Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts 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 for 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 effect of economic conditions and interest rates on a national, regional or international basis; (2) the performance of the Companys business after its merger
with Capital Bancorp, Inc. (Capital); (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 Companys 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 Companys 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 managements 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, a Mississippi corporation, owns and
operates Renasant Bank, a Mississippi-chartered bank with operations in Mississippi, Tennessee and Alabama, and Renasant Insurance, Inc., a Mississippi corporation with operations in Mississippi. Renasant Insurance, Inc. is a wholly-owned subsidiary
of Renasant Bank. The Company has full service offices located throughout north and north central Mississippi, west and middle Tennessee and north and north central Alabama.
On July 24, 2006, the Company announced a three-for-two stock split in the form of a stock dividend payable on August 28, 2006 to shareholders of record as of August 11, 2006. As a result of the stock
split, the Company issued 5,744,010 shares of its common stock. Share and per share amounts included herein have been restated to reflect the three-for-two stock split.
On May 11, 2007, the Company completed the sale of 2,400,000 shares of its common stock at a price of $22.50 per share in a firm commitment underwritten offering. On June 1, 2007, the Company completed the
sale of 360,000 shares of its common stock in connection with the exercise of the over-allotment option granted to the underwriters associated with the aforementioned offering. Net proceeds from the offering, including proceeds received in
connection with the underwriters exercise of their over-allotment option, totaled $58,126.
On July 1, 2007, the Company completed its
acquisition by merger of Capital, a bank holding company headquartered in Nashville, Tennessee, and the parent of Capital Bank & Trust Company, a Tennessee banking corporation. On the same date, Capital Bank & Trust Company was
merged into Renasant Bank. At June 30, 2007, Capital operated seven full-service banking offices in the Nashville-Davidson-Murfreesboro, Tennessee Metropolitan Statistical Area and had total assets of $614,802, loans of $515,982, deposits of
$490,257 and total shareholders equity of $36,267. See Note 11, Mergers and Acquisitions, in the Notes to Consolidated Financial Statements included in Item 1, Condensed Consolidated Financial Statements, for
details regarding the terms and conditions of the Companys merger with Capital.
14
Financial Condition
Total assets for the Company increased to $3,584,519 on September 30, 2007 from $2,611,356 on December 31, 2006, representing an increase of 37.27%. The acquisition of Capital contributed total assets of $614,802, or 63.18% of the
increase in total assets.
Cash and cash equivalents decreased $6,553 from $98,201 at December 31, 2006 to $91,648 at September 30, 2007. Cash
and cash equivalents represented 2.56% of total assets at September 30, 2007 compared to 3.76% of total assets at December 31, 2006. Our investment portfolio increased to $543,017 at September 30, 2007 from $428,065 at
December 31, 2006. The acquisition of Capital contributed investment securities with a balance of $72,234, or 62.84% of the increase in investments.
Mortgage loans held for sale were $25,911 at September 30, 2007 compared to $38,672 at December 31, 2006. Originations of mortgage loans to be sold totaled $457,636 for the first nine months of 2007 as compared to $334,795 for the
same period in 2006. In the first nine months of 2007, the Company was able to grow its levels of mortgage originations in an environment in which mortgage activity nationally continues to slow as compared to prior years. This increase in
originations of mortgage loans to be sold was due in part to the expansion of our retail mortgage operations in Alabama and the hiring of a group of wholesale mortgage lenders in Mississippi in the latter part of the third quarter of 2006. Mortgage
loans to be sold are locked in at a contractual rate with third party private investors, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. Gains and losses are realized at the time
consideration is received from the sale of the loans and all other criteria for sales treatment have been met. These loans are typically sold within thirty days after the loan is funded. Although some interest income is derived from mortgage loans
held for sale, the main source of income is gains from the sale of mortgage loans in the secondary market. The Company does not actively market or originate subprime mortgage loans. For the first nine months of 2007, originations of subprime
mortgage loans constituted .05% of the aggregate originations of mortgage loans.
The loan balance, net of unearned income, at September 30, 2007 was
$2,588,563, representing an increase of $761,801 from $1,826,762 at December 31, 2006. The acquisition of Capital contributed total loans of $515,982, or 67.73% of the increase in total loans. Excluding Capitals loans, loans increased
$245,819 from December 31, 2006.
The growth in loans during the first nine months of 2007 is attributable to loan production across all three of our
geographic regions. Excluding the loans acquired from Capital, loans in the Mississippi, Tennessee and Alabama regions grew $66,854, $82,064 and $96,901, respectively, during the first nine months of 2007 compared to the respective balances at
December 31, 2006. We expect future loan growth to be primarily from the Tennessee and Alabama regions and from certain key markets within the Mississippi region. The table below sets forth loans outstanding, according to loan type, net of
unearned income.
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
Commercial, financial, agricultural
|
|
$
|
336,157
|
|
$
|
236,741
|
Lease financing
|
|
|
2,906
|
|
|
4,234
|
Real estate construction
|
|
|
401,652
|
|
|
242,669
|
Real estate 1-4 family mortgages
|
|
|
841,266
|
|
|
636,060
|
Real estate commercial mortgages
|
|
|
925,001
|
|
|
629,354
|
Installment loans to individuals
|
|
|
81,581
|
|
|
77,704
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
$
|
2,588,563
|
|
$
|
1,826,762
|
|
|
|
|
|
|
|
Loan concentrations are considered to exist when there are amounts loaned to a large number of borrowers engaged
in similar activities who would be similarly impacted by economic or other conditions. At September 30, 2007, we had no significant concentrations of loans other than those presented in the categories in the table above.
15
Intangible assets increased $98,347 to $196,643 at September 30, 2007 from $98,296 at December 31, 2006. The
increase reflects $94,053 and $5,975 of goodwill and core deposits intangible, respectively, recorded in connection with the acquisition of Capital. The core deposits intangible is being amortized over its estimated useful life of ten years.
Total deposits increased $554,912 to $2,663,877 at September 30, 2007 from $2,108,965 on December 31, 2006. The acquisition of Capital
contributed total deposits of $490,257, or 88.35% of the increase in total deposits. Excluding Capitals deposits, deposits increased $64,655 from December 31, 2006. Noninterest-bearing deposits increased $44,576 to $315,813 at
September 30, 2007 compared to $271,237 at December 31, 2006. Interest-bearing deposits grew $510,336 to $2,348,064 at September 30, 2007 from $1,837,728 at December 31, 2006.
Total borrowings consist of federal funds purchased, advances from the Federal Home Loan Bank (FHLB), subordinated debentures and other borrowings. Total
borrowings were $483,988 at September 30, 2007 compared to $216,423 at December 31, 2006. The Company relied on borrowings, in addition to deposits, as a funding source for loan growth during 2007. The Company has $56,500 in federal funds
purchased at September 30, 2007. As of December 31, 2006, the Company did not have any federal funds purchased outstanding. FHLB advances increased $187,512 to $331,724 at September 30, 2007 compared to $144,212 at December 31,
2006. The acquisition of Capital increased our FHLB advances by $57,254. Subordinated debentures and notes increased $12,031 to $76,235 at September 30, 2007 as compared to $64,204 at December 31, 2006. In connection with the acquisition
of Capital, the Company assumed Capitals outstanding subordinated notes which totaled $12,372.
Shareholders equity increased 55.25% to
$392,312 at September 30, 2007 compared to $252,704 at December 31, 2006. The acquisition of Capital increased shareholders equity by $69,993, or 50.14% of the increase in total shareholders equity. The aforementioned equity
offering completed during the second quarter of 2007 increased shareholders equity by $58,126. Other factors contributing to the change in shareholders equity include current year earnings offset by dividends and changes in other
comprehensive income.
Results of Operations Third Quarter of 2007 as Compared to the Third Quarter of 2006
Summary
Net income for the three month period ended September 30, 2007
was $8,297, an increase of $1,665, or 25.11%, from net income of $6,632 for the same period in 2006. Basic and diluted earnings per share were $0.39 for the three month period ended September 30, 2007, as compared to basic earnings per share of
$0.43 and diluted earnings per share of $0.42 for the comparable period a year ago.
Net Interest Income
Net interest income is the difference between interest earned on earning assets and the cost of interest-bearing liabilities, which are two of the largest components
contributing to 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 grew 23.02% to $26,698 for the third quarter of 2007 compared to $21,703
for the same period in 2006.
On a tax equivalent basis, net interest margin for the three month period ended September 30, 2007 was 3.52% compared to 4.02% for the same period in 2006. Net interest income for the third quarter of 2007
includes $38 in interest income related to certain Heritage Financial Holding Corporation (Heritage) loans accounted for under American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer, (SOP 03-3) as compared to $527 in interest income from similar loans for the third quarter of 2006. The additional interest income from these loans was due to increased cash flows
that exceeded initial estimates. This additional interest income increased net interest margin for the third quarter of 2006 by 9 basis points. The acquisition of Capital decreased our margin by 2 basis points for the third quarter of 2007.
Interest income grew 41.34% to $56,636 for the third quarter of 2007 from $40,070 for the same period in 2006. The growth in interest income was primarily
driven by increases in volume, although the tax equivalent yield on earning assets increased 3 basis points to 7.32%. The average balance of interest-earning assets for the three months ending September 30, 2007 increased $892,130 as compared
to the same period in 2006 due to organic loan growth and the acquisition of Capital. The acquisition of Capital increased our average interest earnings assets $589,656.
16
Interest expense increased $11,571 to $29,938 for the three months ended September 30, 2007 as compared to $18,367
for the same period in 2006. This increase resulted from the growth in interest-bearing deposits, as well as the increase in the cost of all interest-bearing liabilities. The average balance of interest-bearing deposits for the three months ended
September 30, 2007 increased $656,688 as compared to the same period in 2006. The acquisition of Capital increased the average balance of interest-bearing deposits by $450,292. The cost of interest-bearing deposits increased 63 basis points to 4.07%
for the third quarter of 2007 compared to 3.44% for the same period in 2006. Overall, the cost of interest-bearing liabilities increased 58 basis points to 4.28% over this same period.
Noninterest Income
Noninterest income was $13,446 for the three month period ended September 30, 2007 compared to
$11,713 for the same period in 2006, an increase of $1,733, or 14.80%. For the three month period ended September 30, 2007, Capital contributed $688 to noninterest income. Excluding Capitals noninterest income, the Companys
noninterest income increased $1,045, or 8.9% as compared to the third quarter of 2006. The growth in noninterest income is attributable to growth in service charges on deposits, loan fees and gains recognized on the sale of mortgage loans in the
secondary market.
Service charges on deposits were $5,239 for the third quarter of 2007, an increase of 11.80% over $4,686 for the same period in 2006.
Service charges represent the largest component of noninterest income. Overdraft fees were $4,662 for the three month period ended September 30, 2007, an increase of $578, or 14.14%, compared to the same period in 2006.
Fees and commissions include fees charged for both deposit services (other than service charges on deposits) and loan services. Fees and commissions were $4,104 and
$3,662 for the three month periods ended September 30, 2007 and 2006, respectively. Fees charged for loan services increased $263 to $2,481 for the third quarter of 2007 compared to $2,218 for the same period in 2006. This increase reflects the
loan growth, including mortgage loans originated and sold in the secondary market, the Company has achieved over the same period in 2006. Interchange fees on debit card transactions continue to be a strong source of noninterest income. For the third
quarter, fees associated with debit card usage were $1,016, up 25.43% from the same period in 2006. The Company also provides specialized products and services to our customers. 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 declined slightly to $243 for the third quarter of 2007 compared to $248 for the same period in 2006. Revenues from these products
are included in the Condensed Consolidated Statements of Income in the account line Fees and commissions.
The trust department operates on a
custodial basis which includes administration of benefit plans, 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
IRAs, and custodial accounts. Fees for managing these accounts are generated based on the contractual terms of the accounts. Trust revenue for the third quarter of 2007 was $806 as compared to $630 for the same period of 2006. The market value
of assets under management as of September 30, 2007 was $542,734, an increase of approximately $15,032 from the prior year.
Gains from sales of
mortgage loans increased to $1,201 for the three months ended September 30, 2007 compared to $1,029 for the same period in 2006. The increase in gains on the sale of mortgage loans is attributable to higher volumes of overall originations (both
retail and wholesale). Originations of mortgage loans to be sold totaled $150,029 for the third quarter of 2007 as compared to $125,183 for same period in 2006. In addition, gains on the sale of mortgage loans were positively impacted by higher
volumes of retail originations during the third quarter of 2007 as compared to 2006. Typically, retail originations carry a higher profit margin when sold as compared to wholesale originations.
Other noninterest income increased $264 to $596 for the three months ended September 30, 2007 as compared to the same period in 2006. Other noninterest income for
the three months ended September 30, 2007 includes a $141 gain resulting from insurance proceeds that exceeded the write-off of premises and equipment due to a fire.
17
Noninterest Expense
Noninterest expense was $26,689 for the three month period ended September 30, 2007 compared to $23,045 for the same period in 2006, an increase of $3,644, or 15.81%. The acquisition of Capital increased noninterest expense by $3,657,
including $604 of merger related expenses. Excluding these noninterest expenses, the Companys noninterest expenses decreased $13 as compared to the third quarter of 2006.
Salaries and employee benefits for the three month period ended September 30, 2007 were $15,010, which is $1,997 greater than the same period last year. The acquisition of Capital increased salaries and employee
benefits by $1,858 for the three month period ended September 30, 2007.
Data processing costs for the three month period ended September 30,
2007 were $1,425, an increase of $303 compared to the same period last year. Net occupancy expense and equipment expense for the three month period ended September 30, 2007 increased $481 to $3,269 over the comparable period for the prior year,
primarily due to additional depreciation on assets placed into service and expenses related to Capital.
Amortization of intangible assets increased to
$610 for the three months ended September 30, 2007 compared to $398 for the same period in 2006. The increase is due to the amortization of the finite-lived intangible assets recorded as a result of the Capital acquisition. Intangible assets
are amortized over their estimated useful lives, which range between five and ten years.
Noninterest expense as a percentage of average assets was 3.01%
for the three month period ended September 30, 2007 and 3.63% for the comparable period in 2006. The net overhead ratio was 1.49% and 1.79% for the third quarter of 2007 and 2006, respectively. The net overhead ratio is defined as noninterest
expense less noninterest income, expressed as a percent of average assets. Our efficiency ratio decreased to 64.97% for the three month period ended September 30, 2007 compared to 67.26% for the same period of 2006. The efficiency ratio
measures 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. We calculate this ratio by dividing noninterest expense by the
sum of net interest income on a fully taxable equivalent basis and noninterest income.
Income tax expense was $3,845 for the three month period ended
September 30, 2007 (with an effective tax rate of 31.67%), compared to $2,839 (with an effective tax rate of 29.98%) for the same period in 2006. We continually seek investing opportunities in assets, primarily through state and local
investment securities, whose earnings are given favorable tax treatment.
Results of Operations Nine Months Ended September 30, 2007 as
Compared to the Nine Months Ended September 30, 2006
Summary
Net income for the nine month period ended September 30, 2007 was $22,346, an increase of $2,170, or 10.76%, from net income of $20,176 for the same period in 2006. Basic earnings per share were $1.25 and diluted earnings per share
were $1.23 for the nine month period ended September 30, 2007, as compared to basic earnings per share of $1.30 and diluted earnings per share of $1.27 for the comparable period a year ago.
Net Interest Income
Net interest income grew 9.07% to $68,878 for the nine
months ended September 30, 2007 compared to $63,153 for the same period in 2006.
On a tax equivalent basis, net interest margin for the nine month period ended September 30, 2007 was 3.60% compared to 3.99% for the same period in
2006. Net interest income for the first nine months of 2007 includes $118 in interest income related to certain Heritage loans accounted for under SOP 03-3 as compared to $910 in interest income from similar loans for the first nine months of 2006.
This additional interest income increased net interest margin by 1 and 6 basis points for the first nine months of 2007 and 2006, respectively.
Interest
income grew 25.03% to $141,887 for the first nine months of 2007 from $113,484 for the same period in 2006. The growth in interest income was driven by changes in volume and in rate. The average balance of interest-earning assets for the nine months
ending September 30, 2007 increased $452,405 as compared to the same period in 2006 due primarily to the aforementioned loan growth. Over this same period, the tax equivalent yield on earning assets increased 24 basis points to 7.29%.
18
Interest expense increased $22,678 to $73,009 for the nine months ended September 30, 2007 as compared to $50,331
for the same period in 2006. The cost of interest-bearing deposits increased 76 basis points to 3.95% for the nine months ended September 30, 2007 compared to 3.19% for the same period in 2006. Overall, the cost of interest-bearing liabilities
increased 71 basis points to 4.15% over this same period.
Noninterest Income
Noninterest income was $38,990 for the nine month period ended September 30, 2007 compared to $34,179 for the same period in 2006, an increase of $4,811, or 14.08%.
Service charges on deposits were $15,002 for the first nine months of 2007, an increase of 10.01% over $13,637 for the same period in 2006. Overdraft fees were $13,218
for the nine month period ended September 30, 2007, an increase of $1,479, or 12.60%, compared to the same period in 2006.
Fees and commissions were
$11,892 and $10,324 for the nine month periods ended September 30, 2007 and 2006, respectively. Fees charged for loan services increased $1,048 to $7,082 for the first nine months of 2007 compared to $6,034 for the same period in 2006. For the
nine month period ended September 30, 2007, fees associated with debit card usage were $2,910, up 24.05% from the same period in 2006. Revenues generated from the sale of all specialized products by the Financial Services division totaled $692
for the nine month period ended September 30, 2007 compared to $790 for the same period in 2006. Revenue generated by the trust department for managing accounts was $2,053 as compared to $1,890 for the same period of 2006.
Gains from sales of mortgage loans increased to $3,572 for the nine months ended September 30, 2007 compared to $2,463 for the same period in 2006. Originations of
mortgage loans to be sold totaled $457,636 for the first nine months of 2007 as compared to $334,795 for same period in 2006.
Other noninterest income was
$2,236 and $1,992 for the nine month periods ended September 30, 2007 and 2006, respectively. Other noninterest income for the nine months ended September 30, 2007 includes a $499 gain recognized on the sale of other real estate, a $252
nontaxable death benefit from life insurance and a $141 gain resulting from insurance proceeds that exceeded the write-off of premises and equipment due to a fire. In comparison, other noninterest income for the nine months ended September 30,
2006 includes a $558 gain recognized on the early repayment of an FHLB advance which was called in February 2006 and a $439 nontaxable death benefit from life insurance. Other noninterest income also includes contingency income of $261 and $145 for
the nine months ended September 30, 2007 and 2006, respectively. Contingency income is a bonus received from insurance underwriters and is based on both commission income and claims experience on our clients policies during the previous
year.
Noninterest Expense
Noninterest expense was $72,557
for the nine month period ended September 30, 2007 compared to $66,995 for the same period in 2006, an increase of $5,562, or 8.30%.
Salaries and
employee benefits for the nine month period ended September 30, 2007 were $41,020 which is $3,494 greater than the same period last year. The increase in salaries and employee benefits is due the acquisition of Capital, normal annual salary
increases which were effective March 2007 and strategic hires.
Data processing costs for the nine month period ended September 30, 2007 were $3,892,
an increase of $735 compared to the same period last year. Net occupancy expense and equipment expense for the nine month period ended September 30, 2007 increased $574 to $8,836 over the comparable period for the prior year. In June 2007, the
Company opened a new full service branch in Oxford, Mississippi.
Amortization of intangible assets increased to $1,395 for the nine months ended
September 30, 2007 compared to $1,243 for the same period in 2006.
19
Noninterest expense as a percentage of average assets was 3.26% for the nine month period ended September 30, 2007
and 3.60% for the comparable period in 2006. The net overhead ratio was 1.51% and 1.77% for the first nine months of 2007 and 2006, respectively. Our efficiency ratio improved to 65.67% for the nine month period ended September 30, 2007
compared to 67.11% for the same period of 2006. The improvement in the net overhead and efficiency ratios is reflective of the growth in noninterest income exceeding the growth in noninterest expenses.
Income tax expense was $10,102 for the nine month period ended September 30, 2007 (with an effective tax rate of 31.13%), compared to $8,553 (with an effective tax
rate of 29.77%) for the same period in 2006.
Allowance and Provision for Loan Losses
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 adequate to meet the inherent
risks of losses on our current portfolio of loans. The appropriate level of the allowance is based on a quarterly analysis of the loan portfolio which includes consideration of such factors as the risk rating of individual credits, the size and
diversity of the portfolio, economic conditions, prior loss experience, and the results of periodic credit reviews by internal loan review and regulators.
Nonperforming loans (accruing loans past due 90 days or more and nonaccrual loans) as a percentage of total loans were 0.57% at September 30, 2007 compared to 0.62% at December 31, 2006. Nonaccrual loans at September 30,
2007, were $12,657, up $4,836 as compared to the balance at December 31, 2006. The acquisition of Capital increased the nonaccrual loan balance by $1,259. The remainder of the increase is due primarily from the addition of two loans from our
Alabama region to nonaccrual status. Loans past due 90 days or more still accruing interest decreased $1,342 to $2,125 at September 30, 2007 compared to $3,467 at December 31, 2006. Management has evaluated these loans and other loans
classified as non-performing and concluded that all non-performing loans have been adequately reserved for in the allowance for loan losses at September 30, 2007.
The provision for loan losses was $1,313 and $900 for the three months ended September 30, 2007 and 2006, respectively. For the third quarter of 2007, net charge-offs were $377, or 0.06% annualized as a
percentage of average loans, compared to net charge-offs for the same period in 2006 of $590, or 0.13% annualized. The provision for loan losses was $2,863 and $1,608 for the nine months ended September 30, 2007 and 2006, respectively. For the
nine months ended September 30, 2007, net charge-offs were $856, or 0.05% annualized as a percentage of average loans, compared to net charge-offs for the same period in 2006 of $671, or 0.05% annualized.
In determining the amount of provision to charge to current period operations, management considers the risk rating of individual credits, the size and diversity of the
loan portfolio, current trends in net charge-offs, trends in non-performing loans, trends in past due loans and current economic conditions in the markets in which we operate.
The allowance for loan losses as a percentage of loans was 1.04% at September 30, 2007 as compared to 1.07% at December 31, 2006, and 1.10% at September 30, 2006. The reduction of the allowance for loan
losses as a percentage of loans was primarily due to growth in the loan portfolio.
20
The table below presents information and ratios regarding loans, net charge-offs, the allowance for loan losses and
nonperforming loans.
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2007
|
|
|
2006
|
|
|
|
3
rd
Quarter
|
|
|
2
nd
Quarter
|
|
|
1
st
Quarter
|
|
|
4
th
Quarter
|
|
|
3
rd
Quarter
|
|
|
2
nd
Quarter
|
|
|
1
st
Quarter
|
|
Balance at beginning of period
|
|
$
|
20,605
|
|
|
$
|
20,082
|
|
|
$
|
19,534
|
|
|
$
|
19,300
|
|
|
$
|
18,990
|
|
|
$
|
18,473
|
|
|
$
|
18,363
|
|
Addition from acquisitions
|
|
|
5,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off
|
|
|
634
|
|
|
|
338
|
|
|
|
323
|
|
|
|
773
|
|
|
|
896
|
|
|
|
379
|
|
|
|
1,034
|
|
Recoveries of loans previously charged-off
|
|
|
(257
|
)
|
|
|
(61
|
)
|
|
|
(121
|
)
|
|
|
(207
|
)
|
|
|
(306
|
)
|
|
|
(1,256
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
377
|
|
|
|
277
|
|
|
|
202
|
|
|
|
566
|
|
|
|
590
|
|
|
|
(877
|
)
|
|
|
958
|
|
Provision for loan losses
|
|
|
1,313
|
|
|
|
800
|
|
|
|
750
|
|
|
|
800
|
|
|
|
900
|
|
|
|
(360
|
)
|
|
|
1,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
26,926
|
|
|
$
|
20,605
|
|
|
$
|
20,082
|
|
|
$
|
19,534
|
|
|
$
|
19,300
|
|
|
$
|
18,990
|
|
|
$
|
18,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing loans
|
|
$
|
12,657
|
|
|
$
|
5,905
|
|
|
$
|
6,368
|
|
|
$
|
7,821
|
|
|
$
|
6,264
|
|
|
$
|
5,978
|
|
|
$
|
2,509
|
|
Accruing loans 90 days past due or more
|
|
|
2,125
|
|
|
|
1,648
|
|
|
|
3,913
|
|
|
|
3,467
|
|
|
|
1,798
|
|
|
|
1,745
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
14,782
|
|
|
|
7,553
|
|
|
|
10,281
|
|
|
|
11,288
|
|
|
|
8,062
|
|
|
|
7,723
|
|
|
|
4,055
|
|
Other real estate owned and repossessions
|
|
|
3,168
|
|
|
|
2,309
|
|
|
|
2,897
|
|
|
|
4,579
|
|
|
|
3,502
|
|
|
|
3,697
|
|
|
|
3,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
17,950
|
|
|
$
|
9,862
|
|
|
$
|
13,178
|
|
|
$
|
15,867
|
|
|
$
|
11,564
|
|
|
$
|
11,420
|
|
|
$
|
7,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
1.04
|
%
|
|
|
1.04
|
%
|
|
|
1.06
|
%
|
|
|
1.07
|
%
|
|
|
1.10
|
%
|
|
|
1.10
|
%
|
|
|
1.11
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
182.15
|
|
|
|
272.81
|
|
|
|
195.33
|
|
|
|
173.05
|
|
|
|
239.39
|
|
|
|
245.89
|
|
|
|
455.56
|
|
Annualized net charge-offs to average loans
|
|
|
0.06
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.12
|
|
|
|
0.13
|
|
|
|
(0.20
|
)
|
|
|
0.23
|
|
Nonperforming loans to total loans
|
|
|
0.57
|
|
|
|
0.38
|
|
|
|
0.54
|
|
|
|
0.62
|
|
|
|
0.46
|
|
|
|
0.45
|
|
|
|
0.24
|
|
Nonperforming assets to total assets
|
|
|
0.50
|
|
|
|
0.35
|
|
|
|
0.48
|
|
|
|
0.61
|
|
|
|
0.46
|
|
|
|
0.46
|
|
|
|
0.32
|
|
The table below presents net charge-offs (recoveries) by loan type for the three and nine month periods ending
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
Commercial, financial, agricultural
|
|
$
|
(136
|
)
|
|
$
|
57
|
|
$
|
(105
|
)
|
|
$
|
(26
|
)
|
Lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
63
|
|
|
|
13
|
|
|
109
|
|
|
|
110
|
|
Real estate 1-4 family mortgages
|
|
|
110
|
|
|
|
336
|
|
|
448
|
|
|
|
1,190
|
|
Real estate commercial mortgages
|
|
|
2
|
|
|
|
127
|
|
|
(2
|
)
|
|
|
(718
|
)
|
Installment loans to individuals
|
|
|
338
|
|
|
|
57
|
|
|
406
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs
|
|
$
|
377
|
|
|
$
|
590
|
|
$
|
856
|
|
|
$
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table quantifies the amount of the specific reserves component of the allowance for loan losses and
the amount of the allowance determined by applying allowance factors to graded loans as of September 30, 2007, and December 31, 2006:
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
Specific reserves
|
|
$
|
6,640
|
|
$
|
4,377
|
Allocated reserves based on loan grades
|
|
|
20,286
|
|
|
15,157
|
|
|
|
|
|
|
|
Total reserves
|
|
$
|
26,926
|
|
$
|
19,534
|
|
|
|
|
|
|
|
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. 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. We constantly monitor our
funds position and evaluate the effect various funding sources have on our financial position.
21
Deposits are our primary source of funds used to meet cash flow needs. While we do not control the types of deposit
instruments our clients choose, we do influence those choices with the rates we offer and with the deposit products we offer. Understanding the competitive pressures on deposits is key to maintaining the ability to acquire and retain these funds in
a variety of markets. When evaluating the movement of these funds, even during large interest rate changes, it is essential that we continue to attract deposits that can be used to meet cash flow needs. Management continues to monitor the liquidity
and volatility liabilities ratios to ensure compliance with Asset-Liability Committee targets. Total deposits increased $554,912 to $2,663,877 at September 30, 2007 from $2,108,965 on December 31, 2006. The acquisition of Capital
represented $490,257, or 88.35% of the increase in total deposits.
Our securities portfolio is another alternative for meeting liquidity needs. These
assets 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. The balance of our securities portfolio was $543,017
at September 30, 2007 as compared to $428,065 at December 31, 2006. Other sources available for meeting liquidity needs include federal funds purchased and advances from the FHLB. Interest is charged at the market federal funds rate on
federal funds purchased and FHLB advances. The Company utilized borrowings, primarily short-term borrowings, as a funding source for loan growth during 2007 in addition to deposits. We focused on utilizing short-term borrowings as we expect the
short-term interest rates to decline in the future. At September 30, 2007, we had $56,500 outstanding in federal funds purchased. 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; FHLB advances may also be used to meet day to day liquidity needs. As of September 30, 2007, our outstanding balance with the FHLB was $331,724 compared to $144,212 at December 31, 2006. The
total amount of remaining credit available to us from the FHLB at September 30, 2007 was $383,538. We also maintain lines of credits with other commercial banks totaling $35,000. These are unsecured lines of credit maturing at various times
within the next twelve months. At September 30, 2007, there were no amounts outstanding under these lines of credit.
For the nine months ended
September 30, 2007, our total cost of funds, including noninterest-bearing demand deposit accounts, was 3.72%, up from 3.04% for the same period in 2006. Noninterest-bearing demand deposit accounts made up approximately 10.37% of our average
total deposits and borrowed funds at September 30, 2007 down from 11.80% at September 30, 2006. Interest-bearing transaction accounts, money market accounts and savings accounts made up approximately 32.28% of our average total deposits
and borrowed funds and had an average cost of 2.69%, compared to 33.80% of the average total deposits and borrowed funds with an average cost of 2.09% for the same period in 2006. Another significant source of funds was time deposits, making up
47.06% of the average total deposits and borrowed funds with an average cost of 4.82% for the nine months ended September 30, 2007, compared to 43.73% of the average total deposits and borrowed funds with an average cost of 4.04% for the same
period in 2006. FHLB advances made up approximately 6.92% of our average total deposits and borrowed funds with an average cost of 5.02%, compared to 6.80% of the average total deposits and borrowed funds with an average cost of 4.41% for the same
period in 2006.
Cash and cash equivalents were $91,648 at September 30, 2007 compared to $75,766 at September 30, 2006. Cash used in investing
activities for the nine months ended September 30, 2007 was $353,349 compared to $160,092 for the same period of 2006. The primary contribution to this increase was due to a net increase in loans of $252,117. Purchases of investment securities
were $149,051 for the nine months ending September 30, 2007 offset by proceeds from the sale and maturity of our investment security portfolio of $105,189.
Cash provided by financing activities for the nine months ended September 30, 2007 was $293,991 compared to $110,722 for the same period of 2006. Cash flows from the generation of deposits were $64,393 for the nine months ended
September 30, 2007 compared to $116,963 for the same period in 2006. Cash provided from the generation of deposits and other borrowings for the nine months ended September 30, 2007 was used primarily to fund the $252,117 in net loan
growth. Cash provided by financing activities for the nine months ended September 30, 2007 also includes the net proceeds of $58,126 from the aforementioned equity offering.
Under the terms of our merger agreement with Capital, described in Note 11, Mergers and Acquisitions, in the Notes to Consolidated Financial Statements included in Item 1, Condensed Consolidated
Financial Statements, the Company paid $56,055 to Capital shareholders as part of the merger consideration. The Company used the net proceeds from its offering of common stock to fund the cash portion of the merger consideration payable in
connection with the Companys acquisition of Capital. Other expenditures arising in connection with the Companys acquisition of Capital were funded using the remaining net proceeds of the offering and the Companys traditional
sources of liquidity.
22
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our
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 us 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). As of September 30, 2007, we met all capital adequacy requirements to which we are subject. As of September 30,
2007, the most recent notification from the Federal Deposit Insurance Corporation categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, we must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios of 10%, 6%, and 5%, respectively. In the opinion of management, there are no conditions or events since the last notification that have changed our rating as well capitalized.
The following table includes our capital ratios and the capital ratios of our banking subsidiary as of September 30, 2007:
|
|
|
|
|
|
|
|
|
Company
|
|
|
Bank
|
|
Tier I Leverage (to average assets)
|
|
8.26
|
%
|
|
8.03
|
%
|
Tier I Capital (to risk-weighted assets)
|
|
9.99
|
%
|
|
9.71
|
%
|
Total Capital (to risk-weighted assets)
|
|
10.97
|
%
|
|
10.69
|
%
|
Management recognizes the importance of maintaining a strong capital base. As the above ratios indicate, we exceed
the requirements for a well capitalized bank.
The Companys 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, loans and advances. The approval of the Mississippi Department of Banking and Consumer Finance is required prior to
Renasant Bank paying dividends, which are limited to earned surplus in excess of three times capital stock. At September 30, 2007, the unrestricted surplus for Renasant Bank was approximately $422,496. Federal Reserve regulations also limit the
amount Renasant Bank may loan to the Company unless such loans are collateralized by specific obligations. At September 30, 2007, the maximum amount available for transfer from Renasant Bank to the Company in the form of loans was $29,328.
There were no loans outstanding from Renasant Bank to the Company at September 30, 2007. These restrictions did not have any impact on the Companys ability to meet its cash obligations in the first nine months of 2007, nor does management
expect such restrictions to materially impact the Companys ability to meet its currently-anticipated cash obligations.
Book value per share was
$18.70 and $16.27 at September 30, 2007 and December 31, 2006, respectively.
Off Balance Sheet Arrangements
Loan commitments are made to accommodate the financial needs of the Companys 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 Companys normal credit policies. Collateral (e.g.,
securities, receivables, inventory, and equipment) is obtained based on managements credit assessment of the customer.
23
The Companys unfunded loan commitments (unfunded loans and unused lines of credit) and standby letters of credit
outstanding at September 30, 2007 were approximately $755,994 and $28,984, respectively, compared to $577,439 and $23,245, respectively, at December 31, 2006.
In May 2006, the Company entered into an interest rate swap with a notional amount of $100,000 whereby it receives a fixed rate of interest and pays a variable rate based on the Prime rate. The effective date of the
swap was May 11, 2006 and the maturity date of the swap is May 11, 2009. The interest rate swap is a designated cash flow hedge designed to convert the variable interest rate on $100,000 of loans to a fixed rate. This hedging relationship
is assessed under the hypothetical derivative method, and the swap is considered to be effective.
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- or 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, 2006.