RENASANT CORP - Quarter Report: 2018 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2018
Or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 001-13253
________________________________________________________
RENASANT CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________________________
Mississippi | 64-0676974 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
209 Troy Street, Tupelo, Mississippi | 38804-4827 | |
(Address of principal executive offices) | (Zip Code) |
(662) 680-1001
(Registrant’s telephone number, including area code)
________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of July 31, 2018, 49,438,848 shares of the registrant’s common stock, $5.00 par value per share, were outstanding.
Renasant Corporation and Subsidiaries
Form 10-Q
For the Quarterly Period Ended June 30, 2018
CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Renasant Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
(Unaudited) | |||||||
June 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Cash and due from banks | $ | 155,235 | $ | 187,838 | |||
Interest-bearing balances with banks | 137,717 | 93,615 | |||||
Cash and cash equivalents | 292,952 | 281,453 | |||||
Securities available for sale, at fair value | 1,088,779 | 671,488 | |||||
Mortgage loans held for sale, at fair value | 245,046 | 108,316 | |||||
Loans, net of unearned income: | |||||||
Non purchased loans and leases | 6,057,766 | 5,588,556 | |||||
Purchased loans | 1,709,891 | 2,031,766 | |||||
Total loans, net of unearned income | 7,767,657 | 7,620,322 | |||||
Allowance for loan losses | (47,355 | ) | (46,211 | ) | |||
Loans, net | 7,720,302 | 7,574,111 | |||||
Premises and equipment, net | 186,568 | 183,254 | |||||
Other real estate owned: | |||||||
Non purchased | 4,698 | 4,410 | |||||
Purchased | 9,006 | 11,524 | |||||
Total other real estate owned, net | 13,704 | 15,934 | |||||
Goodwill | 611,046 | 611,046 | |||||
Other intangible assets, net | 21,265 | 24,510 | |||||
Bank-owned life insurance | 177,973 | 175,863 | |||||
Mortgage servicing rights | 43,239 | 39,339 | |||||
Other assets | 143,601 | 144,667 | |||||
Total assets | $ | 10,544,475 | $ | 9,829,981 | |||
Liabilities and shareholders’ equity | |||||||
Liabilities | |||||||
Deposits | |||||||
Noninterest-bearing | $ | 1,888,561 | $ | 1,840,424 | |||
Interest-bearing | 6,492,159 | 6,080,651 | |||||
Total deposits | 8,380,720 | 7,921,075 | |||||
Short-term borrowings | 313,393 | 89,814 | |||||
Long-term debt | 207,354 | 207,546 | |||||
Other liabilities | 84,340 | 96,563 | |||||
Total liabilities | 8,985,807 | 8,314,998 | |||||
Shareholders’ equity | |||||||
Preferred stock, $.01 par value – 5,000,000 shares authorized; no shares issued and outstanding | — | — | |||||
Common stock, $5.00 par value – 150,000,000 shares authorized; 49,990,248 shares issued; 49,424,339 and 49,321,231 shares outstanding, respectively | 249,951 | 249,951 | |||||
Treasury stock, at cost | (17,523 | ) | (19,906 | ) | |||
Additional paid-in capital | 897,817 | 898,095 | |||||
Retained earnings | 448,475 | 397,354 | |||||
Accumulated other comprehensive loss, net of taxes | (20,052 | ) | (10,511 | ) | |||
Total shareholders’ equity | 1,558,668 | 1,514,983 | |||||
Total liabilities and shareholders’ equity | $ | 10,544,475 | $ | 9,829,981 |
See Notes to Consolidated Financial Statements.
1
Renasant Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In Thousands, Except Share Data)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest income | |||||||||||||||
Loans | $ | 98,656 | $ | 80,133 | $ | 192,774 | $ | 154,540 | |||||||
Securities | |||||||||||||||
Taxable | 5,700 | 4,627 | 9,694 | 8,979 | |||||||||||
Tax-exempt | 1,649 | 2,310 | 3,334 | 4,884 | |||||||||||
Other | 569 | 509 | 1,152 | 1,065 | |||||||||||
Total interest income | 106,574 | 87,579 | 206,954 | 169,468 | |||||||||||
Interest expense | |||||||||||||||
Deposits | 10,919 | 5,314 | 18,978 | 10,463 | |||||||||||
Borrowings | 3,266 | 2,662 | 6,347 | 5,387 | |||||||||||
Total interest expense | 14,185 | 7,976 | 25,325 | 15,850 | |||||||||||
Net interest income | 92,389 | 79,603 | 181,629 | 153,618 | |||||||||||
Provision for loan losses | 1,810 | 1,750 | 3,560 | 3,250 | |||||||||||
Net interest income after provision for loan losses | 90,579 | 77,853 | 178,069 | 150,368 | |||||||||||
Noninterest income | |||||||||||||||
Service charges on deposit accounts | 8,271 | 7,958 | 16,744 | 15,889 | |||||||||||
Fees and commissions | 5,917 | 5,470 | 11,602 | 10,669 | |||||||||||
Insurance commissions | 2,110 | 2,181 | 4,115 | 4,041 | |||||||||||
Wealth management revenue | 3,446 | 3,037 | 6,708 | 5,921 | |||||||||||
Mortgage banking income | 12,839 | 12,424 | 23,799 | 22,928 | |||||||||||
BOLI income | 1,195 | 985 | 2,140 | 2,098 | |||||||||||
Other | 1,803 | 2,210 | 4,426 | 4,740 | |||||||||||
Total noninterest income | 35,581 | 34,265 | 69,534 | 66,286 | |||||||||||
Noninterest expense | |||||||||||||||
Salaries and employee benefits | 52,010 | 45,014 | 100,794 | 87,223 | |||||||||||
Data processing | 4,600 | 3,835 | 8,844 | 8,069 | |||||||||||
Net occupancy and equipment | 9,805 | 8,814 | 19,627 | 18,133 | |||||||||||
Other real estate owned | 232 | 781 | 889 | 1,313 | |||||||||||
Professional fees | 2,176 | 1,882 | 4,314 | 3,949 | |||||||||||
Advertising and public relations | 2,647 | 2,430 | 4,850 | 4,022 | |||||||||||
Intangible amortization | 1,594 | 1,493 | 3,245 | 3,056 | |||||||||||
Communications | 1,877 | 1,908 | 3,846 | 3,771 | |||||||||||
Extinguishment of debt | — | — | — | 205 | |||||||||||
Merger and conversion related expenses | 500 | 3,044 | 1,400 | 3,389 | |||||||||||
Other | 3,585 | 5,640 | 9,161 | 11,020 | |||||||||||
Total noninterest expense | 79,026 | 74,841 | 156,970 | 144,150 | |||||||||||
Income before income taxes | 47,134 | 37,277 | 90,633 | 72,504 | |||||||||||
Income taxes | 10,424 | 11,993 | 20,097 | 23,248 | |||||||||||
Net income | $ | 36,710 | $ | 25,284 | $ | 70,536 | $ | 49,256 | |||||||
Basic earnings per share | $ | 0.74 | $ | 0.57 | $ | 1.43 | $ | 1.11 | |||||||
Diluted earnings per share | $ | 0.74 | $ | 0.57 | $ | 1.42 | $ | 1.11 | |||||||
Cash dividends per common share | $ | 0.20 | $ | 0.18 | $ | 0.39 | $ | 0.36 |
See Notes to Consolidated Financial Statements.
2
Renasant Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In Thousands, Except Share Data)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 36,710 | $ | 25,284 | $ | 70,536 | $ | 49,256 | |||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||
Securities available for sale: | |||||||||||||||
Unrealized holding (losses) gains on securities | (3,000 | ) | 2,569 | (10,909 | ) | 5,476 | |||||||||
Amortization of unrealized holding gains on securities transferred to the held to maturity category | — | (18 | ) | — | (169 | ) | |||||||||
Total securities | (3,000 | ) | 2,551 | (10,909 | ) | 5,307 | |||||||||
Derivative instruments: | |||||||||||||||
Unrealized holding gains (losses) on derivative instruments | 387 | (165 | ) | 1,245 | 4 | ||||||||||
Total derivative instruments | 387 | (165 | ) | 1,245 | 4 | ||||||||||
Defined benefit pension and post-retirement benefit plans: | |||||||||||||||
Amortization of net actuarial loss recognized in net periodic pension cost | 57 | 56 | 123 | 125 | |||||||||||
Total defined benefit pension and post-retirement benefit plans | 57 | 56 | 123 | 125 | |||||||||||
Other comprehensive (loss) income, net of tax | (2,556 | ) | 2,442 | (9,541 | ) | 5,436 | |||||||||
Comprehensive income | $ | 34,154 | $ | 27,726 | $ | 60,995 | $ | 54,692 |
See Notes to Consolidated Financial Statements.
3
Renasant Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six Months Ended June 30, | |||||||
2018 | 2017 | ||||||
Operating activities | |||||||
Net income | $ | 70,536 | $ | 49,256 | |||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||
Provision for loan losses | 3,560 | 3,250 | |||||
Depreciation, amortization and accretion | 1,854 | 2,625 | |||||
Deferred income tax expense | 3,476 | 2,219 | |||||
Funding of mortgage loans held for sale | (838,564 | ) | (772,456 | ) | |||
Proceeds from sales of mortgage loans held for sale | 721,351 | 729,532 | |||||
Gains on sales of mortgage loans held for sale | (19,517 | ) | (11,608 | ) | |||
Penalty on prepayment of debt | — | 205 | |||||
(Gains) losses on sales of premises and equipment | (225 | ) | 546 | ||||
Stock-based compensation expense | 3,712 | 2,411 | |||||
(Increase) decrease in other assets | (6,649 | ) | 10,428 | ||||
Decrease in other liabilities | (12,657 | ) | (8,715 | ) | |||
Net cash (used in) provided by operating activities | (73,123 | ) | 7,693 | ||||
Investing activities | |||||||
Purchases of securities available for sale | (497,845 | ) | (119,766 | ) | |||
Proceeds from sales of securities available for sale | — | 2,946 | |||||
Proceeds from call/maturities of securities available for sale | 63,655 | 60,928 | |||||
Proceeds from call/maturities of securities held to maturity | — | 15,507 | |||||
Net increase in loans | (140,205 | ) | (163,349 | ) | |||
Purchases of premises and equipment | (10,313 | ) | (7,668 | ) | |||
Proceeds from sales of premises and equipment | 233 | 1,255 | |||||
Proceeds from sales of other assets | 4,026 | 7,385 | |||||
Net cash used in investing activities | (580,449 | ) | (202,762 | ) | |||
Financing activities | |||||||
Net increase in noninterest-bearing deposits | 48,137 | 81,506 | |||||
Net increase in interest-bearing deposits | 413,003 | 62,405 | |||||
Net increase in short-term borrowings | 223,579 | 10,445 | |||||
Repayment of long-term debt | (436 | ) | (11,063 | ) | |||
Cash paid for dividends | (19,413 | ) | (16,068 | ) | |||
Net stock-based compensation transactions | 201 | (2,319 | ) | ||||
Net cash provided by financing activities | 665,071 | 124,906 | |||||
Net increase (decrease) in cash and cash equivalents | 11,499 | (70,163 | ) | ||||
Cash and cash equivalents at beginning of period | 281,453 | 306,224 | |||||
Cash and cash equivalents at end of period | $ | 292,952 | $ | 236,061 | |||
Supplemental disclosures | |||||||
Cash paid for interest | $ | 24,652 | $ | 16,155 | |||
Cash paid for income taxes | $ | 12,044 | $ | 12,701 | |||
Noncash transactions: | |||||||
Transfers of loans to other real estate owned | $ | 2,291 | $ | 4,227 | |||
Financed sales of other real estate owned | $ | 418 | $ | 257 | |||
Transfers of loans held for sale to loans held for investment | $ | 663 | $ | — |
See Notes to Consolidated Financial Statements.
4
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
(In Thousands)
Nature of Operations: Renasant Corporation (referred to herein as the “Company”) owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. (“Renasant Insurance”). The Company offers a diversified range of financial, wealth management and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and central Mississippi, Tennessee, Georgia, Alabama and north Florida.
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform to the current year presentation. For further information regarding the Company’s significant accounting policies, refer to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on February 28, 2018.
Business Combinations: The Company completed its acquisition of Metropolitan BancGroup, Inc. (“Metropolitan”) on July 1, 2017. Metropolitan’s financial condition and results of operations are included in the Company’s financial condition and results of operations as of the acquisition date.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and such differences may be material.
Subsequent Events: The Company has evaluated, for consideration of recognition or disclosure, subsequent events that have occurred through the date of issuance of its financial statements. The Company has determined that no significant events occurred after June 30, 2018 but prior to the issuance of these financial statements that would have a material impact on its Consolidated Financial Statements.
Impact of Recently-Issued Accounting Standards and Pronouncements:
In February 2016, FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 amends the accounting model and disclosure requirements for leases. The current accounting model for leases distinguishes between capital leases, which are recognized on the balance sheet, and operating leases, which are not. Under the new standard, the lease classifications are defined as finance leases, which are similar to capital leases under current GAAP, and operating leases. Further, a lessee will recognize a lease liability and a right-of-use asset for all leases with a term greater than 12 months on its balance sheet regardless of the lease’s classification, which may significantly increase reported assets and liabilities. The accounting model and disclosure requirements for lessors remains substantially unchanged from current GAAP. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact ASU 2016-02 will have on its financial position and results of operations, and its financial statement disclosures, and the expected results include the recognition of leased assets and related lease liabilities on the balance sheet, along with leasehold amortization and interest expense recognized in the statements of income.
In June 2016, FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This update will significantly change the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of credit losses since it incorporates expected credit losses versus incurred credit losses. The scope of FASB’s CECL model includes loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. For public companies, this update is effective for interim and annual periods beginning after December 15, 2019. The Company has formed an implementation committee comprised of both accounting and credit employees to guide Renasant Bank through the implementation of ASU 2016-13. Currently, this committee is working with a consulting firm to develop the Company’s CECL model, which includes reviewing the different model requirements and ensuring historical data integrity across all reporting systems.
5
In January 2017, FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350)” (“ASU 2017-04”). ASU 2017-04 will amend and simplify current goodwill impairment testing by eliminating certain testing under the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for interim and annual periods beginning after December 15, 2019 and is not expected to have a material impact on the Company’s financial statements.
In March 2017, FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 requires the amortization period for certain callable debt securities held at a premium to be the earliest call date. ASU 2017-08 will be effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect that ASU 2017-08 will have on its financial position and results of operations and its financial statement disclosures.
In August 2017, FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 is intended to simplify hedge accounting by eliminating the requirement to separately measure and report hedge effectiveness. ASU 2017-12 also seeks to expand the application of hedge accounting by modifying current requirements to include hedge accounting on partial-term hedges, the hedging of prepayable financial instruments and other strategies. ASU 2017-12 will be effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effect that ASU 2017-12 will have on its financial position and results of operations and its financial statement disclosures.
Note 2 – Mergers and Acquisitions
(In Thousands, Except Share Data)
Merger with Brand Group Holdings, Inc.
On March 28, 2018, the Company and Brand Group Holdings, Inc. (“Brand”), the parent company of The Brand Banking Company (“Brand Bank”), jointly announced the signing of a definitive merger agreement pursuant to which the Company will acquire Brand. Under the terms of the agreement, Brand will merge with and into Renasant, with Renasant continuing as the surviving corporation. Immediately after the merger of Brand with and into Renasant, Brand Bank will merge with and into Renasant Bank, with Renasant Bank continuing as the surviving banking corporation in the merger.
Under the terms of the merger agreement, the merger consideration to be received by Brand shareholders and the amount to be paid to cash out in-the-money Brand stock options is contingent (and subject to reduction only) upon Brand's divestiture of certain assets, as outlined in the definitive merger agreement filed with the Securities and Exchange Commission on March 30, 2018. Although the deadline for fixing the merger consideration and the option cash-out amount has not yet occurred, as of July 20, 2018 Brand had already divested all of the assets impacting the merger consideration and the option cash-out amount. Accordingly, the Company does not anticipate any further adjustments to the merger consideration and the option cash-out amount. After adjusting the merger consideration and the option cash-out amount to reflect Brand’s divestiture of these assets, each Brand shareholder will have the right to receive 31.72 shares of Renasant common stock and $74.57 in cash for each share of Brand common stock. Additionally, all in-the-money Brand stock options will be cashed out at an amount equal to the excess of $1,519 per share over the exercise price of such option (underwater options will be cancelled).
As of June 30, 2018, Brand, which has 13 locations throughout the greater Atlanta market, had approximately $2,240,000 in total assets, which included approximately $1,730,000 in total loans (excluding mortgage loans held for sale), and approximately $1,800,000 in total deposits.
The acquisition is expected to close in the third quarter of 2018 and is subject customary conditions set forth in the merger agreement. Brand shareholders approved the merger on July 26, 2018 and all required regulatory approvals have been received.
Acquisition of Metropolitan BancGroup, Inc.
Effective July 1, 2017, the Company completed its acquisition of Metropolitan, the parent company of Metropolitan Bank, in a transaction valued at approximately $219,461. The Company issued 4,883,182 shares of common stock and paid approximately $4,764 to Metropolitan stock option holders for 100% of the voting equity interest in Metropolitan. At closing, Metropolitan merged with and into the Company, with the Company the surviving corporation in the merger; immediately thereafter, Metropolitan Bank merged with and into Renasant Bank, with Renasant Bank the surviving banking corporation in the merger. On July 1, 2017, Metropolitan operated eight banking locations in Nashville and Memphis, Tennessee and the Jackson, Mississippi Metropolitan Statistical Area.
6
The Company recorded approximately $147,478 in intangible assets which consist of goodwill of $140,512 and a core deposit intangible of $6,966. Goodwill resulted from a combination of revenue enhancements from expansion in existing markets and efficiencies resulting from operational synergies. The fair value of the core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately 10 years. The goodwill is not deductible for income tax purposes.
The following table summarizes the allocation of purchase price to assets and liabilities acquired in connection with the Company’s acquisition of Metropolitan based on their fair values on July 1, 2017.
Purchase Price: | ||||||
Shares issued to common shareholders | 4,883,182 | |||||
Purchase price per share | $ | 43.74 | ||||
Value of stock paid | $ | 213,590 | ||||
Cash paid for fractional shares | 5 | |||||
Cash settlement for stock options | 4,764 | |||||
Deal charges, net of taxes | 1,102 | |||||
Total Purchase Price | $ | 219,461 | ||||
Net Assets Acquired: | ||||||
Stockholders’ equity at acquisition date | $ | 89,253 | ||||
Increase (decrease) to net assets as a result of fair value adjustments to assets acquired and liabilities assumed: | ||||||
Securities | (731 | ) | ||||
Mortgage loans held for sale | 30 | |||||
Loans, net of Metropolitan’s allowance for loan losses | (13,071 | ) | ||||
Premises and equipment | (4,629 | ) | ||||
Intangible assets, net of Metropolitan’s existing intangibles | 2,340 | |||||
Other real estate owned | (1,251 | ) | ||||
Other assets | 2,731 | |||||
Deposits | (3,603 | ) | ||||
Borrowings | (1,294 | ) | ||||
Other liabilities | 3,930 | |||||
Deferred income taxes | 5,244 | |||||
Total Net Assets Acquired | $ | 78,949 | ||||
Goodwill resulting from merger(1) | $ | 140,512 |
(1) The goodwill resulting from the merger has been assigned to the Community Banks operating segment.
7
The following table summarizes the fair value on July 1, 2017 of assets acquired and liabilities assumed on that date in connection with the merger with Metropolitan.
Cash and cash equivalents | $ | 47,556 | ||
Securities | 108,697 | |||
Loans, including mortgage loans held for sale, net of unearned income | 967,804 | |||
Premises and equipment | 8,576 | |||
Other real estate owned | 1,203 | |||
Intangible assets | 147,478 | |||
Other assets | 69,567 | |||
Total assets | $ | 1,350,881 | ||
Deposits | $ | 942,084 | ||
Borrowings | 174,522 | |||
Other liabilities | 20,685 | |||
Total liabilities | $ | 1,137,291 |
The following unaudited pro forma combined condensed consolidated financial information presents the results of operations for the six months ended June 30, 2018 and 2017 of the Company as though the Metropolitan merger had been completed as of January 1, 2016. The unaudited pro forma information combines the historical results of Metropolitan with the Company’s historical consolidated results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the periods presented. The pro forma information is not necessarily indicative of what would have occurred had the acquisition taken place on January 1, 2016. The pro forma information does not include the effect of any cost-saving or revenue-enhancing strategies. Merger expenses are reflected in the period in which they were incurred.
(Unaudited) | |||||||
Six Months Ended | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Net interest income - pro forma | $ | 181,629 | $ | 173,508 | |||
Net income - pro forma | $ | 70,536 | $ | 46,912 | |||
Earnings per share - pro forma: | |||||||
Basic | $ | 1.43 | $ | 1.00 | |||
Diluted | $ | 1.42 | $ | 1.00 |
8
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 3 – Securities
(In Thousands, Except Number of Securities)
The amortized cost and fair value of securities available for sale were as follows as of the dates presented:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
June 30, 2018 | |||||||||||||||
Obligations of other U.S. Government agencies and corporations | $ | 3,545 | $ | 19 | $ | (49 | ) | $ | 3,515 | ||||||
Obligations of states and political subdivisions | 217,847 | 3,787 | (758 | ) | 220,876 | ||||||||||
Residential mortgage backed securities: | |||||||||||||||
Government agency mortgage backed securities | 493,001 | 336 | (10,212 | ) | 483,125 | ||||||||||
Government agency collateralized mortgage obligations | 303,625 | 59 | (7,679 | ) | 296,005 | ||||||||||
Commercial mortgage backed securities: | |||||||||||||||
Government agency mortgage backed securities | 27,468 | 251 | (530 | ) | 27,189 | ||||||||||
Government agency collateralized mortgage obligations | 24,585 | — | (264 | ) | 24,321 | ||||||||||
Trust preferred securities | 12,402 | — | (2,001 | ) | 10,401 | ||||||||||
Other debt securities | 23,555 | 94 | (302 | ) | 23,347 | ||||||||||
$ | 1,106,028 | $ | 4,546 | $ | (21,795 | ) | $ | 1,088,779 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
December 31, 2017 | |||||||||||||||
Obligations of other U.S. Government agencies and corporations | $ | 3,554 | $ | 40 | $ | (30 | ) | $ | 3,564 | ||||||
Obligations of states and political subdivisions | 228,589 | 6,161 | (269 | ) | 234,481 | ||||||||||
Residential mortgage backed securities: | |||||||||||||||
Government agency mortgage backed securities | 196,121 | 888 | (3,059 | ) | 193,950 | ||||||||||
Government agency collateralized mortgage obligations | 180,258 | 133 | (3,752 | ) | 176,639 | ||||||||||
Commercial mortgage backed securities: | |||||||||||||||
Government agency mortgage backed securities | 31,015 | 389 | (234 | ) | 31,170 | ||||||||||
Government agency collateralized mortgage obligations | 5,019 | 1 | (14 | ) | 5,006 | ||||||||||
Trust preferred securities | 12,442 | — | (3,054 | ) | 9,388 | ||||||||||
Other debt securities | 17,106 | 260 | (76 | ) | 17,290 | ||||||||||
$ | 674,104 | $ | 7,872 | $ | (10,488 | ) | $ | 671,488 |
There were no sales of securities during the six months ended June 30, 2018. During the first quarter of 2017, the Company sold residential mortgage backed securities with a carrying value of $2,946 at the time of the sale for net proceeds of $2,946 resulting in no gain or loss on the sale. There were no securities sold during the second quarter of 2017.
At June 30, 2018 and December 31, 2017, securities with a carrying value of $443,011 and $217,867, respectively, were pledged to secure government, public and trust deposits. Securities with a carrying value of $18,278 and $25,888 were pledged as collateral for short-term borrowings and derivative instruments at June 30, 2018 and December 31, 2017, respectively.
The amortized cost and fair value of securities at June 30, 2018 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.
9
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Available for Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due within one year | $ | 41,602 | $ | 42,138 | ||||
Due after one year through five years | 54,549 | 55,472 | ||||||
Due after five years through ten years | 80,531 | 81,272 | ||||||
Due after ten years | 65,931 | 64,758 | ||||||
Residential mortgage backed securities: | ||||||||
Government agency mortgage backed securities | 493,001 | 483,125 | ||||||
Government agency collateralized mortgage obligations | 303,625 | 296,005 | ||||||
Commercial mortgage backed securities: | ||||||||
Government agency mortgage backed securities | 27,468 | 27,189 | ||||||
Government agency collateralized mortgage obligations | 24,585 | 24,321 | ||||||
Other debt securities | 14,736 | 14,499 | ||||||
$ | 1,106,028 | $ | 1,088,779 |
10
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the age of gross unrealized losses and fair value by investment category as of the dates presented:
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
# | Fair Value | Unrealized Losses | # | Fair Value | Unrealized Losses | # | Fair Value | Unrealized Losses | |||||||||||||||||||||
Available for Sale: | |||||||||||||||||||||||||||||
June 30, 2018 | |||||||||||||||||||||||||||||
Obligations of other U.S. Government agencies and corporations | 1 | $ | 492 | $ | (8 | ) | 2 | $ | 1,980 | $ | (41 | ) | 3 | $ | 2,472 | $ | (49 | ) | |||||||||||
Obligations of states and political subdivisions | 51 | 32,251 | (386 | ) | 13 | 7,800 | (372 | ) | 64 | 40,051 | (758 | ) | |||||||||||||||||
Residential mortgage backed securities: | |||||||||||||||||||||||||||||
Government agency mortgage backed securities | 105 | 361,859 | (5,623 | ) | 47 | 88,914 | (4,589 | ) | 152 | 450,773 | (10,212 | ) | |||||||||||||||||
Government agency collateralized mortgage obligations | 52 | 178,776 | (3,538 | ) | 34 | 74,271 | (4,141 | ) | 86 | 253,047 | (7,679 | ) | |||||||||||||||||
Commercial mortgage backed securities: | |||||||||||||||||||||||||||||
Government agency mortgage backed securities | 8 | 14,530 | (178 | ) | 3 | 5,659 | (352 | ) | 11 | 20,189 | (530 | ) | |||||||||||||||||
Government agency collateralized mortgage obligations | 4 | 24,321 | (264 | ) | 0 | — | — | 4 | 24,321 | (264 | ) | ||||||||||||||||||
Trust preferred securities | 0 | — | — | 2 | 10,401 | (2,001 | ) | 2 | 10,401 | (2,001 | ) | ||||||||||||||||||
Other debt securities | 10 | 10,011 | (110 | ) | 2 | 5,815 | (192 | ) | 12 | 15,826 | (302 | ) | |||||||||||||||||
Total | 231 | $ | 622,240 | $ | (10,107 | ) | 103 | $ | 194,840 | $ | (11,688 | ) | 334 | $ | 817,080 | $ | (21,795 | ) | |||||||||||
December 31, 2017 | |||||||||||||||||||||||||||||
Obligations of other U.S. Government agencies and corporations | 1 | $ | 497 | $ | (3 | ) | 2 | $ | 1,999 | $ | (27 | ) | 3 | $ | 2,496 | $ | (30 | ) | |||||||||||
Obligations of states and political subdivisions | 23 | 11,860 | (59 | ) | 12 | 7,728 | (210 | ) | 35 | 19,588 | (269 | ) | |||||||||||||||||
Residential mortgage backed securities: | |||||||||||||||||||||||||||||
Government agency mortgage backed securities | 29 | 64,595 | (659 | ) | 44 | 89,414 | (2,400 | ) | 73 | 154,009 | (3,059 | ) | |||||||||||||||||
Government agency collateralized mortgage obligations | 33 | 102,509 | (1,470 | ) | 29 | 62,406 | (2,282 | ) | 62 | 164,915 | (3,752 | ) | |||||||||||||||||
Commercial mortgage backed securities: | |||||||||||||||||||||||||||||
Government agency mortgage backed securities | 2 | 5,629 | (17 | ) | 3 | 5,872 | (217 | ) | 5 | 11,501 | (234 | ) | |||||||||||||||||
Government agency collateralized mortgage obligations | 1 | 4,986 | (14 | ) | 0 | — | — | 1 | 4,986 | (14 | ) | ||||||||||||||||||
Trust preferred securities | 0 | — | — | 2 | 9,388 | (3,054 | ) | 2 | 9,388 | (3,054 | ) | ||||||||||||||||||
Other debt securities | 2 | 756 | (12 | ) | 2 | 6,308 | (64 | ) | 4 | 7,064 | (76 | ) | |||||||||||||||||
Total | 91 | $ | 190,832 | $ | (2,234 | ) | 94 | $ | 183,115 | $ | (8,254 | ) | 185 | $ | 373,947 | $ | (10,488 | ) |
The Company evaluates its investment portfolio for other-than-temporary-impairment (“OTTI”) on a quarterly basis. Impairment is assessed at the individual security level. The Company considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. Impairment is considered to be other-than-temporary if the Company intends to sell the investment security or if the Company does not expect to recover the entire amortized cost basis of the security before the Company is required to sell the security or before the security’s maturity.
The Company does not intend to sell any securities in an unrealized loss position that it holds, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for a period
11
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
greater than twelve months, the Company is collecting principal and interest payments from the respective issuers as scheduled. As such, the Company did not record any OTTI for the six months ended June 30, 2018 or 2017.
The Company holds investments in pooled trust preferred securities that had an amortized cost basis of $12,402 and $12,442 and a fair value of $10,401 and $9,388 at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, the investments in pooled trust preferred securities consisted of two securities representing interests in various tranches of trusts collateralized by debt issued by over 160 financial institutions. Management’s determination of the fair value of each of its holdings in pooled trust preferred securities is based on the current credit ratings, the known deferrals and defaults by the underlying issuing financial institutions and the degree to which future deferrals and defaults would be required to occur before the cash flow for the Company’s tranches is negatively impacted. In addition, management continually monitors key credit quality and capital ratios of the issuing institutions. This determination is further supported by quarterly valuations, which are performed by third parties, of each security obtained by the Company. The Company does not intend to sell the investments before recovery of the investments’ amortized cost, and it is not more likely than not that the Company will be required to sell the investments before recovery of the investments’ amortized cost, which may be at maturity. At June 30, 2018, management did not, and does not currently, believe such securities will be settled at a price less than the amortized cost of the investment, but the Company previously concluded that it was probable that there had been an adverse change in estimated cash flows for both trust preferred securities and recognized credit related impairment losses on these securities in 2011. No additional impairment was recognized during the six months ended June 30, 2018.
The following table provides information regarding the Company’s investments in pooled trust preferred securities at June 30, 2018:
Name | Single/ Pooled | Class/ Tranche | Amortized Cost | Fair Value | Unrealized Loss | Lowest Credit Rating | Issuers Currently in Deferral or Default | |||||||||||||
XXIII | Pooled | B-2 | $ | 8,313 | $ | 6,751 | $ | (1,562 | ) | BB | 16 | % | ||||||||
XXVI | Pooled | B-2 | 4,089 | 3,650 | (439 | ) | B | 19 | % | |||||||||||
$ | 12,402 | $ | 10,401 | $ | (2,001 | ) |
The following table provides a summary of the cumulative credit related losses recognized in earnings for which a portion of OTTI has been recognized in other comprehensive income:
2018 | 2017 | ||||||
Balance at January 1 | $ | (261 | ) | $ | (3,337 | ) | |
Additions related to credit losses for which OTTI was not previously recognized | — | — | |||||
Increases in credit loss for which OTTI was previously recognized | — | — | |||||
Reductions for securities sold during the period | — | 3,076 | |||||
Balance at June 30 | $ | (261 | ) | $ | (261 | ) |
12
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 4 – Non Purchased Loans
(In Thousands, Except Number of Loans)
For purposes of this Note 4, all references to “loans” mean non purchased loans.
The following is a summary of non purchased loans and leases as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||
Commercial, financial, agricultural | $ | 790,363 | $ | 763,823 | |||
Lease financing | 55,749 | 57,354 | |||||
Real estate – construction | 642,380 | 547,658 | |||||
Real estate – 1-4 family mortgage | 1,912,450 | 1,729,534 | |||||
Real estate – commercial mortgage | 2,554,955 | 2,390,076 | |||||
Installment loans to individuals | 105,195 | 103,452 | |||||
Gross loans | 6,061,092 | 5,591,897 | |||||
Unearned income | (3,326 | ) | (3,341 | ) | |||
Loans, net of unearned income | $ | 6,057,766 | $ | 5,588,556 |
Past Due and Nonaccrual Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, the recognition of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer and other retail loans are typically charged-off no later than the time the loan is 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. All interest accrued for the current year, but not collected, for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
13
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:
Accruing Loans | Nonaccruing Loans | ||||||||||||||||||||||||||||||||||
30-89 Days Past Due | 90 Days or More Past Due | Current Loans | Total Loans | 30-89 Days Past Due | 90 Days or More Past Due | Current Loans | Total Loans | Total Loans | |||||||||||||||||||||||||||
June 30, 2018 | |||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural | $ | 1,575 | $ | 150 | $ | 786,645 | $ | 788,370 | $ | — | $ | 1,900 | $ | 93 | $ | 1,993 | $ | 790,363 | |||||||||||||||||
Lease financing | 288 | 44 | 55,082 | 55,414 | — | 335 | — | 335 | 55,749 | ||||||||||||||||||||||||||
Real estate – construction | 273 | 49 | 642,058 | 642,380 | — | — | — | — | 642,380 | ||||||||||||||||||||||||||
Real estate – 1-4 family mortgage | 6,921 | 1,663 | 1,901,680 | 1,910,264 | 286 | 1,158 | 742 | 2,186 | 1,912,450 | ||||||||||||||||||||||||||
Real estate – commercial mortgage | 2,069 | 254 | 2,548,264 | 2,550,587 | 14 | 2,427 | 1,927 | 4,368 | 2,554,955 | ||||||||||||||||||||||||||
Installment loans to individuals | 487 | 30 | 104,639 | 105,156 | 6 | 23 | 10 | 39 | 105,195 | ||||||||||||||||||||||||||
Unearned income | — | — | (3,326 | ) | (3,326 | ) | — | — | — | — | (3,326 | ) | |||||||||||||||||||||||
Total | $ | 11,613 | $ | 2,190 | $ | 6,035,042 | $ | 6,048,845 | $ | 306 | $ | 5,843 | $ | 2,772 | $ | 8,921 | $ | 6,057,766 | |||||||||||||||||
December 31, 2017 | |||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural | $ | 2,722 | $ | 22 | $ | 759,143 | $ | 761,887 | $ | 205 | $ | 1,033 | $ | 698 | $ | 1,936 | $ | 763,823 | |||||||||||||||||
Lease financing | 47 | — | 57,148 | 57,195 | — | 159 | — | 159 | 57,354 | ||||||||||||||||||||||||||
Real estate – construction | 50 | — | 547,608 | 547,658 | — | — | — | — | 547,658 | ||||||||||||||||||||||||||
Real estate – 1-4 family mortgage | 11,810 | 2,194 | 1,712,982 | 1,726,986 | — | 1,818 | 730 | 2,548 | 1,729,534 | ||||||||||||||||||||||||||
Real estate – commercial mortgage | 1,921 | 727 | 2,381,871 | 2,384,519 | — | 2,877 | 2,680 | 5,557 | 2,390,076 | ||||||||||||||||||||||||||
Installment loans to individuals | 429 | 72 | 102,901 | 103,402 | 1 | 28 | 21 | 50 | 103,452 | ||||||||||||||||||||||||||
Unearned income | — | — | (3,341 | ) | (3,341 | ) | — | — | — | — | (3,341 | ) | |||||||||||||||||||||||
Total | $ | 16,979 | $ | 3,015 | $ | 5,558,312 | $ | 5,578,306 | $ | 206 | $ | 5,915 | $ | 4,129 | $ | 10,250 | $ | 5,588,556 |
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for commercial, consumer and construction loans of $500 or more by, as applicable, the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are evaluated collectively for impairment. When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, the loan is placed on nonaccrual status and all cash receipts are applied to principal. Once the recorded balance has been reduced to zero, future cash receipts are applied to interest income, to the extent any interest has been foregone, and then they are recorded as recoveries of any amounts previously charged-off. For impaired loans, a specific reserve is established to adjust the carrying value of the loan to its estimated net realizable value.
14
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Loans accounted for under FASB ASC 310-20, “Nonrefundable Fees and Other Cost” (“ASC 310-20”), and which are impaired loans recognized in conformity with ASC 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of the dates presented:
Unpaid Contractual Principal Balance | Recorded Investment With Allowance | Recorded Investment With No Allowance | Total Recorded Investment | Related Allowance | |||||||||||||||
June 30, 2018 | |||||||||||||||||||
Commercial, financial, agricultural | $ | 2,634 | $ | 2,319 | $ | — | $ | 2,319 | $ | 376 | |||||||||
Lease financing | 335 | 335 | — | 335 | 4 | ||||||||||||||
Real estate – construction | — | — | — | — | — | ||||||||||||||
Real estate – 1-4 family mortgage | 8,065 | 6,935 | — | 6,935 | 64 | ||||||||||||||
Real estate – commercial mortgage | 8,901 | 4,454 | 1,316 | 5,770 | 948 | ||||||||||||||
Installment loans to individuals | 109 | 104 | — | 104 | 1 | ||||||||||||||
Total | $ | 20,044 | $ | 14,147 | $ | 1,316 | $ | 15,463 | $ | 1,393 | |||||||||
December 31, 2017 | |||||||||||||||||||
Commercial, financial, agricultural | $ | 3,043 | $ | 2,365 | $ | — | $ | 2,365 | $ | 138 | |||||||||
Lease financing | 159 | 159 | — | 159 | 2 | ||||||||||||||
Real estate – construction | 578 | 578 | — | 578 | 4 | ||||||||||||||
Real estate – 1-4 family mortgage | 10,018 | 8,169 | 703 | 8,872 | 561 | ||||||||||||||
Real estate – commercial mortgage | 12,463 | 9,652 | — | 9,652 | 1,861 | ||||||||||||||
Installment loans to individuals | 121 | 117 | — | 117 | 1 | ||||||||||||||
Totals | $ | 26,382 | $ | 21,040 | $ | 703 | $ | 21,743 | $ | 2,567 |
The following table presents the average recorded investment and interest income recognized on loans accounted for under ASC 310-20 and which are impaired loans for the periods presented:
Three Months Ended | Three Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial, financial, agricultural | $ | 2,663 | $ | 8 | $ | 1,873 | $ | — | |||||||
Lease financing | 335 | — | — | — | |||||||||||
Real estate – construction | — | — | 295 | 6 | |||||||||||
Real estate – 1-4 family mortgage | 7,442 | 57 | 8,911 | 89 | |||||||||||
Real estate – commercial mortgage | 5,807 | 38 | 14,487 | 176 | |||||||||||
Installment loans to individuals | 106 | 1 | 160 | 2 | |||||||||||
Total | $ | 16,353 | $ | 104 | $ | 25,726 | $ | 273 |
15
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended | Six Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial, financial, agricultural | $ | 2,653 | $ | 19 | $ | 2,187 | $ | — | |||||||
Lease financing | 335 | — | — | — | |||||||||||
Real estate – construction | — | — | 268 | 6 | |||||||||||
Real estate – 1-4 family mortgage | 7,507 | 123 | 8,892 | 110 | |||||||||||
Real estate – commercial mortgage | 6,041 | 130 | 14,635 | 279 | |||||||||||
Installment loans to individuals | 108 | 2 | 166 | 2 | |||||||||||
Total | $ | 16,644 | $ | 274 | $ | 26,148 | $ | 397 |
Restructured Loans
Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and which 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.
The following tables illustrate the impact of modifications classified as restructured loans which were made during the periods presented and held on the Consolidated Balance Sheets at the respective period end:
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||
Three months ended June 30, 2018 | ||||||||||
Real estate – 1-4 family mortgage | 1 | $ | 49 | $ | 49 | |||||
Total | 1 | $ | 49 | $ | 49 | |||||
Three months ended June 30, 2017 | ||||||||||
Real estate – 1-4 family mortgage | 3 | $ | 127 | $ | 126 | |||||
Real estate – commercial mortgage | 1 | 366 | 62 | |||||||
Installment loans to individuals | 1 | 4 | 4 | |||||||
Total | 5 | $ | 497 | $ | 192 |
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||
Six months ended June 30, 2018 | ||||||||||
Real estate – 1-4 family mortgage | 4 | $ | 625 | $ | 625 | |||||
Real estate – commercial mortgage | 1 | 83 | 78 | |||||||
Total | 5 | $ | 708 | $ | 703 | |||||
Six months ended June 30, 2017 | ||||||||||
Real estate – 1-4 family mortgage | 5 | $ | 304 | $ | 297 | |||||
Real estate – commercial mortgage | 2 | 453 | 147 | |||||||
Installment loans to individuals | 1 | 4 | 4 | |||||||
Total | 8 | $ | 761 | $ | 448 |
16
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
With respect to loans that were restructured during the six months ended June 30, 2018, none have subsequently defaulted as of the date of this report. With respect to loans that were restructured during the six months ended June 30, 2017, $156 subsequently defaulted within twelve months of the restructuring.
Restructured loans not performing in accordance with their restructured terms that are either contractually 90 days or more past due or placed on nonaccrual status are reported as nonperforming loans. There were two restructured loans in the amount of $468 contractually 90 days past due or more and still accruing at June 30, 2018 and one restructured loan in the amount of $71 contractually 90 days past due or more and still accruing at June 30, 2017. The outstanding balance of restructured loans on nonaccrual status was $2,417 and $4,409 at June 30, 2018 and June 30, 2017, respectively.
Changes in the Company’s restructured loans are set forth in the table below:
Number of Loans | Recorded Investment | |||||
Totals at January 1, 2018 | 54 | $ | 5,588 | |||
Additional loans with concessions | 5 | 707 | ||||
Reclassified as performing | 2 | 154 | ||||
Reductions due to: | ||||||
Reclassified as nonperforming | (5 | ) | (370 | ) | ||
Paid in full | (5 | ) | (1,268 | ) | ||
Principal paydowns | — | (126 | ) | |||
Totals at June 30, 2018 | 51 | $ | 4,685 |
The allocated allowance for loan losses attributable to restructured loans was $37 and $238 at June 30, 2018 and June 30, 2017, respectively. The Company had $22 in remaining availability under commitments to lend additional funds on these restructured loans at June 30, 2018. There was no remaining availability under commitments to lend additional funds on these restructured loans at June 30, 2017.
Credit Quality
For commercial and commercial real estate loans, internal risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances of these loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans within the “Pass” grade (historically, those with a risk rating between 1 and 4) generally have a lower risk of loss and therefore a lower risk factor applied to the loan balances. Management has established more granular risk rating categories to better identify heightened credit risk as loans migrate downward in the risk rating system. The “Pass” grade is now reserved for loans with a risk rating between 1 and 4A, and the “Watch” grade (those with a risk rating of 4B and 4E) is utilized on a temporary basis for “Pass” grade loans where a significant adverse risk-modifying action is anticipated in the near term. Loans that migrate toward the “Substandard” grade (those with a risk rating between 5 and 9) generally have a higher risk of loss and therefore a higher risk factor applied to the related loan balances. The following table presents the Company’s loan portfolio by risk-rating grades as of the dates presented:
17
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Pass | Watch | Substandard | Total | ||||||||||||
June 30, 2018 | |||||||||||||||
Commercial, financial, agricultural | $ | 576,063 | $ | 13,105 | $ | 5,015 | $ | 594,183 | |||||||
Real estate – construction | 575,005 | 8,258 | 125 | 583,388 | |||||||||||
Real estate – 1-4 family mortgage | 281,968 | 1,159 | 6,983 | 290,110 | |||||||||||
Real estate – commercial mortgage | 2,150,721 | 51,372 | 18,826 | 2,220,919 | |||||||||||
Installment loans to individuals | 548 | — | — | 548 | |||||||||||
Total | $ | 3,584,305 | $ | 73,894 | $ | 30,949 | $ | 3,689,148 | |||||||
December 31, 2017 | |||||||||||||||
Commercial, financial, agricultural | $ | 554,943 | $ | 11,496 | $ | 4,402 | $ | 570,841 | |||||||
Real estate – construction | 483,498 | 662 | 81 | 484,241 | |||||||||||
Real estate – 1-4 family mortgage | 254,643 | 505 | 8,697 | 263,845 | |||||||||||
Real estate – commercial mortgage | 1,983,750 | 50,428 | 24,241 | 2,058,419 | |||||||||||
Installment loans to individuals | 921 | — | — | 921 | |||||||||||
Total | $ | 3,277,755 | $ | 63,091 | $ | 37,421 | $ | 3,378,267 |
For portfolio balances of consumer, small balance consumer mortgage loans, such as 1-4 family mortgage loans, and certain other loans originated for other than commercial purposes, allowance factors are determined based on historical loss ratios by portfolio for the preceding eight quarters and may be adjusted by other qualitative criteria. The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
Performing | Non- Performing | Total | |||||||||
June 30, 2018 | |||||||||||
Commercial, financial, agricultural | $ | 194,765 | $ | 1,415 | $ | 196,180 | |||||
Lease financing | 52,044 | 379 | 52,423 | ||||||||
Real estate – construction | 58,943 | 49 | 58,992 | ||||||||
Real estate – 1-4 family mortgage | 1,618,669 | 3,671 | 1,622,340 | ||||||||
Real estate – commercial mortgage | 333,351 | 685 | 334,036 | ||||||||
Installment loans to individuals | 104,577 | 70 | 104,647 | ||||||||
Total | $ | 2,362,349 | $ | 6,269 | $ | 2,368,618 | |||||
December 31, 2017 | |||||||||||
Commercial, financial, agricultural | $ | 191,473 | $ | 1,509 | $ | 192,982 | |||||
Lease financing | 53,854 | 159 | 54,013 | ||||||||
Real estate – construction | 63,417 | — | 63,417 | ||||||||
Real estate – 1-4 family mortgage | 1,462,347 | 3,342 | 1,465,689 | ||||||||
Real estate – commercial mortgage | 330,441 | 1,216 | 331,657 | ||||||||
Installment loans to individuals | 102,409 | 122 | 102,531 | ||||||||
Total | $ | 2,203,941 | $ | 6,348 | $ | 2,210,289 |
Note 5 – Purchased Loans
(In Thousands, Except Number of Loans)
For purposes of this Note 5, all references to “loans” mean purchased loans.
The following is a summary of purchased loans as of the dates presented:
18
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2018 | December 31, 2017 | ||||||
Commercial, financial, agricultural | $ | 197,455 | $ | 275,570 | |||
Real estate – construction | 70,438 | 85,731 | |||||
Real estate – 1-4 family mortgage | 520,649 | 614,187 | |||||
Real estate – commercial mortgage | 906,219 | 1,037,454 | |||||
Installment loans to individuals | 15,130 | 18,824 | |||||
Gross loans | 1,709,891 | 2,031,766 | |||||
Unearned income | — | — | |||||
Loans, net of unearned income | $ | 1,709,891 | $ | 2,031,766 |
Past Due and Nonaccrual Loans
The Company’s policies with respect to placing loans on nonaccrual status or charging off loans, and its accounting for interest on any such loans, are described above in Note 4, “Non Purchased Loans.”
The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:
Accruing Loans | Nonaccruing Loans | ||||||||||||||||||||||||||||||||||
30-89 Days Past Due | 90 Days or More Past Due | Current Loans | Total Loans | 30-89 Days Past Due | 90 Days or More Past Due | Current Loans | Total Loans | Total Loans | |||||||||||||||||||||||||||
June 30, 2018 | |||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural | $ | 894 | $ | 514 | $ | 195,614 | $ | 197,022 | $ | — | $ | 349 | $ | 84 | $ | 433 | $ | 197,455 | |||||||||||||||||
Real estate – construction | 919 | — | 69,519 | 70,438 | — | — | — | — | 70,438 | ||||||||||||||||||||||||||
Real estate – 1-4 family mortgage | 3,127 | 2,177 | 512,235 | 517,539 | 260 | 1,236 | 1,614 | 3,110 | 520,649 | ||||||||||||||||||||||||||
Real estate – commercial mortgage | 1,150 | 2,770 | 901,527 | 905,447 | 430 | 132 | 210 | 772 | 906,219 | ||||||||||||||||||||||||||
Installment loans to individuals | 73 | 30 | 14,781 | 14,884 | 2 | 93 | 151 | 246 | 15,130 | ||||||||||||||||||||||||||
Total | $ | 6,163 | $ | 5,491 | $ | 1,693,676 | $ | 1,705,330 | $ | 692 | $ | 1,810 | $ | 2,059 | $ | 4,561 | $ | 1,709,891 | |||||||||||||||||
December 31, 2017 | |||||||||||||||||||||||||||||||||||
Commercial, financial, agricultural | $ | 1,119 | $ | 532 | $ | 273,488 | $ | 275,139 | $ | — | $ | 199 | $ | 232 | $ | 431 | $ | 275,570 | |||||||||||||||||
Real estate – construction | 415 | — | 85,316 | 85,731 | — | — | — | — | 85,731 | ||||||||||||||||||||||||||
Real estate – 1-4 family mortgage | 6,070 | 2,280 | 602,464 | 610,814 | 385 | 879 | 2,109 | 3,373 | 614,187 | ||||||||||||||||||||||||||
Real estate – commercial mortgage | 2,947 | 2,910 | 1,031,141 | 1,036,998 | 191 | 99 | 166 | 456 | 1,037,454 | ||||||||||||||||||||||||||
Installment loans to individuals | 208 | 9 | 18,443 | 18,660 | 59 | — | 105 | 164 | 18,824 | ||||||||||||||||||||||||||
Total | $ | 10,759 | $ | 5,731 | $ | 2,010,852 | $ | 2,027,342 | $ | 635 | $ | 1,177 | $ | 2,612 | $ | 4,424 | $ | 2,031,766 |
19
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Impaired Loans
The Company’s policies with respect to the determination of whether a loan is impaired and the treatment of such loans are described above in Note 4, “Non Purchased Loans.”
Loans accounted for under ASC 310-20, and which are impaired loans recognized in conformity with ASC 310, segregated by class, were as follows as of the dates presented:
Unpaid Contractual Principal Balance | Recorded Investment With Allowance | Recorded Investment With No Allowance | Total Recorded Investment | Related Allowance | |||||||||||||||
June 30, 2018 | |||||||||||||||||||
Commercial, financial, agricultural | $ | 439 | $ | 329 | $ | 49 | $ | 378 | $ | 41 | |||||||||
Real estate – 1-4 family mortgage | 5,225 | 700 | 3,926 | 4,626 | 12 | ||||||||||||||
Real estate – commercial mortgage | 1,466 | 1,287 | 156 | 1,443 | 66 | ||||||||||||||
Installment loans to individuals | 248 | 247 | — | 247 | 3 | ||||||||||||||
Total | $ | 7,378 | $ | 2,563 | $ | 4,131 | $ | 6,694 | $ | 122 | |||||||||
December 31, 2017 | |||||||||||||||||||
Commercial, financial, agricultural | $ | 757 | $ | 625 | $ | 74 | $ | 699 | $ | 52 | |||||||||
Real estate – construction | 1,207 | — | 1,199 | 1,199 | — | ||||||||||||||
Real estate – 1-4 family mortgage | 6,173 | 1,385 | 4,225 | 5,610 | 45 | ||||||||||||||
Real estate – commercial mortgage | 901 | 728 | 165 | 893 | 6 | ||||||||||||||
Installment loans to individuals | 165 | 154 | 9 | 163 | 4 | ||||||||||||||
Totals | $ | 9,203 | $ | 2,892 | $ | 5,672 | $ | 8,564 | $ | 107 |
The following table presents the average recorded investment and interest income recognized on loans accounted for under ASC 310-20 and which are impaired loans for the periods presented:
Three Months Ended | Three Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial, financial, agricultural | $ | 380 | $ | 3 | $ | 342 | $ | 1 | |||||||
Real estate – 1-4 family mortgage | 5,135 | 34 | 4,960 | 47 | |||||||||||
Real estate – commercial mortgage | 1,462 | 12 | 2,515 | 30 | |||||||||||
Installment loans to individuals | 247 | — | 19 | — | |||||||||||
Total | $ | 7,224 | $ | 49 | $ | 7,836 | $ | 78 |
Six Months Ended | Six Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial, financial, agricultural | $ | 383 | $ | 6 | $ | 347 | $ | 3 | |||||||
Real estate – 1-4 family mortgage | 5,252 | 74 | 5,032 | 62 | |||||||||||
Real estate – commercial mortgage | 1,479 | 30 | 2,284 | 51 | |||||||||||
Installment loans to individuals | 247 | — | 21 | — | |||||||||||
Total | $ | 7,361 | $ | 110 | $ | 7,684 | $ | 116 |
Loans accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), and which are impaired loans recognized in conformity with ASC 310, segregated by class, were as follows as of the dates presented:
20
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Unpaid Contractual Principal Balance | Recorded Investment With Allowance | Recorded Investment With No Allowance | Total Recorded Investment | Related Allowance | |||||||||||||||
June 30, 2018 | |||||||||||||||||||
Commercial, financial, agricultural | $ | 18,239 | $ | 3,845 | $ | 6,570 | $ | 10,415 | $ | 325 | |||||||||
Real estate – 1-4 family mortgage | 56,339 | 14,254 | 32,122 | 46,376 | 528 | ||||||||||||||
Real estate – commercial mortgage | 170,327 | 63,365 | 79,328 | 142,693 | 1,400 | ||||||||||||||
Installment loans to individuals | 1,645 | 715 | 842 | 1,557 | 3 | ||||||||||||||
Total | $ | 246,550 | $ | 82,179 | $ | 118,862 | $ | 201,041 | $ | 2,256 | |||||||||
December 31, 2017 | |||||||||||||||||||
Commercial, financial, agricultural | $ | 24,179 | $ | 5,768 | $ | 9,547 | $ | 15,315 | $ | 312 | |||||||||
Real estate – 1-4 family mortgage | 65,049 | 15,910 | 38,059 | 53,969 | 572 | ||||||||||||||
Real estate – commercial mortgage | 186,720 | 65,108 | 91,230 | 156,338 | 892 | ||||||||||||||
Installment loans to individuals | 1,761 | 698 | 940 | 1,638 | 1 | ||||||||||||||
Totals | $ | 277,709 | $ | 87,484 | $ | 139,776 | $ | 227,260 | $ | 1,777 |
The following table presents the average recorded investment and interest income recognized on loans accounted for under ASC 310-30 and which are impaired loans for the periods presented:
Three Months Ended | Three Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial, financial, agricultural | $ | 12,815 | $ | 192 | $ | 14,894 | $ | 252 | |||||||
Real estate – 1-4 family mortgage | 54,634 | 647 | 72,933 | 759 | |||||||||||
Real estate – commercial mortgage | 162,712 | 1,933 | 181,007 | 2,169 | |||||||||||
Installment loans to individuals | 1,651 | 18 | 1,935 | 19 | |||||||||||
Total | $ | 231,812 | $ | 2,790 | $ | 270,769 | $ | 3,199 |
Six Months Ended | Six Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial, financial, agricultural | $ | 13,051 | $ | 417 | $ | 14,048 | $ | 487 | |||||||
Real estate – 1-4 family mortgage | 55,293 | 1,320 | 73,656 | 1,582 | |||||||||||
Real estate – commercial mortgage | 163,959 | 3,905 | 182,894 | 4,394 | |||||||||||
Installment loans to individuals | 1,640 | 36 | 1,966 | 38 | |||||||||||
Total | $ | 233,943 | $ | 5,678 | $ | 272,564 | $ | 6,501 |
Restructured Loans
An explanation of what constitutes a “restructured loan,” and management’s analysis in determining whether to restructure a loan, are described above in Note 4, “Non Purchased Loans.”
The following tables illustrate the impact of modifications classified as restructured loans which were made during the periods presented and held on the Consolidated Balance Sheets at the respective period end:
21
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||
Three months ended June 30, 2018 | ||||||||||
Real estate – 1-4 family mortgage | 1 | $ | 18 | $ | 17 | |||||
Total | 1 | $ | 18 | $ | 17 | |||||
Three months ended June 30, 2017 | ||||||||||
Real estate – 1-4 family mortgage | 4 | $ | 463 | $ | 367 | |||||
Total | 4 | $ | 463 | $ | 367 |
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||
Six months ended June 30, 2018 | ||||||||||
Commercial, financial, agricultural | 1 | $ | 48 | $ | 44 | |||||
Real estate – 1-4 family mortgage | 1 | $ | 18 | $ | 17 | |||||
Real estate – commercial mortgage | 1 | 8 | 7 | |||||||
Total | 3 | $ | 74 | $ | 68 | |||||
Six months ended June 30, 2017 | ||||||||||
Real estate – 1-4 family mortgage | 14 | $ | 2,684 | $ | 2,178 | |||||
Real estate – commercial mortgage | 4 | 2,721 | 1,999 | |||||||
Total | 18 | $ | 5,405 | $ | 4,177 |
With respect to loans that were restructured during the first six months ended June 30, 2018, none have subsequently defaulted as of the date of this report. With respect to loans that were restructured during the first six months ended June 30, 2017, $368 subsequently defaulted within twelve months of the restructuring.
There were four restructured loans in the amount of $425 contractually 90 days past due or more and still accruing at June 30, 2018 and seven restructured loans in the amount of $534 contractually 90 days past due or more and still accruing at June 30, 2017. The outstanding balance of restructured loans on nonaccrual status was $684 and $446 at June 30, 2018 and June 30, 2017, respectively.
Changes in the Company’s restructured loans are set forth in the table below:
Number of Loans | Recorded Investment | |||||
Totals at January 1, 2018 | 68 | $ | 8,965 | |||
Additional loans with concessions | 3 | 132 | ||||
Reclassified as performing restructured loan | 2 | 23 | ||||
Reductions due to: | ||||||
Reclassified to nonperforming loans | (4 | ) | (425 | ) | ||
Paid in full | (1 | ) | (76 | ) | ||
Principal paydowns | — | (486 | ) | |||
Totals at June 30, 2018 | 68 | $ | 8,133 |
The allocated allowance for loan losses attributable to restructured loans was $69 and $27 at June 30, 2018 and June 30, 2017, respectively. The Company had $2 and $5 in remaining availability under commitments to lend additional funds on these restructured loans at June 30, 2018 and June 30, 2017, respectively.
Credit Quality
22
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
A discussion of the Company’s policies regarding internal risk-rating of loans is discussed above in Note 4, “Non Purchased Loans.” The following table presents the Company’s loan portfolio by risk-rating grades as of the dates presented:
Pass | Watch | Substandard | Total | ||||||||||||
June 30, 2018 | |||||||||||||||
Commercial, financial, agricultural | $ | 168,753 | $ | 4,562 | $ | 3,262 | $ | 176,577 | |||||||
Real estate – construction | 67,609 | 1,538 | 263 | 69,410 | |||||||||||
Real estate – 1-4 family mortgage | 75,205 | 1,798 | 4,820 | 81,823 | |||||||||||
Real estate – commercial mortgage | 708,999 | 14,634 | 9,541 | 733,174 | |||||||||||
Installment loans to individuals | 627 | — | 2 | 629 | |||||||||||
Total | $ | 1,021,193 | $ | 22,532 | $ | 17,888 | $ | 1,061,613 | |||||||
December 31, 2017 | |||||||||||||||
Commercial, financial, agricultural | $ | 241,195 | $ | 4,974 | $ | 2,824 | $ | 248,993 | |||||||
Real estate – construction | 81,220 | — | — | 81,220 | |||||||||||
Real estate – 1-4 family mortgage | 91,369 | 2,498 | 6,172 | 100,039 | |||||||||||
Real estate – commercial mortgage | 827,372 | 17,123 | 9,003 | 853,498 | |||||||||||
Installment loans to individuals | 678 | — | 3 | 681 | |||||||||||
Total | $ | 1,241,834 | $ | 24,595 | $ | 18,002 | $ | 1,284,431 |
The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
Performing | Non- Performing | Total | |||||||||
June 30, 2018 | |||||||||||
Commercial, financial, agricultural | $ | 10,424 | $ | 39 | $ | 10,463 | |||||
Real estate – construction | 1,028 | — | 1,028 | ||||||||
Real estate – 1-4 family mortgage | 390,746 | 1,704 | 392,450 | ||||||||
Real estate – commercial mortgage | 30,234 | 118 | 30,352 | ||||||||
Installment loans to individuals | 12,670 | 274 | 12,944 | ||||||||
Total | $ | 445,102 | $ | 2,135 | $ | 447,237 | |||||
December 31, 2017 | |||||||||||
Commercial, financial, agricultural | $ | 11,216 | $ | 46 | $ | 11,262 | |||||
Real estate – construction | 4,511 | — | 4,511 | ||||||||
Real estate – 1-4 family mortgage | 459,038 | 1,141 | 460,179 | ||||||||
Real estate – commercial mortgage | 27,495 | 123 | 27,618 | ||||||||
Installment loans to individuals | 16,344 | 161 | 16,505 | ||||||||
Total | $ | 518,604 | $ | 1,471 | $ | 520,075 |
Loans Purchased with Deteriorated Credit Quality
Loans purchased in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows as of the dates presented:
23
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Total Purchased Credit Deteriorated Loans | |||
June 30, 2018 | |||
Commercial, financial, agricultural | $ | 10,415 | |
Real estate – 1-4 family mortgage | 46,376 | ||
Real estate – commercial mortgage | 142,693 | ||
Installment loans to individuals | 1,557 | ||
Total | $ | 201,041 | |
December 31, 2017 | |||
Commercial, financial, agricultural | $ | 15,315 | |
Real estate – 1-4 family mortgage | 53,969 | ||
Real estate – commercial mortgage | 156,338 | ||
Installment loans to individuals | 1,638 | ||
Total | $ | 227,260 |
The following table presents the fair value of loans that exhibited evidence of deteriorated credit quality at the time of acquisition at June 30, 2018:
Total Purchased Credit Deteriorated Loans | |||
Contractually-required principal and interest | $ | 282,632 | |
Nonaccretable difference(1) | (52,424 | ) | |
Cash flows expected to be collected | 230,208 | ||
Accretable yield(2) | (29,167 | ) | |
Fair value | $ | 201,041 |
(1) | Represents contractual principal and interest cash flows of $43,499 and $8,925, respectively, not expected to be collected. |
(2) | Represents contractual principal and interest cash flows of $1,579 and $27,588, respectively, expected to be collected. |
Changes in the accretable yield of loans purchased with deteriorated credit quality were as follows as of June 30, 2018:
Total Purchased Credit Deteriorated Loans | |||
Balance at January 1, 2018 | $ | (32,207 | ) |
Reclassification from nonaccretable difference | (3,678 | ) | |
Accretion | 6,660 | ||
Charge-offs | 58 | ||
Balance at June 30, 2018 | $ | (29,167 | ) |
The following table presents the fair value of loans purchased from Metropolitan as of the July 1, 2017 acquisition date.
At acquisition date: | July 1, 2017 | |||
Contractually-required principal and interest | $ | 1,198,741 | ||
Nonaccretable difference | (79,165 | ) | ||
Cash flows expected to be collected | 1,119,576 | |||
Accretable yield | (154,543 | ) | ||
Fair value | $ | 965,033 |
24
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6 – Allowance for Loan Losses
(In Thousands)
The following is a summary of total non purchased and purchased loans as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||
Commercial, financial, agricultural | $ | 987,818 | $ | 1,039,393 | |||
Lease financing | 55,749 | 57,354 | |||||
Real estate – construction | 712,818 | 633,389 | |||||
Real estate – 1-4 family mortgage | 2,433,099 | 2,343,721 | |||||
Real estate – commercial mortgage | 3,461,174 | 3,427,530 | |||||
Installment loans to individuals | 120,325 | 122,276 | |||||
Gross loans | 7,770,983 | 7,623,663 | |||||
Unearned income | (3,326 | ) | (3,341 | ) | |||
Loans, net of unearned income | 7,767,657 | 7,620,322 | |||||
Allowance for loan losses | (47,355 | ) | (46,211 | ) | |||
Net loans | $ | 7,720,302 | $ | 7,574,111 |
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management based on its ongoing analysis of the loan portfolio to absorb probable credit losses inherent in the entire loan portfolio, including collective impairment as recognized under ASC 450, “Contingencies”. Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310. The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Management and the internal loan review staff evaluate the adequacy of the allowance for loan losses quarterly. The allowance for loan losses is evaluated based on a continuing 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 its risk rating system, regulatory guidance and economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is established through a provision for loan losses charged to earnings resulting from measurements of inherent credit risk in the loan portfolio and estimates of probable losses or impairments of individual loans. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
25
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The following table provides a roll forward of the allowance for loan losses and a breakdown of the ending balance of the allowance based on the Company’s impairment methodology for the periods presented:
Commercial | Real Estate - Construction | Real Estate - 1-4 Family Mortgage | Real Estate - Commercial Mortgage | Installment and Other(1) | Total | ||||||||||||||||||
Three Months Ended June 30, 2018 | |||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Beginning balance | $ | 7,071 | $ | 4,198 | $ | 11,404 | $ | 21,914 | $ | 1,814 | $ | 46,401 | |||||||||||
Charge-offs | (457 | ) | — | (979 | ) | (46 | ) | (99 | ) | (1,581 | ) | ||||||||||||
Recoveries | 114 | 3 | 83 | 496 | 29 | 725 | |||||||||||||||||
Net (charge-offs) recoveries | (343 | ) | 3 | (896 | ) | 450 | (70 | ) | (856 | ) | |||||||||||||
Provision for loan losses charged to operations | 418 | 501 | 1,149 | 86 | (344 | ) | 1,810 | ||||||||||||||||
Ending balance | $ | 7,146 | $ | 4,702 | $ | 11,657 | $ | 22,450 | $ | 1,400 | $ | 47,355 |
Commercial | Real Estate - Construction | Real Estate - 1-4 Family Mortgage | Real Estate - Commercial Mortgage | Installment and Other(1) | Total | ||||||||||||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Beginning balance | $ | 5,542 | $ | 3,428 | $ | 12,009 | $ | 23,384 | $ | 1,848 | $ | 46,211 | |||||||||||
Charge-offs | (1,116 | ) | — | (1,650 | ) | (659 | ) | (221 | ) | (3,646 | ) | ||||||||||||
Recoveries | 349 | 7 | 216 | 604 | 54 | 1,230 | |||||||||||||||||
Net (charge-offs) recoveries | (767 | ) | 7 | (1,434 | ) | (55 | ) | (167 | ) | (2,416 | ) | ||||||||||||
Provision for loan losses charged to operations | 2,371 | 1,267 | 1,082 | (879 | ) | (281 | ) | 3,560 | |||||||||||||||
Ending balance | $ | 7,146 | $ | 4,702 | $ | 11,657 | $ | 22,450 | $ | 1,400 | $ | 47,355 | |||||||||||
Period-End Amount Allocated to: | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 417 | $ | — | $ | 76 | $ | 1,014 | $ | 8 | $ | 1,515 | |||||||||||
Collectively evaluated for impairment | 6,404 | 4,702 | 11,053 | 20,036 | 1,389 | 43,584 | |||||||||||||||||
Purchased with deteriorated credit quality | 325 | — | 528 | 1,400 | 3 | 2,256 | |||||||||||||||||
Ending balance | $ | 7,146 | $ | 4,702 | $ | 11,657 | $ | 22,450 | $ | 1,400 | $ | 47,355 |
Commercial | Real Estate - Construction | Real Estate - 1-4 Family Mortgage | Real Estate - Commercial Mortgage | Installment and Other(1) | Total | ||||||||||||||||||
Three Months Ended June 30, 2017 | |||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Beginning balance | $ | 5,112 | $ | 2,119 | $ | 12,162 | $ | 22,073 | $ | 1,457 | $ | 42,923 | |||||||||||
Charge-offs | (304 | ) | — | (551 | ) | (434 | ) | (125 | ) | (1,414 | ) | ||||||||||||
Recoveries | 64 | 3 | 64 | 717 | 42 | 890 | |||||||||||||||||
Net (charge-offs) recoveries | (240 | ) | 3 | (487 | ) | 283 | (83 | ) | (524 | ) | |||||||||||||
Provision for loan losses charged to operations | 220 | 458 | 429 | 244 | 399 | 1,750 | |||||||||||||||||
Ending balance | $ | 5,092 | $ | 2,580 | $ | 12,104 | $ | 22,600 | $ | 1,773 | $ | 44,149 |
26
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Commercial | Real Estate - Construction | Real Estate - 1-4 Family Mortgage | Real Estate - Commercial Mortgage | Installment and Other(1) | Total | ||||||||||||||||||
Six Months Ended June 30, 2017 | |||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Beginning balance | $ | 5,486 | $ | 2,380 | $ | 14,294 | $ | 19,059 | $ | 1,518 | $ | 42,737 | |||||||||||
Charge-offs | (1,136 | ) | — | (826 | ) | (661 | ) | (389 | ) | (3,012 | ) | ||||||||||||
Recoveries | 121 | 34 | 146 | 812 | 61 | 1,174 | |||||||||||||||||
Net (charge-offs) recoveries | (1,015 | ) | 34 | (680 | ) | 151 | (328 | ) | (1,838 | ) | |||||||||||||
Provision for loan losses charged to operations | 621 | 166 | (1,510 | ) | 3,390 | 583 | 3,250 | ||||||||||||||||
Ending balance | $ | 5,092 | $ | 2,580 | $ | 12,104 | $ | 22,600 | $ | 1,773 | $ | 44,149 | |||||||||||
Period-End Amount Allocated to: | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 166 | $ | 2 | $ | 878 | $ | 2,159 | $ | 3 | $ | 3,208 | |||||||||||
Collectively evaluated for impairment | 4,587 | 2,578 | 10,534 | 19,313 | 1,769 | 38,781 | |||||||||||||||||
Purchased with deteriorated credit quality | 339 | — | 692 | 1,128 | 1 | 2,160 | |||||||||||||||||
Ending balance | $ | 5,092 | $ | 2,580 | $ | 12,104 | $ | 22,600 | $ | 1,773 | $ | 44,149 |
(1) | Includes lease financing receivables. |
The following table provides the recorded investment in loans, net of unearned income, based on the Company’s impairment methodology as of the dates presented:
Commercial | Real Estate - Construction | Real Estate - 1-4 Family Mortgage | Real Estate - Commercial Mortgage | Installment and Other(1) | Total | ||||||||||||||||||
June 30, 2018 | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,697 | $ | — | $ | 11,561 | $ | 7,213 | $ | 686 | $ | 22,157 | |||||||||||
Collectively evaluated for impairment | 974,706 | 712,818 | 2,375,162 | 3,311,268 | 170,505 | 7,544,459 | |||||||||||||||||
Purchased with deteriorated credit quality | 10,415 | — | 46,376 | 142,693 | 1,557 | 201,041 | |||||||||||||||||
Ending balance | $ | 987,818 | $ | 712,818 | $ | 2,433,099 | $ | 3,461,174 | $ | 172,748 | $ | 7,767,657 | |||||||||||
December 31, 2017 | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,064 | $ | 1,777 | $ | 14,482 | $ | 10,545 | $ | 439 | $ | 30,307 | |||||||||||
Collectively evaluated for impairment | 1,021,014 | 631,612 | 2,275,270 | 3,260,648 | 174,211 | 7,362,755 | |||||||||||||||||
Purchased with deteriorated credit quality | 15,315 | — | 53,969 | 156,337 | 1,639 | 227,260 | |||||||||||||||||
Ending balance | $ | 1,039,393 | $ | 633,389 | $ | 2,343,721 | $ | 3,427,530 | $ | 176,289 | $ | 7,620,322 |
(1) | Includes lease financing receivables. |
Note 7 – Other Real Estate Owned
(In Thousands)
The following table provides details of the Company’s other real estate owned (“OREO”) purchased and non purchased, net of
valuation allowances and direct write-downs, as of the dates presented:
27
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Purchased OREO | Non Purchased OREO | Total OREO | |||||||||
June 30, 2018 | |||||||||||
Residential real estate | $ | 543 | $ | 1,540 | $ | 2,083 | |||||
Commercial real estate | 3,257 | 1,484 | 4,741 | ||||||||
Residential land development | 724 | 605 | 1,329 | ||||||||
Commercial land development | 4,482 | 1,069 | 5,551 | ||||||||
Total | $ | 9,006 | $ | 4,698 | $ | 13,704 | |||||
December 31, 2017 | |||||||||||
Residential real estate | $ | 1,683 | $ | 758 | $ | 2,441 | |||||
Commercial real estate | 4,314 | 1,624 | 5,938 | ||||||||
Residential land development | 1,100 | 781 | 1,881 | ||||||||
Commercial land development | 4,427 | 1,247 | 5,674 | ||||||||
Total | $ | 11,524 | $ | 4,410 | $ | 15,934 |
Changes in the Company’s purchased and non purchased OREO were as follows:
Purchased OREO | Non Purchased OREO | Total OREO | |||||||||
Balance at January 1, 2018 | $ | 11,524 | $ | 4,410 | $ | 15,934 | |||||
Transfers of loans | 515 | 1,776 | 2,291 | ||||||||
Impairments | (455 | ) | (294 | ) | (749 | ) | |||||
Dispositions | (2,576 | ) | (1,193 | ) | (3,769 | ) | |||||
Other | (2 | ) | (1 | ) | (3 | ) | |||||
Balance at June 30, 2018 | $ | 9,006 | $ | 4,698 | $ | 13,704 |
Components of the line item “Other real estate owned” in the Consolidated Statements of Income were as follows for the periods presented:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Repairs and maintenance | $ | 55 | $ | 199 | $ | 168 | $ | 396 | |||||||
Property taxes and insurance | 37 | 76 | 149 | 408 | |||||||||||
Impairments | 397 | 379 | 749 | 757 | |||||||||||
Net losses (gains) on OREO sales | (239 | ) | 189 | (143 | ) | (138 | ) | ||||||||
Rental income | (18 | ) | (62 | ) | (34 | ) | (110 | ) | |||||||
Total | $ | 232 | $ | 781 | $ | 889 | $ | 1,313 |
Note 8 – Goodwill and Other Intangible Assets
(In Thousands)
The carrying amounts of goodwill by operating segments for the six months ended June 30, 2018 were as follows:
28
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Community Banks | Insurance | Total | |||||||||
Balance at January 1, 2018 | $ | 608,279 | $ | 2,767 | $ | 611,046 | |||||
Addition to goodwill from acquisition | — | — | — | ||||||||
Adjustment to previously recorded goodwill | — | — | — | ||||||||
Balance at June 30, 2018 | $ | 608,279 | $ | 2,767 | $ | 611,046 |
The following table provides a summary of finite-lived intangible assets as of the dates presented:
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
June 30, 2018 | |||||||||||
Core deposit intangibles | $ | 54,958 | $ | (34,765 | ) | $ | 20,193 | ||||
Customer relationship intangible | 1,970 | (898 | ) | 1,072 | |||||||
Total finite-lived intangible assets | $ | 56,928 | $ | (35,663 | ) | $ | 21,265 | ||||
December 31, 2017 | |||||||||||
Core deposit intangibles | $ | 54,958 | $ | (31,586 | ) | $ | 23,372 | ||||
Customer relationship intangible | 1,970 | (832 | ) | 1,138 | |||||||
Total finite-lived intangible assets | $ | 56,928 | $ | (32,418 | ) | $ | 24,510 |
Current year amortization expense for finite-lived intangible assets is presented in the table below.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Amortization expense for: | |||||||||||||||
Core deposit intangibles | $ | 1,561 | $ | 1,460 | $ | 3,179 | $ | 2,990 | |||||||
Customer relationship intangible | 33 | 33 | 66 | 66 | |||||||||||
Total intangible amortization | $ | 1,594 | $ | 1,493 | $ | 3,245 | $ | 3,056 |
The estimated amortization expense of finite-lived intangible assets for the year ending December 31, 2018 and the succeeding four years is summarized as follows:
Core Deposit Intangibles | Customer Relationship Intangible | Total | |||||||||
2018 | $ | 6,130 | $ | 131 | $ | 6,261 | |||||
2019 | 5,212 | 131 | 5,343 | ||||||||
2020 | 4,186 | 131 | 4,317 | ||||||||
2021 | 3,107 | 131 | 3,238 | ||||||||
2022 | 2,187 | 131 | 2,318 |
Note 9 – Mortgage Servicing Rights
(In Thousands)
The Company retains the right to service certain mortgage loans that it sells to secondary market investors. These mortgage servicing rights (“MSRs”) are recognized as a separate asset on the date the corresponding mortgage loan is sold. MSRs are amortized in proportion to and over the period of estimated net servicing income. These servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. Impairment losses on MSRs are recognized to the extent by which the unamortized cost exceeds fair value. There were no impairment losses recognized during the six months ended June 30, 2018 and 2017.
29
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Changes in the Company’s MSRs were as follows:
Balance at January 1, 2018 | $ | 39,339 | |
Capitalization | 6,303 | ||
Amortization | (2,403 | ) | |
Balance at June 30, 2018 | $ | 43,239 |
Data and key economic assumptions related to the Company’s MSRs are as follows as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||
Unpaid principal balance | $ | 4,315,261 | $ | 4,012,519 | |||
Weighted-average prepayment speed (CPR) | 7.32 | % | 8.04 | % | |||
Estimated impact of a 10% increase | $ | (1,792 | ) | $ | (1,592 | ) | |
Estimated impact of a 20% increase | (3,475 | ) | (3,095 | ) | |||
Discount rate | 9.42 | % | 9.69 | % | |||
Estimated impact of a 10% increase | $ | (2,573 | ) | $ | (2,027 | ) | |
Estimated impact of a 20% increase | (4,937 | ) | (3,896 | ) | |||
Weighted-average coupon interest rate | 3.94 | % | 3.89 | % | |||
Weighted-average servicing fee (basis points) | 26.77 | 26.36 | |||||
Weighted-average remaining maturity (in years) | 8.35 | 7.98 |
The Company recorded servicing fees of $2,124 and $1,434 for the three months ended June 30, 2018 and 2017, respectively, which are included in “Mortgage banking income” in the Consolidated Statements of Income. The Company recorded servicing fees of $4,494 and $2,667 for the six months ended June 30, 2018 and 2017, respectively.
Note 10 - Employee Benefit and Deferred Compensation Plans
(In Thousands, Except Share Data)
Pension and Post-retirement Medical Plans
The Company sponsors a noncontributory defined benefit pension plan, under which participation and future benefit accruals ceased as of December 31, 1996.
The Company also provides retiree health benefits for certain employees who were employed by the Company and enrolled in the Company’s health plan as of December 31, 2004. To receive benefits, an eligible employee must retire from service with the Company and its affiliates between age 55 and 65 and be credited with at least 15 years of service or with 70 points, determined as the sum of age and service at retirement. The Company periodically determines the portion of the premium to be paid by each eligible retiree and the portion to be paid by the Company. Coverage ceases when an employee attains age 65 and is eligible for Medicare. The Company also provides life insurance coverage for each retiree in the face amount of $5 until age 70. Retirees can purchase additional insurance or continue coverage beyond age 70 at their sole expense.
The plan expense for the legacy Renasant defined benefit pension plan (“Pension Benefits - Renasant”) and post-retirement health and life plans (“Other Benefits”) for the periods presented was as follows:
30
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Pension Benefits | |||||||||||||||
Renasant | Other Benefits | ||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | — | $ | — | $ | 2 | $ | 1 | |||||||
Interest cost | 256 | 291 | 7 | 8 | |||||||||||
Expected return on plan assets | (520 | ) | (487 | ) | — | — | |||||||||
Recognized actuarial loss (gain) | 77 | 100 | — | (10 | ) | ||||||||||
Net periodic benefit (return) cost | $ | (187 | ) | $ | (96 | ) | $ | 9 | $ | (1 | ) |
Pension Benefits | |||||||||||||||
Renasant | Other Benefits | ||||||||||||||
Six Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | — | $ | — | $ | 4 | $ | 4 | |||||||
Interest cost | 522 | 584 | 16 | 21 | |||||||||||
Expected return on plan assets | (1,038 | ) | (971 | ) | — | — | |||||||||
Recognized actuarial loss | 164 | 200 | — | 3 | |||||||||||
Net periodic benefit (return) cost | $ | (352 | ) | $ | (187 | ) | $ | 20 | $ | 28 |
Incentive Compensation Plans
In March 2011, the Company adopted a long-term equity incentive plan, which provides for the grant of stock options and the award of restricted stock. The plan replaced the long-term incentive plan adopted in 2001, which expired in October 2011. The Company issues shares of treasury stock to satisfy stock options exercised or restricted stock granted under the plan. Options granted under the plan allow participants to acquire shares of the Company’s common stock at a fixed exercise price and expire ten years after the grant date. Options vest and become exercisable in installments over a three-year period measured from the grant date. Options that have not vested are forfeited and cancelled upon the termination of a participant’s employment. There were no stock options granted during the six months ended June 30, 2018 or 2017.
The following table summarizes the changes in stock options as of and for the six months ended June 30, 2018:
Shares | Weighted Average Exercise Price | ||||||
Options outstanding at beginning of period | 89,750 | $ | 15.67 | ||||
Granted | — | — | |||||
Exercised | (38,000 | ) | 15.48 | ||||
Forfeited | (5,000 | ) | 15.32 | ||||
Options outstanding at end of period | 46,750 | $ | 15.87 |
The Company awards performance-based restricted stock to executives and other officers and time-based restricted stock to directors, executives and other officers and employees under the long-term equity incentive plan. The performance-based restricted stock vests upon completion of a designated service period or the attainment of specified performance goals. Target performance levels are derived from the Company’s budget, with threshold performance set at approximately 5% below target and superior performance set at approximately 5% above target. Performance-based restricted stock is granted at the target level; the number of shares ultimately awarded is determined at the end of the applicable performance period and may be increased or decreased depending upon the Company meeting or exceeding (or failing to meet or exceed) the financial performance measures defined by the Board of Directors. Time-based restricted stock vests at the end of the service period defined in the respective grant. The fair
31
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
value of each restricted stock grant is the closing price of the Company’s common stock on the day immediately preceding the grant date. The following table summarizes the changes in restricted stock as of and for the six months ended June 30, 2018:
Performance-Based Restricted Stock | Weighted Average Grant-Date Fair Value | Time- Based Restricted Stock | Weighted Average Grant-Date Fair Value | |||||||||||
Nonvested at beginning of period | — | $ | — | 218,075 | $ | 39.08 | ||||||||
Awarded | 95,183 | 40.89 | 138,061 | 41.91 | ||||||||||
Vested | — | — | (56,646 | ) | 38.43 | |||||||||
Cancelled | (3,014 | ) | 40.89 | (14,646 | ) | 41.97 | ||||||||
Nonvested at end of period | 92,169 | $ | 40.89 | 284,844 | $ | 40.43 |
During the six months ended June 30, 2018, the Company reissued 93,511 shares from treasury in connection with the exercise of stock options and awards of restricted stock. The Company recorded total stock-based compensation expense of $1,920 and $1,237 for the three months ended June 30, 2018 and 2017, respectively, and $3,712 and $2,411 for the six months ended June 30, 2018 and 2017, respectively.
Note 11 – Derivative Instruments
(In Thousands)
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 also from time to time 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. 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, 2018, the Company had notional amounts of $219,738 on interest rate contracts with corporate customers and $219,738 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.
In June 2014, the Company entered into two forward interest rate swap contracts on floating rate liabilities at the Bank level with notional amounts of $15,000 each. The interest rate swap contracts are each accounted for as a cash flow hedge with the objective of protecting against any interest rate volatility on future FHLB borrowings for a four-year and five-year period beginning June 1, 2018 and December 3, 2018 and ending June 2022 and June 2023, respectively. Under these contracts, Renasant Bank will pay a fixed interest rate and will receive a variable interest rate based on the three-month LIBOR plus a pre-determined spread, with quarterly net settlements.
In March and April 2012, the Company entered into two interest rate swap agreements effective March 30, 2014 and March 17, 2014, respectively. Under these swap agreements, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures.
In April 2018, the Company entered into an interest rate swap agreement effective June 15, 2018. Under this swap agreement, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreement, which terminates in June 2028, is accounted for as a cash flow hedge to reduce the variability in cash flows resulting from changes in interest rates on $30,000 of the Company’s junior subordinated debentures.
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. The notional amount of commitments to fund fixed-rate and adjustable-rate mortgage loans was $196,667 and $131,000 at June 30, 2018 and December 31, 2017, respectively. The Company also enters into forward commitments to sell residential mortgage loans to secondary market investors. The notional amount of commitments to sell residential mortgage loans to secondary market investors was $374,000 and $199,000 at June 30, 2018 and December 31, 2017, respectively.
32
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The following table provides details on the Company’s derivative financial instruments as of the dates presented:
Fair Value | |||||||||
Balance Sheet Location | June 30, 2018 | December 31, 2017 | |||||||
Derivative assets: | |||||||||
Designated as hedging instruments | |||||||||
Interest rate swap | Other Assets | $ | 181 | $ | — | ||||
Totals | $ | 181 | $ | — | |||||
Not designated as hedging instruments: | |||||||||
Interest rate contracts | Other Assets | $ | 4,142 | $ | 3,171 | ||||
Interest rate lock commitments | Other Assets | 4,699 | 2,756 | ||||||
Forward commitments | Other Assets | 98 | 50 | ||||||
Totals | $ | 8,939 | $ | 5,977 | |||||
Derivative liabilities: | |||||||||
Designated as hedging instruments: | |||||||||
Interest rate swaps | Other Liabilities | $ | 1,047 | $ | 2,536 | ||||
Totals | $ | 1,047 | $ | 2,536 | |||||
Not designated as hedging instruments: | |||||||||
Interest rate contracts | Other Liabilities | $ | 4,142 | $ | 3,171 | ||||
Interest rate lock commitments | Other Liabilities | 1 | 4 | ||||||
Forward commitments | Other Liabilities | 1,301 | 328 | ||||||
Totals | $ | 5,444 | $ | 3,503 |
Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows as of the periods presented:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||
Interest rate contracts: | |||||||||||||||
Included in interest income on loans | $ | 1,038 | $ | 690 | $ | 2,024 | $ | 1,369 | |||||||
Interest rate lock commitments: | |||||||||||||||
Included in mortgage banking income | (238 | ) | (1,538 | ) | 1,946 | 1,315 | |||||||||
Forward commitments | |||||||||||||||
Included in mortgage banking income | (1,012 | ) | 2,256 | (924 | ) | (3,613 | ) | ||||||||
Total | $ | (212 | ) | $ | 1,408 | $ | 3,046 | $ | (929 | ) |
For the Company’s derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method. There were no ineffective portions for the six months ended June 30, 2018 or 2017. The impact on other comprehensive income for the six months ended June 30, 2018 and 2017, respectively, can be seen at Note 15, “Other Comprehensive Income (Loss).”
Offsetting
33
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet when the “right of offset” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements; however, the Company has not elected to offset such financial instruments in the Consolidated Balance Sheets. The following table presents the Company’s gross derivative positions as recognized in the Consolidated Balance Sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement:
Offsetting Derivative Assets | Offsetting Derivative Liabilities | ||||||||||||||
June 30, 2018 | December 31, 2017 | June 30, 2018 | December 31, 2017 | ||||||||||||
Gross amounts recognized | $ | 3,659 | $ | 717 | $ | 3,111 | $ | 5,303 | |||||||
Gross amounts offset in the Consolidated Balance Sheets | — | — | — | — | |||||||||||
Net amounts presented in the Consolidated Balance Sheets | 3,659 | 717 | 3,111 | 5,303 | |||||||||||
Gross amounts not offset in the Consolidated Balance Sheets | |||||||||||||||
Financial instruments | 884 | 717 | 884 | 717 | |||||||||||
Financial collateral pledged | — | — | 175 | 4,357 | |||||||||||
Net amounts | $ | 2,775 | $ | — | $ | 2,052 | $ | 229 |
Note 12 – Income Taxes
(In Thousands)
The following table is a summary of the Company’s temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities and their approximate tax effects as of the dates presented.
34
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, | December 31, | ||||||||||
2018 | 2017 | 2017 | |||||||||
Deferred tax assets | |||||||||||
Allowance for loan losses | $ | 15,800 | $ | 20,566 | $ | 13,966 | |||||
Loans | 11,789 | 19,575 | 15,062 | ||||||||
Deferred compensation | 7,098 | 9,845 | 7,093 | ||||||||
Securities | — | 2,440 | 3,659 | ||||||||
Net unrealized losses on securities - OCI | 6,916 | 6,670 | — | ||||||||
Impairment of assets | 1,791 | 1,986 | 1,748 | ||||||||
Federal and State net operating loss carryforwards | 1,297 | 3,081 | 2,419 | ||||||||
Intangibles | — | 1,758 | — | ||||||||
Other | 4,310 | 3,577 | 4,722 | ||||||||
Total deferred tax assets | 49,001 | 69,498 | 48,669 | ||||||||
Deferred tax liabilities | |||||||||||
Investment in partnerships | 548 | 1,272 | 757 | ||||||||
Fixed assets | 3,073 | 1,875 | 3,163 | ||||||||
Mortgage servicing rights | 11,224 | 3,360 | 10,139 | ||||||||
Junior subordinated debt | 2,352 | 4,004 | 2,394 | ||||||||
Other | 1,665 | 2,000 | 1,859 | ||||||||
Total deferred tax liabilities | 18,862 | 12,511 | 18,312 | ||||||||
Net deferred tax assets | $ | 30,139 | $ | 56,987 | $ | 30,357 |
The Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate tax rate from 35% to 21%, effective for tax years including or beginning January 1, 2018. As a result, the Company calculated taxes in the current quarter based on a 21% federal corporate tax rate, whereas taxes were calculated in previous periods based on a 35% federal corporate tax rate. Under the guidance of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation. After reviewing the Company’s inventory of deferred tax assets and liabilities on the date of enactment and giving consideration to the future impact of the lower corporate tax rates and other provisions of the new legislation, the Company’s revaluation of its net deferred tax assets was $14,486, which was included as a reduction in “Income taxes” in the Consolidated Statements of Income for the year ended December 31, 2017. Although in the normal course of business the Company is required to make estimates and assumptions for certain tax items which cannot be fully determined at period end, the Company did not identify items for which the income tax effects of the Tax Act had not been completed as of December 31, 2017 and, therefore, considered its accounting for the tax effects of the Tax Act on its deferred tax assets and liabilities to have been completed as of December 31, 2017.
The Company expects to utilize its federal and state net operating losses prior to expiration. Because the benefits are expected to be fully realized, the Company recorded no valuation allowance against the net operating losses for the six months ended June 30, 2018 or 2017 or the year ended December 31, 2017.
Note 13 – Investments in Qualified Affordable Housing Projects
(In Thousands)
The Company has investments in qualified affordable housing projects (“QAHPs”) that provide low income housing tax credits and operating loss benefits over an extended period. At June 30, 2018 and December 31, 2017, the Company’s carrying value of QAHPs was $6,855 and $7,637, respectively. The Company has no remaining funding obligations related to the QAHPs. The investments in QAHPs are being accounted for using the effective yield method. The investments in QAHPs are included in “Other assets” on the Consolidated Balance Sheets.
Components of the Company’s investments in QAHPs were included in the line item “Income taxes” in the Consolidated Statements of Income for the periods presented:
35
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Tax credit amortization | $ | 410 | $ | 262 | $ | 804 | $ | 523 | |||||||
Tax credits and other benefits | (572 | ) | (388 | ) | (1,145 | ) | (848 | ) | |||||||
Total | $ | (162 | ) | $ | (126 | ) | $ | (341 | ) | $ | (325 | ) |
Note 14 – Fair Value Measurements
(In Thousands)
Fair Value Measurements and the Fair Level Hierarchy
ASC 820, “Fair Value Measurements and Disclosures,” provides guidance for using fair value to measure assets and liabilities and also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to a valuation based on quoted prices in active markets for identical assets and liabilities (Level 1), moderate priority to a valuation based on quoted prices in active markets for similar assets and liabilities and/or based on assumptions that are observable in the market (Level 2), and the lowest priority to a valuation based on assumptions that are not observable in the market (Level 3).
Recurring Fair Value Measurements
The Company carries certain assets and liabilities at fair value on a recurring basis in accordance with applicable standards. The Company’s recurring fair value measurements are based on the requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain eligible assets and liabilities at fair value. Assets and liabilities that are required to be carried at fair value on a recurring basis include securities available for sale and derivative instruments. The Company has elected to carry mortgage loans held for sale at fair value on a recurring basis as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”).
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities that are measured on a recurring basis:
Securities available for sale: Securities available for sale consist primarily of debt securities, such as obligations of U.S. Government agencies and corporations, obligations of states and political subdivisions, mortgage-backed securities, trust preferred securities, and other debt securities. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.
Derivative instruments: The Company uses derivatives to manage various financial risks. Most of the Company’s derivative contracts are extensively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts such as interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage-backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy.
Mortgage loans held for sale: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.
36
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The following table presents assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:
Level 1 | Level 2 | Level 3 | Totals | ||||||||||||
June 30, 2018 | |||||||||||||||
Financial assets: | |||||||||||||||
Securities available for sale: | |||||||||||||||
Obligations of other U.S. Government agencies and corporations | $ | — | $ | 3,515 | $ | — | $ | 3,515 | |||||||
Obligations of states and political subdivisions | — | 220,876 | — | $ | 220,876 | ||||||||||
Residential mortgage-backed securities: | |||||||||||||||
Government agency mortgage backed securities | — | 483,125 | — | 483,125 | |||||||||||
Government agency collateralized mortgage obligations | — | 296,005 | — | 296,005 | |||||||||||
Commercial mortgage-backed securities: | |||||||||||||||
Government agency mortgage backed securities | — | 27,189 | — | 27,189 | |||||||||||
Government agency collateralized mortgage obligations | — | 24,321 | — | 24,321 | |||||||||||
Trust preferred securities | — | — | 10,401 | 10,401 | |||||||||||
Other debt securities | — | 23,347 | — | 23,347 | |||||||||||
Total securities available for sale | — | 1,078,378 | 10,401 | 1,088,779 | |||||||||||
Derivative instruments: | |||||||||||||||
Interest rate swaps | — | 181 | — | 181 | |||||||||||
Interest rate contracts | — | 4,142 | — | 4,142 | |||||||||||
Interest rate lock commitments | — | 4,699 | — | 4,699 | |||||||||||
Forward commitments | — | 98 | — | 98 | |||||||||||
Total derivative instruments | — | 9,120 | — | 9,120 | |||||||||||
Mortgage loans held for sale | — | 245,046 | — | 245,046 | |||||||||||
Total financial assets | $ | — | $ | 1,332,544 | $ | 10,401 | $ | 1,342,945 | |||||||
Financial liabilities: | |||||||||||||||
Derivative instruments: | |||||||||||||||
Interest rate swaps | $ | — | $ | 1,047 | $ | — | $ | 1,047 | |||||||
Interest rate contracts | — | 4,142 | — | 4,142 | |||||||||||
Interest rate lock commitments | — | 1 | — | 1 | |||||||||||
Forward commitments | — | 1,301 | — | 1,301 | |||||||||||
Total derivative instruments | — | 6,491 | — | 6,491 | |||||||||||
Total financial liabilities | $ | — | $ | 6,491 | $ | — | $ | 6,491 |
37
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Level 1 | Level 2 | Level 3 | Totals | ||||||||||||
December 31, 2017 | |||||||||||||||
Financial assets: | |||||||||||||||
Securities available for sale: | |||||||||||||||
Obligations of other U.S. Government agencies and corporations | $ | — | $ | 3,564 | $ | — | $ | 3,564 | |||||||
Obligations of states and political subdivisions | — | 234,481 | — | 234,481 | |||||||||||
Residential mortgage-backed securities: | |||||||||||||||
Government agency mortgage backed securities | — | 193,950 | — | 193,950 | |||||||||||
Government agency collateralized mortgage obligations | — | 176,639 | — | 176,639 | |||||||||||
Commercial mortgage-backed securities: | |||||||||||||||
Government agency mortgage backed securities | — | 31,170 | — | 31,170 | |||||||||||
Government agency collateralized mortgage obligations | — | 5,006 | — | 5,006 | |||||||||||
Trust preferred securities | — | — | 9,388 | 9,388 | |||||||||||
Other debt securities | — | 17,290 | — | 17,290 | |||||||||||
Total securities available for sale | — | 662,100 | 9,388 | 671,488 | |||||||||||
Derivative instruments: | |||||||||||||||
Interest rate contracts | — | 3,171 | — | 3,171 | |||||||||||
Interest rate lock commitments | — | 2,756 | — | 2,756 | |||||||||||
Forward commitments | — | 50 | — | 50 | |||||||||||
Total derivative instruments | — | 5,977 | — | 5,977 | |||||||||||
Mortgage loans held for sale | — | 108,316 | — | 108,316 | |||||||||||
Total financial assets | $ | — | $ | 776,393 | $ | 9,388 | $ | 785,781 | |||||||
Financial liabilities: | |||||||||||||||
Derivative instruments: | |||||||||||||||
Interest rate swaps | $ | — | $ | 2,536 | $ | — | $ | 2,536 | |||||||
Interest rate contracts | — | 3,171 | — | 3,171 | |||||||||||
Interest rate lock commitments | — | 4 | — | 4 | |||||||||||
Forward commitments | — | 328 | — | 328 | |||||||||||
Total derivative instruments | — | 6,039 | — | 6,039 | |||||||||||
Total financial liabilities | $ | — | $ | 6,039 | $ | — | $ | 6,039 |
The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. Transfers between levels of the hierarchy are deemed to have occurred at the end of period. There were no such transfers between levels of the fair value hierarchy during the six months ended June 30, 2018.
The following tables provide a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, as of the dates presented:
38
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended June 30, 2018 | Trust preferred securities | ||
Balance at April 1, 2018 | $ | 10,045 | |
Accretion included in net income | 8 | ||
Unrealized gains included in other comprehensive income | 383 | ||
Purchases | — | ||
Sales | — | ||
Issues | — | ||
Settlements | (35 | ) | |
Transfers into Level 3 | — | ||
Transfers out of Level 3 | — | ||
Balance at June 30, 2018 | $ | 10,401 |
Three Months Ended June 30, 2017 | Trust preferred securities | ||
Balance at April 1, 2017 | $ | 17,823 | |
Accretion included in net income | 38 | ||
Unrealized gains included in other comprehensive income | 22 | ||
Purchases | — | ||
Sales | — | ||
Issues | — | ||
Settlements | (891 | ) | |
Transfers into Level 3 | — | ||
Transfers out of Level 3 | — | ||
Balance at June 30, 2017 | $ | 16,992 |
Six Months Ended June 30, 2018 | Trust preferred securities | ||
Balance at January 1, 2018 | $ | 9,388 | |
Accretion included in net income | 17 | ||
Unrealized gains included in other comprehensive income | 1,052 | ||
Purchases | — | ||
Sales | — | ||
Issues | — | ||
Settlements | (56 | ) | |
Transfers into Level 3 | — | ||
Transfers out of Level 3 | — | ||
Balance at June 30, 2018 | $ | 10,401 |
39
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2017 | Trust preferred securities | ||
Balance at January 1, 2017 | $ | 18,389 | |
Accretion included in net income | 46 | ||
Unrealized losses included in other comprehensive income | 559 | ||
Reclassification adjustment | — | ||
Purchases | — | ||
Sales | — | ||
Issues | — | ||
Settlements | (2,002 | ) | |
Transfers into Level 3 | — | ||
Transfers out of Level 3 | — | ||
Balance at June 30, 2017 | $ | 16,992 |
For each of the three and six months ended June 30, 2018 and 2017, there were no gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs.
The following table presents information as of June 30, 2018 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a recurring basis:
Financial instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range of Inputs | |||||
Trust preferred securities | $ | 10,401 | Discounted cash flows | Default rate | 0-100% |
Nonrecurring Fair Value Measurements
Certain assets and liabilities may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following table provides the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheets as of the dates presented and the level within the fair value hierarchy each is classified:
June 30, 2018 | Level 1 | Level 2 | Level 3 | Totals | |||||||||||
Impaired loans | $ | — | $ | — | $ | 3,964 | $ | 3,964 | |||||||
OREO | — | — | 2,662 | 2,662 | |||||||||||
Total | $ | — | $ | — | $ | 6,626 | $ | 6,626 |
December 31, 2017 | Level 1 | Level 2 | Level 3 | Totals | |||||||||||
Impaired loans | $ | — | $ | — | $ | 9,251 | $ | 9,251 | |||||||
OREO | — | — | 7,392 | 7,392 | |||||||||||
Total | $ | — | $ | — | $ | 16,643 | $ | 16,643 |
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets measured on a nonrecurring basis:
Impaired loans: Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value
40
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Impaired loans that were measured or re-measured at fair value had a carrying value of $4,518 and $9,608 at June 30, 2018 and December 31, 2017, respectively, and a specific reserve for these loans of $554 and $357 was included in the allowance for loan losses as of such dates.
Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3.
The following table presents OREO measured at fair value on a nonrecurring basis that was still held in the Consolidated Balance Sheets as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||
Carrying amount prior to remeasurement | $ | 3,212 | $ | 8,732 | |||
Impairment recognized in results of operations | (550 | ) | (1,340 | ) | |||
Fair value | $ | 2,662 | $ | 7,392 |
The following table presents information as of June 30, 2018 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:
Financial instrument | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range of Inputs | |||||
Impaired loans | $ | 3,964 | Appraised value of collateral less estimated costs to sell | Estimated costs to sell | 4-10% | ||||
OREO | 2,662 | Appraised value of property less estimated costs to sell | Estimated costs to sell | 4-10% |
Fair Value Option
The Company elected to measure all mortgage loans originated for sale on or after July 1, 2012 at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.
Net gains of $4,177 and $6,092 resulting from fair value changes of these mortgage loans were recorded in income during the six months ended June 30, 2018 and 2017, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income.
The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income.
The following table summarizes the differences between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of June 30, 2018:
41
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Aggregate Fair Value | Aggregate Unpaid Principal Balance | Difference | |||||||||
Mortgage loans held for sale measured at fair value | $ | 245,046 | $ | 237,373 | $ | 7,673 | |||||
Past due loans of 90 days or more | — | — | — | ||||||||
Nonaccrual loans | — | — | — |
42
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:
Fair Value | |||||||||||||||||||
As of June 30, 2018 | Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Financial assets | |||||||||||||||||||
Cash and cash equivalents | $ | 292,952 | $ | 292,952 | $ | — | $ | — | $ | 292,952 | |||||||||
Securities available for sale | 1,088,779 | — | 1,078,378 | 10,401 | 1,088,779 | ||||||||||||||
Mortgage loans held for sale | 245,046 | — | 245,046 | — | 245,046 | ||||||||||||||
Loans, net | 7,720,302 | — | — | 7,608,411 | 7,608,411 | ||||||||||||||
Mortgage servicing rights | 43,239 | — | — | 57,575 | 57,575 | ||||||||||||||
Derivative instruments | 9,120 | — | 9,120 | — | 9,120 | ||||||||||||||
Financial liabilities | |||||||||||||||||||
Deposits | $ | 8,380,720 | $ | 6,508,375 | $ | 1,867,633 | $ | — | $ | 8,376,008 | |||||||||
Short-term borrowings | 313,393 | 313,393 | — | — | 313,393 | ||||||||||||||
Other long-term borrowings | 73 | 73 | — | — | 73 | ||||||||||||||
Federal Home Loan Bank advances | 7,082 | — | 7,135 | — | 7,135 | ||||||||||||||
Junior subordinated debentures | 86,155 | — | 82,166 | — | 82,166 | ||||||||||||||
Subordinated notes | 114,044 | — | 116,650 | — | 116,650 | ||||||||||||||
Derivative instruments | 6,491 | — | 6,491 | — | 6,491 |
Fair Value | |||||||||||||||||||
As of December 31, 2017 | Carrying Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Financial assets | |||||||||||||||||||
Cash and cash equivalents | $ | 281,453 | $ | 281,453 | $ | — | $ | — | $ | 281,453 | |||||||||
Securities available for sale | 671,488 | — | 662,100 | 9,388 | 671,488 | ||||||||||||||
Mortgage loans held for sale | 108,316 | — | 108,316 | — | 108,316 | ||||||||||||||
Loans, net | 7,574,111 | — | — | 7,514,185 | 7,514,185 | ||||||||||||||
Mortgage servicing rights | 39,339 | — | — | 47,868 | 47,868 | ||||||||||||||
Derivative instruments | 5,977 | — | 5,977 | — | 5,977 | ||||||||||||||
Financial liabilities | |||||||||||||||||||
Deposits | $ | 7,921,075 | $ | 6,114,391 | $ | 1,809,085 | $ | — | $ | 7,923,476 | |||||||||
Short-term borrowings | 89,814 | 89,814 | — | — | 89,814 | ||||||||||||||
Other long-term borrowings | 98 | 98 | — | — | 98 | ||||||||||||||
Federal Home Loan Bank advances | 7,493 | — | 7,661 | — | 7,661 | ||||||||||||||
Junior subordinated debentures | 85,881 | — | 69,702 | — | 69,702 | ||||||||||||||
Subordinated notes | 114,074 | — | 118,650 | — | 118,650 | ||||||||||||||
Derivative instruments | 6,039 | — | 6,039 | — | 6,039 |
43
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 15 – Other Comprehensive Income (Loss)
(In Thousands)
Changes in the components of other comprehensive income (loss), net of tax, were as follows for the periods presented:
Pre-Tax | Tax Expense (Benefit) | Net of Tax | |||||||||
Three months ended June 30, 2018 | |||||||||||
Securities available for sale: | |||||||||||
Unrealized holding losses on securities | $ | (4,025 | ) | $ | (1,025 | ) | $ | (3,000 | ) | ||
Total securities available for sale | (4,025 | ) | (1,025 | ) | (3,000 | ) | |||||
Derivative instruments: | |||||||||||
Unrealized holding gains on derivative instruments | 519 | 132 | 387 | ||||||||
Total derivative instruments | 519 | 132 | 387 | ||||||||
Defined benefit pension and post-retirement benefit plans: | |||||||||||
Amortization of net actuarial loss recognized in net periodic pension cost | 77 | 20 | 57 | ||||||||
Total defined benefit pension and post-retirement benefit plans | 77 | 20 | 57 | ||||||||
Total other comprehensive loss | $ | (3,429 | ) | $ | (873 | ) | $ | (2,556 | ) | ||
Three months ended June 30, 2017 | |||||||||||
Securities available for sale: | |||||||||||
Unrealized holding gains on securities | $ | 4,188 | $ | 1,619 | $ | 2,569 | |||||
Amortization of unrealized holding gains on securities transferred to the held to maturity category | (29 | ) | (11 | ) | (18 | ) | |||||
Total securities available for sale | 4,159 | 1,608 | 2,551 | ||||||||
Derivative instruments: | |||||||||||
Unrealized holding losses on derivative instruments | (270 | ) | (105 | ) | (165 | ) | |||||
Total derivative instruments | (270 | ) | (105 | ) | (165 | ) | |||||
Defined benefit pension and post-retirement benefit plans: | |||||||||||
Amortization of net actuarial loss recognized in net periodic pension cost | 91 | 35 | 56 | ||||||||
Total defined benefit pension and post-retirement benefit plans | 91 | 35 | 56 | ||||||||
Total other comprehensive income | $ | 3,980 | $ | 1,538 | $ | 2,442 |
44
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Pre-Tax | Tax Expense (Benefit) | Net of Tax | |||||||||
Six months ended June 30, 2018 | |||||||||||
Securities available for sale: | |||||||||||
Unrealized holding losses on securities | $ | (14,634 | ) | $ | (3,725 | ) | $ | (10,909 | ) | ||
Total securities available for sale | (14,634 | ) | (3,725 | ) | (10,909 | ) | |||||
Derivative instruments: | |||||||||||
Unrealized holding gains on derivative instruments | 1,670 | 425 | 1,245 | ||||||||
Total derivative instruments | 1,670 | 425 | 1,245 | ||||||||
Defined benefit pension and post-retirement benefit plans: | |||||||||||
Amortization of net actuarial loss recognized in net periodic pension cost | 164 | 41 | 123 | ||||||||
Total defined benefit pension and post-retirement benefit plans | 164 | 41 | 123 | ||||||||
Total other comprehensive loss | $ | (12,800 | ) | $ | (3,259 | ) | $ | (9,541 | ) | ||
Six months ended June 30, 2017 | |||||||||||
Securities available for sale: | |||||||||||
Unrealized holding gains on securities | $ | 8,927 | $ | 3,451 | $ | 5,476 | |||||
Amortization of unrealized holding gains on securities transferred to the held to maturity category | (275 | ) | (106 | ) | (169 | ) | |||||
Total securities available for sale | 8,652 | 3,345 | 5,307 | ||||||||
Derivative instruments: | |||||||||||
Unrealized holding gains on derivative instruments | 6 | 2 | 4 | ||||||||
Total derivative instruments | 6 | 2 | 4 | ||||||||
Defined benefit pension and post-retirement benefit plans: | |||||||||||
Amortization of net actuarial loss recognized in net periodic pension cost | 204 | 79 | 125 | ||||||||
Total defined benefit pension and post-retirement benefit plans | 204 | 79 | 125 | ||||||||
Total other comprehensive income | $ | 8,862 | $ | 3,426 | $ | 5,436 |
The accumulated balances for each component of other comprehensive income (loss), net of tax, were as follows as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||
Unrealized gains (losses) on securities | $ | (1,540 | ) | $ | 7,363 | ||
Non-credit related portion of other-than-temporary impairment on securities | (11,319 | ) | (9,313 | ) | |||
Unrealized gains (losses) on derivative instruments | 250 | (995 | ) | ||||
Unrecognized losses on defined benefit pension and post-retirement benefit plans obligations | (7,443 | ) | (7,566 | ) | |||
Total accumulated other comprehensive loss | $ | (20,052 | ) | $ | (10,511 | ) |
45
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 16 – Net Income Per Common Share
(In Thousands, Except Share Data)
Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the pro forma dilution of shares outstanding, assuming outstanding service-based restricted stock awards fully vested and outstanding stock options were exercised into common shares, calculated in accordance with the treasury method. Basic and diluted net income per common share calculations are as follows for the periods presented:
Three Months Ended | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Basic | |||||||
Net income applicable to common stock | $ | 36,710 | $ | 25,284 | |||
Average common shares outstanding | 49,413,754 | 44,415,423 | |||||
Net income per common share - basic | $ | 0.74 | $ | 0.57 | |||
Diluted | |||||||
Net income applicable to common stock | $ | 36,710 | $ | 25,284 | |||
Average common shares outstanding | 49,413,754 | 44,415,423 | |||||
Effect of dilutive stock-based compensation | 136,007 | 108,118 | |||||
Average common shares outstanding - diluted | 49,549,761 | 44,523,541 | |||||
Net income per common share - diluted | $ | 0.74 | $ | 0.57 |
Six Months Ended | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Basic | |||||||
Net income applicable to common stock | $ | 70,536 | $ | 49,256 | |||
Average common shares outstanding | 49,385,244 | 44,390,021 | |||||
Net income per common share - basic | $ | 1.43 | $ | 1.11 | |||
Diluted | |||||||
Net income applicable to common stock | $ | 70,536 | $ | 49,256 | |||
Average common shares outstanding | 49,385,244 | 44,390,021 | |||||
Effect of dilutive stock-based compensation | 136,801 | 110,259 | |||||
Average common shares outstanding - diluted | 49,522,045 | 44,500,280 | |||||
Net income per common share - diluted | $ | 1.42 | $ | 1.11 |
Stock-based compensation awards that could potentially dilute basic net income per common share in the future that were not included in the computation of diluted net income per common share due to their anti-dilutive effect were as follows for the periods presented:
Three Months Ended | |||
June 30, | |||
2018 | 2017 | ||
Number of shares | 44,273 | — | |
Exercise prices (for stock option awards) | — | — |
Six Months Ended | |||
June 30, | |||
2018 | 2017 | ||
Number of shares | 44,273 | — | |
Exercise prices (for stock option awards) | — | — |
46
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 17 – Regulatory Matters
(In Thousands)
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Federal Reserve, the FDIC and the Office 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:
Capital Tiers | Tier 1 Capital to Average Assets (Leverage) | Common Equity Tier 1 to Risk - Weighted Assets | Tier 1 Capital to Risk – Weighted Assets | Total Capital to Risk – Weighted Assets | |||
Well capitalized | 5% or above | 6.5% or above | 8% or above | 10% or above | |||
Adequately capitalized | 4% or above | 4.5% or above | 6% or above | 8% or above | |||
Undercapitalized | Less than 4% | Less than 4.5% | Less than 6% | Less than 8% | |||
Significantly undercapitalized | Less than 3% | Less than 3% | Less than 4% | Less than 6% | |||
Critically undercapitalized | Tangible Equity / Total Assets less than 2% |
The following table provides the capital and risk-based capital and leverage ratios for the Company and for Renasant Bank as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||||||||
Amount | Ratio | Amount | Ratio | ||||||||||
Renasant Corporation | |||||||||||||
Tier 1 Capital to Average Assets (Leverage) | $ | 1,034,498 | 10.63 | % | $ | 979,604 | 10.18 | % | |||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | 951,490 | 11.71 | % | 896,733 | 11.34 | % | |||||||
Tier 1 Capital to Risk-Weighted Assets | 1,034,498 | 12.73 | % | 979,604 | 12.39 | % | |||||||
Total Capital to Risk-Weighted Assets | 1,198,046 | 14.75 | % | 1,142,926 | 14.46 | % | |||||||
Renasant Bank | |||||||||||||
Tier 1 Capital to Average Assets (Leverage) | $ | 1,057,998 | 10.89 | % | $ | 1,000,715 | 10.42 | % | |||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | 1,057,998 | 13.04 | % | 1,000,715 | 12.69 | % | |||||||
Tier 1 Capital to Risk-Weighted Assets | 1,057,998 | 13.04 | % | 1,000,715 | 12.69 | % | |||||||
Total Capital to Risk-Weighted Assets | 1,108,178 | 13.66 | % | 1,050,751 | 13.32 | % |
Common equity Tier 1 capital (“CET1”) generally consists of common stock, retained earnings, accumulated other comprehensive income and certain minority interests, less certain adjustments and deductions. In addition, the Company must maintain a “capital conservation buffer,” which is a specified amount of CET1 capital in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress. If the Company’s ratio of CET1 to risk-weighted capital is below the capital conservation buffer, the Company will face restrictions on its ability to pay dividends, repurchase outstanding stock and make certain discretionary bonus payments. When fully phased in on January 1, 2019, the required capital conservation buffer will be 2.5% of CET1 to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements; as of June 30, 2018, the capital conservation buffer is 1.875% of risk-weighted assets. In addition, the Basel III regulatory capital reforms and rules effecting certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 issued by the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (the “Basel III Rules”) have revised the agencies’ rules for calculating risk-weighted assets to enhance
47
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
risk sensitivity and to incorporate certain international capital standards of the Basel Committee on Banking Supervision. These revisions affect the calculation of the denominator of a banking organization’s risk-based capital ratios to reflect the higher-risk nature of certain types of loans. As applicable to Renasant Bank:
— For residential mortgages, the former 50% risk weight for performing residential first-lien mortgages and 100% risk-weight for all other mortgages has been replaced with a risk weight of between 35% and 200% determined by the mortgage’s loan-to-value ratio and whether the mortgage falls into one of two categories based on eight criteria that include the term, use of negative amortization and balloon payments, certain rate increases and documented and verified borrower income.
— For commercial mortgages, a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans has been substituted for the former 100% risk weight.
— For nonperforming loans, the former 100% risk weight is now a 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on nonaccrual status.
Finally, Tier 1 capital treatment for “hybrid” capital items like trust preferred securities has been eliminated, subject to various grandfathering and transition rules.
Note 18 – Segment Reporting
(In Thousands)
The operations of the Company’s reportable segments are described as follows:
• | The Community Banks segment delivers a complete range of banking and financial services to individuals and small to medium-sized businesses including checking and savings accounts, business and personal loans, asset-based lending and equipment leasing, as well as safe deposit and night depository facilities. |
• | The Insurance segment includes a full service insurance agency offering all major lines of commercial and personal insurance through major carriers. |
• | The Wealth Management segment offers a broad range of fiduciary services which include the administration and management of trust accounts including personal and corporate benefit accounts, self-directed IRAs, and custodial accounts. In addition, the Wealth Management segment offers annuities, mutual funds and other investment services through a third party broker-dealer. |
In order to give the Company’s divisional management a more precise indication of the income and expenses they can control, the results of operations for the Community Banks, the Insurance and the Wealth Management segments reflect the direct revenues and expenses of each respective segment. Indirect revenues and expenses, including but not limited to income from the Company’s investment portfolio, as well as certain costs associated with data processing and back office functions, primarily support the operations of the community banks and, therefore, are included in the results of the Community Banks segment. Included in “Other” are the operations of the holding company and other eliminations which are necessary for purposes of reconciling to the consolidated amounts.
The following table provides financial information for the Company’s operating segments as of and for the periods presented:
48
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Community Banks | Insurance | Wealth Management | Other | Consolidated | |||||||||||||||
Three months ended June 30, 2018 | |||||||||||||||||||
Net interest income (loss) | $ | 94,676 | $ | 118 | $ | 315 | $ | (2,720 | ) | $ | 92,389 | ||||||||
Provision for loan losses | 1,810 | — | — | — | 1,810 | ||||||||||||||
Noninterest income | 29,949 | 2,148 | 3,714 | (230 | ) | 35,581 | |||||||||||||
Noninterest expense | 73,628 | 1,819 | 3,213 | 366 | 79,026 | ||||||||||||||
Income (loss) before income taxes | 49,187 | 447 | 816 | (3,316 | ) | 47,134 | |||||||||||||
Income tax expense (benefit) | 11,165 | 116 | — | (857 | ) | 10,424 | |||||||||||||
Net income (loss) | $ | 38,022 | $ | 331 | $ | 816 | $ | (2,459 | ) | $ | 36,710 | ||||||||
Total assets | $ | 10,439,785 | $ | 24,513 | $ | 61,869 | $ | 18,308 | $ | 10,544,475 | |||||||||
Goodwill | $ | 608,279 | $ | 2,767 | — | — | $ | 611,046 | |||||||||||
Three months ended June 30, 2017 | |||||||||||||||||||
Net interest income (loss) | $ | 81,392 | $ | 124 | $ | 524 | $ | (2,437 | ) | $ | 79,603 | ||||||||
Provision for loan losses | 1,750 | — | — | — | 1,750 | ||||||||||||||
Noninterest income | 28,592 | 2,264 | 3,267 | 142 | 34,265 | ||||||||||||||
Noninterest expense | 70,018 | 1,766 | 2,905 | 152 | 74,841 | ||||||||||||||
Income (loss) before income taxes | 38,216 | 622 | 886 | (2,447 | ) | 37,277 | |||||||||||||
Income tax expense (benefit) | 12,712 | 238 | — | (957 | ) | 11,993 | |||||||||||||
Net income (loss) | $ | 25,504 | $ | 384 | $ | 886 | $ | (1,490 | ) | $ | 25,284 | ||||||||
Total assets | $ | 8,776,737 | $ | 24,746 | $ | 58,156 | $ | 12,633 | $ | 8,872,272 | |||||||||
Goodwill | $ | 467,767 | $ | 2,767 | — | — | $ | 470,534 |
Community Banks | Insurance | Wealth Management | Other | Consolidated | |||||||||||||||
Six months ended June 30, 2018 | |||||||||||||||||||
Net interest income (loss) | $ | 186,103 | $ | 224 | $ | 628 | $ | (5,326 | ) | $ | 181,629 | ||||||||
Provision for loan losses | 3,560 | — | — | 3,560 | |||||||||||||||
Noninterest income (loss) | 57,867 | 4,920 | 7,241 | (494 | ) | 69,534 | |||||||||||||
Noninterest expense | 146,261 | 3,550 | 6,605 | 554 | 156,970 | ||||||||||||||
Income (loss) before income taxes | 94,149 | 1,594 | 1,264 | (6,374 | ) | 90,633 | |||||||||||||
Income tax expense (benefit) | 21,332 | 413 | — | (1,648 | ) | 20,097 | |||||||||||||
Net income (loss) | $ | 72,817 | $ | 1,181 | $ | 1,264 | $ | (4,726 | ) | $ | 70,536 | ||||||||
Total assets | $ | 10,439,785 | $ | 24,513 | $ | 61,869 | $ | 18,308 | $ | 10,544,475 | |||||||||
Goodwill | $ | 608,279 | $ | 2,767 | — | — | $ | 611,046 | |||||||||||
Six months ended June 30, 2017 | |||||||||||||||||||
Net interest income (loss) | $ | 157,348 | $ | 216 | $ | 1,011 | $ | (4,957 | ) | $ | 153,618 | ||||||||
Provision for loan losses | 3,250 | — | — | — | 3,250 | ||||||||||||||
Noninterest income | 55,170 | 4,813 | 6,386 | (83 | ) | 66,286 | |||||||||||||
Noninterest expense | 134,239 | 3,458 | 5,901 | 552 | 144,150 | ||||||||||||||
Income (loss) before income taxes | 75,029 | 1,571 | 1,496 | (5,592 | ) | 72,504 | |||||||||||||
Income tax expense (benefit) | 24,822 | 613 | — | (2,187 | ) | 23,248 | |||||||||||||
Net income (loss) | $ | 50,207 | $ | 958 | $ | 1,496 | $ | (3,405 | ) | $ | 49,256 | ||||||||
Total assets | $ | 8,776,737 | $ | 24,746 | $ | 58,156 | $ | 12,633 | $ | 8,872,272 | |||||||||
Goodwill | $ | 467,767 | $ | 2,767 | — | — | $ | 470,534 |
49
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 19 – Revenue Recognition
(In Thousands)
The Company adopted ASU 2014-09, an update to ASC 606, in the first quarter of 2018. The majority of the Company’s revenue streams are governed by other authoritative guidance and, therefore, considered out-of-scope of ASC 606. The Company’s revenue streams that are considered in-scope of ASC 606 are discussed below.
ASC 606 requires costs that are incremental to obtaining a contract to be capitalized. In the case of the Company, these costs would include sales commissions for insurance and wealth management products. ASC 606 has established, and the Company has utilized, a practical expedient allowing costs that, if capitalized, would have an amortization period of one year or less to instead be expensed as incurred.
Service Charges on Deposit Accounts
Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. The contracts with deposit account customers are day-to-day contracts and are considered to be terminable at will by either party. Therefore, the fees are all considered to be earned when charged and simultaneously collected.
Insurance Commissions
Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers, which include health and life insurance and property and casualty insurance. Insurance commissions are earned when policies are placed by customers with the insurance carriers and are collected and recognized using two different methods: the agency bill method and the direct bill method.
Under the agency bill method, Renasant Insurance is responsible for billing the customers directly and then collecting and remitting the premiums to the insurance carriers. Agency bill revenue is recognized at the later of the invoice date or effective date of the policy. The Company has established a reserve for such policies which is derived from historical collection experience and updated annually. The contract balances (i.e. accounts receivable and accounts payable related to insurance commisions earned and premiums due) and the reserve established are considered inconsequential to the overall financial results of the Company.
Under the direct bill method, premium billing and collections are handled by the insurance carriers, and a commission is then paid to Renasant Insurance. Direct bill revenue is recognized when the cash is received from the insurance carriers. While there is recourse on these commissions in the event of policy cancellations, based on the Company’s historical data, significant or material reversals of revenue based on policy cancellations are not anticipated. The Company monitors policy cancellations on a monthly basis and, if a significant or material set of transactions occurred, the Company will adjust earnings accordingly.
The Company also earns contingency income that it recognizes on a cash basis. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on the Company’s clients’ policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers. Contingency income, which is included in “Other noninterest income” in the Consolidated Statements of Income, was $31 and $79 for the three months ending June 30, 2018 and 2017, respectively, and $794 and $766 for the six months ending June 30, 2018 and 2017, respectively.
Wealth Management Revenue
Wealth management consists of the Trust division and the Financial Services division. 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, self-directed IRAs, and custodial accounts. Fees for managing these accounts are based on the value of assets under management in the account, with the amount of the fee depending on the type of account. Revenue is recognized on monthly basis, and there is little to no risk of a material reversal of revenue. The contract balance (i.e. management fee receivable) recognized is considered inconsequential to the overall financial results of the Company.
The Financial Services division provides specialized products and services to the Company’s customers, which include investment guidance relating to fixed and variable annuities, mutual funds, stocks and other investments offered through a third party provider. Fees are recognized based on either trade activity, which are recognized at the time of the trade, or assets under management, which are recognized monthly.
Sales of Other Real Estate Owned
50
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
The Company continually markets the properties included in the OREO portfolio. The Company will at times, in the ordinary course of business, provide seller-financing on the sales of OREO. In cases where a sale is seller-financed, the Company must ensure the commitment of both parties to perform their respective obligations and the collectability of the transaction price in order to properly recognize the revenue on the sale of OREO. This is accomplished through the Company’s loan underwriting process. In this process the Company considers things such as the buyer’s initial equity in the property, the credit quality of the borrower, the financing terms of the loan and the cash flow from the property, if applicable. If it is determined that the contract criteria in ASC 606 have been met, the revenue on the sale of OREO will be recognized on the closing date of the sale when the Company has transferred title to the buyer and obtained the right to receive payment for the property. In instances where sales are not seller-financed, the Company recognizes revenue on the closing date of the sale when the Company has obtained payment for the property and transferred title to the buyer. For additional information on OREO, please see Note 7, “Other Real Estate Owned.”
51
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
This Form 10-Q may contain or incorporate by reference statements regarding Renasant 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. Such forward-looking statements usually include words such as “expects,” “projects,” “proposes,” “anticipates,” “believes,” “intends,” “estimates,” “strategy,” “plan,” “potential,” “possible,” “approximately,” “should” and variations of such words and other similar expressions. The forward-looking statements in, or incorporated by reference into, this report reflect our current assumptions and estimates of, among other things, future economic circumstances, industry conditions, business strategy and decisions, Company performance and financial results. Management believes its assumptions and estimates are reasonable, but they are all inherently subject to significant business, economic and competitive risks and uncertainties, many beyond management’s control, that could cause the Company’s actual results and experience to differ from the anticipated results and expectations indicated or implied in such forward-looking statements. Such differences may be material. Investors are cautioned that any such forward-looking statements are not guarantees of future performance 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 actual results to differ materially from those in forward-looking statements include the following risks: (1) 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 time frame anticipated by management, including with respect to its pending acquisition of Brand Group Holdings, Inc.; (2) the effect of economic conditions and interest rates on a national, regional or international basis; (3) timing and success of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (4) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries; (5) the financial resources of, and products available to, competitors; (6) changes in laws and regulations as well as changes in accounting standards; (7) changes in policy by regulatory agencies; (8) changes in the securities and foreign exchange markets; (9) the Company’s potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (10) 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; (11) an insufficient allowance for loan losses as a result of inaccurate assumptions; (12) general economic, market or business conditions, including the impact of inflation; (13) changes in demand for loan products and financial services; (14) concentration of credit exposure; (15) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; (16) increased cybersecurity risk, including potential network breaches, business disruptions or financial losses; (17) natural disasters and other catastrophic events in the Company’s geographic area; (18) the impact, extent and timing of technological changes; and (19) other circumstances, many of which are beyond management’s control.
The Company expressly disclaims any obligation to update or revise forward-looking statements to reflect changed assumptions or estimates, the occurrence of unanticipated events or changes to future operating results that occur after the date the forward-looking statements are made.
Non-GAAP Financial Measures
This report presents the Company's efficiency ratio, in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Additionally, this report presents an adjusted efficiency ratio, which is a non-GAAP financial measure. We calculated the efficiency ratio by dividing noninterest expense by the sums of net interest income on a fully tax equivalent basis and noninterest income.The adjusted efficiency ratio excludes expenses that (1) the Company does not consider to be part of our normal operations, such as amortization of intangibles, or (2) the Company incurred in connection with certain transactions where management is unable to accurately predict the timing of when these expenses will be incurred or, when incurred, the amount of such expenses, such as merger and conversion related expenses and debt prepayment penalties. Management uses the adjusted efficiency ratio to evaluate ongoing operating results and efficiency of the Company's operations. The reconciliation from GAAP to non-GAAP for this financial measure is below.
52
Efficiency Ratio | |||||||||||||||
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest income (fully tax equivalent basis) | $ | 107,991 | $ | 89,429 | $ | 209,938 | $ | 173,210 | |||||||
Interest expense | 14,185 | 7,976 | 25,325 | 15,850 | |||||||||||
Net interest income (fully tax equivalent basis) | 93,806 | 81,453 | 184,613 | 157,360 | |||||||||||
Total noninterest income | 35,581 | 34,265 | 69,534 | 66,286 | |||||||||||
Net gains on sales of securities | — | — | — | — | |||||||||||
Adjusted noninterest income | 35,581 | 34,265 | 69,534 | 66,286 | |||||||||||
Total noninterest expense | 79,026 | 74,841 | 156,970 | 144,150 | |||||||||||
Intangible amortization | 1,594 | 1,493 | 3,245 | 3,056 | |||||||||||
Merger and conversion related expenses | 500 | 3,044 | 1,400 | 3,389 | |||||||||||
Extinguishment of debt | — | — | — | 205 | |||||||||||
Adjusted noninterest expense | 76,932 | 70,304 | 152,325 | 137,500 | |||||||||||
Efficiency Ratio (GAAP) | 61.08 | % | 64.68 | % | 61.76 | % | 64.45 | % | |||||||
Adjusted Efficiency Ratio (non-GAAP) | 59.46 | % | 60.75 | % | 59.94 | % | 61.48 | % |
The presentation of this non-GAAP financial measure 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 other similarly-titled measures 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.
Financial Condition
The following discussion provides details regarding the changes in significant balance sheet accounts at June 30, 2018 compared to December 31, 2017.
Assets
Total assets were $10,544,475 at June 30, 2018 compared to $9,829,981 at December 31, 2017.
Investments
The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio, all of which are classified as available for sale, by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented:
53
June 30, 2018 | December 31, 2017 | ||||||||||||
Balance | Percentage of Portfolio | Balance | Percentage of Portfolio | ||||||||||
Obligations of other U.S. Government agencies and corporations | $ | 3,515 | 0.32 | % | $ | 3,564 | 0.53 | % | |||||
Obligations of states and political subdivisions | 220,876 | 20.29 | 234,481 | 34.92 | |||||||||
Mortgage-backed securities | 830,640 | 76.29 | 406,765 | 60.58 | |||||||||
Trust preferred securities | 10,401 | 0.96 | 9,388 | 1.40 | |||||||||
Other debt securities | 23,347 | 2.14 | 17,290 | 2.57 | |||||||||
$ | 1,088,779 | 100.00 | % | $ | 671,488 | 100.00 | % |
The balance of our securities portfolio at June 30, 2018 increased $417,291 to $1,088,779 from $671,488 at December 31, 2017. As discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, in the fourth quarter of 2017, we implemented strategic initiatives, collectively referred to as our “deleveraging strategy,” to manage total assets below $10,000,000 as of December 31, 2017, which included the sale of certain investment securities. During the six months ended June 30, 2018, we purchased $497,845 in investment securities; the majority of these purchases were made as part of the releveraging of the Company’s balance sheet, which was completed in the second quarter of 2018, with the remainder of our purchases being ordinary course purchases of investment securities. Mortgage-backed securities and collateralized mortgage obligations (“CMOs”), in the aggregate, comprised approximately 99% 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. Proceeds from maturities, calls and principal payments on securities during the first six months of 2018 totaled $63,655. There were no securities sold during the first six months of 2018.
For more information about the Company’s security portfolio, see Note 3, “Securities,” in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements, in this report.
Loans
Total loans at June 30, 2018 were $7,767,657, an increase of $147,335 from $7,620,322 at December 31, 2017.
The table below sets forth the balance of loans, net of unearned income, outstanding by loan type and the percentage of each loan type to total loans as of the dates presented:
June 30, 2018 | December 31, 2017 | ||||||||||||
Balance | Percentage of Total Loans | Balance | Percentage of Total Loans | ||||||||||
Commercial, financial, agricultural | $ | 987,818 | 12.72 | % | $ | 1,039,393 | 13.64 | % | |||||
Lease financing | 52,423 | 0.67 | 54,013 | 0.71 | |||||||||
Real estate – construction | 712,818 | 9.18 | 633,389 | 8.31 | |||||||||
Real estate – 1-4 family mortgage | 2,433,099 | 31.32 | 2,343,721 | 30.76 | |||||||||
Real estate – commercial mortgage | 3,461,174 | 44.56 | 3,427,530 | 44.98 | |||||||||
Installment loans to individuals | 120,325 | 1.55 | 122,276 | 1.60 | |||||||||
Total loans, net of unearned income | $ | 7,767,657 | 100.00 | % | $ | 7,620,322 | 100.00 | % |
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At June 30, 2018, 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.
Non purchased loans totaled $6,057,766 at June 30, 2018 compared to $5,588,556 at December 31, 2017. With the exception of lease financing, the Company experienced loan growth across all categories of non purchased loans, with loans from our specialty commercial business lines, which consist of our asset-based lending, healthcare, factoring, and equipment lease financing banking groups as well as loans meeting the criteria to be guaranteed by the Small Business Administration (“SBA”), contributing $55,107 of the total increase in non purchased loans from December 31, 2017.
54
Looking at the change in loans geographically, non purchased loans in our Mississippi, Georgia, and Tennessee markets increased $68,947, $195,447, and $71,287, respectively, when compared to December 31, 2017. Non purchased loans in our Alabama and Florida markets (collectively referred to as our “Central Region”) increased $127,301.
Loans purchased in previous acquisitions totaled $1,709,891 and $2,031,766 at June 30, 2018 and December 31, 2017, respectively. The following tables provide a breakdown of non purchased loans and purchased loans as of the dates presented:
June 30, 2018 | |||||||||||
Non Purchased | Purchased | Total Loans | |||||||||
Commercial, financial, agricultural | $ | 790,363 | $ | 197,455 | $ | 987,818 | |||||
Lease financing, net of unearned income | 52,423 | — | 52,423 | ||||||||
Real estate – construction: | |||||||||||
Residential | 194,164 | 7,669 | 201,833 | ||||||||
Commercial | 435,107 | 62,769 | 497,876 | ||||||||
Condominiums | 13,109 | — | 13,109 | ||||||||
Total real estate – construction | 642,380 | 70,438 | 712,818 | ||||||||
Real estate – 1-4 family mortgage: | |||||||||||
Primary | 1,088,293 | 340,821 | 1,429,114 | ||||||||
Home equity | 446,564 | 99,992 | 546,556 | ||||||||
Rental/investment | 285,626 | 63,360 | 348,986 | ||||||||
Land development | 91,967 | 16,476 | 108,443 | ||||||||
Total real estate – 1-4 family mortgage | 1,912,450 | 520,649 | 2,433,099 | ||||||||
Real estate – commercial mortgage: | |||||||||||
Owner-occupied | 993,797 | 386,088 | 1,379,885 | ||||||||
Non-owner occupied | 1,425,481 | 485,392 | 1,910,873 | ||||||||
Land development | 135,677 | 34,739 | 170,416 | ||||||||
Total real estate – commercial mortgage | 2,554,955 | 906,219 | 3,461,174 | ||||||||
Installment loans to individuals | 105,195 | 15,130 | 120,325 | ||||||||
Total loans, net of unearned income | $ | 6,057,766 | $ | 1,709,891 | $ | 7,767,657 |
55
December 31, 2017 | |||||||||||
Non Purchased | Purchased | Total Loans | |||||||||
Commercial, financial, agricultural | $ | 763,823 | $ | 275,570 | $ | 1,039,393 | |||||
Lease financing, net of unearned income | 54,013 | — | 54,013 | ||||||||
Real estate – construction: | |||||||||||
Residential | 178,400 | 25,041 | 203,441 | ||||||||
Commercial | 361,345 | 55,734 | 417,079 | ||||||||
Condominiums | 7,913 | 4,956 | 12,869 | ||||||||
Total real estate – construction | 547,658 | 85,731 | 633,389 | ||||||||
Real estate – 1-4 family mortgage: | |||||||||||
Primary | 924,468 | 403,637 | 1,328,105 | ||||||||
Home equity | 445,149 | 116,990 | 562,139 | ||||||||
Rental/investment | 281,662 | 72,590 | 354,252 | ||||||||
Land development | 78,255 | 20,970 | 99,225 | ||||||||
Total real estate – 1-4 family mortgage | 1,729,534 | 614,187 | 2,343,721 | ||||||||
Real estate – commercial mortgage: | |||||||||||
Owner-occupied | 938,444 | 436,011 | 1,374,455 | ||||||||
Non-owner occupied | 1,319,453 | 554,239 | 1,873,692 | ||||||||
Land development | 132,179 | 47,204 | 179,383 | ||||||||
Total real estate – commercial mortgage | 2,390,076 | 1,037,454 | 3,427,530 | ||||||||
Installment loans to individuals | 103,452 | 18,824 | 122,276 | ||||||||
Total loans, net of unearned income | $ | 5,588,556 | $ | 2,031,766 | $ | 7,620,322 |
Mortgage Loans Held for Sale
Mortgage loans held for sale were $245,046 at June 30, 2018 compared to $108,316 at December 31, 2017. The Company's aforementioned deleveraging strategy included shortening the holding period of mortgage loans held for sale. At the beginning of 2018, the holding period of mortgage loans held for sale reverted to standard practice, which was the primary reason for the increase in the balance from December 31, 2017.
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.
Deposits
The Company relies on deposits as its major source of funds. Total deposits were $8,380,720 and $7,921,075 at June 30, 2018 and December 31, 2017, respectively. Noninterest-bearing deposits were $1,888,561 and $1,840,424 at June 30, 2018 and December 31, 2017, respectively, while interest-bearing deposits were $6,492,159 and $6,080,651 at June 30, 2018 and December 31, 2017, respectively. Management continues to focus on growing and maintaining a stable source of funding, specifically core deposits. Under certain circumstances, however, management may seek to acquire non-core deposits in the form of public fund deposits or time deposits. 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. During the fourth quarter of 2017, as part of our deleveraging strategy, the Company reduced the balance of its wholesale deposit funding sources. These deposits were reacquired during the first quarter of 2018 accounting for a portion of the increase in deposits from December 31, 2017.
56
Public fund deposits are those of counties, municipalities or other political subdivisions and may be readily obtained based on the Company’s pricing bid in comparison with competitors. Since public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. The Company has focused on growing stable sources of deposits to reduce reliance on public fund deposits. However, the Company continues to participate in the bidding process for public fund deposits when it is reasonable under the circumstances. Our public fund transaction accounts are principally obtained from municipalities including school boards and utilities. Public fund deposits were $1,160,984 and $1,000,324 at June 30, 2018 and December 31, 2017, respectively.
Looking at the change in deposits geographically, deposits in our Mississippi and Georgia markets increased $289,915 and $58,835, respectively, from December 31, 2017, while deposits in our Tennessee and Central Division markets decreased $25,047 and $40,165, respectively, from December 31, 2017. The decrease in these markets is primarily related to a decrease in public fund deposits.
Borrowed Funds
Total borrowings include securities sold under agreements to repurchase, short-term borrowings, 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 securities sold under agreements to repurchase, federal funds purchased and short-term FHLB advances. At June 30, 2018, short-term borrowings consisted of $8,393 in security repurchase agreements and short-term borrowings from the FHLB of $305,000, compared to security repurchase agreements of $6,814 and short-term borrowings from the FHLB of $83,000 at December 31, 2017.
At June 30, 2018, long-term debt, consisting of long-term FHLB advances, our junior subordinated debentures and our subordinated notes, totaled $207,354 compared to $207,546 at December 31, 2017. Funds are borrowed from the FHLB primarily to match-fund against certain loans, negating interest rate exposure when rates rise. Such match-funded loans are typically large, fixed rate commercial or real estate loans with long-term maturities. Long-term FHLB advances were $7,082 and $7,493 at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, there were no long-term FHLB advances outstanding scheduled to mature within twelve months or less. The Company had $2,649,635 of availability on unused lines of credit with the FHLB at June 30, 2018 compared to $2,670,141 at December 31, 2017.
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. The Company’s junior subordinated debentures totaled $86,155 at June 30, 2018 compared to $85,881 at December 31, 2017.
The Company’s subordinated notes, net of unamortized debt issuance costs, totaled $114,044 at June 30, 2018 compared to $114,074 at December 31, 2017.
Results of Operations
Net Income
Net income for the second quarter of 2018 was $36,710 compared to net income of $25,284 for the second quarter of 2017. Basic and diluted earnings per share (“EPS”) for the second quarter of 2018 were $0.74, as compared to basic and diluted EPS of $0.57 for the second quarter of 2017. Net income for the six months ended June 30, 2018 was $70,536 compared to net income of $49,256 for the six months ended June 30, 2017. Basic and diluted EPS for the six months ended June 30, 2018 were $1.43 and $1.42, respectively, as compared to basic and diluted EPS of $1.11 for the six months ended June 30, 2017.
The Company incurred expenses and charges in connection with certain transactions with respect to which management is unable to accurately predict the timing of when these expenses or charges will be incurred or, when incurred, the amount of such expenses or charges. The following table presents the impact of these expenses and charges on reported earnings per share for the dates presented:
57
Three Months Ended | |||||||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||||||
Pre-tax | After-tax | Impact to Diluted EPS | Pre-tax | After-tax | Impact to Diluted EPS | ||||||||||||||
Merger and conversion expenses | $ | 500 | $ | 389 | $ | 0.01 | $ | 3,044 | $ | 2,065 | $ | 0.04 | |||||||
Six Months Ended | |||||||||||||||||||
June 30, 2018 | June 30, 2017 | ||||||||||||||||||
Pre-tax | After-tax | Impact to Diluted EPS | Pre-tax | After-tax | Impact to Diluted EPS | ||||||||||||||
Merger and conversion expenses | $ | 1,400 | $ | 1,090 | $ | 0.02 | $ | 3,389 | $ | 2,302 | $ | 0.05 | |||||||
Debt prepayment penalties | — | — | — | 205 | 139 | — |
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 72.50% of total revenue (i.e., net interest income on a fully taxable equivalent basis and noninterest income) for the second quarter of 2018 and 72.64% of total net revenue for the first six months of 2018. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.
Net interest income was $92,389 and $181,629 for the three and six months ended June 30, 2018, respectively, as compared to $79,603 and $153,618 for the same respective time periods in 2017. On a tax equivalent basis, net interest income was $93,806 and $184,613 for the three and six months ended June 30, 2018, respectively, as compared to $81,453 and $157,360 for the same respective time periods in 2017. The following table presents reported net interest margin.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Taxable equivalent net interest income | $ | 93,806 | $ | 81,453 | $ | 184,613 | $ | 157,360 | |||||||
Average earning assets | 9,067,016 | 7,657,849 | 8,914,694 | 7,663,186 | |||||||||||
Net interest margin | 4.15 | % | 4.27 | % | 4.18 | % | 4.14 | % |
The impact from interest income collected on problem loans and purchase accounting adjustments on loans to net interest income and net interest margin is shown in the following table.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net interest income collected on problem loans | $ | 1,045 | $ | 2,745 | $ | 1,403 | $ | 3,302 | |||||||
Accretable yield recognized on purchased loans(1) | 5,719 | 5,410 | 11,837 | 11,014 | |||||||||||
Total impact to net interest income | $ | 6,764 | $ | 8,155 | $ | 13,240 | $ | 14,316 | |||||||
Impact to net interest margin | 0.30 | % | 0.43 | % | 0.30 | % | 0.38 | % |
(1) | Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of $3,316 and $2,684 for the second quarter of 2018 and 2017, respectively. This impact was $6,674 and $5,416 for the six months ended June 30, 2018 and 2017, respectively. The impact on net interest margin was 15 basis points and 14 basis points for the second quarter of 2018 and 2017, respectively, and 15 basis points and 14 basis points for the six months ended June 30, 2018 and 2017, respectively. |
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, for the three and six months ended June 30, 2018, as compared to the respective corresponding periods in 2017, growth in the Company’s loan portfolio was the largest contributing factor to the increase in net interest income over these periods. Also, the Company’s continued efforts to replace maturing loans with new or
58
renewed loans at similar or higher rates, bolstered by the rising rate environment resulting from the Federal Reserve Board’s increases to the target federal funds rate over the last two years, and coupled with our efforts to limit the growth in deposits and borrowing costs (while remaining competitive), drove further interest income and interest margin expansion (before and after excluding the impact from purchase accounting adjustments).
The following tables sets 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, | |||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | ||||||||||||||||
Assets | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Loans: | |||||||||||||||||||||
Not purchased | $ | 5,920,430 | $ | 69,737 | 4.72 | % | $ | 4,938,922 | $ | 54,955 | 4.46 | % | |||||||||
Purchased | 1,783,791 | 27,308 | 6.14 | 1,354,575 | 23,902 | 7.08 | |||||||||||||||
Total Loans | 7,704,221 | 97,045 | 5.05 | 6,293,497 | 78,857 | 5.03 | |||||||||||||||
Mortgage loans held for sale | 209,652 | 2,381 | 4.56 | 168,650 | 1,831 | 4.35 | |||||||||||||||
Securities: | |||||||||||||||||||||
Taxable(1) | 819,004 | 5,638 | 2.76 | 737,494 | 4,340 | 2.36 | |||||||||||||||
Tax-exempt | 220,943 | 2,358 | 4.28 | 331,750 | 3,891 | 4.70 | |||||||||||||||
Interest-bearing balances with banks | 113,196 | 569 | 2.02 | 126,458 | 510 | 1.62 | |||||||||||||||
Total interest-earning assets | 9,067,016 | 107,991 | 4.78 | 7,657,849 | 89,429 | 4.68 | |||||||||||||||
Cash and due from banks | 158,173 | 116,783 | |||||||||||||||||||
Intangible assets | 633,155 | 492,349 | |||||||||||||||||||
Other assets | 483,519 | 453,679 | |||||||||||||||||||
Total assets | $ | 10,341,863 | $ | 8,720,660 | |||||||||||||||||
Liabilities and shareholders’ equity | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Deposits: | |||||||||||||||||||||
Interest-bearing demand(2) | $ | 4,054,909 | $ | 5,441 | 0.54 | % | $ | 3,368,363 | $ | 1,917 | 0.23 | % | |||||||||
Savings deposits | 593,227 | 227 | 0.15 | 568,535 | 97 | 0.07 | |||||||||||||||
Time deposits | 1,872,987 | 5,251 | 1.12 | 1,603,800 | 3,300 | 0.83 | |||||||||||||||
Total interest-bearing deposits | 6,521,123 | 10,919 | 0.67 | 5,540,698 | 5,314 | 0.38 | |||||||||||||||
Borrowed funds | 329,287 | 3,266 | 3.98 | 233,542 | 2,662 | 4.57 | |||||||||||||||
Total interest-bearing liabilities | 6,850,410 | 14,185 | 0.83 | 5,774,240 | 7,976 | 0.55 | |||||||||||||||
Noninterest-bearing deposits | 1,867,925 | 1,608,467 | |||||||||||||||||||
Other liabilities | 81,457 | 79,018 | |||||||||||||||||||
Shareholders’ equity | 1,542,071 | 1,258,935 | |||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 10,341,863 | $ | 8,720,660 | |||||||||||||||||
Net interest income/net interest margin | $ | 93,806 | 4.15 | % | $ | 81,453 | 4.27 | % |
59
Six Months Ended June 30, | |||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | ||||||||||||||||
Assets | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Loans: | |||||||||||||||||||||
Non purchased | $ | 5,805,459 | $ | 134,348 | 4.67 | % | $ | 4,846,290 | $ | 106,098 | 4.41 | % | |||||||||
Purchased | 1,870,305 | 56,070 | 6.05 | 1,400,073 | 46,469 | 6.69 | |||||||||||||||
Total Loans | 7,675,764 | 190,418 | 5.00 | 6,246,363 | 152,567 | 4.93 | |||||||||||||||
Mortgage loans held for sale | 181,134 | 4,052 | 4.51 | 140,534 | 2,980 | 4.28 | |||||||||||||||
Securities: | |||||||||||||||||||||
Taxable(1) | 713,410 | 9,552 | 2.70 | 721,240 | 8,410 | 2.35 | |||||||||||||||
Tax-exempt | 223,673 | 4,764 | 4.30 | 335,301 | 8,188 | 4.92 | |||||||||||||||
Interest-bearing balances with banks | 120,713 | 1,152 | 1.92 | 219,748 | 1,065 | 0.98 | |||||||||||||||
Total interest-earning assets | 8,914,694 | 209,938 | 4.75 | 7,663,186 | 173,210 | 4.56 | |||||||||||||||
Cash and due from banks | 160,644 | 124,287 | |||||||||||||||||||
Intangible assets | 634,022 | 493,078 | |||||||||||||||||||
Other assets | 490,239 | 459,396 | |||||||||||||||||||
Total assets | $ | 10,199,599 | $ | 8,739,947 | |||||||||||||||||
Liabilities and shareholders’ equity | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Deposits: | |||||||||||||||||||||
Interest-bearing demand(2) | $ | 3,983,751 | $ | 8,848 | 0.45 | % | $ | 3,389,368 | $ | 3,730 | 0.22 | % | |||||||||
Savings deposits | 587,244 | 378 | 0.13 | 561,300 | 194 | 0.07 | |||||||||||||||
Time deposits | 1,847,195 | 9,752 | 1.06 | 1,610,494 | 6,539 | 0.82 | |||||||||||||||
Total interest-bearing deposits | 6,418,190 | 18,978 | 0.60 | 5,561,162 | 10,463 | 0.38 | |||||||||||||||
Borrowed funds | 321,799 | 6,347 | 3.98 | 257,641 | 5,387 | 4.22 | |||||||||||||||
Total interest-bearing liabilities | 6,739,989 | 25,325 | 0.76 | 5,818,803 | 15,850 | 0.55 | |||||||||||||||
Noninterest-bearing deposits | 1,843,025 | 1,583,775 | |||||||||||||||||||
Other liabilities | 83,563 | 84,417 | |||||||||||||||||||
Shareholders’ equity | 1,533,022 | 1,252,952 | |||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 10,199,599 | $ | 8,739,947 | |||||||||||||||||
Net interest income/net interest margin | $ | 184,613 | 4.18 | % | $ | 157,360 | 4.14 | % |
(1)U.S. Government and some U.S. Government Agency securities are tax-exempt in the states in which we operate.
(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.
The following tables sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for both the three and six months ended June 30, 2018 compared to the same respective periods in 2017 (the changes attributable to the combined impact of yield/rate and volume have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated):
60
Three Months Ended June 30, 2018 | |||||||||||
Volume | Rate | Net | |||||||||
Interest income: | |||||||||||
Loans: | |||||||||||
Not purchased | $ | 11,562 | $ | 3,220 | $ | 14,782 | |||||
Purchased | 6,571 | (3,165 | ) | 3,406 | |||||||
Mortgage loans held for sale | 466 | 84 | 550 | ||||||||
Securities: | |||||||||||
Taxable | 562 | 736 | 1,298 | ||||||||
Tax-exempt | (1,183 | ) | (350 | ) | (1,533 | ) | |||||
Interest-bearing balances with banks | (67 | ) | 126 | 59 | |||||||
Total interest-earning assets | 17,911 | 651 | 18,562 | ||||||||
Interest expense: | |||||||||||
Interest-bearing demand deposits | 921 | 2,603 | 3,524 | ||||||||
Savings deposits | 10 | 120 | 130 | ||||||||
Time deposits | 755 | 1,196 | 1,951 | ||||||||
Borrowed funds | 949 | (345 | ) | 604 | |||||||
Total interest-bearing liabilities | 2,635 | 3,574 | 6,209 | ||||||||
Change in net interest income | $ | 15,276 | $ | (2,923 | ) | $ | 12,353 | ||||
Six Months Ended June 30, 2018 | |||||||||||
Volume | Rate | Net | |||||||||
Interest income: | |||||||||||
Loans: | |||||||||||
Non purchased | $ | 22,068 | $ | 6,182 | $ | 28,250 | |||||
Purchased | 14,177 | (4,576 | ) | 9,601 | |||||||
Mortgage loans held for sale | 908 | 164 | 1,072 | ||||||||
Securities: | |||||||||||
Taxable | (105 | ) | 1,247 | 1,142 | |||||||
Tax-exempt | (2,378 | ) | (1,046 | ) | (3,424 | ) | |||||
Interest-bearing balances with banks | (945 | ) | 1,032 | 87 | |||||||
Total interest-earning assets | 33,725 | 3,003 | 36,728 | ||||||||
Interest expense: | |||||||||||
Interest-bearing demand deposits | 1,320 | 3,798 | 5,118 | ||||||||
Savings deposits | 17 | 167 | 184 | ||||||||
Time deposits | 1,250 | 1,963 | 3,213 | ||||||||
Borrowed funds | 1,265 | (305 | ) | 960 | |||||||
Total interest-bearing liabilities | 3,852 | 5,623 | 9,475 | ||||||||
Change in net interest income | $ | 29,873 | $ | (2,620 | ) | $ | 27,253 |
Interest income, on a tax equivalent basis, was $107,991 and $209,938, respectively, for the three and six months ended June 30, 2018 compared to $89,429 and $173,210, respectively, for the same periods in 2017. This increase in interest income, on a tax equivalent basis, is due primarily to the additional earning assets from the Metropolitan acquisition and loan growth in the Company’s non purchased loan portfolio, slightly offset by a decrease in the Company’s investment portfolio. As of June 30, 2018, the Company has fully releveraged the balance sheet through the repurchase of investments. As previously disclosed, the Company sold securities as part of the deleveraging strategy implemented in the fourth quarter of 2017. The increase in interest income is also being driven by an overall increase in the yield on the Company’s earning assets due to replacing maturing assets with assets earning similar or higher rates of interest.
The following tables presents the percentage of total average earning assets, by type and yield, for the periods presented:
61
Percentage of Total Average Earning Assets | Yield | ||||||||||
Three Months Ended | Three Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Loans | 84.97 | % | 82.19 | % | 5.05 | % | 5.03 | % | |||
Mortgage loans held for sale | 2.31 | 2.20 | 4.56 | 4.35 | |||||||
Securities | 11.47 | 13.96 | 3.08 | 3.09 | |||||||
Other | 1.25 | 1.65 | 2.02 | 1.62 | |||||||
Total earning assets | 100.00 | % | 100.00 | % | 4.78 | % | 4.68 | % |
Percentage of Total Average Earning Assets | Yield | ||||||||||
Six Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Loans | 86.10 | % | 81.51 | % | 5.00 | % | 4.93 | % | |||
Mortgage loans held for sale | 2.03 | 1.83 | 4.51 | 4.28 | |||||||
Securities | 10.51 | 13.79 | 3.08 | 3.17 | |||||||
Interest-bearing balances with banks | 1.36 | 2.87 | 1.92 | 0.98 | |||||||
Total earning assets | 100.00 | % | 100.00 | % | 4.75 | % | 4.56 | % |
For the second quarter of 2018, loan income, on a tax equivalent basis, increased $18,188 to $97,045 from $78,857 compared to the same period in 2017. For the six months ending June 30, 2018, loan income, on a tax equivalent basis, increased $37,851 to $190,418 from $152,567 in the same period in 2017. Loan income increased as a result of the increase in the average balance of loans due to the Metropolitan acquisition and strong non purchased loan growth in the first half of 2018. The following table presents reported taxable equivalent yield on loans for the periods presented.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Taxable equivalent interest income on loans | $ | 97,045 | $ | 78,857 | $ | 190,418 | $ | 152,567 | |||||||
Average loans | 7,704,221 | 6,293,497 | 7,675,764 | 6,246,363 | |||||||||||
Loan yield | 5.05 | % | 5.03 | % | 5.00 | % | 4.93 | % |
The impact from interest income collected on problem loans and purchase accounting adjustments on loans to total interest income on loans and loan yield is shown in the following table for the periods presented.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net interest income collected on problem loans | $ | 1,045 | $ | 2,745 | $ | 1,403 | $ | 3,302 | |||||||
Accretable yield recognized on purchased loans(1) | 5,719 | 5,410 | 11,837 | 11,014 | |||||||||||
Total impact to interest income on loans | $ | 6,764 | $ | 8,155 | $ | 13,240 | $ | 14,316 | |||||||
Impact to loan yield | 0.35 | % | 0.52 | % | 0.35 | % | 0.46 | % |
(1) | Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of $3,316 and $2,684, respectively, for the second quarter of 2018 and 2017, respectively. This impact was $6,674 and $5,416 for the six months ended June 30, 2018 and 2017, respectively. The impact on taxable equivalent loan yield was 17 basis points for both the second quarter of 2018 and 2017 and 18 basis points and 17 basis points for the six months ended June 30, 2018 and 2017, respectively. |
Investment income, on a tax equivalent basis, decreased $235 to $7,996 for the second quarter of 2018 from $8,231 for the second quarter of 2017. Investment income, on a tax equivalent basis, decreased $2,282 to $14,316 for the six months ended June 30,
62
2018 from $16,598 for the same period in 2017. The average balance in the investment portfolio was down for both the three and six months ended June 30, 2018 as compared to the same periods in 2017 resulting in the decline in interest income. The decrease in the average balance of the investment portfolio was due to the pace at which we repurchased investment securities following the deleveraging strategy implemented by the Company in the fourth quarter of 2017.
Interest expense was $14,185 for the second quarter of 2018 as compared to $7,976 for the same period in 2017. Interest expense for the six months ended June 30, 2018 was $25,325 as compared to $15,850 for the same period in 2017. The cost of interest-bearing liabilities was 0.83% for the three months ended June 30, 2018 as compared to 0.55% for the three months ended June 30, 2017. The cost of interest-bearing liabilities was 0.76% for the six months ended June 30, 2018 as compared to 0.55% for the same period in 2017.
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, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Noninterest-bearing demand | 21.43 | % | 21.79 | % | — | % | — | % | |||
Interest-bearing demand | 46.51 | 45.63 | 0.54 | 0.23 | |||||||
Savings | 6.80 | 7.70 | 0.15 | 0.07 | |||||||
Time deposits | 21.48 | 21.72 | 1.12 | 0.83 | |||||||
Short term borrowings | 1.40 | 0.56 | 1.52 | 1.29 | |||||||
Long-term Federal Home Loan Bank advances | 0.08 | 0.11 | 3.30 | 3.43 | |||||||
Subordinated notes | 1.31 | 1.33 | 5.57 | 5.48 | |||||||
Other borrowed funds | 0.99 | 1.16 | 5.41 | 5.23 | |||||||
Total deposits and borrowed funds | 100.00 | % | 100.00 | % | 0.65 | % | 0.43 | % |
Percentage of Total Average Deposits and Borrowed Funds | Cost of Funds | ||||||||||
Six Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Noninterest-bearing demand | 21.47 | % | 21.39 | % | — | % | — | % | |||
Interest-bearing demand | 46.43 | 45.79 | 0.45 | 0.22 | |||||||
Savings | 6.84 | 7.58 | 0.13 | 0.07 | |||||||
Time deposits | 21.52 | 21.76 | 1.06 | 0.82 | |||||||
Short-term borrowings | 1.33 | 0.84 | 1.48 | 0.79 | |||||||
Long-term Federal Home Loan Bank advances | 0.08 | 0.11 | 3.35 | 3.46 | |||||||
Subordinated notes | 1.33 | 1.33 | 5.60 | 5.50 | |||||||
Other long term borrowings | 1.00 | 1.20 | 5.19 | 5.27 | |||||||
Total deposits and borrowed funds | 100.00 | % | 100.00 | % | 0.60 | % | 0.43 | % |
Interest expense on deposits was $10,919 and $5,314 for the second quarter of 2018 and 2017, respectively. The cost of total deposits was 0.52% and 0.30% for the same respective periods. Interest expense on deposits was $18,978 and $10,463 for the six months ended June 30, 2018 and 2017, respectively. The cost of total deposits was 0.46% and 0.30% for the same respective periods. The increase is attributable to both the increase in the average balance of all interest-bearing deposits resulting from the Metropolitan acquisition and organic deposit growth as well as an increase in the interest rates on interest-bearing deposits. Although the Company continues to seek changes in the mix of our deposits from higher costing time deposits to lower costing interest-bearing deposits and noninterest-bearing deposits, rates offered on the Company’s interest-bearing deposit accounts, including time deposits, have increased to match competitive market interest rates in order to maintain stable sources of funding.
Interest expense on total borrowings was $3,266 and $2,662 for the second quarter of 2018 and 2017, respectively. The average balance of borrowings increased $95,745 to $329,287 for the three months ended June 30, 2018, as compared to $233,542 for the same period in 2017. Interest expense on total borrowings was $6,347 and $5,387 for the first six months of 2018 and 2017,
63
respectively. The average balance of borrowings increased $64,158 to $321,799 for the six months ended June 30, 2018, as compared to $257,641 for the same period in 2017. The increase is attributable to an increase in short-term FHLB advances and the subordinated notes we assumed in the Metropolitan acquisition. The increases in borrowing expense and cost of total borrowings are both attributable to a higher rate charged on the short-term FHLB advances and the higher costing subordinated notes that were assumed in the Metropolitan acquisition.
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, | |||||
2018 | 2017 | 2018 | 2017 | |||
1.38% | 1.58% | 1.37% | 1.53% |
Noninterest income was $35,581 for the second quarter of 2018 as compared to $34,265 for the same period in 2017. Noninterest income was $69,534 for the six months ended June 30, 2018 as compared to $66,286 for the same period in 2017. The increase in noninterest income and its related components is attributable to the addition of Metropolitan, coupled with an increase in service charges on deposit accounts, fee income on loan and deposit products and mortgage banking income.
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 $8,271 and $7,958 for the second quarter of 2018 and 2017, respectively, and were $16,744 and $15,889 for the six months ended June 30, 2018 and 2017, respectively. Overdraft fees, the largest component of service charges on deposits, were $5,722 for the three months ended June 30, 2018 compared to $5,778 for the same period in 2017. These fees were $11,630 for the six months ended June 30, 2018 compared to $11,457 for the same period in 2017.
Fees and commissions were $5,917 during the second quarter of 2018 as compared to $5,470 for the same period in 2017, and were $11,602 for the first six months of 2018 as compared to $10,669 for the same period in 2017. Fees and commissions include fees related to deposit services, such as ATM fees and interchange fees on debit card transactions. For the second quarter of 2018, interchange fees on debit card transactions, the largest component of fees and commissions, were $5,108 as compared to $4,579 for the same period in 2017. Interchange fees were $9,895 for the six months ending June 30, 2018 as compared to $8,878 for the same period in 2017. If our total assets remain above $10,000,000 at December 31, 2018, then beginning on July 1, 2019 we will become subject to the limitations on interchange fees imposed pursuant to §1075 of the Dodd-Frank Act (this provision, which is commonly referred to as the “Durbin Amendment,” is discussed in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017). Management is continuing to examine this issue and develop strategies to offset the impact of the Durbin Amendment.
Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $2,110 and $2,181 for the three months ended June 30, 2018 and 2017, respectively, and was $4,115 and $4,041 for the six months ended June 30, 2018 and 2017, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our clients’ policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers. Contingency income, which is included in “Other noninterest income” in the Consolidated Statements of Income, was $31 and $79 for the three months ending June 30, 2018 and 2017, respectively, and $794,000 and $766,000 for the six months ended June 30, 2018 and 2017, respectively.
The Trust division within the Wealth Management segment operates on both a fully discretionary and a directed basis which includes administration of employee benefit plans, as well as accounting and money management for trust accounts. The division manages a number of trust accounts inclusive of personal, corporate and employee benefit accounts, self-directed 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. Additionally, the Financial Services division within the Wealth Management segment 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 $3,446 for the second quarter of 2018 compared to $3,037 for the same period in 2017. Wealth Management revenue was $6,708 for the six months ended June 30, 2018 compared to $5,921 for the same period in 2017. The market value of assets under management or administration was $3,295,244 and $2,944,381 at June 30, 2018 and June 30, 2017, respectively.
64
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 $475,761 in the second quarter of 2018 compared to $454,312 for the same period in 2017. Mortgage loan originations totaled $838,564 in the six months ended June 30, 2018 compared to $772,456 for the same period in 2017. The increase in mortgage loan originations is due to an increase in producers throughout our footprint during the current year. The following table 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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Mortgage servicing income, net | $ | 926 | $ | 583 | $ | 2,080 | $ | 993 | |||||||
Gain on sales of loans, net | 10,719 | 5,028 | 19,517 | 11,535 | |||||||||||
Fees, net | 1,194 | 6,813 | 2,202 | 10,400 | |||||||||||
Mortgage banking income, net | $ | 12,839 | $ | 12,424 | $ | 23,799 | $ | 22,928 |
Bank-owned life insurance (“BOLI”) income is derived from changes in the cash surrender value of the bank-owned life insurance policies and death benefits received on covered individuals. BOLI income was $1,195 for the three months ended June 30, 2018 as compared to $985 for the same period in 2017 and was $2,140 for the first six months of June 30, 2018 as compared to $2,098 for the same period in 2017.
Other noninterest income was $1,803 and $2,210 for the three months ended June 30, 2018 and 2017, respectively, and was $4,426 and $4,740 for the six months ended June 30, 2018 and 2017, 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 unseasonal income items.
Noninterest Expense
Noninterest Expense to Average Assets | ||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||
2018 | 2017 | 2018 | 2017 | |||
3.06% | 3.44% | 3.10% | 3.33% |
Noninterest expense was $79,026 and $74,841 for the second quarter of 2018 and 2017, respectively, and was $156,970 and $144,150 for the six months ended June 30, 2018 and 2017, respectively. The Company recorded merger and conversion expenses of $500 for the three months ended June 30, 2018, as compared to $3,044 for the same period in 2017. Merger and conversion expenses were $1,400 for the six months ended June 30, 2018, as compared to $3,389 for the same period in 2017. The Company recognized a penalty charge of $205 in connection with the prepayment of $10,310 of junior subordinated debentures in the first quarter of 2017. There was no such penalty incurred during the first six months of 2018. The decrease in merger and conversion expenses period-over-period was offset primarily by the additional expenses associated with the acquisition of Metropolitan’s operations, as discussed in more detail in the remainder of this section.
Salaries and employee benefits increased $6,996 to $52,010 for the second quarter of 2018 as compared to $45,014 for the same period in 2017. Salaries and employee benefits increased $13,571 to $100,794 for the six months ended June 30, 2018 as compared to $87,223 for the same period in 2017. The increase in salaries and employee benefits is primarily due to the Metropolitan acquisition, annual merit based pay increases and an increase in mortgage banking commissions.
Data processing costs increased to $4,600 in the second quarter of 2018 from $3,835 for the same period in 2017 and were $8,844 for the six months ended June 30, 2018 as compared to $8,069 for the same period in 2017. Increased costs arising on account of our greater size were partially offset by the cost savings realized through certain contract renegotiations.
Net occupancy and equipment expense for the second quarter of 2018 was $9,805, up from $8,814 for the same period in 2017. These expenses for the first six months of 2018 were $19,627, up from $18,133 for the same period in 2017. The increase in occupancy and equipment expense is primarily attributable to the additional locations and assets added from the Metropolitan acquisition.
65
Expenses related to other real estate owned for the second quarter of 2018 were $232 compared to $781 for the same period in 2017 and were $889 and $1,313, respectively, for the first six months of 2018 and 2017. 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 $397 and $379 for the second quarter of 2018 and 2017, respectively, and included write downs of $749 and $757 for the first six months of 2018 and 2017, respectively. For the three months ended June 30, 2018 and 2017, other real estate owned with a cost basis of $1,588 and $2,267, respectively, was sold resulting in a net gain of $239 and a net loss of $189, respectively. For the six months ended June 30, 2018 and 2017, other real estate owned with a cost basis of $3,769 and $6,986, respectively, was sold resulting in a net gain of $143 and $138, respectively.
Professional fees include fees for legal and accounting services. Professional fees were $2,176 for the second quarter of 2018 as compared to $1,882 for the same period in 2017 and were $4,314 for the six months ended June 30, 2018 as compared to $3,949 for the same period in 2017. Professional fees remain elevated in large part due to additional legal, accounting and consulting fees associated with compliance costs of newly enacted as well as existing banking and governmental regulation.
Advertising and public relations expense was $2,647 for the second quarter of 2018 compared to $2,430 for the same period in 2017 and was $4,850 for the six months ended June 30, 2018 compared to $4,022 for the same period in 2017. This increase is primarily attributable to an increased focus on digital marketing and branding throughout our footprint, an increase in the overall size of the Company and also an increase in the marketing of the Company’s community involvement.
Amortization of intangible assets totaled $1,594 and $1,493 for the second quarter of 2018 and 2017, respectively, and totaled $3,245 and $3,056 for the six months ended June 30, 2018 and 2017, 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 3 years to approximately 9 years.
Communication expenses, those expenses incurred for communication to clients and between employees, were $1,877 for the second quarter of 2018 as compared to $1,908 for the same period in 2017. Communication expenses were $3,846 for the six months ended June 30, 2018 as compared to $3,771 for the same period in 2017. The year-to-date increase in communication expenses is primarily attributable to the additional locations added as part of the Metropolitan acquisition.
Efficiency Ratio
Efficiency Ratio | |||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2018 | 2017 | 2018 | 2017 | ||||
Efficiency ratio | 61.08% | 64.68% | 61.76% | 64.45% | |||
Impact on efficiency ratio from: | |||||||
Intangible amortization | (1.23)% | (1.30)% | (1.27)% | (1.36)% | |||
Merger and conversion related expenses | (0.39)% | (2.63)% | (0.55)% | (1.52)% | |||
Extinguishment of debt | —% | —% | —% | (0.09)% | |||
Adjusted efficiency ratio | 59.46% | 60.75% | 59.94% | 61.48% |
The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. The table above shows the impact on the efficiency ratio of expenses that (1) the Company does not consider to be part of our normal operations, such as amortization of intangibles, or (2) the Company incurred in connection with certain transactions where management is unable to accurately predict the timing of when these expenses will be incurred or, when incurred, the amount of such expenses, such as merger and conversion related expenses and debt prepayment penalties. We remain committed to aggressively managing our costs within the framework of our business model. We expect the efficiency ratio to continue to improve 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 2018 and 2017 was $10,424 and $11,993, respectively. The effective tax rates for those periods were 22.12% and 32.17%, respectively. Income tax expense for the six months ended June 30, 2018 and 2017 was
66
$20,097 and $23,248, respectively. The effective tax rates for those periods were 22.17% and 32.06%, respectively. Although taxable income has continued to increase, the decreased effective tax rate for the three and six months ended June 30, 2018 as compared to the same period in 2017 is the result of the lower corporate tax rate that resulted from the enactment of the Tax Cuts and Jobs Act.
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 Loan Losses
Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. The Company’s credit quality remained strong in the first half of 2018, and the Company continues to see the lowest levels of charge-offs and nonperforming loans since the 2008-2009 recession. These results are due in part to the pace of the economic recovery, declining unemployment levels, improved labor participation rate, improved performance of the housing market, and the Company’s continued efforts to bring problem credits to resolution.
Management of Credit Risk. Credit risk is monitored and managed on an ongoing basis by a credit administration department, a loss management committee and the Board of Directors loan committee. Credit quality, adherence to policies 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 a State Certified General Real Estate Appraiser and employs two additional State Certified General Real Estate appraisers, one Appraisal Intern and four real estate evaluators.
We have a number of documented loan policies and procedures that set forth the approval and monitoring process of the lending function. Adherence to these policies and procedures is monitored by management and the Board of Directors. A number of committees and an underwriting staff oversee the lending operations of the Company. These include in-house loss management committees and the Board of Directors loan committee. In addition, we maintain a loan review staff separate from the credit administration department 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 limits are reviewed by senior credit officers or the loan committee of the Board of Directors.
For commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration or 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 being loans with the least credit risk. Allowance factors established by management are applied to the total balance of loans in each grade to determine the amount needed in the allowance for loan losses. The allowance factors are established based on historical loss ratios experienced by the Company for these loan types, as well as the credit quality criteria underlying each grade, adjusted for trends and expectations about losses inherent in our existing portfolios. In making these adjustments to the allowance factors, management takes into consideration factors which it believes are causing, or are likely in the future to cause, losses within our loan portfolio but that may not be fully reflected in our historical loss ratios. For portfolio balances of consumer, small balance consumer mortgage loans, such as 1-4 family mortgage loans, and certain other loans originated other than for commercial purposes, allowance factors are determined based on historical loss ratios by portfolio for the preceding eight quarters and may be adjusted by other qualitative criteria.
The loss management committee and the Board of Directors’ loan committee monitor loans that are past due or those that have been downgraded and placed on the Company’s internal watch list due to a decline in the collateral value or cash flow of the debtor; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.
67
Impairment is measured on a loan-by-loan basis for problem loans of $500 or greater by, as applicable, the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For real estate collateral, the fair market value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser of the underlying collateral. When the ultimate collectability of a loan’s principal is in doubt, wholly or partially, the loan is placed on nonaccrual.
After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals described in the above paragraph), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors’ loan committee for charge-off approval. These charge-offs reduce the allowance for loan losses. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses.
The Company’s practice is to charge off estimated losses as soon as such loss is identified and reasonably quantified. Net charge-offs for the first six months of 2018 were $2,416, or 0.06% of average loans (annualized), compared to net charge-offs of $1,838, or 0.06% of average loans (annualized), for the same period in 2017. The charge-offs in 2018 were fully reserved for in the Company’s allowance for loan losses and resulted in no additional provision for loan loss expense.
Allowance for Loan Losses; Provision for Loan Losses. The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. 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 collective impairment as recognized under the Financial Accounting Standards Board Accounting Standards Codification Topic (“ASC”) 450, “Contingencies.” Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310, “Receivables.” The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses.
The allowance for loan losses is established after input from management, loan review and the loss management committee. Factors considered by management in evaluating the adequacy of the allowance, which occurs on a quarterly basis, include the internal risk rating of individual credits, loan segmentation, historical and current trends in net charge-offs, trends in nonperforming loans, trends in past due loans, trends in the market values of underlying collateral securing loans and the unemployment rate and other current economic conditions in the markets in which we operate. In addition, on a regular basis, management and the Board of Directors review loan ratios. These ratios include the allowance for loan losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for loan losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by officer, community bank and the Company as a whole.
The following table presents the allocation of the allowance for loan losses by loan category as of the dates presented:
June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||
Commercial, financial, agricultural | $ | 7,146 | $ | 5,542 | $ | 5,092 | |||||
Lease financing | 600 | 555 | 530 | ||||||||
Real estate – construction | 4,702 | 3,428 | 2,580 | ||||||||
Real estate – 1-4 family mortgage | 11,657 | 12,009 | 12,104 | ||||||||
Real estate – commercial mortgage | 22,450 | 23,384 | 22,600 | ||||||||
Installment loans to individuals | 800 | 1,293 | 1,243 | ||||||||
Total | $ | 47,355 | $ | 46,211 | $ | 44,149 |
For impaired loans, specific reserves are established to adjust the carrying value of the loan to its estimated net realizable value. The following table quantifies the amount of the specific reserves component of the allowance for loan losses and the amount of the allowance determined by applying allowance factors to graded loans as of the dates presented:
68
June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||
Specific reserves for impaired loans | $ | 1,515 | $ | 2,674 | $ | 3,208 | |||||
Allocated reserves for remaining portfolio | 43,584 | 41,760 | 38,781 | ||||||||
Purchased with deteriorated credit quality | 2,256 | 1,777 | $ | 2,160 | |||||||
Total | $ | 47,355 | $ | 46,211 | $ | 44,149 |
The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for loan losses at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The provision for loan losses was $1,810 and $1,750 for the three months ended June 30, 2018 and 2017, respectively, and $3,560 and $3,250 for the six months ended June 30, 2018 and 2017, respectively. Although the Company has experienced lower levels of classified loans and nonperforming loans in the current year, as illustrated in the nonperforming loan tables later in this section, and while our other credit quality measures have also improved, the growth in non purchased loans has dictated that we increase the provision for loans losses in order to maintain the allowance for loan losses at an acceptable level in light of the increased size of our non purchased loan portfolio.
For a purchased loan, as part of the acquisition we establish a “Day 1 Fair Value,” which equals the outstanding customer balance of a purchased loan on the acquisition date less any credit and/or yield discount applied against the purchased loan. A purchased loan will either meet or exceed the performance expectations established in determining the Day 1 Fair Values or deteriorate from such expected performance. If the purchased loan’s performance deteriorates from expectations established in determining the Day 1 Fair Values or since our most recent review of such portfolio’s performance, then the Company provides for such loan in the provision for loan losses and may ultimately partially or fully charge-off the carrying value of such purchased loan. If performance expectations are exceeded, then the Company reverses any previous provision for such loan. If the purchased loan continues to exceed expectations subsequent to the reversal of previously-established provision, then an adjustment to accretable yield is warranted, which has a positive impact on interest income.
Certain loans purchased are accounted for under ASC 310-30, “Loans and Debt Securities Purchased with Deteriorated Credit Quality” (“ASC 310-30”), and are carried at values which, in management’s opinion, reflect the estimated future cash flows, based on the facts and circumstances surrounding each respective loan at the date of acquisition. As of June 30, 2018, the fair value of loans accounted for in accordance with ASC 310-30 was $201,041. The Company continually monitors these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows; to the extent future cash flows deteriorate below initial projections, the Company may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses. Of the entire allowance for loan losses as of June 30, 2018 and 2017, $2,256 and $2,160, respectively, is allocated to loans accounted for under ASC 310-30.
The table below reflects the activity in the allowance for loan losses for the periods presented:
69
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Balance at beginning of period | $ | 46,401 | $ | 42,923 | $ | 46,211 | $ | 42,737 | |||||||
Charge-offs | |||||||||||||||
Commercial, financial, agricultural | 457 | 304 | 1,116 | 1,136 | |||||||||||
Lease financing | — | — | 5 | — | |||||||||||
Real estate – construction | — | — | — | — | |||||||||||
Real estate – 1-4 family mortgage | 979 | 551 | 1,650 | 826 | |||||||||||
Real estate – commercial mortgage | 46 | 434 | 659 | 661 | |||||||||||
Installment loans to individuals | 99 | 125 | 216 | 389 | |||||||||||
Total charge-offs | 1,581 | 1,414 | 3,646 | 3,012 | |||||||||||
Recoveries | |||||||||||||||
Commercial, financial, agricultural | 114 | 64 | 349 | 121 | |||||||||||
Lease financing | — | — | — | — | |||||||||||
Real estate – construction | 3 | 3 | 7 | 34 | |||||||||||
Real estate – 1-4 family mortgage | 83 | 64 | 216 | 146 | |||||||||||
Real estate – commercial mortgage | 496 | 717 | 604 | 812 | |||||||||||
Installment loans to individuals | 29 | 42 | 54 | 61 | |||||||||||
Total recoveries | 725 | 890 | 1,230 | 1,174 | |||||||||||
Net charge-offs | 856 | 524 | 2,416 | 1,838 | |||||||||||
Provision for loan losses | 1,810 | 1,750 | 3,560 | 3,250 | |||||||||||
Balance at end of period | $ | 47,355 | $ | 44,149 | $ | 47,355 | $ | 44,149 | |||||||
Net charge-offs (annualized) to average loans | 0.04 | % | 0.03 | % | 0.06 | % | 0.06 | % | |||||||
Allowance for loan losses to: | |||||||||||||||
Total non purchased loans | 0.78 | % | 0.87 | % | 0.78 | % | 0.87 | % | |||||||
Nonperforming non purchased loans | 426.20 | % | 347.74 | % | 426.20 | % | 347.74 | % |
70
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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Real estate – construction: | |||||||||||||||
Residential | $ | (3 | ) | $ | (3 | ) | $ | (7 | ) | $ | (34 | ) | |||
Total real estate – construction | (3 | ) | (3 | ) | (7 | ) | (34 | ) | |||||||
Real estate – 1-4 family mortgage: | |||||||||||||||
Primary | 192 | 306 | 221 | 513 | |||||||||||
Home equity | 733 | 78 | 772 | 89 | |||||||||||
Rental/investment | (19 | ) | 70 | 44 | 80 | ||||||||||
Land development | (10 | ) | 33 | 397 | (2 | ) | |||||||||
Total real estate – 1-4 family mortgage | 896 | 487 | 1,434 | 680 | |||||||||||
Real estate – commercial mortgage: | |||||||||||||||
Owner-occupied | (423 | ) | 37 | 123 | 80 | ||||||||||
Non-owner occupied | (30 | ) | (22 | ) | (71 | ) | 70 | ||||||||
Land development | 3 | (298 | ) | 3 | (301 | ) | |||||||||
Total real estate – commercial mortgage | (450 | ) | (283 | ) | 55 | (151 | ) | ||||||||
Total net charge-offs of loans secured by real estate | $ | 443 | $ | 201 | $ | 1,482 | $ | 495 |
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 loss management 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 loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Other real estate owned” in the Consolidated Statements of Income.
71
The following table provides details of the Company’s non purchased and purchased nonperforming assets as of the dates presented.
Non Purchased | Purchased | Total | |||||||||
June 30, 2018 | |||||||||||
Nonaccruing loans | $ | 8,921 | $ | 4,561 | $ | 13,482 | |||||
Accruing loans past due 90 days or more | 2,190 | 5,491 | 7,681 | ||||||||
Total nonperforming loans | 11,111 | 10,052 | 21,163 | ||||||||
Other real estate owned | 4,698 | 9,006 | 13,704 | ||||||||
Total nonperforming assets | $ | 15,809 | $ | 19,058 | $ | 34,867 | |||||
Nonperforming loans to total loans | 0.27 | % | |||||||||
Nonperforming assets to total assets | 0.33 | % | |||||||||
December 31, 2017 | |||||||||||
Nonaccruing loans | $ | 10,250 | $ | 4,424 | $ | 14,674 | |||||
Accruing loans past due 90 days or more | 3,015 | 5,731 | 8,746 | ||||||||
Total nonperforming loans | 13,265 | 10,155 | 23,420 | ||||||||
Other real estate owned | 4,410 | 11,524 | 15,934 | ||||||||
Total nonperforming assets | $ | 17,675 | $ | 21,679 | $ | 39,354 | |||||
Nonperforming loans to total loans | 0.31 | % | |||||||||
Nonperforming assets to total assets | 0.40 | % |
The Company experienced improving credit quality metrics during the first six months of 2018. The level of nonperforming loans decreased $2,257 from December 31, 2017 while OREO decreased $2,230 during the same period.
72
The following table presents nonperforming loans by loan category as of the dates presented:
June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||
Commercial, financial, agricultural | $ | 3,090 | $ | 2,921 | $ | 3,080 | |||||
Real estate – construction: | |||||||||||
Residential | 49 | — | — | ||||||||
Total real estate – construction | 49 | — | — | ||||||||
Real estate – 1-4 family mortgage: | |||||||||||
Primary | 6,841 | 6,221 | 6,543 | ||||||||
Home equity | 1,545 | 2,701 | 2,137 | ||||||||
Rental/investment | 549 | 395 | 1,883 | ||||||||
Land development | 201 | 1,078 | 1,197 | ||||||||
Total real estate – 1-4 family mortgage | 9,136 | 10,395 | 11,760 | ||||||||
Real estate – commercial mortgage: | |||||||||||
Owner-occupied | 4,048 | 5,473 | 7,103 | ||||||||
Non-owner occupied | 3,156 | 3,087 | 3,345 | ||||||||
Land development | 960 | 1,090 | 989 | ||||||||
Total real estate – commercial mortgage | 8,164 | 9,650 | 11,437 | ||||||||
Installment loans to individuals | 345 | 295 | 304 | ||||||||
Lease financing | 379 | 159 | 170 | ||||||||
Total nonperforming loans | $ | 21,163 | $ | 23,420 | $ | 26,751 |
The decrease in the level of nonperforming loans from December 31, 2017 is a reflection of the Company’s continued strategy to aggressively manage problem loans and assets. The Company continues its efforts to bring problem credits to resolution. Total nonperforming loans as a percentage of total loans were 0.27% as of June 30, 2018 as compared to 0.31% as of December 31, 2017 and 0.42% as of June 30, 2017. The Company’s coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was 223.76% as of June 30, 2018 as compared to 197.31% as of December 31, 2017 and 165.04% as of June 30, 2017. The coverage ratio for non purchased, nonperforming loans was 426.20% as of June 30, 2018 as compared to 348.37% as of December 31, 2017 and 347.74% as of June 30, 2017.
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 loan losses at June 30, 2018. Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due were $17,776 at June 30, 2018 as compared to $27,738 at December 31, 2017 and $13,537 at June 30, 2017.
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.
73
As shown below, restructured loans totaled $12,818 at June 30, 2018 compared to $14,553 at December 31, 2017 and $14,467 at June 30, 2017. At June 30, 2018, loans restructured through interest rate concessions represented 28% 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:
June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||
Commercial, financial, agricultural | $ | 363 | $ | 331 | $ | — | |||||
Real estate – 1-4 family mortgage: | |||||||||||
Primary | 6,129 | 6,213 | 5,638 | ||||||||
Home equity | 42 | 282 | 244 | ||||||||
Rental/investment | 1,946 | 2,247 | 2,247 | ||||||||
Land development | 5 | 4 | 7 | ||||||||
Total real estate – 1-4 family mortgage | 8,122 | 8,746 | 8,136 | ||||||||
Real estate – commercial mortgage: | |||||||||||
Owner-occupied | 3,256 | 3,503 | 4,323 | ||||||||
Non-owner occupied | 725 | 1,466 | 1,501 | ||||||||
Land development | 287 | 440 | 438 | ||||||||
Total real estate – commercial mortgage | 4,268 | 5,409 | 6,262 | ||||||||
Installment loans to individuals | 65 | 67 | 69 | ||||||||
Total restructured loans in compliance with modified terms | $ | 12,818 | $ | 14,553 | $ | 14,467 |
Changes in the Company’s restructured loans are set forth in the table below:
2018 | 2017 | ||||||
Balance at January 1, | $ | 14,553 | $ | 11,475 | |||
Additional loans with concessions | 839 | 4,745 | |||||
Reclassified as performing | 177 | — | |||||
Reductions due to: | |||||||
Reclassified as nonperforming | (795 | ) | (660 | ) | |||
Paid in full | (1,344 | ) | (367 | ) | |||
Charge-offs | — | (267 | ) | ||||
Paydowns | (612 | ) | (358 | ) | |||
Lapse of concession period | — | (101 | ) | ||||
Balance at June 30, | $ | 12,818 | $ | 14,467 |
74
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, 2018 | December 31, 2017 | June 30, 2017 | |||||||||
Nonaccruing loans | $ | 13,482 | $ | 14,674 | $ | 17,340 | |||||
Accruing loans past due 90 days or more | 7,681 | 8,746 | 9,411 | ||||||||
Total nonperforming loans | 21,163 | 23,420 | 26,751 | ||||||||
Restructured loans in compliance with modified terms | 12,818 | 14,553 | 14,467 | ||||||||
Total nonperforming and restructured loans | $ | 33,981 | $ | 37,973 | $ | 41,218 |
The following table provides details of the Company’s other real estate owned as of the dates presented:
June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||
Residential real estate | $ | 2,083 | $ | 2,441 | $ | 1,913 | |||||
Commercial real estate | 4,741 | 5,938 | 8,507 | ||||||||
Residential land development | 1,329 | 1,881 | 2,620 | ||||||||
Commercial land development | 5,551 | 5,674 | 6,674 | ||||||||
Total other real estate owned | $ | 13,704 | $ | 15,934 | $ | 19,714 |
Changes in the Company’s other real estate owned were as follows:
2018 | 2017 | ||||||
Balance at January 1, | $ | 15,934 | $ | 23,299 | |||
Transfers of loans | 2,291 | 4,227 | |||||
Impairments | (749 | ) | (757 | ) | |||
Dispositions | (3,769 | ) | (6,986 | ) | |||
Other | (3 | ) | (69 | ) | |||
Balance at June 30, | $ | 13,704 | $ | 19,714 |
Other real estate owned with a cost basis of $3,769 was sold during the six months ended June 30, 2018, resulting in a net gain of $143, while other real estate owned with a cost basis of $6,986 was sold during the six months ended June 30, 2017, resulting in a net gain of $138.
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.
75
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, 2018, in each case as compared to the result under rates present in the market on June 30, 2018. The changes in interest rates assume an instantaneous and parallel shift in the yield curve and do not take into account changes in the slope of the yield curve.
Percentage Change In: | ||||||
Immediate Change in Rates of (in basis points): | Economic Value Equity (EVE) | Earning at Risk (Net Interest Income) | ||||
Static | 1-12 Months | 13-24 Months | ||||
+400 | 14.80% | 11.24% | 19.97% | |||
+300 | 11.65% | 7.55% | 14.79% | |||
+200 | 7.34% | 5.19% | 10.10% | |||
+100 | 3.38% | 2.10% | 5.54% | |||
-100 | (5.16)% | (6.86)% | (8.45)% |
The rate shock results for the net interest income simulations for the next twenty-four months produce an asset sensitive position at June 30, 2018. The Company’s interest rate risk strategy is to remain in an asset sensitive position with a focus on increasing variable rate loan production and generating deposits that are less sensitive to increases in interest rates.
The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. The measures do not reflect future actions the ALCO may undertake in response to such changes in interest rates. The above results of the interest rate shock analysis are within the parameters set by the Board of Directors. The scenarios assume instantaneous movements in interest rates in increments of plus 100, 200, 300 and 400 basis points and minus 100 basis points. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results will differ from simulated results.
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, forward commitments, and interest rate lock commitments, as part of its ongoing efforts to mitigate its interest rate risk exposure. For more information about the Company’s derivative financial instruments, see the “Off-Balance Sheet Transactions” section below and Note 11, “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 and public fund deposits, are a major source of funds used by Renasant 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 Renasant 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 15.40% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At June 30,
76
2018, securities with a carrying value of $461,289 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 $243,755 similarly pledged at December 31, 2017.
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 short-term borrowings from the FHLB in the amount of $305,000 at June 30, 2018 compared to $83,000 at December 31, 2017. Long-term funds obtained from the FHLB are used primarily 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, 2018, the balance of our outstanding long-term advances with the FHLB was $7,082 compared to $7,493 at December 31, 2017. The total amount of the remaining credit available to us from the FHLB at June 30, 2018 was $2,649,635. We also maintain lines of credit with other commercial banks totaling $80,000. 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 at June 30, 2018 or December 31, 2017.
As part of the Metropolitan acquisition, the Company assumed $15,000 aggregate principal amount of 6.50% fixed-to-floating rate subordinated notes due July 1, 2026. Additionally, in 2016, we accessed the debt capital market to generate liquidity in the form of subordinated notes. The carrying value of the subordinated notes, net of unamortized debt issuance costs, was $114,044 at June 30, 2018.
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, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Noninterest-bearing demand | 21.47 | % | 21.39 | % | — | % | — | % | |||
Interest-bearing demand | 46.43 | 45.79 | 0.45 | 0.22 | |||||||
Savings | 6.84 | 7.58 | 0.13 | 0.07 | |||||||
Time deposits | 21.52 | 21.76 | 1.06 | 0.82 | |||||||
Short-term borrowings | 1.33 | 0.84 | 1.48 | 0.79 | |||||||
Long-term Federal Home Loan Bank advances | 0.08 | 0.11 | 3.35 | 3.46 | |||||||
Subordinated notes | 1.33 | 1.33 | 5.60 | 5.50 | |||||||
Other borrowed funds | 1.00 | 1.20 | 5.19 | 5.27 | |||||||
Total deposits and borrowed funds | 100.00 | % | 100.00 | % | 0.60 | % | 0.43 | % |
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 $292,952 at June 30, 2018 compared to $236,061 at June 30, 2017. Cash used in investing activities for the six months ended June 30, 2018 was $580,449 compared to $202,762 for the six months ended June 30, 2017. Proceeds from the sale, maturity or call of securities within our investment portfolio were $63,655 for the six months ended June 30, 2018 compared to $79,381 for the same period in 2017. These proceeds were reinvested into the investment portfolio or used to fund loan growth. Purchases of investment securities were $497,845 for the first six months of 2018 compared to $119,766 for the same period in 2017. The large increase in purchases of investment securities in 2018 is related to the releveraging of the Company's balance sheet.
Cash provided by financing activities for the six months ended June 30, 2018 and 2017 was $665,071 and $124,906, respectively. Deposits increased $461,140 and $143,911 for the six months ended June 30, 2018 and 2017, respectively. A portion of the increase in deposits during the first six months of 2018 is the result of the Company reacquiring certain wholesale deposit funding sources which had been reduced during the fourth quarter of 2017 as part of the Company’s deleveraging strategy. Cash provided through deposit growth was used to fund loan growth and purchase investment securities.
77
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 Renasant Bank to transfer funds to the Company in the form of dividends, loans and advances. Under Mississippi law, a Mississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the 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 Renasant 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 Renasant Bank may loan to the Company unless such loans are collateralized by specific obligations. At June 30, 2018, the maximum amount available for transfer from Renasant Bank to the Company in the form of loans was $110,818. The Company maintains a line of credit collateralized by cash with Renasant Bank totaling $3,052. There were no amounts outstanding under this line of credit at June 30, 2018. These restrictions did not have any impact on the Company’s ability to meet its cash obligations in the six months ended June 30, 2018, nor does management expect such restrictions to materially impact the Company’s ability to meet its currently-anticipated cash obligations.
Off-Balance Sheet Transactions
The Company enters into loan commitments 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. 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, 2018 | December 31, 2017 | ||||||
Loan commitments | $ | 1,575,805 | $ | 1,619,022 | |||
Standby letters of credit | 65,253 | 68,946 |
The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed.
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position with other financial institutions. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At June 30, 2018, the Company had notional amounts of $219,738 on interest rate contracts with corporate customers and $219,738 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts.
Additionally, the Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans and also enters into forward commitments to sell residential mortgage loans to secondary market investors.
The Company has also entered into forward interest rate swap contracts on FHLB borrowings, as well as interest rate swap agreements on junior subordinated debentures that are all accounted for as cash flow hedges. Under each of these contracts, the Company will pay a fixed rate of interest and will receive a variable rate of interest based on the three-month LIBOR plus a predetermined spread.
78
For more information about the Company’s off-balance sheet transactions, see Note 11, “Derivative Instruments,” in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements.
Shareholders’ Equity and Regulatory Matters
Total shareholders’ equity of the Company was $1,558,668 at June 30, 2018 compared to $1,514,983 at December 31, 2017. Book value per share was $31.54 and $30.72 at June 30, 2018 and December 31, 2017, respectively. The growth in shareholders’ equity was attributable to earnings retention offset by changes in accumulated other comprehensive loss and dividends declared.
On September 15, 2015, the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). The shelf registration statement, which was automatically 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 the SEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes or as otherwise described in the prospectus supplement applicable to the offering and could include the expansion of the Company’s banking, insurance and wealth management operations as well as other business opportunities.
The Company has junior subordinated debentures with a carrying value of $86,155 at June 30, 2018, of which $83,277 are included in the Company’s Tier 1 capital. Federal Reserve guidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the amount of debentures we include in Tier 1 capital at June 30, 2018. Although our existing junior subordinated debentures are currently unaffected by these Federal Reserve guidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition 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 $114,044 at June 30, 2018. These notes are included in the Company’s Tier 2 capital.
The Federal Reserve, the FDIC and the Office 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:
Capital Tiers | Tier 1 Capital to Average Assets (Leverage) | Common Equity Tier 1 to Risk - Weighted Assets | Tier 1 Capital to Risk – Weighted Assets | Total Capital to Risk – Weighted 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% |
79
The following table provides the capital and risk-based capital and leverage ratios for the Company and for Renasant Bank as of the dates presented:
Actual | Minimum Capital Requirement to be Well Capitalized | Minimum Capital Requirement to be Adequately Capitalized (including the phase-in of the Capital Conservation Buffer) | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
June 30, 2018 | ||||||||||||||||||||
Renasant Corporation: | ||||||||||||||||||||
Risk-based capital ratios: | ||||||||||||||||||||
Common equity tier 1 capital ratio | $ | 951,490 | 11.71 | % | $ | 528,043 | 6.50 | % | $ | 517,888 | 6.375 | % | ||||||||
Tier 1 risk-based capital ratio | 1,034,498 | 12.73 | % | 649,899 | 8.00 | % | 639,744 | 7.875 | % | |||||||||||
Total risk-based capital ratio | 1,198,046 | 14.75 | % | 812,373 | 10.00 | % | 802,219 | 9.875 | % | |||||||||||
Leverage capital ratios: | ||||||||||||||||||||
Tier 1 leverage ratio | 1,034,498 | 10.63 | % | 485,456 | 5.00 | % | 388,365 | 4.00 | % | |||||||||||
Renasant Bank: | ||||||||||||||||||||
Risk-based capital ratios: | ||||||||||||||||||||
Common equity tier 1 capital ratio | $ | 1,057,998 | 13.04 | % | $ | 527,172 | 6.50 | % | $ | 517,034 | 6.375 | % | ||||||||
Tier 1 risk-based capital ratio | 1,057,998 | 13.04 | % | 648,827 | 8.00 | % | 638,689 | 7.875 | % | |||||||||||
Total risk-based capital ratio | 1,108,178 | 13.66 | % | 811,033 | 10.00 | % | 800,895 | 9.875 | % | |||||||||||
Leverage capital ratios: | ||||||||||||||||||||
Tier 1 leverage ratio | 1,057,998 | 10.89 | % | 484,518 | 5.00 | % | 387,614 | 4.00 | % | |||||||||||
December 31, 2017 | ||||||||||||||||||||
Renasant Corporation: | ||||||||||||||||||||
Risk-based capital ratios: | ||||||||||||||||||||
Common equity tier 1 capital ratio | $ | 896,733 | 11.34 | % | $ | 513,827 | 6.50 | % | $ | 454,539 | 5.75 | % | ||||||||
Tier 1 risk-based capital ratio | 979,604 | 12.39 | % | 632,402 | 8.00 | % | 573,114 | 7.25 | % | |||||||||||
Total risk-based capital ratio | 1,142,926 | 14.46 | % | 790,503 | 10.00 | % | 731,215 | 9.25 | % | |||||||||||
Leverage capital ratios: | ||||||||||||||||||||
Tier 1 leverage ratio | 979,604 | 10.18 | % | 481,086 | 5.00 | % | 384,968 | 4.00 | % | |||||||||||
Renasant Bank: | ||||||||||||||||||||
Risk-based capital ratios: | ||||||||||||||||||||
Common equity tier 1 capital ratio | $ | 1,000,715 | 12.69 | % | $ | 512,570 | 6.50 | % | $ | 453,427 | 5.75 | % | ||||||||
Tier 1 risk-based capital ratio | 1,000,715 | 12.69 | % | 630,856 | 8.00 | % | 571,713 | 7.25 | % | |||||||||||
Total risk-based capital ratio | 1,050,751 | 13.32 | % | 788,569 | 10.00 | % | 729,427 | 9.25 | % | |||||||||||
Leverage capital ratios: | ||||||||||||||||||||
Tier 1 leverage ratio | 1,000,715 | 10.42 | % | 480,353 | 5.00 | % | 384,282 | 4.00 | % |
For more information regarding the capital adequacy guidelines applicable to the Company and Renasant Bank, please refer to Note 17, “Regulatory Matters,” in Item 1, Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk since December 31, 2017. For additional information regarding our market risk, see our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
80
15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Principal Executive and Principal Financial Officers, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
81
Part II. OTHER INFORMATION
Item 1A. RISK FACTORS
Information regarding risk factors appears in Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes in the risk factors disclosed in the Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
During the three month period ended June 30, 2018, the Company repurchased shares of its common stock as indicated in the following table:
Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Shares | Maximum Number of Shares or Approximate Dollar Value That May Yet Be Purchased Under Share Repurchase Plans | ||||||||||
April 1, 2018 to April 30, 2018 | 2,394 | $ | 42.56 | — | — | ||||||||
May 1, 2018 to May 31, 2018 | 1,753 | 45.23 | — | — | |||||||||
June 1, 2018 to June 30, 2018 | — | — | — | — | |||||||||
Total | 4,147 | $ | 43.69 | — | — |
(1) | Represents shares withheld to satisfy federal and state tax liabilities related to the vesting of time-based restricted stock awards during the three month period ended June 30, 2018. |
Please refer to the information discussing restrictions on the Company’s ability to pay dividends under the heading “Liquidity and Capital Resources” in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report, which is incorporated by reference herein.
82
Item 6. EXHIBITS
Exhibit Number | Description | |
(2)(i) | ||
(2)(ii) | ||
(3)(i) | ||
(3)(ii) | ||
(4)(i) | ||
(4)(ii) | ||
(31)(i) | ||
(31)(ii) | ||
(32)(i) | ||
(32)(ii) | ||
(101) | The following materials from Renasant Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited). |
(1) | Filed as exhibit 2.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on January 19, 2017 and incorporated herein by reference. |
(2) | Filed as exhibit 2.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on March 30, 2018 and incorporated herein by reference. |
(3) | Filed as exhibit 3.1 to the Form 10-Q of the Company filed with the Securities and Exchange Commission on May 10, 2016 and incorporated herein by reference. |
(4) | Filed as exhibit 3(ii) to the Form 8-K of the Company filed with the Securities and Exchange Commission on July 20, 2018 and incorporated herein by reference. |
The Company does not have any long-term debt instruments under which securities are authorized exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the Securities and Exchange Commission, upon its request, a copy of all long-term debt instruments.
83
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RENASANT CORPORATION | ||
(Registrant) | ||
Date: | August 8, 2018 | /s/ C. Mitchell Waycaster |
C. Mitchell Waycaster | ||
President and | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | August 8, 2018 | /s/ Kevin D. Chapman |
Kevin D. Chapman | ||
Executive Vice President and | ||
Chief Financial and Operating Officer | ||
(Principal Financial Officer) |
84