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, 2011

Commission file number 001-13253

RENASANT CORPORATION

 

(Exact name of registrant as specified in its charter)

 

Mississippi

   

64-0676974

(State or other jurisdiction of     (I.R.S. Employer
incorporation or organization)     Identification No.)

209 Troy Street, Tupelo, Mississippi

   

38804-4827

(Address of principal executive offices)     (Zip Code)
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.                                                                                                                          ¨ 

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, 2011, 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 $347,444,060.

As of February 29, 2012, 25,066,068 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 2012 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, 2011

CONTENTS

 

PART I    Page  
  Item 1.      Business      1   
  Item 1A.      Risk Factors      14   
  Item 1B.      Unresolved Staff Comments      26   
  Item 2.      Properties      26   
  Item 3.      Legal Proceedings      27   
  Item 4.      Mine Safety Disclosures      27   
PART II   
  Item 5.     

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

     28   
  Item 6.      Selected Financial Data      30   
  Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   
  Item 7A.      Quantitative and Qualitative Disclosures About Market Risk      57   
  Item 8.      Financial Statements and Supplementary Data      57   
  Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      113   
  Item 9A.      Controls and Procedures      113   
  Item 9B.      Other Information      113   
PART III   
  Item 10.      Directors, Executive Officers and Corporate Governance      114   
  Item 11.      Executive Compensation      114   
  Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      114   
  Item 13.      Certain Relationships and Related Transactions, and Director Independence      114   
  Item 14.      Principal Accounting Fees and Services      114   
PART IV   
  Item 15.      Exhibits, Financial Statement Schedules      115   


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 integration of our recent acquisitions, 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 29, 2012, 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 department 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 consolidated into Renasant Bank and the acquired operations were reconstituted under the title of 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.

Operations

As a result of the aforementioned acquisition activity, the Company reconstituted its reportable segments in 2011. Our community banking operations that were previously segmented along geographic boundaries have been consolidated into one Community Banks segment. The operations of the Community Banks’ trust services and Financial Services division were combined with the newly-constituted Renasant Asset Management group to create a Wealth Management segment. Finally, we retained the Insurance 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 (as reconstituted in 2011), 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. The financial information for our reportable segments in 2010 and 2009 has been restated to reflect the changes in our reportable segments made in 2011.

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.

On February 29, 2012, we had 78 banking and financial services offices located throughout our markets in north and north central Mississippi, west and middle 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 61.37%, 53.92% and 63.56% of

 

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our total gross revenues in 2011, 2010 and 2009, 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 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, 2011.

•    Commercial, Financial and Agricultural Loans. Commercial, financial and agricultural loans (referred to as “commercial loans”), which accounted for approximately 10.77% of our total loans at December 31, 2011, 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.

•    Real Estate – Construction. Our real estate – construction loans (“construction loans”) represented approximately 3.15% of our total loans at December 31, 2011. 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 31.95% of our total loans at December 31, 2011 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.

 

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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. These loans are collateralized by one-to-four family residential real estate and are sold with servicing rights released. 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, 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.

•    Real Estate – Commercial Mortgage. Our real estate – commercial mortgage loans (“commercial real estate loans”) represented approximately 51.79% of our total loans at December 31, 2011. 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 2.33% of our total loans at December 31, 2011, 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

 

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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, 2011, 2010 and 2009, construction and land development loans represented 13.10%, 15.72% and 17.67%, 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, CD-ROM statements with account reconciliation, 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 11.59%, 11.15% and 12.51% of our total gross revenues in 2011, 2010 and 2009, 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.

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, 2011, the Wealth Management segment contributed total revenue of $7.3 million, or 2.99%, of the Company’s total gross revenues. Wealth Management operations have headquarters in Tupelo, Mississippi as well as 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, 2011, Renasant Insurance contributed total revenue of $3.9 million, or 1.60%, of the Company’s total gross revenues and operated three offices in central and northern Mississippi.

 

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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 2011, we maintained approximately 16% of the market share (deposit base) in our entire Mississippi area, approximately 1% in our entire Tennessee area, approximately 2% 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, 2011 (which is the latest date that such information is available):

 

Market

  Available
Deposits

(in  billions)
            Deposit        
Share

Mississippi

   

Tupelo

   $                     1.6        35.8%

DeSoto County

    2.1        10.7%

Oxford

    0.8          2.2%

Tennessee

   

Memphis

    18.2          1.3%

Nashville

    30.0          1.0%

Alabama

   

Birmingham

    23.7          0.6%

Decatur

    1.6        16.6%

Huntsville/Madison

    5.9          1.7%

Georgia

   

Alpharetta/Roswell

    6.0          2.9%

Canton/Woodstock

    2.4          8.4%

Cartersville

    1.3          8.2%

Cumming

    1.7          6.4%
 

 

 

   

Total

    $ 93.8     

Source: FDIC, As of June 30, 2011

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.

 

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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.

 

Provide for unlimited federal deposit insurance on non-interest bearing deposit accounts until December 31, 2012, 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.

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.

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. Thus, we will not be subject to any of the regulations enacted with respect to such program. We have, however, issued debt guaranteed under the FDIC’s Debt Guarantee

 

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Program, which is part of the FDIC’s Temporary Liquidity Guarantee Program (the “TLGP”). We also participated in the TLGP’s Transaction Account Guarantee Program, which expired on December 31, 2010. The regulations we remain subject to on account of our participation in this program currently do not have a material effect on our business or operations.

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 substantially lessen competition 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.

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.

 

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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 our 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.

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

 

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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, especially in connection with the economic downturn of the past few years from which the United States appears to be emerging, 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.

Personnel

At December 31, 2011, we employed 1,030 people at all of our subsidiaries on a full-time equivalent basis. Of this total, the Bank accounted for 996 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, 2011, 16 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, 2011, 2010 and 2009:

 

    2011      2010      2009
 

 

 

    

 

 

    

 

 

    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)

    $2,577,185         $  142,592       5.53%        $2,442,761          $  137,905       5.65%        $2,497,377         $  139,808       5.60% 

Securities:

                       

Taxable(2)

    602,006         19,829       3.29            574,596         21,933       3.82            574,427         26,939       4.69     

Tax-exempt

    219,526         13,560       6.18            162,660         10,073       6.19            128,262         8,193       6.39     

Interest-bearing balances with banks

    189,478         543       0.29            204,839         573       0.28            90,290         230       0.25     
 

 

 

        

 

 

        

 

 

   

Total interest-earning assets

    3,588,195         176,524       4.92            3,384,856         170,484       5.04            3,290,356         175,170       5.32     

Cash and due from banks

    71,138                55,023                52,802        

Intangible assets

    191,776                191,867                192,321        

FDIC loss-share indemnification asset

    142,933                67,595                      

Other assets

    263,202                244,668                168,871        
 

 

 

          

 

 

          

 

 

     

Total assets

    $4,257,244                $3,944,009                $3,704,350        
 

 

 

          

 

 

          

 

 

     

Liabilities and shareholders’ equity

                       

Interest-bearing liabilities:

                       

Deposits:

                       

Interest-bearing demand(3)

    1,341,760         9,094       0.68            1,092,482         12,035       1.10            892,545         11,874       1.33     

Savings deposits

    210,648         798       0.38            152,165         1,105       0.73            91,563         154       0.17     

Time deposits

    1,435,800         21,837       1.52            1,438,370         31,347       2.18            1,297,685         34,680       2.67     
 

 

 

        

 

 

        

 

 

   

Total interest-bearing deposits

    2,988,208         31,729       1.06            2,683,017         44,487       1.66            2,281,793         46,708       2.05     

Borrowed funds

    267,726         9,672       3.61            438,140         15,790       3.60            689,020         24,390       3.54     
 

 

 

        

 

 

        

 

 

   

Total interest-bearing liabilities

    3,255,934         41,401       1.27            3,121,157         60,277       1.93            2,970,813         71,098       2.39     

Noninterest-bearing deposits

    487,310                334,849                299,465        

Other liabilities

    34,283                45,692                27,894        

Shareholders’ equity

    479,717                442,311                406,178        
 

 

 

          

 

 

          

 

 

     

Total liabilities and shareholders’ equity

     $4,257,244                 $3,944,009                 $3,704,350        
 

 

 

          

 

 

          

 

 

     

Net interest income/net interest margin

       $  135,123       3.77%           $  110,207       3.26%           $  104,072       3.16% 
   

 

 

          

 

 

          

 

 

   

(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:

 

    2011 Compared to 2010     2010 Compared to 2009  
    Volume     Rate     Net(1)     Volume     Rate     Net(1)  

Interest income:

           

Loans (2)

   $         7,589        $       (2,902)       $         4,687        $         (3,060)       $       1,157        $         (1,903)   

Securities:

           

Taxable

    1,046         (3,150)        (2,104)        (162)        (4,844)        (5,006)   

Tax-exempt

    3,522         (35)        3,487         2,249         (369)        1,880    

Interest-bearing balances with banks

    (43)        13         (30)        291         52         343    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    12,114         (6,074)        6,040         (682)        (4,004)        (4,686)   

Interest expense:

           

Interest-bearing demand deposits

    2,746         (5,687)        (2,941)        2,660         (2,499)        161    

Savings deposits

    425         (732)        (307)        102         849         951    

Time deposits

    (56)        (9,454)        (9,510)        3,760         (7,093)        (3,333)   

Borrowed funds

    (6,142)        24         (6,118)        (8,881)        281         (8,600)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    (3,027)        (15,849)        (18,876)        (2,359)        (8,462)        (10,821)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 15,141        $ 9,775        $ 24,916        $ 1,677        $ 4,458        $ 6,135    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2011. Information regarding the carrying value of the investment securities listed below as of December 31, 2011, 2010 and 2009 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

   $         —         —           $         —         —           $   107,660         2.71%        $         —         —       

Obligations of states and political subdivisions

    8,986         3.32%         38,113         3.91%         42,961         4.63%         134,690         5.57%    

Available for Sale:

               

Obligations of other U.S. Government agencies and corporations

    —         —            —         —            17,193         2.35%         —         —       

Mortgage-backed securities

    —         —            4,693         4.69%         42,708         3.87%         350,015         3.06%    

Trust preferred securities

    —         —            —         —            —         —            30,410         2.12%    

Other debt securities

    —         —            —         —            —         —            21,351         2.40%    

Other equity securities

    —         —            —         —            —         —            2,341         8.18%    
 

 

 

     

 

 

     

 

 

     

 

 

   
   $ 8,986          $ 42,806          $ 210,522          $ 538,807      
 

 

 

     

 

 

     

 

 

     

 

 

   

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, 2011, 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

    $           144,794         $           118,030         $           15,267         $           278,091    

Lease financing

    112         216         —         328    

Real estate – construction

    43,171         26,767         11,297         81,235    

Real estate – 1-4 family mortgage

    214,148         384,580         225,899         824,627    

Real estate – commercial mortgage

    288,444         835,563         212,628         1,336,635    

Installment loans to individuals

    24,031         33,499         2,638         60,168    
 

 

 

   

 

 

   

 

 

   

 

 

 
    $ 714,700         $ 1,398,655         $ 467,729         $ 2,581,084    
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the fixed and variable rate loans maturing or scheduled to reprice after one year as of December 31, 2011:

 

    Interest Sensitivity  
    Fixed
Rate
       Variable
Rate
 

Due after one year through five years

   $             984,880           $             413,775    

Due after five years

    152,215            315,514    
 

 

 

      

 

 

 
   $ 1,137,095           $ 729,289    
 

 

 

      

 

 

 

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, 2011:

 

    Certificates of
Deposit
    Other  

Three Months or Less

    $               86,472        $               4,144    

Over Three through Six Months

    80,954         10,447    

Over Six through Twelve Months

    202,198         14,561    

Over 12 Months

    232,734         31,875    
 

 

 

   

 

 

 
    $ 602,358        $ 61,027    
 

 

 

   

 

 

 

 

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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 few quarters has it appeared that United States and global economic conditions are beginning to improve. 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 increased. 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 recover only marginally 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.

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.

 

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As of December 31, 2011, approximately 65.71% 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, 2011, approximately 86.88% 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, and it is not clear at this point whether real estate values have begun to stabilize. Although real estate values in our Alabama, Mississippi and Tennessee markets have not declined as dramatically as in 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, which has been the case since 2008. 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, 2011, we had approximately $1.3 billion in commercial real estate loans, representing approximately 51.79% 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.

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

 

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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 through at least 2013. 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.

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

 

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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.

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 beginning of 2010, we opened six 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. We intend to continue pursuing a growth strategy for our business through de novo branching. In addition, we expect to continue 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:

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;

 

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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, and all of our growth through acquisitions, has been focused in the highly-competitive Memphis and Nashville, Tennessee, Birmingham and Huntsville, Alabama metropolitan and north Georgia 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). 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.

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 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 and our acquisition of the trust department of RBC Bank (USA) 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.

 

 

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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. 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 these transactions, 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.

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

 

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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.

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. In addition to the particular risks associated with FDIC-assisted transactions highlighted immediately 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.

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. 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

 

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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.

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

 

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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.

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, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

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.

 

 

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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.

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 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

 

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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.

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 29, 2012, the average daily trading volume for Renasant common stock was 55,238 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

 

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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.

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, 2011, 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 29, 2012, there were 75,000,000 shares of our common stock authorized, of which 25,066,068 shares were outstanding.

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

 

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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 and one financial services office throughout north and north central Mississippi, nine branches throughout west and middle 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.

In Tennessee, the Bank operates nine branches, three branches in the Memphis area and six branches in the Nashville area. 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 Alabama, the Bank has three branches in Decatur, three branches in Birmingham and one branch each in Huntsville, Madison, Montgomery, and Tuscaloosa.

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 financial services office. The Bank leases seven locations in Mississippi for use in conducting banking activities as well as various storage facilities. In Tennessee, the Bank owns four branch

 

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office sites. The remaining five 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, 2011 was $2.5 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 2011.

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 29, 2012, the Company had approximately 7,000 shareholders of record and the closing sales price of the Company’s common stock was $15.17. 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, 2011 and 2010 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        

2011

              

1st Quarter

       $  0.170          $  17.63          $  14.77  

2nd Quarter

       0.170          17.59          13.74  

3rd Quarter

       0.170          15.89          11.80  

4th Quarter

       0.170          15.35          12.11  

2010

              

1st Quarter

       $  0.170          $  17.17          $  13.43  

2nd Quarter

       0.170          18.16          13.25  

3rd Quarter

       0.170          15.79          12.85  

4th Quarter

       0.170          18.09          15.08  

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.

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, 2011.

 

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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, 2006, and that all dividends were reinvested.

 

LOGO

 

    Period Ending December 31,  
    2006      2007      2008      2009      2010      2011  

Renasant Corporation

      $100.00           $   72.53           $   59.38           $   49.88           $ 64.83           $ 60.34     

NASDAQ Market Index

    100.00           110.66           66.42           96.54           114.06           113.16     

SNL Southeast Bank Index(1)

    100.00           75.33           30.50           30.62           29.73           17.39     

 

(1)

The SNL Geographic Index, Southeast Banks, is a peer group of 92 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,   2011     2010     2009     2008     2007  

Interest income

  $ 170,478       $ 165,339       $ 170,564       $ 200,962        $ 198,203    

Interest expense

    41,401         60,277         71,098         91,520         102,382    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    129,077         105,062         99,466         109,442         95,821    

Provision for loan losses

    22,350         30,665         26,890         22,804         4,838    

Noninterest income

    68,624         95,915         57,558         54,042         52,187    

Noninterest expense

    140,676         123,619         105,753         107,968         98,000    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    34,675         46,693         24,381         32,712         45,170    

Income taxes

    9,043         15,018         5,863         8,660         14,069    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 25,632        $ 31,675        $ 18,518        $ 24,052        $ 31,101    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share

         

Net income – Basic

   $ 1.02        $ 1.39        $ 0.88        $ 1.15        $ 1.66    

Net income – Diluted

    1.02         1.38         0.87         1.14         1.64    

Book value at December 31

    19.44         18.75         19.45         19.00         19.15    

Closing price(2)

    15.00         16.91         13.60         17.03         21.57    

Cash dividends declared and paid

    0.68         0.68         0.68         0.68         0.66    

At December 31,

         

Assets

   $   4,202,008        $   4,297,327        $   3,641,081        $   3,715,980        $   3,612,287    

Loans, net of unearned income

    2,581,084         2,524,590         2,347,615         2,530,886         2,586,593    

Securities

    796,341         834,472         714,164         695,106         539,590    

Deposits

    3,412,237         3,468,151         2,576,100         2,344,331         2,547,821    

Borrowings

    254,709         316,436         618,024         933,976         624,388    

Shareholders’ equity

    487,202         469,509         410,122         400,371         399,073    

Selected Ratios

         

Return on average:

         

Total assets

    0.60%         0.80%         0.50%         0.65%         0.99%    

Shareholders’ equity

    5.34%         7.16%         4.56%         5.97%         9.29%    

Average shareholders’ equity to average assets

    11.27%         11.21%         10.96%         10.87%         10.69%    

At December 31,

         

Shareholders’ equity to assets

    11.59%         10.93%         11.26%         10.77%         11.05%    

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

    1.98%         2.07%         1.67%         1.38%         1.02%    

Allowance for loan losses to nonperforming loans(3)

    127.00%         84.32%         78.25%         87.45%         162.02%    

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

    1.56%         2.46%         2.13%         1.58%         0.63%    

Dividend payout

    66.67%         49.28%         78.16%         59.65%         40.24%    

 

(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 $25,632 for 2011 compared to $31,675 for 2010 and $18,518 for 2009. The fluctuation in net income since 2009 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.

 

 

In 2011, the Company acquired the Birmingham, Alabama-based trust department 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 and Starkville, Mississippi and Montgomery and Tuscaloosa, Alabama during 2011. These four de novo branches contributed $34,058 to total loans and $53,203 to total deposits at December 31, 2011.

 

 

Net interest income increased 22.86% to $129,077 for 2011 as compared to $105,062 for 2010 and increased 29.79% as compared to $99,466 for 2009. Interest income increased 3.11% to $170,478 for 2011 from $165,339 for 2010; interest income was $170,564 for 2009. The increase from 2010 is primarily attributable to an increase in average earning assets offset by a decrease in our yield resulting from a change in asset mix and declining interest rate environment. Interest expense decreased 31.32% to $41,401 for 2011 compared to $60,277 for 2010; interest expense was $71,098 for 2009. A shift from higher costing liabilities to lower costing deposits resulted in lower interest expense as compared to 2010.

 

 

Net charge-offs as a percentage of average loans decreased to 0.91% in 2011 compared to 1.00% in 2010. Net charge-offs as a percentage of average loans was 0.91% in 2009. The provision for loan losses was $22,350 for 2011 compared to $30,665 for 2010 and $26,890 for 2009.

 

 

Noninterest income was $68,624 for 2011 compared to $95,915 for 2010 and $57,558 for 2009. 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 $140,676 for 2011 compared to $123,619 for 2010 and $105,753 for 2009. Noninterest expense for 2011 includes $1,651 in merger-related expenses recognized in connection with the acquisitions of American Trust and RBC Bank (USA) and $1,903 in penalties for the early extinguishment of debt. Noninterest expense for 2010 includes $1,955 in merger-related expenses recognized in connection with the acquisition of Crescent and $2,785 in penalties for the early extinguishment of debt.

 

 

Loans, net of unearned income, totaled $2,581,084 at December 31, 2011, an increase of $56,494, or 2.24%, from December 31, 2010. The operations acquired from American Trust contributed approximately $69,352 to total loans at December 31, 2011. The remaining net decrease in loans is attributable to management’s continued focus on diversifying the loan portfolio and reducing our exposure to construction and land development loans.

 

 

Deposits totaled $3,412,237 at December 31, 2011, a decrease of $55,914, or 1.61%, from December 31, 2010. The operations acquired from American Trust contributed approximately $115,286 to total deposits at December 31, 2011. Management’s strategy to build and maintain a stable source of funding through core deposits has allowed for certain higher costing time deposits and public fund deposit contracts to mature or expire without renewal reducing our deposit balance year over year.

 

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A historical look at key performance indicators is presented below.

 

       2011          2010          2009          2008          2007    

Diluted EPS

    $ 1.02             $ 1.38           $ 0.87             $ 1.14             $ 1.64        

Diluted EPS Growth

        (26.09%)            58.62%            (23.68%)            (30.49%)            (4.09%)   

Return on Average Assets

     0.60%          0.80%         0.50%          0.65%          0.99%    

Return on Average Shareholders’ Equity

     5.34%          7.16%         4.56%          5.97%          9.29%    

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.

Allowance for Loan Losses

The critical 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.

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

 

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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,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

Intangible Assets

Our intangible assets consist 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.

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

 

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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, 2011 valuation was 5.06%, compared to 5.50% in 2010. Actual plan assets as of December 31, 2011 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 2011, 2010 and 2009. 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.

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.

 

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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, 2011 was $25,632 compared to net income of $31,675 for the year ended December 31, 2010 and $18,518 for the year ended December 31, 2009. Basic earnings per share for the year ended December 31, 2011 were $1.02 as compared to $1.39 for the year ended December 31, 2010 and $0.88 for the year ended December 31, 2009. Diluted earnings per share for the year ended December 31, 2011 were $1.02 as compared to $1.38 for the year ended December 31, 2010 and $0.87 for the year ended December 31, 2009. The higher earnings per share in 2010 as compared to 2011 and 2009 was due primarily to the acquisition of Crescent and the related one-time gain the Company recorded in connection with the acquisition.

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 66.32% of total net revenue in 2011. 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 22.86% to $129,077 for 2011 compared to $105,062 in 2010. Net interest income was $99,466 in 2009. On a tax equivalent basis, net interest income increased $24,916 to $135,123 in 2011 as compared to $110,207 in 2010; net interest income was $104,072 in 2009. With respect to the increase in net interest income in 2011, the increase due to the change in the volume of net earning assets was $15,141, while the increase from the changing interest rate environment was $9,775.

 

Net Interest Margin – Tax Equivalent
            2011                              2010                             2009              
3.77%    3.26%   3.16%

 

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Net interest margin, the tax equivalent net yield on earning assets, increased to 3.77% during 2011 from 3.26% in 2010 and 3.16% in 2009. 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 through 2010 and 2011; however, a shift in our costing liabilities mix from higher costing borrowed funds to lower costing deposits and a lower overall cost of funds has offset the impact of the depressed interest rate environment on our net interest margin, resulting in net interest margin improvement in both 2010 and 2011.

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. The following table presents the percentage of total average earning assets, by type and yield, for 2011, 2010 and 2009:

 

     Percentage of Total      Yield  
     2011      2010      2009      2011      2010      2009  

Loans

     71.82%          72.17%          75.90%          5.53%          5.65%          5.60%    

Securities

     22.90             21.78             21.36             4.06             4.34             5.00       

Other

     5.28             6.05             2.74             0.29             0.28             0.25       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total earning assets

      100.00%           100.00%           100.00%             4.92%             5.04%             5.32%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

The following table presents the Company’s funding sources which consist of total average deposits and borrowed funds, by type, and total cost of funds, for 2011, 2010 and 2009:

 

     Percentage of Total      Cost of Funds  
     2011      2010      2009      2011      2010      2009  

Noninterest-bearing demand

     13.02%          9.69%          9.16%          —%          —%          —%     

Interest-bearing demand

     35.84             31.61             27.29             0.68             1.10             1.33        

Savings

     5.63             4.40             2.80             0.38             0.73             0.17        

Time deposits

     38.36             41.62             39.68             1.52             2.18             2.67        

Federal Home Loan Bank advances

     3.40             8.49             16.52             4.11             3.67             3.42        

Other borrowed funds

     3.75             4.19             4.55             3.16             3.47             3.99        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits and borrowed funds

      100.00%           100.00%           100.00%             1.11%             1.74%             2.17%     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income, on a tax equivalent basis, was $170,484 for 2010 compared to $175,170 for 2009. The decrease in interest income was driven primarily by a decline in the yield on interest-earning assets as the tax equivalent yield on interest-earning assets decreased 28 basis points during 2010. Although the average balance of interest-earning assets increased during 2010 as compared to 2009, the change in the mix of interest-earning assets from higher yielding loans to lower yielding interest bearing cash balances further contributed to the decline in interest income. Interest expense was $60,277 for 2010, a decrease of $10,821, or 15.22%, as compared to 2009. 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 1.93% for 2010 as compared to 2.39% for 2009, while the average balance of interest-bearing liabilities increased to $3,121,157 for 2010 compared to $2,970,813 for 2009.

 

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Loans and Loan Interest Income

Loans, excluding mortgage loans held for sale, are the Company’s most significant earning asset, comprising 61.43%, 58.75% and 64.48% of total assets at December 31, 2011, 2010 and 2009, respectively. The table below sets forth the balance of loans outstanding by loan type at December 31:

 

     2011      2010      2009      2008      2007  

Commercial, financial, agricultural

    $ 278,091         $ 265,276         $ 281,329         $ 312,648         $ 317,866    

Lease financing

     328          503          778          1,746          2,557    

Real estate – construction

     81,235          82,361          133,299          241,818          386,184    

Real estate – 1-4 family mortgage

     824,627          872,382          820,917          886,380          850,658    

Real estate – commercial mortgage

     1,336,635          1,239,843          1,040,589          1,015,894          948,322    

Installment loans to individuals

     60,168          64,225          70,703          72,400          81,006    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

    $ 2,581,084         $ 2,524,590         $ 2,347,615         $ 2,530,886         $ 2,586,593    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     2011      2010      2009      2008      2007  

Commercial, financial, agricultural

     10.77%          10.51%          11.98%          12.35%          12.29%    

Lease financing

     0.01             0.02             0.03             0.07             0.10       

Real estate – construction

     3.15             3.26             5.68             9.56             14.93       

Real estate – 1-4 family mortgage

     31.95             34.56             34.97             35.02             32.89       

Real estate – commercial mortgage

     51.79             49.11             44.33             40.14             36.66       

Installment loans to individuals

     2.33             2.54             3.01             2.86             3.13       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans separate from the categories listed above.

Total loans at December 31, 2011 were $2,581,084, an increase of $56,494 from $2,524,590 at December 31, 2010. Loans covered under loss-share agreements with the FDIC (referred to as “covered loans”) were $339,462 at December 31, 2011, an increase of $5,781, compared to $333,681 at December 31, 2010. Covered loans acquired in the American Trust transaction totaled $65,561 at December 31, 2011. For covered loans, the FDIC will reimburse the Bank 80% of the losses incurred on these loans.

Loans not covered under a loss-share agreement were $2,241,622, an increase of $50,713, compared to $2,190,909 at December 31, 2010. The increase in loans not covered under a loss-share agreement in 2011 was attributable to growth in owner and non-owner occupied commercial real estate and commercial and industrial loans, as well as loan production generated by our de novo expansion in the second half of 2011. Our de novo locations in Columbus and Starkville, Mississippi and Tuscaloosa and Montgomery, Alabama, all of which opened since the 4th quarter of 2010, contributed $34,058 to total loans at December 31, 2011.

During 2011, loans in our Alabama and Mississippi markets increased $56,507 and $15,962, respectively, while loans in our Tennessee markets decreased $60,971 from December 31, 2010. Loans in our Georgia markets increased $44,996 from December 31, 2010 as a result of the loans acquired from American Trust and new loan originations offset by aggressive efforts to bring the covered loans that are commercial in nature to resolution as the loss-share agreements applicable to this portfolio provides reimbursement for five years.

 

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The following table provides a breakdown of covered loans and loans not covered under a loss-share agreement at December 31, 2011 and 2010:

 

     December 31, 2011      December 31, 2010  
     Covered
Loans
     Not Covered
Loans
     Total
Loans
     Covered
Loans
     Not Covered
Loans
     Total
Loans
 

Commercial, financial, agricultural

    $          17,803         $ 260,288         $ 278,091         $ 20,921         $ 244,355         $ 265,276    

Lease financing

     —          328          328          —          503          503    

Real estate – construction:

                 

Residential

     3,158          28,644          31,802          6,476          31,143          37,619    

Commercial

     3,918          43,702          47,620          9,087          30,638          39,725    

Condominiums

     —          1,813          1,813          —          5,017          5,017    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate – construction

     7,076          74,159          81,235          15,563          66,798          82,361    

Real estate – 1-4 family mortgage:

                 

Primary

     21,447          351,702          373,149          19,786          343,712          363,498    

Home equity

     23,048          170,092          193,140          21,454          161,973          183,427    

Rental/investment

     42,261          125,147          167,408          51,065          148,308          199,373    

Land development

     21,167          69,763          90,930          30,214          95,870          126,084    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate – 1-4 family mortgage

     107,923          716,704          824,627          122,519          749,863          872,382    

Real estate – commercial mortgage:

                 

Owner-occupied

     101,448          539,772          641,220          71,455          522,288          593,743    

Non-owner occupied

     48,939          480,585          529,524          24,863          432,872          457,735    

Land development

      56,105          109,786          165,891          78,254          110,111          188,365    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate – commercial mortgage

     206,492          1,130,143          1,336,635          174,572          1,065,271          1,239,843    

Installment loans to individuals

     168          60,000          60,168          106          64,119          64,225    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

    $ 339,462         $     2,241,622         $     2,581,084         $       333,681         $     2,190,909         $     2,524,590    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans secured by real estate represented 86.88%, 86.93% and 84.98% of the Company’s total loan portfolio at December 31, 2011, 2010 and 2009, 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, 2011, 2010 and 2009:

 

     2011      2010      2009  

Real estate – construction:

        

Residential

    $ 31,802         $ 37,619         $ 45,559    

Commercial

     47,620          39,725          74,440    

Condominiums

     1,813          5,017          13,300    
  

 

 

    

 

 

    

 

 

 

Total real estate – construction

     81,235          82,361          133,299    

Real estate – 1-4 family mortgage:

        

Primary

     373,149          363,498          345,971    

Home equity

     193,140          183,427          171,180    

Rental/investment

     167,408          199,373          158,436    

Land development

     90,930          126,084          145,330    
  

 

 

    

 

 

    

 

 

 

Total real estate – 1-4 family mortgage

     824,627          872,382          820,917    

Real estate – commercial mortgage:

        

Owner-occupied

     641,220          593,743          537,387    

Non-owner occupied

     529,524          457,735          367,011    

Land development

     165,891          188,365          136,191    
  

 

 

    

 

 

    

 

 

 

Total real estate – commercial mortgage

     1,336,635          1,239,843          1,040,589    
  

 

 

    

 

 

    

 

 

 

Total loans secured by real estate

    $       2,242,497         $       2,194,586         $       1,994,805    
  

 

 

    

 

 

    

 

 

 

Mortgage loans held for sale were $28,222 at December 31, 2011 compared to $27,704 at December 31, 2010 and $25,749 at December 31, 2009. Originations of mortgage loans to be sold totaled $433,845 in 2011, $519,447 in 2010 and $815,067 in 2009. Mortgage rates in 2009 declined to historic lows (at that time), which prompted a significant increase in refinancings in 2009; this explains the lower level of originations in 2010 and 2011. Although mortgage rates in the latter half of 2011 have again reached historic lows, there has not yet been an increase in refinancings as occurred in 2009. Mortgage loans to be sold are sold either on a “best efforts” basis or

 

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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, 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.

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:

 

     2011      2010      2009  

Obligations of other U.S. Government agencies and corporations

      $ 125,055          15.70%         $ 97,455          11.68%         $ 63,032          8.83%    

Mortgage-backed securities

     409,639          51.44             473,456          56.74             457,891          64.11       

Obligations of states and political subdivisions

     224,750          28.22             206,083          24.70             138,806          19.44       

Trust preferred securities

     12,785          1.61             4,583          0.54             14,438          2.02       

Other debt securities

     21,875          2.75             23,054          2.76             —          —       

Other equity securities

     2,237          0.28             29,841          3.58             39,997          5.60       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $796,341            100.00%         $ 834,472           100.00%         $ 714,164           100.00%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $821,533 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. The decline in yield was a result of the call of securities within 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, 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 collateralized mortgage obligations (“CMOs”), in the aggregate, made up the remaining 38.22% of the purchases. CMOs are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. The carrying value of securities sold during 2011 totaled $94,023, 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.

The Company holds investments in pooled trust preferred securities. This portfolio had a cost basis of $30,410 and $29,452 and a fair value of $12,785 and $1,433 at December 31, 2011 and 2010, respectively. The investment in pooled trust preferred securities consists of four securities representing interests in various tranches of trusts collateralized by debt issued by over 352 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. Furthermore, based on the qualitative factors discussed above, each of the four pooled trust preferred securities were classified as nonaccrual assets at December 31, 2011. Investment interest income is recorded on the cash-basis method until qualifying for return to accrual status.

 

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In 2010, investment income, on a tax equivalent basis, decreased $3,126 to $32,006 from investment income on a tax equivalent basis for 2009. The average balance in the investment portfolio in 2010 was $737,256. The tax equivalent yield on the investment portfolio in 2010 was 4.34%, down 66 basis points from 2009.

At December 31, 2010, the balance of our investment portfolio was $834,472, an increase of $120,308 as compared to December 31, 2009. The acquisition of Crescent increased the investment portfolio by $24,206. During 2010, we also purchased $530,699 in investment securities. The purchases were primarily mortgage-backed securities, CMOs, and other debt securities comprising approximately 56.22% of the purchases. Other debt securities consist primarily of asset-backed securities other than mortgage-backed securities or CMOs that are guaranteed by U.S. government agencies. U.S. Government Agency securities purchased accounted for approximately 28.66%, with the remainder of the purchases being primarily municipal securities. Maturities and calls of securities during 2010 totaled $284,639. At December 31, 2010, unrealized losses of $32,566 were recorded on investment securities with a carrying value of $192,067.

The Company also held investments in mortgage-backed securities and CMOs of institutions not sponsored by government entities, commonly referred to as “private-label” securities. This portfolio of private label securities was sold during 2010 at which time the Company recorded a loss of $461 on the sale of this portfolio.

Deposits and Deposit Interest Expense

 

  Average Interest-Bearing Deposits to Total Average Deposits  

2011

  

2010

  

2009

85.98%    88.90%    88.40%

The Company relies on deposits as its major source of funds. Total deposits were $3,412,237, $3,468,151 and $2,576,100 at December 31, 2011, 2010 and 2009, respectively. Noninterest-bearing deposits at December 31, 2011, 2010 and 2009 were $531,910, $368,798 and $304,962, respectively, while interest-bearing deposits were $2,880,327, $3,099,353 and $2,271,138 at December 31, 2011, 2010 and 2009, respectively. The acquisition of American Trust contributed noninterest-bearing and interest-bearing deposits of $8,807 and $106,479, respectively, at December 31, 2011, while our de novo locations in Columbus and Starkville, Mississippi and Montgomery and Tuscaloosa, Alabama, all of which opened since the fourth quarter of 2010, collectively contributed noninterest-bearing and interest-bearing deposits of $31,427 and $21,776, respectively, at December 31, 2011. Excluding the American Trust deposits and deposits contributed by de novo branches, deposits decreased $224,403, or 6.48%, during 2011 compared to 2010. The decrease in deposits at December 31, 2011 as compared to December 31, 2010 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 and public fund deposit contracts to expire without renewal. 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. 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. Generally, public fund time deposits are higher costing due to the volume of the deposits and because they are obtained through a bid process. Our public fund transaction accounts are principally obtained from municipalities including school boards and utilities. As a result of management’s strategy to grow and maintain core deposits as described previously, public fund deposits at December 31, 2011 declined to $338,273 from $359,195 and $360,948 at December 31, 2010 and 2009, respectively.

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 Mississippi, Tennessee, and Georgia markets (excluding the contribution of American Trust deposits) decreased $52,499, $33,309, and $101,729, respectively, during 2011. Deposits in our Alabama markets increased $16,337 during 2011 due to an increase in public fund deposits for which contracts previously existed.

Interest expense on deposits was $31,729, $44,487 and $46,708 for 2011, 2010 and 2009, respectively. The cost of interest-bearing deposits was 1.06%, 1.66% and 2.05% 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.

 

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Borrowed Funds and Interest Expense on Borrowings

Total borrowings include federal funds purchased, treasury, tax and loan notes, securities sold under agreements to repurchase, advances from the FHLB, debt guaranteed by the FDIC under its Temporary Liquidity Guarantee Program and junior subordinated debentures. Interest expense on total borrowings was $9,672, $15,790 and $24,390 for the years ending December 31, 2011, 2010 and 2009, 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. In addition, short-term FHLB advances and federal funds purchased are used, as needed, to meet day to day liquidity needs. FHLB advances were $117,454, $175,119 and $469,574 at December 31, 2011, 2010 and 2009, respectively. The Company assumed $15,020 in long-term FHLB advances in connection with the American Trust acquisition, all of which were repaid during the first quarter of 2011. Furthermore, the Company repaid $50,000 of long-term FHLB borrowings during the first quarter of 2011 and incurred prepayment penalties of $1,903. The Company had no short-term FHLB advances outstanding at December 31, 2011, 2010, or 2009. At December 31, 2011, the Company had $983,950 of availability on unused lines of credit with the FHLB. The cost of our FHLB advances was 4.11%, 3.67% and 3.42% for 2011, 2010 and 2009.

Interest expense on junior subordinated debentures was $2,487, $3,058 and $4,332 for the years ended December 31, 2011, 2010 and 2009, 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.”

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 and 2009 was $3,299 and $2,682, respectively.

Noninterest Income

 

Noninterest Income to Average Assets
(Excludes securities gains/losses)
            2011                                 2010                                 2009               
1.50%      2.41%      1.51%

Total noninterest income includes fees generated from deposit services, loan services, insurance products, trust and other wealth management products and services, security gains and all other noninterest income. Our focus over the last few years has been 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 33.68%, 46.53% and 35.61% for 2011, 2010 and 2009.

Noninterest income was $68,624 for the year ended December 31, 2011, a decrease of $27,291, or 28.45%, as compared to $95,915 for 2010. Noninterest income was $57,558 for the year ended December 31, 2009. The bargain purchase gains resulting from the acquisitions of American Trust and Crescent in 2011 and 2010, respectively, are the primary drivers for the fluctuation in noninterest income. Gains on acquisitions, including the gain recognized in connection with acquisition of RBC Bank (USA), totaled $9,344 in 2011 compared to $42,211 in 2010.

Service charges on deposit accounts, the primary contributor to noninterest income, were $19,286 for 2011, a decrease of $2,418, or 11.14%, from 2010. Service charges on deposit accounts were $21,704 in 2010, a decrease of $296 from 2009. Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. 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 88.60%, 89.81% and 90.04% of total charges for deposit services in 2011, 2010 and 2009.

Fees and commissions increased 23.63% to $16,975 during 2011 as compared to $13,731 for 2010. Fees and commissions include fees charged on loans, such as origination, underwriting, documentation and other administrative fees, as well as fees related to deposit services, such as interchange fees on debit card transactions. Loan fees increased $2,116 to $7,851 during 2011 as compared to $5,735 for 2010. This is due to the increase in both portfolio loans originated in 2011 and mortgage loan originations to be sold in the secondary market during the

 

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same period. Interchange fees on debit card transactions continue to be a strong source of noninterest income. For 2011, fees associated with debit card usage were $7,337, an increase of 17.05% as compared to $6,268 for 2010. Income derived from use of our debit cards made up 39.26% of the total fees and commissions for 2011. We expect income from use of our debit cards to continue to grow as our customers use this convenient method of payment. However, the Durbin Debit Interchange Amendment to the Dodd-Frank Act that went into effect October 1, 2011 could have a negative impact on the Company’s income derived from this effort. As directed by statute, 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. The provisions apply only to financial institutions with more than $10 billion in assets. As affected institutions lower their debit card fees, we expect that all financial institutions, regardless of size, will have to adjust their rates in order to remain competitive. 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 decreased $1,488 to $13,731 during 2010 as compared to $15,219 for 2009. Loan fees decreased $2,369 during 2010 to $5,735 as compared to 2009. This is due to the decrease in portfolio loans originated during 2010 and lower mortgage loan originations to be sold in the secondary market during the same period. For 2010, fees associated with debit card usage were $6,268, an increase of 12.67% as compared to $5,563 for 2009.

Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $3,274, $3,408 and $3,319 for the years ended December 31, 2011, 2010 and 2009, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our client’s policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the amount of claims paid by insurance carriers. Contingency income, which is included in “Other noninterest income” in the Consolidated Statements of Income, was $368, $274 and $310 for 2011, 2010 and 2009, respectively.

The operations of the Community Banks’ trust services and Financial Services division were combined with the acquired assets under management of the RBC Bank (USA) trust division to create a Wealth Management segment, the revenue of which is reported in the Consolidated Statements of Income in the noninterest income section under the line item “Wealth Management revenue.” 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 Company provides specialized products and services to our customers through our Financial Services division. Specialized products include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was $4,868 for 2011 compared to $3,641 for 2010 and $3,441 for 2009. The market value of trust assets under management was $1,024,585 and $447,839 at December 31, 2011 and 2010, respectively. The increases in trust revenue and the market value of trust assets under management during 2011 were primarily attributable to the acquisition of the Birmingham, Alabama-based trust department of RBC Bank (USA) in the third quarter of 2011.

Gains on sales of securities for 2011 were $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 sales of securities for 2009 were $2,318, resulting from the sale of approximately $100,295 in securities. The gains in 2009 were offset by the complete write-off of the Company’s $645 investment in Silverton Financial Services, Inc., the holding company of Silverton Bank, N.A., which was placed in receivership on May 1, 2009.

Gains on the sale of mortgage loans held for sale were $4,133, $6,224, and $7,566 for the years ended December 31, 2011, 2010, and 2009, respectively. Originations of mortgage loans to be sold totaled $433,835 for 2011 as compared to $519,447 for 2010 and $818,067 for 2011. The decrease in originations of mortgage loans to be sold and the related gain on the sales since 2009 is due to the higher levels of refinancing in 2009 made possible by historically lower mortgage interest rates.

 

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Noninterest Expense

 

Noninterest Expense to Average Assets

            2011             

  

            2010             

  

            2009             

  3.30%

  

  3.13%

  

  2.85%

Noninterest expense was $140,676, $123,619 and $105,753 for 2011, 2010 and 2009, respectively. Noninterest expense increased $17,057, or 13.80%, during 2011 as compared to 2010. The operations of American Trust increased noninterest expenses by $2,365 during 2011. Noninterest expense for 2011 includes $1,651 of acquisition related costs associated with the American Trust and the RBC Bank (USA) trust department acquisitions and $1,903 in prepayment penalties associated with paying off $50 million of FHLB borrowings.

Salaries and employee benefits is the largest component of noninterest expenses and represented 47.01%, 47.65% and 52.40% of total noninterest expense at December 31, 2011, 2010 and 2009, respectively. During 2011, salaries and employee benefits increased $7,235, or 12.28%, to $66,135 as compared to $58,900 for 2010. The increase is attributable to our acquisitions of American Trust and the RBC Bank (USA) trust department and expansion of our franchise by opening de novo locations in Columbus, Mississippi in the fourth quarter of 2010 and Starkville, Mississippi and Tuscaloosa and Montgomery, Alabama during 2011. During 2010, salaries and employee benefits increased $3,485, or 6.28%, to $58,900 as compared to $55,415 for 2009 primarily as a result of the acquisition of Crescent.

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 $620, $752 and $626 for 2011, 2010 and 2009, respectively.

Data processing costs increased $923 to $7,297 for 2011 from 2010. Data processing costs increased $769, or 13.72%, to $6,374 for 2010 from 2009. The increase in data processing costs over the periods presented is reflective of increased loan and deposit processing from growth in the number of loans and deposits. The inclusion of data processing costs from American Trust and Crescent operations in 2011 and 2010, respectively, also contributed to the increase since 2009.

Net occupancy and equipment expense in 2011 was $13,552, up $1,708 from 2010. This increase is attributable to occupancy costs associated with the operations of the Company’s recent banking expansions beginning in 2010 partially offset by lower depreciation expense. Net occupancy and equipment expense in 2010 was $11,844, down $494 from 2009.

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 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. Expenses related to other real estate owned for 2010 were $9,618, an increase of $7,130 compared to the same period in 2009. Expenses on other real estate owned for the year ended December 31, 2010 included a $3,718 write down of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $30,278 was sold during 2010, resulting in a net loss of $1,824.

Professional fees include fees for legal and accounting services as well as fees we pay our directors. Professional fees were $4,305 for 2011 as compared to $3,800 for 2010 and $3,813 for 2009. 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.

Advertising and public relations expense was $4,764 for 2011, up $1,017, or 27.14%, compared to $3,747 for 2010. Advertising and public relations expense increased $571 for 2010 compared to $3,176 for 2009. 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 $1,742 for 2011 compared to $1,974 for 2010 and $1,966 for 2009. 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 three to fifteen 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 department acquisitions.

 

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Communication expenses are those expenses incurred for communication to clients and between employees. Communication expenses were $5,234 for 2011 as compared to $4,677 for 2010 and $4,390 for 2009.

Total noninterest expenses for 2011 included $1,651 of acquisition-related expenses associated with the American Trust and RBC Bank (USA) trust division acquisitions and a prepayment penalty totaling $1,903 associated with the payoff of $50,000 of FHLB advances. In comparison, total noninterest expenses for 2010 included $1,955 of acquisition-related expenses associated with the Crescent acquisition and a prepayment penalty totaling $2,785 associated with the payoff of $148,000 of FHLB advances.

 

Efficiency Ratio

            2011             

  

            2010             

  

            2009             

69.04%

  

59.97%

  

65.43%

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 improvement in our efficiency ratio in 2010 is 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 72.36% and 75.42% 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 2011 and 2010 as the Company replaces noninterest income lost due to recent regulatory changes and reduces credit related costs as credit quality improves.

Income Taxes

Income tax expense for 2011, 2010 and 2009 was $9,043, $15,018 and $5,863, respectively. The effective tax rates for those years were 26.08%, 32.16% and 24.05%, respectively. The decrease in the effective tax rate for 2011 as compared to 2010 was attributable to higher levels of tax-exempt interest income and income from bank-owned life insurance in 2011 as compared to 2010. The increase in the effective tax rate for 2010 as compared to the prior years presented was attributable to higher levels of taxable 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.

Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses. Net charge-offs for 2011 were $23,425, or 0.91% as a percentage of average loans, compared to net charge-offs of $24,395, or 1.00%, for 2010 and $22,650, or 0.91%, for 2009. 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. These conditions largely existed throughout 2011.

 

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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 $44,340, $45,415 and $39,145 at December 31, 2011, 2010 and 2009, respectively.

 

Provision for Loan Losses to Average Loans

            2011             

  

            2010             

  

            2009             

1.26%

  

1.26%

  

1.08%

The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for loan losses at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The provision for loan losses was $22,350, $30,665 and $26,890 for 2011, 2010 and 2009, respectively. 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. The Company has increased the provision for loan losses since 2008 to address credit deterioration resulting from the effects of the economic downturn on our borrowers’ ability to make timely payments or repay their loans at maturity, especially in connection with the construction and land development segment of the loan portfolio. This deterioration is reflected in the increase in nonperforming loans, as well as the decline in market values of underlying collateral securing loans, primarily real estate, over the same period. In addition, the increase in the provision for loan losses during these periods is attributable to management identifying potential credit deterioration through the internal loan grading system and increasing the allowance for loan losses in response. For impaired loans, specific reserves were established to adjust the carrying value of the loan to its estimated net realizable value. The following table quantifies the amount of the specific reserves component of the allowance for loan losses and the amount of the allowance determined by applying allowance factors to graded loans at December 31 for each of the years presented:

 

            2011                     2010                     2009                     2008                     2007          

Specific reserves for impaired loans

    $ 15,410         $   17,529         $ 14,468         $ 8,769       $ 3,625    

Allocated reserves for remaining portfolio

    28,930         27,886         24,677           26,136         22,747    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All of the loans acquired in the American Trust and Crescent acquisitions and certain loans acquired in the Capital and Heritage mergers 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 provision for loan losses for loans accounted for under ASC 310-30 during 2011 or 2010. Management believes that as of December 31, 2011 the estimated cash flows of the loans accounted for under ASC 310-30 has not deteriorated further since the date of acquisition and, thus, the carrying value of these loans at December 31, 2011 continues to reflect the future cash flows.

 

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

 

            2011                     2010                     2009                     2008                     2007          

Commercial, financial, agricultural

    $ 4,197         $ 2,625         $ 4,855         $ 5,238         $ 5,583    

Lease financing

                                12    

Real estate – construction

    1,073         2,115         4,494         6,590         2,613    

Real estate – 1-4 family mortgage

    17,191         20,870         15,593         10,514         8,219    

Real estate – commercial mortgage

    20,979         18,779         12,577         10,775         8,756    

Installment loans to individuals

    899         1,023         1,622         1,780         1,189    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

            2011                     2010                     2009                     2008                     2007          

Balance at beginning of year

   $ 45,415        $ 39,145        $ 34,905        $ 26,372        $ 19,534    

Additions from business combinations

    —         —         —         —         5,253    

Provision for loan losses

    22,350         30,665         26,890         22,804         4,838    

Charge-offs

         

Commercial, financial, agricultural

    2,037         1,161         2,682         623         253    

Lease financing

    —         —         —         —         —    

Real estate – construction

    836         4,181         2,719         2,393         1,821    

Real estate – 1-4 family mortgage

    16,755         14,189         16,234         11,224         1,411    

Real estate – commercial mortgage

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

Installment loans to individuals

    373         319         313         376         612    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

    25,793         26,362         24,092         15,683         4,099    

Recoveries

         

Commercial, financial, agricultural

    272         282         187         207         432    

Lease financing

    —         —         —         —         —    

Real estate – construction

    110         68         199         136         28    

Real estate – 1-4 family mortgage

    767         999         700         237         230    

Real estate – commercial mortgage

    1,056         533         158         31           

Installment loans to individuals

    163         85         198         801         154    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

    2,368         1,967         1,442         1,412         846    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    23,425         24,395         22,650         14,271         3,253    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs to:

         

Loans - average

    0.91%         1.00%         0.91%         0.55%         0.14%    

Allowance for loan losses

    52.83%         53.72%         57.86%         40.89%         12.34%    

Allowance for loan losses to:

         

Loans - year end

    1.98%         2.07%         1.67%         1.38%         1.02%    

Nonperforming loans

    127.00%         84.32%         78.25%         87.45%         162.02%    

 

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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:

 

            2011                     2010                     2009                     2008          

Real estate – construction:

       

Residential

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

Commercial

           —         —         —    

Condominiums

    —         2,735         242         522    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – construction

    726         4,113         2,520         2,257    

Real estate – 1-4 family mortgage:

       

Primary

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

Home equity

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

Rental/investment

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

Land development

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

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – 1-4 family mortgage

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

Real estate – commercial mortgage:

       

Owner-occupied

    3,123         2,713         213         227    

Non-owner occupied

    (282)        2,288         1,711         759    

Land development

    1,895         978         62         50    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – commercial mortgage

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

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs of loans secured by real estate

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

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming Assets

Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually past due 90 days on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the loss management committee and our loan review staff closely monitor loans that are considered to be nonperforming.

Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest.

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 issuing financial institutions and current and projected deferrals or defaults, are considered by management in the determination of whether the 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 consists of the Company’s investments in pooled trust preferred securities, each of which are on nonaccrual status.

 

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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:

 

             Covered        
Assets
         Not Covered    
Assets
     Total
         Assets        
 

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%    

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. Purchased impaired loans had evidence of deterioration in credit quality prior to acquisition, and thus the fair value of these loans as of the acquisition date included an estimate of credit losses. These loans, as well as acquired loans with no evidence of credit deterioration at acquisition, are accounted for on a pool basis, and these pools are considered to be performing. Purchased impaired loans were not classified as nonperforming assets at December 31, 2011 or December 31, 2010 as the loans are considered to be performing under ASC 310-30. As a result, interest income, through the accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all purchased loans accounted for under ASC 310-30.

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

 

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

 

            2011                     2010                     2009                     2008                     2007          

Nonaccruing loans

    $ 31,154         $ 46,662         $ 39,454         $ 35,661         $ 14,231    

Accruing loans past due 90 days or more

    3,760         7,196         10,571         4,252         2,046    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

    34,914         53,858         50,025         39,913         16,277    

Restructured loans

    36,311         32,615         36,335         1,270         543    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming and restructured loans

    $ 71,225         $ 86,473         $ 86,360         $ 41,183         $ 16,820    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income recognized on nonaccruing and restructured loans

    $ 2,043         $ 1,200         $ 1,557         $ 1,597         $ 807    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income foregone on nonaccruing and restructured loans

    $ 2,341         $ 2,166         $ 1,285         $ 538         $ 277    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming loans to:

         

Loans – year end

    1.56%         2.46%         2.13%         1.58%         0.63%    

Loans – average

    1.35%         2.20%         2.00%         1.54%         0.72%    

The following table presents nonperforming loans, not subject to a loss-share agreement, by loan category at December 31 for each of the years presented.

 

            2011                     2010                     2009                     2008                     2007          

Commercial, financial, agricultural

   $ 3,505        $ 2,422        $ 3,446        $ 2,709        $ 140    

Real estate – construction:

         

Residential

    489         333         3,648         5,196         3,671    

Commercial

    —         —         —         —         —    

Condominiums

    —         —         —         1,255         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – construction

    489         333         3,648         6,451         3,671    

Real estate – 1-4 family mortgage:

         

Primary

    5,242         6,514         4,281         2,968         4,883    

Home equity

    1,013         829         990         612         84    

Rental/investment

    5,757         10,942         5,500         3,796         317    

Land development

    1,739         17,608         17,859         18,141         3,915    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – 1-4 family mortgage

    13,751         35,893         28,630         25,517         9,199    

Real estate – commercial mortgage:

         

Owner-occupied

    2,342         6,336         3,984         2,341         339    

Non-owner occupied

    11,741         4,300         5,049         2,753         2,794    

Land development

    2,413         3,903         5,045         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate – commercial mortgage

    16,496         14,539         14,078         5,094         3,133    

Installment loans to individuals

    673         671         223         142         134    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

   $ 34,914        $ 53,858        $ 50,025        $ 39,913        $ 16,277    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The increase in nonperforming loans since December 31, 2007, as shown in the above tables, is attributable to credit deterioration primarily in our commercial and residential land development loans over the period. The decrease in nonperforming loans at December 31, 2011 compared to prior years was due to management foreclosing on several problem loans, primarily residential land development loans. Nonperforming land development loans represented 11.89%, 39.94% and 45.79% of total nonperforming loans at December 31, 2011, 2010, and 2009, respectively. Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at December 31, 2011. Management also continually monitors past due loans for potential credit quality deterioration. Total loans past due 30-89 days were $15,804, $21,520 and $24,062 at December 31, 2011, 2010 and 2009, respectively.

 

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Table of Contents

As shown above, restructured loans totaled $36,311 at December 31, 2011 compared to $32,615 at December 31, 2010. At December 31, 2011, total loans restructured through interest rate concessions represented 67.27% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company’s restructured loans at December 31, 2011 and 2010:

 

                2011                              2010               

Commercial, financial, agricultural

   $ —        $ 125    

Real estate – construction:

   

Residential

    —         —    

Commercial

    —         —    

Condominiums

    —         —    
 

 

 

   

 

 

 

Total real estate – construction

    —         —    

Real estate – 1-4 family mortgage:

   

Primary

    5,106         4,313    

Home equity

    —         —    

Rental/investment

    2,060         1,969    

Land development

    10,923         14,834    
 

 

 

   

 

 

 

Total real estate – 1-4 family mortgage

    18,089         21,116    

Real estate – commercial mortgage:

   

Owner-occupied

    11,226         3,844    

Non-owner occupied

    6,232         5,510    

Land development

    585         1,839    
 

 

 

   

 

 

 

Total real estate – commercial mortgage

    18,043         11,193    

Installment loans to individuals

    179         181    
 

 

 

   

 

 

 

Total restructured loans

   $ 36,311        $ 32,615    
 

 

 

   

 

 

 

Changes in the Company’s restructured loans are set forth in the table below. The update to ASC 310 issued by FASB in April 2011 that provided clarification of which loan modifications constituted troubled debt restructurings did not affect loans previously disclosed as restructured at December 31, 2010 or additional loans with concessions in the table below.

 

                2011                              2010               

Balance as of January 1

   $ 32,615        $ 36,335    

Additional loans with concessions

    18,540         19,312    

Reductions due to:

   

Reclassified as nonperforming

    (9,861)        (14,224)   

Transfer to other real estate owned

    (2,898)        (3,110)   

Charge-offs

    —         (2,914)   

Paydowns

    (1,453)        (1,820)   

Lapse of concession period

    (632)        (964)   
 

 

 

   

 

 

 

Balance as of December 31

   $ 36,311        $ 32,615    
 

 

 

   

 

 

 

Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Other real estate owned” in the Consolidated Statements of Income. Other real estate owned with a cost basis of $29,085 was sold during the year ended December 31, 2011, resulting in a net loss of $2,522, while other real estate owned with a co