10-Q 1 rnst10q3312014.htm 10-Q RNST 10Q 3.31.2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________
FORM 10-Q
 ________________________________________________________
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
Or
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission file number 001-13253
 ________________________________________________________
RENASANT CORPORATION
(Exact name of registrant as specified in its charter)
 ________________________________________________________
 
Mississippi
 
64-0676974
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
209 Troy Street, Tupelo, Mississippi
 
38804-4827
(Address of principal executive offices)
 
(Zip Code)
(662) 680-1001
(Registrant’s telephone number, including area code)
 ________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically 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  ý    No  o
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
o
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  ý
As of April 30, 2014, 31,484,327 shares of the registrant’s common stock, $5.00 par value per share, were outstanding. The registrant has no other classes of securities outstanding.


Renasant Corporation and Subsidiaries
Form 10-Q
For the Quarterly Period Ended March 31, 2014
CONTENTS
 


PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Renasant Corporation and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
 
(Unaudited)
 
 
 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Cash and due from banks
$
82,991

 
$
87,342

Interest-bearing balances with banks
218,624

 
159,306

Cash and cash equivalents
301,615

 
246,648

Securities held to maturity (fair value of $484,780 and $408,576 respectively)
482,410

 
412,075

Securities available for sale, at fair value
564,278

 
501,254

Mortgage loans held for sale, at fair value
28,433

 
33,440

Loans, net of unearned income:
 
 
 
Covered under loss-share agreements
173,545

 
181,674

Not covered under loss-share agreements
3,693,883

 
3,699,344

Total loans, net of unearned income
3,867,428

 
3,881,018

Allowance for loan losses
(48,048
)
 
(47,665
)
Loans, net
3,819,380

 
3,833,353

Premises and equipment, net
102,184

 
101,525

Other real estate owned:
 
 
 
Covered under loss-share agreements
10,218

 
12,942

Not covered under loss-share agreements
37,523

 
39,945

Total other real estate owned, net
47,741

 
52,887

Goodwill
276,144

 
276,100

Other intangible assets, net
26,759

 
28,230

FDIC loss-share indemnification asset
24,963

 
26,273

Other assets
228,924

 
234,485

Total assets
$
5,902,831

 
$
5,746,270

Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
914,964

 
$
856,020

Interest-bearing
4,089,820

 
3,985,892

Total deposits
5,004,784

 
4,841,912

Short-term borrowings
—

 
2,283

Long-term debt
168,700

 
169,592

Other liabilities
52,632

 
66,831

Total liabilities
5,226,116

 
5,080,618

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, 32,656,166 and 32,656,182 shares issued, respectfully; 31,480,395 and 31,387,668 shares outstanding, respectively
163,281

 
163,281

Treasury stock, at cost
(22,109
)
 
(23,023
)
Additional paid-in capital
342,113

 
342,552

Retained earnings
203,037

 
194,815

Accumulated other comprehensive loss, net of taxes
(9,607
)
 
(11,973
)
Total shareholders’ equity
676,715

 
665,652

Total liabilities and shareholders’ equity
$
5,902,831

 
$
5,746,270

See Notes to Consolidated Financial Statements.

1

Renasant Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In Thousands, Except Share Data)

 
Three Months Ended
 
March 31,
 
2014
 
2013
Interest income
 
 
 
Loans
$
49,546

 
$
34,158

Securities
 
 
 
Taxable
4,243

 
2,791

Tax-exempt
2,189

 
1,947

Other
199

 
49

Total interest income
56,177

 
38,945

Interest expense
 
 
 
Deposits
4,373

 
4,080

Borrowings
1,833

 
1,484

Total interest expense
6,206

 
5,564

Net interest income
49,971

 
33,381

Provision for loan losses
1,450

 
3,050

Net interest income after provision for loan losses
48,521

 
30,331

Noninterest income
 
 
 
Service charges on deposit accounts
5,916

 
4,500

Fees and commissions
4,972

 
4,831

Insurance commissions
1,863

 
818

Wealth management revenue
2,144

 
1,724

Gains on sales of securities
—

 
54

BOLI income
731

 
730

Gains on sales of mortgage loans held for sale
1,585

 
3,565

Other
1,405

 
1,113

Total noninterest income
18,616

 
17,335

Noninterest expense
 
 
 
Salaries and employee benefits
28,428

 
21,274

Data processing
2,695

 
2,043

Net occupancy and equipment
4,847

 
3,604

Other real estate owned
1,701

 
2,049

Professional fees
1,200

 
1,173

Advertising and public relations
1,528

 
1,490

Intangible amortization
1,471

 
323

Communications
1,682

 
1,127

Merger-related expenses
195

 
—

Other
3,898

 
4,474

Total noninterest expense
47,645

 
37,557

Income before income taxes
19,492

 
10,109

Income taxes
5,895

 
2,538

Net income
$
13,597

 
$
7,571

Basic earnings per share
$
0.43

 
$
0.30

Diluted earnings per share
$
0.43

 
$
0.30

Cash dividends declared per common share
$
0.17

 
$
0.17


See Notes to Consolidated Financial Statements.

2

Renasant Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In Thousands, Except Share Data)
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
13,597

 
$
7,571

Other comprehensive income, net of tax:
 
 
 
Securities:
 
 
 
Unrealized holding gains on securities
2,784

 
146

Reclassification adjustment for losses (gains) realized in net income
—

 
71

Amortization of unrealized holding gains on securities transferred to the held to maturity category
(44
)
 
(66
)
Total securities
2,740

 
151

Derivative instruments:
 
 
 
       Unrealized holding (losses) gains on derivative instruments
(419
)
 
207

       Reclassification adjustment for gains realized in net income
—

 
(53
)
Totals derivative instruments
(419
)
 
154

Defined benefit pension and post-retirement benefit plans:
 
 
 
Net (loss) gain arising during the period
—

 
—

Less amortization of net actuarial loss recognized in net periodic pension cost
45

 
72

Total defined benefit pension and post-retirement benefit plans
45

 
72

Other comprehensive income, net of tax
2,366

 
377

Comprehensive income
$
15,963

 
$
7,948


See Notes to Consolidated Financial Statements.

3

Renasant Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
 
 
Three Months Ended March 31,
 
2014
 
2013
Operating activities
 
 
 
Net cash provided by operating activities
$
20,260

 
$
41,340

Investing activities
 
 
 
Purchases of securities available for sale
(76,282
)
 
(70,720
)
Proceeds from sales of securities available for sale
—

 
9,013

Proceeds from call/maturities of securities available for sale
17,069

 
21,425

Purchases of securities held to maturity
(128,684
)
 
(59,987
)
Proceeds from sales of securities held to maturity
—

 
4,461

Proceeds from call/maturities of securities held to maturity
57,890

 
28,590

Net decrease/(increase) in loans
12,038

 
(3,608
)
Purchases of premises and equipment
(2,293
)
 
(2,337
)
Net cash used in investing activities
(120,262
)
 
(73,163
)
Financing activities
 
 
 
Net increase (decrease) in noninterest-bearing deposits
58,944

 
(1,149
)
Net increase in interest-bearing deposits
103,928

 
95,103

Net (decrease) increase in short-term borrowings
(2,283
)
 
1,594

Repayment of long-term debt
(989
)
 
(2,197
)
Cash paid for dividends
(5,372
)
 
(4,300
)
Cash received on exercise of stock-based compensation
—

 
225

Excess tax benefit from stock-based compensation
741

 
155

Net cash provided by financing activities
154,969

 
89,431

Net increase in cash and cash equivalents
54,967

 
57,608

Cash and cash equivalents at beginning of period
246,648

 
132,420

Cash and cash equivalents at end of period
$
301,615

 
$
190,028

Supplemental disclosures
 
 
 
Cash paid for interest
$
6,543

 
$
5,779

Cash paid for income taxes
$
4,993

 
$
2,645

Noncash transactions:
 
 
 
Transfers of loans to other real estate owned
$
2,585

 
$
5,828


See Notes to Consolidated Financial Statements.

4

Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note A – Summary of Significant Accounting Policies
Nature of Operations: Renasant Corporation (referred to herein as the “Company”) owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. The Company offers a diversified range of financial, fiduciary and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and north central Mississippi, Tennessee, north and central Alabama and north Georgia.
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 significant 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, 2013 filed with the Securities and Exchange Commission on March 11, 2014.

On September 1, 2013, the Company completed its acquisition of First M&F Corporation (“First M&F”). The financial condition and results of operation for First M&F are included in the Company’s financial statements since the date of the acquisition. See Note M, “Mergers and Acquisitions,” in these Notes to Consolidated Financial Statements for further details regarding the terms and conditions of the Company’s merger with First M&F.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Subsequent Events: The Company has evaluated, for consideration of recognition or disclosure, subsequent events that have occurred through the date of issuance of its financial statements, and has determined that no significant events occurred after March 31, 2014 but prior to the issuance of these financial statements that would have a material impact on its Consolidated Financial Statements.

Note B – Securities
(In Thousands)
The amortized cost and fair value of securities held to maturity were as follows as of the dates presented:
 


 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2014
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
185,056

 
$
10

 
$
(6,764
)
 
$
178,302

Obligations of states and political subdivisions
297,354

 
10,594

 
(1,470
)
 
306,478

 
$
482,410

 
$
10,604

 
$
(8,234
)
 
$
484,780

December 31, 2013
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
125,061

 
$
14

 
$
(8,727
)
 
$
116,348

Obligations of states and political subdivisions
287,014

 
7,897

 
(2,683
)
 
292,228

 
$
412,075

 
$
7,911

 
$
(11,410
)
 
$
408,576


In light of the ongoing fiscal uncertainty in state and local governments, the Company analyzes its exposure to potential losses in its security portfolio on at least a quarterly basis. Management reviews the underlying credit rating and analyzes the financial condition of the respective issuers. The Company had no sales of such securities in the first quarter ending 2014. However, the

5
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Company sold certain securities representing obligations of state and political subdivisions that were classified as held to maturity during the same

period in 2013. The securities sold showed significant credit deterioration because our analysis led us to conclude that the issuers were operating at net deficits with little to no financial cushion to offset future contingencies. The securities sold during the first quarter of 2013 had a carrying value of $4,292, and the Company recognized a net gain of $169 on the sale.

The amortized cost and fair value of securities available for sale were as follows as of the dates presented:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2014
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
6,138

 
$
136

 
$
(159
)
 
$
6,115

Residential mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
303,024

 
3,254

 
(3,296
)
 
302,982

Government agency collateralized mortgage obligations
168,484

 
1,464

 
(4,028
)
 
165,920

Commercial mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
41,063

 
1,402

 
(406
)
 
42,059

Government agency collateralized mortgage obligations
4,184

 
72

 
—

 
4,256

Trust preferred securities
27,514

 
290

 
(8,426
)
 
19,378

Other debt securities
18,918

 
357

 
(177
)
 
19,098

Other equity securities
2,775

 
1,695

 
—

 
4,470

 
$
572,100

 
$
8,670

 
$
(16,492
)
 
$
564,278

 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2013
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
6,144

 
$
125

 
$
(201
)
 
$
6,068

Residential mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
261,659

 
2,747

 
(4,414
)
 
259,992

Government agency collateralized mortgage obligations
149,682

 
1,542

 
(4,679
)
 
146,545

Commercial mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
41,252

 
1,373

 
(584
)
 
42,041

Government agency collateralized mortgage obligations
5,007

 
59

 
—

 
5,066

Trust preferred securities
27,531

 
73

 
(9,933
)
 
17,671

Other debt securities
19,544

 
240

 
(230
)
 
19,554

Other equity securities
2,775

 
1,542

 
—

 
4,317

 
$
513,594

 
$
7,701

 
$
(20,041
)
 
$
501,254


Gross realized gains and gross realized losses on sales of securities available for sale for the three months ended March 31, 2014 and 2013 were as follows:
 

6
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


 
Three Months Ended
 
March 31,
 
2014
 
2013
Gross gains on sales of securities available for sale
$
—

 
$
—

Gross losses on sales of securities available for sale
—

 
(115
)
Loss on sales of securities available for sale, net
$
—

 
$
(115
)
 
At March 31, 2014 and December 31, 2013, securities with a carrying value of $748,738 and $604,571, respectively, were pledged to secure government, public and trust deposits. Securities with a carrying value of $4,991 and $7,626 were pledged as collateral for short-term borrowings and derivative instruments at March 31, 2014 and December 31, 2013, respectively.
The amortized cost and fair value of securities at March 31, 2014 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
$
69,290

 
$
69,391

 
$
—

 
$
—

Due after one year through five years
54,751

 
56,469

 
1,075

 
1,146

Due after five years through ten years
208,703

 
204,699

 
5,063

 
4,969

Due after ten years
149,666

 
154,221

 
27,514

 
19,378

Residential mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
—

 
303,024

 
302,982

Government agency collateralized mortgage obligations
—

 
—

 
168,484

 
165,920

Commercial mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
—

 
41,063

 
42,059

Government agency collateralized mortgage obligations
—

 
—

 
4,184

 
4,256

Other debt securities
—

 
—

 
18,918

 
19,098

Other equity securities
—

 
—

 
2,775

 
4,470

 
$
482,410

 
$
484,780

 
$
572,100

 
$
564,278


7
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following table presents the age of gross unrealized losses and fair value by investment category as of the dates presented:
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
#
 
Fair
Value
 
Unrealized
Losses
 
#
 
Fair
Value
 
Unrealized
Losses
 
#
 
Fair
Value
 
Unrealized
Losses
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
26
 
$
126,526

 
$
(6,053
)
 
2
 
$
9,279

 
$
(711
)
 
28
 
$
135,805

 
$
(6,764
)
Obligations of states and political subdivisions
70
 
45,661

 
(1,205
)
 
6
 
4,087

 
(265
)
 
76
 
49,748

 
(1,470
)
Total
96
 
$
172,187

 
$
(7,258
)
 
8
 
$
13,366

 
$
(976
)
 
104
 
185,553

 
$
(8,234
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
26
 
$
105,747

 
$
(7,826
)
 
2
 
$
9,090

 
$
(901
)
 
28
 
$
114,837

 
$
(8,727
)
Obligations of states and political subdivisions
111
 
59,503

 
(2,578
)
 
2
 
933

 
(105
)
 
113
 
60,436

 
(2,683
)
Total
137
 
$
165,250

 
$
(10,404
)
 
4
 
$
10,023

 
$
(1,006
)
 
141
 
$
175,273

 
$
(11,410
)
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
0
 
$
3,841

 
$
(159
)
 
0
 
$
—

 
$
—

 
0
 
$
3,841

 
$
(159
)
Residential mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
33
 
148,117

 
(2,197
)
 
5
 
18,501

 
(1,100
)
 
38
 
166,618

 
(3,297
)
Government agency collateralized mortgage obligations
17
 
73,776

 
(2,025
)
 
8
 
32,315

 
(2,003
)
 
25
 
106,091

 
(4,028
)
Commercial mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
3
 
10,487

 
(406
)
 
0
 
—

 
—

 
3
 
10,487

 
(406
)
Government agency collateralized mortgage obligations
0
 
—

 
—

 
0
 
—

 
—

 
0
 
—

 
—

Trust preferred securities
0
 
—

 
—

 
4
 
17,964

 
(8,426
)
 
4
 
17,964

 
(8,426
)
Other debt securities
1
 
2,713

 
(170
)
 
1
 
1,817

 
(7
)
 
2
 
4,530

 
(177
)
Total
54
 
$
238,934

 
$
(4,957
)
 
18
 
$
70,597

 
$
(11,536
)
 
72
 
$
309,531

 
$
(16,493
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
1
 
$
3,799

 
$
(201
)
 
0
 
$
—

 
$
—

 
1
 
$
3,799

 
$
(201
)
Residential mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
32
 
134,858

 
(3,451
)
 
3
 
13,239

 
(963
)
 
35
 
148,097

 
(4,414
)
Government agency collateralized mortgage obligations
17
 
68,496

 
(3,468
)
 
4
 
16,750

 
(1,211
)
 
21
 
85,246

 
(4,679
)
Commercial mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
4
 
16,570

 
(584
)
 
0
 
—

 
—

 
4
 
16,570

 
(584
)
Government agency collateralized mortgage obligations
0
 
—

 
—

 
0
 
—

 
—

 
0
 
—

 
—

Trust preferred securities
0
 
—

 
—

 
3
 
16,456

 
(9,933
)
 
3
 
16,456

 
(9,933
)
Other debt securities
3
 
7,100

 
(217
)
 
1
 
1,897

 
(13
)
 
4
 
8,997

 
(230
)
Other equity securities
0
 
—

 
—

 
0
 
—

 
—

 
0
 
—

 
—

Total
57
 
$
230,823

 
$
(7,921
)
 
11
 
$
48,342

 
$
(12,120
)
 
68
 
$
279,165

 
$
(20,041
)
 



8
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The Company evaluates its investment portfolio for other-than-temporary-impairment (“OTTI”) on a quarterly basis. Impairment is assessed at the individual security level. The Company considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. Impairment is considered to be other-than-temporary if the Company intends to sell the investment security or if the Company does not expect to recover the entire amortized cost basis of the security before the Company is required to sell the security or before the security’s maturity.
The Company holds investments in pooled trust preferred securities that had an amortized cost basis of $27,514 and $27,531 and a fair value of $19,378 and $17,671, at March 31, 2014 and December 31, 2013, respectively. The investments in pooled trust preferred securities consist of four securities representing interests in various tranches of trusts collateralized by debt issued by over 340 financial institutions. Management’s determination of the fair value of each of its holdings in pooled trust preferred securities is based on the current credit ratings, the known deferrals and defaults by the underlying issuing financial institutions and the degree to which future deferrals and defaults would be required to occur before the cash flow for the Company’s tranches is negatively impacted. In addition, management continually monitors key credit quality and capital ratios of the issuing institutions. This determination is further supported by quarterly valuations, which are performed by third parties, of each security obtained by the Company. The Company does not intend to sell the investments, 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 March 31, 2014, management did not, and does not currently, believe such securities will be settled at a price less than the amortized cost of the investment, but the Company previously concluded that it was probable that there had been an adverse change in estimated cash flows for all four trust preferred securities and recognized credit related impairment losses on these securities in 2010 and 2011. No additional impairment was recognized during the three months ended March 31, 2014 or 2013.
However, based on the qualitative factors discussed above, each of the four pooled trust preferred securities was classified as a nonaccruing asset at March 31, 2014. Investment interest is recorded on the cash-basis method until qualifying for return to accrual status.
The following table provides information regarding the Company’s investments in pooled trust preferred securities at March 31, 2014:
 
Name
Single/
Pooled
 
Class/
Tranche
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain (Loss)
 
Lowest
Credit
Rating
 
Issuers
Currently in
Deferral or
Default
XIII
Pooled
 
B-2
 
$
1,125

 
$
1,415

 
$
290

 
Caa3
 
28
%
XXIII
Pooled
 
B-2
 
8,746

 
5,495

 
(3,251
)
 
B1
 
20
%
XXIV
Pooled
 
B-2
 
12,076

 
8,175

 
(3,901
)
 
Ca
 
34
%
XXVI
Pooled
 
B-2
 
5,567

 
4,293

 
(1,274
)
 
Ca
 
30
%
 
 
 
 
 
$
27,514

 
$
19,378

 
$
(8,136
)
 
 
 
 

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:
 
 
2014
 
2013
Balance at January 1
$
(3,337
)
 
$
(3,337
)
Additions related to credit losses for which OTTI was not previously recognized
—

 
—

Increases in credit loss for which OTTI was previously recognized
—

 
—

Balance at March 31
$
(3,337
)
 
$
(3,337
)



9
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Note C – Loans and the Allowance for Loan Losses
(In Thousands, Except Number of Loans)
The following is a summary of loans as of the dates presented:
 
 
March 31,
2014
 
December 31, 2013
Commercial, financial, agricultural
$
440,116

 
$
468,963

Lease financing
623

 
53

Real estate – construction
155,900

 
161,436

Real estate – 1-4 family mortgage
1,211,260

 
1,208,233

Real estate – commercial mortgage
1,968,158

 
1,950,572

Installment loans to individuals
91,382

 
91,762

Gross loans
3,867,439

 
3,881,019

Unearned income
(11
)
 
(1
)
Loans, net of unearned income
3,867,428

 
3,881,018

Allowance for loan losses
(48,048
)
 
(47,665
)
Net loans
$
3,819,380

 
$
3,833,353


Past Due and Nonaccrual Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, the recognition of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer and other retail loans are typically charged-off no later than the time the loan is 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans may be placed on nonaccrual 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.

10
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:
 
 
Accruing Loans
 
Nonaccruing Loans
 
 
 
30-89 Days
Past Due
 
90 Days
or More
Past Due
 
Current
Loans
 
Total
Loans
 
30-89 Days
Past Due
 
90 Days
or More
Past Due
 
Current
Loans
 
Total
Loans
 
Total
Loans
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
1,565

 
$
354

 
$
435,597

 
$
437,516

 
$
36

 
$
1,207

 
$
1,357

 
$
2,600

 
$
440,116

Lease financing
—

 
—

 
623

 
623

 
—

 
—

 
—

 
—

 
623

Real estate – construction
265

 
—

 
153,987

 
154,252

 
—

 
1,648

 
—

 
1,648

 
155,900

Real estate – 1-4 family mortgage
11,884

 
1,727

 
1,182,749

 
1,196,360

 
550

 
7,722

 
6,628

 
14,900

 
1,211,260

Real estate – commercial mortgage
7,712

 
1,041

 
1,907,796

 
1,916,549

 
2,939

 
37,035

 
11,635

 
51,609

 
1,968,158

Installment loans to individuals
366

 
154

 
90,783

 
91,303

 
—

 
71

 
8

 
79

 
91,382

Unearned income
—

 
—

 
(11
)
 
(11
)
 
—

 
—

 
—

 
—

 
(11
)
Total
$
21,792

 
$
3,276

 
$
3,771,524

 
$
3,796,592

 
$
3,525

 
$
47,683

 
$
19,628

 
$
70,836

 
$
3,867,428

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
2,067

 
$
607

 
$
463,521

 
$
466,195

 
$
138

 
$
1,959

 
$
671

 
$
2,768

 
$
468,963

Lease financing
—

 
—

 
53

 
53

 
—

 
—

 
—

 
—

 
53

Real estate – construction
664

 
—

 
159,124

 
159,788

 
—

 
1,648

 
—

 
1,648

 
161,436

Real estate – 1-4 family mortgage
10,168

 
2,206

 
1,179,703

 
1,192,077

 
1,203

 
6,041

 
8,912

 
16,156

 
1,208,233

Real estate – commercial mortgage
8,870

 
1,286

 
1,888,745

 
1,898,901

 
966

 
37,439

 
13,266

 
51,671

 
1,950,572

Installment loans to individuals
706

 
88

 
90,880

 
91,674

 
—

 
80

 
8

 
88

 
91,762

Unearned income
—

 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
Total
$
22,475

 
$
4,187

 
$
3,782,025

 
$
3,808,687

 
$
2,307

 
$
47,167

 
$
22,857

 
$
72,331

 
$
3,881,018


There were no restructured loans contractually 90 days past due or more at March 31, 2014 or December 31, 2013. The outstanding balance of restructured loans on nonaccrual status was $9,696 and $10,078 at March 31, 2014 and December 31, 2013, respectively.
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for commercial, consumer and construction loans 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.

11
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Impaired loans recognized in conformity with Financial Accounting Standards Board Accounting Standards Codification Topic ("ASC") 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of the dates presented:
 
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
With
Allowance
 
Recorded
Investment
With No
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
March 31, 2014
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
9,534

 
$
723

 
$
4,761

 
$
5,484

 
$
253

Lease financing
—

 
—

 
—

 
—

 
—

Real estate – construction
2,834

 
—

 
1,882

 
1,882

 
—

Real estate – 1-4 family mortgage
32,727

 
21,831

 
4,481

 
26,312

 
7,285

Real estate – commercial mortgage
123,870

 
32,529

 
46,960

 
79,489

 
7,724

Installment loans to individuals
—

 
—

 
—

 
—

 
—

Total
$
168,965

 
$
55,083

 
$
58,084

 
$
113,167

 
$
15,262

December 31, 2013
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
6,575

 
$
743

 
$
2,043

 
$
2,786

 
$
260

Lease financing
—

 
—

 
—

 
—

 
—

Real estate – construction
2,447

 
—

 
1,648

 
1,648

 
—

Real estate – 1-4 family mortgage
42,868

 
25,374

 
8,542

 
33,916

 
7,353

Real estate – commercial mortgage
108,963

 
30,624

 
38,517

 
69,141

 
7,036

Installment loans to individuals
620

 
183

 
77

 
260

 
1

Totals
$
161,473

 
$
56,924

 
$
50,827

 
$
107,751

 
$
14,650


The following table presents the average recorded investment and interest income recognized on impaired loans for the periods presented:
 
 
Three Months Ended
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized(1)
Commercial, financial, agricultural
$
7,745

 
$
5

 
$
3,758

 
$
—

Lease financing
—

 
—

 
—

 
—

Real estate – construction
2,037

 
2

 
1,650

 
—

Real estate – 1-4 family mortgage
27,754

 
34

 
43,097

 
183

Real estate – commercial mortgage
91,277

 
64

 
79,940

 
343

Installment loans to individuals
—

 
—

 
—

 
—

Total
$
128,813

 
$
105

 
$
128,445

 
$
526

 
(1)
Includes interest income recognized using the cash-basis method of income recognition of $0. The Company recognized $289 interest income using the cash-basis method of income recognition during the three months ended March 31, 2014.

 
 
 
 
 
 
 
 
Restructured Loans
Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and which are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with

12
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. The following table presents restructured loans segregated by class as of the dates presented:
 
 
Number of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
March 31, 2014
 
 
 
 
 
Commercial, financial, agricultural
—

 
$
—

 
$
—

Lease financing
—

 
—

 
—

Real estate – construction
—

 
—

 
—

Real estate – 1-4 family mortgage
22

 
19,042

 
9,061

Real estate – commercial mortgage
16

 
12,785

 
10,741

Installment loans to individuals
—

 
—

 
—

Total
38

 
$
31,827

 
$
19,802

December 31, 2013
 
 
 
 
 
Commercial, financial, agricultural
1

 
$
20

 
$
19

Lease financing
—

 
—

 
—

Real estate – construction
—

 
—

 
—

Real estate – 1-4 family mortgage
23

 
19,371

 
10,354

Real estate – commercial mortgage
16

 
12,785

 
10,934

Installment loans to individuals
1

 
182

 
171

Total
41

 
$
32,358

 
$
21,478



13
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Changes in the Company’s restructured loans are set forth in the table below:
 
 
Number of
Loans
 
Recorded
Investment
Totals at January 1, 2014
41

 
$
21,478

Additional loans with concessions
—

 
—

Reductions due to:
 
 
 
Reclassified as nonperforming
(1
)
 
(331
)
Paid in full
(2
)
 
(190
)
Charge-offs
—

 
—

Transfer to other real estate owned
—

 
—

Principal paydowns
 
 
(1,155
)
Lapse of concession period
—

 
—

Totals at March 31, 2014
38

 
$
19,802


The allocated allowance for loan losses attributable to restructured loans was $3,137 and $2,984 at March 31, 2014 and December 31, 2013, respectively. The Company had $0 and $93 in remaining availability under commitments to lend additional funds on these restructured loans at March 31, 2014 and December 31, 2013, respectively.
Credit Quality
For loans originated for commercial purposes, internal risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances of these loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans 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 adverse 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 as of the dates presented:
 
 
Pass
 
Watch
 
Substandard
 
Total
March 31, 2014
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
318,388

 
$
7,083

 
$
3,011

 
$
328,482

Real estate – construction
109,808

 
840

 
—

 
110,648

Real estate – 1-4 family mortgage
130,472

 
11,822

 
21,875

 
164,169

Real estate – commercial mortgage
1,368,897

 
31,823

 
35,142

 
1,435,862

Installment loans to individuals
1,691

 
—

 
—

 
1,691

Total
$
1,929,256

 
$
51,568

 
$
60,028

 
$
2,040,852

December 31, 2013
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
328,959

 
$
10,588

 
$
4,266

 
$
343,813

Real estate – construction
114,428

 
588

 
—

 
115,016

Real estate – 1-4 family mortgage
126,916

 
13,864

 
23,370

 
164,150

Real estate – commercial mortgage
1,338,340

 
32,892

 
35,121

 
1,406,353

Installment loans to individuals
19

 
—

 
—

 
19

Total
$
1,908,662

 
$
57,932

 
$
62,757

 
$
2,029,351



14
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


For portfolio balances of consumer, consumer mortgage and certain other loans originated for other than commercial purposes, allowance factors are determined based on historical loss ratios by portfolio for the preceding eight quarters and may be adjusted by other qualitative criteria. The following table presents the performing status of the Company’s loan portfolio not subject to risk rating as of the dates presented:
 
 
Performing
 
Non-
Performing
 
Total
March 31, 2014
 
 
 
 
 
Commercial, financial, agricultural
$
80,738

 
$
50

 
$
80,788

Lease financing
623

 
—

 
623

Real estate – construction
42,480

 
—

 
42,480

Real estate – 1-4 family mortgage
946,404

 
2,358

 
948,762

Real estate – commercial mortgage
244,863

 
177

 
245,040

Installment loans to individuals
83,382

 
143

 
83,525

Total
$
1,398,490

 
$
2,728

 
$
1,401,218

December 31, 2013
 
 
 
 
 
Commercial, financial, agricultural
$
89,490

 
$
176

 
$
89,666

Lease financing
53

 
—

 
53

Real estate – construction
43,535

 
—

 
43,535

Real estate – 1-4 family mortgage
938,994

 
2,527

 
941,521

Real estate – commercial mortgage
242,363

 
666

 
243,029

Installment loans to individuals
84,855

 
79

 
84,934

Total
$
1,399,290

 
$
3,448

 
$
1,402,738


Loans Acquired with Deteriorated Credit Quality
Loans acquired in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows as of the dates presented:
 
 
Impaired
Covered
Loans
 
Other
Covered
Loans
 
Not
Covered
Loans
 
Total
March 31, 2014
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
—

 
$
8,283

 
$
22,563

 
$
30,846

Lease financing
—

 
—

 
—

 
—

Real estate – construction
—

 
1,648

 
1,124

 
2,772

Real estate – 1-4 family mortgage
835

 
51,417

 
46,077

 
98,329

Real estate – commercial mortgage
23,164

 
88,173

 
175,919

 
287,256

Installment loans to individuals
—

 
25

 
6,141

 
6,166

Total
$
23,999

 
$
149,546

 
$
251,824

 
$
425,369

December 31, 2013
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
—

 
$
9,546

 
$
25,938

 
$
35,484

Lease financing
—

 
—

 
—

 
—

Real estate – construction
—

 
1,648

 
1,237

 
2,885

Real estate – 1-4 family mortgage
835

 
53,631

 
48,096

 
102,562

Real estate – commercial mortgage
23,684

 
92,302

 
185,204

 
301,190

Installment loans to individuals
—

 
28

 
6,781

 
6,809

Total
$
24,519

 
$
157,155

 
$
267,256

 
$
448,930



15
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The references in the table above and elsewhere in these Notes to "covered loans" and "not covered loans" (as well as to "covered OREO" and "not covered OREO") refer to loans (or OREO, as applicable) covered and not covered, respectively, by loss-share agreements with the FDIC. See Note E, "FDIC Loss-Share Indemnification Asset," below for more information.

The following table presents the fair value of loans determined to be impaired at the time of acquisition and determined not to be impaired at the time of acquisition at March 31, 2014:
 
 
Impaired
Covered
Loans
 
Other
Covered
Loans
 
Not
Covered
Loans
 
Total
Contractually-required principal and interest
$
66,318

 
$
191,885

 
$
337,443

 
$
595,646

Nonaccretable difference(1)
(42,318
)
 
(39,131
)
 
(50,645
)
 
(132,094
)
Cash flows expected to be collected
24,000

 
152,754

 
286,798

 
463,552

Accretable yield(2)
(1
)
 
(3,208
)
 
(34,974
)
 
(38,183
)
Fair value
$
23,999

 
$
149,546

 
$
251,824

 
$
425,369

 
(1)
Represents contractual principal and interest cash flows of $582,714 and $12,932, respectively, not expected to be collected.
(2)
Represents contractual interest payments of $3,352 expected to be collected and purchase discount of $34,888.
Changes in the accretable yield of loans acquired with deteriorated credit quality were as follows:
 
 
Impaired
Covered
Loans
 
Other
Covered
Loans
 
Not
Covered
Loans
 
Total
Balance at January 1, 2014
$
(13
)
 
$
(6,705
)
 
$
(1,129
)
 
$
(7,847
)
Reclasses from nonaccretable difference
(17
)
 
1,419

 
(37,489
)
 
(36,087
)
Accretion
29

 
2,078

 
3,587

 
5,694

Balance at March 31, 2014
$
(1
)
 
$
(3,208
)
 
$
(35,031
)
 
$
(38,240
)

Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under ASC 450, “Contingencies”. Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310. The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Management and the internal loan review staff evaluate the adequacy of the allowance for loan losses quarterly. The allowance for loan losses is evaluated based on a continuing assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors, including its risk rating system, regulatory guidance and economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is established through a provision for loan losses charged to earnings resulting from measurements of inherent credit risk in the loan portfolio and estimates of probable losses or impairments of individual loans. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

16
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following table provides a roll forward of the allowance for loan losses and a breakdown of the ending balance of the allowance based on the Company’s impairment methodology for the periods presented:
 
 
Commercial
 
Real Estate -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,090

 
$
1,091

 
$
18,629

 
$
23,688

 
$
1,167

 
$
47,665

Charge-offs
(119
)
 
—

 
(887
)
 
(60
)
 
(231
)
 
(1,297
)
Recoveries
37

 
5

 
151

 
30

 
7

 
230

Net (charge-offs) recoveries
(82
)
 
5

 
(736
)
 
(30
)
 
(224
)
 
(1,067
)
Provision for loan losses
183

 
13

 
496

 
480

 
243

 
1,415

Benefit attributable to FDIC loss-share agreements
(68
)
 
—

 
(69
)
 
5

 
—

 
(132
)
Recoveries payable to FDIC
5

 
—

 
158

 
4

 
—

 
167

Provision for loan losses charged to operations
120

 
13

 
585

 
489

 
243

 
1,450

Ending balance
$
3,128

 
$
1,109

 
$
18,478

 
$
24,147

 
$
1,186

 
$
48,048

Period-End Amount Allocated to:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
253

 
$
—

 
$
7,285

 
$
7,724

 
$
—

 
$
15,262

Collectively evaluated for impairment
2,875

 
1,109

 
11,193

 
16,423

 
1,186

 
32,786

Acquired with deteriorated credit quality
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
3,128

 
$
1,109

 
$
18,478

 
$
24,147

 
$
1,186

 
$
48,048

 
 
Commercial
 
Real Estate -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,307

 
$
711

 
$
18,347

 
$
21,416

 
$
566

 
$
44,347

Charge-offs
(234
)
 
—

 
(614
)
 
(593
)
 
(64
)
 
(1,505
)
Recoveries
157

 
16

 
339

 
91

 
10

 
613

Net (charge-offs) recoveries
(77
)
 
16

 
(275
)
 
(502
)
 
(54
)
 
(892
)
Provision for loan losses
(53
)
 
(52
)
 
1,197

 
1,825

 
542

 
3,459

Benefit attributable to FDIC loss-share agreements
(247
)
 
—

 
(261
)
 
(661
)
 
—

 
(1,169
)
Recoveries payable to FDIC
12

 
1

 
729

 
18

 
—

 
760

Provision for loan losses charged to operations
(288
)
 
(51
)
 
1,665

 
1,182

 
542

 
3,050

Ending balance
$
2,942

 
$
676

 
$
19,737

 
$
22,096

 
$
1,054

 
$
46,505

Period-End Amount Allocated to:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
699

 
$
—

 
$
8,641

 
$
8,194

 
$
—

 
$
17,534

Collectively evaluated for impairment
2,243

 
676

 
11,096

 
13,902

 
1,054

 
28,971

Acquired with deteriorated credit quality
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
2,942

 
$
676

 
$
19,737

 
$
22,096

 
$
1,054

 
$
46,505



17
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


(1)
Includes lease financing receivables.The following table provides the recorded investment in loans, net of unearned income, based on the Company’s impairment methodology as of the dates presented:
 
 
Commercial
 
Real Estate  -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
723

 
$
—

 
$
21,831

 
$
32,523

 
$
—

 
$
55,077

Collectively evaluated for impairment
408,547

 
153,128

 
1,091,100

 
1,648,379

 
85,828

 
3,386,982

Acquired with deteriorated credit quality
30,846

 
2,772

 
98,329

 
287,256

 
6,166

 
425,369

Ending balance
$
440,116

 
$
155,900

 
$
1,211,260

 
$
1,968,158

 
$
91,994

 
$
3,867,428

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
743

 
$
—

 
$
25,374

 
$
30,624

 
$
183

 
$
56,924

Collectively evaluated for impairment
432,736

 
158,551

 
1,080,297

 
1,618,758

 
84,822

 
3,375,164

Acquired with deteriorated credit quality
35,484

 
2,885

 
102,562

 
301,190

 
6,809

 
448,930

Ending balance
$
468,963

 
$
161,436

 
$
1,208,233

 
$
1,950,572

 
$
91,814

 
$
3,881,018

 
(1)
Includes lease financing receivables.

Note D – Other Real Estate Owned
(In Thousands)
The following table provides details of the Company’s other real estate owned (“OREO”) covered and not covered under a loss-share agreement, net of valuation allowances and direct write-downs as of the dates presented:
 
 
Covered
OREO
 
Not Covered
OREO
 
Total
OREO
March 31, 2014
 
 
 
 
 
Residential real estate
$
1,671

 
$
6,466

 
$
8,137

Commercial real estate
3,083

 
8,513

 
11,596

Residential land development
916

 
10,419

 
11,335

Commercial land development
4,548

 
12,125

 
16,673

Total
$
10,218

 
$
37,523

 
$
47,741

December 31, 2013
 
 
 
 
 
Residential real estate
$
2,133

 
$
6,767

 
$
8,900

Commercial real estate
3,598

 
8,984

 
12,582

Residential land development
1,161

 
12,334

 
13,495

Commercial land development
6,050

 
11,860

 
17,910

Other
—

 
—

 
—

Total
$
12,942

 
$
39,945

 
$
52,887



18
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


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, 2014
$
12,942

 
$
39,945

 
$
52,887

Acquired OREO
—

 
—

 
—

Transfers of loans
1,031

 
1,554

 
2,585

Capitalized improvements
—

 
—

 
—

Impairments(1)
(1,552
)
 
(528
)
 
(2,080
)
Dispositions
(2,232
)
 
(3,341
)
 
(5,573
)
Other
29

 
(107
)
 
(78
)
Balance at March 31, 2014
$
10,218

 
$
37,523

 
$
47,741

 
(1)
Of the total impairment charges of $1,552 recorded for covered OREO, $310 was included in the Consolidated Statements of Income for the three months ended March 31, 2014, while the remaining $1,242 increased the FDIC loss-share indemnification asset.
Components of the line item “Other real estate owned” in the Consolidated Statements of Income were as follows for the periods presented:
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Repairs and maintenance
$
781

 
$
353

Property taxes and insurance
241

 
353

Impairments
838

 
986

Net (gain) loss on OREO sales
(114
)
 
470

Rental income
(45
)
 
(113
)
Total
$
1,701

 
$
2,049


Note E – FDIC Loss-Share Indemnification Asset
(In Thousands)
As part of the loan portfolio and OREO fair value estimation in connection with FDIC-assisted acquisitions, a FDIC loss-share indemnification asset is established, which represents the present value as of the acquisition date of the estimated losses on covered assets to be reimbursed by the FDIC. Pursuant to the terms of both of our loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses with respect to covered assets, 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 assets. The estimated losses are based on the same cash flow estimates used in determining the fair value of the covered assets. The FDIC loss-share indemnification asset is reduced as losses are recognized on covered assets and loss-share payments are received from the FDIC. Realized losses in excess of estimates as of the date of the acquisition increase the FDIC loss-share indemnification asset. Conversely, when 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 is amortized into interest income using the effective interest method.

19
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Changes in the FDIC loss-share indemnification asset were as follows:
 
Balance at January 1, 2014
$
26,273

Changes in expected cash flows from initial estimates on:
 
Covered Loans
(90
)
Covered OREO
1,183

Reimbursable expenses
136

Accretion
—

Reimbursements received from the FDIC
(2,539
)
 
 
Balance at March 31, 2014
$
24,963


Note F – Mortgage Servicing Rights
(In Thousands)
The Company retains the right to service certain mortgage loans that it sells to secondary market investors. These mortgage servicing rights, included in “Other assets” on the Consolidated Balance Sheets, are recognized as a separate asset on the date the corresponding mortgage loan is sold. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. These servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. Mortgage servicing rights were carried at amortized cost at March 31, 2014 and December 31, 2013.
Impairment losses on mortgage servicing rights are recognized to the extent by which the unamortized cost exceeds fair value. No impairment losses on mortgage servicing rights were recognized in earnings for the three months ended March 31, 2014 and 2013.
Changes in the Company’s mortgage servicing rights were as follows:
 
Balance at January 1, 2014
$
8,994

Capitalization
798

Amortization
(278
)
 
 
Balance at March 31, 2014
$
9,514


Data and key economic assumptions related to the Company’s mortgage servicing rights as of March 31, 2014 are as follows:
 
Unpaid principal balance
$
950,600

 
 
Weighted-average prepayment speed (CPR)
4.41
%
Estimated impact of a 10% increase
$
(768
)
Estimated impact of a 20% increase
(1,031
)
 
 
Discount rate
11.26
%
Estimated impact of a 10% increase
$
(826
)
Estimated impact of a 20% increase
(1,139
)
 
 
Weighted-average coupon interest rate
3.71
%
Weighted-average servicing fee (basis points)
25.09

Weighted-average remaining maturity (in years)
24.17




20
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


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
 
Three Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Service cost
$
—

 
$
—

 
$
6

 
$
7

Interest cost
318

 
188

 
23

 
12

Expected return on plan assets
(539
)
 
(311
)
 
—

 
—

Prior service cost recognized
—

 
—

 
—

 
—

Recognized actuarial loss
45

 
97

 
27

 
19

Net periodic benefit cost (return)
$
(176
)
 
$
(26
)
 
$
56

 
$
38


There were no stock options granted during the three months ended March 31, 2014.

In January 2013, 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 employs the following assumptions with respect to its stock option grants in 2013:
 
 
2014 Grant
 
2013 Grant
Shares granted
—

 
52,500

Dividend yield
—
%
 
3.55
%
Expected volatility
—
%
 
37
%
Risk-free interest rate
—
%
 
0.76
%
Expected lives


 
6 years

Weighted average exercise price
$
—

 
$
19.14

Weighted average fair value
$
—

 
$
4.47


21
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


In connection with its merger with First M&F during the third quarter of 2013, the Company assumed First M&F's 2005 Equity Incentive Plan and Stock Option Plan, under which options to purchase an aggregate of 11,557 shares of the Company's common stock were outstanding as of the date of assumption. The assumed options had a weighted average exercise price of $21.16 and a weighted average remaining contractual life of 2.05 years at the date of assumption. The fair value of the stock options assumed on the date of assumption was $68 and was estimated using the Black-Scholes option-pricing model. No additional options or other forms of equity incentives will be granted or awarded under this plan.

The following table summarizes the changes in stock option grants as of and for the three months ended March 31, 2014:
 
 
Shares
 
Weighted Average Exercise Price
Options outstanding at beginning of period
 
1,060,350

 
$
18.64

Assumed from acquisition
 
—

 
—

Granted
 
—

 
—

Exercised
 
(61,567
)
 
14.63

Forfeited
 
—

 
—

Options outstanding at end of period
 
998,783

 
$
18.89


The Company awards performance-based restricted stock to executives and time-based restricted stock to directors and other officers and employees under a long-term equity incentive plan. The performance-based restricted stock vests upon completion of a one-year service period and the attainment of certain performance goals. Performance-based restricted stock is issued at the target level; the number of shares ultimately awarded is determined at the end of each year and may be increased or decreased depending on the Company falling short of, meeting or exceeding financial performance measures defined by the Board of Directors. Time-based restricted stock vests at the end of the service period defined in the respective grant. The fair value of each restricted stock grant is the closing price of the Company's common stock on the day immediately preceding the grant date. The following table summarizes the changes in restricted stock as of and for the three months ended March 31, 2014:

 
 
Performance-Based Restricted Stock
 
Weighted Average Grant-Date Fair Value
 
Time- Based Restricted Stock
 
Weighted Average Grant-Date Fair Value
Nonvested at beginning of period
 
69,850

 
$
19.14

 
22,338

 
$
24.30

Granted
 
78,600

 
31.46

 
22,500

 
31.46

Vested
 
(69,850
)
 
19.14

 
—

 
—

Cancelled
 
—

 
—

 
—

 
—

Nonvested at end of period
 
78,600

 
$
31.46

 
44,838

 
$
27.89

During the three months ended March 31, 2014, the Company reissued 92,727 shares from treasury in connection with the exercise of stock options and issuance of restricted stock. The Company recorded total stock-based compensation expense of $871 and $478 for the three months ended March 31, 2014 and 2013, respectively.

Note H – Segment Reporting
(In Thousands)
The operations of the Company’s reportable segments are described as follows:
•
The Community Banks segment delivers a complete range of banking and financial services to individuals and small to medium-sized businesses including checking and savings accounts, business and personal loans, equipment leasing, as well as safe deposit and night depository facilities.
•
The Insurance segment includes a full service insurance agency offering all major lines of commercial and personal insurance through major carriers.
•
The Wealth Management segment offers a broad range of fiduciary services which includes the administration and management of trust accounts including personal and corporate benefit accounts, self-directed IRAs, and custodial

22
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


accounts. In addition, the Wealth Management segment offers annuities, mutual funds and other investment services through a third party broker-dealer.
In order to give the Company’s divisional management a more precise indication of the income and expenses they can control, the results of operations for the Community Banks, the Insurance and the Wealth Management segments reflect the direct revenues and expenses of each respective segment. Indirect revenues and expenses, including but not limited to income from the Company’s investment portfolio, as well as certain costs associated with data processing and back office functions, primarily support the operations of the community banks and, therefore, are included in the results of the Community Banks segment. Included in “Other” are the operations of the holding company and other eliminations which are necessary for purposes of reconciling to the consolidated amounts.

23
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following table provides financial information for the Company’s operating segments for the periods presented:
 
 
Community
Banks
 
Insurance
 
Wealth
Management
 
Other
 
Consolidated
Three months ended March 31, 2014
 
 
 
 
 
 
 
 
 
Net interest income
$
50,636

 
$
63

 
$
311

 
$
(1,039
)
 
$
49,971

Provision for loan losses
1,389

 
—

 
61

 
—

 
1,450

Noninterest income
14,083

 
2,393

 
2,116

 
24

 
18,616

Noninterest expense
44,125

 
1,474

 
1,868

 
178

 
47,645

Income (loss) before income taxes
19,205

 
982

 
498

 
(1,193
)
 
19,492

Income taxes
5,978

 
380

 
—

 
(463
)
 
5,895

Net income (loss)
13,227

 
602

 
498

 
(730
)
 
13,597

 
 
 
 
 
 
 
 
 
 
Total assets
$
5,826,289

 
$
17,442

 
$
44,345

 
$
14,755

 
$
5,902,831

Goodwill
273,387

 
2,757

 
—

 
—

 
276,144

 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
Net interest income
$
33,677

 
$
23

 
$
295

 
$
(614
)
 
$
33,381

Provision for loan losses
2,917

 
—

 
133

 
—

 
3,050

Noninterest income
14,547

 
1,033

 
1,734

 
21

 
17,335

Noninterest expense
35,059

 
813

 
1,581

 
104

 
37,557

Income (loss) before income taxes
10,248

 
243

 
315

 
(697
)
 
10,109

Income taxes
2,723

 
94

 
—

 
(279
)
 
2,538

Net income (loss)
$
7,525

 
$
149

 
$
315

 
$
(418
)
 
$
7,571

 
 
 
 
 
 
 
 
 
 
Total assets
$
4,205,826

 
$
10,214

 
$
39,673

 
$
11,945

 
$
4,267,658

Goodwill
181,996

 
2,783

 
—

 
—

 
184,779

 
 
 
 
 
 
 
 
 
 

Note I – Fair Value Measurements
(In Thousands)
Fair Value Measurements and the Fair Level Hierarchy
ASC 820, “Fair Value Measurements and Disclosures,” provides guidance for using fair value to measure assets and liabilities and also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to a valuation based on quoted prices in active markets for identical assets and liabilities (Level 1), moderate priority to a valuation based on quoted prices in active markets for similar assets and liabilities and/or based on assumptions that are observable in the market (Level 2), and the lowest priority to a valuation based on assumptions that are not observable in the market (Level 3).
Recurring Fair Value Measurements
The Company carries certain assets and liabilities at fair value on a recurring basis in accordance with applicable standards. The Company’s recurring fair value measurements are based on the requirement to carry such assets and liabilities at fair value or the Company’s election to carry certain eligible assets and liabilities at fair value. Assets and liabilities that are required to be carried at fair value include securities available for sale and derivative instruments. The Company has elected to carry mortgage loans held for sale at fair value on a recurring basis as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”).
The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities that are measured on a recurring basis:

24
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


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, trust preferred securities, and other debt and equity securities. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.
Derivative instruments: The Company uses derivatives to manage various financial risks. Most of the Company’s derivative contracts are extensively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts such as interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage-backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy.
Mortgage loans held for sale: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.

25
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following table presents assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
March 31, 2014
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
—

 
$
6,115

 
$
—

 
$
6,115

Residential mortgage-backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
302,982

 
—

 
302,982

Government agency collateralized mortgage obligations
—

 
165,920

 
—

 
165,920

Commercial mortgage-backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
42,059

 
—

 
42,059

Government agency collateralized mortgage obligations
—

 
4,256

 
—

 
4,256

Trust preferred securities
—

 
—

 
19,378

 
19,378

Other debt securities
—

 
19,098

 
—

 
19,098

Other equity securities
—

 
4,470

 
—

 
4,470

Total securities available for sale
—

 
544,900

 
19,378

 
564,278

Derivative instruments:
 
 
 
 
 
 
 
Interest rate contracts
—

 
1,278

 
—

 
1,278

Interest rate lock commitments
—

 
967

 
—

 
967

Forward contracts
—

 
98

 
—

 
98

Total derivative instruments
—

 
2,343

 
—

 
2,343

Mortgage loans held for sale
—

 
28,433

 
—

 
28,433

Total financial assets
$
—

 
$
575,676

 
$
19,378

 
$
595,054

Financial liabilities:
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
1,899

 
$
—

 
$
1,899

Interest rate contracts
—

 
1,278

 
—

 
1,278

Interest rate lock commitments
—

 
12

 
—

 
12

Forward commitments
—

 
87

 
—

 
87

Total derivative instruments
—

 
3,276

 
—

 
3,276

Total financial liabilities
$
—

 
$
3,276

 
$
—

 
$
3,276



26
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


 
Level 1
 
Level 2
 
Level 3
 
Totals
December 31, 2013
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
—

 
$
6,068

 
$
—

 
$
6,068

Residential mortgage-backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
259,992

 
—

 
259,992

Government agency collateralized mortgage obligations
—

 
146,545

 
—

 
146,545

Commercial mortgage-backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
42,041

 
—

 
42,041

Government agency collateralized mortgage obligations
—

 
5,066

 
—

 
5,066

Trust preferred securities
—

 
—

 
17,671

 
17,671

Other debt securities
—

 
19,554

 
—

 
19,554

Other equity securities
—

 
4,317

 
—

 
4,317

Total securities available for sale
—

 
483,583

 
17,671

 
501,254

Derivative instruments:
 
 
 
 
 
 
 
Interest rate swap
—

 
208

 
—

 
208

Interest rate contracts
—

 
1,812

 
—

 
1,812

Interest rate lock commitments
—

 
464

 
—

 
464

Forward commitments
—

 
335

 
—

 
335

Total derivative instruments
—

 
2,819

 
—

 
2,819

Mortgage loans held for sale
—

 
33,440

 
—

 
33,440

Total financial assets
$
—

 
$
519,842

 
$
17,671

 
$
537,513

Financial liabilities:
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
1,428

 
$
—

 
$
1,428

Interest rate contracts
—

 
1,812

 
—

 
1,812

Interest rate lock commitments
—

 
52

 
—

 
52

Forward commitments
—

 
24

 
—

 
24

Total derivative instruments
—

 
3,316

 
—

 
3,316

Total financial liabilities
$
—

 
$
3,316

 
$
—

 
$
3,316


The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. Transfers between levels of the hierarchy are deemed to have occurred at the end of period. There were no such transfers between levels of the fair value hierarchy during the three months ended March 31, 2014.

27
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following tables provide a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, during the three months ended March 31, 2014 and 2013, respectively:
 
 
Securities available for sale
Three Months Ended March 31, 2014
Trust preferred
securities
 
Other equity
securities
 
Total
Balance at January 1, 2014
$
17,671

 
$
—

 
$
17,671

Realized gains included in net income
—

 
—

 
—

Unrealized gains included in other comprehensive income
1,724

 
—

 
1,724

Purchases
—

 
—

 
—

Sales
—

 
—

 
—

Issues
—

 
—

 
—

Settlements
(17
)
 
—

 
(17
)
Transfers into Level 3
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

Balance at March 31, 2014
$
19,378

 
$
—

 
$
19,378

 
 
Securities available for sale
Three Months Ended March 31, 2013
Trust preferred
securities
 
Other equity
securities
 
Total
Balance at January 1, 2013
$
15,068

 
$
—

 
$
15,068

Realized gains included in net income
—

 
—

 
—

Unrealized gains included in other comprehensive income
1,878

 
—

 
1,878

Reclassification adjustment
—

 
—

 
—

Purchases
—

 
—

 
—

Sales
—

 
—

 
—

Issues
—

 
—

 
—

Settlements
(784
)
 
—

 
(784
)
Transfers into Level 3
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

Balance at March 31, 2013
$
16,162

 
$
—

 
$
16,162


 
 
 
 
 
 

 
 
 
 
 
 
For the three months ended March 31, 2014 and 2013, there were no gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs.
The following table presents information as of March 31, 2014 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a recurring basis:
 
Financial instrument
Fair
Value
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Range of Inputs
Trust preferred securities
$
19,378

 
Discounted cash flows
 
Default rate
 
0-100%

Nonrecurring Fair Value Measurements
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

28
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


table provides the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheets as of the dates presented and the level within the fair value hierarchy each is classified:
 
March 31, 2014
Level 1
 
Level 2
 
Level 3
 
Totals
Impaired loans
$
—

 
$
—

 
$
3,255

 
$
3,255

OREO
—

 
—

 
7,221

 
7,221

Total
$
—

 
$
—

 
$
10,476

 
$
10,476

 
December 31, 2013
Level 1
 
Level 2
 
Level 3
 
Totals
Impaired loans
$
—

 
$
—

 
$
11,900

 
$
11,900

OREO
—

 
—

 
36,306

 
36,306

Total
$
—

 
$
—

 
$
48,206

 
$
48,206


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:

29
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


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 for the three months ended March 31, 2014 and 2013, respectively. Impaired loans not covered under loss-share agreements that were measured or re-measured at fair value had a carrying value of $4,107 and $12,998 at March 31, 2014 and December 31, 2013, respectively, and a specific reserve for these loans of $852 and $1,098 was included in the allowance for loan losses for the periods ended on such respective dates.
Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO covered under loss-share agreements is recorded at its fair value on its acquisition date. 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.
The following table presents OREO measured at fair value on a nonrecurring basis that was still held in the Consolidated Balance Sheets as of the dates presented:
 
 
March 31,
2014
 
December 31, 2013
OREO covered under loss-share agreements:
 
 
 
Carrying amount prior to remeasurement
$
4,170

 
$
13,067

Impairment recognized in results of operations
(269
)
 
(707
)
Increase in FDIC loss-share indemnification asset
(1,078
)
 
(2,829
)
Receivable from other guarantor
(142
)
 
(768
)
Fair value
$
2,681

 
$
8,763

OREO not covered under loss-share agreements:
 
 
 
Carrying amount prior to remeasurement
$
5,602

 
$
30,436

Impairment recognized in results of operations
(1,062
)
 
(2,893
)
Fair value
$
4,540

 
$
27,543

The following table presents information as of March 31, 2014 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:
 
Financial instrument
Fair
Value
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Range of Inputs
Impaired loans
3,255

 
Appraised value of collateral less estimated costs to sell
 
Estimated costs to sell
 
4-10%
OREO
7,221

 
Appraised value of property less estimated costs to sell
 
Estimated costs to sell
 
4-10%

Fair Value Option
The Company elected to measure all mortgage loans originated for sale on or after July 1, 2012 at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.

30
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Net losses of $64 and $277 resulting from fair value changes of these mortgage loans were recorded in income during the three months ended March 31, 2014 and March 31, 2013, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Gains on sales of mortgage loans held for sale” in the Consolidated Statements of Income.
The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk are nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income.
The following table summarizes the differences between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of:
 
March 31, 2014
Aggregate
Fair  Value
 
Aggregate
Unpaid
Principal
Balance
 
Difference
Mortgage loans held for sale measured at fair value
$
28,433

 
$
28,275

 
$
158

Past due loans of 90 days or more
—

 
—

 
—

Nonaccrual loans
—

 
—

 
—


Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:
 
 
 
 
Fair Value
As of March 31, 2014
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
301,615

 
$
301,615

 
$
—

 
$
—

 
$
301,615

Securities held to maturity
482,410

 
—

 
484,780

 
—

 
484,780

Securities available for sale
564,278

 
—

 
544,900

 
19,378

 
564,278

Mortgage loans held for sale
28,433

 
—

 
28,433

 
—

 
28,433

Loans covered under loss-share agreements
173,545

 
—

 
—

 
174,167

 
174,167

Loans not covered under loss-share agreements, net
3,645,835

 
—

 
—

 
3,597,806

 
3,597,806

FDIC loss-share indemnification asset
24,963

 
—

 
—

 
24,963

 
24,963

Mortgage servicing rights
9,514

 
—

 
—

 
10,485

 
10,485

Derivative instruments
2,343

 
—

 
2,343

 
—

 
2,343

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
5,004,784

 
$
3,539,545

 
$
1,470,862

 
$
—

 
$
5,010,407

Federal Home Loan Bank advances
74,416

 
—

 
79,994

 
—

 
79,994

Junior subordinated debentures
94,284

 
—

 
78,855

 
—

 
78,855

Derivative instruments
3,348

 
—

 
3,348

 
—

 
3,348

 

31
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


 
 
 
Fair Value
As of December 31, 2013
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
246,648

 
$
246,648

 
$
—

 
$
—

 
$
246,648

Securities held to maturity
412,075

 
—

 
408,567

 
—

 
408,567

Securities available for sale
501,254

 
—

 
483,583

 
17,671

 
501,254

Mortgage loans held for sale
33,440

 
—

 
33,440

 
—

 
33,440

Loans covered under loss-share agreements
181,674

 
—

 
—

 
182,244

 
182,244

Loans not covered under loss-share agreements, net
3,651,679

 
—

 
—

 
3,590,446

 
3,590,446

FDIC loss-share indemnification asset
26,273

 
—

 
—

 
26,273

 
26,273

Mortgage servicing rights
8,994

 
—

 
—

 
9,840

 
9,840

Derivative instruments
2,818

 
—

 
2,818

 
—

 
2,818

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
4,841,912

 
$
3,327,688

 
$
1,520,667

 
$
—

 
$
4,848,355

Short-term borrowings
2,283

 
2,283

 
—

 
—

 
2,283

Federal Home Loan Bank advances
75,405

 
—

 
80,989

 
—

 
80,989

Junior subordinated debentures
94,187

 
—

 
78,301

 
—

 
78,301

Derivative instruments
3,096

 
—

 
3,096

 
—

 
3,096


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 previously.
Cash and cash equivalents: Cash and cash equivalents consist 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: Securities held to maturity consist of debt securities such as obligations of U.S. Government agencies, states, and other political subdivisions. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.
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 and 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.

Mortgage servicing rights: The Company retains the right to service certain mortgage loans that it sells to secondary market investors. These servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and

32
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


other factors. Because these factors are not all observable and include management’s assumptions, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Mortgage servicing rights were carried at amortized cost at March 31, 2014 and December 31, 2013, and no impairment charges were recognized in earnings for the three months ended March 31, 2014 and 2013, respectively.
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. Such deposits are classified within Level 1 of the fair value hierarchy. 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 deposits. These deposits are classified within Level 2 of the fair value hierarchy.
Short-term borrowings: Short-term borrowings consist of securities sold under agreements to repurchase and federal funds purchased. The fair value of these borrowings approximates the carrying value of the amounts reported in the Consolidated Balance Sheets for each respective account given the short-term nature of the liabilities.
Federal Home Loan Bank advances: The fair value for Federal Home Loan Bank (“FHLB”) advances is determined by discounting the expected future cash outflows using current market rates for similar borrowings, or Level 2 inputs.
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.

Note J - Derivative Instruments
(In Thousands)
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company also from time to time enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At March 31, 2014, the Company had notional amounts of $73,950 on interest rate contracts with corporate customers and $73,950 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed-rate loans.
In March and April 2012, the Company entered into two interest rate swap agreements effective March 30, 2014 and March 17, 2014, respectively. The Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures.
In connection with its merger with First M&F, the Company assumed an interest rate swap designed to convert floating rate interest payments into fixed rate payments. Based on the terms of the agreement, which terminates in March 2018, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The interest rate swap is accounted for as a cash flow hedge to reduce the variability in cash flows resulting from changes in interest rates on $30,000 of the junior subordinated debentures assumed in the merger with First M&F.
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, respectively. Deferred gains amortized into net interest income were $0 and $85 for the three months ended March 31, 2014 and 2013.
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 $83,103 and $54,807 at March 31, 2014 and December 31, 2013, 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 $75,000 and $50,000 at March 31, 2014 and December 31, 2013, respectively.

33
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The following table provides details on the Company’s derivative financial instruments as of the dates presented:
 
 
 
 
Fair Value
 
Balance Sheet
Location
 
March 31,
2014
 
December 31, 2013
Derivative assets:
 
 
 
 
 
Designated as hedging instruments
 
 
 
 
 
Interest rate swap
Other Assets
 
—

 
208

Totals
 
 
—

 
208

Not designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Other Assets
 
$
1,278

 
$
1,812

Interest rate lock commitments
Other Assets
 
967

 
464

Forward commitments
Other Assets
 
$
98

 
$
335

Totals
 
 
$
2,343

 
$
2,611

Derivative liabilities:
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
Interest rate swap
Other Liabilities
 
$
1,899

 
$
1,428

Totals
 
 
$
1,899

 
$
1,428

Not designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Other Liabilities
 
$
1,278

 
$
1,812

Interest rate lock commitments
Other Liabilities
 
12

 
52

Forward commitments
Other Liabilities
 
87

 
24

Totals
 
 
$
1,377

 
$
1,888


Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows as of the periods presented:
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps (terminated May 2010):
 
 
 
Included in interest income on loans
$
—

 
$
85

Total
$
—

 
$
85

Derivatives not designated as hedging instruments:
 
 
 
Interest rate contracts:
 
 
 
Included in interest income on loans
$
779

 
$
799

Included in other noninterest expense
—

 
92

Interest rate lock commitments:
 
 
 
Included in gains on sales of mortgage loans held for sale
566

 
183

Forward commitments
 
 
 
Included in gains on sales of mortgage loans held for sale
189

 
198

Total
$
1,534

 
$
1,272



34
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Offsetting

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet when the "right of setoff" exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company's derivative instruments are subject to master netting agreements; however, the Company has not elected to offset such financial instruments in the Consolidated Balance Sheets. The following table presents the Company's gross derivative positions as recognized in the Consolidated Balance Sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement:
 
Offsetting Derivative Assets
 
Offsetting Derivative Liabilities
 
March 31,
2014
 
December 31, 2013
 
March 31,
2014
 
December 31, 2013
Gross amounts recognized
$
2,342

 
$
2,818

 
$
3,276

 
$
3,315

Gross amounts offset in the consolidated balance sheets
—

 
—

 
—

 
—

Net amounts presented in the consolidated balance sheets
2,342

 
2,818

 
3,276

 
3,315

Gross amounts not offset in the consolidated balance sheets
 
 
 
 
 
 
 
Financial instruments
573

 
1,664

 
573

 
1,664

Financial collateral pledged
—

 
—

 
—

 
—

Net amounts
$
1,769

 
$
1,154

 
$
2,703

 
$
1,651

 



35
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Note K – Other Comprehensive Income
(In Thousands)
Changes in the components of other comprehensive income were as follows for the periods presented:
 
 
Pre-Tax
 
Tax Expense
(Benefit)
 
Net of Tax
Three months ended March 31, 2014
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains on securities
$
4,509

 
$
1,725

 
$
2,784

Non-credit related portion of other-than-temporary impairment on securities
—

 
—

 
—

Reclassification adjustment for gains realized in net income
—

 
—

 
—

Amortization of unrealized holding gains on securities transferred to the held to maturity category
(71
)
 
(27
)
 
(44
)
Total securities available for sale
4,438

 
1,698

 
2,740

Derivative instruments:
 
 
 
 
 
Unrealized holding losses on derivative instruments
(679
)
 
(260
)
 
(419
)
Reclassification adjustment for gains realized in net income
—

 
—

 
—

Total derivative instruments
(679
)
 
(260
)
 
(419
)
Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
Net gain (loss) arising during the period
—

 
—

 
—

Amortization of net actuarial loss recognized in net periodic pension cost
73

 
28

 
45

Total defined benefit pension and post-retirement benefit plans
73

 
28

 
45

Total other comprehensive income
$
3,832

 
$
1,466

 
$
2,366

Three months ended March 31, 2013
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains on securities
$
236

 
$
90

 
$
146

Non-credit related portion of other-than-temporary impairment on securities
—

 
—

 
—

Reclassification adjustment for gains realized in net income
115

 
44

 
71

Amortization of unrealized holding gains on securities transferred to the held to maturity category
(106
)
 
(40
)
 
(66
)
Total securities available for sale
245

 
94

 
151

Derivative instruments:
 
 
 
 
 
Unrealized holding losses on derivative instruments
335

 
128

 
207

Reclassification adjustment for gains realized in net income
(85
)
 
(32
)
 
(53
)
Total derivative instruments
250

 
96

 
154

Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
Net gain (loss) arising during the period
—

 
—

 
—

Amortization of net actuarial loss recognized in net periodic pension cost
116

 
44

 
72

Total defined benefit pension and post-retirement benefit plans
116

 
44

 
72

Total other comprehensive income
$
611

 
$
234

 
$
377


 
 
 
 
 
 


36
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


The accumulated balances for each component of other comprehensive income, net of tax, were as follows as of the dates presented:
 
 
March 31,
2014
 
December 31, 2013
Unrealized gains on securities
$
13,110

 
$
10,370

Non-credit related portion of other-than-temporary impairment on securities
(17,428
)
 
(17,428
)
Unrealized losses on derivative instruments
(431
)
 
(12
)
Unrecognized defined benefit pension and post-retirement benefit plans obligations
(4,858
)
 
(4,903
)
Total accumulated other comprehensive loss
$
(9,607
)
 
$
(11,973
)

Note L – Net Income Per Common Share
(In Thousands, Except Share Data)
Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the pro forma dilution of shares outstanding assuming outstanding stock options were exercised into common shares, calculated in accordance with the treasury method. Basic and diluted net income per common share calculations are as follows for the periods presented:
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Basic
 
 
 
Net income applicable to common stock
$
13,597

 
$
7,571

Average common shares outstanding
31,436,148

 
25,186,229

Net income per common share - basic
$
0.43

 
$
0.30

Diluted
 
 
 
Net income applicable to common stock
$
13,597

 
$
7,571

Average common shares outstanding
31,436,148

 
25,186,229

Effect of dilutive stock-based compensation
232,214

 
102,556

Average common shares outstanding - diluted
31,668,362

 
25,288,785

Net income per common share - diluted
$
0.43

 
$
0.30


 
 
 
 


37
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Stock options that could potentially dilute basic net income per common share in the future that were not included in the computation of diluted net income per common share due to their anti-dilutive effect were as follows for the periods presented:
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Number of shares
107,396
 
488,824
Range of exercise prices
$17.63 - $29.67
 
$19.14 - $30.63

 
 
 
 

Note M – Mergers and Acquisitions

On September 1, 2013, the Company completed its acquisition by merger of First M&F, a bank holding company headquartered in Kosciusko, Mississippi, and the parent of Merchants and Farmers Bank, a Mississippi banking corporation. On the same date, Merchants and Farmers Bank was merged into Renasant Bank. On August 31, 2013, First M&F operated 43 banking and insurance locations in Mississippi, Alabama and Tennessee. The acquisition of First M&F allowed the Company to further its strategic initiatives by expanding its geographic footprint into certain markets of Mississippi, Alabama and Tennessee. The Company issued 6,175,576 shares of its common stock for 100% of the voting equity interests in First M&F. The aggregate transaction value, including the dilutive impact of First M&F’s stock based compensation assumed by the Company, was $156.8 million.

The Company recorded approximately $116.4 million in intangible assets which consist of goodwill of $91,333 and core deposit intangible of $25,033. The fair value of the core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately 10 years. The intangible assets are not deductible for income tax purposes.

The Company assumed $30.9 million in fixed/floating rate junior subordinated deferrable interest debentures payable to First M&F Statutory Trust I that mature in March 2036. The acquired subordinated debentures require interest to be paid quarterly at a rate of 90-day LIBOR plus 1.33%. The fair value adjustment on the junior subordinated debentures of $12,371 will be amortized on a straight line basis over the remaining life.

The following table summarizes the allocation of purchase price to assets and liabilities acquired in connection with the Company’s acquisition of First M&F based on their fair values on September 1, 2013. The Company is finalizing the fair value of certain assets and liabilities. As a result, the adjustments included in the following table are preliminary and may change.


38

Allocation of Purchase Price for First M&F Corporation.
 
 
Purchase Price:
 
 
Shares issued to common shareholders
6,175,576

 
Purchase price per share
$
25.17

 
Value of stock paid
 
$
155,439

Cash paid for fractional shares
 
17

Fair value of stock based compensation assumed
 
68

Deal charges
 
1,310

  Total Purchase Price
 
$
156,834

Net Assets Acquired:
 
 
Stockholders’ equity at 9/1/13
$
79,440

 
Increase (decrease) to net assets as a result of fair value adjustments
to assets acquired and liabilities assumed:
 
 
  Securities
253

 
Loans, net of First M&F's allowance for loan losses(1)
(45,751
)
 
  Fixed assets
(3,070
)
 
  Core deposits intangible, net of First M&F’s existing core deposit intangible
21,158

 
Other real estate owned(1)
(5,797
)
 
  Other assets
(443
)
 
  Deposits
(3,207
)
 
  Junior Subordinated Debt
12,371

 
  Other liabilities
1,748

 
  Deferred income taxes
8,799

 
     Total Net Assets Acquired
 
65,501

Goodwill resulting from merger(2)
 
$
91,333

(1) The fair value adjustments to acquired loans and other real estate owned reflect management’s expectations to more aggressively market and liquidate problem assets quickly.
(2) The goodwill resulting from the merger has been assigned to the Community Banks operating segment.

The following table summarizes the fair value of assets acquired and liabilities assumed at acquisition date in connection with the merger with First M&F. The Company is finalizing the fair value of certain fixed assets and liabilities associated with First M&F's mortgage operations. As a result, the values included in the following table are preliminary and may change.

Cash and cash equivalents
 
$
170,005

Securities
 
227,693

Mortgage loans held for sale
 
1,659

Loans, net of unearned income
 
899,246

Premises and equipment
 
32,259

Other real estate owned
 
13,527

Intangible assets
 
116,366

Other assets
 
55,848

Total assets
 
1,516,603

 
 
 
Deposits
 
1,325,872

Borrowings
 
25,346

Other liabilities
 
9,861


The following unaudited pro forma combined condensed consolidated financial information presents the results of operations for the three months ended March 31, 2013 of the Company as though the merger with First M&F had been completed as of the beginning of 2013.


39

 
 
 Three Months Ended
March 31,
 
 
2013
Interest income
 
$
54,854

Interest expense
 
7,706

Net interest income
 
47,148

Provision for loan losses
 
4,330

Noninterest income
 
23,080

Noninterest expense
 
51,646

Income before income taxes
 
14,252

Income taxes
 
3,817

Net income
 
$
10,435

Earnings per share:
 
 
   Basic
 
$
0.33

   Diluted
 
$
0.33




40

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 acquisitions, including the acquisition of First M&F Corporation, into its operations, retain the customers of these businesses and grow the acquired operations; (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 relationships; 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.

Financial Condition
The following discussion provides details regarding the changes in significant balance sheet accounts at March 31, 2014 compared to December 31, 2013.
Acquisition of First M&F Corporation
On September 1, 2013, the Company completed its acquisition of First M&F, a bank holding company headquartered in Kosciusko, Mississippi, and the Bank completed its acquisition of First M&F's wholly-owned subsidiary, Merchants and Farmers Bank. Prior to the merger, First M&F operated 35 full-service banking offices and eight insurance offices throughout Mississippi, Tennessee and Alabama. The Company issued approximately 6.2 million shares of its common stock for 100% of the voting equity interests in First M&F in a transaction valued at $156,834. Including the effect of purchase accounting adjustments, the Company acquired assets with a fair value of $1,516,603 including loans with a fair value of $899,246, and assumed liabilities with a fair value of $1,361,079, including deposits with a fair value of $1,325,872. At the acquisition date, approximately $91,333 of goodwill and $25,033 of core deposit intangible assets were recorded. See Note M, “Mergers and Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 1, “Financial Statements,” for additional details regarding the Company’s merger with First M&F.
Assets
Total assets were $5,902,831 at March 31, 2014 compared to $5,746,270 at December 31, 2013.
Investments
The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented:

41

 
March 31, 2014
 
Percentage of
Portfolio
 
December 31, 2013
 
Percentage of
Portfolio
Obligations of other U.S. Government agencies and corporations
$
191,171

 
18.26
%
 
$
131,129

 
14.36
%
Obligations of states and political subdivisions
297,354

 
28.41

 
287,014

 
31.43

Mortgage-backed securities
515,217

 
49.22

 
453,644

 
49.67

Trust preferred securities
19,378

 
1.85

 
17,671

 
1.93

Other debt securities
19,098

 
1.82

 
19,554

 
2.14

Other equity securities
4,470

 
0.44

 
4,317

 
0.47

 
$
1,046,688

 
100.00
%
 
$
913,329

 
100.00
%

The balance of our securities portfolio at March 31, 2014 increased $133,359 to $1,046,688 from $913,329 at December 31, 2013. During the first three months of 2014, we purchased $204,966 in investment securities. Mortgage-backed securities and collateralized mortgage obligations (“CMOs”), in the aggregate, comprised 37.22% of the purchases. CMOs are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. U.S. Government Agency securities and municipal securities accounted for 56.10% and 6.68%, respectively, of total securities purchased in the first quarter of 2014. There were no securities sold during the first three months of 2014. Maturities and calls of securities during the first three months of 2014 totaled $74,959.
The Company holds investments in pooled trust preferred securities. This portfolio had a cost basis of $27,514 and $27,531 and a fair value of $19,378 and $17,671 at March 31, 2014 and December 31, 2013, 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 340 financial institutions. Management’s determination of the fair value of each of its holdings 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 our tranches is negatively impacted. The Company’s quarterly evaluation of these investments for other-than-temporary-impairment resulted in no additional write-downs during the first quarter of 2014 or 2013. Furthermore, based on the qualitative factors discussed above, each of the four pooled trust preferred securities was classified as a nonaccruing asset at March 31, 2014 and December 31, 2013. Investment interest income is recorded on the cash-basis method until qualifying for return to accrual status.
Loans
The table below sets forth the balance of loans outstanding by loan type and the percentage of each loan type to total loans as of the dates presented:
 
March 31, 2014
 
Percentage of
Total Loans
 
December 31, 2013
 
Percentage of
Total Loans
Commercial, financial, agricultural
$
440,116

 
11.38
%
 
$
468,963

 
12.08
%
Lease financing
612

 
0.02

 
52

 
0.01

Real estate – construction
155,900

 
4.03

 
161,436

 
4.16

Real estate – 1-4 family mortgage
1,211,260

 
31.32

 
1,208,233

 
31.13

Real estate – commercial mortgage
1,968,158

 
50.89

 
1,950,572

 
50.26

Installment loans to individuals
91,382

 
2.36

 
91,762

 
2.36

Total loans, net of unearned income
$
3,867,428

 
100.00
%
 
$
3,881,018

 
100.00
%

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 March 31, 2014, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans in the categories table above.
Total loans at March 31, 2014 were $3,867,428, a decrease of $13,590 from $3,881,018 at December 31, 2013. Loans covered under loss-share agreements with the FDIC (referred to as “covered loans”) were $173,545 at March 31, 2014, a decrease of $8,129, or 4.48% compared to $181,674 at December 31, 2013. For covered loans, the FDIC will reimburse Renasant Bank 80% of the losses incurred on these loans. Management intends to continue the Company’s aggressive efforts to bring those covered loans that are commercial in nature to resolution and thus the balance of covered loans is expected to continue to decline. The loss-share agreements applicable to this portfolio provide reimbursement for five years from the acquisition date.

42

Loans not covered under loss-share agreements with the FDIC (sometimes referred to as “not covered loans”) at March 31, 2014 were $3,693,883, compared to $3,699,344 at December 31, 2013. Loans acquired from First M&F totaled $746,047 at March 31, 2014 compared to $813,543 at December 31, 2013. Excluding the loans acquired from First M&F, not covered loans increased $62,035 during the first three months of 2014. The increase in loans not covered under loss-share agreements was attributable to growth in owner and non-owner occupied commercial real estate loans and commercial loans, as well as loan production generated by our de novo expansion. Loans from our de novo locations in Columbus and Starkville, Mississippi, Tuscaloosa and Montgomery, Alabama and Maryville, Bristol, Jonesborough and Johnson City, Tennessee contributed $28,148 from December 31, 2013.
During the first three months of 2014, loans in our de novo markets of Mississippi, Tennessee and Alabama, excluding the contribution from First M&F, increased $14,056, $7,987 and $6,105, respectively.
The following table provides a breakdown of covered loans and loans not covered under loss-share agreements as of the dates presented:
 
 
March 31, 2014
 
 Not Acquired
 
 Acquired and Covered Under Loss Share
 
 Acquired M&F
 
Total
Loans
Commercial, financial, agricultural
$
347,828

 
$
8,283

 
$
84,005

 
$
440,116

Lease financing
612

 
—

 
—

 
612

Real estate – construction:
 
 
 
 
 
 
 
Residential
70,532

 
1,648

 
4,275

 
76,455

Commercial
78,528

 
—

 
—

 
78,528

Condominiums
389

 
—

 
528

 
917

Total real estate – construction
149,449

 
1,648

 
4,803

 
155,900

Real estate – 1-4 family mortgage:
 
 
 
 
 
 
 
Primary
536,268

 
16,378

 
149,597

 
702,243

Home equity
202,144

 
12,100

 
33,658

 
247,902

Rental/investment
145,128

 
19,208

 
29,253

 
193,589

Land development
57,720

 
4,566

 
5,240

 
67,526

Total real estate – 1-4 family mortgage
941,260

 
52,252

 
217,748

 
1,211,260

Real estate – commercial mortgage:
 
 
 
 
 
 
 
Owner-occupied
572,769

 
51,785

 
187,967

 
812,521

Non-owner occupied
752,969

 
30,252

 
202,881

 
986,102

Land development
115,666

 
29,300

 
24,569

 
169,535

Total real estate – commercial mortgage
1,441,404

 
111,337

 
415,417

 
1,968,158

Installment loans to individuals
67,283

 
25

 
24,074

 
91,382

Total loans, net of unearned income
$
2,947,836

 
$
173,545

 
$
746,047

 
$
3,867,428



43

 
December 31, 2013
 
 Not Acquired
 
 Acquired and Covered Under Loss Share
 
 Acquired M&F
 
Total
Loans
Commercial, financial, agricultural
$
341,600

 
$
9,546

 
$
117,817

 
$
468,963

Lease financing
52

 
—

 
—

 
52

Real estate – construction:
 
 
 
 
 
 
 
Residential
62,577

 
1,648

 
7,907

 
72,132

Commercial
84,498

 
—

 
4,279

 
88,777

Condominiums
 
 
—

 
527

 
527

Total real estate – construction
147,075

 
1,648

 
12,713

 
161,436

Real estate – 1-4 family mortgage:
 
 
 
 
 
 
 
Primary
531,956

 
16,586

 
153,909

 
702,451

Home equity
196,387

 
13,167

 
34,482

 
244,036

Rental/investment
142,488

 
19,754

 
31,124

 
193,366

Land development
57,971

 
4,959

 
5,450

 
68,380

Total real estate – 1-4 family mortgage
928,802

 
54,466

 
224,965

 
1,208,233

Real estate – commercial mortgage:
 
 
 
 
 
 
 
Owner-occupied
563,104

 
54,294

 
172,520

 
789,918

Non-owner occupied
727,744

 
31,855

 
229,559

 
989,158

Land development
113,769

 
29,837

 
27,890

 
171,496

Total real estate – commercial mortgage
1,404,617

 
115,986

 
429,969

 
1,950,572

Installment loans to individuals
63,655

 
28

 
28,079

 
91,762

Total loans, net of unearned income
$
2,885,801

 
$
181,674

 
$
813,543

 
$
3,881,018

Mortgage loans held for sale were $28,433 at March 31, 2014 compared to $33,440 at December 31, 2013. Originations of mortgage loans to be sold totaled $104,354 in the first three months of 2014 compared to $159,141 for the same period in 2013. Mortgage rates in the latter half of 2011 declined to historic lows and remained at these historically low levels throughout the first quarter of 2013, which prompted a significant increase in refinancings and, thus mortgage originations during this time period. Beginning in the second quarter of 2013 and continuing through the first quarter of 2014, mortgage rates increased from these historically low levels, resulting in a slowdown in originations. The increase in mortgage rates could result in lower future mortgage originations as refinancings decrease.
Mortgage loans to be sold are sold either on a “best efforts” basis or under a mandatory delivery sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. 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 these loans in the secondary market.
Deposits
The Company relies on deposits as its major source of funds. Total deposits were $5,004,784 and $4,841,912 at March 31, 2014 and December 31, 2013, respectively. Noninterest-bearing deposits were $914,964 and $856,020 at March 31, 2014 and December 31, 2013, respectively, while interest-bearing deposits were $4,089,820 and $3,985,892 at March 31, 2014 and December 31, 2013, respectively. The increase in total deposits at March 31, 2014 as compared to December 31, 2013 is primarily attributable to management’s focus on growing and maintaining a stable source of funding, specifically core deposits, and allowing more costly deposits, including certain time deposits, to mature. In addition, the increase in total deposits is partially attributable to a seasonal increase in public fund deposits.The source of funds that we select depends on the terms and how those terms assist us in mitigating interest rate risk and maintaining our net interest margin. Accordingly, funds are only acquired when needed and

44

at a rate that is prudent under the circumstances. Deposits from our de novo locations have also contributed to the increase in deposits during the first three months of 2014. Deposits from our de novo locations in Columbus and Starkville, Mississippi, Tuscaloosa and Montgomery, Alabama and Maryville and Jonesborough, Tennessee totaled $317,173 at March 31, 2014 representing an increase of $45,496 from December 31, 2013.
Public fund deposits are those of counties, municipalities, or other political subdivisions and may be readily obtained based on the Company’s pricing bid in comparison with competitors. Since public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. The Company has focused on growing stable sources of deposits which has resulted in the Company relying less on public fund deposits. However, the Company continues to participate in the bidding process for public fund deposits. Our public fund transaction accounts are principally obtained from municipalities including school boards and utilities. Public fund deposits were $510,762 and $420,539 at March 31, 2014 and December 31, 2013, respectively.
Deposits in our Alabama and Georgia markets decreased $22,586 and $20,769, respectively, at March 31, 2014 from December 31, 2013. Deposits in our Mississippi and Tennessee markets increased $51,456 and $16,626, respectively, at March 31, 2014 from December 31, 2013.
Borrowed Funds
Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the FHLB and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include securities sold under agreements to repurchase, federal funds purchased and FHLB advances. There were no short-term borrowings on the balance sheet at March 31, 2014, which is a decrease of $2,283 from December 31, 2013.
At March 31, 2014, long-term debt totaled $168,700 compared to $169,592 at December 31, 2013. Funds are borrowed from the FHLB primarily to match-fund against certain loans, negating interest rate exposure when rates rise. Such match-funded loans are typically large, fixed rate commercial or real estate loans with long-term maturities. FHLB advances were $74,416 and $75,405 at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, $6,582 of the total FHLB advances outstanding were scheduled to mature within twelve (12) months or less. The Company had $1,609,519 of availability on unused lines of credit with the FHLB at March 31, 2014 compared to $1,595,864 at December 31, 2013. The cost of our FHLB advances was 4.19% and 4.25% for the first three months of 2014 and 2013, respectively.

Results of Operations
Three Months Ended March 31, 2014 as Compared to the Three Months Ended March 31, 2013
Net Income
Net income for the three month period ended March 31, 2014 was $13,597 compared to net income of $7,571 for the three month period ended March 31, 2013. Basic and diluted earnings per share for the three month period ended March 31, 2014 were $0.43 as compared to $0.30 for the three month period ended March 31, 2013. The increase in net income and earnings per share in the first quarter 2014 as compared to the first quarter of 2013 was due primarily to the acquisition of First M&F, improvement in our net interest margin and continued improvement in our credit risk profile.
Net Interest Income
Net interest income, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of our net income, comprising 73.49% of total net revenue for the first quarter of 2014. Total net revenue consists of net interest income on a fully taxable equivalent basis and noninterest income. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.
Net interest income increased to $49,971 for the first quarter of 2014 compared to $33,381 for the same period in 2013. On a tax equivalent basis, net interest income was $51,605 for the first quarter of 2014 as compared to $34,808 for the first quarter of 2013. Net interest margin, the tax equivalent net yield on earning assets, increased to 4.04% during the first quarter of 2014 compared to 3.89% for the first quarter of 2013. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

45

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 March 31,
 
2014
 
2013
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) 
$
3,888,673

 
$
49,767

 
5.19
%
 
$
2,826,965

 
$
34,324

 
4.92
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable(2)
712,102

 
3,977

 
2.23

 
475,150

 
2,767

 
2.36

Tax-exempt
290,417

 
3,868

 
5.33

 
223,713

 
3,232

 
5.86

Interest-bearing balances with banks
286,877

 
199

 
0.28

 
104,931

 
49

 
0.19

Total interest-earning assets
5,178,069

 
57,811

 
4.52

 
3,630,759

 
40,372

 
4.51

Cash and due from banks
93,578

 
 
 
 
 
163,321

 
 
 
 
Intangible assets
303,599

 
 
 
 
 
190,787

 
 
 
 
FDIC loss-share indemnification asset
25,309

 
 
 
 
 
44,291

 
 
 
 
Other assets
327,329

 
 
 
 
 
177,253

 
 
 
 
Total assets
$
5,927,884

 
 
 
 
 
$
4,206,411

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand(3)
$
2,243,068

 
$
1,135

 
0.21
%
 
$
1,492,237

 
$
922

 
0.25
%
Savings deposits
336,655

 
72

 
0.09

 
246,801

 
120

 
0.20

Time deposits
1,495,022

 
3,166

 
0.86

 
1,204,209

 
3,038

 
1.02

Total interest-bearing deposits
4,074,745

 
4,373

 
0.35

 
2,943,247

 
4,080

 
0.56

Borrowed funds
170,091

 
1,833

 
4.35

 
163,981

 
1,484

 
3.67

Total interest-bearing liabilities
4,244,836

 
6,206

 
0.59

 
3,107,228

 
5,564

 
0.73

Noninterest-bearing deposits
949,317

 
 
 
 
 
549,514

 
 
 
 
Other liabilities
60,685

 
 
 
 
 
48,035

 
 
 
 
Shareholders’ equity
673,046

 
 
 
 
 
501,634

 
 
 
 
Total liabilities and shareholders’ equity
$
5,927,884

 
 
 
 
 
$
4,206,411

 
 
 
 
Net interest income/net interest margin
 
 
$
51,605

 
4.04
%
 
 
 
$
34,808

 
3.89
%
 
(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 assets 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.

46

The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the first quarter of 2014 compared to the first quarter of 2013:

 
Volume
 
Rate
 
Net(1)
Interest income:
 
 
 
 
 
Loans (2)
$
13,474

 
$
1,969

 
$
15,443

Securities:
 
 
 
 
 
Taxable
1,360

 
(150
)
 
1,210

Tax-exempt
913

 
(277
)
 
636

Interest-bearing balances with banks
118

 
32

 
150

Total interest-earning assets
15,865

 
1,574

 
17,439

Interest expense:
 
 
 
 
 
Interest-bearing demand deposits
313

 
(99
)
 
214

Savings deposits
86

 
(134
)
 
(48
)
Time deposits
370

 
(242
)
 
128

Borrowed funds
59

 
291

 
350

Total interest-bearing liabilities
828

 
(184
)
 
644

Change in net interest income
$
15,037

 
$
1,758

 
$
16,795

 
(1) 
Changes in interest due to both volume and rate have been allocated on a pro-rata basis using the absolute ratio value of amounts calculated.
(2) 
Includes mortgage loans held for sale and shown net of unearned income.

Interest income, on a tax equivalent basis, was $57,811 for the first quarter of 2014 compared to $40,372 for the same period in 2013. This increase in interest income, on a tax equivalent basis, is due primarily to the acquisition of First M&F which contributed to an increase in average earning assets. The following table presents the percentage of total average earning assets, by type and yield, for the periods presented:
 
Percentage of Total
 
Yield
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Loans
75.10
%
 
77.86
%
 
5.19
%
 
4.92
%
Securities
19.36

 
19.25

 
3.17

 
3.48

Other
5.54

 
2.89

 
0.28

 
0.22

Total earning assets
100.00
%
 
100.00
%
 
4.53
%
 
4.71
%
For the first quarter of 2014, loan income, on a tax equivalent basis, increased $15,443 to $49,767 from $34,324 compared to the same period in 2013. The average balance of loans increased $1,061,708 from first quarter of 2014 compared to the first quarter of 2013 due in large part to the First M&F merger. The tax equivalent yield on loans was 5.19%, a 27 basis point increase from the first quarter of 2013. The increase in loan yields was a result of accretion of nonaccretable difference due to higher than expected levels of payoffs from the First M&F portfolio, offset partially by replacing higher rate maturing loans with new or renewed loans at current market rates which are generally lower due to the current interest rate environment.



47

Investment income, on a tax equivalent basis, increased $1,846 to $7,845 for the first quarter of 2014 from $5,999 for the first quarter of 2013. The average balance in the investment portfolio for the first quarter of 2014 was $1,002,519 compared to $698,863 for the same period in 2013. The increase in the average balance of the investment portfolio is due primarily to the First M&F merger. The tax equivalent yield on the investment portfolio for the first quarter of 2014 was 3.17%, down 31 basis points from the same period in 2013. The decline in yield was a result of the reinvestment of cash flows from the Company’s portfolio that had higher rates than the rates on the securities that the Company purchased with the proceeds the Company received from the maturity or call of the securities with higher rates. The reinvestment rates on securities were lower due to the generally lower interest rate environment.

Interest expense was $6,206 for the first quarter of 2014 as compared to $5,564 for the same period in 2013. The increase in interest expense was due to an increase average balance of interest bearing liabilities due to the First M&F merger partially offset by a 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, specifically time deposits and borrowed funds. The cost of interest-bearing liabilities was 0.59% for the three months ending March 31, 2014 as compared to 0.73% at March 31, 2013.
The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
 
 
Percentage of Total
 
Cost of Funds
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Noninterest-bearing demand
18.28
%
 
15.03
%
 
—
%
 
—
%
Interest-bearing demand
43.18

 
40.81

 
0.21

 
0.25

Savings
6.48

 
6.75

 
0.09

 
0.20

Time deposits
28.78

 
32.93

 
0.86

 
1.02

Federal Home Loan Bank advances
1.44

 
2.26

 
4.19

 
4.25

Other borrowed funds
1.84

 
2.22

 
4.47

 
3.08

Total deposits and borrowed funds
100.00
%
 
100.00
%
 
0.48
%
 
0.62
%

Interest expense on deposits was $4,373 and $4,080 for the first quarter of 2014 and 2013, respectively. The cost of interest-bearing deposits was 0.35% and 0.56% for the same periods. Interest expense on total borrowings was $1,833 and $1,484 for the first quarter of 2014 and 2013, respectively. A more detailed discussion of the cost of our funding sources is set forth below under the heading “Liquidity and Capital Resources” in this item.

Noninterest Income
 
Noninterest Income to Average Assets
(Excludes securities gains/losses)
Three Months Ended March 31,
2014
 
2013
1.27%
 
1.67%

Total noninterest income includes fees generated from deposit services, mortgage loan originations, insurance products, trust and other wealth management products and services, bargain purchase gain resulting from certain acquisitions, security gains and all other noninterest income. Our focus is to develop and enhance our products that generate noninterest income in order to diversify our revenue sources. Noninterest income was $18,616 for the first quarter of 2014 as compared to $17,335 for the same period in 2013. The increase in noninterest income and its related components is primarily attributable to the First M&F acquisition.
Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. Service charges on deposit accounts were $5,916 and $4,500 for the first quarter of 2014 and 2013, respectively. Overdraft fees, the largest component of service charges on deposits, were $4,631 for the three months ended March 31, 2014 compared to $3,614 for the same period in 2013. The increase in service charge revenues is primarily a result of the First M&F acquisition.


48

Fees and commissions increased to $4,972 during the first quarter of 2014 as compared to $4,831 for the same period in 2013. Fees and commissions include fees related to deposit services, such as interchange fees on debit card transactions, as well as fees charged on mortgage loans originated to be sold, such as origination, underwriting, documentation and other administrative fees. Mortgage loan fees decreased to $1,445 during the first quarter of 2014 as compared to $1,757 for the same period in 2013 as a direct result of the lower levels of mortgage originations between the periods. For the first quarter of 2014, fees associated with debit card usage were $2,730 as compared to $2,054 for the same period in 2013.
Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $1,863 and $818 for the three months ended March 31, 2014 and 2013, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our clients’ policies during the previous year. Contingency income, which is included in "Other noninterest income" in the Consolidated Statements of Income, was $528 and $174 for the three months ending March 31, 2014 and 2013, respectively. The First M&F acquisition is a significant contributing factor to the increase in insurance commissions and contingency income for 2014.
The Trust division within the Wealth Management segment operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The division manages a number of trust accounts inclusive of personal and corporate benefit accounts, self-directed IRAs, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. Additionally, the Financial Services division within the Wealth Management segment provides specialized products and services to our customers, which include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was $2,144 for the first quarter of 2014 compared to $1,724 for the same period in 2013. The market value of trust assets under management was $2,582,446 and $2,324,627 at March 31, 2014 and March 31, 2013, respectively.
Gains on sales of securities for the first quarter of 2013 were $54, resulting from the sale of approximately $13,409 in securities. The Company did not sell any securities during the first quarter of 2014.
Gains on the sale of mortgage loans held for sale were $1,585 and $3,565 for the three months ended March 31, 2014 and 2013, respectively. Originations of mortgage loans to be sold totaled $104,353 for the first quarter of 2014 as compared to $159,141 for the same period of 2013.
Noninterest Expense
 
Noninterest Expense to Average Assets
Three Months Ended March 31,
2014
 
2013
3.26%
 
3.62%

Noninterest expense was $47,645 and $37,557 for the first quarter of 2014 and 2013, respectively. The increase in noninterest expense and its related components is primarily attributable to the First M&F acquisition. Merger expense related to the First M&F acquisition was $195 for the three months ended, March 31, 2014. There were no merger related expenses for the same period in 2013.
Salaries and employee benefits increased $7,154 to $28,428 for the first quarter of 2014 as compared to $21,274 for the same period in 2013.
Data processing costs increased to $2,695 in the first quarter of 2014 from $2,043 for the same period in 2013. The increase for the first quarter of 2014 as compared to the same period in 2013 was attributable to the addition of the First M&F deposit and loan customer databases, offset by cost savings achieved through efforts to improve the cost structure of loan and deposit processing by renegotiating contracts with data processing service providers.
Net occupancy and equipment expense for the first quarter of 2014 was $4,847, up from $3,604 for the same period in 2013.
Expenses related to other real estate owned for the first quarter of 2014 were $1,701 compared to $2,049 for the same period in 2013. Expenses on other real estate owned for the first quarter of 2014 include write downs of $838 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 $5,573 was sold during the three months ended March 31, 2014, resulting in a net gain of $114. Expenses on other real estate owned for the three months ended March 31, 2013 included a $986 write down of the carrying value to fair value on certain pieces of property held

49

in other real estate owned. Other real estate owned with a cost basis of $17,822 was sold during the three months ended March 31, 2013, resulting in a net loss of $470.
Professional fees include fees for legal and accounting services. Professional fees were $1,200 for the first quarter of 2014 as compared to $1,173 for the same period in 2013. The increase in professional fees is in large part attributable to additional legal, accounting and consulting fees associated with compliance costs of newly enacted as well as existing banking and governmental regulation. Professional fees attributable to legal fees associated with loan workouts and foreclosure proceedings remain at higher levels in correlation with the overall economic downturn and credit deterioration identified in our loan portfolio and the Company’s efforts to bring these credits to resolution.

Advertising and public relations expense was $1,528 for the first quarter of 2014 compared to $1,490 for the same period in 2013.
Amortization of intangible assets totaled $1,471 and $323 for the first quarter of 2014 and 2013, respectively. This amortization relates to finite-lived intangible assets which are being amortized over the useful lives as determined at acquisition. These finite-lived intangible assets have remaining estimated useful lives ranging from one and a half to thirteen years. The increase in amortization of intangible assets is attributable to amortization of finite-lived intangible assets associated with the acquisition of First M&F.
Communication expenses, those expenses incurred for communication to clients and between employees, were $1,682 for the first quarter of 2014 as compared to $1,127 for the same period in 2013.
 
Efficiency Ratio
Three Months Ended March 31,
2014
 
2013
67.85%
 
72.03%

The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. We remain committed to aggressively managing our costs within the framework of our business model. We expect the efficiency ratio to improve from levels reported in 2013 and 2012 from incremental revenue driven by growth from the additional markets added via the First M&F acquisition in 2013 and the maturity of the Company’s de novo locations and continued reduction in credit related costs as credit quality improves.
Income Taxes
Income tax expense for the first quarter of 2014 and 2013 was $5,895 and $2,538, respectively. The effective tax rates for those periods were 30.24% and 25.11%, respectively. The increased effective tax rate for the first quarter of 2014 as compared to the same period in 2013 is the result of the Company experiencing improvements in its financial results throughout 2013 and into the first quarter of 2014 as well as higher levels of taxable income as a result of the merger with First M&F.

Risk Management
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit risk and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading “Liquidity and Capital Resources.”
Credit Risk and Allowance for Loan Losses
Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. Credit risk is monitored and managed on an ongoing basis by a credit administration department, senior loan committee, a loss management committee and the Board of Directors loan committee. Credit quality, adherence to policies and loss mitigation are major concerns of credit administration and these committees. The Company’s central appraisal review department reviews and approves third-party appraisals obtained by the Company on real estate collateral and monitors loan maturities to ensure updated appraisals are obtained. This department is managed by a licensed real estate appraiser and employs an additional three licensed appraisers.
We have a number of documented loan policies and procedures that set forth the approval and monitoring process of the lending function. Adherence to these policies and procedures is monitored by management and the Board of Directors. A number of committees and an underwriting staff oversee the lending operations of the Company. These include in-house loan and loss

50

management committees and the Board of Directors loan committee and problem loan review committee. In addition, we maintain a loan review staff to independently monitor loan quality and lending practices. Loan review personnel monitor and, if necessary, adjust the grades assigned to loans through periodic examination, focusing its review on commercial and real estate loans rather than consumer and consumer mortgage loans.
In compliance with loan policy, the lending staff is given lending limits based on their knowledge and experience. In addition, each lending officer’s prior performance is evaluated for credit quality and compliance as a tool for establishing and enhancing lending limits. Before funds are advanced on consumer and commercial loans below certain dollar thresholds, loans are reviewed and scored using centralized underwriting methodologies. Loan quality or “risk-rating” grades are assigned based upon certain factors, which include the scoring of the loans. This information is used to assist management in monitoring the credit quality. Loan requests of amounts greater than an officer’s lending limits are reviewed by senior credit officers, in-house loan committees or the Board of Directors.
For commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 being loans with the least credit risk. Allowance factors established by management are applied to the total balance of loans in each grade to determine the amount needed in the allowance for loan losses. The allowance factors are established based on historical loss ratios experienced by the Company for these loan types, as well as the credit quality criteria underlying each grade, adjusted for trends and expectations about losses inherent in our existing portfolios. In making these adjustments to the allowance factors, management takes into consideration factors which it believes are causing, or are likely in the future to cause, losses within our loan portfolio but which may not be fully reflected in our historical loss ratios. 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 loss management committee and the Board of Directors’ problem loan review committee monitor loans that are past due or those that have been downgraded and placed on the Company’s internal watch list due to a decline in the collateral value or cash flow of the debtor; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality. In addition, the Company’s portfolio management committee monitors and identifies risks within the Company’s loan portfolio by focusing its efforts on reviewing and analyzing loans which are not on the Company’s internal watch list. The portfolio management committee monitors loans in portfolios or regions which management believes could be stressed or experiencing credit deterioration.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for problem loans of $500 or greater 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. For real estate collateral, the fair market value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser of the underlying collateral. When the ultimate collectability of a loan’s principal is in doubt, wholly or partially, the loan is placed on nonaccrual.
After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings are initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals described in the above paragraph), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors’ loan committee for charge-off approval. These charge-offs reduce the allowance for loan losses.
Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs for the first quarter 2014 were $1,067 compared to net charge-offs of $892 for the same period 2013. The level of net charge-offs since 2011 are a direct result of the prolonged effects of the economic downturn in our markets on borrowers’ ability to repay their loans coupled with the decline in market values of the underlying collateral securing loans, particularly real estate secured loans. The large inventories of both completed residential homes and land that had been developed for future residential home construction, coupled with declining consumer demand for residential real estate, caused a severe decline in the values of both homes and developed land. As a result, the credit quality of some of our loans in the construction and land development portfolios deteriorated.
The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under the Financial Accounting Standards Board Accounting Standards Codification Topic (“ASC”) 450, “Contingencies.” Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310, “Receivables.” The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Other considerations in establishing the allowance for loan losses include economic conditions reflected within industry

51

segments, the unemployment rate in our markets, loan segmentation and historical losses that are inherent in the loan portfolio. The allowance for loan losses is established after input from management, loan review and the loss management committee. An evaluation of the adequacy of the allowance is calculated quarterly based on the types of loans, an analysis of credit losses and risk in the portfolio, economic conditions and trends within each of these factors. In addition, on a regular basis, management and the Board of Directors review loan ratios. These ratios include the allowance for loan losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for loan losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by officer, community bank and the Company as a whole.
The following table presents the allocation of the allowance for loan losses by loan category as of the dates presented:
 
 
March 31,
2014
 
December 31, 2013
 
March 31,
2013
Commercial, financial, agricultural
$
3,128

 
$
3,090

 
$
2,942

Lease financing
—

 
—

 
1

Real estate – construction
1,109

 
1,091

 
676

Real estate – 1-4 family mortgage
18,478

 
18,629

 
19,737

Real estate – commercial mortgage
24,147

 
23,688

 
22,096

Installment loans to individuals
1,186

 
1,167

 
1,053

Total
$
48,048

 
$
47,665

 
$
46,505


For impaired loans, specific reserves are established to adjust the carrying value of the loan to its estimated net realizable value. The following table quantifies the amount of the specific reserves component of the allowance for loan losses and the amount of the allowance determined by applying allowance factors to graded loans as of the dates presented:
 
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
Specific reserves for impaired loans
$
15,262

 
$
14,650

 
$
17,534

Allocated reserves for remaining portfolio
32,786

 
33,015

 
28,971

Total
$
48,048

 
$
47,665

 
$
46,505


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 the provision for loan losses 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 markets in which we operate. The Company has recorded higher levels of provision for loan losses since 2008 to address credit deterioration resulting from the effects of the economic downturn on our borrowers’ ability to make timely payments or repay their loans at maturity, especially in connection with the construction and land development segment of the loan portfolio. This deterioration was reflected in the increase in nonperforming loans, as well as the decline in market values of underlying collateral securing loans, primarily real estate, which peaked in 2010. In addition, the increase in the provision for loan losses during these periods is attributable to management identifying potential credit deterioration through the internal loan grading system and increasing the allowance for loan losses in response. The Company experienced lower levels of classified loans and nonperforming loans in 2013 and through the first quarter of 2014. In combination with lower levels of classified loans and nonperforming loans, the Company has experienced improving credit quality measures that has resulted in a decrease in the provision for loan losses for the three month period ending March 31, 2014 as compared to the same period in 2013. The provision for loan losses was $1,450 and $3,050 for the first quarter of 2014 and 2013, respectively.
All of the loans acquired in the Company’s FDIC-assisted acquisitions and certain loans acquired in the First M&F merger and in previous acquisitions that are accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), are carried at values which, in management’s opinion, reflect the estimated future cash flows, based on the facts and circumstances surrounding each respective loan at the date of acquisition. The Company continually monitors these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows; to the extent future cash flows deteriorate below initial projections, the Company may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses. The Company did not increase the allowance for loan losses for loans accounted for under ASC 310-30 during the three months ended March 31, 2014 or 2013. However, the provision for

52

loan losses charged to operating expense attributable to loans accounted for under ASC 310-30 totaled $121 during the first quarter 2013 to cover charge-offs of such loans accounted for under ASC 310-30.
The table below reflects the activity in the allowance for loan losses for the periods presented :
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
Balance at beginning of period
$
47,665

 
$
44,347

Charge-offs
 
 
 
Commercial, financial, agricultural
119

 
234

Lease financing
—

 
—

Real estate – construction
—

 
—

Real estate – 1-4 family mortgage
887

 
614

Real estate – commercial mortgage
60

 
593

Installment loans to individuals
231

 
64

Total charge-offs
1,297

 
1,505

Recoveries
 
 
 
Commercial, financial, agricultural
37

 
157

Lease financing
—

 
—

Real estate – construction
5

 
16

Real estate – 1-4 family mortgage
151

 
339

Real estate – commercial mortgage
30

 
91

Installment loans to individuals
7

 
10

Total recoveries
230

 
613

Net charge-offs
1,067

 
892

Provision for loan losses
1,450

 
3,050

Balance at end of period
$
48,048

 
$
46,505

Net charge-offs (annualized) to average loans
0.11
%
 
0.13
%
Allowance for loan losses to:
 
 
 
Total loans not covered under loss share agreements
1.30
%
 
1.79
%
Nonperforming loans not covered under loss share agreements
171.59
%
 
166.19
%


53

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
 
March 31,
 
2014
 
2013
Real estate – construction:
 
 
 
Residential
$
(5
)
 
$
(16
)
Commercial
—

 
—

Condominiums
—

 
—

Total real estate – construction
(5
)
 
(16
)
Real estate – 1-4 family mortgage:
 
 
 
Primary
93

 
126

Home equity
215

 
240

Rental/investment
150

 
62

Land development
278

 
(153
)
Total real estate – 1-4 family mortgage
736

 
275

Real estate – commercial mortgage:
 
 
 
Owner-occupied
(7
)
 
58

Non-owner occupied
(20
)
 
439

Land development
58

 
5

Total real estate – commercial mortgage
31

 
502

Total net charge-offs of loans secured by real estate
$
762

 
$
761

Nonperforming Assets
Nonperforming assets consist of nonperforming loans, other real estate owned and nonaccruing securities available-for-sale. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the loss management committee and our loan review staff closely monitor loans that are considered to be nonperforming.
Debt securities may be transferred to nonaccrual status where the recognition of investment interest is discontinued. A number of qualitative factors, including but not limited to the financial condition of the underlying issuer and current and projected deferrals or defaults, are considered by management in the determination of whether a debt security should be transferred to nonaccrual status. The interest on these nonaccrual investment securities is accounted for on the cash-basis method until qualifying for return to accrual status. Nonaccruing securities available-for-sale consist of the Company’s investments in pooled trust preferred securities issued by financial institutions, each of which is on nonaccrual status.

54

The following table provides details of the Company’s nonperforming assets that are not acquired and not covered by FDIC loss-share agreements, nonperforming assets that have been acquired and are covered by loss-share agreements with the FDIC (“covered assets”), and nonperforming assets acquired through the First M&F merger and not covered by loss-share agreements with the FDIC as of the dates presented (“acquired M&F”):
 
 
 Not Acquired
 
 Acquired and Covered Under Loss Share
 
 Acquired M&F
 
 Total
March 31, 2014
 
 
 
 
 
 
 
Nonaccruing loans
$
18,365

 
$
46,078

 
$
6,393

 
$
70,836

Accruing loans past due 90 days or more
1,322

 
32

 
1,922

 
3,276

Total nonperforming loans
19,687

 
46,110

 
8,315

 
74,112

Other real estate owned
25,117

 
10,218

 
12,406

 
47,741

Total nonperforming loans and OREO
44,804

 
56,328

 
20,721

 
121,853

Nonaccruing securities available-for-sale, at fair value
19,378

 
—

 
—

 
19,378

Total nonperforming assets
$
64,182

 
$
56,328

 
$
20,721

 
$
141,231

Nonperforming loans to total loans
 
 
 
 

 
1.92
%
Nonperforming assets to total assets
 
 
 
 

 
2.39
%
 
 
 
 
 

 
 
December 31, 2013
 
 
 
 
 
 
 
Nonaccruing loans
$
16,863

 
$
49,194

 
$
6,274

 
$
72,331

Accruing loans past due 90 days or more
2,287

 
—

 
1,899

 
4,186

Total nonperforming loans
19,150

 
49,194

 
8,173

 
76,517

Other real estate owned
27,543

 
12,942

 
12,402

 
52,887

Total nonperforming loans and OREO
46,693

 
62,136

 
20,575

 
129,404

Nonaccruing securities available-for-sale, at fair value
17,671

 
—

 
—

 
17,671

Total nonperforming assets
$
64,364

 
$
62,136

 
$
20,575

 
$
147,075

Nonperforming loans to total loans
 
 
 
 
 
 
1.97
%
Nonperforming assets to total assets
 
 
 
 
 
 
2.56
%

Due to the significant difference in the accounting for the loans and other real estate owned covered by loss-share agreements 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. The asset quality measures surrounding the Company’s nonperforming assets discussed in the remainder of this section exclude covered assets relating to the Company’s FDIC-assisted acquisitions.
Another category of assets which contribute to our credit risk is restructured loans. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans.

55

The following table shows the principal amounts of nonperforming and restructured loans as of the dates presented. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current repayment terms of the loan have been reflected in the table below.
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Nonaccruing loans
$
24,758

 
$
23,137

 
$
25,382

Accruing loans past due 90 days or more
3,244

 
4,187

 
2,601

Total nonperforming loans
28,002

 
27,324

 
27,983

Restructured loans in compliance with modified terms
19,802

 
21,478

 
30,387

Total nonperforming and restructured loans
$
47,804

 
$
48,802

 
$
58,370

 
 
 
 
 
 
Nonperforming loans to loans
0.72
%
 
0.74
%
 
1.08
%

The acquisition of First M&F increased nonperforming loans $8,315 at March 31, 2014 which consisted of $6,393 in loans of nonaccrual status and $1,922 in accruing loans past due 90 days or more. Excluding the nonperforming loans from the First M&F merger, nonperforming loans were $65,797 at March 31, 2014, a decrease of $10,158, or 13.37%, from March 31, 2013. The following table presents nonperforming loans, not subject to a loss-share agreement, by loan category as of the dates presented:
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Commercial, financial, agricultural
$
1,264

 
$
1,524

 
$
1,553

Real estate – construction:
 
 
 
 
 
Residential
—

 
—

 
—

Commercial
—

 
—

 
—

Condominiums
—

 
—

 
—

Total real estate – construction
—

 
—

 
—

Real estate – 1-4 family mortgage:
 
 
 
 
 
Primary
3,844

 
4,323

 
6,254

Home equity
868

 
916

 
811

Rental/investment
1,597

 
1,972

 
3,530

Land development
2,876

 
2,969

 
3,906

Total real estate – 1-4 family mortgage
9,185

 
10,180

 
14,501

Real estate – commercial mortgage:
 
 
 
 
 
Owner-occupied
3,430

 
1,306

 
2,458

Non-owner occupied
12,987

 
13,288

 
7,411

Land development
903

 
850

 
1,771

Total real estate – commercial mortgage
17,320

 
15,444

 
11,640

Installment loans to individuals
233

 
176

 
289

Total nonperforming loans
$
28,002

 
$
27,324

 
$
27,983


Total nonperforming loans as a percentage of total loans were 0.72% as of March 31, 2014 compared to 0.74% as of December 31, 2013 and 1.08% as of March 31, 2013. The Company’s coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was 171.59% as of March 31, 2014 as compared to 174.44% as of December 31, 2013 and 166.19% as of March 31, 2013.
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 March 31, 2014. Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due were $21,792 at March 31, 2014 as compared to $21,159 at December 31, 2013 and $8,302 at March 31, 2013. The acquisition of First M&F contributed $13,550 to loans 30-89 days past due at March 31, 2014, an increase of $1,381 from December 31, 2013.

56

As shown above, restructured loans totaled $19,802 at March 31, 2014 compared to $21,478 at December 31, 2013 and $30,387 at March 31, 2013. At March 31, 2014, loans restructured through interest rate concessions represented 72% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company’s restructured loans in compliance with their modified terms as of the dates presented:
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Commercial, financial, agricultural
$
—

 
$
19

 
$
—

Real estate – construction:
 
 
 
 
 
Residential
—

 
—

 
—

Commercial
—

 
—

 
—

Condominiums
—

 
—

 
—

Total real estate – construction
—

 
—

 
—

Real estate – 1-4 family mortgage:
 
 
 
 
 
Primary
1,914

 
2,063

 
1,459

Home equity
—

 
—

 
—

Rental/investment
1,809

 
1,821

 
2,379

Land development
5,338

 
6,470

 
7,272

Total real estate – 1-4 family mortgage
9,061

 
10,354

 
11,110

Real estate – commercial mortgage:
 
 
 
 
 
Owner-occupied
3,564

 
3,702

 
11,327

Non-owner occupied
5,300

 
5,343

 
6,896

Land development
1,877

 
1,889

 
881

Total real estate – commercial mortgage
10,741

 
10,934

 
19,104

Installment loans to individuals
—

 
171

 
173

Total restructured loans in compliance with modified terms
$
19,802

 
$
21,478

 
$
30,387


Changes in the Company’s restructured loans are set forth in the table below:
 
 
2014
 
2013
Balance at January 1
$
21,478

 
$
29,436

Additional loans with concessions
—

 
4,336

Reductions due to:
 
 
 
Reclassified as nonperforming
(331
)
 
(3,227
)
Paid in full
(190
)
 
—

Charge-offs
—

 
(1,301
)
Transfer to other real estate owned
—

 
—

Paydowns
(1,155
)
 
(2,025
)
Lapse of concession period
—

 
(5,741
)
Balance at March 31
$
19,802

 
$
21,478


Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Other real estate owned” in the Consolidated Statements of Income. Other real estate owned with a cost basis of $3,340 was sold during the three months ended March 31, 2014, resulting in a net loss of $99, while other real estate owned with a cost basis of $6,263 was sold during the three months ended March 31, 2013, resulting in a net loss of $481.

57

The following table provides details of the Company’s other real estate owned as of the dates presented:
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Residential real estate
$
6,466

 
$
6,767

 
$
5,559

Commercial real estate
8,514

 
8,984

 
7,288

Residential land development
10,418

 
12,334

 
20,428

Commercial land development
12,124

 
11,860

 
6,126

Other
—

 
—

 
385

Total other real estate owned
$
37,522

 
$
39,945

 
$
39,786


Changes in the Company’s other real estate owned were as follows:
 
 
2014
 
2013
Balance at January 1
$
39,945

 
$
44,717

Acquired from First M&F
—

 
13,527

Additions
1,554

 
11,164

Capitalized improvements
—

 
—

Impairments
(528
)
 
(1,434
)
Dispositions
(3,340
)
 
(28,027
)
Other
(109
)
 
(2
)
Balance at March 31
$
37,522

 
$
39,945


Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Our market risk arises primarily from interest rate risk inherent in lending and deposit-taking activities. Management believes a significant impact on the Company’s financial results stems from our ability to react to changes in interest rates. 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 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. 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.
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 for the dates presented:
 

58

 
 
Percentage Change In:
 
 
Net Interest Income(2)
 
Economic Value
of Equity (3)
Change in Interest Rates(1)
(In Basis Points)
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
+400
 
0.51
 %
 
1.31
 %
 
16.69
 %
 
16.85
 %
+300
 
0.44
 %
 
0.94
 %
 
14.85
 %
 
15.06
 %
+200
 
0.20
 %
 
0.41
 %
 
12.50
 %
 
12.76
 %
+100
 
(0.06
)%
 
0.08
 %
 
9.91
 %
 
10.21
 %
-100
 
(2.01
)%
 
(2.33
)%
 
(3.78
)%
 
(4.61
)%
 
(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 more than 100 bps.
(2)
The percentage change in this column represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected 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 EVE in the various rate scenarios.
The rate shock results for the net interest income simulation is less asset sensitive at March 31, 2014, as compared to December 31, 2013. This shift is due to our improved liability mix as higher cost fixed-rate borrowings and time deposits were replaced with variable, but much lower rate deposits. Additionally, on the asset side, lower-yielding investments within the securities portfolio and overnight investments in interest-bearing balances with banks were shifted to the higher-yielding, longer-term loan portfolio. The EVE results are slightly more asset sensitive reflecting the increased value of the non-time deposits whose rates have declined versus the prior year.
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, 200, 300 and 400 basis points. With the present position of the target federal funds rate, the declining rate scenario seems 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.
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company also enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At March 31, 2014, the Company had notional amounts of $73,950 on interest rate contracts with corporate customers and $73,950 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed-rate loans.
In March and April 2012, the Company entered into two interest rate swap agreements effective March 30, 2014 and March 17, 2014, respectively. Beginning on the respective effective date, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures. In connection with its acquisition of First M&F, the Company assumed an interest rate swap designed to convert floating rate interest payments into fixed rate payments. Based on the terms of the agreement, which terminates in March 2018, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The interest rate swap is accounted for as a cash flow hedge to reduce the variability in cash flows resulting from changes in interest rates on $30,000 of the junior subordinated debentures assumed in the merger with First M&F.

59

The Company also enters into interest rate lock commitments with its customers to mitigate the Company’s interest rate risk associated with its 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 a forward commitment to sell the residential mortgage loan to secondary market investors. Accordingly, 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 J, “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 and public fund deposits, are a major source of funds used by Renasant Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring Renasant Bank’s liquidity. Management continually monitors the liquidity through review of a variety of reports.
Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Within the next twelve months the securities portfolio is forecasted to generate cash flow through principal payments and maturities equal to 16.3% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At March 31, 2014, securities with a carrying value of $747,611 were pledged to secure public fund deposits and as collateral for short-term borrowings and derivative instruments as compared to securities with a carrying value of $608,401 similarly pledged at December 31, 2013.
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 March 31, 2014 and $222 of federal funds purchased at December 31, 2013. Funds obtained from the FHLB are used primarily to match-fund fixed rate loans in order to minimize interest rate risk and also be used to meet day to day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. At March 31, 2014, the balance of our outstanding advances with the FHLB was $74,416. The total amount of the remaining credit available to us from the FHLB at March 31, 2014 was $1,609,519. We also maintain lines of credit with other commercial banks totaling $75,000. 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 March 31, 2014 or December 31, 2013.
The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
 
 
Percentage of Total
 
Cost of Funds
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Noninterest-bearing demand
18.28
%
 
15.03
%
 
—
%
 
—
%
Interest-bearing demand
43.18

 
40.81

 
0.21

 
0.25

Savings
6.48

 
6.75

 
0.09

 
0.20

Time deposits
28.78

 
32.93

 
0.86

 
1.02

FHLB advances
1.44

 
2.26

 
4.19

 
4.25

Other borrowed funds
1.84

 
2.22

 
4.47

 
3.08

 
100.00
%
 
100.00
%
 
0.48
%
 
0.62
%


60

Our strategy in choosing funds is focused on minimizing cost along with considering our balance sheet composition and interest rate risk position. Accordingly, management targets growth of non-interest bearing deposits. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. We constantly monitor our funds position and evaluate the effect that various funding sources have on our financial position. Our cost of funds decreased for the three months ended March 31, 2014 as compared to the same period in 2013 as management improved our funding mix using non-interest bearing or lower costing deposits and repaying higher costing funding including time deposits and borrowed funds.
Cash and cash equivalents were $301,615 at March 31, 2014 compared to $190,028 at March 31, 2013. Cash used in investing activities for the three months ended March 31, 2014 was $120,262 compared to $73,163 for the three months ended March 31, 2013. Proceeds from the sale, maturity or call of securities within our investment portfolio were $74,959 for the first three months of 2014. These proceeds from the investment portfolio were primarily reinvested back into the security portfolio or used to fund loan growth. Proceeds from the sale, maturity, or call of securities within our investment portfolio during the first three months of 2013 were $63,489. These proceeds were primarily reinvested in the securities portfolio. Purchases of investment securities were $204,966 for the first three months of 2014 compared to $130,707 for the same period in 2013.
Cash provided by financing activities for the three months ended March 31, 2014 was $154,969 compared to cash provided by financing activities of $89,431 for the same period in 2013. Deposits increased $162,872 for the three months ended March 31, 2014 compared to an increase of $93,954 for the same period in 2013.
Restrictions on Bank Dividends, Loans and Advances
The Company’s liquidity and capital resources, as well as its ability to pay dividends to our shareholders, are substantially dependent on the ability of Renasant Bank to transfer funds to the Company in the form of dividends, loans and advances. Under Mississippi law, a Mississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the Mississippi Department of Banking and Consumer Finance. 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 March 31, 2014, the maximum amount available for transfer from Renasant Bank to the Company in the form of loans was $51,599. The Company maintains a line of credit collateralized by cash with Renasant Bank totaling $3,000. There were no amounts outstanding under this line of credit at March 31, 2014. These restrictions did not have any impact on the Company’s ability to meet its cash obligations in the first three months of 2014, 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 essentially the same credit risk as that involved in extending loans to customers and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent future cash requirements of the Company in that while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. The Company’s unfunded loan commitments and standby letters of credit outstanding were as follows for the periods presented:
 
 
March 31, 2014
 
December 31, 2013
Loan commitments
$
631,309

 
$
630,266

Standby letters of credit
29,264

 
30,062


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.

Shareholders’ Equity and Regulatory Matters

61

Total shareholders’ equity of the Company was $676,715 at March 31, 2014 compared to $665,652 at December 31, 2013. The acquisition of M&F contributed $155,524 to the Company's equity position at December 31, 2013. Book value per share was $21.50 and $21.21 at March 31, 2014 and December 31, 2013, respectively. The growth in shareholders’ equity was attributable to the acquisition of First M&F along with earnings retention offset by dividends declared and changes in accumulated other comprehensive income.
On September 5, 2012, the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). The shelf registration statement, which the SEC declared effective on September 17, 2012, 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, debt securities, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will be required to file with 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.
The Company has junior subordinated debentures with a carrying value of $94,284 at March 31, 2014, of which $91,096 are included in the Company’s Tier 1 capital. The Federal Reserve Board issued guidance in March 2005 providing more strict quantitative limits on the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital. The new guidance, which became effective in March 2009, did not impact the amount of debentures we include in Tier 1 capital. In addition, although our existing junior subordinated debentures are unaffected, on account of changes enacted as part of the Dodd-Frank Act, any trust preferred securities issued after May 19, 2010 may not be included in Tier 1 capital.
The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that banks must maintain. Those guidelines specify capital tiers, which include the following classifications:
 
Capital Tiers
Tier 1 Capital to
Average Assets
(Leverage)
 
Tier 1 Capital to
Risk – Weighted
Assets
 
Total Capital to
Risk – Weighted
Assets
Well capitalized
5% or above
 
6% or above
 
10% or above
Adequately capitalized
4% or above
 
4% or above
 
8% or above
Undercapitalized
Less than 4%
 
Less than 4%
 
Less than 8%
Significantly undercapitalized
Less than 3%
 
Less than 3%
 
Less than 6%
Critically undercapitalized
 
 
2% or less
 
 



62

The following table provides the capital and risk-based capital and leverage ratios for the Company and for Renasant Bank as of the dates presented:
 
 
Actual
 
Minimum Capital
Requirement to be
Well Capitalized
 
Minimum Capital
Requirement to be
Adequately
Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Renasant Corporation:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Average Assets
$
483,738

 
8.56
%
 
$
282,454

 
5.00
%
 
$
225,963

 
4.00
%
Tier 1 Capital to Risk-Weighted Assets
483,738

 
11.54
%
 
251,510

 
6.00
%
 
167,674

 
4.00
%
Total Capital to Risk-Weighted Assets
532,549

 
12.70
%
 
419,184

 
10.00
%
 
335,347

 
8.00
%
Renasant Bank:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Average Assets
$
467,944

 
8.30
%
 
$
281,839

 
5.00
%
 
$
225,471

 
4.00
%
Tier 1 Capital to Risk-Weighted Assets
467,944

 
11.24
%
 
249,881

 
6.00
%
 
166,587

 
4.00
%
Total Capital to Risk-Weighted Assets
515,993

 
12.39
%
 
416,468

 
10.00
%
 
333,174

 
8.00
%
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Renasant Corporation:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Average Assets
$
473,817

 
8.68
%
 
$
196,871

 
5.00
%
 
$
157,497

 
4.00
%
Tier 1 Capital to Risk-Weighted Assets
473,817

 
11.41
%
 
182,964

 
6.00
%
 
121,976

 
4.00
%
Total Capital to Risk-Weighted Assets
522,181

 
12.58
%
 
304,940

 
10.00
%
 
243,952

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Renasant Bank:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Average Assets
$
457,798

 
8.40
%
 
$
196,192

 
5.00
%
 
$
156,954

 
4.00
%
Tier 1 Capital to Risk-Weighted Assets
457,798

 
11.05
%
 
182,580

 
6.00
%
 
121,720

 
4.00
%
Total Capital to Risk-Weighted Assets
505,463

 
12.20
%
 
304,300

 
10.00
%
 
243,440

 
8.00
%

In July 2013, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”) that call for broad and comprehensive revision of regulatory capital standards for U.S. banking organizations. The Basel III Rules will implement a new common equity Tier 1 minimum capital requirement, a higher minimum Tier 1 capital requirement and other items that will affect the calculation of the numerator of a banking organization’s risk-based capital ratios. Additionally, the Basel III Rules apply limits to a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.
The new common equity Tier 1 capital ratio includes common equity as defined under GAAP and does not include any other type of non-common equity under GAAP. When the Basel III Rules are fully phased in in 2019, banks will be required to have common equity Tier 1 capital of 4.5% of average assets, Tier 1 capital of 6% of average assets, as compared to the current 4%, and total capital of 8% of risk-weighted assets to be categorized as adequately capitalized. The Basel III Rules require the phase-out of trust preferred securities as Tier 1 capital of bank holding companies of the Company’s size in equal installments over a defined period.
Further, the Basel III Rules changed the agencies’ general risk-based capital requirements for determining risk-weighted assets, which will affect the calculation of the denominator of a banking organization’s risk-based capital ratios. The Basel III Rules have revised the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity and will incorporate certain international capital standards of the Basel Committee on Banking Supervision set forth in the standardized approach of the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”.


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The calculation of risk-weighted assets in the denominator of the Basel III capital ratios would be adjusted to reflect the higher risk nature of certain types of loans. Specifically, as applicable to the Company and Renasant Bank:
—
Residential mortgages: Replaces the current 50% risk weight for performing residential first-lien mortgages and a 100% risk-weight for all other mortgages with a risk weight of between 35% and 200% determined by the mortgage’s loan-to-value ratio and whether the mortgage falls into one of two categories based on eight criteria that include the term, use of negative amortization and balloon payments, certain rate increases and documented and verified borrower income.
—
Commercial mortgages: Replaces the current 100% risk weight with a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.
—
Nonperforming loans: Replaces the current 100% risk weight with a 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on nonaccrual status.
Generally, the new Basel III Rules become effective on January 1, 2015, although parts of the Basel III Rules will be phased in through 2019. Management is reviewing the new rules to assess their impact on the Company.


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk since December 31, 2013. For additional information regarding our market risk, see our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 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, 2013. 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 March 31, 2014.
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.

Item 6. EXHIBITS
 
Exhibit
Number
 
Description
 
 
(2)(i)
 
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, First M&F Corporation and Merchants and Farmers Bank dated as of February 6, 2013(1)
 
 
(3)(i)
 
Articles of Incorporation of Renasant Corporation, as amended(2)
 
 
(3)(ii)
 
Restated Bylaws of Renasant Corporation (3)
 
 
(4)(i)
 
Articles of Incorporation of Renasant Corporation, as amended(2)
 
 
(4)(ii)
 
Restated Bylaws of Renasant Corporation (3)
 
 
(31)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(31)(ii)
 
Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(ii)
 
Certification of the Principal 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 March 31, 2014 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited).
 
(1)
Filed as exhibit 2.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on February 11, 2013 and incorporated herein by reference.
(2)
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.
(3)
Filed as exhibit 3(ii) to the Company's Form 10-Q filed with the Securities and Exchange Commission on May 8, 2013 and incorporated herein by reference.

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The Company does not have any long-term debt instruments under which securities are authorized exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the Securities and Exchange Commission, upon its request, a copy of all long-term debt instruments.

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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
 
 
(Registrant)
 
 
 
Date:
May 9, 2014
/s/ E. Robinson McGraw
 
 
E. Robinson McGraw
 
 
Chairman of the Board, Director,
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date:
May 9, 2014
/s/ Kevin D. Chapman
 
 
Kevin D. Chapman
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)

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EXHIBIT INDEX
 
Exhibit
Number
 
Description
 
 
 
(31)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(31)(ii)
 
Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(ii)
 
Certification of the Principal 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 March 31, 2014 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited).

68