
Other real estate owned with a cost basis of $3,328 was sold during the six
months ended June 30, 2021 , resulting in a net gain of $50 , while other real
estate owned with a cost basis of $2,317 was sold during the six months ended
June 30, 2020 , resulting in a net gain of $89 .
Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The majority of assets and liabilities of a financial institution are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets and inventories. Our
market risk arises primarily from interest rate risk inherent in lending and
deposit-taking activities. Management believes a significant impact on the
Company's financial results stems from our ability to react to changes in
interest rates. A sudden and substantial change in interest rates may adversely
impact our earnings because the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent or on the same basis.
Because of the impact of interest rate fluctuations on our profitability, the
Board of Directors and management actively monitor and manage our interest rate
risk exposure. We have an Asset/Liability Committee ("ALCO") that is authorized
by the Board of Directors to monitor our interest rate sensitivity and to make
decisions relating to that process. The ALCO's goal is to structure our
asset/liability composition to maximize net interest income while managing
interest rate risk so as to minimize the adverse impact of changes in interest
rates on net interest income and capital. The ALCO uses an asset/liability model
as the primary quantitative tool in measuring the amount of interest rate risk
associated with changing market rates. The model is used to perform both net
interest income forecast simulations for multiple year horizons and economic
value of equity ("EVE") analyses, each under various interest rate scenarios,
which could impact the results presented in the table below.
Net interest income simulations measure the short and medium-term earnings
exposure from changes in market interest rates in a rigorous and explicit
fashion. Our current financial position is combined with assumptions regarding
future business to calculate net interest income under various hypothetical rate
scenarios. EVE measures our long-term earnings exposure from changes in market
rates of interest. EVE is defined as the present value of assets minus the
present value of liabilities at a point in time for a given set of market rate
assumptions. An increase in EVE due to a specified rate change indicates an
improvement in the long-term earnings capacity of the balance sheet assuming
that the rate change remains in effect over the life of the current balance
sheet.
The following table presents the projected impact of a change in interest rates
on (1) static EVE and (2) earnings at risk (that is, net interest income) for
the 1-12 and 13-24 month periods commencing July 1, 2021 , in each case as
compared to the result under rates present in the market on June 30, 2021 . The
changes in interest rates assume an instantaneous and parallel shift in the
yield curve and do not account for changes in the slope of the yield curve.
76--------------------------------------------------------------------------------
Table of Contents
Percentage Change In:
Economic Value Equity
Immediate Change in Rates of (in basis (EVE) Earning at Risk (Net Interest Income)
points): Static 1-12 Months 13-24 Months
+200 18.87% 21.38% 30.35%
+100 10.52% 10.72% 15.57%
The rate shock results for the net interest income simulations for the next
twenty-four months produce an asset sensitive position at June 30, 2021 and are
all within the parameters set by the Board of Directors. The preceding measures
assume no change in the size or asset/liability compositions of the balance
sheet, and they do not reflect future actions the ALCO may undertake in response
to such changes in interest rates.
The scenarios assume instantaneous movements in interest rates in increments of
plus 100 and 200. As interest rates are adjusted over a period of time, it is
our strategy to proactively change the volume and mix of our balance sheet in
order to mitigate our interest rate risk. The computation of the prospective
effects of hypothetical interest rate changes requires numerous assumptions,
including asset prepayment speeds, the impact of competitive factors on our
pricing of loans and deposits, how responsive our deposit repricing is to the
change in market rates and the expected life of non-maturity deposits. These
business assumptions are based upon our experience, business plans and published
industry experience; however, such assumptions may not necessarily reflect the
manner or timing in which cash flows, asset yields and liability costs respond
to changes in market rates. Because these assumptions are inherently uncertain,
actual results will differ from simulated results.
The Company utilizes derivative financial instruments, including interest rate
contracts such as swaps, caps and/or floors, as part of its ongoing efforts to
mitigate its interest rate risk exposure and to facilitate the needs of its
customers. The Company enters into derivative instruments that are not
designated as hedging instruments to help its commercial customers manage their
exposure to interest rate fluctuations. To mitigate the interest rate risk
associated with these customer contracts, the Company enters into an offsetting
derivative contract position with other financial institutions. The Company
manages its credit risk, or potential risk of default by its commercial
customers, through credit limit approval and monitoring procedures. At June 30,
2021 , the Company had notional amounts of $204,113 on interest rate contracts
with corporate customers and $204,113 in offsetting interest rate contracts with
other financial institutions to mitigate the Company's rate exposure on its
corporate customers' contracts and certain fixed rate loans.
Additionally, the Company enters into interest rate lock commitments with its
customers to mitigate the interest rate risk associated with the commitments to
fund fixed-rate and adjustable rate residential mortgage loans and also enters
into forward commitments to sell residential mortgage loans to secondary market
investors.
The Company also enters into forward interest rate swap contracts on its FHLB
borrowings and its junior subordinated debentures that are accounted for as cash
flow hedges. Under each of these contracts, the Company pays a fixed rate of
interest and receives a variable rate of interest based on the three-month or
one-month LIBOR plus a predetermined spread. The Company entered into an
interest rate swap contract on its subordinated notes that is accounted for as a
fair value hedge. Under this contract, the Company pays a variable rate of
interest based on the three-month LIBOR plus a predetermined spread and receives
a fixed rate of interest.
For more information about the Company's derivatives, see Note 10, "Derivative
Instruments," in the Notes to Consolidated Financial Statements of the Company
in Item 1, Financial Statements.
Liquidity and Capital Resources
Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Core deposits, which are deposits excluding time deposits greater than$250,000 , are the major source of funds used by the Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring the Bank's liquidity. Management continually monitors the Bank's liquidity and non-core dependency ratios to ensure compliance with targets established by the Asset/Liability Management Committee. Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Within the next twelve months, the securities portfolio is forecasted to generate cash flow through principal payments and maturities equal to approximately 16.50% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types, short-term 77 -------------------------------------------------------------------------------- Table of Contents borrowings and derivative instruments. AtJune 30, 2021 , securities with a carrying value of$617,709 were pledged to secure public fund deposits and as collateral for short-term borrowings and derivative instruments as compared to securities with a carrying value of$614,610 similarly pledged atDecember 31, 2020 . Other sources available for meeting liquidity needs include federal funds purchased and short-term and long-term advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. There were no short-term borrowings from the FHLB atJune 30, 2021 orDecember 31, 2020 . Long-term funds obtained from the FHLB are used to match-fund fixed rate loans in order to minimize interest rate risk and also are used to meet day-to-day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. AtJune 30, 2021 , the balance of our outstanding long-term advances with the FHLB was$150,434 compared to$152,167 atDecember 31, 2020 . The total amount of the remaining credit available to us from the FHLB atJune 30, 2021 was$3,864,732 . We also maintain lines of credit with other commercial banks totaling$180,000 . These are unsecured lines of credit with the majority maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit atJune 30, 2021 orDecember 31, 2020 . In 2016 and 2020, we accessed the capital markets to generate liquidity in the form of subordinated notes. In addition, we assumed subordinated notes in connection with our acquisition ofMetropolitan BancGroup, Inc. in 2017. The carrying value of the subordinated notes, net of unamortized debt issuance costs, was$207,889 atJune 30, 2021 .
The following table presents, by type, the Company's funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
Percentage of Total Average Deposits and
Borrowed Funds Cost of Funds
Six Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Noninterest-bearing demand 31.06 % 25.62 % - % - %
Interest-bearing demand 45.88 42.89 0.27 0.59
Savings 7.07 6.07 0.08 0.12
Time deposits 12.30 17.64 0.95 1.66
Short-term borrowings 0.10 4.58 0.31 1.04
Long-term Federal Home Loan Bank advances 1.16 1.29 0.04 1.13
Subordinated notes 1.58 0.97 5.06 5.60
Other borrowed funds 0.85 0.94 4.22 4.69
Total deposits and borrowed funds 100.00 % 100.00 % 0.36 % 0.71 %
Our strategy in choosing funds is focused on minimizing cost in the context of
our balance sheet composition and interest rate risk position. Accordingly,
management targets growth of noninterest-bearing deposits. While we do not
control the types of deposit instruments our clients choose, we do influence
those choices with the rates and the deposit specials we offer. We constantly
monitor our funds position and evaluate the effect that various funding sources
have on our financial position.
Cash and cash equivalents were $1,605,488 at June 30, 2021 , as compared to
$616,903 at June 30, 2020 . Cash used in investing activities for the six months
ended June 30, 2021 was $100,321 , as compared to cash used in investing
activities of $1,289,169 for the six months ended June 30, 2020 . Proceeds from
the sale, maturity or call of securities within our investment portfolio were
$350,505 for the six months ended June 30, 2021 , as compared to $192,580 for the
same period in 2020. These proceeds were primarily reinvested into the
investment portfolio. Purchases of investment securities were $1,190,400 for the
first six months of 2021, as compared to $182,745 for the same period in 2020.
Cash provided by financing activities for the six months ended June 30, 2021 was
$1,023,026 , as compared to $1,436,229 for the same period in 2020. Deposits
increased $1,056,270 and $1,633,336 for the six months ended June 30, 2021 and
2020, respectively.
Restrictions on Bank Dividends, Loans and Advances
The Company's liquidity and capital resources, as well as its ability to pay
dividends to its shareholders, are substantially dependent on the ability of the
Renasant Bank to transfer funds to the Company in the form of dividends, loans
and advances.
78
--------------------------------------------------------------------------------
Table of Contents
Under Mississippi law, a Mississippi bank may not pay dividends unless its
earned surplus is in excess of three times capital stock. A Mississippi bank
with earned surplus in excess of three times capital stock may pay a dividend,
subject to the approval of the Mississippi Department of Banking and Consumer
Finance (the "DBCF"). In addition, the FDIC also 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.
Federal Reserve regulations also limit the amount the Bank may loan to the
Company unless such loans are collateralized by specific obligations. At
June 30, 2021 , the maximum amount available for transfer from the Bank to the
Company in the form of loans was $158,102 . The Company maintains a line of
credit collateralized by cash with the Bank totaling $3,079 . There were no
amounts outstanding under this line of credit at June 30, 2021 .
These restrictions did not have any impact on the Company's ability to meet its
cash obligations in the six months ended June 30, 2021 , nor does management
expect such restrictions to materially impact the Company's ability to meet its
currently-anticipated cash obligations.
Potential Demands on Liquidity from Off-Balance Sheet Arrangements
The Company enters into loan commitments and standby letters of credit in the
normal course of its business. Loan commitments are made to accommodate the
financial needs of the Company's customers. Standby letters of credit commit the
Company to make payments on behalf of customers when certain specified future
events occur. Both arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to the Company's normal
credit policies, including establishing a provision for credit losses on
unfunded commitments. Collateral (e.g., securities, receivables, inventory,
equipment, etc.) is obtained based on management's credit assessment of the
customer.
Loan commitments and standby letters of credit do not necessarily represent
future cash requirements of the Company in that while the borrower has the
ability to draw upon these commitments at any time, these commitments often
expire without being drawn upon. The Company's unfunded loan commitments and
standby letters of credit outstanding were as follows as of the dates presented:
June 30, 2021 December 31, 2020
Loan commitments $ 2,953,982 $ 2,749,988
Standby letters of credit 95,473 90,597
The Company closely monitors the amount of remaining future commitments to
borrowers in light of prevailing economic conditions and adjusts these
commitments and the provision related thereto as necessary. The Company will
continue this process as new commitments are entered into or existing
commitments are renewed. For a more detailed discussion related to the allowance
and provision for credit losses on unfunded loan commitments, refer to the "Risk
Management" section above.
Shareholders' Equity and Regulatory Matters
Total shareholders' equity of the Company was$2,203,807 atJune 30, 2021 compared to$2,132,733 atDecember 31, 2020 . Book value per share was$39.11 and$37.95 atJune 30, 2021 andDecember 31, 2020 , respectively. The growth in shareholders' equity was attributable to earnings retention offset by changes in accumulated other comprehensive income and dividends declared. The Company maintains a shelf registration statement with theSecurities and Exchange Commission ("SEC"). The shelf registration statement, which was effective upon filing, allows the Company to raise capital from time to time through the sale of common stock, preferred stock, depositary shares, debt securities, rights, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will file with theSEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes or as otherwise described in the prospectus supplement applicable to the offering and could include the expansion of the Company's banking, insurance and wealth management operations as well as other business opportunities. OnOctober 20, 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 repurchase program will remain in effect for one year or, if earlier, the repurchase of the entire amount of common stock 79 -------------------------------------------------------------------------------- Table of Contents authorized to be repurchased. The Company did not repurchase any of its common stock under the stock repurchase plan during the first six months of 2021. The Company has junior subordinated debentures with a carrying value of$111,083 atJune 30, 2021 , of which$107,492 is included in the Company's Tier 1 capital.Federal Reserve guidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the debentures we include in Tier 1 capital atJune 30, 2021 . Although our existing junior subordinated debentures are currently unaffected by theseFederal Reserve guidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition we exceed$15,000,000 in assets, or if we make any acquisition after we have exceeded$15,000,000 in assets, we will lose Tier 1 treatment of our junior subordinated debentures.
The Company has subordinated notes with a carrying value of
TheFederal Reserve , theFDIC and theOffice of the Comptroller of the Currency have issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications: Tier 1 Capital to Tier 1 Capital to
Total Capital to
Average Assets Common Equity Tier 1 to Risk - Weighted Risk - Weighted
Capital Tiers (Leverage) Risk - Weighted Assets Assets Assets
Well capitalized 5% or above 6.5% or above 8% or above 10% or above
Adequately capitalized 4% or above 4.5% or above 6% or above 8% or above
Undercapitalized Less than 4% Less than 4.5% Less than 6% Less than 8%
Significantly undercapitalized Less than 3% Less than 3% Less than 4% Less than 6%
Critically undercapitalized Tangible Equity / Total Assets less than 2%
80-------------------------------------------------------------------------------- Table of Contents The following table provides the capital and risk-based capital and leverage ratios for the Company and forRenasant Bank as of the dates presented:Minimum Capital Requirement to beMinimum Capital Adequately Requirement to be Capitalized
(including the Capital
Actual Well Capitalized Conservation Buffer)
Amount Ratio Amount Ratio Amount Ratio
June 30, 2021
Renasant Corporation :
Risk-based capital ratios:
Common equity tier 1 capital ratio $ 1,278,165 11.14 % $ 745,917 6.50 % $ 803,295 7.00 %
Tier 1 risk-based capital ratio 1,385,657 12.07 % 918,052 8.00 % 975,430 8.50 %
Total risk-based capital ratio 1,734,376 15.11 % 1,147,564 10.00 % 1,204,943 10.50 %
Leverage capital ratios:
Tier 1 leverage ratio 1,385,657 9.30 % 744,961 5.00 % 595,969 4.00 %
Renasant Bank:
Risk-based capital ratios:
Common equity tier 1 capital ratio $ 1,444,582 12.59 % $ 745,647 6.50 % $ 803,004 7.00 %
Tier 1 risk-based capital ratio 1,444,582 12.59 % 917,719 8.00 % 975,076 8.50 %
Total risk-based capital ratio 1,581,025 13.78 % 1,147,149 10.00 % 1,204,506 10.50 %
Leverage capital ratios:
Tier 1 leverage ratio 1,444,582 9.70 % 744,592 5.00 % 595,674 4.00 %
December 31, 2020
Renasant Corporation :
Risk-based capital ratios:
Common equity tier 1 capital ratio $ 1,199,394 10.93 % $ 713,086 6.50 % $ 767,939 7.00 %
Tier 1 risk-based capital ratio 1,306,597 11.91 % 877,644 8.00 % 932,497 8.50 %
Total risk-based capital ratio 1,653,694 15.07 % 1,097,055 10.00 % 1,151,908 10.50 %
Leverage capital ratios:
Tier 1 leverage ratio 1,306,597 9.37 % 697,579 5.00 % 558,063 4.00 %
Renasant Bank:
Risk-based capital ratios:
Common equity tier 1 capital ratio $ 1,369,994 12.49 % $ 712,709 6.50 % $ 767,533 7.00 %
Tier 1 risk-based capital ratio 1,369,994 12.49 % 877,181 8.00 % 932,004 8.50 %
Total risk-based capital ratio 1,504,985 13.73 % 1,096,476 10.00 % 1,151,299 10.50 %
Leverage capital ratios:
Tier 1 leverage ratio 1,369,994 9.83 % 696,738 5.00 % 557,391 4.00 %
The Company has elected to take advantage of transitional relief offered by the
Federal Reserve and FDIC to delay for two years the estimated impact of CECL on
regulatory capital, followed by a three-year transitional period to phase out
the capital benefit provided by the two-year delay.
For more information regarding the capital adequacy guidelines applicable to the
Company and Renasant Bank , please refer to Note 15, "Regulatory Matters," in the
Notes to the Consolidated Financial Statements of the Company in Item 1,
Financial Statements.
81
--------------------------------------------------------------------------------
Table of Contents
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, an adjusted efficiency
ratio and the allowance for credit losses on loans to total loans, excluding PPP
loans (the "adjusted allowance ratio"). The adjusted allowance ratio only
excludes PPP loans; the adjusted efficiency ratio adjusts GAAP financial
measures to exclude the amortization of intangible assets and certain items
(such as, when applicable, COVID-19 related expenses, debt prepayment penalties,
restructuring charges, provision for unfunded commitments, gains on sales of
securities and asset valuation adjustments) with respect to which the Company is
unable to accurately predict when these items will be incurred or, when
incurred, the amount thereof. With respect to COVID-19 related expenses in
particular, management added these expenses as a charge to exclude when
calculating non-GAAP financial measures because the expenses included within
this line item are readily quantifiable and possess the same characteristics
with respect to management's inability to accurately predict the timing or
amount thereof as the other items excluded when calculating non-GAAP financial
measures. Management uses the adjusted efficiency ratio when evaluating capital
utilization and adequacy, while it uses the adjusted allowance ratio to
determine the adequacy of our allowance with respect to loans not fully
guaranteed by the U.S. Small Business Administration . In addition, the Company
believes that non-GAAP financial measures facilitate the making of
period-to-period comparisons and are meaningful indicators of its operating
performance, particularly because these measures are widely used by industry
analysts for companies with merger and acquisition activities. Also, because the
amortization of intangible assets and items such as restructuring charges and
COVID-19 related expenses can vary extensively from company to company and, as
to intangible assets, are excluded from the calculation of a financial
institution's regulatory capital, the Company believes that the presentation of
this non-GAAP financial information allows readers to more easily compare the
Company's results to information provided in other regulatory reports and the
results of other companies. The reconciliations from GAAP to non-GAAP for these
financial measures are below.
Adjusted Efficiency Ratio
Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Interest income (fully tax equivalent
basis) $ 122,617 $ 125,630 $ 245,995 $ 257,517
Interest expense 11,412 18,173 23,526 41,744
Net interest income (fully tax equivalent
basis) 111,205 107,457 222,469 215,773
Total noninterest income 47,610 64,170 128,647 101,740
Net gains on sales of securities - 31 1,357 31
MSR valuation adjustment - (4,951) 13,561 (14,522)
Adjusted noninterest income 47,610 69,090 113,729 116,231
Total noninterest expense 108,777 118,285 224,712 233,326
Intangible amortization 1,539 1,834 3,137 3,729
Debt prepayment penalty - 90 - 90
Restructuring charges 15 - 307 -
COVID-19 related expenses 370 6,257 1,155 9,160
Provision for unfunded commitments - 2,600 - 6,000
Adjusted noninterest expense 106,853 107,504 220,113 214,347
Efficiency Ratio (GAAP) 68.49 % 68.92 % 64.00 % 73.49 %
Adjusted Efficiency Ratio (non-GAAP) 67.28 % 60.89 % 65.47 % 64.56 %
82--------------------------------------------------------------------------------
Table of Contents
Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans
June 30, 2021 December 31, 2020
Total loans (GAAP) $ 10,149,242 $ 10,933,647
Less PPP loans 246,931 1,128,703
Adjusted total loans (non-GAAP) $ 9,902,311 Allowance for Credit Losses on Loans$ 172,354 $ 176,144 ACL/Total loans (GAAP) 1.70 % 1.61 % ACL/Total loans excluding PPP loans (non-GAAP) 1.74 % 1.80 % The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Readers of this Form 10-Q should note that, because there are no standard definitions for the calculations as well as the results, the Company's calculations may not be comparable to a similarly-titled measure presented by other companies. Also, there may be limits in the usefulness of this measure to readers of this document. As a result, the Company encourages readers to consider its consolidated financial statements and footnotes thereto in their entirety and not to rely on any single financial measure.
© Edgar Online, source
