10-K 1 d444375d10k.htm FORM 10-K FORM 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

Commission file number 001-13253

 

RENASANT CORPORATION
(Exact name of registrant as specified in its charter)
Mississippi     64-0676974

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

209 Troy Street, Tupelo, Mississippi     38804-4827
(Address of principal executive offices)     (Zip Code)
Registrant’s telephone number, including area code     (662) 680-1001

 

Securities registered pursuant to Section 12(b) of the Act:

   

 

Title of each class

    Name of each exchange on which registered
Common Stock, $5.00 par value     The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:         None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                                                                                                                                                                                             Yes ¨  No  þ 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                                                                                                                                                                                             Yes ¨  No  þ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ  No ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ  No ¨ 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                                                                                          þ 

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No þ

As of June 30, 2012, the aggregate market value of the registrant’s common stock, $5.00 par value, held by non-affiliates of the registrant, computed by reference to the last sale price as reported on The NASDAQ Global Select Market for such date, was $377,062,355.

As of February 28, 2013, 25,193,906 shares of the registrant’s common stock, $5.00 par value, were outstanding. The registrant has no other classes of securities outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement relating to the 2013 Annual Meeting of Shareholders of Renasant Corporation are incorporated by reference into Part III of this Form 10-K.


Table of Contents

Renasant Corporation and Subsidiaries

Form 10-K

For the Year Ended December 31, 2012

CONTENTS

 

PART I   

Page

 
  Item 1.     

Business

     1   
  Item 1A.     

Risk Factors

     15   
  Item 1B.     

Unresolved Staff Comments

     28   
  Item 2.     

Properties

     28   
  Item 3.     

Legal Proceedings

     29   
  Item 4.     

Mine Safety Disclosures

     29   
PART II   
  Item 5.     

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     30   
  Item 6.     

Selected Financial Data

     32   
  Item 7.     

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33   
  Item 7A.     

Quantitative and Qualitative Disclosures About Market Risk

     63   
  Item 8.     

Financial Statements and Supplementary Data

     63   
  Item 9.     

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     129   
  Item 9A.     

Controls and Procedures

     129   
  Item 9B.     

Other Information

     129   
PART III   
  Item 10.     

Directors, Executive Officers and Corporate Governance

     130   
  Item 11.     

Executive Compensation

     130   
  Item 12.     

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     131   
  Item 13.     

Certain Relationships and Related Transactions, and Director Independence

     132   
  Item 14.     

Principal Accounting Fees and Services

     132   
PART IV   
  Item 15.     

Exhibits, Financial Statement Schedules

     133   


Table of Contents

PART I

This Annual Report on Form 10-K may contain or incorporate by reference statements 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. 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 those risks identified in Item 1A, Risk Factors, of this Form 10-K as well as difficulties encountered in the completion and subsequent integration of our recently announced acquisition, significant fluctuations in interest rates, inflation, economic recession, significant changes in the federal and state legal and regulatory environment, significant underperformance in our portfolio of outstanding loans and competition in our markets. We undertake 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.

The information set forth in this Annual Report on Form 10-K is as of February 28, 2013, unless otherwise indicated herein.

ITEM 1. BUSINESS

General

Renasant Corporation (referred to herein as the “Company,” “we,” “our,” or “us”), a Mississippi corporation incorporated in 1982, owns and operates Renasant Bank, a Mississippi banking association with operations in Mississippi, Tennessee, Alabama and Georgia, and Renasant Insurance, Inc., a Mississippi corporation with operations in Mississippi. Renasant Insurance, Inc. is a wholly-owned subsidiary of Renasant Bank. Renasant Bank is referred to herein as the “Bank” and Renasant Insurance, Inc. is referred to herein as “Renasant Insurance.”

Our vision is to be the financial services advisor and provider of choice in each community we serve. With this vision in mind, management has organized the branch banks into community banks using a franchise concept. The franchise approach empowers community bank presidents to execute their own business plans in order to achieve our vision. Specific performance measurement tools are available to assist these presidents in determining the success of their plan implementation. A few of the ratios used in measuring the success of their business plan include:

 

     return on average assets        net interest margin and spread

 

    

 

the efficiency ratio

 

 

    

 

fee income shown as a percentage of loans and deposits

 

    

 

loan and deposit growth

 

 

    

 

the number and type of services provided per household

 

    

 

net charge-offs to average loans

 

 

    

 

the percentage of loans past due and nonaccruing

While we have preserved decision-making at a local level, we have centralized our legal, accounting, investment, loan review, human resources, audit and data processing functions. The centralization of these processes enables us to maintain consistent quality of these functions and achieve certain economies of scale.

Our vision is further validated through our core values. These values state that (1) employees are our greatest assets, (2) quality is not negotiable and (3) clients’ trust is foremost. Centered on these values was the development of five different objectives that are the focal point of our strategic plan. Those objectives include: (1) client satisfaction and development, (2) financial soundness and profitability, (3) growth, (4) employee satisfaction and development and (5) shareholder satisfaction and development.

Members of our Board of Directors also serve as members of the Board of Directors of the Bank. Responsibility for the management of our Bank remains with the Board of Directors and officers of the Bank; however, management services rendered by the Company to the Bank are intended to supplement internal management and expand the scope of banking services normally offered by the Bank.

 

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Acquisition of RBC Bank (USA) Trust Division

On August 31, 2011, the Company acquired the Birmingham, Alabama-based trust division of RBC Bank (USA), which services clients in Alabama and Georgia. Under the terms of the transaction, RBC Bank (USA) transferred its approximately $680 million in assets under management, comprised of personal and institutional clients with over 200 trust, custodial and escrow accounts, to a wholly-owned subsidiary, and Renasant Bank acquired all of the ownership interests in the subsidiary. The subsidiary was merged into Renasant Bank and the acquired operations were reconstituted into a separate division of Renasant Bank, titled Renasant Asset Management. In connection with the acquisition, the Company recognized a gain of $570 thousand.

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

On February 4, 2011, the Bank acquired specified assets and assumed specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”), from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver for American Trust. American Trust operated, and the Company acquired and retained, 3 branches in the northwest region of Georgia. The branch in Cumming, Georgia was subsequently closed in October 2011. The Bank acquired assets with a fair value of $248 million, including loans with a fair value of $74 million, and assumed liabilities with a fair value of $239 million, including deposits with a fair value of $223 million. At the acquisition date, approximately $74 million of the acquired loans were covered by loss-share agreements between the FDIC and the Bank. The acquisition of American Trust resulted in a pre-tax gain of approximately $9 million.

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

On July 23, 2010, the Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the FDIC, as receiver for Crescent. Crescent operated, and the Company acquired and retained, 11 branches in the northwest region of Georgia. The branch in Adairsville, Georgia was later closed in July 2011. The Bank acquired assets with a fair value of $959 million, including loans with a fair value of $371 million, and assumed liabilities with a fair value of $917 million, including deposits with a fair value of $890 million. At the acquisition date, approximately $361 million of acquired loans and $50 million of other real estate owned were covered by loss-share agreements between the FDIC and the Bank. The acquisition of Crescent resulted in a pre-tax gain of approximately $42 million.

Pending Acquisition of First M&F Corporation

On February 7, 2013, the Company announced the signing of a definitive merger agreement pursuant to which the Company will acquire First M&F Corporation (“First M&F”), a bank holding company headquartered in Kosciusko, Mississippi, and the parent of Merchants and Farmers Bank, a Mississippi banking corporation. At December 31, 2012, First M&F operated 36 banking branches and nine insurance offices throughout Mississippi, Tennessee and Alabama and had total assets of $1.6 billion, total deposits of $1.4 billion and total shareholders’ equity of $118.4 million.

According to the terms of the merger agreement, each First M&F common shareholder will receive 0.6425 shares of our common stock for each share of First M&F common stock held. Based on our 10-day trading average as of February 4, 2013 of $19.22, the aggregate transaction value is approximately $118.8 million.

In addition, in connection with the consummation of the merger, each outstanding share of First M&F’s Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series CD, issued to the U.S. Department of the Treasury under its Community Development Capital Initiative (the “CDCI Preferred Stock”), as well as the related warrants held by the U.S. Department of the Treasury, will be either redeemed by First M&F or repurchased by the Company. If this does not occur, then the CDCI Preferred Stock will be converted into the right to receive one share of preferred stock of the Company with an analogous designation and the related warrant will be converted into a warrant to purchase the Company’s common stock, subject to adjustment to reflect the exchange ratio in the merger.

The acquisition is expected to close early in the third quarter of 2013 and is subject to regulatory approval, the approval of the shareholders of both the Company and First M&F, and other conditions set forth in the merger agreement. Pursuant to the terms of the merger agreement, Merchants and Farmers Bank is expected to merge with and into the Bank immediately after the merger of First M&F with and into us.

 

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Operations

The Company has three reportable segments: a Community Banks segment, an Insurance segment and a Wealth Management segment. Financial information about our segments for each of the last three years, including information with respect to revenues from external customers, profit or loss and total assets for each segment is contained in Note Q, “Segment Reporting,” in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data. In 2011, as a result of the Company’s acquisition activity, the Company’s reportable segments were reconstituted from its prior composition. 2010 information has been restated to reflect the current composition of the Company’s reportable segments.

Neither we nor the Bank have any foreign operations.

Operations of Community Banks

Substantially all of our business activities are conducted through, and substantially all of our assets and revenues are derived from, the operations of our community banks, which offer a complete range of banking and financial services to individuals and to small to medium-size businesses. These services include checking and savings accounts, business and personal loans, interim construction loans, equipment leasing, as well as safe deposit and night depository facilities. Automated teller machines are located throughout our market area. Our Online and Mobile Banking products and our call center also provide 24-hour banking services. Accounts receivable financing is also available to qualified businesses.

As of February 28, 2013, we had 83 banking and financial services offices located throughout our markets in north and north central Mississippi, Tennessee, north and central Alabama and north Georgia.

Lending Activities.  Income generated by our lending activities, in the form of both interest income and loan-related fees, comprises a substantial portion of our revenue, accounting for approximately 62.32%, 60.83% and 53.53% of our total gross revenues in 2012, 2011 and 2010, respectively. Total gross revenues consist of interest income on a fully taxable equivalent basis and noninterest income. Our lending philosophy is to minimize credit losses by following strict credit approval standards, diversifying our loan portfolio by both type and geography and conducting ongoing review and management of the loan portfolio. The following is a description of each of the principal types of loans in our loan portfolio, the relative risk of each type of loan and the steps we take to reduce credit risk. A further discussion of our risk reduction policies and procedures can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Risk Management – Credit Risk and Allowance for Loan Losses.” We have omitted a discussion of lease financing, as such financing comprised approximately 0.01% of our portfolio at December 31, 2012.

     Commercial, Financial and Agricultural Loans.  Commercial, financial and agricultural loans (referred to as “commercial loans”), which accounted for approximately 11.28% of our total loans at December 31, 2012, are customarily granted to established local business customers in our market area on a fully collateralized basis to meet their credit needs. Many of these loans have terms allowing the loan to be extended for periods of between one and five years. Loans are usually structured either to fully amortize over the term of the loan or to balloon after the third year or fifth year of the loan, typically with an amortization period not to exceed 15 years. The terms and loan structure are dependent on the collateral and strength of the borrower. The loan-to-value ratios range from 50% to 80%, depending on the type of collateral.

Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets, the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the local business borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. To manage these risks, the Bank’s policy is to secure its commercial loans with both the assets of the borrowing business and any other additional collateral and guarantees that may be available. In addition, we actively monitor certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. We use commercial loan credit scoring models for smaller level commercial loans.

 

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     Real Estate – Construction.    Our real estate – construction loans (“construction loans”) represented approximately 3.76% of our total loans at December 31, 2012. Our construction loan portfolio consists of loans for the construction of single family residential properties, multi-family properties and commercial projects. Maturities for construction loans generally range from 6 to 12 months for residential property and from 12 to 24 months for non-residential and multi-family properties. Construction lending entails significant additional risks compared to residential real estate or commercial real estate lending. A significant additional risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. To minimize the risks associated with construction lending, we limit loan-to-value ratios to 85% of when-completed appraised values for owner-occupied and investor-owned residential or commercial properties.

     Real Estate – 1-4 Family Mortgage.  We are active in the real estate – 1-4 family mortgage area (referred to as “residential real estate loans”), with approximately 32.15% of our total loans at December 31, 2012, being residential real estate loans. We offer both first and second mortgages on residential real estate. Loans secured by residential real estate in which the property is the principal residence of the borrower are referred to as “primary” 1-4 family mortgages. Loans secured by residential real estate in which the property is rented to tenants or is not the principal residence of the borrower are referred to as “rental/investment” 1-4 family mortgages. We also offer loans for the preparation of residential real property prior to construction (referred to in this Annual Report as “residential land development loans”). In addition, we offer home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for purchases, refinances, home improvements, education and other personal expenditures. Both fixed and variable rate loans are offered with competitive terms and fees. Originations of residential real estate loans are generated through either retail efforts in our branches or wholesale marketing, which involves obtaining mortgage referrals from third-party mortgage brokers. We attempt to minimize the risk associated with residential real estate loans by strictly scrutinizing the financial condition of the borrower; typically, we also limit the maximum loan-to-value ratio.

We retain loans for our portfolio when the Bank has sufficient liquidity to fund the needs of established customers and when rates are favorable to retain the loans. We also originate residential real estate loans with the intention of selling them in the secondary market to third party private investors or directly to government sponsored agencies. These loans are collateralized by one-to-four family residential real estate. When these loans are sold, we either release or retain the related servicing rights, depending on a number of factors including the pricing of such loans in the secondary market, fluctuations in interest rates that would impact the profitability of the loans, as well as other market-related conditions. Residential real estate originations 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 we are 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. The Company does not actively market or originate subprime mortgage loans.

We also offer home equity loans or lines of credit as an option to borrowers who elect to utilize the accumulated equity in their homes by borrowing money through either a first or second lien home equity loan or line of credit. We limit our exposure to second lien home equity loans or lines of credit, which inherently carry a higher risk of loss upon default, by limiting these types of loans to borrowers with high credit scores.

 

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     Real Estate – Commercial Mortgage.  Our real estate – commercial mortgage loans (“commercial real estate loans”) represented approximately 50.76% of our total loans at December 31, 2012. We offer loans in which the owner develops a property with the intention of locating its business there. These loans are referred to as “owner-occupied” commercial real estate loans. Because payments on these loans are often dependent on the successful development, operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy as a whole, in addition to the borrower’s ability to generate sufficient operating revenue to repay us. If our estimate of value proves to be inaccurate, we may not be able to obtain full repayment on the loan in the event of default and foreclosure. In most instances, these loans are secured by the underlying real estate of the business and other non-real estate collateral, such as equipment or other assets used in the course of business.

In addition to owner-occupied commercial real estate loans, we offer loans in which the owner develops a property where the source of repayment of the loan will come from the sale or lease of the developed property, for example, retail shopping centers, hotels, storage facilities, nursing homes, etc. These loans are referred to as “non-owner occupied” commercial real estate loans. We also offer commercial real estate loans to developers of commercial properties for purposes of site acquisition and preparation and other development prior to actual construction (referred to in this Annual Report as “commercial land development loans”).

We seek to minimize risks relating to all commercial real estate loans by limiting the maximum loan-to-value ratio and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. We also actively monitor such financial measures as advance rate, cash flow, collateral value and other appropriate credit factors. We generally obtain loan guarantees from financially capable parties to the transaction based on a review of the guarantor’s financial statements.

     Installment Loans to Individuals.    Installment loans to individuals (or “consumer loans”), which represented approximately 2.04% of our total loans at December 31, 2012, are granted to individuals for the purchase of personal goods. These loans are generally granted for periods ranging between one and six years at fixed rates of interest from 100 to 500 basis points above the prime interest rate quoted in The Wall Street Journal. Loss or decline of income by the borrower due to unplanned occurrences represents the primary risk of default to us. In the event of default, a shortfall in the value of the collateral may pose a loss to us in this loan category. Before granting a consumer loan, we assess the applicant’s credit history and ability to meet existing and proposed debt obligations. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. We obtain a lien against the collateral securing the loan and hold title until the loan is repaid in full.

As the general economic environment in the United States and the markets in which we operate began to decline in late 2008, management responded by implementing a strategy to diversify the Company’s loan portfolio by specifically reducing the concentration of construction and land development loans (both residential and commercial). To accomplish this, management applied more stringent levels of underwriting on new originations of such loans and required principal reductions of these loans at time of renewal. The construction loan portfolio was further reduced as such loans were refinanced into permanent financing arrangements due to the completion of the construction phase of underlying projects and thus reclassified to commercial or residential real estate loans. The Company will continue this strategy to reduce the concentration of construction and land development loans in the portfolio. At December 31, 2012, 2011 and 2010, construction and land development loans represented 11.90%, 13.10% and 15.72%, respectively, of the total loan portfolio.

Deposit Services.  We offer a broad range of deposit services and products to our consumer and commercial clients. Through our community branch networks, we offer consumer checking accounts with free Internet banking with bill pay and free debit cards, interest bearing checking, money market accounts and savings accounts. In addition, Renasant offers certificates of deposit, individual retirement accounts and health savings accounts.

For our commercial clients, we offer a competitive suite of cash management products which include, but are not limited to, remote deposit capture, account reconciliation with CD-ROM statements, electronic statements, positive pay, ACH origination and wire transfer, wholesale and retail lockbox, investment sweep accounts, enhanced business Internet banking, outbound data exchange and multi-bank reporting.

The deposit services we offer accounted for approximately 12.32%, 11.65% and 11.05% of our total gross revenues in 2012, 2011 and 2010, respectively, in the form of fees for deposit services. The deposits held by our Bank have been primarily generated within the market areas where our branches are located.

 

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Operations of Wealth Management

Through the Wealth Management segment, we offer a wide variety of fiduciary services and administer (as trustee or in other fiduciary or representative capacities) qualified retirement plans, profit sharing and other employee benefit plans, personal trusts and estates. In addition, the Wealth Management segment offers annuities, mutual funds and other investment services through a third party broker-dealer. At December 31, 2012, the Wealth Management segment contributed total revenue of $8.7 million, or 3.71%, of the Company’s total gross revenues. Wealth Management operations are headquartered in Tupelo, Mississippi, and Birmingham, Alabama, but our products and services are available to customers in all of our markets through our community banks.

Operations of Insurance

Renasant Insurance is a full-service insurance agency offering all lines of commercial and personal insurance through major carriers. At December 31, 2012, Renasant Insurance contributed total revenue of $4.1 million, or 1.77%, of the Company’s total gross revenues and operated three offices in central and northern Mississippi.

Competition

Community Banks

Vigorous competition exists in all major product and geographic areas in which we conduct banking business. We compete through our Bank for available loans and deposits with state, regional and national banks in all of our service areas, as well as savings and loan associations, credit unions, finance companies, mortgage companies, insurance companies, brokerage firms and investment companies. All of these numerous institutions compete in the delivery of services and products through availability, quality and pricing, and many of our competitors are larger and have substantially greater resources than we do, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services.

For 2012, we maintained approximately 15% of the market share (deposit base) in our entire Mississippi area, approximately 1% in our entire Tennessee area, approximately 1% in our entire Alabama area and approximately 1% in our entire Georgia area. Certain markets in which we operate have demographics which we believe indicate the possibility of future growth at higher rates than other markets in which we operate. The following table shows our deposit share in those markets as of June 30, 2012 (which is the latest date that such information is available):

 

Market

            Available     
      Deposits     

     (in billions)     
              Deposit          
         Share         
 

Mississippi

       

Tupelo

      $ 1.8          36.3%             

DeSoto County

       2.0          4.2%             

Oxford

       0.9          2.9%             

Columbus

       0.8          4.1%             

Starkville

       0.5          2.5%             

Tennessee

       

Memphis

       18.4          1.3%             

Nashville

       30.6          1.0%             

Maryville

       1.9          0.1%             

Alabama

       

Birmingham

       23.5          0.6%             

Decatur

       1.6          17.1%             

Huntsville/Madison

       6.2          1.6%             

Montgomery

       6.6          0.3%             

Tuscaloosa

       2.8          0.2%             

Georgia

       

Alpharetta/Roswell

       6.1          2.4%             

Canton/Woodstock

       2.3          7.5%             

Cartersville

       1.0          10.2%             

Cumming

       1.9          4.9%             

Source:  FDIC, As of June 30, 2012

 

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Wealth Management

Our Wealth Management segment competes with other banks, brokerage firms, financial advisers and trust companies, which provide one or more of the services and products that we offer. Our wealth management operations compete on the basis of available product lines, rates and fees, as well as reputation and professional expertise. No particular company or group of companies dominates this industry.

Insurance

We encounter strong competition in the markets in which we conduct insurance operations. Through our insurance subsidiary, we compete with independent insurance agencies and agencies affiliated with other banks and/or other insurance carriers. All of these agencies compete in the delivery of personal and commercial product lines. There is no dominant insurance agency in our markets.

Supervision and Regulation

Community Banks

Under the current regulatory environment, nearly every facet of our banking operations is regulated pursuant to various state and federal banking laws, rules and regulations. The primary focus of these laws and regulations is the protection of depositors and the maintenance of the safety and soundness of the banking system as a whole and the insurance funds of the FDIC. While the following summary addresses the regulatory environment in which we operate, it is not intended to be a fully inclusive discussion of the statutes and regulations affecting our operations. Discussions in this section focus only on certain provisions of such statutes and regulations and do not purport to be comprehensive. Such discussions are qualified in their entirety by reference to the relevant statutes and regulations.

In addition, the regulatory environment in which we operate is likely to change over the coming years as a result of the enactment into law of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July, 2010. The Dodd-Frank Act has significantly altered the current bank regulatory structure and affected the lending, investment, trading, and operating activities of financial institutions and their holding companies, and more changes are likely. The Dodd-Frank Act includes the following provisions that, among other things:

 

 

Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and, for large financial institutions, enforcing compliance with federal consumer financial laws. Banks with $10 billion or less in assets will be examined by their applicable bank regulators.

 

Weaken the federal preemption available for national banks and give state attorneys general the ability to enforce applicable federal consumer protection laws.

 

Broaden the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“the DIF”) and increase the floor of the size of the DIF.

 

Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.

 

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

 

Authorize the FDIC to assess the cost of examinations.

 

Direct the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

 

Expand limitations on insider transactions through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.

 

Restrict certain asset sales to and from an insider to an insured depository institution unless the transaction is on market terms and, if the amount involved in the transaction represents more than 10% of the capital of the insured depository institution, the transaction is approved in advance by the disinterested directors.

 

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Some of these provisions may have the consequence of increasing the Company’s expenses, decreasing its revenues and changing the activities in which the Company engages. The environment in which banking organizations will now operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the profitability of banking organizations that cannot now be foreseen. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities do not apply to the Company’s trust preferred securities because of the Company’s size. The specific impact of the Dodd-Frank Act on the Company’s financial performance and the markets in which its operates will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry in general.

On June 12, 2012, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a joint press release announcing three notices of proposed rulemaking (the “Basel III NPRs”) in connection with revised international regulatory framework for banks by the Basel Committee on Banking Supervision, including a proposal, among other things, to implement a new common equity Tier 1 minimum capital requirement and a higher minimum Tier 1 capital requirement. As proposed, the new common equity Tier 1 minimum capital requirement and the higher minimum Tier 1 capital requirement would apply to U.S. bank holding companies with more than $500 million in assets. An assessment of the Basel III NPRs on the Company and Renasant Bank is not provided in this annual report because such proposals are subject to change through the comment and review process. Therefore, the effects of the Basel III NPRs on the Company and Renasant Bank cannot be meaningfully assessed. The final rules resulting from the Basel III NPRs could impact the Company’s and Renasant Bank’s capital ratios.

We elected not to participate in the U.S. Treasury Department’s Capital Purchase Program, which is part of the federal government’s Troubled Asset Relief Program (the “TARP”). Thus, we will not be subject to any of the regulations enacted with respect to such program. However, First M&F Corporation issued CDCI Preferred Stock. If that stock is not redeemed or repurchased prior to the closing, then they will be exchanged for shares of our preferred stock with the same terms and conditions. This would result in our being subject to the TARP regulations. We currently anticipate that these shares of CDCI Preferred Stock will be redeemed or purchased.

We are a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Act”), and are registered as such with the Board of Governors of the Federal Reserve System (the “Federal Reserve”). We are required to file with the Federal Reserve an annual report and such other information as the Federal Reserve may require. The Federal Reserve may also make examinations of us and the Bank pursuant to the Act. The Federal Reserve has the authority (which to date it has not exercised) to regulate provisions of certain types of our debt.

The Act requires a bank holding company to obtain the prior approval of the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by such bank holding company. The Act further provides that the Federal Reserve shall not approve any acquisition, merger or consolidation which would result in a monopoly or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking. The Federal Reserve will also not approve any transaction in which the effect of the transaction might be to lessen competition substantially or in any manner amount to a restraint on trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the benefits to the public interest resulting from the probable effect of the transaction in meeting the convenience and needs of the community to be served.

 

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The Act also prohibits a bank holding company, with certain exceptions, from itself engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. The principal exception to this prohibition is for a bank holding company engaging in or acquiring shares of a company whose activities are found by the Federal Reserve to be so closely related to banking or managing banks as to be a proper incident thereto. In making determinations whether activities are closely related to banking or managing banks, the Federal Reserve is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency of resources and whether such public benefits outweigh the risks of possible adverse effects, such as decreased or unfair competition, conflicts of interest or unsound banking practices.

The Company and the Bank are subject to certain restrictions imposed by the Federal Reserve Act and the Federal Deposit Insurance Act on any extensions of credit to the Company or the Bank, on investments in the stock or other securities of the Company or the Bank and on taking such stock or other securities as collateral for loans of any borrower.

On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Financial Services Modernization Act”) was signed into law. The Financial Services Modernization Act eliminates the barriers erected by the 1933 Glass-Steagall Act and amends the Act, among other statutes. Further, it allows for the affiliation of banking, securities and insurance activities in new financial services organizations.

A dominant theme of the Financial Services Modernization Act is functional regulation of financial services, with the primary regulator of the Company or its subsidiaries being the agency which traditionally regulates the activity in which the Company or its subsidiaries wish to engage. For example, the Securities and Exchange Commission (“SEC”) will regulate bank holding company securities transactions, and the various banking regulators will oversee banking activities.

The principal provisions of the Financial Services Modernization Act permit the Company, so long as it meets the standards for a “well-managed” and “well-capitalized” institution and has at least a “satisfactory” Community Reinvestment Act performance rating, to engage in any activity that is “financial in nature,” including security and insurance underwriting, investment banking and merchant banking investing in commercial and industrial companies. The Company, if it satisfies the above criteria, can file a declaration of its status as a “financial holding company” (“FHC”) with the Federal Reserve and thereafter engage directly or through nonbank subsidiaries in the expanded range of activities which the Financial Services Modernization Act identifies as financial in nature. Further, the Company, if it elects FHC status, will be able to pursue additional activities which are incidental or complementary in nature to a financial activity or which the Federal Reserve subsequently determines to be financial in nature. We have not elected to become an FHC.

The Dodd-Frank Act removed the restrictions on interstate branching contained in the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994. National and state-chartered banks are now authorized to establish de novo branches in other states if, under the laws of the state in which the branch is to be located, a bank chartered by that state would be permitted to establish the branch. Accordingly, banks will be able to enter new markets more freely.

Bank holding companies are allowed to acquire savings associations under The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). Deposit insurance premiums for banks and savings associations were increased as a result of FIRREA, and losses incurred by the FDIC in connection with the default or assistance of troubled federally-insured financial institutions are required to be reimbursed by other federally-insured financial institutions.

The Company’s ability to pay dividends to its shareholders is 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. In addition, the FDIC must approve any payment of dividends by the Bank. Accordingly, the approval of these supervisory authorities 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.

 

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The Bank’s deposits are insured by the FDIC, and the Bank is subject to examination and review by that regulatory authority. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) provides for increased funding for the DIF through risk based assessments and expands the regulatory powers of federal banking agencies to permit prompt corrective actions to resolve problems of insured depository institutions.

The Community Reinvestment Act of 1997 requires the assessment by the appropriate regulatory authority of a financial institution’s record in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.

The USA PATRIOT Act of 2001 contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as our Bank. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The IMLAFA requires all “financial institutions,” as defined, to establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee training programs and an independent audit function to review and test the program. The Company believes that it has complied with these requirements.

Wealth Management and Insurance

Our Wealth Management and Insurance operations are subject to licensing requirements and regulation under the laws of the United States and the State of Mississippi. The laws and regulations are primarily for the benefit of clients. In all jurisdictions, the applicable laws and regulations are subject to amendment by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Licenses may be denied or revoked for various reasons, including the violation of such regulations, conviction of crimes and the like. Other possible sanctions which may be imposed for violation of regulations include suspension of individual employees, limitations on engaging in a particular business for a specified period of time, censures and fines.

Monetary Policy and Economic Controls

We and the Bank are affected by the policies of regulatory authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to stabilize prices. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These instruments are used in varying degrees to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. In view of changing conditions in the national economy and in the various money markets, as well as the effect of actions by monetary and fiscal authorities including the Federal Reserve, the effect on our, and the Bank’s, future business and earnings cannot be predicted with accuracy.

Sources and Availability of Funds

The funds essential to our, and our Bank’s, business consist primarily of funds derived from customer deposits, federal funds purchased, securities sold under repurchase agreements, Federal Home Loan Bank advances and borrowings from correspondent banks by the Bank. The availability of such funds is primarily dependent upon the economic policies of the federal government, the economy in general and the general credit market for loans.

 

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Personnel

At December 31, 2012, we employed 1,096 people throughout all of our segments on a full-time equivalent basis. Of this total, the Bank accounted for 1,062 employees (inclusive of employees in our Community Banks and Wealth Management operations), and Renasant Insurance employed 34 individuals. The Company has no additional employees; however, at December 31, 2012, 15 employees of the Bank served as officers of the Company in addition to their positions with the Bank.

Dependence Upon a Single Customer

No material portion of our loans have been made to, nor have our deposits been obtained from, a single or small group of customers; the loss of any single customer or small group of customers with respect to any of our reportable segments would not have a materially adverse effect on our business as a whole or with respect to that segment in particular. A discussion of concentrations of credit in our loan portfolio is set forth under the heading “Financial Condition and Results of Operations – Loans and Loan Interest Income” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Available Information

Our Internet address is www.renasant.com. We make available at this address on the Investor Relations webpage under the heading “SEC Filings”, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

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Table 1 – Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

(In Thousands)

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 years ended December 31, 2012, 2011 and 2010:

 

    2012   2011   2010
   

 

 

     

 

 

     

 

 

 
    Average
Balance
  Interest
Income/
Expense
  Yield/  
 Rate
  Average
Balance
  Interest
Income/
Expense
  Yield/  
 Rate
  Average
Balance
  Interest
Income/
Expense
  Yield/  
 Rate
   

 

 

     

 

 

     

 

 

 

Assets

                                   

Interest-earning assets:

                                   

Loans(1)

        $2,711,253             $  138,408           5.10%            $2,577,185             $  142,592           5.53%           $2,442,761             $  137,905           5.65%     

Securities:

                                   

Taxable(2)

      505,686           13,058           2.58              602,006           19,829           3.29              574,596           21,933           3.82       

Tax-exempt

      232,679           13,571           5.83              219,526           13,560           6.18              162,660           10,073           6.19       

Interest-bearing balances with banks

      87,303           199           0.23              189,478           543           0.29              204,839           573           0.28       
   

 

 

         

 

 

         

 

 

     

Total interest-earning assets

      3,536,921           165,236           4.67              3,588,195           176,524           4.92              3,384,856           170,484           5.04       

Cash and due from banks

      63,624                   71,138                   55,023            

Intangible assets

      191,612                   191,776                   191,867            

FDIC loss-share indemnification asset

      59,083                   142,933                   67,595            

Other assets

      281,449                   263,202                   244,668            
   

 

 

             

 

 

             

 

 

         

Total assets

        $4,132,689                     $4,257,244                     $3,944,009            
   

 

 

             

 

 

             

 

 

         

Liabilities and shareholders’ equity

                                   

Interest-bearing liabilities:

                                   

Deposits:

                                   

Interest-bearing demand(3)

      1,379,447           3,927           0.28              1,341,760           9,094           0.68              1,092,482           12,035           1.10       

Savings deposits

      230,553           533           0.23              210,648           798           0.38              152,165           1,105           0.73       

Time deposits

      1,248,938           14,570           1.17              1,435,800           21,837           1.52              1,438,370           31,347           2.18       
   

 

 

         

 

 

         

 

 

     

Total interest-bearing deposits

      2,858,938           19,030           0.67              2,988,208           31,729           1.06              2,683,017           44,487           1.66       

Borrowed funds

      190,096           6,945           3.65              267,726           9,672           3.61              438,140           15,790           3.60       
   

 

 

         

 

 

         

 

 

     

Total interest-bearing liabilities

      3,049,034           25,975           0.85              3,255,934           41,401           1.27              3,121,157           60,277           1.93       

Noninterest-bearing deposits

      543,628                   487,310                   334,849            

Other liabilities

      45,865                   34,283                   45,692            

Shareholders’ equity

      494,162                   479,717                   442,311            
   

 

 

             

 

 

             

 

 

         

Total liabilities and shareholders’ equity

        $4,132,689                     $4,257,244                     $3,944,009            
   

 

 

             

 

 

             

 

 

         

Net interest income/ net interest margin

            $  139,261           3.94%                 $  135,123           3.77%                 $  110,207           3.26%    
       

 

 

             

 

 

             

 

 

     

 

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

 

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Table 2 – Volume/Rate Analysis

(In Thousands)

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 years ended December 31, as indicated:

 

     2012 Compared to 2011      2011 Compared to 2010  
        Volume               Rate                 Net(1)              Volume              Rate                Net(1)       

Interest income:

                 

Loans (2)

    $ 7,418          $ (11,602)         $ (4,184)         $ 7,589          $ (2,902)         $ 4,687     

Securities:

                 

Taxable

     (3,175)          (3,596)          (6,771)          1,046           (3,150)          (2,104)    

Tax-exempt

     813           (802)          11           3,522           (35)          3,487     

Interest-bearing balances with banks

     (293)          (51)          (344)          (43)          13           (30)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     4,763           (16,051)          (11,288)          12,114           (6,074)          6,040     

Interest expense:

                 

Interest-bearing demand deposits

     256           (5,423)          (5,167)          2,746           (5,687)          (2,941)    

Savings deposits

     75           (340)          (265)          425           (732)          (307)    

Time deposits

     (2,842)          (4,425)          (7,267)          (56)          (9,454)          (9,510)    

Borrowed funds

     (2,804)          77           (2,727)          (6,142)          24           (6,118)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     (5,315)          (10,111)          (15,426)          (3,027)          (15,849)          (18,876)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Change in net interest income

    $       10,078          $      (5,940)         $        4,138          $       15,141          $        9,775          $      24,916     

 

(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.

Table 3 – Investment Portfolio

(In Thousands)

The following table sets forth the scheduled maturity distribution and weighted average yield based on the amortized cost of our investment portfolio as of December 31, 2012. Information regarding the carrying value of the investment securities listed below as of December 31, 2012, 2011 and 2010 is contained under the heading “Financial Condition and Results of Operations – Investments and Investment Interest Income” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

     One Year or Less   After One Year
Through Five Years
  After Five Years
Through Ten Years
  After Ten Years
     Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield  

Held to Maturity:

                                    

Obligations of other U.S. Government agencies and corporations

      $ —                  $ 3,500           0.68 %       $ 86,545           1.93 %      $ —            

Obligations of states and political subdivisions

       8,937           4.82 %       34,076           3.93 %       45,883           4.60 %       138,825           5.37 %

Available for Sale:

                                    

Obligations of other U.S. Government agencies and corporations

       —                   —                   2,169           3.35 %       —            

Mortgage-backed securities

       —                   6,159           4.99 %       54,074           3.58 %       242,185           2.41 %

Trust preferred securities

       —                   —                   —                   28,612           1.02 %

Other debt securities

       —                   —                   —                   22,079           2.43 %

Other equity securities

       —                   —                   —                   2,355           1.26 %
    

 

 

          

 

 

          

 

 

          

 

 

      
      $      8,937              $     43,735              $   188,671              $   434,056        
    

 

 

          

 

 

          

 

 

          

 

 

      

The maturity of mortgage-backed securities reflects scheduled repayments based upon the contractual maturities of the securities. Weighted average yields on tax-exempt obligations have been computed on a fully tax equivalent basis assuming a federal tax rate of 35% and a state tax rate of 3.3%, which is net of federal tax benefit.

 

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Table 4 – Loan Portfolio

(In Thousands)

The following table sets forth loans, net of unearned income, outstanding at December 31, 2012, which, based on remaining scheduled repayments of principal, are due in the periods indicated. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported below as due in one year or less. For information regarding the loan balances in each of the categories listed below as of the end of each of the last five years, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Financial Condition and Results of Operations – Loan and Loan Interest Income.” See “Risk Management – Credit Risk and Allowance for Loan Losses” in Item 7 for information regarding the risk elements applicable to, and a summary of our loan loss experience with respect to, the loans in each of the categories listed below.

 

        One Year or    
Less
     After One Year 
Through

Five Years
         After Five     
Years
              Total             

Commercial, financial, agricultural

    $ 162,323         $ 127,202         $ 27,525         $ 317,050    

Lease financing

    30         160         —         190    

Real estate – construction

    68,747         13,949         23,010         105,706    

Real estate – 1-4 family mortgage

    220,120         427,834         255,469         903,423    

Real estate – commercial mortgage

    496,563         739,610         190,470         1,426,643    

Installment loans to individuals

    22,697         32,970         1,574         57,241    
 

 

 

   

 

 

   

 

 

   

 

 

 
    $             970,480         $          1,341,725         $             498,048         $          2,810,253    
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the fixed and variable rate loans maturing or scheduled to reprice after one year as of December 31, 2012:

 

    Interest Sensitivity  
              Fixed           
Rate
            Variable        
Rate
 

Due after one year through five years

   $ 1,058,780         $ 282,945    

Due after five years

    331,800         166,248    
 

 

 

   

 

 

 
   $           1,390,580         $             449,193    
 

 

 

   

 

 

 

Table 5 – Deposits

(In Thousands)

The following table shows the maturity of certificates of deposit and other time deposits of $100 or more at December 31, 2012:

 

    Certificates of
Deposit
    Other  

Three Months or Less

    $ 86,872        $ 6,688    

Over Three through Six Months

    69,623         6,992    

Over Six through Twelve Months

    159,456         9,727    

Over 12 Months

    234,025         35,264    
 

 

 

   

 

 

 
    $             549,976         $               58,671    
 

 

 

   

 

 

 

 

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ITEM 1A. RISK FACTORS

In addition to the other information contained in or incorporated by reference into this Form 10-K and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. The risks disclosed below, either alone or in combination, could materially adversely affect the business, financial condition or results of operations of the Company. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

Risks Related To Our Business and Industry

Our business may be adversely affected by current economic conditions in general and specifically in our Mississippi, Tennessee, Alabama and Georgia markets.

Over the past few years, the United States economy and the global economy have experienced a severe economic downturn. Only in the past year has it appeared that United States and global economic conditions are beginning to improve, and even then the improvement has been sluggish. Notwithstanding these signs of improvement, business activity across a wide range of industries and regions remains greatly reduced, and local governments and many businesses are in serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit markets. Unemployment has also remained elevated above historical levels. The markets in which we operate have not been immune from the effects of this economic downturn.

Since mid-2007, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a significant lack of liquidity in the credit markets. This was initially triggered by declines in home prices and the values of subprime mortgages. The global markets have since been characterized by substantially increased volatility and an overall loss of investor confidence, initially in financial institutions, but now in companies in virtually all other industries and in the broader markets.

Declining asset values, defaults on mortgages and consumer loans, and the lack of market and investor confidence, as well as other factors, have all combined to cause rating agencies to lower credit ratings, and to otherwise increase the cost and decrease the availability of liquidity, despite very significant and lasting declines in Federal Reserve borrowing rates and other government actions. As a result of this market volatility, many banks and other institutions have suffered significant losses and have become reluctant to lend, even on a secured basis, due to the increased risk of default and the impact of declining asset values on the value of collateral. This has significantly weakened the strength and liquidity of many financial institutions worldwide, resulting in the failure or near-failure of many institutions.

In addition, the economic conditions in the states of Mississippi, Tennessee, Alabama and Georgia and the specific local markets in which we operate will particularly affect our results of operations and our financial condition. Due to our limited market areas, the local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business conditions in the markets where we operate, in the United States as a whole and abroad. These conditions include liquidity in the credit markets, short-term and long-term interest rates, inflation, deflated money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. We anticipate that the business environment in our markets and the United States as a whole will continue its slow recovery over the foreseeable future, and there remains a possibility of further deterioration. In either case, the credit quality of our loans and the value of loan collateral, as well as our results of operations and financial condition, are likely to be materially and adversely affected. We believe that the impact of the economic downturn in the United States heightens all of the risks described in the remainder of this Item 1A.

 

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We are subject to lending risk.

There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. For the reasons explained below, if current trends in the housing and real estate markets continue, we may experience higher than normal delinquencies and credit losses.

As of December 31, 2012, approximately 65.80% of our loan portfolio consisted of commercial, construction and commercial real estate loans. These types of loans are generally viewed as having more risk to our financial condition than other types of loans due primarily to the large amounts loaned to individual borrowers. Because the loan portfolio contains a significant number of commercial, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Our commercial, construction and commercial real estate loan portfolios are discussed in more detail under the heading “Operations – Operations of Community Banks” in Item 1, Business.

We have a high concentration of loans secured by real estate.

At December 31, 2012, approximately 86.67% of our loan portfolio had real estate as a primary or secondary component of the collateral securing the loan. The real estate provides an alternate source of repayment in the event of a default by the borrower. Over the past few years, United States real estate, particularly Georgia real estate, has experienced a severe decline in value, with the real estate market and property values just recently showing small signs of stabilization. Although real estate values in our Alabama, Mississippi and Tennessee markets have not declined as dramatically as in Georgia and other areas of the United States, any such adverse change in our markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. Furthermore, in a declining real estate market, we often will need to further increase our allowance for loan losses to address the deterioration in the value of the real estate securing our loans. This was the case from 2008 to 2011. Any of the foregoing could have a material adverse effect on our financial condition and results of operations.

We have a concentration of credit exposure in commercial real estate.

At December 31, 2012, we had approximately $1.4 billion in commercial real estate loans, representing approximately 50.76% of our loans outstanding on that date. In addition to the general risks associated with our lending activities described above, including the effects of declines in real estate values, commercial real estate loans are subject to additional risks. Commercial real estate loans depend on cash flows from the property to service the debt. Cash flows, either in the form of rental income or the proceeds from sales of commercial real estate, may be affected significantly by general economic conditions. A downturn in the local economy generally or in occupancy rates where the property is located could increase the likelihood of default.

In addition, in light of the current downturn in United States real estate markets generally, banking regulators are giving commercial real estate lending greater scrutiny and, in some instances, have required banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for loan losses and capital levels as a result of commercial real estate lending growth and exposure. Any of these factors could have a material adverse effect on our financial condition and results of operations.

We depend on the accuracy and completeness of information furnished by others about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, we often rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, other financial information and appraisals of the value of collateral. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, other financial information or appraisals could have a material adverse effect on our business and, in turn, our financial condition and results of operations.

 

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Our allowance for possible loan losses may be insufficient, and we may be required to further increase our provision for loan losses.

Although we try to maintain diversification within our loan portfolio in order to minimize the effect of economic conditions within a particular industry, management also maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on management’s ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collateral impairment. Among other considerations in establishing the allowance for loan losses, management considers economic conditions reflected within industry segments, the unemployment rate in our markets, loan segmentation and historical losses that are inherent in the loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.

The economic downturn in the United States has made it more difficult to estimate with precision the extent to which credit risks and future trends need to be addressed through a provision to our allowance for loan losses. If current weak economic conditions continue, particularly in the construction and real estate markets, we expect that we will continue to experience higher than normal delinquencies and credit losses. As a result, we may be required to make further increases in our provision for loan losses and to charge off additional loans in the future, which could materially adversely affect our financial condition and results of operations.

In addition, bank regulatory agencies periodically review the allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations. A discussion of the policies and procedures related to management’s process for determining the appropriate level of the allowance for loan losses is set forth under the heading “Risk Management – Credit Risk and Allowance for Loan Losses” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest earned on assets, such as loans and securities, and the cost of interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Currently, to help combat the effects of the economic downturn in the United States, the Federal Reserve has indicated that it is likely to maintain a low interest rate policy with respect to its federal funds target rate for the foreseeable future. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (1) our ability to originate loans and obtain deposits, which could reduce the amount of fee income generated, and (2) the fair value of our financial assets and liabilities.

 

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Our financial results are constantly exposed to market risk.

Market risk refers to the probability of variations in net interest income or the fair value of our assets and liabilities due to changes in interest rates, among other things. The primary source of market risk to us is the impact of changes in interest rates on net interest income. We are subject to market risk because of the following factors:

 

 

Assets and liabilities may mature or reprice at different times. For example, if assets reprice more slowly than liabilities and interest rates are generally rising, earnings may initially decline.

 

Assets and liabilities may reprice at the same time but by different amounts. For example, when interest rates are generally rising, we may increase rates charged on loans by an amount that is less than the general increase in market interest rates because of intense pricing competition. Also, risk occurs when assets and liabilities have similar repricing frequencies but are tied to different market interest rate indices that may not move in tandem.

 

Short-term and long-term market interest rates may change by different amounts, i.e., the shape of the yield curve may affect new loan yields and funding costs differently.

 

The remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change. For example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in our securities portfolio may prepay significantly earlier than anticipated, which could reduce portfolio income. If prepayment rates increase, we would be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income.

 

Interest rates may have an indirect impact on loan demand, credit losses, loan origination volume, the value of financial assets and financial liabilities, gains and losses on sales of securities and loans, the value of mortgage servicing rights and other sources of earnings.

Although management believes it has implemented effective asset and liability management strategies to reduce market risk on the results of our operations, these strategies are based on assumptions that may be incorrect. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

Volatility in interest rates may also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as U.S. Government and Agency securities and other investment vehicles, including mutual funds, which generally pay higher rates of return than financial institutions because of the absence of federal insurance premiums and reserve requirements. Disintermediation could also result in material adverse effects on our financial condition and results of operations.

A discussion of our policies and procedures used to identify, assess and manage certain interest rate risk is set forth under the heading “Risk Management – Interest Rate Risk” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity needs could adversely affect our results of operations and financial condition.

We rely on dividends from the Bank as our primary source of funds. The primary source of the Bank’s funds are customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Many of these conditions arose during the recent economic downturn. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations or to support growth. Such sources include Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands.

If the aforementioned sources of liquidity are not adequate for our needs, we may attempt to raise additional capital in the capital markets. Our ability to raise additional capital, if needed, will depend on conditions in such markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital in this manner.

 

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If we are unable to meet our liquidity needs, we may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets.

Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We have grown our business outside our Mississippi footprint through the acquisition of entire financial institutions and through de novo branching. Since the second half of 2010, we have opened seven de novo branches, acquired specified assets and the operations of, and assumed specified liabilities of, Crescent and American Trust in two FDIC-assisted transactions and acquired the RBC Bank (USA) trust division. Also, on February 7th, 2013, we announced the signing of a definitive merger agreement pursuant to which we will acquire by merger First M&F Corporation (“First M&F”) and its wholly-owned subsidiary, Merchants and Farmers Bank. We intend to continue pursuing a growth strategy for our business through de novo branching and to evaluate attractive acquisition opportunities that are presented to us, whether via negotiated or FDIC-assisted transactions. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies when expanding their franchise, including the following (all of which are generally applicable to an analysis of the risks relating to our pending acquisition of First M&F):

Management of Growth.  We may be unable to successfully:

 

 

maintain loan quality in the context of significant loan growth;

 

maintain adequate management personnel and systems to oversee such growth;

 

maintain adequate internal audit, loan review and compliance functions; and

 

implement additional policies, procedures and operating systems required to support such growth.

Operating Results.  There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth and de novo branching strategy necessarily entails growth in overhead expenses as we routinely add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to increase the number and concentration of our branch offices. Should any new location be unprofitable or marginally profitable, or should any existing location experience a decline in profitability or incur losses, the adverse effect on our results of operations and financial condition could be more significant than would be the case for a larger company.

Development of Offices.  There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our de novo branches can be expected to negatively impact our earnings for some period of time until the branches reach certain economies of scale. Our expenses could be further increased if we encounter delays in opening any of our de novo branches. We may be unable to accomplish future branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs or other factors. Finally, we have no assurance our de novo branches or branches that we may acquire will be successful even after they have been established or acquired, as the case may be.

Expansion into New Markets.  Much of our recent growth has been focused in the highly-competitive metropolitan areas of Memphis and Nashville, Tennessee and Birmingham and Huntsville, Alabama as well as north Georgia and east Tennessee markets. The customer demographics and financial services offerings in these markets are unlike those found in the Mississippi markets that we have historically served. In these growth markets we face competition from a wide array of financial institutions, including much larger, well-established financial institutions.

Regulatory and Economic Factors.  Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events, including regulatory changes enacted in response to the current economic downturn (which are discussed in more detail below) or regulatory conditions imposed on us in connection with the approval of our pending acquisition. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering certain target markets or allow competitors to gain or retain market share in our existing or expected markets.

 

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Failure to successfully address these issues could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

We may fail to realize the anticipated benefits of our recent and pending acquisitions.

The success of our acquisitions of specified assets and the operations of, and our assumption of specified liabilities of, Crescent and American Trust from the FDIC, our acquisition of the trust division of RBC Bank (USA) and, if completed, our acquisition of First M&F will depend on, among other things, our ability to realize anticipated cost savings and to integrate the acquired assets and operations in a manner that permits growth opportunities and does not materially disrupt our existing customer relationships or result in decreased revenues resulting from any loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected. Additionally, we will make fair value estimates of certain assets and liabilities in recording each acquisition. Actual values of these assets and liabilities could differ from our estimates, which could result in our not achieving the anticipated benefits of the particular acquisition.

We cannot assure you that our acquisitions will have positive results, including results relating to: correctly assessing the asset quality of the assets acquired; the total cost of integration, including management attention and resources; the time required to complete the integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquired in the transaction; retaining the existing client relationships; or the overall performance of the combined business.

Our future growth and profitability depends, in part, on our ability to successfully manage the combined operations. Integration of an acquired business can be complex and costly, and we may encounter a number of difficulties, such as:

 

 

deposit attrition, customer loss and revenue loss;

 

the loss of key employees;

 

the disruption of our operations and business;

 

our inability to maintain and increase competitive presence;

 

possible inconsistencies in standards, control procedures and policies; and/or

 

unexpected problems with costs, operations, personnel, technology and credit.

Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration of the operations acquired.

Notwithstanding our loss-share arrangements with the FDIC with respect to some of the assets that we acquired, we may continue to experience increased credit costs or need to take additional markdowns and make additional provisions to the allowance for loan losses on the Crescent and American Trust loans acquired whether on account of the effects of the economic downturn in the United States or otherwise. Similar circumstances could arise following our completion of our acquisition of First M&F. Any of these actions could adversely affect our financial condition and results of operations in the future. There is no assurance that as our integration efforts continue in connection with either of the FDIC-assisted transactions or the integration of First M&F, other unanticipated costs, including the diversion of personnel, or losses will not be incurred. In addition, the attention and effort devoted to the integration of an acquired business may divert management’s attention from other important issues and could harm our business.

 

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We may experience difficulty in managing the loan portfolios acquired from Crescent and American Trust within the limits of the loss protection provided by the FDIC.

In connection with the acquisitions of Crescent’s and American Trust’s respective assets and operations and the assumption of their liabilities, the Bank entered into loss-share arrangements with the FDIC that covered approximately $700 million of acquired assets in the aggregate. Under each loss-share arrangement, 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. In addition, each Purchase and Assumption Agreement with the FDIC provides that after the 10th anniversary of the acquisition, the FDIC has a right to recover a portion of its shared-loss reimbursements if losses on the covered assets are less than $242 million for Crescent or $16 million for American Trust. The loss-share agreements applicable to single-family residential mortgage loans provide for FDIC loss-share and Bank reimbursement to the FDIC to run for ten years, and the loss-share agreement applicable to commercial and other assets provides for FDIC loss-share and Bank reimbursement to the FDIC to run for five years, with additional recovery sharing for three years thereafter.

The FDIC has the right to refuse or delay loss-share payments for loan losses if we do not adhere to the terms of the loss-share agreements. Also, any charge-offs that we experience after the terms of the loss-share agreements have ended would not be recoverable from the FDIC.

Certain provisions of the loss-share agreements entered into with the FDIC may have anti-takeover effects and could limit our ability to engage in certain strategic transactions that our board of directors believes would be in the best interests of shareholders.

The FDIC’s agreement to bear 80% of qualifying losses on single family residential loans for ten years and commercial loans for five years is a significant asset of the Company and a feature of the Crescent and American Trust acquisitions without which we would not have entered into either transaction. Our agreements with the FDIC require that we receive FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to us or our shareholders engaging in certain transactions. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue either or both of the loss-share arrangements.

Among other things, prior FDIC consent is required for (1) a merger or consolidation of the Company with or into another company if our shareholders will own less than 2/3 of the combined company, (2) a sale of all or substantially all of the assets of the Bank, or (3) a sale of shares by one or more of our shareholders that will effect a change in control of the Bank, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act (generally, the acquisition of between 10% and 25% of our voting securities where the presumption of control is not rebutted, or the acquisition of more than 25% of our voting securities). It is unlikely that we would have any ability to control or prevent such a sale by our shareholders. If we or any shareholder desired to enter into any such transaction, there can be no assurances that the FDIC would grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss-share protection, there could be a material adverse impact on the Company.

We may engage in additional FDIC-assisted transactions.

We intend to continue to evaluate opportunities to acquire failed banks through FDIC-assisted transactions. If we acquire the assets and liabilities of additional failed banks in FDIC-assisted transactions, we will be subject to many of the same risks as those discussed above with respect to the Crescent and American Trust transactions, in addition to the risks we would face in acquiring another bank in a negotiated transaction. In addition, because FDIC-assisted transactions are structured in a manner that do not allow us the time and access to information normally associated with preparing for and evaluating a negotiated acquisition, we may face additional risks in FDIC-assisted transactions, including additional strain on management resources, management of problem loans, problems related to integration of personnel and operating systems and impact to our capital resources requiring us to raise additional capital. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with FDIC-assisted transactions. Our inability to overcome these risks could have a material adverse effect on our business, financial condition and results of operations.

 

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We may face risks with respect to future acquisitions.

When we attempt to expand our business through mergers and acquisitions (including FDIC-assisted transactions), we seek targets that are culturally similar to us, have experienced management and possess either significant market presence or have potential for improved profitability through economies of scale or expanded services or, in the case of FDIC-assisted transactions, on account of the loss-share arrangements with the FDIC associated with such transactions. We believe that our pending acquisition of First M&F meets these criteria. In addition to the general risks associated with our growth plans and the particular risks associated with FDIC-assisted transactions both of which are highlighted above, in general acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:

 

 

the time and costs associated with identifying and evaluating potential acquisition and merger targets;

 

inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;

 

the time and costs of evaluating new markets, hiring experienced local management and opening new bank locations, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

 

our ability to finance an acquisition and possible dilution to our existing shareholders;

 

the diversion of our management’s attention to the negotiation of a transaction;

 

the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of operations;

 

entry into new markets where we lack experience; and

 

risks associated with integrating the operations and personnel of the acquired business, as discussed above in the context of the Crescent and American Trust transactions.

All of the foregoing matters are applicable to our pending acquisition of First M&F.

We expect to continue to evaluate merger and acquisition opportunities (including FDIC-assisted transactions) that are presented to us and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Historically, acquisitions of non-failed financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of our book value and net income per common share may occur in connection with any future transaction (which may be the case as a result of the First M&F acquisition). Failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.

Competition in our industry is intense and may adversely affect our profitability.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have substantially greater resources than we have, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services. Such competitors primarily include national, regional and community banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The information under the heading “Competition” in Item 1, Business, provides more information regarding the competitive conditions in our growth markets.

Our industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. The economic downturn in the United States has already resulted in the consolidation of a number of financial institutions, in addition to acquisitions of failed institutions. We expect additional consolidation to occur. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, as highlighted by our discussion of the Dodd-Frank Act, legislative and regulatory changes on both the federal and state level may materially affect competitive conditions in our industry. Finally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures.

 

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Our ability to compete successfully depends on a number of factors, including, among other things:

 

 

the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe and sound assets;

 

the ability to expand our market position;

 

the scope, relevance and pricing of products and services offered to meet customer needs and demands;

 

the rate at which we introduce new products and services relative to our competitors;

 

customer satisfaction with our level of service; and

 

industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We may be adversely affected by the soundness of other financial institutions.

Entities within the financial services industry are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different industries and counterparties and from time to time execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.

We are subject to extensive government regulation, and such regulation could limit or restrict our activities and adversely affect our earnings.

We and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Furthermore, as discussed below, the Dodd-Frank Act has already, and likely in the future will, result in significant changes to the regulations governing banks and other financial institutions, and other changes to such regulations have been proposed. We believe it is likely that some of these proposed changes will be enacted, although it is impossible to predict the ultimate substance of these changes or their likely effect on our activities or profitability. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of the foregoing, could affect us and/or the Bank in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.

Under regulatory capital adequacy guidelines and other regulatory requirements, we and the Bank must meet guidelines that include quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. Our failure to maintain the status of “well capitalized” under our regulatory framework could affect the confidence of our customers in us, thus compromising our competitive position. In addition, failure to maintain the status of “well capitalized” under our regulatory framework or “well managed” under regulatory examination procedures could compromise our status as a bank holding company and related eligibility for a streamlined review process for merger or acquisition proposals and would result in higher deposit insurance premiums assessed by the FDIC.

We are also subject to laws, regulations and standards relating to corporate governance and public disclosure in addition to the Dodd-Frank Act, including the Sarbanes-Oxley Act of 2002 and SEC regulations. These laws, regulations and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time and attention.

 

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Failure to comply with laws, regulations or policies could also result in sanctions by regulatory agencies and/or civil money penalties, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. The information under the heading “Supervision and Regulation” in Item 1, Business, and Note P, “Regulatory Matters,” in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, provides more information regarding the regulatory environment in which we and the Bank operate.

Financial reform legislation enacted by Congress will, among other things, tighten capital standards and result in new laws and regulations that likely will increase our costs of operations.

The Dodd-Frank Act was signed into law on July 21, 2010. This new law significantly changed the then-existing bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies have been given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act have had a near term impact on us. For example, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on the Company’s interest expense.

The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009.

The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments in certain circumstances. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau (the “CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Institutions such as Renasant Bank with $10 billion or less in assets will continued to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakened the federal preemption rules that were applicable for national banks and federal savings associations, and gave state attorneys general the ability to enforce federal consumer protection laws.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on us. However, it is expected that at a minimum our operating and compliance costs will increase, and our interest expense could increase.

Because of stresses on the Deposit Insurance Fund, the FDIC has recently imposed, and could impose in the future, additional assessments on the banking industry.

The current financial crisis has caused the Deposit Insurance Fund administered by the FDIC to fall below required minimum levels. Because the FDIC replenishes the DIF through assessments on the banking industry, we anticipate that the FDIC will likely maintain relatively high deposit insurance premiums for the foreseeable future. In 2010, the FDIC imposed a special deposit insurance assessment on the banking industry, and there can be no assurance that it will not do so again. It has also required banking organizations to “pre-pay” deposit insurance premiums in order to replenish the liquid assets of the DIF, and may impose similar requirements in the future. High insurance premiums and special assessments will adversely affect our profitability.

 

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Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are subject to the application of accounting principles generally accepted in the United States (“GAAP”), which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by FASB. Market conditions have prompted accounting standard setters to promulgate new guidance which further interprets or seeks to revise accounting pronouncements related to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. The impact of accounting developments that have been issued but not yet implemented is disclosed in our annual reports on Form 10-K and our quarterly reports on Form 10-Q. An assessment of proposed standards is not provided as such proposals are subject to change through the exposure process and, therefore, the effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards that we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material effect on our financial condition and results of operations.

Our information systems may experience a security breach, computer virus or disruption of service.

Renasant Bank provides its customers the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. While we use qualified third party vendors to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses, phishing schemes, cyber-attacks and other security problems. The Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us or the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits. Any failures, interruptions or security breaches could result in damage to our reputation, a loss of customer business, increased regulatory scrutiny, or possible exposure to financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We may not be able to attract and retain skilled people.

Our success depends in part on our ability to retain key executives and to attract and retain additional qualified personnel who have experience both in sophisticated banking matters and in operating a bank of our size. Competition for such personnel can be intense in the banking industry, and we may not be successful in attracting or retaining the personnel we require. The unexpected loss of one or more of our key personnel could have a material adverse effect on our business because of their skills, knowledge of our markets, years of industry experience and the difficulty of promptly finding qualified replacements. We expect to effectively compete in this area by offering financial packages that are competitive within the industry.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although management has policies and procedures to perform an environmental review before the loan is recorded and before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.

 

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Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Risks Associated With Our Common Stock

Our stock price can be volatile.

Stock price volatility may make it more difficult for an investor to resell our common stock when desired and at attractive prices. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

 

 

actual or anticipated variations in quarterly results of operations;

 

recommendations by securities analysts;

 

operating and stock price performance of other companies that investors deem comparable to us;

 

news reports relating to trends, concerns and other issues in the banking and financial services industry;

 

perceptions in the marketplace regarding us and/or our competitors;

 

new technology used, or services offered, by us or our competitors;

 

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

 

failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

changes in government regulations; and

 

geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.

The trading volume in our common stock is less than that of other larger bank holding companies.

Although our common stock is listed for trading on The NASDAQ Global Select Market, the average daily trading volume in our common stock is lower than other publicly traded companies, generally less than that of many of our competitors and other larger bank holding companies. For the three months ended February 28, 2013, the average daily trading volume for Renasant common stock was 66,547 shares per day. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Significant sales of our common stock, or the expectation of these sales, could cause volatility in the price of our common stock.

Our ability to declare and pay dividends is limited by law, and we may be unable to pay future dividends.

We are a separate and distinct legal entity from the Bank, and we receive substantially all of our revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to us. In the event the Bank is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our common stock. The inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations. The information under Note O, “Restrictions on Cash, Bank Dividends, Loans or Advances,” in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, provides a detailed discussion about the restrictions governing the Bank’s ability to transfer funds to us.

 

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Holders of our junior subordinated debentures have rights that are senior to those of our common shareholders.

We have supported a portion of our growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. Also, in connection with the Heritage Financial Holding Corporation (“Heritage”) and Capital Bancorp, Inc. (“Capital”) mergers, we assumed junior subordinated debentures issued by Heritage and Capital, respectively. At December 31, 2012, we had trust preferred securities and accompanying junior subordinated debentures with a carrying value of $76 million. Payments of the principal and interest on the trust preferred securities of these trusts are conditionally guaranteed by us. Further, the junior subordinated debentures we issued to the trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor may lose some or all of his investment in our common stock.

Our Articles of Incorporation and Bylaws, as well as certain banking laws, could decrease our chances of being acquired even if our acquisition is in our shareholders’ best interests.

Provisions of our Articles of Incorporation and Bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions impedes a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.

Our issuance of preferred stock could adversely affect holders of our common stock and discourage a takeover.

Our shareholders authorized the Board of Directors to issue up to 5,000,000 shares of preferred stock without any further action on the part of our shareholders. Our Board of Directors also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our Board of Directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

Shares eligible for future sale could have a dilutive effect.

Shares of our common stock eligible for future sale, including those that may be issued in any other private or public offering of our common stock for cash or as incentives under incentive plans, could have a dilutive effect on the market for our common stock and could adversely affect market prices. As of February 28, 2013, there were 75,000,000 shares of our common stock authorized, of which 25,193,906 shares were outstanding.

 

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The FDIC’s Statement of Policy on the Acquisition of Failed Insured Depository Institutions may restrict our activities and those of certain investors in us.

On August 26, 2009, the FDIC adopted the final Statement of Policy on the Acquisition of Failed Insured Depository Institutions (the “Statement”). The Statement purports to provide guidance concerning the standards for more than de minimis investments in acquirers of deposit liabilities and the operations of failed insured depository institutions. The Statement applies to private investors in a company, including any company acquired to facilitate bidding on failed banks or thrifts that is proposing to, directly or indirectly, assume deposit liabilities, or such liabilities and assets, from the resolution of a failed insured depository institution. By its terms, the Statement does not apply to investors with 5% or less of the total voting power of an acquired depository institution or its bank or thrift holding company (provided there is no evidence of concerted action by these investors). When applicable, among other things, covered investors (other than certain mutual funds) are prohibited by the Statement from selling their securities in the relevant institution for three years. In addition, covered investors must disclose to the FDIC information about the investors and all entities in the ownership chain, including information as to the size of the capital fund or funds, its diversification, the return profile, the marketing documents, the management team and the business model, as well as such other information as is determined to be necessary to assure compliance with the Statement. Furthermore, among other restrictions, the acquired institution must maintain a ratio of Tier 1 common equity to total assets of at least 10% for a period of three years from the time of acquisition; thereafter, the institution must maintain capital such that it is “well capitalized” during the remaining period of ownership by the covered investor. In addition, under the Statement, covered investors employing ownership structures utilizing entities that are domiciled in Secrecy Law Jurisdictions (as defined in the Statement) would not be eligible to own a direct or indirect interest in an insured depository institution, subject to certain exceptions.

The Statement may be applicable to private investors in us and, in the event of any such private investors covered by the Statement, will be applicable to us. Furthermore, because the applicability of the Statement depends in large part on the specific investor, we may not know at any given point of time whether the Statement applies to any investor and, accordingly, to us. Each investor must make its own determination concerning whether the Statement applies to it and its investment in us. Each investor is cautioned to consult its own legal advisors concerning such matters. We cannot assure investors that the Statement will not be applicable to us.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The main office of the Company is located at 209 Troy Street, Tupelo, Mississippi. Various departments occupy each floor of the five-story building. The Technology Center, also located in Tupelo, houses electronic data processing, document preparation, document imaging, loan servicing and deposit operations. In addition, the Bank operates forty-six branches, two financial services offices and one mortgage loan production office throughout north and north central Mississippi, twelve branches throughout Tennessee, ten branches throughout north and central Alabama and twelve branches throughout north Georgia. Our Community Banks and Wealth Management segments operate out of all of these offices.

In Mississippi, the Bank has seven branches in Tupelo, three branches in Booneville, two branches each in Amory, Corinth, New Albany, Oxford, Pontotoc, Starkville and West Point and one branch each in Aberdeen, Batesville, Belden, Calhoun City, Coffeeville, Columbus, Grenada, Guntown, Hernando, Horn Lake, Iuka, Louisville, Okolona, Olive Branch, Saltillo, Sardis, Shannon, Smithville, Southaven, Verona, Water Valley and Winona. The Bank operates one financial services office in Tupelo and one mortgage loan production office in Oxford.

In Tennessee, the Bank operates twelve branches: three branches in the Memphis area, six branches in the Nashville area and three branches in eastern Tennessee. In Memphis, the Bank operates one branch each in East Memphis, Germantown and Collierville. In Nashville, the Bank operates two branches within the city of Nashville and one branch each in Franklin, Goodlettsville, Hendersonville and Hermitage. In eastern Tennessee, the Bank operates one branch each in Bristol, Jonesborough and Maryville.

In Alabama, the Bank has three branches in Decatur, three branches in Birmingham and one branch each in Huntsville, Madison, Montgomery, and Tuscaloosa.

 

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In Georgia, the Bank has three branches in Alpharetta, two branches each in Cartersville and Woodstock and one branch each in Canton, Cumming, Jasper, Marble Hill and Roswell.

Renasant Insurance has one office each in Corinth, Louisville and Tupelo, Mississippi.

The Bank owns the Company’s main office located at 209 Troy Street, Tupelo, Mississippi as well as forty of the Mississippi branch office sites and its two financial services offices. The Bank leases seven locations in Mississippi for use in conducting banking activities as well as various storage facilities. In Tennessee, the Bank owns five branch office sites. The remaining seven branch office sites as well as storage facilities in Tennessee are leased. In Alabama, the Bank owns two of the branch office sites and leases eight office sites. In Georgia, the Bank owns nine of the branch office sites and leases three office sites. Renasant Insurance owns each of the three locations for conducting its business. The aggregate annual rental for all leased premises during the year ending December 31, 2012 was $2.6 million. None of our properties are subject to any material encumbrances.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company, the Bank, Renasant Insurance or any other subsidiaries are a party or to which any of their property is subject, and no such legal proceedings were terminated in the fourth quarter of 2012.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Dividends

The Company’s common stock trades on The NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “RNST.” On February 28, 2013, the Company had approximately 7,100 shareholders of record and the closing sales price of the Company’s common stock was $22.01. The following table sets forth the high and low sales price for the Company’s common stock for each quarterly period for the fiscal years ended December 31, 2012 and 2011 as reported on NASDAQ, and the amount of cash dividends declared during each quarterly period during such fiscal years:

 

         Dividends    
Per Share
     Prices  
                High                      Low          

2012

        

1st Quarter

         $  0.17                      $  16.99                    $  14.42       

2nd Quarter

     0.17                 17.16              14.66       

3rd Quarter

     0.17                 19.97              15.66       

4th Quarter

     0.17                 20.45              16.53       

2011

        

1st Quarter

         $  0.17                      $  17.63                    $  14.77       

2nd Quarter

     0.17                 17.59              13.74       

3rd Quarter

     0.17                 15.89              11.80       

4th Quarter

     0.17                 15.35              12.11       

The Company declares dividends on a quarterly basis. Funds for the payment of cash dividends are obtained from dividends received by the Company from the Bank. Accordingly, the declaration and payment of cash dividends by the Company depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. Restrictions on the Bank’s ability to transfer funds to the Company in the form of cash dividends exist under federal and state law and regulations. See Note O, “Restrictions on Cash, Bank Dividends, Loans or Advances,” in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, for a discussion of these restrictions. These restrictions do not, and are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders in an amount consistent with the Company’s history of dividend payments.

However, as discussed above in Item 1, “Business,” under the subheading “Pending Acquisition of First M&F Corporation,” if, in connection with the Company’s acquisition of First M&F, First M&F does not redeem, or the Company does not repurchase, the CDCI Preferred Stock prior to the closing, then the Company will issue shares of preferred stock with the same terms and conditions as the shares of CDCI Preferred Stock, which could result in the Company being subject to the TARP regulations, including the dividend restrictions thereunder. The Company currently anticipates that these shares of CDCI Preferred Stock will be redeemed or purchased.

Please refer to Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the securities authorized for issuance under the Company’s equity compensation plans.

Issuer Purchases of Equity Securities

The Company did not repurchase any of its outstanding equity securities during the three month period ended December 31, 2012.

Unregistered Sales of Equity Securities

In January 2012, 41,500 shares of restricted stock were awarded under the Company’s 2011 Long-term Incentive Compensation Plan. At the time of the award, the shares issuable under the incentive plan had not been registered with the Securities and Exchange Commission. All recipients of the restricted stock awards were senior executive officers; therefore, the sale was exempt as a private placement under §4(2) of the Securities Exchange Act of 1934, as amended. Furthermore, no consideration was paid for the restricted stock awards.

 

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Stock Performance Graph

The following performance graph compares the performance of our common stock to the NASDAQ Market Index and to a peer group of regional southeast bank holding companies (which includes the Company) for our reporting period. The performance graph assumes that the value of the investment in our common stock, the NASDAQ Market Index and the peer group of regional southeast bank holding companies was $100 at December 31, 2007, and that all dividends were reinvested.

 

 

LOGO

 

     Period Ending December 31,  
          2007                2008                2009                2010                2011                2012       

Renasant Corporation

       $ 100.00             $   1.88             $   68.77             $ 89.39             $ 83.20             $   110.53     

NASDAQ Market Index

     100.00           60.02           87.24           103.08           102.26           120.42     

SNL Southeast Bank Index(1)

     100.00           40.48           40.65           39.47           23.09           38.36     

 

(1)

The SNL Geographic Index, Southeast Banks, is a peer group of 91 regional bank holding companies, whose common stock is traded either on the New York Stock Exchange, NYSE Amex or NASDAQ, and who are headquartered in Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

There can be no assurance that our common stock performance will continue in the future with the same or similar trends depicted in the performance graph above. We will not make or endorse any predictions as to future stock performance. The information provided under the heading “Stock Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to its proxy regulations or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, other than as provided in Item 201 of Regulation S-K. The information provided in this section shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

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ITEM 6. SELECTED FINANCIAL DATA(1)

(In Thousands, Except Share Data) (Unaudited)

 

Year Ended December 31,           2012                    2011                    2010                    2009                    2008         

Interest income

   $ 159,313        $ 170,687        $ 165,483        $ 170,316        $ 200,177    

Interest expense

     25,975          41,401          60,277          71,098          91,520    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     133,338          129,286          105,206          99,218          108,657    

Provision for loan losses

     18,125          22,350          30,665          26,890          22,804    

Noninterest income

     68,711          64,699          92,692          57,493          54,548    

Noninterest expense

     150,459          136,960          120,540          105,440          107,689    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     33,465          34,675          46,693          24,381          32,712    

Income taxes

     6,828          9,043          15,018          5,863          8,660    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

    $ 26,637         $ 25,632         $ 31,675         $ 18,518         $ 24,052    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Per Common Share

              

Net income – Basic

    $ 1.06         $ 1.02         $ 1.39         $ 0.88         $ 1.15    

Net income – Diluted

     1.06          1.02          1.38          0.87          1.14    

Book value at December 31

     19.80          19.44          18.75          19.45          19.00    

Closing price(2)

     19.14          15.00          16.91          13.60          17.03    

Cash dividends declared and paid

     0.68          0.68          0.68          0.68          0.68    

At December 31,

              

Assets

    $ 4,178,616         $ 4,202,008         $ 4,297,327         $ 3,641,081         $ 3,715,980    

Loans, net of unearned income

     2,810,253          2,581,084          2,524,590          2,347,615          2,530,886    

Securities

     674,077          796,341          834,472          714,164          695,106    

Deposits

     3,461,221          3,412,237          3,468,151          2,576,100          2,344,331    

Borrowings

     164,706          254,709          316,436          618,024          933,976    

Shareholders’ equity

     498,208          487,202          469,509          410,122          400,371    

Selected Ratios

              

Return on average:

              

Total assets

     0.64%          0.60%          0.80%          0.50%          0.65%    

Shareholders’ equity

     5.39%          5.34%          7.16%          4.56%          5.97%    

Average shareholders’ equity to average assets

     11.96%          11.27%          11.21%          10.96%          10.87%    

At December 31,

              

Shareholders’ equity to assets

     11.92%          11.59%          10.93%          11.26%          10.77%    

Allowance for loan losses to total loans, net of unearned income(3)

     1.72%          1.98%          2.07%          1.67%          1.38%    

Allowance for loan losses to nonperforming loans(3)

     146.90%          127.00%          84.32%          78.25%          87.45%    

Nonperforming loans to total loans, net of unearned income(3)

     1.17%          1.56%          2.46%          2.13%          1.58%    

Dividend payout

     64.15%          66.67%          49.28%          78.16%          59.65%    

 

(1)

Selected consolidated financial data includes the effect of mergers and other acquisition transactions from the date of each merger or other transaction. On February 4, 2011, Renasant Bank acquired specified assets and assumed specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”), from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for American Trust. On July 23, 2010, Renasant Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the FDIC, as receiver for Crescent. Refer to Item 1, Business, and Note B, “Mergers and Acquisitions,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, for additional information about the transaction involving American Trust and Crescent.

(2)

Reflects the closing price on The NASDAQ Global Select Market on the last trading day of the Company’s fiscal year.

(3)

Excludes assets covered under loss-share agreements with the FDIC.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(In Thousands, Except Share Data)

Performance Overview

Net income was $26,637 for 2012 compared to $25,632 for 2011 and $31,675 for 2010. The fluctuation in net income since 2010 was influenced by a number of factors:

 

 

In 2010, the Company expanded into north Georgia through its acquisition of the assets of Crescent Bank & Trust Company (“Crescent”) in an FDIC-assisted transaction. The acquisition resulted in a bargain purchase gain of $42,211 for 2010. In 2011, the Company broadened its footprint in north Georgia through its acquisition of the assets of American Trust Bank (“American Trust”) in an FDIC-assisted transaction. A bargain purchase gain of $8,774 was recorded in 2011. The Company did not record any bargain purchase gains during 2012.

 

 

In 2011, the Company acquired the Birmingham, Alabama-based trust division of RBC Bank (USA). Under the terms of the agreement, approximately $680,000 in assets under management were transferred to the Company. In connection with the acquisition, the Company recognized a gain of $570.

 

 

The Company expanded its franchise by opening de novo locations in Columbus, Mississippi during the fourth quarter of 2010, Starkville, Mississippi and Montgomery and Tuscaloosa, Alabama during 2011, and Maryville and Jonesborough, Tennessee during 2012. These de novo branches contributed $185,722 to total loans and $134,113 to total deposits at December 31, 2012, and $34,058 to total loans and $53,203 to total deposits at December 31, 2011.

 

 

Net interest income increased 3.13% to $133,338 for 2012 as compared to $129,286 for 2011; net interest income was $105,206 for 2010. Interest income decreased 6.66% to $159,313 for 2012 from $170,687 for 2011; interest income was $165,483 for 2010. The decrease from 2010 and 2011 levels is primarily attributable to an increase in average earning assets offset by a decrease in our yield resulting from the declining interest rate environment. Interest expense decreased 37.26% to $25,975 for 2012 compared to $41,401 for 2011; interest expense was $60,277 for 2010. A shift from higher costing liabilities to lower costing deposits resulted in lower interest expense since 2010.

 

 

Net charge-offs as a percentage of average loans decreased to 0.67% in 2012 compared to 0.91% in 2011. Net charge-offs as a percentage of average loans was 1.00% in 2010. The provision for loan losses was $18,125 for 2012 compared to $22,350 for 2011 and $30,665 for 2010.

 

 

Noninterest income was $68,711 for 2012 compared to $64,699 for 2011 and $92,692 for 2010. Higher levels of mortgage loan refinancings in 2012 primarily drove the increase in noninterest income from 2011 through the collection of commissions and fees on the loan originations and the gain on the subsequent sale of the loans in the secondary market. The aforementioned gains from the acquisitions of American Trust and the RBC Bank (USA) trust division were recorded in noninterest income in 2011, and the gain from the acquisition of Crescent was recorded in noninterest income in 2010.

 

 

Noninterest expenses were $150,459 for 2012 compared to $136,960 for 2011 and $120,540 for 2010. The increase in noninterest expense during 2012 was primarily due to costs associated with our de novo locations, commissions related to the increase in mortgage production during 2012 as compared to 2011 as well as higher health insurance costs.

 

 

Loans, net of unearned income, totaled $2,810,253 at December 31, 2012, an increase of $229,169, or 8.88%, from December 31, 2011. The increase in loans was attributable to growth in 1-4 family residential mortgages, owner and non-owner occupied commercial real estate loans and commercial loans, as well as loan production generated by our de novo expansion.

 

 

Deposits totaled $3,461,221 at December 31, 2012, an increase of $48,984, or 1.44%, from December 31, 2011. Management’s strategy to build and maintain a stable source of funding through core deposits, driven by noninterest-bearing deposits, has allowed for certain higher costing time deposits to mature or expire without renewal, some of which have been replaced with noninterest-bearing deposits and other lower costing deposits. Deposits from our de novo locations also contributed to the increase in deposits year over year.

 

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A historical look at key performance indicators is presented below.

 

           2012                  2011                 2010                  2009                 2008        

Diluted EPS

    $ 1.06            $ 1.02           $ 1.38            $ 0.87          $ 1.14       

Diluted EPS Growth

     3.92%          (26.09%     58.62%          (23.68%     (30.49%

Return on Average Assets

     0.64%          0.60%        0.80%          0.50%        0.65%   

Return on Average Shareholders’ Equity

     5.39%          5.34%        7.16%          4.56%        5.97%   

Pending acquisition of First M&F Corporation

On February 7, 2013, the Company announced the signing of a definitive merger agreement pursuant to which it will acquire First M&F Corporation (“First M&F”), a bank holding company headquartered in Kosciusko, Mississippi, and the parent of Merchants and Farmers Bank, a Mississippi banking corporation.

According to the terms of the merger agreement, each First M&F common shareholder will receive 0.6425 shares of Renasant common stock for each share of First M&F common stock, and the merger is expected to qualify as a tax-free reorganization for First M&F shareholders. Based on Renasant’s 10-day average closing price of $19.22 per share as of February 4, 2013, the aggregate transaction value is approximately $118.8 million.

The acquisition is expected to close in the third quarter of 2013 and is subject to regulatory approval, the approval of the shareholders of both the Company and First M&F, and other customary conditions set forth in the merger agreement. Pursuant to the terms of the merger agreement, Merchants and Farmers Bank is expected to merge with and into Renasant Bank immediately after the merger of First M&F with and into the Company.

In addition, in connection with the consummation of the merger, each outstanding share of First M&F’s Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series CD, issued to the U.S. Department of the Treasury under its Community Development Capital Initiative (the “CDCI Preferred Stock”), as well as the related warrant held by the U.S. Department of the Treasury, will be either redeemed by First M&F or purchased by the Company. If this does not occur, then the CDCI Preferred Stock will be converted into the right to receive one share of preferred stock of the Company with an analogous designation and the related warrant will be converted into a warrant to purchase the Company’s common stock, subject to adjustment to reflect the exchange ratio in the merger.

Critical Accounting Policies

Our financial statements are prepared using accounting estimates for various accounts. Wherever feasible, we utilize third-party information to provide management with estimates. Although independent third parties are engaged to assist us in the estimation process, management evaluates the results, challenges assumptions used and considers other factors which could impact these estimates. We monitor the status of proposed and newly issued accounting standards to evaluate the impact on our financial condition and results of operations. Our accounting policies, including the impact of newly issued accounting standards, are discussed in further detail in Note A, “Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data. The following discussion presents some of the more significant estimates used in preparing our financial statements.

 

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Allowance for Loan Losses

The accounting policy most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses. The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under the Financial Accounting Standards Board Accounting Standards Codification Topic (“ASC”) 450, “Contingencies” (“ASC 450”). 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” (“ASC 310”). The balance of the loans determined to be impaired under ASC 310 and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance is sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. Additionally, the estimate of the allowance required to absorb credit losses in the entire portfolio may change due to shifts in the mix and level of loan balances outstanding and in prevailing economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment rates and energy costs. While no one factor is dominant, each could cause actual loan losses to differ materially from originally estimated amounts. For a discussion of other considerations in establishing the allowance for loan losses and our loan policies and procedures for addressing credit risk, please refer to the disclosures in this Item under the heading “Risk Management – Credit Risk and Allowance for Loan Losses.”

Certain loans acquired in acquisitions or mergers are accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). ASC 310-30 prohibits the carryover of an allowance for loan losses for loans acquired in which the acquirer concludes that it will not collect the contractual amount. As a result, these loans are carried at values which represent management’s estimate of the future cash flows of these loans. Increases in expected cash flows to be collected from the contractual cash flows are required to be recognized as an adjustment of the loan’s yield over its remaining life, while decreases in expected cash flows are required to be recognized as an impairment. A more detailed discussion of loans accounted for under ASC 310-30, which were acquired in connection with our mergers with Capital Bancorp, Inc. (“Capital”) in 2007 and with Heritage Financial Holding Corporation (“Heritage”) in 2005 and our acquisitions of Crescent and American Trust in FDIC-assisted transactions in 2010 and 2011, respectively, is set forth below under the heading “Risk Management – Credit Risk and Allowance for Loan Losses” and in Note D, “Loans and the Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

 

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Other-Than-Temporary-Impairment on Investment Securities

On a quarterly basis, we evaluate our investment portfolio for other-than-temporary-impairment (“OTTI”) in accordance with ASC 320, “Investments – Debt and Equity Securities.” An investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis. When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded in earnings. When impairment of a debt security is considered to be other-than-temporary, the security is written down to its fair value. The amount of OTTI recorded as a loss in earnings depends on whether we intend to sell the debt security and whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the entire difference between the security’s amortized cost basis and its fair value is recorded as an impairment loss in earnings. If we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, OTTI is separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss is recognized in earnings. The amount related to other market factors is recognized in other comprehensive income, net of applicable taxes.

The amount of OTTI recorded in earnings as a credit loss is dependent upon management’s estimate of discounted future cash flows expected from the investment security. The difference between the expected cash flows and the amortized cost basis of the security is considered to be credit loss. The remaining difference between the fair value and the amortized cost basis of the security is considered to be related to all other market factors. Our estimate of discounted future cash flows incorporates a number of assumptions based on both qualitative and quantitative factors. Performance indicators of the security’s underlying assets, including credit ratings and current and projected default and deferral rates, as well as the credit quality and capital ratios of the issuing institutions are considered in the analysis. Changes in these assumptions could impact the amount of OTTI recognized as a credit loss in earnings. For additional information regarding the evaluation of our securities portfolio for OTTI, please refer to Note A, “Significant Accounting Policies,” and Note C, “Securities,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

Intangible Assets

Our intangible assets consist primarily of goodwill, core deposit intangibles, and customer relationship intangibles. Goodwill arises from business combinations and represents the value attributable to unidentifiable intangible elements of the business acquired. In connection with the reconstitution of our reportable segments, we redefined our reporting units with respect to the level at which our impairment testing of goodwill is performed. Reporting units related to our bank that were previously defined along geographical boundaries have been consolidated into one Community Banks reporting unit. A Wealth Management reporting unit was created, and the Insurance reporting unit was retained. We review the goodwill of each reporting unit for impairment on an annual basis, or more often, if events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is below the carrying value of its equity. In determining the fair value of our reporting units, we use both the market and discounted cash flow approaches. The market approach averages the values derived by applying a market multiple, based on observed purchase transactions, to the book value, tangible book value, loan and/or deposit balances and the last twelve months adjusted and unadjusted net income. The discounted cash flow approach requires assumptions about short and long-term net cash flow growth rates for each reporting unit, as well as discount rates. Long-term net cash flow forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, market share changes, anticipated loan and deposit growth, historical performance, and industry and economic trends, among other considerations.

We assess the reasonableness of the estimated fair value of the reporting units by reference to our market capitalization; however, due to the significant volatility in the equity markets with respect to the financial institution sector since 2008, we also consulted supplemental information based on observable market multiples, adjusting to reflect our specific factors, as well as current market conditions.

 

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The estimated fair value of a reporting unit is highly sensitive to changes in the estimates and assumptions. In some instances changes in these assumptions could impact whether the fair value of a reporting unit is greater than its carrying value. We perform sensitivity analyses around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. If the carrying value of a reporting unit’s equity exceeds its estimated fair value, we then calculate the fair value of the reporting unit’s implied goodwill. Implied goodwill is the excess fair value of a reporting unit (as determined using the above-described methodology) over the fair value of its net assets and is calculated by determining the fair value of the reporting unit’s assets and liabilities, including previously unrecognized intangible assets, on an individual basis. This calculation is performed in the same manner as goodwill is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.

Other identifiable intangible assets, primarily core deposit intangibles and customer relationship intangibles, are reviewed at least annually for events or circumstances which could impact the recoverability of the intangible asset, such as loss of core deposits, increased competition or adverse changes in the economy. To the extent any other identifiable intangible asset is deemed unrecoverable, an impairment loss would be recorded as a noninterest expense to reduce the carrying amount. These events or circumstances, when or if they occur, could be material to our operating results for any particular reporting period.

Benefit Plans and Stock Based Compensation

Our independent actuary firm prepares actuarial valuations of our pension cost under ASC 715, “Compensation – Retirement Benefits” (“ASC 715”). The discount rate utilized in the December 31, 2012 valuation was 3.90%, compared to 5.06% in 2011. Actual plan assets as of December 31, 2012 were used in the calculation and the expected long-term return on plan assets assumed for this valuation was 8.00%. Changes in these assumptions and estimates can materially affect the benefit plan obligation and the funded status of the plan which in turn may impact shareholders’ equity through an adjustment to accumulated other comprehensive income and future pension expense. The pension plan covered under ASC 715 was frozen as of December 31, 1996.

The Company recognizes compensation expense for all share-based payments to employees in accordance with ASC 718, “Compensation – Stock Compensation.” We utilize the Black-Scholes model for determining fair value of our options. Determining the fair value of, and ultimately the expense we recognize related to, our stock options requires us to make assumptions regarding dividend yields, expected stock price volatility, estimated forfeitures and the expected life of the option. Changes in these assumptions and estimates can materially affect the calculated fair value of stock-based compensation and the related expense to be recognized. Due to the low historical forfeiture rate, the Company has not estimated any forfeitures in determining the fair value of options granted in 2012, 2011 and 2010. Changes in this assumption in the future could result in lower expenses related to the Company’s stock options. For a description of our assumptions utilized in calculating the fair value of our share-based payments, please refer to Note N, “Employee Benefit and Deferred Compensation Plans,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

Business Combinations, Accounting for Acquired Loans and Related Assets

The Company accounts for its acquisitions under ASC 805, “Business Combinations”, which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value measurements incorporate assumptions regarding credit risk. The fair value measurements of acquired loans are based on estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. The Company evaluates, as of the end of each fiscal quarter, the present value of the acquired loans determined using the effective interest rates. If the cash flows expected to be collected have decreased, the Company recognizes a provision for loan loss in its consolidated statement of income; for any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

 

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Because the FDIC will reimburse the Company for losses related to a portion of the loans acquired in the Crescent and American Trust transactions, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans and measured on the same basis, subject to collectability or contractual limitations. The fair value of the indemnification asset reflects the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.

The indemnification asset is measured on the same basis as the related indemnified loans. Subsequent changes to the fair value of the indemnification asset also follow that model. Decreases in the future cash flows expected to be collected on the loans immediately increase the fair value of the indemnification asset. Increases in the future cash flows expected to be collected on the loans decrease the fair value of the indemnification asset, with such decrease being accreted into interest income over (1) the same period or (2) the life of the fair value of the indemnification asset, whichever is shorter. Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared loss agreements.

Upon the determination of an incurred loss the indemnification asset will be reduced by the amount owed by the FDIC. A corresponding receivable is recorded on the balance sheet until cash is received from the FDIC.

Income Taxes

Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of “Other assets” in the Consolidated Balance Sheets. The calculation of our income tax expense is complex and requires the use of many estimates and judgments in its determination.

Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income earned by certain subsidiaries and the implementation of various tax plans to maximize realization of the deferred tax asset. Management believes that the Company and its subsidiaries will generate sufficient operating earnings to realize the deferred tax assets.

For certain business plans enacted by the Company, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. As part of this process, management consults with its outside advisers to assess the relative merits and risks of our proposed tax treatment of such business plans. Although we have received from these outside advisers opinions that our proposed tax treatment should prevail, the examination of our income tax returns, changes in tax law and regulatory guidance may impact the tax treatment of these transactions and resulting provisions for income taxes.

We believe that we employ appropriate methods for these calculations and that the results of such calculations closely approximate the actual cost. We review the calculated results for reasonableness and compare those calculations to prior period costs. We also consider the effect of current economic conditions on the calculations.

For additional information regarding our income tax accounting, please refer to Note A, “Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

Financial Condition and Results of Operations

Net Income

Net income for the year ended December 31, 2012 was $26,637 compared to net income of $25,632 for the year ended December 31, 2011 and $31,675 for the year ended December 31, 2010. Basic earnings per share for the year ended December 31, 2012 were $1.06 as compared to $1.02 for the year ended December 31, 2011 and $1.39 for the year ended December 31, 2010. Diluted earnings per share for the year ended December 31, 2012 were $1.06 as compared to $1.02 for the year ended December 31, 2011 and $1.38 for the year ended December 31, 2010. The higher earnings per share in 2010 as compared to 2012 and 2011 was due primarily to the acquisition of Crescent and the related one-time gain the Company recorded in connection with the acquisition.

 

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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 66.96% of total net revenue in 2012. 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 mix and the repricing of rate-sensitive assets and liabilities.

Net interest income increased 3.13% to $133,338 for 2012 compared to $129,286 in 2011. Net interest income was $105,206 in 2010. On a tax equivalent basis, net interest income increased $4,138 to $139,261 in 2012 as compared to $135,123 in 2011; net interest income was $110,207 in 2010. With respect to the increase in tax-equivalent net interest income in 2012, the increase due to the change in the volume of net earning assets was $10,078, while the decrease from the changing interest rate environment was $5,940.

 

        Net Interest Margin – Tax Equivalent         

2012

      

2011

      

2010

3.94%

     3.77%      3.26%

Net interest margin, the tax equivalent net yield on earning assets, increased to 3.94% during 2012 from 3.77% in 2011 and 3.26% in 2010. Net interest margin and net interest income are influenced by several factors, primarily changes in interest rates, competition and the shape of the interest rate yield curve. Significant reductions in interest rate indices in 2008 have put downward pressure on net interest margin since 2009. With each rate reduction in rate indices, specifically, the prime rate, rates paid on U.S. Treasury securities and the London Interbank Offering Rate (“LIBOR”), the yield on our variable rate loans indexed to these indices decreased. At the same time, competitive and market-wide liquidity factors prevented the cost of funding sources, particularly deposits, from declining proportionately. As a result, net interest margin declined. Economic forces have continued to keep interest rates low since 2008; however, a shift in our costing liabilities mix from higher costing borrowed funds to lower costing deposits resulting in a lower overall cost of funds and a shift in our earning assets from cash and securities into loans has offset the impact of the depressed interest rate environment on our net interest margin, resulting in net interest margin improvement in both 2011 and 2012.

Interest income, on a tax equivalent basis, was $165,236 for 2012 compared to $176,524 for 2011. The prolonged low interest rate environment contributed to a lower yield on earning assets. The following table presents the percentage of total average earning assets, by type and yield, for 2012, 2011 and 2010:

 

     Percentage of Total      Yield  
          2012                2011                2010                2012                2011                2010       

Loans

     76.65%          71.82%          72.17%          5.10%          5.53%          5.65%    

Securities

     20.88             22.90             21.78             3.61             4.06             4.34       

Other

     2.47             5.28             6.05             0.23             0.29             0.28       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total earning assets

     100.00%          100.00%          100.00%          4.67%          4.92%          5.04%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense was $25,975 for 2012, a decrease of $15,426, or 37.26%, as compared to 2011. The decrease in interest expense was due to the decrease in the cost of interest-bearing liabilities as a result of the declining interest rate environment and a change in the mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities, specifically time deposits and borrowed funds. In addition, the average balance of noninterest-bearing deposits increased $56,318, or 11.56%, during 2012 as compared to 2011. The cost of interest-bearing liabilities was 0.85% for 2012 as compared to 1.27% for 2011, while the average balance of interest-bearing liabilities decreased to $3,049,034 for 2012 compared to $3,255,934 for 2011.

 

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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 each of the years presented:

 

     Percentage of Total      Cost of Funds  
     2012        2011        2010        2012        2011        2010    

Noninterest-bearing demand

     15.13%           13.02%           9.69%           —%           —%           —%     

Interest-bearing demand

     38.40              35.84              31.61              0.28              0.68              1.10        

Savings

     6.42              5.63              4.40              0.23              0.38              0.73        

Time deposits

     34.76              38.36              41.62              1.17              1.52              2.18        

Federal Home Loan Bank advances

     2.50              3.40              8.49              4.29              4.11              3.67        

Other borrowed funds

     2.79              3.75              4.19              3.08              3.16              3.47        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits and borrowed funds

       100.00%             100.00%             100.00%               0.72%               1.11%               1.74%     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income, on a tax equivalent basis, was $176,524 for 2011 compared to $170,484 for 2010. The average balance of interest-earning assets increased during 2011 as compared to 2010 driving the increase in interest income; however, the lower interest rate environment and the change in the mix of interest-earning assets from higher yielding loans to lower yielding investment securities contributed to a lower yield on earning assets. Interest expense was $41,401 for 2011, a decrease of $18,876, or 31.32%, as compared to 2010. The decrease in interest expense was due to the decrease in the cost of interest-bearing liabilities as a result of the declining interest rate environment and a change in the mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities. The cost of interest-bearing liabilities was 1.27% for 2011 as compared to 1.93% for 2010, while the average balance of interest-bearing liabilities increased to $3,255,934 for 2011 compared to $3,121,157 for 2010.

Loans and Loan Interest Income

Loans, excluding mortgage loans held for sale, are the Company’s most significant earning asset, comprising 67.25%, 61.43% and 58.75% of total assets at December 31, 2012, 2011 and 2010, respectively. The table below sets forth the balance of loans outstanding by loan type at December 31:

 

           2012                  2011                  2010                  2009                  2008        

Commercial, financial, agricultural

     $ 317,050          $ 278,091          $ 265,276          $ 281,329          $ 312,648    

Lease financing

     190          328          503          778          1,746    

Real estate – construction

     105,706          81,235          82,361          133,299          241,818    

Real estate – 1-4 family mortgage

     903,423          824,627          872,382          820,917          886,380    

Real estate – commercial mortgage

     1,426,643          1,336,635          1,239,843          1,040,589          1,015,894    

Installment loans to individuals

     57,241          60,168          64,225          70,703          72,400    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

     $ 2,810,253          $ 2,581,084          $ 2,524,590          $ 2,347,615          $ 2,530,886    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the percentage of loans, by category, to total loans at December 31 for the last five years:

 

           2012                   2011                   2010                   2009                   2008        

Commercial, financial, agricultural

     11.28%          10.77%          10.51%          11.98%          12.35%    

Lease financing

     0.01             0.01             0.02             0.04             0.07       

Real estate – construction

     3.76             3.15             3.26             5.68             9.56       

Real estate – 1-4 family mortgage

     32.15             31.95             34.56             34.97             35.02       

Real estate – commercial mortgage

     50.76             51.79             49.11             44.32             40.14       

Installment loans to individuals

     2.04             2.33             2.54             3.01             2.86       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     100.00%           100.00%          100.00%          100.00%          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 December 31, 2012, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans separate from the categories listed above.

 

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Loans secured by real estate represented 86.67%, 86.89%, 86.93%, 84.97% and 84.72% of the Company’s total loan portfolio at December 31, 2012, 2011, 2010, 2009 and 2008, respectively. The following table provides further details of the types of loans in the Company’s loan portfolio secured by real estate at December 31:

 

     2012      2011      2010      2009      2008  

Real estate – construction:

              

Residential

    $ 48,453         $ 31,802         $ 37,619         $ 45,559         $ 139,332    

Commercial

     56,201          47,620          39,725          74,440          90,039    

Condominiums

     1,052          1,813          5,017          13,300          12,447    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate – construction

     105,706          81,235          82,361          133,299          241,818    

Real estate – 1-4 family mortgage:

              

Primary

     466,282          373,192          363,498          345,971          361,153    

Home equity

     198,781          193,140          183,427          171,180          181,960    

Rental/investment

     156,956          167,364          199,373          158,436          178,814    

Land development

     81,404          90,930          126,084          145,330          164,453    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate – 1-4 family mortgage

     903,423          824,627          872,382          820,917          886,380    

Real estate – commercial mortgage:

              

Owner-occupied

     640,906          641,220          593,743          537,387          530,938    

Non-owner occupied

     638,486          529,524          457,735          367,011          347,000    

Land development

     147,251          165,891          188,365          136,191          137,956    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate – commercial mortgage

     1,426,643          1,336,635          1,239,843          1,040,589          1,015,894    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans secured by real estate

    $ 2,435,772         $ 2,242,497         $ 2,194,586         $ 1,994,805         $ 2,144,092    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans at December 31, 2012 were $2,810,253, an increase of $229,169 from $2,581,084 at December 31, 2011. Loans covered under loss-share agreements with the FDIC (referred to as “covered loans”) were $237,088 at December 31, 2012, a decrease of $102,374, compared to $339,462 at December 31, 2011. For covered loans, the FDIC will reimburse the Bank 80% of the losses incurred on these loans. The covered loans will continue to decline through the Company’s aggressive efforts to bring those covered loans that are commercial in nature to resolution as the loss-share agreements applicable to this portfolio provides reimbursement for five years from the acquisition date. The following table provides a breakdown of covered loans at December 31:

 

     2012        2011        2010    

Commercial, financial, agricultural

    $ 10,800         $ 17,803         $ 20,921     

Lease financing

     —          —          —     

Real estate – construction:

        

Residential

     1,648          3,158          6,476     

Commercial

     —          3,918          9,087     

Condominiums

     —          —          —     
  

 

 

    

 

 

    

 

 

 

Total real estate – construction

     1,648          7,076          15,563     

Real estate – 1-4 family mortgage:

        

Primary

     20,623          21,491          19,786     

Home equity

     15,622          23,048          21,454     

Rental/investment

     26,586          42,217          51,065     

Land development

     10,617          21,167          30,214     
  

 

 

    

 

 

    

 

 

 

Total real estate – 1-4 family mortgage

     73,448          107,923          122,519     

Real estate – commercial mortgage:

        

Owner-occupied

     63,683          101,448          71,455     

Non-owner occupied

     50,879          48,939          24,863     

Land development

     36,599          56,105          78,254     
  

 

 

    

 

 

    

 

 

 

Total real estate – commercial mortgage

             151,161                  206,492                  174,572     

Installment loans to individuals

     31          168          106     
  

 

 

    

 

 

    

 

 

 

Total covered loans

    $ 237,088         $ 339,462         $ 333,681     
  

 

 

    

 

 

    

 

 

 

 

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Loans not covered under a loss-share agreement at December 31, 2012 were $2,573,165, an increase of $331,543, compared to $2,241,622 at December 31, 2011. The increase in loans not covered under loss-share agreements in 2012 was attributable to growth in 1-4 family residential mortgages, 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 and Jonesborough, Tennessee contributed $151,664 of the total increase in loans from December 31, 2011.

The following table provides a breakdown of loans not covered under a loss-share agreement at December 31:

 

     2012      2011      2010  

Commercial, financial, agricultural

    $ 306,250          $ 260,288         $ 244,355     

Lease financing

     190           328          503     

Real estate – construction:

        

Residential

     46,805           28,644          31,143     

Commercial

     56,201           43,702          30,638     

Condominiums

     1,052           1,813          5,017     
  

 

 

    

 

 

    

 

 

 

Total real estate – construction

     104,058           74,159          66,798     

Real estate – 1-4 family mortgage:

        

Primary

     445,659           351,702          343,712     

Home equity

     183,159           170,092          161,973     

Rental/investment

     130,370           125,147          148,308     

Land development

     70,787           69,763          95,870     
  

 

 

    

 

 

    

 

 

 

Total real estate – 1-4 family mortgage

     829,975           716,704          749,863     

Real estate – commercial mortgage:

        

Owner-occupied

     577,223           539,772          522,288     

Non-owner occupied

     587,607           480,585          432,872     

Land development

     110,652           109,786          110,111     
  

 

 

    

 

 

    

 

 

 

Total real estate – commercial mortgage

           1,275,482                 1,130,143                1,065,271     

Installment loans to individuals

     57,210           60,000          64,119     
  

 

 

    

 

 

    

 

 

 

Total loans not covered under a loss-share agreement

    $ 2,573,165          $ 2,241,622         $ 2,190,909     
  

 

 

    

 

 

    

 

 

 

During 2012, loans in our Tennessee and Mississippi markets increased $74,495 and $75,147, respectively, while loans in our Alabama markets increased $101,382. Loans in our Georgia markets not covered under loss-share agreements increased $79,104 from December 31, 2011.

Mortgage Loans Held for Sale

Mortgage loans held for sale were $34,845 at December 31, 2012 compared to $28,222 at December 31, 2011. Originations of mortgage loans to be sold totaled $588,454 in 2012, $433,845 in 2011 and $519,447 in 2010. Mortgage rates in in the latter half of 2011 declined to historic lows and remained at these historically low levels throughout 2012, which prompted a significant increase in refinancings in 2012.

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.

 

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Investments and Investment Interest Income

Investment income is the second largest component of interest income. 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, at December 31:

 

     2012      2011      2010  
     Balance      % of
Portfolio
     Balance      % of
Portfolio
     Balance      % of
Portfolio
 

Obligations of other U.S. Government agencies and corporations

    $ 92,487          13.72%        $ 125,055          15.70%        $ 97,455          11.68%    

Mortgage-backed securities

     312,803          46.40             409,639          51.44             473,456          56.74       

Obligations of states and political subdivisions

     227,721          33.78             224,750          28.22             206,083          24.70       

Trust preferred securities

     15,068          2.24             12,785          1.61             4,583          0.54       

Other debt securities

     22,930          3.40             21,875          2.75             23,054          2.76       

Other equity securities

     3,068          0.46             2,237          0.28             29,841          3.58       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $ 674,077             100.00%         $ 796,341            100.00%         $ 834,472            100.00%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In 2012, investment income, on a tax equivalent basis, decreased $6,760 to $26,629 from $33,389 for 2011. The average balance in the investment portfolio in 2012 was $738,365 compared to $821,532 in 2011. The tax equivalent yield on the investment portfolio in 2012 was 3.61%, down 45 basis points from 2011. 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 of such calls. These rates were lower due to the generally lower interest rate environment.

The balance of our investment portfolio at December 31, 2012 was $674,077 compared to $796,341 at December 31, 2011. During 2012, we purchased $287,384 in investment securities. Mortgage-backed securities and collateralized mortgage obligations (“CMOs”), in the aggregate, comprised 52.10% 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 40.49% and 6.32%, respectively, of total securities purchased in 2012. The carrying value of securities sold during 2012 totaled $124,156, consisting solely of mortgage-backed securities. Maturities and calls of securities during 2012 totaled $282,985. At December 31, 2012, unrealized losses of $14,035 were recorded on investment securities with a carrying value of $78,908.

The Company holds investments in pooled trust preferred securities that had a cost basis of $28,612 and $30,410 and a fair value of $15,068 and $12,785 at December 31, 2012 and 2011, 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 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. Management has determined that there has been an adverse change in estimated cash flows for each of the four pooled trust preferred securities. Accordingly, the Company recognized other-than-temporary-impairment losses on these securities of $262 and $3,075 during the years ended December 31, 2011 and 2010, respectively. No additional impairment was recognized during the year ended December 31, 2012. Furthermore, based on the qualitative factors discussed above, each of the four pooled trust preferred securities were classified as nonaccrual assets at December 31, 2012. Investment interest income is recorded on the cash-basis method until qualifying for return to accrual status.

In 2011, investment income, on a tax equivalent basis, increased $1,383 to $33,389 from $32,006 for 2010. The average balance in the investment portfolio in 2011 was $821,532 compared to $737,256 in 2010. The tax equivalent yield on the investment portfolio in 2011 was 4.06%, down 28 basis points from 2010.

 

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The balance of our investment portfolio at December 31, 2011 declined $38,131 to $796,341 compared to $834,472 at December 31, 2010. During 2011, we purchased $295,038 in investment securities. U.S. Government Agency securities and municipal securities accounted for 44.28% and 17.50%, respectively, of total securities purchased in 2011. Mortgage-backed securities and CMOs, in the aggregate, made up the remaining 38.22% of the purchases. The carrying value of securities sold during 2011 totaled $94,024, consisting of mortgage-backed securities and municipal securities. Maturities and calls of securities during 2011 totaled $234,395. At December 31, 2011, unrealized losses of $17,864 were recorded on investment securities with a carrying value of $40,191.

Deposits and Deposit Interest Expense

 

  Average Interest-Bearing Deposits to Total Average Deposits  

2012

      

2011

      

2010

84.02%

     85.98%      88.90%

The Company relies on deposits as its major source of funds. Total deposits were $3,461,221 and $3,412,237 at December 31, 2012 and 2011, respectively. Noninterest-bearing deposits at December 31, 2012 and 2011 were $568,214 and $531,910, respectively, while interest-bearing deposits were $2,893,007 and $2,880,327 at December 31, 2012 and 2011, respectively. The balance of deposits at December 31, 2012 as compared to December 31, 2011 increased 1.44% which 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. 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 at a rate that is prudent under the circumstances.

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 at December 31, 2012 were $344,342 compared to $338,273 at December 31, 2011 and $359,195 at December 31, 2010.

Following management’s emphasis on growing a stable source of funding through core deposits and allowing more costly deposits to mature or expire, deposits in our Alabama, Mississippi, and Tennessee markets increased $981, $27,009, and $66,716, respectively, during 2012. Deposits in our Georgia markets decreased $78,328 during 2012 due to an intentional runoff of time deposits. Deposits from our de novo locations in Columbus and Starkville, Mississippi, Tuscaloosa and Montgomery, Alabama and Maryville and Jonesborough, Tennessee totaled $134,113 at December 31, 2012 representing an increase of $80,910 from December 31, 2011.

Interest expense on deposits was $19,030, $31,729 and $44,487 for 2012, 2011 and 2010, respectively. The cost of total deposits was 0.56%, 0.91%, and 1.47% for the years ending December 31, 2012, 2011, and 2010, respectively. The cost of interest-bearing deposits was 0.67%, 1.06% and 1.66% for the same periods. A more detailed discussion of the cost of our deposits is set forth below under the heading “Liquidity and Capital Resources” in this item.

Borrowed Funds and Interest Expense on Borrowings

Total borrowings include securities sold under agreements to repurchase, federal funds purchased, advances from the FHLB and junior subordinated debentures. Interest expense on total borrowings was $6,945, $9,672 and $15,790 for the years ending December 31, 2012, 2011 and 2010, respectively. 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 commercial or real estate loans. FHLB advances were $83,843 and $117,454 at December 31, 2012 and 2011, respectively. The cost of our FHLB advances was 4.29%, 4.11% and 3.67% for 2012, 2011 and 2010.

In addition, short-term FHLB advances, securities purchased under agreements to repurchase and federal funds purchased are used, as needed, to meet day to day liquidity needs. The Company had no short-term FHLB advances or federal funds purchased outstanding at December 31, 2012, 2011 or 2010. The Company had $5,254, $11,485, and $12,087 in securities sold under agreements to repurchase at December 31, 2012, 2011, and 2010, respectively.

 

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Interest expense on junior subordinated debentures was $2,594, $2,487 and $3,058 for the years ended December 31, 2012, 2011 and 2010, respectively. For more information about our outstanding subordinated debentures, refer to the discussion in this item below under the heading “Shareholders’ Equity and Regulatory Matters.”

In March 2012, the Company repaid $50,000 of qualifying senior debt securities issued under the Temporary Liquidity Guaranty Program (“TLGP”) at maturity. While outstanding, the cost of the TLGP debt was 3.94%, 3.83% and 3.79% for 2012, 2011 and 2010.

Effective January 2012, a portion of the Federal Reserve’s Treasury Tax and Loan program was eliminated. As a result, all deposits held by the Company under the program were withdrawn as of December 31, 2011. The outstanding balance of treasury, tax and loan notes at December 31, 2010 was $3,299.

Noninterest Income

 

            Noninterest Income to Average Assets             

(Excludes securities gains/losses)

2012

      

2011

      

2010

1.62%

     1.41%      2.33%

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, securities 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 as a percentage of total net revenues was 33.04%, 32.38% and 45.68% for 2012, 2011 and 2010.

Noninterest income was $68,711 for the year ended December 31, 2012, an increase of $4,012, or 6.20%, as compared to $64,699 for 2011. Noninterest income was $92,692 for the year ended December 31, 2010. The bargain purchase gain resulting from the acquisition of Crescent in 2010 totaled $42,211.

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 $18,612 for 2012, a decrease of $499, or 2.61%, from 2011. Service charges on deposit accounts were $19,111 in 2011, a decrease of $2,393 from 2010. The decline in service charges on deposit accounts was primarily a result of the reduction in customer spending which began in 2009 as a result of current economic conditions and the impact of new regulations enacted in the third quarter of 2010 which restricted the Company’s ability to impose overdraft fees. Overdraft fees represented 82.14%, 87.80%, and 89.28% of total charges for deposit services in 2012, 2011 and 2010, respectively.

Fees and commissions increased 34.05% to $17,595 during 2012 as compared to $13,126 for 2011. 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 increased $3,005, or 83.36%, to $6,610 during 2012 as compared to $3,605 for 2011. This is due to the increase in mortgage loan originations to be sold in the secondary market in 2012. Interchange fees on debit card transactions continue to be a strong source of noninterest income. For 2012, fees associated with debit card usage were $8,322, an increase of 13.43% as compared to $7,337 for 2011. Income derived from use of our debit cards made up 47.30% of the total fees and commissions for 2012. We expect income from use of our debit cards to continue to grow as our customers use this convenient method of payment. As directed by the Durbin Debit Interchange Amendment to the Dodd-Frank Act that went into effect October 1, 2011, the Federal Reserve enacted regulations governing the “reasonableness” of certain fees associated with our debit cards and also placed restrictions on the rates charged for interchange fees on debit card transactions. Although these provisions apply only to financial institutions with more than $10 billion in assets, we expect that all financial institutions, regardless of size, will have to adjust their rates in order to remain competitive as affected institutions lower their debit card fees. Management believes these restrictions could have an adverse impact on these interchange fees in the future, but is unable at this time to predict the extent or timing of such impact.

Fees and commissions increased $2,564 to $13,126 during 2011 as compared to $10,562 for 2010. Mortgage loan fees increased $806 during 2011 to $3,604 as compared to 2010. This is due to the increase in mortgage loan originations to be sold in the secondary market during the same period. For 2011, fees associated with debit card usage were $7,337, an increase of 22.90% as compared to $5,970 for 2010.

 

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Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $3,630, $3,298 and $3,435 for the years ended December 31, 2012, 2011 and 2010, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our clients’ policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers. Contingency income, which is included in “Other noninterest income” in the Consolidated Statements of Income, was $257, $368 and $274 for 2012, 2011 and 2010, respectively.

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 IRA’s, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. 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 $6,926 for 2012 compared to $4,864 for 2011 and $3,637 for 2010. The market value of trust assets under management was $1,090,908 and $1,024,585 at December 31, 2012 and 2011, respectively. The increases in Wealth Management revenue were primarily attributable to the acquisition of the Birmingham, Alabama-based trust division of RBC Bank (USA) in the third quarter of 2011.

Gains on sales of securities for 2012 were $1,894, resulting from the sale of approximately $124,156 in securities, compared to gains on sales of securities for 2011 of $5,057, resulting from the sale of approximately $94,024 in securities. Gains on sales of securities for 2010 were $3,955, resulting from the sale of approximately $125,969 in securities. Other-than-temporary-impairment losses recognized in 2010 and 2011 are discussed above.

Gains on the sale of mortgage loans held for sale were $12,499, $4,133 and $6,224 for the years ended December 31, 2012, 2011, and 2010, respectively. Originations of mortgage loans to be sold totaled $588,454 for 2012 as compared to $433,845 for 2011 and $519,447 for 2010. The increase in originations of mortgage loans to be sold and the related gain on the sales in 2012 is due to the higher levels of refinancing in 2012 made possible by historically lower mortgage interest rates.

Noninterest Expense

 

        Noninterest Expense to Average Assets         

2012

      

2011

      

2010

3.64%

     3.22%      3.06%

Noninterest expense was $150,459, $136,960 and $120,540 for 2012, 2011 and 2010, respectively. Noninterest expense increased $13,499, or 9.86%, during 2012 as compared to 2011, as detailed in the discussion below.

Salaries and employee benefits is the largest component of noninterest expenses and represented 53.84%, 48.29% and 48.86% of total noninterest expense at December 31, 2012, 2011 and 2010, respectively. During 2012, salaries and employee benefits increased $14,867, or 22.48%, to $81,002 as compared to $66,135 for 2011. The increase is primarily attributable to commissions related to the increase in mortgage production during 2012 as compared to 2011 as well as higher health insurance costs. Personnel costs associated with our de novo locations in Maryville and Jonesborough, Tennessee also contributed to the increase. During 2011, salaries and employee benefits increased $7,235, or 12.28%, to $66,135 as compared to $58,900 for 2010 primarily as a result of our acquisitions of American Trust and the RBC Bank (USA) trust division and our de novo locations in Columbus, Mississippi, in the fourth quarter of 2010 and Starkville, Mississippi, and Tuscaloosa and Montgomery, Alabama, during 2011.

 

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The compensation expense recorded in connection with grants of stock options and awards of restricted stock, which is included within salaries and employee benefits, was $1,368, $620 and $752 for 2012, 2011 and 2010, respectively. Restricted stock awards in all three years were subject to the satisfaction of performance-based conditions. In 2012, the target performance conditions were achieved, and compensation expense was recognized accordingly. In 2011, the Company’s compensation committee exercised its negative discretion to cancel the 2011 restricted stock awards because the relevant performance conditions were achieved only after taking into account the impact of the American Trust Acquisition. This explains the increase in compensation expense recorded in connection with grants of stock options and awards of restricted stock from 2011 to 2012. Performance thresholds required for the awards granted in 2010 were achieved, but fewer shares were issued resulting in less compensation expense as compared to 2012.

Data processing costs increased $1,427, or 19.56%, to $8,724 for 2012 from 2011. Data processing costs increased $923 to $7,297 for 2011 from $6,374 in 2010. The increase in data processing costs over the periods presented is reflective of increased loan, deposit and debit card processing from growth in the number of loans and deposits and increases in debit card transactions. The inclusion of data processing costs from American Trust and Crescent operations in 2011 and 2010, respectively, also contributed to the increase.

Net occupancy and equipment expense in 2012 was $14,597, an increase of $1,045, compared to $13,552 for 2011. Net occupancy and equipment expense increased $1,708 for 2011 compared to $11,844 for 2010. These increases are attributable to occupancy costs associated with the operations of the Company’s recent banking expansions beginning in 2010.

Expenses related to other real estate owned for 2012 were $13,596, a decrease of $1,730 compared to 2011. Expenses on other real estate owned for 2012 include write downs of $7,272 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 $57,840 was sold during 2012, resulting in a net loss of $2,096. Expenses related to other real estate owned for 2011 were $15,326, an increase of $5,708 compared to 2010. Expenses on other real estate owned for the year ended December 31, 2011 include write downs of $8,224 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 $47,972 was sold during 2011, resulting in a net loss of $3,073.

Professional fees include fees for legal and accounting services. Professional fees were $4,241 for 2012 as compared to $4,173 for 2011 and $3,651 for 2010. 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 $4,835 for 2012, an increase of $750 compared to $4,085 for 2011. Advertising and public relations expense increased $872 for 2011 compared to $3,213 for 2010. These year-over-year increases are attributable to advertising and marketing costs associated with the Company’s expansion into new markets since 2010.

Amortization of intangible assets totaled $1,381 for 2012 compared to $1,742 for 2011 and $1,974 for 2010. This amortization relates to finite-lived intangible assets recorded in prior mergers which are being amortized over the useful lives as determined at acquisition. These finite-lived intangible assets have remaining estimated useful lives ranging from two to fourteen years. During 2011, the Company amortized the remaining core deposit intangible recorded in connection with the Renasant Bancshares acquisition. The amortization was $326 in 2011 compared to $652 in 2010. This reduction was offset by amortization expense related to finite-lived intangible assets recorded in association with the Crescent, American Trust and the RBC Trust (USA) trust division acquisitions.

Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were $4,212 for 2012 as compared to $4,500 for 2011 and $3,985 for 2010.

Total noninterest expenses for 2011 included $1,651 of acquisition-related expenses associated with the American Trust and RBC Bank (USA) trust division acquisitions. In comparison, total noninterest expenses for 2010 included $1,955 of acquisition-related expenses associated with the Crescent acquisition. The Company did not record any acquisition related expenses during 2012.

The Company repaid FHLB advances prior to their contractual maturity of $24,000 in 2012, $50,000 in 2011, and $148,000 in 2010, and, as a result, incurred prepayment penalties of $898, $1,903 and $2,785 for the years ended December 31, 2012, 2011, and 2010, respectively.

 

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Efficiency Ratio

            2012             

              2011                            2010             
  72.35%      68.54%       59.41%

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 taxable equivalent basis and noninterest income. The increase in noninterest expense coupled with net interest income and noninterest income remaining relatively flat resulted in the deterioration in the Company’s efficiency ratio for 2012 as compared to 2011. The lower efficiency ratio in 2010 as compared to 2012 and 2011 was attributable to the bargain purchase gain arising from the Crescent acquisition. Excluding the gains on acquisitions included in noninterest income in 2011 and 2010, our efficiency ratio was 71.90% and 75.01% in 2011 and 2010, respectively. 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 2012 and 2011 from incremental revenue driven by the associated salaries expense generated by the maturity of the Company’s de novo locations and continued reduction in credit related costs as credit quality improves. The Company experienced an unusually high level of health insurance claims in 2012. Lower levels of health insurance costs in 2013 are also expected to contribute to an improvement in the efficiency ratio.

Income Taxes

Income tax expense for 2012, 2011 and 2010 was $6,828, $9,043 and $15,018, respectively. The effective tax rates for those years were 20.40%, 26.08% and 32.16%, respectively. The decrease in the effective tax rate for 2012 as compared to 2011 was attributable to reversals of valuation allowances against the deferred tax assets related to state net operating loss carryforwards and additional benefits from investments in low-income housing tax credits that were utilized on federal and state income tax returns filed during 2012. The decrease in the effective tax rate for 2011 as compared to 2010 was attributable to higher levels of pre-tax income in 2010 as a result of the Crescent acquisition.

Risk Management

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

Credit Risk and Allowance for Loan Losses

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 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.

 

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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.

 

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Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs for 2012 were $18,118, or 0.67% as a percentage of average loans, compared to net charge-offs of $23,425, or 0.91%, for 2011 and $24,395, or 1.00%, for 2010. The current levels of net charge-offs 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. Although many of the markets in which we operate did not experience the extreme appreciation in real estate values as experienced in other national markets over the past few years, the real estate market in all of our markets began to slow down significantly in 2008. 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 ongoing effects of these conditions continued to exist throughout 2012 and our levels of charge-offs are reflective of bringing these credits to resolution.

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 ASC 450. 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. Other considerations in establishing the allowance for loan losses include economic conditions reflected within industry 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 allowance for loan losses was $44,347, $44,340 and $45,415 at December 31, 2012, 2011 and 2010, respectively.

 

Provision for Loan Losses to Average Loans

            2012             

              2011                            2010             
0.67%   0.87%   1.26%

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 market in which we operate.

 

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Beginning in 2008, the Company began recording its provision for loan losses higher than historical levels to address credit deterioration resulting from the effects of the economic downturn on the ability of the Company’s borrowers 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, during these periods management worked to proactively identify potential credit deterioration in the loan portfolio through the internal loan grading system and, as deterioration was identified, increased the provision for loan losses, which resulted in an increase in the allowance for loan losses. Since 2010, however, the Company has experienced improvement in its credit quality measures as evidenced by lower levels of classified loans, total past due loans and nonperforming loans. The decrease in nonperforming and past due loans is attributable to a number of factors. The Company’s continued efforts to bring problem credits to resolution, primarily through the foreclosure process, have had a significant effect. In addition, the markets in which the Company operates have experienced declining inventories of single family properties, lower vacancy rates on commercial and multifamily properties, increasing levels of median household incomes and the addition of several large employers which has resulted in declining unemployment rates. As the improving economic conditions in the Company’s markets resulted in lower levels of classified loans, nonperforming loans and loans 30-89 days past due as compared to previous periods and management simultaneously resolved problem credits, management determined that the allowance for loan losses was at a level adequate to absorb probable losses on the existing loan portfolio. Accordingly, the Company has recorded lower levels of provision for loan losses in 2012 compared to 2011 and 2010. The provision for loan losses was $18,125, $22,350 and $30,665 for 2012, 2011 and 2010, respectively.

 

           2012                  2011                  2010                  2009                  2008        

Specific reserves for impaired loans

    $ 17,597         $ 15,410         $ 17,529         $ 14,468         $ 8,769    

Allocated reserves for remaining portfolio

     26,750          28,930          27,886          24,677          26,136    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 44,347         $ 44,340         $ 45,415         $ 39,145         $ 34,905    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All of the loans acquired in the Company’s FDIC-assisted acquisitions and certain loans acquired in previous acquisitions that are accounted for under 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 2012, 2011 or 2010. The provision for loan losses charged to operating expense attributable to loans accounted for under ASC 310-30 totaled $3,268, $544 and $(135) during 2012, 2011 and 2010, respectively, which includes $2,527 and $512 for 2012 and 2011, respectively, that was attributable to loans covered by loss-share agreements with the FDIC.

The following table presents the allocation of the allowance for loan losses by loan category at December 31 for each of the years presented.

 

           2012                  2011                  2010                  2009                  2008        

Commercial, financial, agricultural

    $ 3,307          $ 4,197          $ 2,625          $ 4,855          $ 5,238     

Lease financing

     1           1           3           4           8     

Real estate – construction

     711           1,073           2,115           4,494           6,590     

Real estate – 1-4 family mortgage

     18,347           17,191           20,870           15,593           10,514     

Real estate – commercial mortgage

     21,416           20,979           18,779           12,577           10,775     

Installment loans to individuals

     565           899           1,023           1,622           1,780     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 44,347          $ 44,340          $ 45,415          $ 39,145          $ 34,905    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The table below reflects the activity in the allowance for loan losses, in thousands, for the years ended December 31:

 

          2012                 2011                 2010                 2009                 2008        

Balance at beginning of year

   $ 44,340        $ 45,415        $ 39,145        $ 34,905        $ 26,372    

Provision for loan losses

    18,125         22,350         30,665         26,890         22,804    

Charge-offs

         

Commercial, financial, agricultural

    4,923         2,037         1,161         2,682         623    

Lease financing

    —         —         —         —         —    

Real estate – construction

    187         836         4,181         2,719         2,393    

Real estate – 1-4 family mortgage

    9,231         16,755         14,189         16,234         11,224    

Real estate – commercial mortgage

    5,828         5,792         6,512         2,144         1,067    

Installment loans to individuals

    386         373         319         313         376    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

    20,555         25,793         26,362         24,092         15,683    

Recoveries

         

Commercial, financial, agricultural

    531         272         282         187         207    

Lease financing

    —         —         —         —         —    

Real estate – construction

    34         110         68         199         136    

Real estate – 1-4 family mortgage

    1,330         767         999         700         237    

Real estate – commercial mortgage

    455         1,056         533         158         31    

Installment loans to individuals

    87         163         85         198         801    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

    2,437         2,368         1,967         1,442         1,412    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    18,118         23,425         24,395         22,650         14,271    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 44,347        $ 44,340        $ 45,415        $ 39,145        $ 34,905    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs to:

         

Loans - average

    0.67%         0.91%         1.00%         0.91%         0.55%    

Allowance for loan losses

    40.86%         52.83%         53.72%         57.86%         40.89%    

Allowance for loan losses to:

         

Loans - year end

    1.72%         1.98%         2.07%         1.67%         1.38%    

Nonperforming loans

    146.90%         127.00%         84.32%         78.25%         87.45%    

The following table provides further details of the Company’s net charge-offs of loans secured by real estate for the years ended December 31:

 

          2012                 2011                 2010                 2009                 2008        

Real estate – construction:

         

Residential

   $ 149       $ 724       $ 1,378       $ 2,278        $ 1,735   

Commercial

    4        2                        

Condominiums

                  2,735        242        522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – construction

    153        726        4,113        2,520        2,257   

Real estate – 1-4 family mortgage:

         

Primary

    1,109        1,570        2,513        1,765        1,481   

Home equity

    2,542        1,721        1,601        2,191        1,160   

Rental/investment

    1,668        3,813        1,751        1,548        1,897   

Land development

    2,582        8,884        7,325        10,030        6,449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – 1-4 family mortgage

    7,901        15,988        13,190        15,534        10,987   

Real estate – commercial mortgage:

         

Owner-occupied

    1,039        3,123        2,713        213        227   

Non-owner occupied

    2,781        (282     2,288        1,711        759   

Land development

    1,553        1,895        978        62        50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – commercial mortgage

    5,373        4,736        5,979        1,986        1,036   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs of loans secured by real estate

   $ 13,427       $ 21,450       $ 23,282       $ 20,040        $ 14,280   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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.

The following table provides details of the Company’s nonperforming assets covered by loss-share agreements with the FDIC (“covered assets”) and not covered under loss-share agreements as of the dates presented:

 

           Covered      
Assets
         Not Covered    
Assets
     Total
         Assets        
 

December 31, 2012

        

Nonaccruing loans

    $ 53,186         $ 26,881         $ 80,067    

Accruing loans past due 90 days or more

     —          3,307          3,307    
  

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     53,186          30,188          83,374    

Other real estate owned

     45,534          44,717          90,251    
  

 

 

    

 

 

    

 

 

 

Total nonperforming loans and OREO

     98,720          74,905          173,625    

Nonaccruing securities available-for-sale, at fair value

     —          15,068          15,068    
  

 

 

    

 

 

    

 

 

 

Total nonperforming assets

    $ 98,720         $ 89,973         $ 188,693    
  

 

 

    

 

 

    

 

 

 

Nonperforming loans to total loans

           2.97%    

Nonperforming assets to total assets

           4.52%    

Allowance for loan losses to total loans

           1.58%    

December 31, 2011

        

Nonaccruing loans

    $ 88,034         $ 31,154         $ 119,188    

Accruing loans past due 90 days or more

     1,134          3,760          4,894    
  

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     89,168          34,914          124,082    

Other real estate owned

     43,156          70,079          113,235    
  

 

 

    

 

 

    

 

 

 

Total nonperforming loans and OREO

     132,324          104,993          237,317    

Nonaccruing securities available-for-sale, at fair value

     —          12,785          12,785    
  

 

 

    

 

 

    

 

 

 

Total nonperforming assets

    $ 132,324         $ 117,778         $ 250,102    
  

 

 

    

 

 

    

 

 

 

Nonperforming loans to total loans

           4.81%    

Nonperforming assets to total assets

           5.95%    

Allowance for loan losses to total loans

           1.72%    

December 31, 2010

        

Nonaccruing loans

    $ 82,393         $ 46,662         $ 129,055    

Accruing loans past due 90 days or more

     —          7,196          7,196    
  

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     82,393          53,858          136,251    

Other real estate owned

     54,715          71,833          126,548    
  

 

 

    

 

 

    

 

 

 

Total nonperforming assets

    $ 137,108         $ 125,691         $ 262,799    
  

 

 

    

 

 

    

 

 

 

Nonperforming loans to total loans

           5.40%    

Nonperforming assets to total assets

           6.12%    

Allowance for loan losses to total loans

           1.80%    

 

53


Table of Contents

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.

The following table shows the principal amounts of nonperforming and restructured loans as of December 31 of each year 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.

 

           2012                  2011                  2010                  2009                  2008     &n