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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

þ	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

Or

 

¨	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   þ    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

		Large accelerated filer		¨		Accelerated filer		þ
		Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of July 29, 2011, 25,061,068 shares of the registrant’s common stock, $5.00 par value per share, were outstanding. The registrant has no other classes of securities outstanding.

 

 

 

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RENASANT CORPORATION AND SUBSIDIARIES

Form 10-Q

For the quarterly period ended June 30, 2011

CONTENTS

 

PART I - FINANCIAL INFORMATION
		Item 1.		Financial Statements (Unaudited)			3
				Consolidated Balance Sheets			3
				Consolidated Statements of Income			4
				Condensed Consolidated Statements of Cash Flows			5
				Notes to Consolidated Financial Statements			6
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk			54
		Item 4.		Controls and Procedures			54
PART II—OTHER INFORMATION
		Item 1A.		Risk Factors			55
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			55
		Item 6.		Exhibits			56
SIGNATURES							57
EXHIBIT INDEX							58

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PART I.

FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

Renasant Corporation and Subsidiaries

Consolidated Balance Sheets

(In Thousands, Except Share Data)

 

		(Unaudited)
		June 30,				December 31,
		2011				2010
Assets
Cash and due from banks		$	59,584			$	47,705
Interest-bearing balances with banks			177,581				244,964
Cash and cash equivalents			237,165				292,669
Securities held to maturity (fair value of $257,513 and $228,157, respectively)			252,688				230,786
Securities available for sale, at fair value			581,022				603,686
Mortgage loans held for sale			11,511				27,704
Loans, net of unearned income:
Covered under loss-share agreements			377,149				333,681
Not covered under loss-share agreements			2,185,490				2,190,909
Total loans, net of unearned income			2,562,639				2,524,590
Allowance for loan losses			(47,571	)			(45,415	)
Loans, net			2,515,068				2,479,175
Premises and equipment, net			52,151				51,424
Other real estate owned and repossessions:
Covered under loss-share agreements			59,802				54,715
Not covered under loss-share agreements			68,384				71,833
Total other real estate owned and repossessions			128,186				126,548
Goodwill			184,879				184,879
Other intangible assets, net			6,207				6,988
FDIC loss-share indemnification asset			149,739				155,657
Other assets			140,584				137,811
Total assets		$	4,259,200			$	4,297,327
Liabilities and shareholders’ equity
Liabilities
Deposits
Noninterest-bearing		$	458,686			$	368,798
Interest-bearing			3,018,733				3,099,353
Total deposits			3,477,419				3,468,151
Short-term borrowings			16,066				15,386
Long-term debt			247,001				301,050
Other liabilities			38,579				43,231
Total liabilities			3,779,065				3,827,818
Shareholders’ equity
Preferred stock, $.01 par value – 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $5.00 par value – 75,000,000 shares authorized, 26,715,797 shares issued, 25,061,068 and 25,043,112 shares outstanding, respectively			133,579				133,579
Treasury stock, at cost			(26,899	)			(27,187	)
Additional paid-in capital			217,583				217,011
Retained earnings			167,322				162,547
Accumulated other comprehensive loss			(11,450	)			(16,441	)
Total shareholders’ equity			480,135				469,509
Total liabilities and shareholders’ equity		$	4,259,200			$	4,297,327

See Notes to Consolidated Financial Statements.

 

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Renasant Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In Thousands, Except Share Data)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Interest income
Loans		$	36,169			$	31,678			$	72,041			$	64,107
Securities
Taxable			5,374				5,238				10,969				11,137
Tax-exempt			2,069				1,413				4,199				2,748
Other			163				52				369				97
Total interest income			43,775				38,381				87,578				78,089
Interest expense
Deposits			8,776				10,446				18,858				20,779
Borrowings			2,377				4,255				5,002				9,220
Total interest expense			11,153				14,701				23,860				29,999
Net interest income			32,622				23,680				63,718				48,090
Provision for loan losses			5,350				7,000				10,850				13,665
Net interest income after provision for loan losses			27,272				16,680				52,868				34,425
Noninterest income
Service charges on deposit accounts			5,082				5,361				9,962				10,451
Fees and commissions			4,548				3,409				8,686				7,130
Insurance commissions			783				830				1,615				1,664
Trust revenue			650				632				1,263				1,216
Gains on sales of securities			4				2,049				16				2,049
Other-than-temporary-impairment losses on securities available for sale			(15,445	)			—				(15,445	)			(11,787	)
Non-credit related portion of other-than-temporary impairment on securities, recognized in other comprehensive income			15,183				—				15,183				11,627
Net impairment losses on securities			(262	)			—				(262	)			(160	)
BOLI income			883				738				1,478				1,312
Gains on sales of mortgage loans held for sale			949				994				2,100				2,323
Gain on acquisition			—				—				8,774				—
Other			697				331				1,467				843
Total noninterest income			13,334				14,344				35,099				26,828
Noninterest expense
Salaries and employee benefits			16,173				13,052				32,410				26,249
Data processing			1,657				1,580				3,445				3,006
Net occupancy and equipment			3,362				2,926				6,596				5,857
Other real estate owned			2,122				959				5,633				1,695
Professional fees			1,206				881				2,104				1,747
Advertising and public relations			1,269				978				2,432				1,868
Intangible amortization			510				470				1,025				946
Communications			1,405				1,047				2,839				2,133
Merger-related expenses			—				—				1,325				—
Extinguishment of debt			—				—				1,903				—
Other			4,851				4,295				9,566				8,321
Total noninterest expense			32,555				26,188				69,278				51,822
Income before income taxes			8,051				4,836				18,689				9,431
Income taxes			2,294				1,040				5,379				2,028
Net income		$	5,757			$	3,796			$	13,310			$	7,403
Basic earnings per share		$	0.23			$	0.18			$	0.53			$	0.35
Diluted earnings per share		$	0.23			$	0.18			$	0.53			$	0.35
Cash dividends per common share		$	0.17			$	0.17			$	0.34			$	0.34

See Notes to Consolidated Financial Statements.

 

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Renasant Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In Thousands)

 

		Six Months Ended June 30,
		2011				2010
Operating activities
Net cash provided by operating activities		$	72,148			$	47,163
Investing activities
Purchases of securities available for sale			(48,586	)			(210,233	)
Proceeds from sales of securities available for sale			—				91,744
Proceeds from call/maturities of securities available for sale			84,781				134,017
Purchases of securities held to maturity			(56,684	)			(28,712	)
Proceeds from sales of securities held to maturity			13,033				—
Proceeds from call/maturities of securities held to maturity			21,917				6,380
Net decrease in loans			2,447				56,581
Purchases of premises and equipment			(2,747	)			(1,365	)
Proceeds from sales of premises and equipment			77				8
Net cash received in acquisition			148,443				—
Net cash provided by investing activities			162,681				48,420
Financing activities
Net increase in noninterest-bearing deposits			79,792				8,347
Net (decrease) increase in interest-bearing deposits			(293,531	)			103,765
Net increase (decrease) in short-term borrowings			680				(5,115	)
Repayment of long-term debt			(68,994	)			(153,042	)
Cash paid for dividends			(8,535	)			(7,186	)
Cash received on exercise of stock-based compensation			255				229
Net cash used in financing activities			(290,333	)			(53,002	)
Net (decrease) increase in cash and cash equivalents			(55,504	)			42,581
Cash and cash equivalents at beginning of period			292,669				148,560
Cash and cash equivalents at end of period		$	237,165			$	191,141
Supplemental disclosures
Noncash transactions:
Transfers of loans to other real estate		$	27,828			$	16,602

See Notes to Consolidated Financial Statements.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note A – Significant Accounting Policies

(In Thousands, Except Share Data)

Basis of Presentation: Renasant Corporation (referred to herein as the “Company”) owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. The Company offers a diversified range of financial and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and north central Mississippi, west and middle Tennessee, north and north central Alabama and north Georgia.

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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. For further information regarding the Company’s accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The Company has evaluated subsequent events that have occurred after June 30, 2011 through the date of issuance of its financial statements for consideration of recognition or disclosure.

Impact of Recently-Issued Accounting Standards and Pronouncements: In January 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification Topic (“ASC”) 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) that requires a reporting entity to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using Level 3 inputs. These disclosures are effective for interim and annual reporting periods beginning after December 15, 2010. See Note J, “Fair Value Measurements,” in these Notes to Consolidated Financial Statements for further disclosures regarding the Company’s adoption of this update.

In July 2010, FASB issued an update to ASC 310, “Receivables,” (“ASC 310”) that requires enhanced and additional disclosures that will provide financial statement users with greater transparency about a reporting entity’s allowance for credit losses and the credit quality of its financial receivables. A reporting entity must provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in its portfolio of financing receivables, explaining how that risk is analyzed and assessed in arriving at the allowance for credit losses, and detailing the changes and reasons for those changes in the allowance for credit losses. To achieve those objectives, a reporting entity should provide disclosures by portfolio segment and/or by class of financing receivable. This update to ASC 310 amends existing disclosures to require a reporting entity to provide a rollforward schedule of the allowance for credit losses on a portfolio segment basis, with the ending balance further segregated by impairment method. A reporting entity must also present nonaccrual, past due 90 days or more and still accruing and impaired financing receivables by class. Additional disclosures include (i) credit quality indicators of financing receivables at the end of the reporting period presented by class, (ii) the aging of past due financing receivables at the end of the reporting period presented by class, (iii) the nature and extent of troubled debt restructurings that occurred during the period presented by class and their effect on the allowance for credit losses, (iv) the nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period presented by class and their effect on the allowance for credit losses, and (v) significant purchases and sales of financing receivables during the reporting period presented by portfolio segment. The disclosures as of the end of a reporting period became effective for the Company’s financial statements at December 31, 2010. The disclosures about activity that occurs during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011. See Note D, “Loans and the Allowance for Loan Losses,” in these Notes to Consolidated Financial Statements for disclosures reflecting the Company’s adoption of this update. An update issued in January 2011 temporarily deferred the effective date for the disclosures related to troubled debt restructurings to be concurrent with the effective date of the then-proposed update which is discussed in the following paragraph.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note A – Significant Accounting Policies (continued)

In April 2011, FASB issued an update to ASC 310 that clarifies which loan modifications constitute troubled debt restructurings in conformity with ASC 310 and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that the restructuring both constitutes a concession by the creditor to the borrower and the borrower is experiencing financial difficulties. This update to ASC 310 is effective for interim and annual reporting periods beginning on or after June 15, 2011 and applied retrospectively to troubled debt restructurings occurring on or after the beginning of the fiscal year of adoption. See Note D, “Loans and the Allowance for Loan Losses,” in these Notes to Consolidated Financial Statements for disclosures reflecting the Company’s adoption of this update.

In June 2011, FASB issued an update to ASC 220, “Comprehensive Income,” (“ASC 220”) that eliminates the option to present components of other comprehensive income as part of the Statements of Changes in Shareholders’ Equity. This update requires that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update to ASC 220 is effective for interim and annual reporting periods beginning on or after December 15, 2011 and should be applied retrospectively. The Company is currently in the process of evaluating the impact of adopting this update on its financial statements.

Note B – FDIC-Assisted Acquisitions

(In Thousands)

FDIC-Assisted Acquisition of Certain Assets and Liabilities of American Trust Bank

On February 4, 2011, the Bank entered into a purchase and assumption agreement with loss-share agreements with the FDIC to acquire specified assets and assume specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”). American Trust operated 3 branches in the northwest region of Georgia.

In connection with the acquisition, the Bank entered into loss-share agreements with the FDIC that covered $73,657 of American Trust loans (the “covered loans”). The Bank will share in the losses on the asset pools (including single family residential mortgage loans and commercial loans) covered under the loss-share agreements. Pursuant to the terms of the loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses with respect to covered loans, beginning with the first dollar of loss incurred. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered loans.

The acquisition of American Trust resulted in a pre-tax gain of $8,774. Due to the difference in tax bases of the assets acquired and liabilities assumed, the Company recorded a deferred tax liability of $3,356, resulting in an after-tax gain of $5,418. Acquisition costs related to the American Trust acquisition of $1,325 were recognized as other noninterest expense in the Consolidated Statements of Income for the six months ended June 30, 2011.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note B – FDIC-Assisted Acquisitions (continued)

The following table sets forth the fair values of the assets acquired and liabilities assumed by the Bank in the acquisition of American Trust as of February 4, 2011:

 

Assets Acquired
Cash and due from banks		$	148,443
Securities available for sale			7,060
Federal Home Loan Bank stock			1,192
Loans			74,399
FDIC loss-share indemnification asset			11,926
Core deposit intangible			229
Other assets			4,256
Total assets acquired			247,505
Liabilities Assumed
Deposits:
Noninterest-bearing			10,096
Interest-bearing			212,911
Total deposits			223,007
Advances from the Federal Home Loan Bank			15,020
Accrued expenses and other liabilities			704
Total liabilities assumed			238,731
Net assets acquired			8,774
Deferred tax liability			3,356
Net assets assumed, including deferred tax liability		$	5,418

The Company’s operating results for the three and six months ended June 30, 2011 include the operating results of the assets acquired and liabilities assumed in the American Trust acquisition subsequent to the February 4, 2011 closing date. The significance of the fair value adjustments recorded as well as the nature of the loss-share agreements in connection with an FDIC-assisted transaction are integral to accurately assessing the impact of the acquired operations on the operations of the Company. Disclosure of pro forma financial information is made more difficult by the troubled nature of American Trust prior to the date of the acquisition. Therefore, the Company has determined that pro forma financial information in relation to the acquisition of American Trust is neither practical nor meaningful.

FDIC-Assisted Acquisition of Certain Assets and Liabilities of Crescent Bank & Trust

On July 23, 2010 the Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the FDIC, as receiver for Crescent. For more information regarding the Crescent acquisition, please refer to Note B, “FDIC-Assisted Acquisition of Certain Assets and Liabilities of Crescent Bank & Trust,” in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note C – Securities

(In Thousands)

The amortized cost and fair value of securities held to maturity were as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2011
Obligations of other U.S. Government agencies and corporations		$	42,421			$	200			$	—			$	42,621
Obligations of states and political subdivisions			210,267				5,116				(491	)			214,892
		$	252,688			$	5,316			$	(491	)		$	257,513
December 31, 2010
Obligations of other U.S. Government agencies and corporations		$	24,703			$	—			$	(404	)		$	24,299
Obligations of states and political subdivisions			206,083				1,408				(3,633	)			203,858
		$	230,786			$	1,408			$	(4,037	)		$	228,157

In light of the ongoing fiscal uncertainty in state and local governments, the Company analyzed its exposure to potential losses in its security portfolio. Management reviewed the underlying credit rating and analyzed the financial condition of the respective issuers. Based on this analysis, the Company sold certain securities representing obligations of state and political subdivisions that were classified as held to maturity. The securities sold showed significant credit deterioration in that an analysis of the financial condition of the respective issuers showed the issuers were operating at net deficits with little to no financial cushion to offset future contingencies. These securities had a carrying value of $13,017 and the Company recognized a net gain of $16 on the sale during the six months ended June 30, 2011.

The amortized cost and fair value of securities available for sale were as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2011
Obligations of other U.S. Government agencies and corporations		$	47,652			$	137			$	(259	)		$	47,530
Mortgage-backed securities			484,862				16,663				(477	)			501,048
Trust preferred securities			33,410				61				(28,937	)			4,534
Other equity securities			27,467				443				—				27,910
		$	593,391			$	17,304			$	(29,673	)		$	581,022
December 31, 2010
Obligations of other U.S. Government agencies and corporations		$	73,656			$	266			$	(1,170	)		$	72,752
Mortgage-backed securities			489,068				10,819				(3,377	)			496,510
Trust preferred securities			32,452				150				(28,019	)			4,583
Other equity securities			29,674				167				—				29,841
		$	624,850			$	11,402			$	(32,566	)		$	603,686

There were no sales of securities available for sale for the six months ended June 30, 2011. Gross gains on sales of securities available for sale for the six months ended June 30, 2010 were $2,568, compared to gross losses on sales of securities available for sale of $519 for the same period.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note C – Securities (continued)

The amortized cost and fair value of securities at June 30, 2011, 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.

 

		Held to Maturity								Available for Sale
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Due within one year		$	6,252			$	6,282			$	—			$	—
Due after one year through five years			37,663				38,249				2,991				3,006
Due after five years through ten years			83,756				85,203				44,661				44,524
Due after ten years			125,017				127,779				33,410				4,534
Mortgage-backed securities			—				—				484,862				501,048
Other equity securities			—				—				27,467				27,910
		$	252,688			$	257,513			$	593,391			$	581,022

The following table presents the age of gross unrealized losses and fair value by investment category:

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Held to Maturity:
June 30, 2011
Obligations of other U.S Government agencies and corporations		$	—			$	—			$	—			$	—			$	—			$	—
Obligations of states and political subdivisions			29,518				(491	)			—				—				29,518				(491	)
Total		$	29,518			$	(491	)		$	—			$	—			$	29,518			$	(491	)
December 31, 2010
Obligations of other U.S Government agencies and corporations		$	15,104			$	(404	)		$	—			$	—			$	15,104			$	(404	)
Obligations of states and political subdivisions			97,367				(3,633	)			—				—				97,367				(3,633	)
Total		$	112,471			$	(4,037	)		$	—			$	—			$	112,471			$	(4,037	)
Available for Sale:
June 30, 2011
Obligations of other U.S Government agencies and corporations		$	22,225			$	(259	)		$	—			$	—			$	22,225			$	(259	)
Mortgage-backed securities			59,837				(477	)			—				—				59,837				(477	)
Trust preferred securities			—				—				1,473				(28,937	)			1,473				(28,937	)
Other equity securities			—				—				—				—				—				—
Total		$	82,062			$	(736	)		$	1,473			$	(28,937	)		$	83,535			$	(29,673	)
December 31, 2010
Obligations of other U.S Government agencies and corporations		$	39,513			$	(1,170	)		$	—			$	—			$	39,513			$	(1,170	)
Mortgage-backed securities			148,867				(3,359	)			2,254				(18	)			151,121				(3,377	)
Trust preferred securities			—				—				1,433				(28,019	)			1,433				(28,019	)
Other equity securities			—				—				—				—				—				—
Total		$	188,380			$	(4,529	)		$	3,687			$	(28,037	)		$	192,067			$	(32,566	)

 

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Table of Contents

Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note C – Securities (continued)

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.

When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded as a loss within noninterest income in the Consolidated Statements of Income. When impairment of a debt security is considered to be other-than-temporary, the security is written down to its fair value. The amount of OTTI recorded as a loss within noninterest income depends on whether an entity intends to sell the debt security and whether it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis. If an entity intends to, or has decided to, sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, OTTI must be recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, OTTI is separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss is recognized in earnings. The amount related to other market factors is recognized in other comprehensive income, net of applicable taxes.

The Company holds investments in pooled trust preferred securities and those from a single issuer. The investments in pooled trust preferred securities had a cost basis of $30,410 and $29,452 and a fair value of $1,473 and $1,433 at June 30, 2011 and December 31, 2010, respectively. The investment in pooled trust preferred securities consists of four securities representing interests in various tranches of trusts collateralized by debt issued by over 321 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 of each security obtained by the Company performed by third parties. The Company does not intend to sell the investments 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 maturity. At June 30, 2011, 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 did conclude that it was probable that there had been an adverse change in estimated cash flows for two of the four pooled trust preferred securities. Accordingly, the Company recognized a credit related impairment loss on these securities of $262 for the three months ended June 30, 2011.

The following table provides information regarding the Company’s investments in pooled trust preferred securities at June 30, 2011:

 

Name		Single/ Pooled				Class/ Tranche				Amortized Cost				Fair Value				Unrealized Loss				Lowest Credit Rating				Issuers Currently in Deferral or Default				Projected Additional Deferrals  or Defaults
XXIV			Pooled				B-2			$	12,733			$	122			$	(12,611	)			Caa3				41	%			11	%
XXVI			Pooled				B-2				5,662				309				(5,353	)			Ca				36	%			6	%
XXIII			Pooled				B-2				10,770				940				(9,830	)			Ca				29	%			4	%
XIII			Pooled				B-2				1,245				102				(1,143	)			Ca				32	%			14	%
										$	30,410			$	1,473			$	(28,937	)

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:

 

		2011				2010
Balance at January 1		$	(3,075	)		$	—
Additions related to credit losses for which OTTI was not previously recognized			(262	)			(160	)
Increases in credit loss for which OTTI was previously recognized			—				—
Balance at June 30		$	(3,337	)		$	(160	)

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses

(In Thousands)

The following is a summary of loans:

 

		June 30, 2011				December 31, 2010
Commercial, financial, agricultural		$	267,576			$	265,276
Lease financing			414				533
Real estate – construction			87,542				82,361
Real estate – 1-4 family mortgage			839,959				872,382
Real estate – commercial mortgage			1,304,677				1,239,843
Installment loans to individuals			62,492				64,225
Gross loans			2,562,660				2,524,620
Unearned income			(21	)			(30	)
Loans, net of unearned income			2,562,639				2,524,590
Allowance for loan losses			(47,571	)			(45,415	)
Net loans		$	2,515,068			$	2,479,175

Loans acquired in FDIC-assisted acquisitions were recorded, as of their respective acquisition dates, at fair value. The fair value of these loans represents the expected discounted cash flows to be received over the lives of the loans, taking into account the Company’s estimate of future credit losses on the loans. These loans were excluded from the calculation of the allowance for loan losses and no provision for loan losses was recorded for these loans during the six months ended June 30, 2011 or for the year ended December 31, 2010 because the fair value measurement incorporates an estimate of losses on acquired loans. The Company will continue to monitor future cash flows on these loans; 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.

In these Notes to Consolidated Financial Statements, the Company refers to loans subject to the loss-share agreements as “covered loans” or “loans covered under loss-share agreements” and loans that are not subject to the loss-share agreements as “not covered loans” or “loans not covered by loss-share agreements.”

A summary of loans acquired in FDIC-assisted acquisitions at fair value follows:

 

		Impaired Covered Loans				Other Covered Loans				Not Covered Loans				Total Loans
June 30, 2011
Commercial, financial, agricultural		$	48			$	24,185			$	—			$	24,233
Real estate – construction			3,376				6,942				—				10,318
Real estate – 1-4 family mortgage			15,818				103,690				79				119,587
Real estate – commercial mortgage			58,877				163,999				—				222,876
Installment loans to individuals			—				214				6,031				6,245
Total		$	78,119			$	299,030			$	6,110			$	383,259
December 31, 2010
Commercial, financial, agricultural		$	10			$	20,911			$	3			$	20,924
Real estate – construction			8,313				7,250				—				15,563
Real estate – 1-4 family mortgage			20,293				102,225				—				122,518
Real estate – commercial mortgage			67,445				107,128				—				174,573
Installment loans to individuals			—				106				8,052				8,158
Total		$	96,061			$	237,620			$	8,055			$	341,736

 

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Table of Contents

Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

Allowance for Loan Losses

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. The following table provides a rollforward of the allowance for loan losses 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, 2011
Allowance for loan losses:
Beginning balance		$	3,282			$	1,735			$	21,107			$	20,410			$	971			$	47,505
Provision for loan losses			1,662				192				1,620				1,879				(3	)			5,350
Charge-offs			(1,139	)			(569	)			(3,084	)			(823	)			(33	)			(5,648	)
Recoveries			36				31				221				52				24				364
Ending balance		$	3,841			$	1,389			$	19,864			$	21,518			$	959			$	47,571
Six Months Ended June 30, 2011
Allowance for loan losses:
Beginning balance		$	2,625			$	2,115			$	20,870			$	18,779			$	1,026			$	45,415
Provision for loan losses			2,322				41				5,272				3,244				(29	)			10,850
Charge-offs			(1,284	)			(798	)			(6,615	)			(1,374	)			(89	)			(10,160	)
Recoveries			178				31				337				869				51				1,466
Ending balance		$	3,841			$	1,389			$	19,864			$	21,518			$	959			$	47,571
June 30, 2011
Individually evaluated for impairment		$	754			$	16			$	8,264			$	7,938			$	—			$	16,972
Collectively evaluated for impairment			3,087				1,373				11,600				13,580				959				30,599
Loans acquired with deteriorated credit quality			—				—				—				—				—				—
Ending balance		$	3,841			$	1,389			$	19,864			$	21,518			$	959			$	47,571
Three Months Ended June 30, 2010
Allowance for loan losses:
Beginning balance		$	2,088			$	3,996			$	19,035			$	15,223			$	752			$	41,094
Provision for loan losses			150				1,078				5,115				661				(4	)			7,000
Charge-offs			(166	)			(2,983	)			(3,573	)			(430	)			(79	)			(7,231	)
Recoveries			18				(10	)			234				5				36				283
Ending balance		$	2,090			$	2,081			$	20,811			$	15,459			$	705			$	41,146
Six Months Ended June 30, 2010
Allowance for loan losses:
Beginning balance		$	4,855			$	4,494			$	15,593			$	12,577			$	1,626			$	39,145
Provision for loan losses			(2,561	)			968				10,359				5,672				(773	)			13,665
Charge-offs			(243	)			(3,418	)			(5,455	)			(2,801	)			(194	)			(12,111	)
Recoveries			39				37				314				11				46				447
Ending balance		$	2,090			$	2,081			$	20,811			$	15,459			$	705			$	41,146
June 30, 2010
Individually evaluated for impairment		$	410			$	548			$	10,080			$	5,998			$	—			$	17,036
Collectively evaluated for impairment			1,680				1,533				10,731				9,461				705				24,110
Loans acquired with deteriorated credit quality			—				—				—				—				—				—
Ending balance		$	2,090			$	2,081			$	20,811			$	15,459			$	705			$	41,146

 

(1)	Includes lease financing receivables.

 

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Table of Contents

Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

The following table provides recorded investment in loans, net of unearned income, 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
June 30, 2011
Individually evaluated for impairment		$	9,134			$	4,287			$	80,437			$	97,793			$	—			$	191,651
Collectively evaluated for impairment			234,209				72,937				639,935				984,008				56,640				1,987,729
Loans acquired with deteriorated credit quality			24,233				10,318				119,587				222,876				6,245				383,259
Ending balance		$	267,576			$	87,542			$	839,959			$	1,304,677			$	62,885			$	2,562,639
December 31, 2010
Individually evaluated for impairment		$	7,361			$	8,837			$	94,883			$	81,288			$	—			$	192,369
Collectively evaluated for impairment			236,991				57,961				654,981				983,982				56,570				1,990,485
Loans acquired with deteriorated credit quality			20,924				15,563				122,518				174,573				8,158				341,736
Ending balance		$	265,276			$	82,361			$	872,382			$	1,239,843			$	64,728			$	2,524,590

 

(1)	Includes lease financing receivables.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

Credit Quality

For commercial and commercial real estate secured 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 commercial and commercial real estate secured loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans that migrate toward the “Pass” grade (those with a risk rating between 1 and 4) or within the “Pass” grade generally have a lower risk of loss and therefore a lower risk factor. The “Watch” grade (those with a risk rating of 5) is utilized on a temporary basis for “Pass” grade loans where a significant risk-modifying action is anticipated in the near term. Loans that migrate toward the “Substandard” grade (those with a risk rating between 6 and 9) generally have a higher risk of loss and therefore a higher risk factor applied to those related loan balances. The following table presents the Company’s loan portfolio by risk-rating grades:

 

		Pass				Watch				Substandard				Total
June 30, 2011
Commercial, financial, agricultural		$	177,476			$	3,608			$	5,525			$	186,609
Real estate – construction			52,386				4,145				142				56,673
Real estate – 1-4 family mortgage			105,706				38,755				41,683				186,144
Real estate – commercial mortgage			842,846				59,422				38,371				940,639
Total		$	1,178,414			$	105,930			$	85,721			$	1,370,065
December 31, 2010
Commercial, financial, agricultural		$	184,125			$	3,536			$	3,825			$	191,486
Real estate – construction			40,129				6,528				2,309				48,966
Real estate – 1-4 family mortgage			121,896				47,911				46,972				216,779
Real estate – commercial mortgage			856,819				49,408				31,880				938,107
Total		$	1,202,969			$	107,383			$	84,986			$	1,395,338

For portfolio balances of consumer, consumer mortgage and certain other similar loan types, 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:

 

						Non-
		Performing				Performing				Total
June 30, 2011
Commercial, financial, agricultural		$	56,734			$	—			$	56,734
Lease financing			414				—				414
Real estate – construction			20,551				—				20,551
Real estate – 1-4 family mortgage			528,708				5,520				534,228
Real estate – commercial mortgage			141,103				59				141,162
Installment loans to individuals			56,128				119				56,247
Total		$	803,638			$	5,698			$	809,336
December 31, 2010
Commercial, financial, agricultural		$	52,866			$	—			$	52,866
Lease financing			533				—				533
Real estate – construction			17,832				—				17,832
Real estate – 1-4 family mortgage			527,086				5,999				533,085
Real estate – commercial mortgage			127,068				95				127,163
Installment loans to individuals			55,996				71				56,067
Total		$	781,381			$	6,165			$	787,546

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

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 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 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 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. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table provides an aging of past due loans, segregated by class:

 

		30-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current Loans				Total Loans				Accruing 90 Days or More Past Due
June 30, 2011
Commercial, financial, agricultural		$	2,434			$	6,502			$	8,936			$	258,640			$	267,576			$	1,326
Lease financing			—				—				—				414				414				—
Real estate – construction			630				7,132				7,762				79,780				87,542				226
Real estate – 1-4 family mortgage			16,951				43,706				60,657				779,302				839,959				6,138
Real estate – commercial mortgage			13,152				66,212				79,364				1,225,313				1,304,677				12,095
Installment loans to individuals			422				1,050				1,472				61,020				62,492				480
Unearned income			—				—				—				(21	)			(21	)			—
Total		$	33,589			$	124,602			$	158,191			$	2,404,448			$	2,562,639			$	20,265
December 31, 2010
Commercial, financial, agricultural		$	2,916			$	3,869			$	6,785			$	258,491			$	265,276			$	224
Lease financing			—				—				—				533				533				—
Real estate – construction			667				11,419				12,086				70,275				82,361				128
Real estate – 1-4 family mortgage			22,255				45,971				68,226				804,156				872,382				4,794
Real estate – commercial mortgage			8,905				46,152				55,057				1,184,786				1,239,843				2,016
Installment loans to individuals			751				205				956				63,269				64,225				34
Unearned income			—				—				—				(30	)			(30	)			—
Total		$	35,494			$	107,616			$	143,110			$	2,381,480			$	2,524,590			$	7,196

The following table presents nonaccrual loans, including those that are not considered past due, segregated by class:

 

		June 30, 2011				December 31, 2010
Commercial, financial, agricultural		$	6,215			$	5,508
Lease financing			—				—
Real estate – construction			6,905				11,980
Real estate – 1-4 family mortgage			50,283				60,203
Real estate – commercial mortgage			57,109				50,719
Installment loans to individuals			599				645
Gross loans		$	121,111			$	129,055

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

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 and construction loans above a minimum dollar amount threshold by either 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, 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.

Impaired loans recognized in conformity with ASC 310, segregated by class, were as follows:

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment(1)
June 30, 2011
With a related allowance recorded:
Commercial, financial, agricultural		$	2,020			$	2,021			$	754			$	2,117
Real estate – construction			108				108				16				108
Real estate – 1-4 family mortgage			39,059				39,294				8,264				31,798
Real estate – commercial mortgage			34,655				35,385				7,938				34,801
Total		$	75,842			$	76,808			$	16,972			$	68,824
With no related allowance recorded:
Commercial, financial, agricultural		$	2,848			$	3,544			$	—			$	2,425
Real estate – construction			6,720				18,736				—				5,283
Real estate – 1-4 family mortgage			32,895				56,011				—				29,682
Real estate – commercial mortgage			72,522				114,151				—				66,799
Total		$	114,985			$	192,442			$	—			$	104,189
Totals		$	190,827			$	269,250			$	16,972			$	173,013
December 31, 2010
With a related allowance recorded:
Commercial, financial, agricultural		$	2,298			$	2,547			$	549			$	2,684
Real estate – construction			181				181				20				906
Real estate – 1-4 family mortgage			42,889				43,654				10,349				44,756
Real estate – commercial mortgage			26,582				27,775				6,611				28,784
Total		$	71,950			$	74,157			$	17,529			$	77,130
With no related allowance recorded:
Commercial, financial, agricultural		$	10			$	10			$	—			$	10
Real estate – construction			8,313				8,313				—				8,315
Real estate – 1-4 family mortgage			26,611				29,086				—				30,455
Real estate – commercial mortgage			68,132				68,132				—				69,989
Total		$	103,066			$	105,541			$	—			$	108,769
Totals		$	175,016			$	179,698			$	17,529			$	185,899

 

(1)

Average recorded investment reported on a year-to-date basis.

 

17

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

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. 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 table presents restructured loans segregated by class:

 

		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
June 30, 2011
Commercial, financial, agricultural			1			$	172			$	125
Lease financing			—				—				—
Real estate – construction			—				—				—
Real estate – 1-4 family mortgage			22				24,561				23,236
Real estate – commercial mortgage			15				16,431				16,629
Installment loans to individuals			1				184				180
Total			39			$	41,348			$	40,170
December 31, 2010
Commercial, financial, agricultural			1			$	172			$	125
Lease financing			—				—				—
Real estate – construction			—				—				—
Real estate – 1-4 family mortgage			26				21,854				21,116
Real estate – commercial mortgage			11				11,080				11,193
Installment loans to individuals			1				184				181
Total			39			$	33,290			$	32,615

Changes in the Company’s restructured loans were as follows:

 

		Number of Loans				Recorded Investment
Totals at January 1, 2011			39			$	32,615
Additional loans with concessions			11				11,336
Reductions due to:
Reclassified as nonperforming			(9	)			(2,546	)
Transfer to other real estate owned			—				—
Charge-offs			—				—
Principal paydowns							(603	)
Lapse of concession period			(2	)			(632	)
Totals at June 30, 2011			39			$	40,170

The allocated allowance for loan losses attributable to restructured loans was $6,514 and $5,138 at June 30, 2011 and December 31, 2010, respectively. The Company had $1,058 and $1,122 in remaining availability under commitments to lend additional funds on these restructured loans at June 30, 2011 and December 31, 2010, respectively.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note D – Loans and the Allowance for Loan Losses (continued)

Loans Acquired with Deteriorated Credit Quality

Certain loans acquired in connection with prior acquisitions (excluding FDIC-assisted acquisitions) exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, and it was probable that all contractually required payments would not be collected. The amount of such loans included in the Consolidated Balance Sheets under the line item “Loans - Not covered under loss-share agreements” at June 30, 2011 were as follows:

 

Real estate – 1-4 family mortgage		$	1,232
Real estate – commercial mortgage			1,780
Total outstanding balance			3,012
Nonaccretable difference			(732	)
Cash flows expected to be collected			2,280
Accretable yield			(88	)
Fair value		$	2,192

Changes in the accretable yield of these loans were as follows:

 

Balance at January 1, 2011		$	172
Additions			—
Reclassifications from nonaccretable difference			69
Accretion			(153	)
Balance at June 30, 2011		$	88

The following table presents the fair value of loans covered by loss-share agreements determined to be impaired at the time of acquisition and determined not to be impaired at the time of acquisition at June 30, 2011:

 

		Impaired Loans				Non-impaired Loans				Total Covered Loans
Contractually-required principal and interest		$	146,695			$	376,914			$	523,609
Nonaccretable difference(1)			(66,902	)			(68,736	)			(135,638	)
Cash flows expected to be collected			79,793				308,178				387,971
Accretable yield(2)			(1,674	)			(9,148	)			(10,822	)
Fair value		$	78,119			$	299,030			$	377,149

 

(1)

Represents contractual principal and interest cash flows of $125,038 and $10,600, respectively, not expected to be collected.

 

(2)

Represents future interest payments of $5,927 expected to be collected and purchase discount of $4,895.

Changes in the accretable yield of covered loans were as follows:

 

		Impaired Loans				Non-impaired Loans				Total Covered Loans
Balance at January 1, 2011		$	(3,626	)		$	(15	)		$	(3,641	)
Additions through acquisition			—				(3,405	)			(3,405	)
Reclassifications from nonaccretable difference			—				—				—
Accretion			1,952				199				2,151
Balance at June 30, 2011		$	(1,674	)		$	(3,221	)		$	(4,895	)

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note E – Other Real Estate and Repossessions

(In Thousands)

The following table provides details of the Company’s other real estate owned and repossessions (“OREO”) covered and not covered under a loss-share agreement:

 

		Covered OREO				Not Covered OREO				Total OREO
June 30, 2011
Residential real estate		$	12,724			$	11,481			$	24,205
Commercial real estate			10,682				13,108				23,790
Residential land development			10,786				38,050				48,836
Commercial land development			25,610				5,526				31,136
Other			—				219				219
Total other real estate and repossessions		$	59,802			$	68,384			$	128,186
December 31, 2010
Residential real estate		$	12,029				15,445				27,474
Commercial real estate			8,360				18,266				26,626
Residential land development			13,280				33,172				46,452
Commercial land development			21,046				4,501				25,547
Other			—				449				449
Total other real estate owned and repossessions		$	54,715			$	71,833			$	126,548

Changes in the Company’s OREO covered and not covered under a loss-share agreement were as follows:

 

		Covered OREO				Not Covered OREO				Total OREO
Balance at January 1, 2011		$	54,715			$	71,833			$	126,548
Transfers of loans			12,585				15,242				27,827
Capitalized improvements			—				37				37
Impairments			—				(1,624	)			(1,624	)
Dispositions			(7,496	)			(17,738	)			(25,234	)
Other			(2	)			634				632
Balance at June 30, 2011		$	59,802			$	68,384			$	128,186

Other real estate owned with a cost basis of $25,234 was sold during the six months ended June 30, 2011, resulting in a net loss of $1,836. Other real estate owned with a cost basis of $8,964 was sold during the six months ended June 30, 2010, resulting in a net loss of $387.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note F – FDIC Loss-Share Indemnification Asset

(In Thousands)

As part of the loan portfolio fair value estimation in connection with the Crescent and American Trust acquisitions, the Bank established a FDIC loss-share indemnification asset, which represents the present value of the estimated losses on loans to be reimbursed by the FDIC. The estimated losses were based on the same cash flow estimates used in determining the fair value of the loans. The FDIC loss-share indemnification asset will be reduced as losses are recognized on loans and loss-share payments are received from the FDIC. Realized losses in excess of estimates as of the dates of the respective acquisitions will increase the FDIC loss-share indemnification asset. Conversely, if realized losses are less than these estimates, the portion of the FDIC loss-share indemnification asset no longer expected to result in a payment from the FDIC will be amortized to interest income using the effective interest method.

Changes in the loss-share indemnification asset were as follows:

 

Balance at January 1, 2011		$	155,657
Additions through acquisition			11,926
Reimbursable expenses claimed			—
Reimbursements received			(18,144	)
Accretion			300
Balance at June 30, 2011		$	149,739

Note G - Employee Benefit and Deferred Compensation Plans

(In Thousands, Except Share Data)

The plan expense for the Company-sponsored noncontributory defined benefit pension plan (“Pension Benefits”) and post-retirement health and life plans (“Other Benefits”) for the periods presented was as follows:

 

		Pension Benefits								Other Benefits
		Three Months Ended June  30,								Three Months Ended June  30,
		2011				2010				2011				2010
Service cost		$	—			$	—			$	9			$	10
Interest cost			222				247				15				23
Expected return on plan assets			(329	)			(252	)			—				—
Prior service cost recognized			—				5				—				—
Recognized actuarial loss			75				93				33				29
Recognized curtailment loss			—				—				—				—
Net periodic benefit (income) cost		$	(32	)		$	93			$	57			$	62

 

		Six Months Ended June  30,								Six Months Ended June  30,
		2011				2010				2011				2010
Service cost		$	—			$	—			$	18			$	19
Interest cost			458				494				38				46
Expected return on plan assets			(616	)			(504	)			—				—
Prior service cost recognized			—				10				—				—
Recognized actuarial loss			152				186				72				59
Recognized curtailment loss			—				—				—				—
Net periodic benefit (income) cost		$	(6	)		$	186			$	128			$	124

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Note G - Employee Benefit and Deferred Compensation Plans (continued)

In January 2011 and 2010, the Company granted stock options which generally vest and become exercisable in equal installments of 33 1/3% upon completion of one, two and three years of service measured from the grant date. The fair value of stock option grants is estimated on the grant date using the Black-Scholes option-pricing model. The Company employed the following assumptions with respect to its stock option grants in 2011 and 2010 for the six month periods ended June 30, 2011 and 2010:

 

		2011 Grant				2010 Grant
Shares granted			170,000				138,500
Dividend yield			4.02	%			4.74	%
Expected volatility			36	%			34	%
Risk-free interest rate			1.97	%			2.48	%
Expected lives			6 years				6 years
Weighted average exercise price		$	16.91			$	14.22
Weighted average fair value		$	3.93			$	3.01

In addition, the Company awarded 7,500 shares of time-based restricted stock and 34,500 shares of performance-based restricted stock in January 2011. The time-based restricted stock is earned 100% upon completion of three years of service measured from the grant date. The performance-based restricted stock is earned, if at all, if the Company meets or exceeds financial performance results defined by the board of directors for the year. The fair value of the restricted stock grants on the date of the grants was $16.91 per share.

During the six months ended June 30, 2011, the Company reissued 17,956 shares from treasury in connection with the exercise of stock-based compensation. The Company recorded total stock-based compensation expense of $605 and $267 for the six months ended June 30, 2011 and 2010, respectively.

Note H – Segment Reporting

(In Thousands)

The Company’s internal reporting process is currently organized into four segments that account for the Company’s principal activities: the delivery of financial services through its community banks in Mississippi, Tennessee and Alabama and the delivery of insurance services through its insurance agency. In order to give the Company’s regional management a more precise indication of the income and expenses they can control, the results of operations for the geographic regions of the community banks and for the insurance company reflect the direct revenues and expenses of each respective segment. The Company believes this management approach will enable its regional management to focus on serving customers through loan originations and deposit gathering. 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, are not allocated to the Company’s segments. Rather, these revenues and expenses are shown in the “Other” column along with the operations of the holding company and eliminations which are necessary for purposes of reconciling to the consolidated amounts. The operations of Crescent and American Trust are included in the operations of the Tennessee community bank. Management believes future strategic opportunities in eastern Tennessee will result from the operations acquired in Georgia.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note H – Segment Reporting (continued)

The following table provides financial information for the Company’s operating segments for the periods presented:

 

		Community Banks
		Mississippi				Tennessee				Alabama				Insurance				Other				Consolidated
Three Months Ended June 30, 2011
Net interest income		$	13,127			$	14,111			$	6,657			$	29			$	(1,317	)		$	32,607
Provision for loan losses			704				2,525				2,121				—				—				5,350
Noninterest income			7,142				2,604				1,803				798				1,002				13,349
Noninterest expense			7,915				9,022				3,489				733				11,396				32,555
Income before income taxes			11,650				5,168				2,850				94				(11,711	)			8,051
Income taxes			3,343				1,727				829				38				(3,643	)			2,294
Net income (loss)		$	8,307				3,441			$	2,021			$	56			$	(8,068	)		$	5,757
Total assets		$	1,510,273			$	1,948,891			$	785,087			$	9,197			$	5,752			$	4,259,200
Goodwill			2,265				133,316				46,515				2,783				—				184,879
Three Months Ended June 30, 2010
Net interest income		$	12,871			$	7,321			$	5,517			$	31			$	(2,060	)		$	23,680
Provision for loan losses			462				6,051				487				—				—				7,000
Noninterest income			7,288				1,344				1,810				863				3,039				14,344
Noninterest expense			8,081				4,821				4,022				730				8,534				26,188
Income before income taxes			11,616				(2,207	)			2,818				164				(7,555	)			4,836
Income taxes			2,660				(507	)			645				65				(1,823	)			1,040
Net income (loss)		$	8,956			$	(1,700	)		$	2,173			$	99			$	(5,732	)		$	3,796
Total assets		$	1,545,202			$	1,288,331			$	746,352			$	8,603			$	5,384			$	3,593,872
Goodwill			2,265				133,316				46,520				2,783				—				184,884
Six Months Ended June 30, 2011
Net interest income		$	26,168			$	27,182			$	13,570			$	61			$	(3,908	)		$	63,073
Provision for loan losses			2,735				5,229				2,886				—				—				10,850
Noninterest income			14,296				13,234				3,767				1,941				1,876				35,114
Noninterest expense			16,121				18,649				8,533				1,456				24,519				69,278
Income before income taxes			21,608				16,538				5,918				546				(25,921	)			18,689
Income taxes			6,305				4,647				1,719				212				(7,504	)			5,379
Net income (loss)		$	15,303			$	11,891			$	4,199			$	334			$	(18,417	)		$	13,310
Total assets		$	1,510,273			$	1,948,891			$	785,087			$	9,197			$	5,752			$	4,259,200
Goodwill			2,265				133,316				46,515				2,783				—				184,879
Six Months Ended June 30, 2010
Net interest income		$	26,137			$	14,990			$	10,703			$	64			$	(3,804	)		$	48,090
Provision for loan losses			2,738				9,197				1,730				—				—				13,665
Noninterest income			14,646				2,824				3,851				1,920				3,587				26,828
Noninterest expense			15,798				9,458				7,999				1,465				17,102				51,822
Income before income taxes			22,247				(841	)			4,825				519				(17,319	)			9,431
Income taxes			5,101				(193	)			1,106				202				(4,188	)			2,028
Net income (loss)		$	17,146			$	(648	)		$	3,719			$	317			$	(13,131	)		$	7,403
Total assets		$	1,545,202			$	1,288,331			$	746,352			$	8,603			$	5,384			$	3,593,872
Goodwill			2,265				133,316				46,520				2,783				—				184,884

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note I - Derivative Instruments

(In Thousands)

Beginning in the first quarter of 2011, the Company began entering 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, 2011, the Company had notional amounts of $20,815 on interest rate contracts with corporate customers and $20,815 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts.

In May 2010, the Company terminated two interest rate swaps, each designated as a cash flow hedge, designed to convert the variable interest rate on an aggregate of $75,000 of loans to a fixed rate. As of the termination date, there were $1,679 of deferred gains related to the swaps, which are being amortized into interest income over the designated hedging periods ending in August 2012 and August 2013. Deferred gains related to the swaps of $303 and $55 were amortized into net interest income for the six months ended June 30, 2011 and 2010, respectively.

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. The notional amount of commitments to fund fixed-rate mortgage loans was $23,495 and $31,685 at June 30, 2011 and December 31, 2010, 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 $22,371 at June 30, 2011. These mortgage loan commitments are recorded at fair value, with gains and losses arising from changes in the valuation of the commitments reflected under the line item “Gains on sales of mortgage loans held for sale” on the Consolidated Statements of Income and do not qualify for hedge accounting.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Note I - Derivative Instruments (continued)

The following table provides details on the Company’s derivative financial instruments:

 

		June 30, 2011						December 31, 2010
		Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
Derivative assets:
Not designated as hedging instruments:
Interest rate swaps		Other Assets		$	1,093			Other Assets		$	941
Interest rate lock commitments		Other Assets			470			Other Assets			316
Totals				$	1,563					$	1,257
Derivative liabilities:
Not designated as hedging instruments:
Interest rate swaps		Other Liabilities		$	1,093			Other Liabilities		$	941
Forward commitments		Other Liabilities			31			Other Liabilities			—
Totals				$	1,124					$	941
Totals not designated as hedging instruments				$	439					$	316

The effect of the Company’s derivative financial instruments on the Consolidated Statements of Income was as follows:

 

		Income Statement Location		Three Months Ended June  30,
				2011				2010
Derivatives designated as cash flow hedging instruments:
Interest rate swaps		Interest Income on Loans		$	—			$	216
Interest rate swaps		Interest Expense on Borrowings			—				—
Total				$	—			$	216
Derivatives not designated as hedging instruments:
Interest rate swaps		Interest Income on Loans		$	111			$	—
Interest rate lock commitments		Gains on Mortgage Loans Held for Sale			354				12
Forward commitments		Gains on Mortgage Loans Held for Sale			(31	)			—
Total				$	434			$	12
		Income Statement Location		Six Months Ended June 30,
				2011				2010
Derivatives designated as cash flow hedging instruments:
Interest rate swaps		Interest Income on Loans		$	—			$	552
Interest rate swaps		Interest Expense on Borrowings			—				225
Total				$	—			$	327
Derivatives not designated as hedging instruments:
Interest rate swaps		Interest Income on Loans		$	160			$	—
Interest rate lock commitments		Gains on Mortgage Loans Held for Sale			154				105
Forward commitments		Gains on Mortgage Loans Held for Sale			(31	)			—
Total				$	283			$	105

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Note J –Fair Value Measurements

(In Thousands)

Fair Value Measurements and the Fair Level Hierarchy

ASC 820 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).

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, mortgage-backed securities and trust preferred securities. For securities available for sale, fair values for debt securities are based on quoted market prices, where available, or a discounted cash flow model. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair value of equity securities traded in an active market is based on quoted market prices; for equity securities not traded in an active market, fair value approximates their historical cost.

Derivative instruments: Interest rate swaps are extensively traded in over-the-counter markets at prices based upon projections of future cash payments/receipts discounted at market rates. The fair value of the Company’s interest rate swaps is determined based upon discounted cash flows. The fair value of the mortgage loan commitments is based on readily available quoted market prices, obtained in the open market from mortgage investors. These fair values reflect the values of mortgage loans having similar terms and characteristics to the mortgage loan commitments entered into by the Company.

Certain assets 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 methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities measured on a nonrecurring basis:

Mortgage loans held for sale: Mortgage loans held for sale are carried at the lower of cost or fair value. If fair value is used, it is determined using current secondary market prices for loans with similar characteristics, that is, using Level 2 inputs. Mortgage loans held for sale were carried at cost on the Consolidated Balance Sheets at June 30, 2011 and December 31, 2010.

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 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 covered under loss-share agreements were recorded at their fair value upon the acquisition date, and no fair value adjustments were necessary through June 30, 2011 or for the year ended December 31, 2010.

Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO not covered under loss-share agreements 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. OREO covered under loss-share agreements were recorded at their fair value upon their acquisition date, and no fair value adjustments were necessary through June 30, 2011 or for the period from its acquisition date to December 31, 2010.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Note J –Fair Value Measurements (continued)

The following table presents assets and liabilities that are measured at fair value on a recurring basis:

 

						Significant
		Quoted Prices				Other				Significant
		In Active				Observable				Unobservable
		Markets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Totals
June 30, 2011
Financial assets:
Securities available for sale:
Obligations of other U.S. Government agencies and corporations		$	—			$	47,530			$	—			$	47,530
Mortgage-backed securities			—				501,048				—				501,048
Trust preferred securities			—				3,061				1,473				4,534
Other equity securities			—				—				27,910				27,910
Total securities available for sale			—				551,639				29,383				581,022
Derivative instruments:
Interest rate swaps			—				1,093				—				1,093
Interest rate lock commitments			—				470				—				470
Total derivative instruments			—				1,563				—				1,563
Total financial assets		$	—			$	553,202			$	29,383			$	582,585
Financial liabilities:
Derivative instruments:
Interest rate swaps		$	—				1,093			$	—				1,093
Forward commitments			—				31				—				31
Total derivative instruments			—				1,124				—				1,124
Total financial liabilities		$	—			$	1,124			$	—			$	1,124
December 31, 2010
Securities available for sale:
Obligations of other U.S. Government agencies and corporations		$	—			$	72,752			$	—			$	72,752
Mortgage-backed securities			—				496,510				—				496,510
Trust preferred securities			—				3,150				1,433				4,583
Other equity securities			—				—				29,841				29,841
Total securities available for sale			—				572,412				31,274				603,686
Derivative instruments:
Interest rate swaps			—				941				—				941
Interest rate lock commitments			—				316				—				316
Total derivative instruments			—				1,257				—				1,257
Total financial assets		$	—			$	573,669			$	31,274			$	604,943
Financial liabilities:
Derivative instruments:
Interest rate swaps		$	—			$	941			$	—			$	941
Total derivative instruments			—				941				—				941
Total financial liabilities		$	—			$	941			$	—			$	941

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Note J –Fair Value Measurements (continued)

The following table provides a reconciliation for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the six months ended June 30, 2011:

 

		Securities available for sale
		Trust preferred securities				Other equity securities				Total
Balance at January 1, 2011		$	1,433			$	29,841			$	31,274
Transfers in and/or out of Level 3			—				—				—
Realized losses included in net income			(256	)			(59	)			(315	)
Unrealized gains (losses) included in other comprehensive income			(918	)			276				(642	)
Additions through acquisition			—				1,194				1,194
Purchases			1,214				—				1,214
Settlements			—				(3,342	)			(3,342	)
Balance at June 30, 2011		$	1,473			$	27,910			$	29,383

The following table presents assets measured at fair value on a nonrecurring basis that were still held in the Consolidated Balance Sheets at those respective dates:

 

		Level 1				Level 2				Level 3				Totals
June 30, 2011
Impaired loans		$	—			$	—			$	75,842			$	75,842
Other real estate owned			—				—				7,185				7,185
December 31, 2010
Impaired loans		$	—			$	—			$	78,954			$	78,954
Other real estate owned			—				—				15,150				15,150

Impaired loans not covered under loss-share agreements with a carrying value of $75,842 and $78,954 had an allocated allowance for loan losses of $16,972 and $17,529 at June 30, 2011 and December 31, 2010, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

OREO not covered under loss-share agreements with a carrying amount of $8,643 was written down to $7,185, resulting in a loss of $1,458, which was included in the results of operations for the six months ended June 30, 2011. OREO with a carrying amount of $18,816 was written down to $15,150, resulting in a loss of $3,666, which was included in the results of operations for the year ended December 31, 2010.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note J –Fair Value Measurements (continued)

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:

 

		June 30, 2011								December 31, 2010
		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial assets
Cash and cash equivalents		$	237,165			$	237,165			$	292,669			$	292,669
Securities held to maturity			252,688				257,513				230,786				228,157
Securities available for sale			581,022				581,022				603,686				603,686
Mortgage loans held for sale			11,511				11,511				27,704				27,704
Loans covered under loss-share agreements			377,149				381,647				333,681				334,096
Loans not covered under loss-share agreements			2,185,490				2,154,374				2,145,494				2,123,169
FDIC loss-share indemnification asset			149,740				149,740				155,657				155,657
Derivative instruments			1,563				1,563				1,257				1,257
Financial liabilities
Deposits			3,477,419				3,477,117				3,468,151				3,468,574
Short-term borrowings			16,066				16,066				15,386				15,386
Federal Home Loan Bank advances			121,151				126,040				175,119				181,909
Junior subordinated debentures			75,851				24,177				75,931				25,073
TLGP Senior Note			50,000				51,123				50,000				50,361
Derivative instruments			1,124				1,124				941				941

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above.

Cash and cash equivalents: Cash and cash equivalents consists of cash and due from banks and interest-bearing balances with banks. The carrying amount reported in the Consolidated Balance Sheets for cash and cash equivalents approximates fair value based on the short-term nature of these assets.

Securities held to maturity: For securities held to maturity, fair values for debt securities are based on quoted market prices, where available, or a discounted cash flow model. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans covered under loss-share agreements: The fair value of loans covered under loss-share agreements is based on the net present value of future cash proceeds expected to be received using discount rates that are derived from current market rates and reflect the level of interest risk in the covered loans.

Loans not covered under loss-share agreements: For variable-rate loans not covered under loss-share agreements that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values of fixed-rate loans not covered under loss-share agreements, including mortgages, commercial, agricultural and consumer loans, are estimated using a discounted cash flow analysis based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

FDIC loss-share indemnification asset: The fair value of the FDIC loss-share indemnification asset is based on the net present value of future cash flows expected to be received from the FDIC under the provisions of the loss-share agreements using a discount rate that is based on current market rates for the underlying covered loans. Current market rates are used in light of the uncertainty of the timing and receipt of the loss-share reimbursement from the FDIC.

Deposits: The fair values disclosed for demand deposits, both interest-bearing and noninterest-bearing, are, by definition, equal to the amount payable on demand at the reporting date. The fair values of certificates of deposit and individual retirement accounts are estimated using a discounted cash flow based on currently effective interest rates for similar types of accounts.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note J –Fair Value Measurements (continued)

Short-term borrowings: Short-term borrowings consist of treasury, tax and loan notes and securities sold under agreements to repurchase. The fair value of these short-term borrowings approximates the carrying value of the amounts reported in the Consolidated Balance Sheets for each respective account.

Federal Home Loan Bank advances: The fair value for FHLB advances is determined by discounting the future cash flows using the current market rate.

Junior subordinated debentures: The fair value for the Company’s junior subordinated debentures is determined by discounting the future cash flows using the current market rate.

TLGP Senior Note: The fair value for the Company’s senior note guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (“TLGP”) is determined by discounting the future cash flows using the current market rate.

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note K – Other Comprehensive Income

(In Thousands)

The components of other comprehensive income were as follows:

 

		Three Months Ended June 30,
		2011				2010
Net income		$	5,757			$	3,796
Other comprehensive income:
Unrealized holding gains on securities, net of tax expense of $8,905 and $1,497			14,377				2,416
Non-credit related portion of other-than-temporary impairment on securities, net of tax benefit of $5,807			(9,376	)			—
Reclassification adjustment for gains realized in net income, net of tax expense of $38 and $901			(62	)			(1,454	)
Net change in unrealized losses on securities			4,940				962
Unrealized holding gains on derivative instruments, net of tax expense of $105			—				170
Reclassification adjustment for gains realized in net income, net of tax expense of $59 and $21			(94	)			(34	)
Net change in unrealized gains on derivative instruments			(94	)			136
Net change in defined benefit pension and post-retirement benefit plans, net of tax expense of $41 and $49			66				79
Other comprehensive income			4,912				1,177
Comprehensive income		$	10,669			$	4,973

 

		Six Months Ended June 30,
		2011				2010
Net income		$	13,310			$	7,403
Other comprehensive income:
Unrealized holding gains on securities, net of tax expense of $9,077 and $6,076			14,655				9,809
Non-credit related portion of other-than-temporary impairment on securities, net of tax benefit of $5,807 and $4,447			(9,376	)			(7,180	)
Reclassification adjustment for gains realized in net income, net of tax expense of $148 and $897			(238	)			(1,448	)
Net change in unrealized losses on securities			5,041				1,181
Unrealized holding gains on derivative instruments, net of tax expense of $98			—				158
Reclassification adjustment for gains realized in net income, net of tax expense of $116 and $21			(187	)			(34	)
Net change in unrealized gains on derivative instruments			(187	)			124
Net change in defined benefit pension and post-retirement benefit plans, net of tax expense of $85 and $97			137				157
Other comprehensive income			4,991				1,462
Comprehensive income		$	18,301			$	8,865

 

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Renasant Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note K – Other Comprehensive Income (continued)

The accumulated balances for each component of other comprehensive income, net of tax, were as follows

 

		June 30, 2011				June 30, 2010
Net unrealized gains (losses) on securities		$	3,097			$	6,298
Net non-credit related portion of other-than-temporary impairment on securities			(9,376	)			(7,180	)
Net unrealized gains on derivative instruments			626				1,003
Net unrecognized defined benefit pension and post-retirement benefit plans obligations			(5,797	)			(6,115	)
Total accumulated other comprehensive loss		$	(11,450	)		$	(5,994	)

Note L – Net Income Per Common Share

(In Thousands, Except Share Data)

Basic and diluted net income per common share were as follows:

 

		Three Months Ended June 30,
		2011				2010
Basic
Net income applicable to common stock		$	5,757			$	3,796
Average common shares outstanding			25,059,081				21,088,942
Net income per common share - basic		$	0.23			$	0.18
Diluted
Net income applicable to common stock		$	5,757			$	3,796
Average common shares outstanding			25,059,081				21,088,942
Effect of dilutive stock-based compensation			123,422				135,894
Average common shares outstanding - diluted			25,182,503				21,224,836
Net income per common share - diluted		$	0.23			$	0.18
		Six Months Ended June 30,
		2011				2010
Basic
Net income applicable to common stock		$	13,310			$	7,403
Average common shares outstanding			25,055,623				21,085,983
Net income per common share - basic		$	0.53			$	0.35
Diluted
Net income applicable to common stock		$	13,310			$	7,403
Average common shares outstanding			25,055,623				21,085,983
Effect of dilutive stock-based compensation			127,592				133,679
Average common shares outstanding - diluted			25,183,215				21,219,662
Net income per common share - diluted		$	0.53			$	0.35

 

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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”) which may 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” and other similar expressions. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements.

Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include (1) the Company’s ability to efficiently integrate its acquisitions of Crescent Bank & Trust Company and American Trust Bank (described below) into its operations, retain the customers of these institutions and grow the acquired franchises; (2) the effect of economic conditions and interest rates on a national, regional or international basis; (3) the timing 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, including 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; (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 relationship; and (16) other circumstances, many of which are beyond management’s control. Management undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Overview

Renasant Corporation owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. The Company offers a diversified range of financial and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and north central Mississippi, west and middle Tennessee, north and north central Alabama and north Georgia.

On February 4, 2011, the Bank acquired specified assets and assumed specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”), from the FDIC, as receiver for American Trust. American Trust operated, and the Company acquired and retained, 3 branches in the northwest region of Georgia. The Bank acquired assets with a fair value of $247,505, including loans with a fair value of $74,399, and assumed liabilities with a fair value of $238,731, including deposits with a fair value of $223,007. At the acquisition date, approximately $73,657 of acquired loans were covered by loss-share agreements between the FDIC and the Bank. The acquisition of American Trust resulted in a pre-tax gain of $8,774. For more information regarding this transaction, please refer to Note B, “FDIC-Assisted Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 1, “Financial Statements.”

On July 23, 2010, the Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver for Crescent. Crescent operated, and the Company acquired and retained, 11 branches in the northwest region of Georgia. The Bank acquired assets with a fair value of $959,307, including loans with a fair value of $371,100, and assumed liabilities with a fair value of $917,096, including deposits with a fair value of $890,103. At the acquisition date, approximately $361,472 of acquired loans and $50,168 of other real estate owned were covered by loss-share agreements between the FDIC and the Bank. For more information regarding this transaction, please refer to Note B, “FDIC-Assisted Acquisition of Certain Assets and Liabilities of Crescent Bank & Trust,” in the Notes to Consolidated Financial Statements included in Item 8,

 

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“Financial Statements and Supplementary Data,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Financial Condition

The Company’s total assets were $4,259,200 at June 30, 2011 as compared to $4,297,327 on December 31, 2010.

Cash and cash equivalents decreased to $237,165 at June 30, 2011 from $292,669 at December 31, 2010. Cash and cash equivalents represented 5.57% of total assets at June 30, 2011 compared to 6.81% of total assets at December 31, 2010.

Investments

The following table shows the carrying value of our securities portfolio by investment type, and the percentage of such investment type relative to the entire securities portfolio, for the periods presented:

 

		June 30, 2011				Percentage of Portfolio				December 31, 2010				Percentage of Portfolio
Obligations of other U.S. Government agencies and corporations		$	89,951				10.79	%		$	97,455				11.68	%
Mortgage-backed securities			501,048				60.10				496,510				59.50
Obligations of states and political subdivisions			210,267				25.22				206,083				24.70
Trust preferred securities			4,534				0.54				4,583				0.54
Other equity securities			27,910				3.35				29,841				3.58
Total investments		$	833,710				100.00	%		$	834,472				100.00	%

The balance of our investment portfolio at June 30, 2011 was $833,710 compared to $834,472 at December 31, 2010. During the first six months of 2011, we purchased $105,270 in investment securities. The purchases were primarily mortgage-backed securities and collateralized mortgage obligations (“CMO’s”), which in the aggregate made up approximately 46.15% of the purchases. CMO’s are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and CMO’s held in our investment portfolio are primarily issued by government sponsored entities. U.S. Government Agency securities and municipal securities accounted for approximately 26.81% and 27.04%, respectively, of the remainder of the securities purchased in the first six months of 2011. The carrying value of securities sold during the first six months of 2011, totaled $13,017, consisting solely of municipal securities. Maturities and calls of securities during the first six months of 2011 totaled $106,698. At June 30, 2011, unrealized losses of $29,637 were recorded on investment securities with a carrying value of $83,535.

Loans

The table below sets forth the balance of loans outstanding by loan type:

 

		June 30, 2011				Percentage of Total  Loans				December 31, 2010				Percentage of Total  Loans
Commercial, financial, agricultural		$	267,576				10.44	%		$	265,276				10.51	%
Lease financing			393				0.02				503				0.02
Real estate – construction			87,542				3.42				82,361				3.26
Real estate – 1-4 family mortgage			839,959				32.78				872,382				34.56
Real estate – commercial mortgage			1,304,677				50.91				1,239,843				49.11
Installment loans to individuals			62,492				2.43				64,225				2.54
Total loans, net of unearned income		$	2,562,639				100.00	%		$	2,524,590				100.00	%

At June 30, 2011, loans increased $38,049 from December 31, 2010 which is primarily a result of the acquisition of American Trust. The loans acquired in the American Trust acquisition were, for the most part, covered under loss-share agreements with the FDIC. For loans covered under the loss-share agreements (referred to as “covered loans”), the FDIC will reimburse the Bank 80% of the losses incurred on these loans.

 

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The following table provides a breakdown of loans covered and not covered under a loss-share agreement:

 

		June 30, 2011												December 31, 2011
		Covered Loans				Not Covered Loans				Total Loans				Covered Loans				Not Covered Loans				Total Loans
Commercial, financial, agricultural		$	24,233			$	243,343			$	267,576			$	20,921			$	244,355			$	265,276
Lease financing			—				393				393				—				503				503
Real estate – construction:
Residential			4,202				38,330				42,532				6,476				31,143				37,619
Commercial			6,116				33,301				39,417				9,087				30,638				39,725
Condominiums			—				5,593				5,593				—				5,017				5,017
Total real estate – construction			10,318				77,224				87,542				15,563				66,798				82,361
Real estate – 1-4 family mortgage:
Primary			21,914				340,502				362,416				19,786				343,712				363,498
Home equity			22,621				161,438				184,059				21,454				161,973				183,427
Rental/investment			46,435				138,455				184,890				51,065				148,308				199,373
Land development			28,538				80,056				108,594				30,214				95,870				126,084
Total real estate – 1-4 family mortgage			119,508				720,451				839,959				122,519				749,863				872,382
Real estate – commercial mortgage:
Owner-occupied			105,699				518,971				624,670				71,455				522,288				593,743
Non-owner occupied			47,036				448,203				495,239				24,863				432,872				457,735
Land development			70,141				114,627				184,768				78,254				110,111				188,365
Total real estate – commercial mortgage			222,876				1,081,801				1,304,677				174,572				1,065,271				1,239,843
Installment loans to individuals			214				62,278				62,492				106				64,119				64,225
Total loans, net of unearned income		$	377,149			$	2,185,490			$	2,562,639			$	333,681			$	2,190,909			$	2,524,590

During the six months of 2011, loans in our Alabama and Georgia regions increased $26,606 and $55,404, respectively, while loans in our Mississippi and Tennessee region decreased $17,729 and $24,844, respectively, from December 31, 2010. The increase in the Georgia region is due primarily to the American Trust acquisition.

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At June 30, 2011, 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.

Mortgage loans held for sale were $11,511 at June 30, 2011 compared to $27,704 at December 31, 2010. Originations of mortgage loans to be sold totaled $185,652 for the first six months of 2011 as compared to $214,385 for the same period in 2010. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within thirty 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 mortgage loans in the secondary market.

Deposits

The Company relies on deposits as its major source of funds. Total deposits were $3,477,419 at June 30, 2011 compared to $3,468,151 at December 31, 2010. Noninterest-bearing deposits were $458,686 at June 30, 2011 compared to $368,798 at December 31, 2010, while interest-bearing deposits were $3,018,733 at June 30, 2011 compared to $3,099,353 at December 31, 2010. The acquisition of American Trust increased noninterest-bearing and interest-bearing deposits by $8,585 and $120,692, respectively, at June 30, 2011 compared to December 31, 2010. Deposits in the Mississippi region increased $39,086 in the first six months of 2011, while deposits in the Alabama and Tennessee regions decreased $46,779 and $62,329, respectively, in the first six months of 2011. Deposits in our Georgia markets increased $79,289 at June 30, 2011 since December 31, 2010 due to the American Trust acquisition.

 

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Borrowed Funds

Total borrowings, which include federal funds purchased, treasury, tax and loan notes, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (“FHLB”), debt guaranteed by the FDIC under its Temporary Liquidity Guarantee Program and junior subordinated debentures, were $263,067 at June 30, 2011 compared to $316,436 at December 31, 2010. FHLB advances were $121,151 at June 30, 2011 compared to $175,119 at December 31, 2010. The Company assumed $15,020 in long-term FHLB advances in connection with the American Trust acquisition, all of which were repaid during the first quarter of 2011. The Company repaid $50,000 of long-term FHLB borrowings during the first three months of 2011 and incurred prepayment penalties of $1,903.

Results of Operations

Three Months Ended June 30, 2011 as Compared to the Three Months Ended June 30, 2010

Net income for the three month period ended June 30, 2011 was $5,757, which represents an increase of $1,961, or 51.67%, from net income of $3,796 for the three month period ended June 30, 2010. Basic and diluted earnings per share increased $0.05 to $0.23 for the three month period ended June 30, 2011 as compared to $0.18 for the prior year.

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. The primary concerns in managing net interest income are the mix and the repricing of rate-sensitive assets and liabilities. Net interest income increased 37.70% to $32,607 for the second quarter of 2011 compared to $23,680 for the same period in 2010. Net interest margin, the tax equivalent net yield on earning assets, increased to 3.76% for the first six months of 2011 from 3.15% for the same period in 2010. Net interest margin and net interest income are influenced by several factors, primarily changes in interest rates, competition and the shape of the interest rate yield curve.

 

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The following table 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,
		2011												2010
		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate
Assets
Interest-earning assets:
Loans(1)		$	2,575,890			$	36,347				5.66	%		$	2,304,663			$	31,904				5.55	%
Securities:
Taxable(2)			648,978				5,473				3.37				584,312				5,290				3.63
Tax-exempt			214,757				3,308				6.16				150,378				2,344				6.23
Interest-bearing balances with banks			200,071				163				0.33				121,861				52				0.17
Total interest-earning assets			3,639,696				45,291				4.99				3,161,214				39,590				5.02
Cash and due from banks			67,037												50,617
Intangible assets			191,320												190,639
FDIC loss-share indemnification asset			150,312												—
Other assets			246,165												213,655
Total assets		$	4,294,530											$	3,616,125
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand(3)		$	1,421,044				3,085				0.87			$	1,009,194				3,066				1.22
Savings deposits			214,190				195				0.36				144,202				286				0.79
Time deposits			1,437,575				5,496				1.53				1,233,779				7,094				2.31
Total interest-bearing deposits			3,072,809				8,776				1.15				2,387,175				10,446				1.76
Borrowed funds			261,060				2,377				3.64				468,196				4,255				3.67
Total interest-bearing liabilities			3,333,869				11,153				1.34				2,855,371				14,701				2.07
Noninterest-bearing deposits			468,170												315,242
Other liabilities			15,595												32,553
Shareholders’ equity			476,896												412,959
Total liabilities and shareholders’ equity		$	4,294,530											$	3,616,125
Net interest income/net interest margin						$	34,138				3.76	%						$	24,889				3.15	%

 

(1)	Includes mortgage loans held for sale and shown net of unearned income.

 

(2)	U.S. Government and some U.S. Government Agency securities are tax-exempt in the states in which we operate.

 

(3)	Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.

The average balances of nonaccruing loans are included in the table 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 35% and a state tax rate of 3.3%, which is net of federal tax benefit.

Interest income, on a tax equivalent basis, was $45,291 for the second quarter of 2011 compared to $39,590 for the same period in 2010. The increase in interest income was driven primarily by an increase in the average balance of interest earning assets offset by a slight decline in the yield on interest-earning assets. The tax equivalent yield on interest-earning assets decreased 3 basis points in the second quarter of 2011 compared to the second quarter of 2010. The change in the mix of interest-earning assets from higher yielding loans to lower yielding interest bearing cash balances further contributed to the decline in tax equivalent yield.

 

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The following table presents the percentage of total average earning assets, by type and yield, for the three months ended June 30 for each of the years presented:

 

		Percentage of Total								Yield
		2011				2010				2011				2010
Loans			70.77	%			72.90	%			5.66	%			5.55	%
Securities			23.73				23.24				4.07				4.16
Other			5.50				3.86				0.33				0.17
Total earning assets			100.00	%			100.00	%			4.99	%			5.02	%

Interest expense was $11,153 for the second quarter of 2011, a decrease of $3,548, or 24.13%, as compared to the same period in 2010. The decrease in interest expense was due to the decrease in the cost of interest-bearing liabilities as a result of the declining interest rate environment and a change in the mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities. The cost of interest-bearing liabilities was 1.34% for the second quarter of 2011 as compared to 2.07% for the same period in 2010.

The following table presents the Company’s funding sources which consists of total average deposits and borrowed funds, by type, and total cost of funds, for the second quarter for each of the years presented:

 

		Percentage of Total								Cost of Funds
		2011				2010				2011				2010
Noninterest-bearing demand			12.31	%			9.94	%			—	%			—	%
Interest-bearing demand			37.38				31.83				0.87				1.22
Savings			5.63				4.55				0.36				0.79
Time deposits			37.81				38.91				1.53				2.31
Federal Home Loan Bank advances			3.21				10.19				4.17				3.74
Other borrowed funds			3.66				4.58				3.18				3.52
Total deposits and borrowed funds			100.00	%			100.00	%			1.17	%			1.86	%

Noninterest Income

Noninterest income was $13,349 for the three months ended June 30, 2011, a decrease of $995, or 6.94%, as compared to 2010.

Charges for deposit services, the primary contributor to noninterest income, were $5,082 and $5,361 for the second quarter of 2011 and 2010, respectively. The operations of Crescent and American Trust increased service charges on deposit accounts by $361 during the second quarter of 2011. Overdraft fees, the largest component of service charges on deposits, were $4,519 for the three month period ended June 30, 2011 compared to $4,832 for the same period in 2010.

Fees and commissions (which includes fees charged for both deposit services and loan services) increased 33.41% to $4,548 during the second quarter of 2011 as compared to $3,409 for the second quarter of 2010. The operations of Crescent and American Trust increased fees and commissions by $369 during the second quarter of 2011. Fees charged on loans include origination, underwriting, documentation and other administrative fees. Loan fees were $1,807 during the second quarter of 2011 as compared to $1,238 for the second quarter of 2010. With respect to fees related to deposit services, interchange fees on debit card transactions continue to be a strong source of noninterest income. For the second quarter of 2011, fees associated with debit card usage were $1,855, an increase of 21.50% as compared to $1,527 for the same period of 2010. The Company also provides specialized products and services to our customers through our Financial Services division. Specialized products include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Revenues generated from the sale of all of these products, which are included in the Consolidated Statements of Income in the account line “Fees and commissions,” were $490 for the second quarter of 2011 compared to $279 for the same period of 2010.

The trust department operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The trust department manages a number of trust accounts inclusive of personal and corporate benefit accounts, self-directed IRA’s, 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. Trust revenue was $650 for the second quarter of 2011 compared to $632 for the same period in 2010. The market value of trust assets under management was $443,232 and $420,487 at June 30, 2011 and 2010, respectively.

 

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On June 29, 2011, the Company announced that Renasant Bank had entered into a definitive purchase agreement to acquire the Birmingham, Alabama-based trust department of RBC Bank (USA), which services clients in Alabama and Georgia. Under the terms of the transaction, prior to the closing RBC Bank (USA) will transfer its assets under management with an approximate market value of $680,000, comprised of personal and institutional clients with over 200 trust, custodial and escrow accounts, to a wholly-owned subsidiary, and Renasant Bank will acquire all of the ownership interests in the subsidiary. The transition from RBC Bank (USA) to Renasant for client accounts and personnel is expected to be completed during the third quarter of 2011.

For the three months ended June 30, 2011, the Company recognized net other-than-temporary-impairment losses of $262 related to investments in pooled trust preferred securities. Gains on sales of securities for the three months ended June 30, 2011 were $4, resulting from the sale of approximately $7,988 in securities, compared to gains on sales of securities for the three months ended June 30, 2010 of $2,049, resulting from the sale of approximately $89,695 in securities.

Gains on the sale of mortgage loans held for sale for the second quarter of 2011 were $949, a decrease of 4.53%, from the second quarter of 2010. The decrease in gains on the sale of mortgage loans is attributable to higher volumes of loans sold during 2010 compared to 2011. Originations of mortgage loans to be sold totaled $89,142 for the second quarter of 2011 as compared to $112,814 for the same period in 2010.

Noninterest Expense

 

Noninterest Expense to Average Assets
2011		2010
3.04%		2.90%

Noninterest expense was $32,555 and $26,188 for the second quarter of 2011 and 2010, respectively, an increase of $6,367, or 24.31%. The operations of Crescent and American Trust increased noninterest expenses by $5,292 during the second quarter of 2011.

Salaries and employee benefits increased $3,121, or 23.91%, to $16,173 during the second quarter of 2011 as compared to $13,052 for the second quarter of 2010. The operations of Crescent and American Trust increased salaries and employee benefits $1,985 during the second quarter of 2011.

Data processing costs increased $77 to $1,657 for the second quarter of 2011 as compared to the second quarter of 2010. The increase in data processing costs is reflective of increased loan and deposit processing from growth in the number of loans and deposits and from the completion of the Crescent conversion which occurred in the first quarter of 2011. The American Trust conversion was completed during the second quarter of 2011.

Net occupancy and equipment expense for the second quarter of 2011 was $3,362, up $436 from the second quarter of 2010. This increase is attributable to occupancy costs associated with the operations of Crescent and American Trust partially offset by lower depreciation expense.

Expenses related to other real estate owned for the second quarter of 2011 were $2,122, an increase of $1,163 compared to the same period in 2010. Expenses on other real estate owned for the three months ended June 30, 2011 include a $655 write down of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $10,893 was sold during the three months ended June 30, 2011, resulting in a net loss of $205.

Professional fees include fees for legal and accounting services as well as fees we pay our directors. Professional fees were $1,206 and $881 for the second quarter of 2011 and 2010, respectively. The higher levels of professional fees are attributable to legal fees associated with loan workouts and foreclosure proceedings.

Advertising and public relations expense was $1,269 for the second quarter of 2011 compared to $978 for the second quarter of 2010. This increase is attributable to advertising and marketing costs associated with our expansion into our north Georgia markets.

Amortization of intangible assets increased $40 to $510 for the second quarter of 2011 compared to $470 for the second quarter of 2010. 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 one to ten years.

 

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Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were $1,405 for the second quarter of 2011 as compared to $1,047 for the second quarter of 2010.

Other noninterest expense was $4,851 and $4,295 for the second quarter of 2011 and 2010, respectively.

 

Efficiency Ratio
2011		2010
68.59%		66.75%

The efficiency ratio, shown above for the second quarter for each year, 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 taxable equivalent basis and noninterest income. We remain committed to aggressively managing our costs within the framework of our business model.

Income Taxes

Income tax expense for the second quarter of 2011 was $2,294 as compared to $1,040 for the second quarter of 2010. The effective tax rates for those periods were 28.49% and 21.51%, respectively. The increase in the effective tax rate for the second quarter of 2011 as compared to the same period in 2010 is attributable to higher levels of taxable income.

 

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Six Months Ended June 30, 2011 as Compared to the Six Months Ended June 30, 2010

Net income for the six month period ended June 30, 2011 was $13,310, an increase of $5,907, or 79.80%, from net income of $7,403 for the same period in 2010. Basic and diluted earnings per share were $0.53 for the six month period ended June 30, 2011, as compared to basic and diluted earnings per share of $0.35 for the comparable period a year ago.

The following table 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 six months ended June 30, 2011 and 2010:

 

		Six Months Ended June 30,
		2011												2010
		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate
Assets
Interest-earning assets:
Loans(1)		$	2,572,980			$	72,408				5.68	%		$	2,329,415			$	64,572				5.59	%
Securities:
Taxable(2)			654,360				11,159				3.41				570,950				11,286				3.95
Tax-exempt			218,341				6,726				6.16				145,453				4,535				6.24
Interest-bearing balances with banks			241,826				369				0.31				115,100				97				0.17
Total interest-earning assets			3,687,507				90,662				4.95				3,160,918				80,490				5.13
Cash and due from banks			72,881												53,295
Intangible assets			191,529												190,875
FDIC loss-share indemnification asset			155,687												—
Other assets			248,206												167,337
Total assets		$	4,355,810											$	3,617,888
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand(3)		$	1,394,654			$	6,073				0.88			$	984,486			$	5,862				1.20
Savings			209,284				441				0.42				128,605				437				0.68
Time deposits			1,506,512				12,344				1.65				1,247,017				14,480				2.34
Total interest-bearing deposits			3,110,450				18,858				1.22				2,360,108				20,779				1.78
Borrowed funds			275,550				5,002				3.64				499,252				9,220				3.74
Total interest-bearing liabilities			3,386,000				23,860				1.42				2,859,360				29,999				2.12
Noninterest-bearing deposits			472,116												312,878
Other liabilities			24,153												33,061
Shareholders’ equity			473,541												412,589
Total liabilities and shareholders’ equity		$	4,355,810											$	3,617,888
Net interest income/net interest margin						$	66,802				3.65	%						$	50,491				3.21	%

 

(1)	Includes mortgage loans held for sale and shown net of unearned income.

 

(2)	U.S. Government and some U.S. Government Agency securities are tax-free in the states in which we operate.

 

(3)	Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.

The average balances of nonaccruing loans are included in this table. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax-equivalent basis assuming a federal tax rate of 35% and a state tax rate of 3.3%, which is net of federal tax benefit.

 

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Net Interest Income

Net interest income increased 32.47% to $63,703 for the first six months of 2011 compared to $48,090 for the same period in 2010. On a tax equivalent basis, net interest margin for the six month period ending June 30, 2011 was 3.65% compared to 3.21% for the same period in 2010.

Interest income, on a tax equivalent basis, increased 12.64% to $90,662 for the first six months of 2011 from $80,490 for the same period in 2010. The increase in interest income was driven primarily by an increase in the average balance of interest earning assets from the FDIC assisted acquisitions offset by a decline in the yield on interest-earning assets. The average balance of interest-earning assets increased $526,589 for the six months ended June 30, 2011 as compared to the same period in 2010. The tax equivalent yield on earning assets decreased 18 basis points to 4.95% for the first six months of 2011 compared to 5.13% for the same period in 2010. The tax equivalent yield on the investment portfolio was 4.09% for the first six months of 2011, down 33 basis points from 4.42% in the corresponding period in 2009. The decline in yield on the investment portfolio was a result of the call or maturity of securities within the Company’s portfolio that had higher rates than the rates on the securities that the Company purchased with the proceeds. These rates were lower due to a generally lower interest rate environment.

The following table presents the percentage of total average earning assets, by type and yield, for the six months ended June 30 for each of the years presented:

 

		Percentage of Total								Yield
		2011				2010				2011				2010
Loans			69.78	%			73.70	%			5.68	%			5.59	%
Securities			23.67				22.66				4.10				4.42
Other			6.55				3.64				0.31				0.17
Total earning assets			100.00	%			100.00	%			4.95	%			5.13	%

Interest expense decreased 20.46% to $23,860 for the six months ended June 30, 2011 as compared to $29,999 for the same period in 2010. This decrease primarily resulted from reductions in the cost of deposits and in the volume of borrowed funds. The average balance of interest-bearing deposits, which had an average cost of 1.22%, increased $750,342 for the six months ended June 30, 2011 as compared to the same period in 2010. The increase in the average balance of the interest bearing deposits is primarily attributable to the FDIC-assisted acquisitions. The average balance of borrowed funds, which had an average cost of 3.64%, decreased $223,702 for the six months ended June 30, 2011 as compared to the same period in 2010. Overall, the cost of interest-bearing liabilities decreased 70 basis points to 1.42% for the first six months of 2011 compared to 2.12% for the same period in 2010.

Noninterest Income

Noninterest income was $35,114 for the six month period ended June 30, 2011 compared to $26,828 for the same period in 2010, an increase of $8,286, or 30.89%. The acquisition of American Trust resulted in a bargain purchase gain of $8,774 which is reflected in the noninterest income for the first six months of 2011.

Service charges on deposits were $9,962 and $10,451 for the first six months of 2011 and 2010, respectively. Overdraft fees were $8,838 for the six month period ended June 30, 2011 compared to $9,385 for the same period in 2010.

Fees and commissions were $8,686 for the six month period ended June 30, 2011 compared to $7,130 for the same period in 2010. Fees charged for loan services were $3,340 for the first six months of 2011 compared to $2,673 for the same period in 2010. For the first six months of 2011, fees associated with debit card usage were $3,551, up 14.89% from $3,091 for the same period in 2010. Revenues generated from the sale of all specialized products by the Financial Services division totaled $934 for the first six months of 2011 compared to $623 for the same period of 2010. Revenue generated by the trust department for managing accounts was $1,263 for the first six months of 2011 as compared to $1,216 for the same period in 2010.

Income earned on insurance products was $1,615 and $1,664 for the six months ending June 30, 2011 and 2010, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our client’s 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 $321 and $253 for the six months ending June 30, 2011 and 2010, respectively.

 

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Losses on the securities portfolio for the first six months of 2011 totaled $246 due primarily from the recognition of other-than-temporary-impairment losses of $262 related to investments in pooled trust preferred securities. For the same period in 2010, the Company recognized securities gains of $1,889. The Company sold securities totaling $89,695 in the first six months of 2010 which resulted in a gain of $2,049 offset partially by the recognition of other-than-temporary-impairment losses of $160 related to investments in pooled trust preferred securities.

Gains from sales of mortgage loans held for sale were $2,100 for the six months ended June 30, 2011 compared to $2,323 for the same period in 2010.

Noninterest Expense

Noninterest expense was $69,278 for the six month period ended June 30, 2011 compared to $51,822 for the same period in 2010, a decrease of $17,456, or 33.68%. The additional expense from the operations of the FDIC-assisted acquisitions is the primary reason for the increase in total noninterest expenses, and the components thereof, during the first six months of 2011 compared to the same period in 2010. Total noninterest expenses for the first six months of 2011 also includes $1,325 of acquisition-related expenses associated with the American Trust acquisition and a prepayment penalty totaling $1,903 associated with the payoff of $50,000 of FHLB advances.

Salaries and employee benefits for the six month period ended June 30, 2011 were $32,410 compared to $26,249 for the same period last year.

Data processing costs for the six month period ended June 30, 2011 were $3,445, an increase of $439 compared to $3,006 for the same period last year.

Net occupancy and equipment expense for the six month period ended June 30, 2011 increased $739 to $6,596 over the comparable period for the prior year.

Expenses related to other real estate owned for the first six months of 2011 were $5,633 compared to $1,695 for the same period in 2010. Expenses on other real estate owned for the six months ending June 30, 2011 include a $1,624 write down of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $25,234 was sold during the six months ended June 30, 2011, resulting in a net loss of $1,836.

Advertising and public relations expense was $2,432 for the six months ending June 30, 2011 compared to $1,868 for the same period in 2010.

Amortization of intangible assets was $1,025 for the six months ended June 30, 2011 compared to $946 for the six months ended June 30, 2010.

Communication expense was $2,839 for the six months ended June 30, 2011 compared to $2,133 for the same period in 2010.

Noninterest expense as a percentage of average assets was 3.21% for the six month period ended June 30, 2011 and 2.89% for the comparable period in 2010. The net overhead ratio was 1.57% and 1.50% for the first six months of 2011 and 2010, respectively. Our efficiency ratio increased to 67.99% for the six month period ended June 30, 2011 compared to 67.02% for the same period of 2010.

Income Taxes

Income tax expense was $5,379 for the six month period ended June 30, 2011 compared to $2,028 for the same period in 2010. The effective tax rates for the six month periods ended June 30, 2011 and 2010 were 28.78% and 21.50%, respectively. The increase in the effective tax rate for the six months ended June 30, 2011 as compared to the same period in 2010 is attributable to higher levels of taxable income.

 

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Risk Management

The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading “Liquidity and Capital Resources.”

Credit Risk and Allowance for 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 a quarterly analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under Accounting Standards Codification Topic (“ASC”) 450, “Contingencies.” Other considerations in establishing the allowance include the risk rating of individual credits, the size and diversity of the portfolio, economic conditions reflected within industry segments, the unemployment rate in our markets, loan segmentation, historical losses that are inherent in the loan portfolio and the results of periodic credit reviews by internal loan review and regulators.

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. Factors considered by management in determining the amount of provision for loan losses to charge to current operations include the internal risk rating of individual credits, 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 current economic conditions in the market in which we operate.

Loans acquired in the Crescent and American Trust acquisitions were recorded, as of their respective acquisition dates, at fair value. The fair value of these loans represents the expected discounted cash flows to be received over the lives of the loans, taking into account the Company’s estimate of future credit losses on the loans. Because the fair value measurement incorporates an estimate of losses on acquired loans, these loans were excluded from the calculation of the allowance for loan losses and no provision for loan losses was recorded for these loans during the six months ended June 30, 2011 or for the period from the acquisition date of these loans to December 31, 2010. The Company will continue to monitor future cash flows on these loans; 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.

 

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The table below reflects the activity in the allowance for loan losses, in thousands, for the periods presented:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Balance at beginning of period		$	47,505			$	41,094			$	45,415			$	39,145
Provision for loan losses			5,350				7,000				10,850				13,665
Charge-offs
Commercial, financial, agricultural			1,139				166				1,284				243
Lease financing			—				—				—				—
Real estate – construction			569				2,983				798				3,418
Real estate – 1-4 family mortgage			3,084				3,573				6,615				5,455
Real estate – commercial mortgage			823				430				1,374				2,801
Installment loans to individuals			33				79				89				194
Total charge-offs			5,648				7,231				10,160				12,111
Recoveries
Commercial, financial, agricultural			36				18				178				39
Lease financing			—				—				—				—
Real estate – construction			31				(10	)			31				37
Real estate – 1-4 family mortgage			221				234				337				314
Real estate – commercial mortgage			52				5				869				11
Installment loans to individuals			24				36				51				46
Total recoveries			364				283				1,466				447
Net charge-offs			5,284				6,948				8,694				11,664
Balance at end of period		$	47,571			$	41,146			$	47,571			$	41,146
Net charge-offs to average loans (annualized)			0.82	%			1.21	%			0.68	%			1.01	%
Allowance for loan losses to:
Loans											2.18	%			1.82	%
Nonperforming loans											91.52	%			63.63	%

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 June  30,								Six Months Ended June 30,
		2011				2010				2011				2010
Real estate – construction:
Residential		$	542			$	258			$	771			$	646
Commercial			(4	)			—				(4	)			—
Condominiums			—				2,735				—				2,735
Total real estate – construction			538				2,993				767				3,381
Real estate – 1-4 family mortgage:
Primary			411				1,554				854				1,633
Home equity			827				329				907				739
Rental/investment			867				439				1,297				764
Land development			758				1,017				3,220				2,005
Total real estate – 1-4 family mortgage			2,863				3,339				6,278				5,141
Real estate – commercial mortgage:
Owner-occupied			407				167				607				1,251
Non-owner occupied			(3	)			211				(718	)			1,489
Land development			367				47				616				50
Total real estate – commercial mortgage			771				425				505				2,790
Total net-charge-offs of loans secured by real estate		$	4,172			$	6,919			$	7,550			$	11,312

 

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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 for the periods presented:

 

		June 30, 2011				December 31, 2010
Specific reserves for impaired loans		$	16,972			$	17,529
Allocated reserves for remaining portfolio			30,599				27,886
Total		$	47,571			$	45,415

Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually past due 90 days 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. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition. 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.

Due to the significant difference in the accounting for the loans and other real estate owned covered by loss-share agreements (“covered assets”) and loss mitigation offered under the loss-share agreements with the FDIC, the Company believes that excluding the covered assets from its asset quality measures provides a more meaningful presentation of the Company’s asset quality. Purchased impaired loans had evidence of deterioration in credit quality prior to acquisition, and thus the fair value of these loans as of the acquisition date included an estimate of credit losses. These loans, as well as acquired loans with no evidence of credit deterioration at acquisition, are accounted for on a pool basis, and these pools are considered to be performing. Purchased impaired loans were not classified as nonperforming assets at June 30, 2011 or December 31, 2010 as the loans are considered to be performing under ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). As a result, interest income, through the accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all purchased loans accounted for under ASC 310-30.

The following table provides a detail of the Company’s nonperforming assets covered and not covered under loss-share agreements:

 

		Covered Assets				Not Covered Assets				Total Assets
June 30, 2011
Nonaccruing loans		$	78,780			$	42,331			$	121,111
Accruing loans past due 90 days or more			10,619				9,646				20,265
Total nonperforming loans			89,399				51,977				141,376
Other real estate owned			59,802				68,384				128,186
Total nonperforming assets		$	149,201			$	120,361			$	269,562
Nonperforming loans to total loans											5.52	%
Nonperforming assets to total assets											6.33	%
Allowance for loan losses to total loans											1.86	%
December 31, 2010
Nonaccruing loans		$	82,393			$	46,662			$	129,055
Accruing loans past due 90 days or more			—				7,196				7,196
Total nonperforming loans			82,393				53,858				136,251
Other real estate owned			54,715				71,833				126,548
Total nonperforming assets		$	137,108			$	125,691			$	262,799
Nonperforming loans to total loans											5.40	%
Nonperforming assets to total assets											6.12	%
Allowance for loan losses to total loans											1.80	%

 

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The asset quality measures surrounding the Company’s nonperforming loans and nonperforming assets discussed in the remainder of this section exclude covered assets relating to the Crescent and American Trust acquisitions.

The following table shows the principal amounts of nonperforming and restructured loans for the periods presented:

 

		June 30,								December 31,
		2011				2010				2010
Nonaccruing loans		$	42,331			$	53,868			$	46,662
Accruing loans past due 90 days or more			9,646				10,794				7,196
Total nonperforming loans			51,977				64,662				53,858
Restructured loans			40,170				29,245				32,615
Total nonperforming and restructured loans		$	92,147			$	93,907			$	86,473
Nonperforming loans to total loans – period end			2.38	%			2.86	%			2.46	%

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 above. At June 30, 2011, we did not hold any other interest-bearing assets that would be included in the table above if such assets were loans.

The following table presents nonperforming loans by loan category for each of the periods presented.

 

		June 30,								December 31,
		2011				2010				2010
Commercial, financial, agricultural		$	3,365			$	3,791			$	2,422
Lease financing			—				—				—
Real estate – construction			334				1,943				333
Real estate – 1-4 family mortgage			27,339				37,231				35,893
Real estate – commercial mortgage			19,875				21,501				14,539
Installment loans to individuals			1,064				196				671
Total		$	51,977			$	64,662			$	53,858

The following table provides further details of the Company’s nonperforming loans secured by real estate for the periods presented:

 

		June 30,								December 31,
		2011				2010				2010
Real estate – construction:
Residential		$	334			$	1,943			$	333
Commercial			—				—				—
Condominiums			—				—				—
Total real estate – construction			334				1,943				333
Real estate – 1-4 family mortgage:
Primary			5,643				6,615				6,514
Home equity			1,261				846				829
Rental/investment			9,251				12,764				10,942
Land development			11,184				17,006				17,608
Total real estate – 1-4 family mortgage			27,339				37,231				35,893
Real estate – commercial mortgage:
Owner-occupied			6,346				11,585				6,336
Non-owner occupied			10,375				2,682				4,300
Land development			3,154				7,234				3,903
Total real estate – commercial mortgage			19,875				21,501				14,539
Total nonperforming loans secured by real estate		$	47,548			$	60,675			$	50,765

 

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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, 2011. Management also continually monitors past due loans for potential credit quality deterioration. Total loans past due 30-89 days were $17,527 at June 30, 2011 as compared to $21,520 at December 31, 2010 and $35,552 at June 30, 2010.

As shown above, restructured loans totaled $40,170 at June 30, 2011 as compared to $32,615 at December 31, 2010 and $29,245 at June 30, 2010. At June 30, 2011, total loans restructured that included an interest rate concession represented 80.34% of total restructured loans, while loans restructured by a concession in payment or terms represented the remainder. The following table provides further details of the Company’s restructured loans secured by real estate for the periods presented:

 

		June 30,								December 31,
		2011				2010				2010
Commercial, financial, agricultural		$	125			$	747			$	125
Real estate – construction:
Residential			—				674				—
Commercial			—				—				—
Condominiums			—				—				—
Total real estate – construction			—				674				—
Real estate – 1-4 family mortgage:
Primary			6,159				1,680				4,313
Home equity			—				—				—
Rental/investment			3,594				2,348				1,969
Land development			13,483				16,314				14,834
Total real estate – 1-4 family mortgage			23,236				20,342				21,116
Real estate – commercial mortgage:
Owner-occupied			7,863				3,440				3,844
Non-owner occupied			6,329				1,669				5,510
Land development			2,437				2,189				1,839
Total real estate – commercial mortgage			16,629				7,298				11,193
Installment loans to individuals			180				184				181
Total restructured loans		$	40,170			$	29,245			$	32,615
Changes in the Company’s restructured loans were as follows:
Balance at January 1, 2011										$	32,615
Additional loans with concessions											11,336
Reductions due to:
Reclassified as nonperforming											(2,546	)
Transfer to other real estate owned											—
Charge-offs											—
Paydowns											(603	)
Lapse of concession period											(632	)
Balance at June 30, 2011										$	40,170

 

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Other real estate owned and repossessions consist 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 under the line item “Other real estate owned” in the Consolidated Statements of Income. Other real estate owned with a cost basis of $17,738 was sold during the six months ended June 30, 2011, resulting in a net loss of $1,590.

The following table provides details of the Company’s other real estate owned and repossessions:

 

		June 30, 2011				December 31, 2010
Residential real estate		$	11,481			$	15,445
Commercial real estate			13,108				18,266
Residential land development			38,050				33,172
Commercial land development			5,526				4,501
Other			219				449
Total other real estate owned and repossessions		$	68,384			$	71,833
Changes in the Company’s other real estate owned and repossessions were as follows:
Balance at January 1, 2011						$	71,833
Transfers of loans							15,242
Capitalized improvements							37
Impairments							(1,624	)
Dispositions							(17,738	)
Other							634
Balance at June 30, 2011						$	68,384

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 the most significant impact on the Company’s financial results stems from our ability to react to changes in interest rates. To that end, management actively monitors and manages our interest rate risk exposure.

We have an Asset/Liability Committee (“ALCO”) which 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. Profitability is affected by fluctuations 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. We monitor the impact of changes in interest rates on our net interest income and economic value of equity (“EVE”) using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a more rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. The 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. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.

 

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The following rate shock analysis depicts the estimated impact on net interest income and EVE of immediate changes in interest rates at the specified levels at:

 

		Percentage Change In:
Change in Interest Rates(1) (In Basis Points)		Net Interest Income(2)								Economic Value of Equity (3)
		June 30, 2011				December 31, 2010				June 30, 2011				December 31, 2010
+200			0.25	%			(3.25	%)			15.44	%			10.70	%
+100			0.28	%			(3.37	%)			12.96	%			6.63	%
-100			(1.25	%)			(1.12	%)			(7.78	%)			(4.94	%)

 

(1)

On account of the present position of the target federal funds rate, the Company did not perform an analysis assuming a downward movement in rates of 200 bps.

 

(2)

The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios.

 

(3)

The percentage change in this column represents our EVE in a stable interest rate environment versus the EVE in the various rate scenarios.

The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. Thus, the measures do not reflect 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 100 and 200 basis points. With the present position of the target federal funds rate, the declining rate scenarios seem improbable. Furthermore, it has been the Federal Reserve’s policy to adjust the target federal funds rate incrementally over time. 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.

Beginning in the first quarter of 2011, the Company began entering into derivative instruments 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, 2011, the Company had notional amounts of $20,815 on interest rate contracts with corporate customers and $20,815 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts.

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. Under the interest rate lock commitments, interest rates for a mortgage loan are locked in with the customer for a period of time, typically thirty days. Once an interest rate lock commitment is entered into with a customer, the Company also enters into forward commitments to sell the residential mortgage loan to secondary market investors. As such, the Company does not incur risk if the interest rate lock commitment in the pipeline fails to close.

For more information about the Company’s derivative financial instruments, see Note I, “Derivative Instruments,” in the Notes to Consolidated Financial Statements of the Company in Item 1, “Financial Statements,” in this report.

Liquidity and Capital Resources

Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs.

Core deposits, which are deposits excluding time deposits, are a major source of funds used by the Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring the Bank’s liquidity. Management continually monitors the liquidity and non-core dependency ratios to ensure compliance with ALCO targets.

 

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Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At June 30, 2011, securities with a carrying value of approximately $460,663 were pledged to secure public fund deposits and as collateral for short-term borrowings as compared to $348,392 at December 31, 2010. Higher levels of public fund deposits at June 30, 2011 as compared to December 31, 2010 resulted in the increase in the amount of pledged investment securities at June 30, 2011.

Other sources available for meeting liquidity needs include federal funds purchased and advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. There were no outstanding federal funds purchased at June 30, 2011 or December 31, 2010. Funds obtained from the FHLB are used primarily to match-fund real estate loans and other longer-term fixed rate loans in order to minimize interest rate risk and may be used to meet day to day liquidity needs, primarily when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. At June 30, 2011, the balance of our outstanding advances with the FHLB was $121,151. The total amount of the remaining credit available to us from the FHLB at June 30, 2011 was $868,133. We also maintain lines of credit with other commercial banks totaling $85,000. These are unsecured lines of credit maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit at June 30, 2011 or December 31, 2010.

The following table presents the percentage of total average deposits and borrowed funds, by type, and total cost of funds, as of June 30 for each of the years presented:

 

		Percentage of Total								Cost of Funds
		2011				2010				2011				2010
Noninterest-bearing demand			12.24	%			9.86	%			—	%			—	%
Interest-bearing demand			36.15				31.03				0.88				1.20
Savings			5.42				4.06				0.42				0.68
Time deposits			39.05				39.31				1.65				2.34
Federal Home Loan Bank advances			3.52				11.13				4.11				3.71
Other borrowed funds			3.62				4.61				3.18				3.80
Total deposits and borrowed funds			100.00	%			100.00	%			1.25	%			1.91	%

Our strategy in choosing funds is focused on attempting to mitigate interest rate risk, and thus we utilize funding sources that are commensurate with the interest rate risk associated with the assets. 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. For example, we could obtain time deposits based on our aggressiveness in pricing and length of term. We constantly monitor our funds position and evaluate the effect various funding sources have on our financial position.

Cash and cash equivalents were $237,165 at June 30, 2011 compared to $191,141 at June 30, 2010. Cash provided by investing activities for the six months ended June 30, 2011 was $162,681 compared to $48,420 for the same period of 2010. The net cash proceeds received from the acquisition of American Trust were $148,443 for the six months ended June 30, 2011. Purchases of investment securities were $105,270 for the six months ending June 30, 2011 compared to $238,945 for the six months ending June 30, 2010. Proceeds from the sale, maturity or call of securities within our investment portfolio were $119,731 for the six months ended June 30, 2011 compared to $232,141 for the six months ended June 30, 2010. Cash provided by a net decrease in loans for the six months ended June 30, 2011 was $2,447 compared to $56,581 for the same period in 2010.

Cash used in financing activities for the six months ended June 30, 2011 was $290,333 compared to $53,002 for the same period of 2010. Cash used to reduce long-term debt was $68,994 for the six months ended June 30, 2011. Cash flows of $112,112 from the generation of deposits during the six months ended June 30, 2010 were primarily used to reduce total borrowings by $158,157.

Restrictions on Cash, Bank Dividends, Loans or Advances

The Company’s liquidity and capital resources, as well as its ability to pay dividends to our shareholders, are substantially dependent on the ability of Renasant Bank to transfer funds to the Company in the form of dividends,

 

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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. Accordingly, the approval of this supervisory authority is required prior to Renasant Bank paying dividends to the Company.

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, 2011, the maximum amount available for transfer from Renasant Bank to the Company in the form of loans was $39,947. There were no loans outstanding from Renasant Bank to the Company at June 30, 2011. These restrictions did not have any impact on the Company’s ability to meet its cash obligations in the first six months of 2011, 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 at June 30, 2011 and December 31, 2010 were as follows:

 

		June 30, 2011				December 31, 2010
Loan commitments		$	357,269			$	325,309
Standby letters of credit			30,823				28,105

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.

Market risk resulting from interest rate changes on particular off-balance sheet financial instruments may be offset by other on- or off-balance sheet transactions. Interest rate sensitivity is monitored by the Company for determining the net effect of potential changes in interest rates on the market value of both on- and off-balance sheet financial instruments.

Contractual Obligations

There have not been any material changes outside of the ordinary course of business to any of the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

Shareholders’ Equity and Regulatory Matters

Shareholders’ Equity

Total shareholders’ equity of the Company at June 30, 2011 increased to $480,135 compared to $469,509 at December 31, 2010. The change in shareholders’ equity was attributable to earnings retention offset by dividends declared and changes in accumulated other comprehensive income.

On July 8, 2009, the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). The shelf registration statement, which the SEC declared effective on July 13, 2009, allows the Company to raise capital from time to time, up to an aggregate of $150,000, through the sale of common stock, preferred stock, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will be required to file with 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 as described in any prospectus supplement and could include the expansion of the Company’s banking, insurance and wealth management operations as well as other business opportunities.

 

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The following table sets forth the Company’s book value per share, tangible book value per share, capital ratio and tangible capital ratio for the periods presented:

 

		June 30, 2011				December 31, 2010
Book value per share		$	19.16			$	18.75
Tangible book value per share			11.53				11.09
Capital ratio			11.27	%			10.93	%
Tangible capital ratio			7.11	%			6.76	%

Regulatory Matters

Renasant Bank is 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 Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Renasant Bank to maintain minimum balances and ratios. All banks are required to have core capital (Tier I) of at least 4% of risk-weighted assets, Tier I leverage of 4% of average assets, and total capital of 8% of risk-weighted assets (as such ratios are defined in Federal regulations). To be categorized as well capitalized, banks must maintain minimum Tier I leverage, Tier I risk-based and total risk-based ratios of 5%, 6%, and 10%, respectively. At June 30, 2011, Renasant Bank met all capital adequacy requirements to which it is subject.

At June 30, 2011, the most recent notification from the FDIC categorized Renasant Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The following table includes the capital ratios and capital amounts for the Company and the Bank at June 30, 2011:

 

		Actual								Minimum Capital Requirement to be Well Capitalized								Minimum Capital Requirement to be Adequately Capitalized
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier I Capital to Average Assets
Renasant Corporation		$	373,499				9.10	%		$	205,172				5.00	%		$	164,138				4.00	%
Renasant Bank			364,988				8.91	%			204,795				5.00	%			163,836				4.00	%
Tier I Capital to Risk-Weighted Assets
Renasant Corporation		$	373,499				13.58	%		$	165,019				6.00	%		$	110,013				4.00	%
Renasant Bank			364,988				13.29	%			164,742				6.00	%			109,828				4.00	%
Total Capital to Risk-Weighted Assets
Renasant Corporation		$	408,041				14.83	%		$	275,031				10.00	%		$	220,025				8.00	%
Renasant Bank			399,473				14.55	%			274,570				10.00	%			219,656				8.00	%

 

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Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk since December 31, 2010. For additional information regarding our market risk, see our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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 Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 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. 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.

 

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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, 2010. There have been no material changes in the risk factors disclosed in our 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

The Company did not repurchase any shares of its outstanding stock during the three month period ended June 30, 2011.

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.

 

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Item 6. EXHIBITS

 

Exhibit Number		Description
(3)(i)		Articles of Incorporation of Renasant Corporation, as amended(1)
(3)(ii)		Bylaws of Renasant Corporation, as amended(2)
(4)(i)		Articles of Incorporation of Renasant Corporation, as amended(1)
(4)(ii)		Bylaws of Renasant Corporation, as amended(2)
(31)(i)		Certification of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31)(ii)		Certification of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)(i)		Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32)(ii)		Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(101)		The following materials from Renasant Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 and (iv) Notes to Consolidated Financial Statements (Unaudited).

 

 

(1)	Filed as exhibit 3.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 9, 2005 and incorporated herein by reference.

 

(2)	Filed as exhibit 3(ii) to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 10, 2011 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 their request, a copy of all long-term debt instruments.

 

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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
August 9, 2011						/s/    E. Robinson McGraw
						E. Robinson McGraw
						Chairman, President &
						Chief Executive Officer
						(Principal Executive Officer)

 

						/s/    Stuart R. Johnson
						Stuart R. Johnson Executive Vice President and
						Chief Financial Officer
						(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

Exhibit Number		Description
(31)(i)		Certification of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31)(ii)		Certification of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)(i)		Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32)(ii)		Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(101)		The following materials from Renasant Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 and (iv) Notes to Consolidated Financial Statements (Unaudited).

 

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