RENASANT CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
(In thousands, excluding shared data)
This Form 10-Q may contain or incorporate by reference statements regarding
Renasant Corporation(referred to herein as the "Company", "we", "our", or "us") that 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. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "projects," "anticipates," "intends," "estimates," "plans," "potential," "possible," "may increase," "may fluctuate," "will likely result," and similar expressions, or future or conditional verbs such as "will," "should," "would" and "could," are generally forward-looking in nature and not historical facts. Forward-looking statements include information about the Company's future financial performance, business strategy, projected plans and objectives and are based on the current beliefs and expectations of management. The Company's management believes these forward-looking statements are reasonable, but they are all inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ from those indicated or implied in the forward-looking statements, and such differences may be material. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and, accordingly, investors should not place undue reliance on these forward-looking statements, which speak only as of the date they are made. Important factors currently known to management that could cause our actual results to differ materially from those in forward-looking statements include the following: (i) the Company's ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses, grow the acquired operations and realize the cost savings expected from an acquisition to the extent and in the timeframe anticipated by management; (ii) the effect of economic conditions and interest rates on a national, regional or international basis; (iii) timing and success of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (iv) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management, retail banking, mortgage lending and auto lending industries; (v) the financial resources of, and products available from, competitors; (vi) changes in laws and regulations as well as changes in accounting standards; (vii) changes in policy by regulatory agencies; (viii) changes in the securities and foreign exchange markets; (ix) the Company's potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (x) changes in the quality or composition of the Company's loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers; (xi) an insufficient allowance for credit losses as a result of inaccurate assumptions; (xii) general economic, market or business conditions, including the impact of inflation and changes in monetary policy by the Federal Reserve Board; (xiii) changes in demand for loan products and financial services; (xiv) concentration of credit exposure; (xv) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; (xvi) increased cybersecurity risk, including potential network breaches, business disruptions or financial losses; (xvii) civil unrest, natural disasters, epidemics (including the re-emergence of the COVID-19 pandemic) and other catastrophic events in the Company's geographic area; (xviii) the impact, extent and timing of technological changes; and (xix) other circumstances, many of which are beyond management's control. Management believes that the assumptions underlying the Company's forward-looking statements are reasonable, but any of the assumptions could prove to be inaccurate. The Company undertakes no obligation, and specifically disclaims any obligation, to update or revise forward-looking statements, whether as a result of new information or to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by federal securities laws. Financial Condition
The following discussion provides details regarding changes in major balance sheet accounts as of
Total assets were
$16,863,757at March 31, 2022compared to $16,810,311at December 31, 2021. The Company acquired Southeastern Commercial Finance, LLC, an asset-based lending company headquartered in Birmingham, Alabama, effective March 1, 2022, which added $43,946in total assets, including $28,110in loans, on the date of acquisition. Investments 49
-------------------------------------------------------------------------------- Table of Contents 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 certain types of borrowings. The securities portfolio also serves as an outlet to deploy excess liquidity and generate interest income rather than hold such excess funds as cash. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented: March 31, 2022 December 31, 2021 Percentage of Percentage of Balance Portfolio Balance Portfolio U.S. Treasury securities
$ 2,0000.07 % $ 3,010 0.11 % Obligations of states and political subdivisions 448,065 15.49 426,751 15.23 Mortgage-backed securities 2,327,149 80.45 2,313,167 82.54 Other debt securities 115,328 3.99 59,513 2.12 $ 2,892,542100.00 % $ 2,802,441100.00 % Allowance for credit losses - held to maturity securities (32) (32) Securities, net of allowance for credit losses $ 2,892,510 $ 2,802,409During the three months ended March 31, 2022, we deployed a portion of our excess liquidity into the securities portfolio and purchased $365,069in investment securities. Mortgage-backed securities and collateralized mortgage obligations ("CMOs"), in the aggregate, comprised approximately 72% of these 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. Obligations of state and political subdivisions comprised approximately 11% of purchases made during the first three months of 2022. Other debt securities in our investment portfolio, consisting of corporate debt securities and issuances from the Small Business Administration("SBA"), comprised approximately 17% of purchases made during the first three months of 2022. Rising interest rates in the first quarter of 2022 had a negative impact on the value of our securities portfolio resulting in a fair market value adjustment of our available for sale securities of $134,756, which contributed to our accumulated other comprehensive loss. Proceeds from maturities, calls and principal payments on securities during the first three months of 2022 totaled $135,775. The Company did not sell any securities during the first three months of 2022. Proceeds from the maturities, calls and principal payments on securities during the first three months of 2021 totaled $95,382. The Company sold municipal securities, residential mortgage backed securities and trust preferred securities with a carrying value of $154,034at the time of sale for net proceeds of $155,391, resulting in a net gain on sale of $1,357during the first three months of 2021.
For more information on the Company’s securities portfolio, see Note 2, “Securities”, in the Notes to the Company’s consolidated financial statements under Item 1, Financial Statements, of this report.
Loans held for sale
Loans held for sale, which consist of residential mortgage loans being held until they are sold in the secondary market, were
$280,464at March 31, 2022, as compared to $453,533at December 31, 2021. Mortgage loans to be sold are sold either on a "best efforts" basis or under a mandatory delivery sales agreement. Under a "best efforts" sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. Our standard practice is to sell the loans within 30-40 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.
50 -------------------------------------------------------------------------------- Table of Contents Total loans, excluding loans held for sale, were
$10,313,459at March 31, 2022and $10,020,914at December 31, 2021. Non purchased loans totaled $9,338,890at March 31, 2022compared to $9,011,011at December 31, 2021. Loans purchased in previous acquisitions totaled $974,569and $1,009,903at March 31, 2022and December 31, 2021, respectively. The tables below set forth the balance of loans outstanding, net of unearned income and excluding loans held for sale, by loan type and the percentage of each loan type to total loans as of the dates presented: March 31, 2022 Total Percentage of Non Purchased Purchased Loans Total Loans Commercial, financial, agricultural (1) $ 1,336,239 $ 109,368 $ 1,445,60714.02 % Lease financing, net of unearned income 89,842 - 89,842 0.87 Real estate - construction: Residential 305,396 1,259 306,655 2.97 Commercial 911,532 3,865 915,397 8.88 Total real estate - construction 1,216,928 5,124 1,222,052 11.85 Real estate - 1-4 family mortgage: Primary 1,803,750 122,063 1,925,813 18.67 Home equity 424,426 46,239 470,665 4.56 Rental/investment 274,117 18,694 292,811 2.84 Land development 142,294 9,396 151,690 1.47 Total real estate - 1-4 family mortgage 2,644,587 196,392 2,840,979 27.54 Real estate - commercial mortgage: Owner-occupied 1,318,446 220,247 1,538,693 14.92 Non-owner occupied 2,510,981 396,135 2,907,116 28.19 Land development 116,113 15,942 132,055 1.28 Total real estate - commercial mortgage 3,945,540 632,324 4,577,864 44.39 Installment loans to individuals 105,754 31,361 137,115 1.33 Total loans, net of unearned income $ 9,338,890 $ 974,569 $ 10,313,459100.00 %
(1) Includes Paycheck Protection Program (“PPP”) loans from
Table of Contents December 31, 2021 Total Percentage of Non Purchased Purchased Loans Total Loans Commercial, financial, agricultural (1)
$ 1,332,962 $ 90,308 $ 1,423,27014.20 % Lease financing, net of unearned income 76,125 - 76,125 0.76 Real estate - construction: Residential 300,988 1,287 302,275 3.02 Commercial 798,914 3,707 802,621 8.01 Total real estate - construction 1,099,902 4,994 1,104,896 11.03 Real estate - 1-4 family mortgage: Primary 1,682,050 134,070 1,816,120 18.12 Home equity 423,108 51,496 474,604 4.74 Rental/investment 268,245 20,229 288,474 2.88 Land development 135,070 9,978 145,048 1.45 Total real estate - 1-4 family mortgage 2,508,473 215,773 2,724,246 27.19 Real estate - commercial mortgage: Owner-occupied 1,329,219 234,132 1,563,351 15.60 Non-owner occupied 2,446,370 410,577 2,856,947 28.51 Land development 110,395 18,344 128,739 1.28 Total real estate - commercial mortgage 3,885,984 663,053 4,549,037 45.39 Installment loans to individuals 107,565 35,775 143,340 1.43 Total loans, net of unearned income $ 9,011,011 $ 1,009,903 $ 10,020,914100.00 %
(1)Includes PPP loans from
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At
March 31, 2022, 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.
The Company relies on deposits as its major source of funds. Total deposits were
$13,990,897and $13,905,724at March 31, 2022and December 31, 2021, respectively. Noninterest-bearing deposits were $4,706,256and $4,718,124at March 31, 2022and December 31, 2021, respectively, while interest-bearing deposits were $9,284,641and $9,187,600at March 31, 2022and December 31, 2021, respectively. Management continues to focus on growing and maintaining a stable source of funding, specifically noninterest-bearing deposits and other core deposits (that is, deposits excluding time deposits greater than $250,000). Noninterest bearing deposits represented 33.64% of total deposits at March 31, 2022, as compared to 33.93% of total deposits at December 31, 2021. Under certain circumstances, management may elect to acquire non-core deposits (in the form of time deposits) or public fund deposits (which are deposits of counties, municipalities or other political subdivisions). The source of funds that we select depends on the terms and how those terms assist us in mitigating interest rate risk, maintaining our liquidity position and managing our net interest margin. Accordingly, funds are acquired to meet anticipated funding needs at the rate and with other terms that, in management's view, best address our interest rate risk, liquidity and net interest margin parameters. Public fund deposits may be readily obtained based on the Company's pricing bid in comparison with competitors. Because public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. Although the Company has focused on growing stable sources of deposits to reduce reliance on public fund deposits, it participates in the bidding process for public fund deposits when pricing and other terms make it reasonable given market conditions or when management perceives that other factors, such as the public entity's use of our treasury management or other products and services, make such participation advisable. Our public fund transaction accounts are principally obtained from public universities and municipalities, including school boards and utilities. Public fund deposits were $1,825,839and $1,787,414at March 31, 2022and December 31, 2021, respectively. 52 -------------------------------------------------------------------------------- Table of Contents Borrowed Funds Total borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the FHLB, subordinated notes and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include federal funds purchased, securities sold under agreements to repurchase, and short-term FHLB advances. The following table presents our short-term borrowings by type as of the dates presented: March 31, 2022 December 31, 2021
Securities repurchase agreements
Short-term borrowings from the FHLB 100,000
$ 111,279$ 13,947 The Company has hedged the interest rate risk associated with the short-term borrowings from the FHLB using an interest rate swap, which became effective in March 2022, in which it pays a fixed rate of interest. The effect of this interest rate hedge was to significantly reduce the cost to the Company of borrowing from the FHLB, and so the Company elected to take advantage of the availability of this low-cost funding in the first quarter of 2022.
March 31, 2022 December 31, 2021 Long-term FHLB advances $ 408 $ 417 Junior subordinated debentures 111,518 111,373 Subordinated notes 323,490 359,419
$ 435,416$ 471,209 Long-term funds obtained from the FHLB are used to match-fund fixed rate loans in order to minimize interest rate risk and to meet day-to-day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. At March 31, 2022, all of our outstanding long-term FHLB advances were scheduled to mature within twelve months or less. The Company had $4,047,128of availability on unused lines of credit with the FHLB at March 31, 2022, as compared to $4,214,274at December 31, 2021.
The Company issued subordinated notes, the proceeds of which were used for general corporate purposes, including providing capital to support the growth of the Company either organically or through strategic acquisitions, the repayment of debt and the financing of investments and capital expenditures, and for investments in
The Company owns the outstanding common securities of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts used the proceeds from the issuance of their preferred capital securities and common securities (collectively referred to as "capital securities") to buy floating rate junior subordinated debentures issued by the Company (or by companies that the Company subsequently acquired). The debentures are the trusts' only assets and interest payments from the debentures finance the distributions paid on the capital securities.
The net result for the first quarter of 2022 was
From time to time, the Company incurs expenses and charges or records valuation adjustments in connection with certain transactions for which management is unable to accurately predict when such items will be incurred or, when incurred, the amount of these items. The following table shows the impact of these items on reported EPS for the dates
53 -------------------------------------------------------------------------------- Table of Contents presented. The "COVID-19 related expenses" line item in the table below primarily consists of (a) employee overtime and employee benefit accruals directly related to the Company's response to both the COVID-19 pandemic itself and federal legislation enacted to address the pandemic, such as the CARES Act, and (b) expenses associated with supplying branches with protective equipment and sanitation supplies (such as floor markings and cautionary signage for branches, face coverings and hand sanitizer) as well as more frequent and rigorous branch cleaning. Three Months Ended March 31, 2022 March 31, 2021 Impact to Impact to Pre-tax After-tax Diluted EPS Pre-tax After-tax Diluted EPS Merger and conversion expenses
$ 687 $ 556 $ 0.01$ - $ - $ - MSR valuation adjustment - - - (13,561) (10,497) (0.19) Restructuring (benefit) charges (455) (368) (0.01) 292 226 0.01 COVID-19 related expenses - - - 785 608 0.01 Net Interest Income Net interest income, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of our net income, comprising 73.02% of total revenue (i.e., net interest income on a fully taxable equivalent basis and noninterest income) for the first quarter of 2022. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities. Net interest income was $99,629for the three months ended March 31, 2022, as compared to $109,648for the same period in 2021. On a tax equivalent basis, net interest income was $101,383for the three months ended March 31, 2022, as compared to $111,264same period in 2021. The following tables set forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented: 54
Table of Contents Three Months Ended March 31, 2022 2021 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets Interest-earning assets: Loans held for investment 10,108,511 97,001 3.88 10,802,991 113,072 4.24 Loans held for sale 330,442 2,863 3.48 406,397 2,999 2.96 Securities: Taxable 2,499,822 8,782 1.41 1,065,779 4,840 1.82 Tax-exempt(1) 438,380 2,635 2.40 306,344 2,284 2.98 Interest-bearing balances with banks 1,463,991 664 0.18 777,166 183
Total interest-earning assets 14,841,146 111,945 3.05 13,358,677 123,378 3.74 Cash and due from banks 206,224 205,830 Intangible assets 965,430 969,001 Other assets 684,464 670,183 Total assets
$ 16,697,264 $ 15,203,691Liabilities and shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand(2) $ 6,636,392 $ 3,6470.22 % $ 5,906,230 $ 3,9320.27 % Savings deposits 1,097,560 139 0.05 882,758 169 0.08 Time deposits 1,374,722 1,851 0.55 1,655,778 4,178 1.02 Total interest-bearing deposits 9,108,674 5,637 0.25 8,444,766 8,279 0.40 Borrowed funds 485,777 4,925 4.08 483,907 3,835 3.21 Total interest-bearing liabilities 9,594,451 10,562 0.44 8,928,673 12,114 0.55 Noninterest-bearing deposits 4,651,793 3,862,422 Other liabilities 201,353 240,171 Shareholders' equity 2,249,667 2,172,425 Total liabilities and shareholders' equity $ 16,697,264 $ 15,203,691Net interest income/net interest margin $ 101,3832.76 % $ 111,264
U.S. Governmentand some U.S. Government Agencysecurities are tax-exempt in the states in which the Company operates. (2)Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits. The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 4.45%, which is net of federal tax benefit. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. As discussed in more detail below, the decline in loan yields due to the low interest rate environment during the past year as well as changes in the mix of earning assets over the past year due to increased liquidity on the balance sheet were the largest contributing factors to the decrease in net interest margin and net interest income for the three months ended March 31, 2022, as compared to the same period in 2021. The Company has continued to focus on lowering the cost of funding through growing noninterest-bearing deposits and aggressively lowering interest rates on interest-bearing deposits. The Company has also increased its purchases of investment securities and continues to evaluate options to mitigate the pressure on net interest margin. 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 three months ended March 31, 2022, as compared to the same period 55
Table of contents in 2021 (variations attributable to the combined impact of yield/rate and volume have been pro-rated using the absolute value of calculated amounts):
Three months completed
Volume Rate Net Interest income: Loans held for investment (6,966) (9,105) (16,071) Loans held for sale (606) 470 (136) Securities: Taxable 5,224 (1,282) 3,942 Tax-exempt 844 (493) 351 Interest-bearing balances with banks 235 246 481 Total interest-earning assets (1,269) (10,164) (11,433) Interest expense: Interest-bearing demand deposits 451 (736) (285) Savings deposits 35 (65) (30) Time deposits (621) (1,706) (2,327) Borrowed funds 15 1,075 1,090 Total interest-bearing liabilities (120) (1,432) (1,552) Change in net interest income
Interest income, on a tax equivalent basis, was
$111,945for the three months ended March 31, 2022, as compared to $123,378, for the same period in 2021. This decrease in interest income, on a tax equivalent basis, is due primarily to the Federal Reservemaintaining low interest rates since March 2020(until the Federal Reserve'sfirst rate increase in March 2022) and changes in the mix of earning assets during the year due to increased liquidity on the balance sheet.
The following table presents the percentage of total average earning assets, by type and yield, for the periods presented:
Percentage of Total Average Earning Assets Yield Three Months Ended Three Months Ended March 31, March 31, 2022 2021 2022 2021 Loans held for investment, excl. PPP 67.84 % 73.49 % 3.88 % 4.22 % Paycheck Protection Program 0.27 7.38 6.36 4.40 Loans held for sale 2.23 3.04 3.48 2.96 Securities 19.80 10.27 1.55 2.08 Other 9.86 5.82 0.18 0.10 Total earning assets 100.00 % 100.00 % 3.05 % 3.74 % For the first quarter of 2022, interest income on loans held for investment, on a tax equivalent basis, decreased
$16,071to $97,001from $113,072for the same period in 2021. Interest income on loans held for investment decreased primarily due to the Federal Reservemaintaining low interest rates since March 2020. Interest income attributable to PPP loans included in loan interest income for the three months ended March 31, 2022, was $619, which consisted of $94in interest income and $526in accretion of net origination fees, as compared to $10,687for the three months ended March 31, 2021, which consisted of $2,392in interest income and $8,295in accretion of net origination fees. The PPP origination fees, net of agent fees paid and other origination costs, are being accreted into interest income over the life of the loan. If a PPP loan is forgiven in whole or in part, as provided under the CARES Act, the Company will recognize the non-accreted portion of the net origination fee attributable to the forgiven portion of such loan as of the date of the final forgiveness determination. PPP loans increased margin and loan yield by one basis point each during the first quarter of 2022. PPP loans increased margin and loan yield by eight basis points and two basis points, respectively, in the first quarter of 2021. 56
The impact from interest income collected on problem loans and purchase accounting adjustments on loans to total interest income on loans held for investment, loan yield and net interest margin is shown in the following table for the periods presented. Three Months Ended
March 31, 20222021 Net interest income collected on problem loans
Accretable yield recognized on purchased loans(1)
Total impact to interest income on loans
$ 1,669 $ 5,268Impact to loan yield 0.07 % 0.20 % Impact to net interest margin
(1)Includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of
$373and $1,272, for the first quarter of 2022 and 2021, respectively. This additional interest income increased total loan yield by one basis point and five basis points for the first quarter of 2022 and 2021, respectively, while increasing net interest margin by one and four basis points for the same respective periods.
For the first quarter of 2022, interest income on loans held for sale (consisting of mortgage loans held for sale) decreased
Investment income, on a tax equivalent basis, increased
$4,293to $11,417for the first quarter of 2022 from $7,124for the first quarter of 2021. The tax equivalent yield on the investment portfolio for the first quarter of 2022 was 1.55%, down 53 basis points from 2.08% for the same period in 2021. The decrease in taxable equivalent yield on securities was a result of the low interest rate environment over the period. The growth in the Company's investment securities portfolio during the year has helped offset the loss of investment income due to lower yield on securities.
Interest charges were
The following table presents, by type, the sources of financing of the Company, which consist of the average total of deposits and funds borrowed, and the total cost of each source of financing for the periods presented:
Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Three Months Ended Three Months Ended March 31, March 31, 2022 2021 2022 2021 Noninterest-bearing demand 32.65 % 30.20 % - % - % Interest-bearing demand 46.59 46.18 0.22 0.27 Savings 7.70 6.90 0.05 0.08 Time deposits 9.65 12.94 0.55 1.02 Short term borrowings 0.19 0.10 0.48 0.31 Long-term Federal Home Loan Bank advances 0.01 1.19 1.86 0.05 Subordinated notes 2.43 1.63 4.26 5.15 Other borrowed funds 0.78 0.86 4.41 4.24 Total deposits and borrowed funds 100.00 % 100.00 % 0.30 % 0.38 % Interest expense on deposits was
$5,637and $8,279for the three months ended March 31, 2022and 2021, respectively. The cost of total deposits was 0.17% and 0.27% for the same respective periods. The decrease in both deposit expense and cost is attributable to the Company's efforts to reduce deposit rates as they repriced in a low interest rate environment, although the Company expects that the rising rate environment will limit its ability to achieve further reductions in deposit interest rates and in fact may result in increased deposit costs in future periods. During 2022, the Company has continued its efforts to grow and maintain non-interest bearing deposits. Such deposits stayed relatively flat over the first quarter, representing 33.64% of total 57 -------------------------------------------------------------------------------- Table of Contents deposits at March 31, 2022compared to 33.93% of total deposits at December 31, 2021. Low cost deposits continue to be the preferred choice of funding; however, the Company may rely on wholesale borrowings when rates are advantageous. Interest expense on total borrowings was $4,925and $3,835for the three months ended March 31, 2022and 2021, respectively. The increase in interest expense is a result of higher average borrowings, primarily due to the Company's issuance of $200,000of subordinated notes in November 2021.
A more detailed discussion of the cost of our funding sources is set out below under the “Liquidity and Capital Resources” section of this section.
Noninterest Income Noninterest Income to Average Assets Three Months Ended
March 31, 20222021 0.91% 2.16% Total noninterest income includes fees generated from deposit services and other fees and commissions, income from our insurance, wealth management and mortgage banking operations, realized gains on the sale of securities and all other noninterest income. Our focus is to develop and enhance our products that generate noninterest income in order to diversify revenue sources. Noninterest income was $37,458for the first quarter of 2022 as compared to $81,037for the same period in 2021. This decrease is primarily due to the reduction in mortgage banking income during the first quarter of 2022 (discussed in more detail below) as compared to the record production during the first quarter of 2021. Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees (which encompasses traditional overdraft fees as well as non-sufficient funds fees). Service charges on deposit accounts were $9,562and $8,023for the first quarter of 2022 and 2021, respectively. Overdraft fees, the largest component of service charges on deposits, were $5,178for the three months ended March 31, 2022, as compared to $3,955for the same period in 2021. The Company recently announced its plans to eliminate consumer non-sufficient funds fees as well as transfer fees to linked customer accounts. These changes will take effect January 1, 2023. The fees to be eliminated totaled approximately $1,300in the first quarter of 2022. Fees and commissions were $3,982during the first quarter of 2022 as compared to $3,900for the same period in 2021. Fees and commissions include fees related to deposit services, such as ATM fees and interchange fees on debit card transactions. For the first quarter of 2022, interchange fees were $2,431as compared to $2,392for the same period in 2021. Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $2,554and $2,237for the three months ended March 31, 2022and 2021, respectively. Contingency income is a bonus received from the insurance underwriters and is based both on commission income and claims experience on our clients' policies during the previous year. Increases and decreases in contingency income are reflective of corresponding increases and decreases in the number of claims paid by insurance carriers. Contingency income, which is included in "Other noninterest income" in the Consolidated Statements of Income, was $534and $1,006for the three months ended March 31, 2022and 2021, respectively. Our Wealth Management segment has two primary divisions: Trust and Financial Services. The Trust division 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, IRAs, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. The Financial Services division provides specialized products and services to our customers, which include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was $5,924for the first quarter of 2022 compared to $4,792for the same period in 2021. The market value of assets under management or administration was $5,021,299and $4,453,355at March 31, 2022and March 31, 2021, respectively. Mortgage banking income is derived from the origination and sale of mortgage loans and the servicing of mortgage loans that the Company has sold but retained the right to service. 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. Originations of mortgage loans to be sold totaled $595,045in the first quarter of 2022 compared to $1,143,349for the same period in 2021. During the first quarter of 2022 mortgage loan originations continued to normalize and trend toward pre-pandemic levels while margins on the sale of loans in the secondary market compressed as interest rates rose and housing inventories remained below 58 -------------------------------------------------------------------------------- Table of Contents demand. Mortgage banking income was $9,633and $50,733for the three months ended March 31, 2022and 2021, respectively. The table below presents the components of mortgage banking income included in noninterest income for the periods presented. Three Months Ended March 31, 20222021 Gain on sales of loans, net (1)
Mortgage servicing loss (gain), net
MSR valuation adjustment
Mortgage banking income, net
(1) Gain on sale of loans, net, includes pipeline fair value adjustments
Bank-owned life insurance ("BOLI") income is derived from changes in the cash surrender value of the bank-owned life insurance policies and proceeds received upon the death of covered individuals. BOLI income was
$2,153for the three months ended March 31, 2022as compared to $2,072for the same period in 2021. The Company purchased an additional $80,000in BOLI policies during the first three months of 2022. Other noninterest income was $3,650and $7,923for the three months ended March 31, 2022and 2021, respectively. Other noninterest income includes income from our SBA banking division and other miscellaneous income and can fluctuate based on production in our SBA banking division and recognition of other seasonal income items. Noninterest Expense Noninterest Expense to Average Assets Three Months Ended March 31, 20222021 2.29% 3.09%
Non-interest expenses were
Salaries and employee benefits decreased
$16,457to $62,239for the first quarter of 2022 as compared to $78,696for the same period in 2021. The decrease in salaries and employee benefits is primarily due to a decrease in mortgage commissions and incentives, driven by the decrease in mortgage production described above. Data processing costs decreased to $4,263in the first quarter of 2022 from $5,451for the same period in 2021. The decline in the first quarter of 2022 as compared to the same period in 2021 is primarily due to the Company's renegotiation of certain vendor contracts. The Company continues to examine new and existing contracts to negotiate favorable terms to offset the increased variable cost components of our data processing costs, such as new accounts and increased transaction volume. Net occupancy and equipment expense for the first quarter of 2022 was $11,276, down from $12,538for the same period in 2021. The decrease in occupancy and equipment expense is primarily attributable to the restructuring and non-renewal of certain branch leases. For the first quarter of 2022 the Company experienced a net gain of $241in other real estate expense as compared to expenses of $41for the same period in 2021. Expenses on other real estate owned included write downs of the carrying value to fair value on certain pieces of property held in other real estate owned of $14and $70for the first three months of 2022 and 2021, respectively. For the three months ended March 31, 2022and 2021, other real estate owned with a cost basis of $665and $1,906, respectively, was sold, resulting in a net gain of $291and net gain of $56, respectively. Professional fees include fees for legal and accounting services, such as routine litigation matters, external audit services as well as assistance in complying with newly-enacted and existing banking and governmental regulations. Professional fees were $3,151for the first quarter of 2022 as compared to $2,921for the same period in 2021. Advertising and public relations expense was $4,059for the first quarter of 2022 as compared to $3,252for the same period in 2021. During the first quarter of 2022, the Company contributed approximately $1,000to charitable organizations throughout Mississippiand Georgia, which is included in our advertising and public relations expense, for which it received a dollar for dollar tax credit. 59 -------------------------------------------------------------------------------- Table of Contents Amortization of intangible assets totaled $1,366and $1,598for the first quarter of 2022 and 2021, respectively. This amortization relates to finite-lived intangible assets which are being amortized over the useful lives as determined at acquisition. These finite-lived intangible assets have remaining estimated useful lives ranging from approximately 1 year to 8 years.
Communication expenses, those expenses incurred for communication with customers and between employees, were
Other noninterest expense includes the provision for unfunded commitments, business development and travel expenses, other discretionary expenses, loan fees expense and other miscellaneous fees and operating expenses. Other noninterest expense was
$5,733for the three months ended March 31, 2022as compared to $8,854for the same periods in 2021. During the first quarter of 2022 there was a recovery of provision for unfunded commitments of $550. There was no provision for unfunded commitments recorded for the same period in 2021. Efficiency Ratio Efficiency Ratio Three Months Ended March 31, 2022 2021 Efficiency ratio (GAAP) 67.78 % 60.29 % Adjusted efficiency ratio (Non-GAAP)(1) 67.02 % 63.85 %
(1) A reconciliation of this GAAP financial measure to the non-GAAP measures can be found under the heading “Non-GAAP financial measures” at the end of this section 2, Management’s Discussion and Analysis of Financial Condition and operating results.
The efficiency ratio is a measure of productivity in the banking industry. (This ratio is a measure of our ability to turn expenses into revenue. That is, the ratio is designed to reflect the percentage of
one dollarthat we must expend to generate a dollar of revenue.) The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. The table above shows the impact on the efficiency ratio of items that (1) the Company does not consider to be part of its core operating activities, such as amortization of intangibles, or (2) the Company incurred in connection with certain transactions where management is unable to accurately predict the timing of when these items will be incurred or, when incurred, the amount of such items, such as, for the first quarter of 2022, merger and conversion related expenses, restructuring benefits and a recovery of a portion of the reserve for unfunded commitments. We remain committed to aggressively managing our costs within the framework of our business model. Our goal is to improve the efficiency ratio over time from currently reported levels as a result of revenue growth while at the same time controlling noninterest expenses. Income Taxes Income tax expense for the first quarter of 2022 and 2021 was $7,935and $16,842, respectively. In addition to lower earnings in the first quarter of 2022 as compared to the first quarter of 2021, the Company also recognized tax credits of approximately $1,000in the first quarter of 2022 as mentioned above in the advertising and public relations discussion.
The management of risk is an on-going process. Primary risks that are associated with the Company include credit, interest rate and liquidity risk. Credit risk and interest rate risk are discussed below, while liquidity risk is discussed in the next subsection under the heading "Liquidity and Capital Resources."
Credit risk and allowance for losses on unfunded loans and commitments
Management of Credit Risk. 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 our credit administration department, our problem asset resolution committee and the Board of Directors Credit Review Committee. Oversight of the Company's lending operations (including adherence to our policies and procedures governing the loan approval and monitoring process), credit quality 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
State Certified General Real EstateAppraiser and employs three additional State Certified General Real EstateAppraisers and four real estate evaluators. In addition, we maintain a loan review staff to independently monitor loan quality and lending practices. Loan review personnel 60 -------------------------------------------------------------------------------- Table of Contents monitor and, if necessary, adjust the grades assigned to loans through periodic examination, focusing their review on commercial and real estate loans rather than consumer and small balance consumer mortgage loans, such as 1-4 family mortgage loans. In compliance with loan policy, the lending staff is given lending limits based on their knowledge and experience. In addition, each lending officer's prior performance is evaluated for credit quality and compliance as a tool for establishing and enhancing lending limits. Before funds are advanced on consumer and commercial loans below certain dollar thresholds, loans are reviewed and scored using centralized underwriting methodologies. Loan quality, or "risk-rating," grades are assigned based upon certain factors, which include the scoring of the loans. This information is used to assist management in monitoring credit quality. Loan requests of amounts greater than an officer's lending limit are reviewed for approval by senior credit officers. For loans with a commercial purpose, risk-rating grades are assigned by lending, credit administration and 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 rated loans having the least credit risk. Management's problem asset resolution committee and the Board of Directors' Credit Review Committee monitor loans that are past due or those that have been downgraded to criticized due to a decline in the collateral value or cash flow of the borrower. This information is used to assist management in monitoring credit quality. 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 initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals as described above), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. Any remaining balance is charged-off, which reduces the allowance for credit losses on loans. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for credit losses on loans. The Company's practice is to charge off estimated losses as soon as management believes the uncollectability of a loan balance is confirmed and such losses are reasonably quantified. Net charge-offs for the first quarter of 2022 were $851, or 0.03% of average loans (annualized), compared to net charge-offs of $3,038, or 0.11% of average loans (annualized), for the same period in 2021. The charge-offs were fully reserved for in the Company's allowance for credit losses on loans. Subsequent recoveries, if any, are credited to the allowance for credit losses on loans. Allowance for Credit Losses on Loans; Provision for Credit Losses on Loans. The allowance for credit losses is available to absorb credit losses inherent in the loans held for investment portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. 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 loans evaluated on a collective (pooled) basis and those evaluated on an individual basis as set forth in ASC 326. The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company's loan portfolio segments. Credit quality is assessed and monitored by evaluating various attributes, and the results of those evaluations are utilized in underwriting new loans and in the Company's process for the estimation of expected credit losses. Credit quality monitoring procedures and indicators can include an assessment of problem loans, the types of loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories, and other factors, including our risk rating system, regulatory guidance and economic conditions, such as the unemployment rate and GDP growth in the national and local economies as well as trends in the market values of underlying collateral securing loans, all as determined based on input from management, loan review staff and other sources. This evaluation is complex and inherently subjective, as it requires estimates by management that are inherently uncertain and therefore susceptible to significant revision as more information becomes available. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and provision for credit loss in those future periods. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a collective or pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. •The allowance for credit losses for loans that share similar risk characteristics with other loans is calculated on a collective (or pooled) basis, where such loans are segregated into loan portfolio segments based upon similarity of credit risk. In determining the allowance for credit losses on loans evaluated on a collective basis, the Company categorizes loan pools based on loan type and/or risk rating. The Company uses two CECL models: (1) a loss rate model, based on average 61 -------------------------------------------------------------------------------- Table of Contents historical life-of-loan loss rates, is used for the Real Estate - 1-4 Family Mortgage, Real Estate - Construction and the Installment Loans to Individuals portfolio segments, and (2) for the Commercial, Real Estate- Commercial Mortgage and Lease Financing portfolio segments, the Company uses a probability of default/loss given default model, which calculates an expected loss percentage for each loan pool by considering (a) the probability of default, based on the migration of loans from performing (using risk ratings) to default using life-of-loan analysis periods, and (b) the historical severity of loss, based on the aggregate net lifetime losses incurred per loan pool. The historical loss rates calculated as described above are adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. Internal factors include loss history, changes in credit quality (including movement between risk ratings) and/or credit concentration and the nature and volume of the respective loan portfolio segments. External factors include current and reasonable and supportable forecasted economic conditions and changes in collateral values. These factors are used to adjust the historical loss rates (as described above) to ensure that they reflect management's expectation of future conditions based on a reasonable and supportable forecast period. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, when necessary, the models immediately revert back to the historical loss rates adjusted for qualitative factors related to current conditions. •For loans that do not share similar risk characteristics with other loans, an individual analysis is performed to determine the expected credit loss. If the respective loan is collateral dependent (that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral), the expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of collateral is initially based on external appraisals. Generally, collateral values for loans for which measurement of expected losses is dependent on the fair value of such collateral are updated every twelve months, either from external third parties or in-house certified appraisers. Third-party appraisals are obtained from a pre-approved list of independent, third-party, local appraisal firms. The fair value of the collateral derived from the external appraisal is then adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. Other acceptable methods for determining the expected credit losses for individually evaluated loans (typically used for loans that are not collateral dependent) is a discounted cash flow approach or, if applicable, an observable market price. Once the expected credit loss amount is determined, an allowance equal to such expected credit loss is included in the allowance for credit losses. In addition to its quarterly analysis of the allowance for credit losses, on a regular basis management and the Board of Directors review loan ratios. These ratios include the allowance for credit losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for credit losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans, among others. Also, management reviews past due ratios by officer, community bank and the Company as a whole. The following table presents the allocation of the allowance for credit losses on loans by loan category and the percentage of loans in each category to total loans as of the dates presented: March 31, 2022 December 31, 2021 March 31, 2021 Balance % of Total Balance % of Total Balance % of Total Commercial, financial, agricultural $ 33,60614.02 % $ 33,92214.20 % $ 37,59221.04 % Lease financing 1,582 0.87 % 1,486 0.76 % 1,546 0.70 % Real estate - construction 18,411 11.85 % 16,419 11.03 % 14,977 8.94 % Real estate - 1-4 family mortgage 36,848 27.54 % 32,356 27.19 % 31,694 25.13 % Real estate - commercial mortgage 65,231 44.39 % 68,940 45.39 % 76,225 42.57 % Installment loans to individuals 10,790 1.33 % 11,048 1.43 % 11,072 1.62 % Total $ 166,468100.00 % $ 164,171100.00 % $ 173,106100.00 % The provision for credit losses on loans charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses on loans at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. The Company recorded a provision for credit losses of $1,500during the first quarter of 2022, as compared to no provision for credit losses recorded in the first quarter of 2021. The Company's allowance for credit losses model considers economic projections, primarily the national unemployment rate and GDP, over a reasonable and supportable 62
Table of contents two-year period. Provision activity in the current quarter was primarily driven by strong loan growth in the quarter as well as the acquisition of
The table below reflects the activity of the allowance for credit losses on loans for the periods presented:
Three Months Ended March 31, 2022 2021 Balance at beginning of period
$ 164,171 $ 176,144Impact of PCD loans acquired during the period 1,648 -
Commercial, financial, agricultural 2,102 3,498 Lease financing 7 - Real estate - construction - 52 Real estate - 1-4 family mortgage 163 101 Real estate - commercial mortgage 6 61 Installment loans to individuals 779 1,658 Total charge-offs 3,057 5,370
Commercial, financial, agricultural 1,136 289 Lease financing 12 11 Real estate - construction - 13 Real estate - 1-4 family mortgage 178 261 Real estate - commercial mortgage 155 171 Installment loans to individuals 725 1,587 Total recoveries 2,206 2,332 Net charge-offs 851 3,038 Provision for credit losses on loans 1,500 - Balance at end of period
$ 166,468 $ 173,106Net charge-offs (annualized) to average loans 0.03 % 0.11 % Net charge-offs to allowance for credit losses on loans 0.51 % 1.75 % Allowance for credit losses on loans to: Total loans 1.61 % 1.62 % Total loans excluding PPP loans(1) 1.62 % 1.76 % Nonperforming loans 318.65 % 308.54 % Nonaccrual loans 320.16 % 322.11 % (1) Allowance for credit losses on loans to total loans excluding PPP loans is a non-GAAP financial measure. A reconciliation of this financial measure from GAAP to non-GAAP as well as an explanation of why the Company provides non-GAAP financial measures can be found under the "Non-GAAP Financial Measures" heading at the end of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations 63
Table of Contents The table below reflects the annualized net charges to average daily loans outstanding, by loan category, during the periods presented:
Three Months Ended March 31, 2022 March 31, 2021 Annualized Net Annualized Net Charge-offs to Average Charge-offs to Average Net Charge-offs Average Loans Loans Net Charge-offs Average Loans Loans Commercial, financial, agricultural $ 966 $ 1,424,565 0.28% $ 3,209 $ 2,382,454 0.55% Lease financing (5) 84,681 (0.02) (11) 75,249 (0.06) Real estate - construction - 1,107,529 - 39 921,803 0.02 Real estate - 1-4 family mortgage (15) 2,810,988 - (160) 2,674,824 (0.02) Real estate - commercial mortgage (149) 4,540,731 (0.01) (110) 4,558,003 (0.01) Installment loans to individuals 54 140,017 0.16 71 190,478 0.15 Total $ 851 $ 10,108,511 0.03% $ 3,038 $ 10,802,811 0.11%
The following table provides further details on the Company’s net real estate loan write-offs for the periods presented:
Three Months Ended March 31, 2022 2021 Real estate - construction: Residential $ -
$ 39Total real estate - construction - 39 Real estate - 1-4 family mortgage: Primary 62 (79) Home equity 22 (93) Rental/investment (2) 34 Land development (97) (22) Total real estate - 1-4 family mortgage (15) (160) Real estate - commercial mortgage: Owner-occupied (149) (159) Non-owner occupied - 25 Land development - 24 Total real estate - commercial mortgage (149) (110) Total net charge-offs of loans secured by real estate
Allowance for Credit Losses on Unfunded Commitments; Provision for Credit Losses on Unfunded Commitments. The Company maintains a separate allowance for credit losses on unfunded loan commitments, which is included in the "Other liabilities" line item on the Consolidated Balance Sheets. Management estimates the amount of expected losses on unfunded loan commitments by calculating a likelihood of funding over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the allowance for credit losses on loans methodology described above to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company. A roll-forward of the allowance for credit losses on unfunded commitments is shown in the table below. 64 -------------------------------------------------------------------------------- Table of Contents Three Months Ended
2022 2021 Allowance for credit losses on unfunded loan commitments: Opening balance
(Recovery of) allowance for credit losses on unfunded loan commitments (included in other non-interest expense)
(550) - Ending balance
$ 19,485 $ 20,535Nonperforming Assets. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those on which the accrual of interest has stopped or loans which are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. Management, the problem asset resolution committee and our loan review staff closely monitor loans that are considered to be nonperforming. 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 credit losses on loans. 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.
The following tables provide details of the Company’s non-purchased and purchased nonperforming assets as of the dates presented.
Non Purchased Purchased Total
March 31, 2022Nonaccruing loans $ 32,573 $ 19,422 $ 51,995Accruing loans past due 90 days or more 209 38 247 Total nonperforming loans 32,782 19,460 52,242 Other real estate owned 531 1,531 2,062 Total nonperforming assets $ 33,313 $ 20,991 $ 54,304Nonperforming loans to total loans 0.51 % Nonaccruing loans to total loans 0.50 % Nonperforming assets to total assets 0.32 % December 31, 2021 Nonaccruing loans $ 30,751 $ 18,613 $ 49,364Accruing loans past due 90 days or more 1,074 367 1,441 Total nonperforming loans 31,825 18,980 50,805 Other real estate owned 951 1,589 2,540 Total nonperforming assets $ 32,776 $ 20,569 $ 53,345Nonperforming loans to total loans 0.51 % Nonaccruing loans to total loans 0.49 % Nonperforming assets to total assets
The level of non-performing loans has increased
The following table shows non-performing loans by loan category on the dates shown:
Table of Contents March 31, March 31, 2022 December 31, 2021 2021 Commercial, financial, agricultural
$ 13,177$ 13,131 $ 15,992Lease financing - 11 - Real estate - 1-4 family mortgage: Primary 20,331 19,533 16,275 Home equity 2,233 1,719 2,436 Rental/investment 878 1,595 1,168 Land development 521 257 85 Total real estate - 1-4 family mortgage 23,963 23,104
Real estate - commercial mortgage: Owner-occupied 5,700 5,039 4,923 Non-owner occupied 8,558 8,535 13,998 Land development 485 470 566 Total real estate - commercial mortgage 14,743 14,044
Installment loans to individuals 359 515 662 Total nonperforming loans
$ 52,242$ 50,805 $ 56,105Total nonperforming loans as a percentage of total loans were 0.51% as of March 31, 2022as compared to 0.51% and 0.52% as of December 31, 2021and March 31, 2021, respectively. The Company's coverage ratio, or its allowance for credit losses on loans as a percentage of nonperforming loans, was 318.65% as of March 31, 2022as compared to 323.14% as of December 31, 2021and 308.54% as of March 31, 2021. 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 credit losses at March 31, 2022. Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due but still accruing interest were $30,617at March 31, 2022as compared to $27,604at December 31, 2021and $21,801at March 31, 2021. Although not classified as nonperforming loans, restructured loans are another category of assets that contribute to our credit risk. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower's financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans. As shown below, restructured loans totaled $25,320at March 31, 2022as compared to $20,259at December 31, 2021and $20,370at March 31, 2021. At March 31, 2022, loans restructured through interest rate concessions represented 23% of total restructured loans, while loans restructured by a concession in payment terms represented the remainder. The following table provides further details of the Company's restructured loans in compliance with their modified terms as of the dates presented: 66
Table of Contents March 31, March 31, 2022 December 31, 2021 2021 Commercial, financial, agricultural
$ 774$ 967 $ 2,639Real estate - 1-4 family mortgage: Primary 12,196 11,750 8,363 Home equity 191 298 331 Rental/investment 344 350 427 Land development 94 - - Total real estate - 1-4 family mortgage 12,825 12,398 9,121 Real estate - commercial mortgage: Owner-occupied 3,667 5,407 6,757 Non-owner occupied 7,911 1,341 1,595 Land development 74 75 179 Total real estate - commercial mortgage 11,652 6,823 8,531 Installment loans to individuals 69 71 79 Total restructured loans in compliance with modified terms $ 25,320$ 20,259 $ 20,370
The evolution of the Company’s restructured loans is presented in the table below:
2022 2021 Balance at January 1,
$ 20,259 $ 20,448
Additional advances or loans with concessions 7,513 1,621 Reclassified as performing restructured loan 302
- Reductions due to: Reclassified as nonperforming (493) (1,495) Paid in full (2,126) - Paydowns (135) (204) Balance at March 31,
$ 25,320 $ 20,370The following table shows the principal amounts of nonperforming and restructured loans as of the dates presented. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower's ability to comply with the current repayment terms of the loan have been reflected in the table below. March 31, March 31, 2022 December 31, 2021 2021 Nonaccruing loans $ 51,995$ 49,364 $ 53,741Accruing loans past due 90 days or more 247 1,441 2,364 Total nonperforming loans 52,242 50,805 56,105
Loans restructured under amended terms 25,320
20,259 20,370 Total nonperforming and restructured loans
$ 77,562$ 71,064 $ 76,475
The following table provides details of other real estate held by the Company as of the dates presented:
Table of Contents March 31, March 31, 2022 December 31, 2021 2021 Residential real estate
$ 376$ 259 $ 484Commercial real estate 175 761 3,109 Residential land development 295 305
Commercial land development 1,216 1,215
Total other real estate owned
$ 2,062$ 2,540 $
Changes in other real estate held by the Company are as follows:
2022 2021 Balance at January 1,
$ 2,540 $ 5,972Transfers of loans 200 2,039 Impairments (14) (70) Dispositions (665) (1,906) Other 1 (64) Balance at March 31, $ 2,062 $ 5,971Other real estate owned with a cost basis of $665was sold during the three months ended March 31, 2022, resulting in a net gain of $291, while other real estate owned with a cost basis of $1,906was sold during the three months ended March 31, 2021, resulting in a net gain of $56.
Interest rate risk
Market risk is the risk of loss from adverse changes in market prices and rates. The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets and inventories. Our market risk arises primarily from interest rate risk inherent in lending and deposit-taking activities. Management believes a significant impact on the Company's financial results stems from our ability to react to changes in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. Because of the impact of interest rate fluctuations on our profitability, the Board of Directors and management actively monitor and manage our interest rate risk exposure. We have an Asset/Liability Committee ("ALCO") that is authorized by the Board of Directors to monitor our interest rate sensitivity and to make decisions relating to that process. The ALCO's goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital. The ALCO uses an asset/liability model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model is used to perform both net interest income forecast simulations for multiple year horizons and economic value of equity ("EVE") analyses, each under various interest rate scenarios, which could impact the results presented in the table below. Net interest income simulations measure the short and medium-term earnings exposure from changes in market interest rates in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time for a given set of market rate assumptions. An increase in EVE due to a specified rate change indicates an improvement in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet. The following table presents the projected impact of a change in interest rates on (1) static EVE and (2) earnings at risk (that is, net interest income) for the 1-12 and 13-24 month periods commencing
April 1, 2022, in each case as compared to the result under rates present in the market on March 31, 2022. The changes in interest rates assume an instantaneous and parallel shift in the yield curve and do not account for changes in the slope of the yield curve. 68
Table of Contents Percentage Change In: Economic Value Equity Immediate Change in Rates of (in basis (EVE) Earning at Risk (Net Interest Income) points): Static 1-12 Months 13-24 Months +400 12.17% 31.70% 38.29% +300 9.78% 23.94% 28.87% +200 7.21% 16.14% 19.58% +100 4.26% 8.20% 10.21% The rate shock results for the net interest income simulations for the next twenty-four months produce an asset sensitive position at
March 31, 2022and are all within the parameters set by the Board of Directors. The preceding measures assume no change in the size or asset/liability compositions of the balance sheet, and they do not reflect future actions the ALCO may undertake in response to such changes in interest rates. The scenarios assume instantaneous movements in interest rates in increments of plus 100, 200, 300 and 400. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions, including asset prepayment speeds, the impact of competitive factors on our pricing of loans and deposits, how responsive our deposit repricing is to the change in market rates and the expected life of non-maturity deposits. These business assumptions are based upon our experience, business plans and published industry experience; however, such assumptions may not necessarily reflect the manner or timing in which cash flows, asset yields and liability costs respond to changes in market rates. Because these assumptions are inherently uncertain, actual results will differ from simulated results. The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, forward commitments, and interest rate lock commitments, as part of its ongoing efforts to mitigate its interest rate risk exposure. For more information about the Company's derivatives, see the information under the heading "Loan Commitments and Other Off-Balance Sheet Arrangements" in the Liquidity and Capital Resources section below and Note 10, "Derivative Instruments," in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements.
Cash and capital resources
Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Core deposits, which are deposits excluding time deposits greater than
$250,000, are the major source of funds used by the Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring the Bank's liquidity. Management continually monitors the Bank's liquidity and non-core dependency ratios to ensure compliance with targets established by the Asset/Liability Management Committee. Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Within the next twelve months, the securities portfolio is forecasted to generate cash flow through principal payments and maturities equal to approximately 13.31% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types, short-term borrowings and derivative instruments. At March 31, 2022, securities with a carrying value of $702,992were pledged to secure public fund deposits and as collateral for short-term borrowings and derivative instruments as compared to securities with a carrying value of $629,174similarly pledged at December 31, 2021. Other sources available for meeting liquidity needs include federal funds purchased and short-term and long-term advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. There were $100,000in short-term borrowings from the FHLB at March 31, 2022, as compared to no such borrowings at December 31, 2021. Long-term funds obtained from the FHLB are used to match-fund fixed rate loans in order to minimize interest rate risk and also are used to meet day-to-day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. At March 31, 2022, the balance of our outstanding long-term advances with the FHLB was $408compared to $417at December 31, 2021. The total amount of the remaining credit available to us from the FHLB at March 31, 2022was $4,047,128. We also maintain lines of credit with other commercial banks totaling $180,000. These are unsecured lines of credit with the majority maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit at March 31, 2022or December 31, 2021. 69 -------------------------------------------------------------------------------- Table of Contents Finally, we can access the capital markets to meet liquidity needs, as we did in 2016, 2020 and 2021 in the form of subordinated notes. The Company maintains a shelf registration statement with the Securities and Exchange Commission("SEC"). The shelf registration statement, which was effective upon filing, allows the Company to raise capital from time to time through the sale of common stock, preferred stock, depositary shares, debt securities, rights, warrants and units, or a combination thereof, subject to market conditions. Specific terms and prices will be determined at the time of any offering under a separate prospectus supplement that the Company will file with the SECat the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes or as otherwise described in the prospectus supplement applicable to the offering and could include the expansion of the Company's banking, insurance and wealth management operations as well as other business opportunities. The carrying value of the subordinated notes, net of unamortized debt issuance costs, was $323,490at March 31, 2022. We redeemed $30,000of subordinated notes in the first quarter of 2022.
The following table presents, by type, the sources of financing of the Company, which consist of the average total of deposits and funds borrowed, and the total cost of each source of financing for the periods presented:
Percentage of Total Average Deposits and Borrowed Funds Cost of Funds Three Months Ended Three Months Ended March 31, March 31, 2022 2021 2022 2021 Noninterest-bearing demand 32.65 % 30.20 % - % - % Interest-bearing demand 46.59 46.17 0.22 0.27 Savings 7.70 6.90 0.05 0.08 Time deposits 9.65 12.94 0.55 1.02 Short-term borrowings 0.19 0.10 0.48 0.31 Long-term Federal Home Loan Bank advances 0.01 1.19 1.86 0.05 Subordinated notes 2.43 1.63 4.26 5.15 Other borrowed funds 0.78 0.87 4.41 4.24 Total deposits and borrowed funds 100.00 % 100.00 % 0.30 % 0.38 % Our strategy in choosing funds is focused on minimizing cost in the context of our balance sheet composition and interest rate risk position. Accordingly, management targets growth of noninterest-bearing deposits. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. We constantly monitor our funds position and evaluate the effect that various funding sources have on our financial position. Cash and cash equivalents were
$1,607,493at March 31, 2022, as compared to $1,261,916at March 31, 2021. Cash used in investing activities for the three months ended March 31, 2022was $584,800, as compared to cash provided by investing activities of $29,466for the three months ended March 31, 2021. Proceeds from the sale, maturity or call of securities within our investment portfolio were $135,775for the three months ended March 31, 2022, as compared to $250,773for the same period in 2021. These proceeds were primarily reinvested into the investment portfolio. Purchases of investment securities were $365,069for the first three months of 2022, as compared to $465,245for the same period in 2021. Cash provided by financing activities for the three months ended March 31, 2022was $108,512, as compared to $656,035for the same period in 2021. Deposits increased $85,173and $677,827for the three months ended March 31, 2022and 2021, respectively.
Restrictions on dividends, loans and bank advances
The Company's liquidity and capital resources, as well as its ability to pay dividends to its shareholders, are substantially dependent on the ability of the
Renasant Bankto transfer funds to the Company in the form of dividends, loans and advances. Under Mississippilaw, a Mississippibank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippibank 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(the "DBCF"). In addition, the FDICalso has the authority to prohibit the Bank from engaging in business practices that the FDICconsiders to be unsafe or unsound, which, depending on the financial condition of the bank, could include the payment of dividends. Accordingly, the approval of the DBCF is required prior to the Bank paying dividends to the Company, and under certain circumstances the approval of the FDICmay be required. 70 -------------------------------------------------------------------------------- Table of Contents Federal Reserveregulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At March 31, 2022, the maximum amount available for transfer from the Bank to the Company in the form of loans was $171,473. The Company maintains a $3,000line of credit collateralized by cash with the Bank. There were no amounts outstanding under this line of credit at March 31, 2022. These restrictions did not have any impact on the Company's ability to meet its cash obligations in the three months ended March 31, 2022, nor does management expect such restrictions to materially impact the Company's ability to meet its currently-anticipated cash obligations.
Loan commitments and other off-balance sheet arrangements
The Company enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies, including establishing a provision for credit losses on unfunded commitments. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management's credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent the Company’s future cash requirements because although the borrower has the ability to draw on these commitments at any time, these commitments often expire unused. The Company’s outstanding unfunded loan commitments and standby letters of credit were as follows at the dates presented:
March 31, 2022 December 31, 2021 Loan commitments
$ 3,254,402 $ 3,104,940Standby letters of credit 89,723 89,830 The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments and the provision related thereto as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed. For a more detailed discussion related to the allowance and provision for credit losses on unfunded loan commitments, refer to the "Risk Management" section above. The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position with other financial institutions. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At March 31, 2022, the Company had notional amounts of $179,648on interest rate contracts with corporate customers and $179,648in offsetting interest rate contracts with other financial institutions to mitigate the Company's rate exposure on its corporate customers' contracts and certain fixed rate loans. Additionally, the Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate and adjustable rate residential mortgage loans and also enters into forward commitments to sell residential mortgage loans to secondary market investors. The Company also enters into forward interest rate swap contracts on its FHLB borrowings and its junior subordinated debentures that are accounted for as cash flow hedges. Under each of these contracts, the Company pays a fixed rate of interest and receives a variable rate of interest based on the three-month or one-month LIBOR plus a predetermined spread. The Company entered into an interest rate swap contract on its subordinated notes that is accounted for as a fair value hedge. Under this contract, the Company pays a variable rate of interest based on the three-month LIBOR plus a predetermined spread and receives a fixed rate of interest. For more information about the Company's derivatives, see Note 10, "Derivative Instruments," in the Notes to Consolidated Financial Statements of the Company in Item 1, Financial Statements.
Equity and regulatory issues
71 -------------------------------------------------------------------------------- Table of Contents Total shareholders' equity of the Company was
$2,137,642at March 31, 2022compared to $2,209,853at December 31, 2021. Book value per share was $38.25and $39.63at March 31, 2022and December 31, 2021, respectively. The decrease in shareholders' equity was attributable to changes in accumulated other comprehensive income and dividends declared, partially offset by current period earnings. On October 26, 2021, the Company's Board of Directors approved a new stock repurchase program, authorizing the Company to repurchase up to $50,000of its outstanding common stock, either in open market purchases or privately-negotiated transactions. The new repurchase program will remain in effect for one year or, if earlier, the repurchase of the entire amount of common stock authorized to be repurchased. The Company did not repurchase any of its common stock under the stock repurchase plan in the first quarter of 2022. The Company has junior subordinated debentures with a carrying value of $111,518at March 31, 2022, of which $107,927is included in the Company's Tier 1 capital. Federal Reserveguidelines limit the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital, but these guidelines did not impact the debentures we include in Tier 1 capital at March 31, 2022. Although our existing junior subordinated debentures are currently unaffected by these Federal Reserveguidelines, on account of changes enacted as part of the Dodd-Frank Act, any new trust preferred securities are not includable in Tier 1 capital. Further, if as a result of an acquisition of a financial institution we exceed $15,000,000in assets, or if we make any acquisition of a financial institution after we have exceeded $15,000,000in assets, we will lose Tier 1 treatment of our junior subordinated debentures.
The Company holds subordinated notes with a face value of
Federal Reserve, the FDICand the Office of the Comptroller of the Currencyhave issued guidelines governing the levels of capital that bank holding companies and banks must maintain. Those guidelines specify capital tiers, which include the following classifications: Tier 1 Capital to Tier 1 Capital to
Total capital at
Average Assets Common Equity Tier 1 to Risk - Weighted Risk - Weighted Capital Tiers (Leverage) Risk - Weighted Assets Assets Assets Well capitalized 5% or above 6.5% or above 8% or above 10% or above Adequately capitalized 4% or above 4.5% or above 6% or above 8% or above Undercapitalized Less than 4% Less than 4.5% Less than 6% Less than 8% Significantly undercapitalized Less than 3% Less than 3% Less than 4% Less than 6% Critically undercapitalized Tangible Equity / Total Assets less than 2% 72
The following table presents the capital and risk-based capital and leverage ratios for the Company and for
Minimum CapitalRequirement to be Minimum CapitalAdequately Requirement to be Capitalized
Actual Well Capitalized Conservation Buffer) Amount Ratio Amount Ratio Amount Ratio
March 31, 2022 Renasant Corporation: Risk-based capital ratios: Common equity tier 1 capital ratio $ 1,316,34210.78 % $ 793,5696.50 % $ 854,613 7.00 % Tier 1 risk-based capital ratio 1,424,268 11.67 % 976,700 8.00 % 1,037,744 8.50 % Total risk-based capital ratio 1,892,630 15.50 % 1,220,875 10.00 % 1,281,919 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,424,268 9.00 % 791,134 5.00 % 632,907 4.00 % Renasant Bank: Risk-based capital ratios: Common equity tier 1 capital ratio $ 1,581,60812.95 % $ 793,9426.50 % $ 855,014 7.00 % Tier 1 risk-based capital ratio 1,581,608 12.95 % 977,159 8.00 % 1,038,232 8.50 % Total risk-based capital ratio 1,714,725 14.04 % 1,221,449 10.00 % 1,282,521 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,581,608 10.00 % 790,518 5.00 % 632,414 4.00 % December 31, 2021 Renasant Corporation: Risk-based capital ratios: Common equity tier 1 capital ratio $ 1,314,29511.18 % $ 763,9526.50 % $ 822,717 7.00 % Tier 1 risk-based capital ratio 1,422,077 12.10 % 940,248 8.00 % 999,014 8.50 % Total risk-based capital ratio 1,897,167 16.14 % 1,175,610 10.00 % 1,234,076 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,422,077 9.15 % 777,289 5.00 % 621,831 4.00 % Renasant Bank: Risk-based capital ratios: Common equity tier 1 capital ratio $ 1,580,90413.46 % $ 763,7136.50 % $ 822,460 7.00 % Tier 1 risk-based capital ratio 1,580,904 13.46 % 939,954 8.00 % 998,702 8.50 % Total risk-based capital ratio 1,697,163 14.44 % 1,174,943 10.00 % 1,233,690 10.50 % Leverage capital ratios: Tier 1 leverage ratio 1,580,904 10.18 % 776,700 5.00 % 621,360 4.00 % The Company has elected to take advantage of transitional relief offered by the Federal Reserveand FDICto delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transitional period to phase out the capital benefit provided by the two-year delay. The three-year transitional period began on January1, 2022. For more information regarding the capital adequacy guidelines applicable to the Company and Renasant Bank, please refer to Note 15, "Regulatory Matters," in the Notes to the Consolidated Financial Statements of the Company in Item 1, Financial Statements.
Critical accounting estimates
We have identified certain accounting estimates that involve significant judgment and estimates that may materially affect our financial condition or results of operations. Our accounting policies are described in more detail in Note 1,
"Significant Accounting Policies," in the Notes to Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, in our Annual Report on Form 10-K for the year ended
December 31, 2021, filed with the Securities and Exchange Commissionon February 25, 2022. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. The critical accounting estimates which we believe to be the most critical in preparing our consolidated financial statements relate to allowance for credit losses and acquisition accounting, which are described under "Critical Accounting Policies and Estimates" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2021. Since December 31, 2021, there have been no material changes in these critical accounting estimates.
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles in
the United States of America("GAAP"), this document contains certain non-GAAP financial measures, namely, an adjusted efficiency ratio and the allowance for credit losses on loans to total loans, excluding PPP loans (the "adjusted allowance ratio"). The adjusted allowance ratio only excludes PPP loans; the adjusted efficiency ratio adjusts GAAP financial measures to exclude the amortization of intangible assets and certain items (such as, among others, merger and conversion related expenses, COVID-19 related expenses, restructuring benefit, and a recovery of a portion of the reserve for unfunded commitments, gains on sales of securities and asset valuation adjustments) with respect to which the Company is unable to accurately predict when these items will be incurred or, when incurred, the amount thereof. With respect to COVID-19 related expenses in particular, management added these expenses as a charge to exclude when calculating non-GAAP financial measures because the expenses included within this line item are readily quantifiable and possess the same characteristics with respect to management's inability to accurately predict the timing or amount thereof as the other items excluded when calculating non-GAAP financial measures. Management uses the adjusted efficiency ratio when evaluating capital utilization and adequacy, while it uses the adjusted allowance ratio to determine the adequacy of our allowance with respect to loans not fully guaranteed by the U.S. Small Business Administration. In addition, the Company believes that non-GAAP financial measures facilitate the making of period-to-period comparisons and are meaningful indicators of its operating performance, particularly because these measures are widely used by industry analysts for companies with merger and acquisition activities. Also, because the amortization of intangible assets and items such as restructuring charges and COVID-19 related expenses can vary extensively from company to company and, as to intangible assets, are excluded from the calculation of a financial institution's regulatory capital, the Company believes that the presentation of this non-GAAP financial information allows readers to more easily compare the Company's results to information provided in other regulatory reports and the results of other companies. The reconciliations from GAAP to non-GAAP for these financial measures are below. 74
Table of Contents Adjusted Efficiency Ratio Three months ended March 31, 2022 2021 Interest income (fully tax equivalent basis)
$ 111,945 $ 123,378Interest expense 10,562 12,114 Net interest income (fully tax equivalent basis) 101,383 111,264 Total noninterest income 37,458 81,037 Net gains on sales of securities - 1,357 MSR valuation adjustment - 13,561 Adjusted noninterest income 37,458 66,119 Total noninterest expense 94,105 115,935 Intangible amortization 1,366 1,598 Merger and conversion related expenses 687 - Restructuring (benefit) charges (455) 292 COVID-19 related expenses - 785 Recovery of unfunded commitments (550) - Adjusted noninterest expense 93,057 113,260 Efficiency Ratio (GAAP) 67.78 % 60.29 % Adjusted Efficiency Ratio (non-GAAP) 67.02 % 63.85 % Allowance for Credit Losses on Loans to Total Loans, excluding PPP Loans March 31, 2022 December 31, 2021 Total loans (GAAP) $ 10,313,459 $ 10,020,914Less PPP loans 8,382 58,391 Adjusted total loans (non-GAAP) $ 10,305,077
Allowance for Credit Losses on Loans $ 166,468 $ 164,171 ACL/Total loans (GAAP) 1.61 % 1.64 % ACL/Total loans excluding PPP loans (non-GAAP) 1.62 % 1.65 % The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Readers of this Form 10-Q should note that, because there are no standard definitions for the calculations as well as the results, the Company's calculations may not be comparable to a similarly-titled measure presented by other companies. Also, there may be limits in the usefulness of this measure to readers of this document. As a result, the Company encourages readers to consider its consolidated financial statements and footnotes thereto in their entirety and not to rely on any single financial measure.
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