RENASANT CORP - FORM 10-Q - November 9, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________
FORM 10-Q
 ________________________________________________________
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
Or
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission file number 001-13253
 ________________________________________________________
RENASANT CORPORATION
(Exact name of registrant as specified in its charter)
 ________________________________________________________
Mississippi
 
64-0676974
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
209 Troy Street, Tupelo, Mississippi
 
38804-4827
(Address of principal executive offices)
 
(Zip Code)
(662) 680-1001
(Registrant’s telephone number, including area code)
 ________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  ý
As of October 30, 2015, 40,264,555 shares of the registrant’s common stock, $5.00 par value per share, were outstanding. The registrant has no other classes of securities outstanding.


Renasant Corporation and Subsidiaries
Form 10-Q
For the Quarterly Period Ended September 30, 2015
CONTENTS
 


PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS


Renasant Corporation and Subsidiaries
Consolidated Balance Sheets

(In Thousands, Except Share Data)
 
(Unaudited)
 
 
 
September 30,
2015
 
December 31, 2014
Assets
 
 
 
Cash and due from banks
$
128,758

 
$
95,793

Interest-bearing balances with banks
75,091

 
65,790

Cash and cash equivalents
203,849

 
161,583

Securities held to maturity (fair value of $490,233 and $442,488, respectively)
476,752

 
430,163

Securities available for sale, at fair value
662,801

 
553,584

Mortgage loans held for sale, at fair value
317,681

 
25,628

Loans, net of unearned income:
 
 
 
Acquired and covered by FDIC loss-share agreements ("acquired covered loans")
100,839

 
143,041

Acquired and not covered by FDIC loss-share agreements ("acquired non-covered loans")
1,570,116

 
577,347

Not acquired
3,607,005

 
3,267,486

Total loans, net of unearned income
5,277,960

 
3,987,874

Allowance for loan losses
(42,051
)
 
(42,289
)
Loans, net
5,235,909

 
3,945,585

Premises and equipment, net
167,642

 
113,735

Other real estate owned:
 
 
 
Covered under FDIC loss-share agreements
3,183

 
6,368

Not covered under FDIC loss-share agreements
33,151

 
28,104

Total other real estate owned, net
36,334

 
34,472

Goodwill
452,037

 
274,706

Other intangible assets, net
30,562

 
22,624

FDIC loss-share indemnification asset
8,044

 
12,516

Other assets
327,121

 
230,533

Total assets
$
7,918,732

 
$
5,805,129

Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
1,303,884

 
$
919,872

Interest-bearing
4,930,677

 
3,918,546

Total deposits
6,234,561

 
4,838,418

Short-term borrowings
402,122

 
32,403

Long-term debt
149,618

 
156,422

Other liabilities
99,732

 
66,235

Total liabilities
6,886,033

 
5,093,478

Shareholders’ equity
 
 
 
Preferred stock, $.01 par value – 5,000,000 shares authorized; no shares issued and outstanding
—

 
—

Common stock, $5.00 par value – 75,000,000 shares authorized, 41,292,045 and 32,656,166 shares issued, respectively; 40,268,455 and 31,545,145 shares outstanding, respectively
206,460

 
163,281

Treasury stock, at cost
(22,010
)
 
(22,128
)
Additional paid-in capital
592,132

 
345,213

Retained earnings
262,057

 
232,883

Accumulated other comprehensive loss, net of taxes
(5,940
)
 
(7,598
)
Total shareholders’ equity
1,032,699

 
711,651

Total liabilities and shareholders’ equity
$
7,918,732

 
$
5,805,129

See Notes to Consolidated Financial Statements.    

1

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Loans
$
67,527

 
$
49,833

 
$
165,418

 
$
150,658

Securities
 
 
 
 
 
 
 
Taxable
4,193

 
4,144

 
12,634

 
12,998

Tax-exempt
2,529

 
2,308

 
7,029

 
6,821

Other
51

 
73

 
154

 
335

Total interest income
74,300

 
56,358

 
185,235

 
170,812

Interest expense
 
 
 
 
 
 
 
Deposits
3,547

 
3,915

 
10,155

 
12,424

Borrowings
2,073

 
1,971

 
5,888

 
5,776

Total interest expense
5,620

 
5,886

 
16,043

 
18,200

Net interest income
68,680

 
50,472

 
169,192

 
152,612

Provision for loan losses
750

 
2,217

 
3,000

 
5,117

Net interest income after provision for loan losses
67,930

 
48,255

 
166,192

 
147,495

Noninterest income
 
 
 
 
 
 
 
Service charges on deposit accounts
8,151

 
7,107

 
21,008

 
19,851

Fees and commissions
5,704

 
5,877

 
15,150

 
15,729

Insurance commissions
2,381

 
2,270

 
6,467

 
6,221

Wealth management revenue
2,871

 
2,197

 
7,309

 
6,511

Gains on sales of securities
—

 
375

 
96

 
375

BOLI income
1,110

 
811

 
2,668

 
2,288

Gains on sales of mortgage loans held for sale
10,578

 
2,635

 
20,618

 
6,226

Other
1,322

 
1,291

 
3,622

 
3,449

Total noninterest income
32,117

 
22,563

 
76,938

 
60,650

Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
43,048

 
29,569

 
101,702

 
87,807

Data processing
3,773

 
2,906

 
10,106

 
8,451

Net occupancy and equipment
7,733

 
5,353

 
18,816

 
15,106

Other real estate owned
861

 
1,101

 
2,347

 
3,870

Professional fees
1,242

 
1,018

 
3,238

 
3,607

Advertising and public relations
1,567

 
1,133

 
4,351

 
4,549

Intangible amortization
1,803

 
1,381

 
4,317

 
4,279

Communications
2,339

 
1,079

 
5,263

 
4,462

Merger-related expenses
7,746

 
—

 
9,691

 
195

Other
5,973

 
4,635

 
14,844

 
12,890

Total noninterest expense
76,085

 
48,175

 
174,675

 
145,216

Income before income taxes
23,962

 
22,643

 
68,455

 
62,929

Income taxes
7,742

 
7,108

 
21,601

 
18,944

Net income
$
16,220

 
$
15,535

 
$
46,854

 
$
43,985

Basic earnings per share
$
0.40

 
$
0.49

 
$
1.36

 
$
1.40

Diluted earnings per share
$
0.40

 
$
0.49

 
$
1.35

 
$
1.39

Cash dividends per common share
$
0.17

 
$
0.17

 
$
0.51

 
$
0.51


See Notes to Consolidated Financial Statements.

2

Renasant Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In Thousands, Except Share Data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
16,220

 
$
15,535

 
$
46,854

 
$
43,985

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Net change in unrealized holding gains on securities
3,717

 
866

 
2,505

 
4,856

Reclassification adjustment for gains realized in net income
—

 
(232
)
 
(60
)
 
(232
)
Amortization of unrealized holding gains on securities transferred to the held to maturity category
(26
)
 
(38
)
 
(86
)
 
(121
)
Total securities
3,691

 
596

 
2,359

 
4,503

Derivative instruments:
 
 
 
 
 
 
 
Net change in unrealized holding (losses) gains on derivative instruments
(1,075
)
 
42

 
(881
)
 
(773
)
Totals derivative instruments
(1,075
)
 
42

 
(881
)
 
(773
)
Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
 
 
Amortization of net actuarial loss recognized in net periodic pension cost
55

 
47

 
180

 
137

Total defined benefit pension and post-retirement benefit plans
55

 
47

 
180

 
137

Other comprehensive income, net of tax
2,671

 
685

 
1,658

 
3,867

Comprehensive income
$
18,891

 
$
16,220

 
$
48,512

 
$
47,852


See Notes to Consolidated Financial Statements.

3

Renasant Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Operating activities
 
 
 
Net income
$
46,854

 
$
43,985

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3,000

 
5,117

Depreciation, amortization and accretion
5,053

 
5,658

Deferred income tax expense
3,794

 
12,237

Funding of mortgage loans held for sale
(992,555
)
 
(408,863
)
Proceeds from sales of mortgage loans held for sale
1,069,625

 
418,090

Gains on sales of mortgage loans held for sale
(20,618
)
 
(6,226
)
Gains on sales of securities
(96
)
 
(375
)
Losses (gains) on sales of premises and equipment
37

 
(58
)
Stock-based compensation
2,739

 
3,162

Decrease in FDIC loss-share indemnification asset, net of accretion
5,202

 
10,227

Decrease in other assets
17,182

 
16,429

Decrease in other liabilities
(11,047
)
 
(9,526
)
Net cash provided by operating activities
$
129,170

 
$
89,857

Investing activities
 
 
 
Purchases of securities available for sale
(54,256
)
 
(100,129
)
Proceeds from sales of securities available for sale
8,444

 
1,099

Proceeds from call/maturities of securities available for sale
83,488

 
60,202

Purchases of securities held to maturity
(137,776
)
 
(154,126
)
Proceeds from call/maturities of securities held to maturity
121,438

 
130,206

Net increase in loans
(177,740
)
 
(82,319
)
Purchases of premises and equipment
(19,364
)
 
(12,494
)
Proceeds from sales of premises and equipment
448

 
—

Net cash received in acquisition
35,787

 
—

Net cash used in investing activities
(139,531
)
 
(157,561
)
Financing activities
 
 
 
Net increase in noninterest-bearing deposits
107,728

 
79,524

Net decrease in interest-bearing deposits
(85,693
)
 
(157,766
)
Net increase in short-term borrowings
355,063

 
63,363

Proceeds from long-term borrowings
42

 
—

Repayment of long-term debt
(307,230
)
 
(7,864
)
Cash paid for dividends
(17,681
)
 
(16,135
)
Cash received on exercise of stock-based compensation
102

 
401

Excess tax benefit from stock-based compensation
296

 
1,127

Net cash provided by (used in) financing activities
52,627

 
(37,350
)
Net increase (decrease) in cash and cash equivalents
42,266

 
(105,054
)
Cash and cash equivalents at beginning of period
161,583

 
246,648

Cash and cash equivalents at end of period
$
203,849

 
$
141,594

Supplemental disclosures
 
 
 
Cash paid for interest
$
15,936

 
$
18,674

Cash paid for income taxes
$
10,768

 
$
9,300

Noncash transactions:
 
 
 
Transfers of loans to other real estate owned
$
12,268

 
$
8,318

Financed sales of other real estate owned
$
1,017

 
$
860

See Notes to Consolidated Financial Statements.

4

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

Note A – Summary of Significant Accounting Policies
Nature of Operations: Renasant Corporation (referred to herein as the “Company”) owns and operates Renasant Bank (“Renasant Bank” or the “Bank”) and Renasant Insurance, Inc. The Company offers a diversified range of financial, fiduciary and insurance services to its retail and commercial customers through its subsidiaries and full service offices located throughout north and central Mississippi, Tennessee, north and central Alabama and north Georgia.
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information regarding the Company’s significant accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 2, 2015.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Subsequent Events: The Company has evaluated, for consideration of recognition or disclosure, subsequent events that have occurred through the date of issuance of its financial statements. On October 20, 2015, the Company announced the signing of a definitive merger agreement to acquire KeyWorth Bank, the terms of which are disclosed in Note P, "Subsequent Events". The Company has determined that no other significant events occurred after September 30, 2015 but prior to the issuance of these financial statements that would have a material impact on its Consolidated Financial Statements.

Note B – Securities
(In Thousands, Except Number of Securities)
The amortized cost and fair value of securities held to maturity were as follows as of the dates presented:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2015
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
120,602

 
$
32

 
$
(883
)
 
$
119,751

Obligations of states and political subdivisions
356,150

 
14,742

 
(410
)
 
370,482

 
$
476,752

 
$
14,774

 
$
(1,293
)
 
$
490,233

December 31, 2014
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
125,081

 
$
10

 
$
(2,915
)
 
$
122,176

Obligations of states and political subdivisions
305,082

 
15,428

 
(198
)
 
320,312

 
$
430,163

 
$
15,438

 
$
(3,113
)
 
$
442,488





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


The amortized cost and fair value of securities available for sale were as follows as of the dates presented:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2015
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
6,100

 
$
150

 
$
(2
)
 
$
6,248

Residential mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
362,702

 
5,740

 
(892
)
 
367,550

Government agency collateralized mortgage obligations
178,546

 
2,422

 
(1,542
)
 
179,426

Commercial mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
59,544

 
1,623

 
(14
)
 
61,153

Government agency collateralized mortgage obligations
5,211

 
237

 
—

 
5,448

Trust preferred securities
24,807

 
—

 
(5,917
)
 
18,890

Other debt securities
19,607

 
548

 
(20
)
 
20,135

Other equity securities
2,500

 
1,451

 
—

 
3,951

 
$
659,017

 
$
12,171

 
$
(8,387
)
 
$
662,801

 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2014
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
6,119

 
$
147

 
$
(119
)
 
$
6,147

Residential mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
292,283

 
4,908

 
(832
)
 
296,359

Government agency collateralized mortgage obligations
158,436

 
1,523

 
(2,523
)
 
157,436

Commercial mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
45,714

 
1,608

 
(137
)
 
47,185

Government agency collateralized mortgage obligations
4,970

 
202

 
—

 
5,172

Trust preferred securities
26,400

 
137

 
(6,781
)
 
19,756

Other debt securities
17,517

 
487

 
(74
)
 
17,930

Other equity securities
2,331

 
1,268

 
—

 
3,599

 
$
553,770

 
$
10,280

 
$
(10,466
)
 
$
553,584


During the nine months ended September 30, 2015, the Company sold its pooled trust preferred security XIII with a carrying value of $1,117 at the time of sale for net proceeds of $1,213 resulting in a gain of $96. Furthermore, the Company sold certain investments acquired from Heritage shortly after acquisition with an aggregate carrying value of $7,231 at the time of sale for net proceeds of $7,231, resulting in no gain or loss on the sale. During the same period in 2014, the Company sold securities with a carrying value of $724 at the time of sale for net proceeds of $1,099 resulting in a gain of $375.


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


Gross realized gains on sales of securities available for sale for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Gross gains on sales of securities available for sale
$
—

 
$
375

 
$
96

 
$
375

Gross losses on sales of securities available for sale
—

 
—

 
—

 
—

Gain on sales of securities available for sale, net
$
—

 
$
375

 
$
96

 
$
375


At September 30, 2015 and December 31, 2014, securities with a carrying value of $721,834 and $617,189, respectively, were pledged to secure government, public and trust deposits. Securities with a carrying value of $37,976 and $16,410 were pledged as collateral for short-term borrowings and derivative instruments at September 30, 2015 and December 31, 2014, respectively.
The amortized cost and fair value of securities at September 30, 2015 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.
 
 
Held to Maturity
 
Available for Sale
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due within one year
$
15,035

 
$
15,227

 
$
—

 
$
—

Due after one year through five years
86,835

 
89,467

 
6,100

 
6,248

Due after five years through ten years
237,759

 
242,027

 
—

 
—

Due after ten years
137,123

 
143,512

 
24,807

 
18,890

Residential mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
—

 
362,702

 
367,550

Government agency collateralized mortgage obligations
—

 
—

 
178,546

 
179,426

Commercial mortgage backed securities:
 
 
 
 
 
 
 
Government agency mortgage backed securities
—

 
—

 
59,544

 
61,153

Government agency collateralized mortgage obligations
—

 
—

 
5,211

 
5,448

Other debt securities
—

 
—

 
19,607

 
20,135

Other equity securities
—

 
—

 
2,500

 
3,951

 
$
476,752

 
$
490,233

 
$
659,017

 
$
662,801



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


The following table presents the age of gross unrealized losses and fair value by investment category as of the dates presented:
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
#
 
Fair
Value
 
Unrealized
Losses
 
#
 
Fair
Value
 
Unrealized
Losses
 
#
 
Fair
Value
 
Unrealized
Losses
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
11
 
$
45,255

 
$
(230
)
 
12
 
$
55,050

 
$
(653
)
 
23
 
$
100,305

 
$
(883
)
Obligations of states and political subdivisions
35
 
26,941

 
(305
)
 
6
 
3,861

 
(105
)
 
41
 
30,802

 
(410
)
Total
46
 
$
72,196

 
$
(535
)
 
18
 
$
58,911

 
$
(758
)
 
64
 
131,107

 
$
(1,293
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
2
 
$
1,000

 
$
(1
)
 
26
 
$
119,174

 
$
(2,914
)
 
28
 
$
120,174

 
$
(2,915
)
Obligations of states and political subdivisions
3
 
3,353

 
(29
)
 
16
 
10,052

 
(169
)
 
19
 
13,405

 
(198
)
Total
5
 
$
4,353

 
$
(30
)
 
42
 
$
129,226

 
$
(3,083
)
 
47
 
$
133,579

 
$
(3,113
)
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
1
 
$
3,998

 
$
(2
)
 
0
 
$
—

 
$
—

 
1
 
$
3,998

 
$
(2
)
Residential mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
14
 
51,459

 
(184
)
 
9
 
28,867

 
(708
)
 
23
 
80,326

 
(892
)
Government agency collateralized mortgage obligations
3
 
6,995

 
(35
)
 
16
 
54,514

 
(1,507
)
 
19
 
61,509

 
(1,542
)
Commercial mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
2
 
1,144

 
(11
)
 
1
 
820

 
(3
)
 
3
 
1,964

 
(14
)
Government agency collateralized mortgage obligations
0
 
—

 
—

 
0
 
—

 
—

 
0
 
—

 
—

Trust preferred securities
0
 
—

 
—

 
3
 
18,890

 
(5,917
)
 
3
 
18,890

 
(5,917
)
Other debt securities
0
 
—

 
—

 
2
 
4,051

 
(20
)
 
2
 
4,051

 
(20
)
Total
20
 
$
63,596

 
$
(232
)
 
31
 
$
107,142

 
$
(8,155
)
 
51
 
$
170,738

 
$
(8,387
)
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
0
 
$
—

 
$
—

 
1
 
$
3,881

 
$
(119
)
 
1
 
$
3,881

 
$
(119
)
Residential mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
3
 
18,924

 
(39
)
 
13
 
49,612

 
(793
)
 
16
 
68,536

 
(832
)
Government agency collateralized mortgage obligations
6
 
32,169

 
(138
)
 
18
 
65,552

 
(2,385
)
 
24
 
97,721

 
(2,523
)
Commercial mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency mortgage backed securities
0
 
—

 
—

 
3
 
10,651

 
(137
)
 
3
 
10,651

 
(137
)
Government agency collateralized mortgage obligations
0
 
—

 
—

 
0
 
—

 
—

 
0
 
—

 
—

Trust preferred securities
0
 
—

 
—

 
3
 
18,503

 
(6,781
)
 
3
 
18,503

 
(6,781
)
Other debt securities
0
 
—

 
—

 
2
 
4,175

 
(74
)
 
2
 
4,175

 
(74
)
Other equity securities
0
 
—

 
—

 
0
 
—

 
—

 
0
 
—

 
—

Total
9
 
$
51,093

 
$
(177
)
 
40
 
$
152,374

 
$
(10,289
)
 
49
 
$
203,467

 
$
(10,466
)
 



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


The Company evaluates its investment portfolio for other-than-temporary-impairment (“OTTI”) on a quarterly basis. Impairment is assessed at the individual security level. The Company considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. Impairment is considered to be other-than-temporary if the Company intends to sell the investment security or if the Company does not expect to recover the entire amortized cost basis of the security before the Company is required to sell the security or before the security’s maturity.

The Company does not intend to sell any of the securities in an unrealized loss position, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for a period greater than twelve months, the Company has experienced an overall improvement in the fair value of its investment portfolio on account of the decrease in interest rates from the prior year and, with the exception of one of its pooled trust preferred securities (discussed below), is collecting principal and interest payments from the respective issuers as scheduled. As such, the Company did not record any OTTI for the three or nine months ended September 30, 2015 or 2014.
The Company holds investments in pooled trust preferred securities that had an amortized cost basis of $24,807 and $26,400 and a fair value of $18,890 and $19,756 at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the investments in pooled trust preferred securities consist of three securities representing interests in various tranches of trusts collateralized by debt issued by over 250 financial institutions. Management’s determination of the fair value of each of its holdings in pooled trust preferred securities is based on the current credit ratings, the known deferrals and defaults by the underlying issuing financial institutions and the degree to which future deferrals and defaults would be required to occur before the cash flow for the Company’s tranches is negatively impacted. In addition, management continually monitors key credit quality and capital ratios of the issuing institutions. This determination is further supported by quarterly valuations, which are performed by third parties, of each security obtained by the Company. The Company does not intend to sell the investments before recovery of the investments' amortized cost, and it is not more likely than not that the Company will be required to sell the investments before recovery of the investments’ amortized cost, which may be at maturity. At September 30, 2015, management did not, and does not currently, believe such securities will be settled at a price less than the amortized cost of the investment, but the Company previously concluded that it was probable that there had been an adverse change in estimated cash flows for all three trust preferred securities and recognized credit related impairment losses on these securities in 2010 and 2011. No additional impairment was recognized during the nine months ended September 30, 2015.
The Company's analysis of the pooled trust preferred securities during the second quarter of 2015 supported a return to accrual status for one of the three securities (XXVI). During the second quarter of 2014, the Company's analysis supported a return to accrual status for one of the other securities (XXIII). An observed history of principal and interest payments combined with improved qualitative and quantitative factors described above justified the accrual of interest on these securities. However, the remaining security (XXIV) is still in "payment in kind" status where interest payments are not expected until a future date and therefore, the qualitative and quantitative factors described above do not justify a return to accrual status at this time. As a result, pooled trust preferred security XXIV remains classified as nonaccruing asset at September 30, 2015, and investment interest is recorded on the cash-basis method until qualifying for return to accrual status.
The following table provides information regarding the Company’s investments in pooled trust preferred securities at September 30, 2015:
 
Name
Single/
Pooled
 
Class/
Tranche
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Loss
 
Lowest
Credit
Rating
 
Issuers
Currently in
Deferral or
Default
XXIII
Pooled
 
B-2
 
$
8,510

 
$
5,882

 
$
(2,628
)
 
Baa3
 
18
%
XXIV
Pooled
 
B-2
 
12,076

 
9,963

 
(2,113
)
 
Caa2
 
31
%
XXVI
Pooled
 
B-2
 
4,221

 
3,045

 
(1,176
)
 
Ba3
 
26
%
 
 
 
 
 
$
24,807

 
$
18,890

 
$
(5,917
)
 
 
 
 


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


The following table provides a summary of the cumulative credit related losses recognized in earnings for which a portion of OTTI has been recognized in other comprehensive income:
 
 
2015
 
2014
Balance at January 1
$
(3,337
)
 
$
(3,337
)
Additions related to credit losses for which OTTI was not previously recognized
—

 
—

Increases in credit loss for which OTTI was previously recognized
—

 
—

Balance at September 30
$
(3,337
)
 
$
(3,337
)


Note C – Loans and the Allowance for Loan Losses
(In Thousands, Except Number of Loans)
The following is a summary of loans as of the dates presented:
 
 
September 30,
2015
 
December 31, 2014
Commercial, financial, agricultural
$
621,121

 
$
483,283

Lease financing
25,190

 
10,427

Real estate – construction
339,370

 
212,061

Real estate – 1-4 family mortgage
1,662,505

 
1,236,360

Real estate – commercial mortgage
2,516,889

 
1,956,914

Installment loans to individuals
113,377

 
89,142

Gross loans
5,278,452

 
3,988,187

Unearned income
(492
)
 
(313
)
Loans, net of unearned income
5,277,960

 
3,987,874

Allowance for loan losses
(42,051
)
 
(42,289
)
Net loans
$
5,235,909

 
$
3,945,585


Past Due and Nonaccrual Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, the recognition of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer and other retail loans are typically charged-off no later than the time the loan is 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans may be placed on nonaccrual regardless of whether or not such loans are considered past due. All interest accrued for the current year, but not collected, for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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


The following table provides an aging of past due and nonaccrual loans, segregated by class, as of the dates presented:
 
 
Accruing Loans
 
Nonaccruing Loans
 
 
 
30-89 Days
Past Due
 
90 Days
or More
Past Due
 
Current
Loans
 
Total
Loans
 
30-89 Days
Past Due
 
90 Days
or More
Past Due
 
Current
Loans
 
Total
Loans
 
Total
Loans
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
928

 
$
1,146

 
$
618,263

 
$
620,337

 
$
—

 
$
503

 
$
281

 
$
784

 
$
621,121

Lease financing
—

 
—

 
24,771

 
24,771

 
—

 
419

 
—

 
419

 
25,190

Real estate – construction
789

 
—

 
338,581

 
339,370

 
—

 
—

 
—

 
—

 
339,370

Real estate – 1-4 family mortgage
8,947

 
5,789

 
1,635,107

 
1,649,843

 
296

 
3,618

 
8,748

 
12,662

 
1,662,505

Real estate – commercial mortgage
6,918

 
6,614

 
2,483,675

 
2,497,207

 
560

 
9,285

 
9,837

 
19,682

 
2,516,889

Installment loans to individuals
434

 
65

 
112,837

 
113,336

 
—

 
34

 
7

 
41

 
113,377

Unearned income
—

 
—

 
(492
)
 
(492
)
 
—

 
—

 
—

 
—

 
(492
)
Total
$
18,016

 
$
13,614

 
$
5,212,742

 
$
5,244,372

 
$
856

 
$
13,859

 
$
18,873

 
$
33,588

 
$
5,277,960

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
1,113

 
$
636

 
$
480,332

 
$
482,081

 
$
16

 
$
820

 
$
366

 
$
1,202

 
$
483,283

Lease financing
462

 
—

 
9,965

 
10,427

 
—

 
—

 
—

 
—

 
10,427

Real estate – construction
—

 
37

 
211,860

 
211,897

 
—

 
164

 
—

 
164

 
212,061

Real estate – 1-4 family mortgage
8,398

 
2,382

 
1,212,214

 
1,222,994

 
355

 
4,604

 
8,407

 
13,366

 
1,236,360

Real estate – commercial mortgage
6,924

 
7,637

 
1,912,758

 
1,927,319

 
1,826

 
16,928

 
10,841

 
29,595

 
1,956,914

Installment loans to individuals
269

 
21

 
88,782

 
89,072

 
—

 
59

 
11

 
70

 
89,142

Unearned income
—

 
—

 
(313
)
 
(313
)
 
—

 
—

 
—

 
—

 
(313
)
Total
$
17,166

 
$
10,713

 
$
3,915,598

 
$
3,943,477

 
$
2,197

 
$
22,575

 
$
19,625

 
$
44,397

 
$
3,987,874


Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days or more past due or placed on nonaccrual status are reported as nonperforming loans. There were no restructured loans contractually 90 days past due or more and still accruing at September 30, 2015 or December 31, 2014. The outstanding balance of restructured loans on nonaccrual status was $14,200 and $11,392 at September 30, 2015 and December 31, 2014, respectively.
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for commercial, consumer and construction loans above a minimum dollar amount threshold by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are evaluated collectively for impairment. When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded balance has been reduced to zero, future cash receipts are applied to interest income, to the extent any interest has been foregone, and then they are recorded as recoveries of any amounts previously charged-off. For impaired loans, a specific reserve is established to adjust the carrying value of the loan to its estimated net realizable value.

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


Impaired loans recognized in conformity with Financial Accounting Standards Board Accounting Standards Codification Topic ("ASC") 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of the dates presented:
 
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
With
Allowance
 
Recorded
Investment
With No
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
September 30, 2015
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
8,456

 
$
6,529

 
$
49

 
$
6,578

 
$
599

Real estate – construction
—

 
—

 
—

 
—

 
—

Real estate – 1-4 family mortgage
43,363

 
32,769

 
6,118

 
38,887

 
4,773

Real estate – commercial mortgage
99,819

 
79,292

 
9,379

 
88,671

 
4,374

Installment loans to individuals
811

 
499

 
7

 
506

 
1

Total
$
152,449

 
$
119,089

 
$
15,553

 
$
134,642

 
$
9,747

December 31, 2014
 
 
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
4,871

 
$
984

 
$
1,375

 
$
2,359

 
$
171

Real estate – construction
164

 
164

 
—

 
164

 
—

Real estate – 1-4 family mortgage
31,906

 
18,401

 
7,295

 
25,696

 
4,824

Real estate – commercial mortgage
90,196

 
29,079

 
28,784

 
57,863

 
5,767

Installment loans to individuals
397

 
21

 
51

 
72

 
—

Totals
$
127,534

 
$
48,649

 
$
37,505

 
$
86,154

 
$
10,762


The following table presents the average recorded investment and interest income recognized on impaired loans for the periods presented:
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Three Months Ended
 
September 30, 2015
 
September 30, 2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial, agricultural
$
6,763

 
$
10

 
$
4,167

 
$
160

Lease financing
—

 
—

 
—

 
—

Real estate – construction
—

 
—

 
1,997

 
96

Real estate – 1-4 family mortgage
40,410

 
46

 
26,378

 
808

Real estate – commercial mortgage
91,323

 
152

 
74,648

 
3,110

Installment loans to individuals
520

 
1

 
141

 
13

Total
$
139,016

 
$
209

 
$
107,331

 
$
4,187


 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial, financial, agricultural
$
6,519

 
$
184

 
$
4,399

 
$
165

Real estate – construction
—

 
—

 
2,023

 
98

Real estate – 1-4 family mortgage
40,203

 
917

 
27,122

 
843

Real estate – commercial mortgage
93,107

 
2,764

 
80,402

 
3,174

Installment loans to individuals
531

 
13

 
147

 
13

Total
$
140,360

 
$
3,878

 
$
114,093

 
$
4,293



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


Restructured Loans
Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and which are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest.
The following table presents restructured loans segregated by class as of the dates presented:
 
 
Number of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
September 30, 2015
 
 
 
 
 
Commercial, financial, agricultural
2

 
$
507

 
$
460

Real estate – construction
—

 
—

 
—

Real estate – 1-4 family mortgage
60

 
6,084

 
5,563

Real estate – commercial mortgage
25

 
14,324

 
12,791

Installment loans to individuals
1

 
67

 
67

Total
88

 
$
20,982

 
$
18,881

December 31, 2014
 
 
 
 
 
Commercial, financial, agricultural
2

 
$
507

 
$
507

Real estate – construction
—

 
—

 
—

Real estate – 1-4 family mortgage
35

 
5,212

 
4,567

Real estate – commercial mortgage
16

 
10,590

 
9,263

Installment loans to individuals
—

 
—

 
—

Total
53

 
$
16,309

 
$
14,337


Changes in the Company’s restructured loans are set forth in the table below:
 
 
Number of
Loans
 
Recorded
Investment
Totals at January 1, 2015
53

 
$
14,337

Additional loans with concessions
53

 
12,662

Reductions due to:
 
 
 
Reclassified as nonperforming
(3
)
 
(331
)
Paid in full
(13
)
 
(4,820
)
Charge-offs
(1
)
 
(56
)
Transfer to other real estate owned
—

 
—

Principal paydowns
—

 
(688
)
Lapse of concession period
—

 
—

       TDR reclassified as performing loan
(1
)
 
(2,223
)
Totals at September 30, 2015
88

 
$
18,881


The allocated allowance for loan losses attributable to restructured loans was $1,343 and $1,547 at September 30, 2015 and December 31, 2014, respectively. The Company had $6 remaining availability under commitments to lend additional funds on these restructured loans at September 30, 2015 and none at December 31, 2014.
Credit Quality

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


For loans originated for commercial purposes, internal risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances of these loans. Loan grades range between 1 and 9, with 1 being loans with the least credit risk. Loans that migrate toward the “Pass” grade (those with a risk rating between 1 and 4) or within the “Pass” grade generally have a lower risk of loss and therefore a lower risk factor applied to the loan balances. The “Watch” grade (those with a risk rating of 5) is utilized on a temporary basis for “Pass” grade loans where a significant adverse risk-modifying action is anticipated in the near term. Loans that migrate toward the “Substandard” grade (those with a risk rating between 6 and 9) generally have a higher risk of loss and therefore a higher risk factor applied to the related loan balances. The following table presents the Company’s loan portfolio by risk-rating grades as of the dates presented:
 
 
Pass
 
Watch
 
Substandard
 
Total
September 30, 2015
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
460,425

 
$
7,583

 
$
4,159

 
$
472,167

Lease financing
—

 
—

 
419

 
419

Real estate – construction
256,056

 
1,692

 
38

 
257,786

Real estate – 1-4 family mortgage
250,296

 
10,736

 
14,448

 
275,480

Real estate – commercial mortgage
1,927,091

 
40,811

 
25,853

 
1,993,755

Installment loans to individuals
27

 
—

 
—

 
27

Total
$
2,893,895

 
$
60,822

 
$
44,917

 
$
2,999,634

December 31, 2014
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
337,998

 
$
5,255

 
$
1,451

 
$
344,704

Lease financing
—

 
—

 
—

 
—

Real estate – construction
150,683

 
855

 
—

 
151,538

Real estate – 1-4 family mortgage
122,608

 
6,079

 
11,479

 
140,166

Real estate – commercial mortgage
1,389,787

 
31,109

 
33,554

 
1,454,450

Installment loans to individuals
1,402

 
—

 
—

 
1,402

Total
$
2,002,478

 
$
43,298

 
$
46,484

 
$
2,092,260


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

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


 
Performing
 
Non-
Performing
 
Total
September 30, 2015
 
 
 
 
 
Commercial, financial, agricultural
$
135,821

 
$
356

 
$
136,177

Lease financing
24,279

 
—

 
24,279

Real estate – construction
79,970

 
—

 
79,970

Real estate – 1-4 family mortgage
1,292,638

 
2,961

 
1,295,599

Real estate – commercial mortgage
300,582

 
1,340

 
301,922

Installment loans to individuals
110,431

 
26

 
110,457

Total
$
1,943,721

 
$
4,683

 
$
1,948,404

December 31, 2014
 
 
 
 
 
Commercial, financial, agricultural
$
114,996

 
$
179

 
$
115,175

Lease financing
10,114

 
—

 
10,114

Real estate – construction
60,323

 
200

 
60,523

Real estate – 1-4 family mortgage
1,010,645

 
2,730

 
1,013,375

Real estate – commercial mortgage
266,867

 
1,352

 
268,219

Installment loans to individuals
83,744

 
39

 
83,783

Total
$
1,546,689

 
$
4,500

 
$
1,551,189


Loans Acquired with Deteriorated Credit Quality
Loans acquired in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows as of the dates presented:
 
 
Impaired
Covered
Loans
 
Other
Covered
Loans
 
Not
Covered
Loans
 
Total
September 30, 2015
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
1,205

 
$
415

 
$
11,157

 
$
12,777

Lease financing
—

 
—

 
—

 
—

Real estate – construction
—

 
94

 
1,520

 
1,614

Real estate – 1-4 family mortgage
5,895

 
26,990

 
58,541

 
91,426

Real estate – commercial mortgage
13,893

 
23,323

 
183,996

 
221,212

Installment loans to individuals
—

 
47

 
2,846

 
2,893

Total
$
20,993

 
$
50,869

 
$
258,060

 
$
329,922

December 31, 2014
 
 
 
 
 
 
 
Commercial, financial, agricultural
$
—

 
$
6,684

 
$
16,720

 
$
23,404

Lease financing
—

 
—

 
—

 
—

Real estate – construction
—

 
—

 
—

 
—

Real estate – 1-4 family mortgage
420

 
43,597

 
38,802

 
82,819

Real estate – commercial mortgage
7,584

 
84,720

 
141,941

 
234,245

Installment loans to individuals
—

 
36

 
3,921

 
3,957

Total
$
8,004

 
$
135,037

 
$
201,384

 
$
344,425


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


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


The following table presents the fair value of loans determined to be impaired at the time of acquisition and determined not to be impaired at the time of acquisition at September 30, 2015:
 
 
Impaired
Covered
Loans
 
Other
Covered
Loans
 
Not
Covered
Loans
 
Total
Contractually-required principal and interest
$
22,400

 
$
67,828

 
$
383,887

 
$
474,115

Nonaccretable difference(1)
(1,397
)
 
(11,983
)
 
(86,891
)
 
(100,271
)
Cash flows expected to be collected
21,003

 
55,845

 
296,996

 
373,844

Accretable yield(2)
(10
)
 
(4,976
)
 
(38,936
)
 
(43,922
)
Fair value
$
20,993

 
$
50,869

 
$
258,060

 
$
329,922

 
(1)
Represents contractual principal and interest cash flows of $100,023 and $249, respectively, not expected to be collected.
(2)
Represents contractual interest payments of $2,329 expected to be collected and purchase discount of $41,594.
Changes in the accretable yield of loans acquired with deteriorated credit quality were as follows:
 
 
Impaired
Covered
Loans
 
Other
Covered
Loans
 
Not
Covered
Loans
 
Total
Balance at January 1, 2015
$
(1
)
 
$
(2,623
)
 
$
(29,809
)
 
$
(32,433
)
Additions due to acquisition
—

 
(4,880
)
 
(15,386
)
 
(20,266
)
Reclasses from nonaccretable difference
(578
)
 
977

 
(4,355
)
 
(3,956
)
Accretion
569

 
1,550

 
9,131

 
11,250

Charge-offs
—

 
—

 
1,483

 
1,483

Balance at September 30, 2015
$
(10
)
 
$
(4,976
)
 
$
(38,936
)
 
$
(43,922
)


The following table presents the fair value of loans acquired from Heritage Financial Group, Inc. (“Heritage”) as of the July 1, 2015 acquisition date.
At acquisition date:
 
July 1, 2015
  Contractually-required principal and interest
 
$
1,237,944

  Nonaccretable difference
 
59,408

  Cash flows expected to be collected
 
1,178,536

  Accretable yield
 
66,919

      Fair value
 
$
1,111,617


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


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



The following table provides a roll forward of the allowance for loan losses and a breakdown of the ending balance of the allowance based on the Company’s impairment methodology for the periods presented:
 
 
Commercial
 
Real Estate -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,971

 
$
1,297

 
$
13,792

 
$
21,547

 
$
1,281

 
$
41,888

Charge-offs
(143
)
 
—

 
(251
)
 
(430
)
 
(132
)
 
(956
)
Recoveries
82

 
3

 
145

 
112

 
27

 
369

Net charge-offs
(61
)
 
3

 
(106
)
 
(318
)
 
(105
)
 
(587
)
Provision for loan losses
(307
)
 
360

 
165

 
53

 
358

 
629

Benefit attributable to FDIC loss-share agreements
(10
)
 
—

 
(39
)
 
(231
)
 
—

 
(280
)
Recoveries payable to FDIC
20

 
1

 
99

 
277

 
4

 
401

Provision for loan losses charged to operations
(297
)
 
361

 
225

 
99

 
362

 
750

Ending balance
$
3,613

 
$
1,661

 
$
13,911

 
$
21,328

 
$
1,538

 
$
42,051


 
Commercial
 
Real Estate -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,305

 
$
1,415

 
$
13,549

 
$
22,759

 
$
1,261

 
$
42,289

Charge-offs
(501
)
 
(26
)
 
(1,605
)
 
(2,287
)
 
(238
)
 
(4,657
)
Recoveries
221

 
16

 
515

 
581

 
86

 
1,419

Net charge-offs
(280
)
 
(10
)
 
(1,090
)
 
(1,706
)
 
(152
)
 
(3,238
)
Provision for loan losses
624

 
254

 
653

 
244

 
425

 
2,200

Benefit attributable to FDIC loss-share agreements
(65
)
 
—

 
(82
)
 
(717
)
 
—

 
(864
)
Recoveries payable to FDIC
29

 
2

 
881

 
748

 
4

 
1,664

Provision for loan losses charged to operations
588

 
256

 
1,452

 
275

 
429

 
3,000

Ending balance
$
3,613

 
$
1,661

 
$
13,911

 
$
21,328

 
$
1,538

 
$
42,051

Period-End Amount Allocated to:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
214

 
$
—

 
$
4,482

 
$
3,101

 
$
—

 
$
7,797

Collectively evaluated for impairment
3,014

 
1,661

 
9,137

 
16,955

 
1,537

 
32,304

Acquired with deteriorated credit quality
385

 
—

 
292

 
1,272

 
1

 
1,950

Ending balance
$
3,613

 
$
1,661

 
$
13,911

 
$
21,328

 
$
1,538

 
$
42,051


 

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


 
Commercial
 
Real Estate -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,264

 
$
1,267

 
$
11,797

 
$
29,771

 
$
1,205

 
$
47,304

Charge-offs
(1,206
)
 
—

 
(1,271
)
 
(3,513
)
 
(112
)
 
(6,102
)
Recoveries
103

 
6

 
751

 
267

 
23

 
1,150

Net (charge-offs) recoveries
(1,103
)
 
6

 
(520
)
 
(3,246
)
 
(89
)
 
(4,952
)
Provision for loan losses
1,007

 
109

 
(491
)
 
4,043

 
107

 
4,775

Benefit attributable to FDIC loss-share agreements
(19
)
 
—

 
(189
)
 
(3,169
)
 
—

 
(3,377
)
Recoveries payable to FDIC
22

 
—

 
16

 
781

 
—

 
819

Provision for loan losses charged to operations
1,010

 
109

 
(664
)
 
1,655

 
107

 
2,217

Ending balance
$
3,171

 
$
1,382

 
$
10,613

 
$
28,180

 
$
1,223

 
$
44,569


 
Commercial
 
Real Estate -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,090

 
$
1,091

 
$
18,629

 
$
23,688

 
$
1,167

 
$
47,665

Charge-offs
(1,325
)
 
—

 
(4,143
)
 
(4,056
)
 
(404
)
 
(9,928
)
Recoveries
215

 
14

 
1,108

 
325

 
53

 
1,715

Net (charge-offs) recoveries
(1,110
)
 
14

 
(3,035
)
 
(3,731
)
 
(351
)
 
(8,213
)
Provision for loan losses
1,095

 
276

 
(5,182
)
 
12,045

 
407

 
8,641

Benefit attributable to FDIC loss-share agreements
(87
)
 
—

 
(324
)
 
(4,640
)
 
—

 
(5,051
)
Recoveries payable to FDIC
183

 
1

 
525

 
818

 
—

 
1,527

Provision for loan losses charged to operations
1,191

 
277

 
(4,981
)
 
8,223

 
407

 
5,117

Ending balance
$
3,171

 
$
1,382

 
$
10,613

 
$
28,180

 
$
1,223

 
$
44,569

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

 
$
—

 
$
1,260

 
$
6,820

 
$
—

 
$
8,080

Collectively evaluated for impairment
3,171

 
1,382

 
9,353

 
21,360

 
1,223

 
36,489

Acquired with deteriorated credit quality
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
3,171

 
$
1,382

 
$
10,613

 
$
28,180

 
$
1,223

 
$
44,569


(1)
Includes lease financing receivables.


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


The following table provides the recorded investment in loans, net of unearned income, based on the Company’s impairment methodology as of the dates presented:
 
 
Commercial
 
Real Estate  -
Construction
 
Real Estate -
1-4 Family
Mortgage
 
Real Estate  -
Commercial
Mortgage
 
Installment
and  Other(1)
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,265

 
$
—

 
$
16,462

 
$
20,096

 
$
71

 
$
37,894

Collectively evaluated for impairment
607,079

 
337,756

 
1,554,617

 
2,275,581

 
135,111

 
4,910,144

Acquired with deteriorated credit quality
12,777

 
1,614

 
91,426

 
221,212

 
2,893

 
329,922

Ending balance
$
621,121

 
$
339,370

 
$
1,662,505

 
$
2,516,889

 
$
138,075

 
$
5,277,960

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
984

 
$
164

 
$
18,401

 
$
29,079

 
$
21

 
$
48,649

Collectively evaluated for impairment
458,895

 
211,897

 
1,135,140

 
1,693,590

 
95,278

 
3,594,800

Acquired with deteriorated credit quality
23,404

 
—

 
82,819

 
234,245

 
3,957

 
344,425

Ending balance
$
483,283

 
$
212,061

 
$
1,236,360

 
$
1,956,914

 
$
99,256

 
$
3,987,874

 
(1)
Includes lease financing receivables.

Note D – Other Real Estate Owned
(In Thousands)
The following table provides details of the Company’s other real estate owned (“OREO”) covered and not covered under a loss-share agreement, net of valuation allowances and direct write-downs as of the dates presented:
 
 
Covered
OREO
 
Not Covered
OREO
 
Total
OREO
September 30, 2015
 
 
 
 
 
Residential real estate
$
556

 
$
4,452

 
$
5,008

Commercial real estate
632

 
12,583

 
13,215

Residential land development
1

 
4,729

 
4,730

Commercial land development
1,994

 
11,387

 
13,381

Total
$
3,183

 
$
33,151

 
$
36,334

December 31, 2014
 
 
 
 
 
Residential real estate
$
657

 
$
4,549

 
$
5,206

Commercial real estate
470

 
9,179

 
9,649

Residential land development
2,445

 
4,990

 
7,435

Commercial land development
2,796

 
9,386

 
12,182

Total
$
6,368

 
$
28,104

 
$
34,472



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


Changes in the Company’s OREO covered and not covered under a loss-share agreement were as follows:
 
 
Covered
OREO
 
Not Covered
OREO
 
Total
OREO
Balance at January 1, 2015
$
6,368

 
$
28,104

 
$
34,472

Acquired OREO
3,722

 
6,250

 
9,972

Transfer of balance to non-covered OREO(1)
(3,431
)
 
3,431

 
—

Transfers of loans
4,252

 
8,016

 
12,268

Capitalized improvements
—

 
—

 
—

Impairments(2)
(454
)
 
(1,831
)
 
(2,285
)
Dispositions
(7,268
)
 
(10,794
)
 
(18,062
)
Other
(6
)
 
(25
)
 
(31
)
Balance at September 30, 2015
$
3,183

 
$
33,151

 
$
36,334

 
(1)
Represents a transfer of balance on non-single family assets of Crescent Bank & Trust Company. The claims period to submit losses to the FDIC for reimbursement ended July 25, 2015 for non-single family assets.
(2)
Of the total impairment charges of $454 recorded for covered OREO, $91 was included in the Consolidated Statements of Income for the nine months ended September 30, 2015, while the remaining $363 increased the FDIC loss-share indemnification asset.
Components of the line item “Other real estate owned” in the Consolidated Statements of Income were as follows for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Repairs and maintenance
$
215

 
$
223

 
$
513

 
$
1,760

Property taxes and insurance
176

 
148

 
560

 
445

Impairments
527

 
856

 
1,922

 
1,901

Net gains on OREO sales
(16
)
 
(85
)
 
(499
)
 
(97
)
Rental income
(41
)
 
(41
)
 
(149
)
 
(139
)
Total
$
861

 
$
1,101

 
$
2,347

 
$
3,870


Note E – FDIC Loss-Share Indemnification Asset
(In Thousands)
As part of the loan portfolio and OREO fair value estimation in connection with FDIC-assisted acquisitions, a FDIC loss-share indemnification asset is established, which represents the present value as of the acquisition date of the estimated losses on covered assets to be reimbursed by the FDIC. Pursuant to the terms of both of our loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses with respect to covered assets, beginning with the first dollar of loss incurred. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered assets. The estimated losses are based on the same cash flow estimates used in determining the fair value of the covered assets. The FDIC loss-share indemnification asset is reduced as losses are recognized on covered assets and loss-share payments are received from the FDIC. Realized losses in excess of estimates as of the date of the acquisition increase the FDIC loss-share indemnification asset. Conversely, when realized losses are less than these estimates, the portion of the FDIC loss-share indemnification asset no longer expected to result in a payment from the FDIC is amortized into interest income using the effective interest method.

Changes in the FDIC loss-share indemnification asset were as follows:


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


Balance at January 1, 2015
$
12,516

Acquisition of Heritage
2,322

Changes in expected cash flows from initial estimates on:
 
Covered Loans
(2,775
)
Covered OREO
(68
)
Reimbursable expenses
372

Accretion
—

Reimbursements received from the FDIC
(4,323
)
 
 
Balance at September 30, 2015
$
8,044


Note F – Mortgage Servicing Rights
(In Thousands)
The Company retains the right to service certain mortgage loans that it sells to secondary market investors. These mortgage servicing rights, included in “Other assets” on the Consolidated Balance Sheets, are recognized as a separate asset on the date the corresponding mortgage loan is sold. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. These servicing rights are carried at the lower of amortized cost or fair market value. Fair market value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. Impairment losses on mortgage servicing rights are recognized to the extent by which the unamortized cost exceeds fair value. No impairment losses on mortgage servicing rights were recognized in earnings for the three or nine months ended September 30, 2015 or 2014.
Changes in the Company’s mortgage servicing rights were as follows:
 
Balance at January 1, 2015
$
11,662

Addition from acquisition
11,847

Capitalization
7,015

Amortization
(2,256
)
 
 
Balance at September 30, 2015
$
28,268


Data and key economic assumptions related to the Company’s mortgage servicing rights as of September 30, 2015 are as follows:
 
Unpaid principal balance
$
2,739,359

 
 
Weighted-average prepayment speed (CPR)
9.73
%
Estimated impact of a 10% increase
$
(1,091
)
Estimated impact of a 20% increase
(2,109
)
 
 
Discount rate
9.51
%
Estimated impact of a 10% increase
$
(1,125
)
Estimated impact of a 20% increase
(2,169
)
 
 
Weighted-average coupon interest rate
3.96
%
Weighted-average servicing fee (basis points)
25.02

Weighted-average remaining maturity (in years)
14.42


Note G - Employee Benefit and Deferred Compensation Plans
(In Thousands, Except Share Data)
The Company sponsors a noncontributory defined benefit pension plan, under which participation and future benefit accruals ceased as of December 31, 1996. The Company also provides retiree health benefits for certain employees who were employed by the Company and enrolled in the Company's health plan as of December 31, 2004. To receive benefits, an eligible employee must retire from service with the Company and its affiliates between age 55 and 65 and be credited with at least 15 years of service

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


or with 70 points, determined as the sum of age and service at retirement. The Company periodically determines the portion of the premium to be paid by each eligible retiree and the portion to be paid by the Company. Coverage ceases when an employee attains age 65 and is eligible for Medicare. The Company also provides life insurance coverage for each retiree in the face amount of $5 until age 70. Retirees can purchase additional insurance or continue coverage beyond age 70 at their sole expense.
In connection with the acquisition of Heritage, the Company assumed the noncontributory defined benefit pension plan maintained by HeritageBank, under which accruals had ceased and the plan had been terminated by HeritageBank immediately prior to the acquisition date. The Company will sponsor the plan until satisfactory status of termination has been received from both the Pension Benefit Guarantee Corporation and the Internal Revenue Service at which point final distribution will be made to participants.
The plan expense for the Company-sponsored noncontributory defined benefit pension plans, including the plan assumed from HeritageBank, (“Pension Benefits”) and post-retirement health and life plans (“Other Benefits”) for the periods presented was as follows:
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
—

 
$
—

 
$
5

 
$
1

Interest cost
427

 
328

 
15

 
19

Expected return on plan assets
(618
)
 
(539
)
 
—

 
—

Prior service cost recognized
—

 
—

 
—

 
—

Recognized actuarial loss
88

 
59

 
27

 
18

Net periodic benefit cost (return)
$
(103
)
 
$
(152
)
 
$
47

 
$
38


 
Pension Benefits
 
Other Benefits
 
Nine Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
—

 
$
—

 
$
13

 
$
13

Interest cost
972

 
964

 
45

 
65

Expected return on plan assets
(1,639
)
 
(1,617
)
 
—

 
—

Prior service cost recognized
—

 
—

 
—

 
—

Recognized actuarial loss
244

 
150

 
73

 
72

Net periodic benefit (return) cost
$
(423
)
 
$
(503
)
 
$
131

 
$
150


In March 2011, the Company adopted a long-term equity incentive plan, which provides for the grant of stock options and the award of restricted stock. The plan replaced the long-term incentive plan adopted in 2001, which expired in October 2011. The Company issues shares of treasury stock to satisfy stock options exercised or restricted stock granted under the plan. Options granted under the plan allow participants to acquire shares of the Company's common stock at a fixed exercise price and expire ten years after the grant date. Options vest and become exercisable in installments over a three-year period measured from the grant date. Options that have not vested are forfeited and canceled upon the termination of a participant's employment. There were no stock options granted during the three and nine months ended September 30, 2015 and 2014.

The following table summarizes the changes in stock options as of and for the nine months ended September 30, 2015:

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


 
 
Shares
 
Weighted Average Exercise Price
Options outstanding at beginning of period
 
830,950

 
$
18.70

Granted
 
—

 
—

Exercised
 
(129,785
)
 
19.55

Forfeited
 
(7,500
)
 
30.63

Options outstanding at end of period
 
693,665

 
$
18.42


The Company awards performance-based restricted stock to executives and time-based restricted stock to directors and other officers and employees under the long-term equity incentive plan. The performance-based restricted stock vests upon completion of a one-year service period and the attainment of certain performance goals. Performance-based restricted stock is issued at the target level; the number of shares ultimately awarded is determined at the end of each year and may be increased or decreased depending on the Company falling short of, meeting or exceeding financial performance measures defined by the Board of Directors. Time-based restricted stock vests at the end of the service period defined in the respective grant. The fair value of each restricted stock award is the closing price of the Company's common stock on the day immediately preceding the award date. The following table summarizes the changes in restricted stock as of and for the nine months ended September 30, 2015:

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

 
$
—

 
38,336

 
$
27.26

Awarded
 
81,750

 
28.93

 
103,588

 
31.74

Vested
 
—

 
—

 
(11,486
)
 
27.86

Cancelled
 
(250
)
 
28.93

 
(250
)
 
31.46

Nonvested at end of period
 
81,500

 
$
28.93

 
130,188

 
$
30.91

During the nine months ended September 30, 2015, the Company reissued 100,618 shares from treasury in connection with the exercise of stock options and award of restricted stock. The Company recorded total stock-based compensation expense of $1,019 and $1,340 for the three months ended September 30, 2015 and 2014, respectively, and $2,739 and $3,162 for the nine months ended September 30, 2015 and 2014, respectively.


Note H – Segment Reporting
(In Thousands)
The operations of the Company’s reportable segments are described as follows:
•
The Community Banks segment delivers a complete range of banking and financial services to individuals and small to medium-sized businesses including checking and savings accounts, business and personal loans, asset-based lending and equipment leasing, as well as safe deposit and night depository facilities.
•
The Insurance segment includes a full service insurance agency offering all major lines of commercial and personal insurance through major carriers.
•
The Wealth Management segment offers a broad range of fiduciary services which includes the administration and management of trust accounts including personal and corporate benefit accounts, self-directed IRAs, and custodial accounts. In addition, the Wealth Management segment offers annuities, mutual funds and other investment services through a third party broker-dealer.
In order to give the Company’s divisional management a more precise indication of the income and expenses they can control, the results of operations for the Community Banks, the Insurance and the Wealth Management segments reflect the direct revenues and expenses of each respective segment. Indirect revenues and expenses, including but not limited to income from the Company’s investment portfolio, as well as certain costs associated with data processing and back office functions, primarily support the operations of the community banks and, therefore, are included in the results of the Community Banks segment. Included in “Other”

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


are the operations of the holding company and other eliminations which are necessary for purposes of reconciling to the consolidated amounts.
The following table provides financial information for the Company’s operating segments for the periods presented:
 
Community
Banks
 
Insurance
 
Wealth
Management
 
Other
 
Consolidated
Three months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Net interest income
$
69,471

 
$
81

 
$
419

 
$
(1,291
)
 
$
68,680

Provision for loan losses
749

 
—

 
1

 
—

 
750

Noninterest income
26,677

 
2,434

 
2,981

 
25

 
32,117

Noninterest expense
71,569

 
1,783

 
2,497

 
236

 
76,085

Income (loss) before income taxes
23,830

 
732

 
902

 
(1,502
)
 
23,962

Income taxes
8,039

 
289

 
—

 
(586
)
 
7,742

Net income (loss)
$
15,791

 
$
443

 
$
902

 
$
(916
)
 
$
16,220

 
 
 
 
 
 
 
 
 
 
Total assets
$
7,837,534

 
$
21,978

 
$
43,150

 
$
16,070

 
$
7,918,732

Goodwill
449,270

 
2,767

 
—

 
—

 
452,037

 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Net interest income
$
51,298

 
$
65

 
$
338

 
$
(1,229
)
 
$
50,472

Provision for loan losses
2,268

 
—

 
(51
)
 
—

 
2,217

Noninterest income
17,547

 
2,261

 
2,357

 
398

 
22,563

Noninterest expense
44,129

 
1,656

 
2,177

 
213

 
48,175

Income (loss) before income taxes
22,448

 
670

 
569

 
(1,044
)
 
22,643

Income taxes
7,251

 
262

 
—

 
(405
)
 
7,108

Net income (loss)
$
15,197

 
$
408

 
$
569

 
$
(639
)
 
$
15,535

 
 
 
 
 
 
 
 
 
 
Total assets
$
5,671,079

 
$
18,834

 
$
46,527

 
$
15,271

 
$
5,751,711

Goodwill
271,891

 
2,767

 
—

 
—

 
274,658



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


 
 
 
 
 
 
 
 
 
 
 
Community
Banks
 
Insurance
 
Wealth
Management
 
Other
 
Consolidated
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Net interest income
$
171,310

 
$
228

 
$
1,260

 
$
(3,606
)
 
$
169,192

Provision for loan losses
3,008

 
—

 
(8
)
 
—

 
3,000

Noninterest income
62,174

 
7,012

 
7,694

 
58

 
76,938

Noninterest expense
162,184

 
5,131

 
6,748

 
612

 
174,675

Income (loss) before income taxes
68,292

 
2,109

 
2,214

 
(4,160
)
 
68,455

Income taxes
22,397

 
827

 
—

 
(1,623
)
 
21,601

Net income (loss)
$
45,895

 
$
1,282

 
$
2,214

 
$
(2,537
)
 
$
46,854

 
 
 
 
 
 
 
 
 
 
Total assets
$
7,837,534

 
$
21,978

 
$
43,150

 
$
16,070

 
$
7,918,732

Goodwill
449,270

 
2,767

 
—

 
—

 
452,037

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Net interest income
$
154,678

 
$
177

 
$
969

 
$
(3,212
)
 
$
152,612

Provision for loan losses
5,158

 
—

 
(41
)
 
—

 
5,117

Noninterest income
46,722

 
6,792

 
6,691

 
445

 
60,650

Noninterest expense
133,784

 
4,814

 
6,044

 
574

 
145,216

Income (loss) before income taxes
62,458

 
2,155

 
1,657

 
(3,341
)
 
62,929

Income taxes
19,397

 
844

 
—

 
(1,297
)
 
18,944

Net income (loss)
$
43,061

 
$
1,311

 
$
1,657

 
$
(2,044
)
 
$
43,985

 
 
 
 
 
 
 
 
 
 
Total assets
$
5,671,079

 
$
18,834

 
$
46,527

 
$
15,271

 
$
5,751,711

Goodwill
271,891

 
2,767

 
—

 
—

 
274,658


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

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


used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.
Derivative instruments: The Company uses derivatives to manage various financial risks. Most of the Company’s derivative contracts are extensively traded in over-the-counter markets and are valued using discounted cash flow models which incorporate observable market based inputs including current market interest rates, credit spreads, and other factors. Such instruments are categorized within Level 2 of the fair value hierarchy and include interest rate swaps and other interest rate contracts such as interest rate caps and/or floors. The Company’s interest rate lock commitments are valued using current market prices for mortgage-backed securities with similar characteristics, adjusted for certain factors including servicing and risk. The value of the Company’s forward commitments is based on current prices for securities backed by similar types of loans. Because these assumptions are observable in active markets, the Company’s interest rate lock commitments and forward commitments are categorized within Level 2 of the fair value hierarchy.
Mortgage loans held for sale: Mortgage loans held for sale are primarily agency loans which trade in active secondary markets. The fair value of these instruments is derived from current market pricing for similar loans, adjusted for differences in loan characteristics, including servicing and risk. Because the valuation is based on external pricing of similar instruments, mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.

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


The following table presents assets and liabilities that are measured at fair value on a recurring basis as of the dates presented:
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
September 30, 2015
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
—

 
$
6,248

 
$
—

 
$
6,248

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

 
367,550

 
—

 
367,550

Government agency collateralized mortgage obligations
—

 
179,426

 
—

 
179,426

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

 
61,153

 
—

 
61,153

Government agency collateralized mortgage obligations
—

 
5,448

 
—

 
5,448

Trust preferred securities
—

 
—

 
18,890

 
18,890

Other debt securities
—

 
20,135

 
—

 
20,135

Other equity securities
—

 
3,951

 
—

 
3,951

Total securities available for sale
—

 
643,911

 
18,890

 
662,801

Derivative instruments:
 
 
 
 
 
 
 
Interest rate contracts
—

 
3,282

 
—

 
3,282

Interest rate lock commitments
—

 
9,293

 
—

 
9,293

Total derivative instruments
—

 
12,575

 
—

 
12,575

Mortgage loans held for sale
—

 
317,681

 
—

 
317,681

Total financial assets
$
—

 
$
974,167

 
$
18,890

 
$
993,057

Financial liabilities:
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
5,284

 
$
—

 
$
5,284

Interest rate contracts
—

 
3,282

 
—

 
3,282

Interest rate lock commitments
—

 
30

 
—

 
30

Forward commitments
—

 
3,866

 
—

 
3,866

Total derivative instruments
—

 
12,462

 
—

 
12,462

Total financial liabilities
$
—

 
$
12,462

 
$
—

 
$
12,462



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


 
Level 1
 
Level 2
 
Level 3
 
Totals
December 31, 2014
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Obligations of other U.S. Government agencies and corporations
$
—

 
$
6,147

 
$
—

 
$
6,147

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

 
296,359

 
—

 
296,359

Government agency collateralized mortgage obligations
—

 
157,436

 
—

 
157,436

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

 
47,185

 
—

 
47,185

Government agency collateralized mortgage obligations
—

 
5,172

 
—

 
5,172

Trust preferred securities
—

 
—

 
19,756

 
19,756

Other debt securities
—

 
17,930

 
—

 
17,930

Other equity securities
—

 
3,599

 
—

 
3,599

Total securities available for sale
—

 
533,828

 
19,756

 
553,584

Derivative instruments:
 
 
 
 
 
 
 
Interest rate contracts
—

 
2,142

 
—

 
2,142

Interest rate lock commitments
—

 
1,584

 
—

 
1,584

Forward commitments
—

 
5

 
—

 
5

Total derivative instruments
—

 
3,731

 
—

 
3,731

Mortgage loans held for sale
—

 
25,628

 
—

 
25,628

Total financial assets
$
—

 
$
563,187

 
$
19,756

 
$
582,943

Financial liabilities:
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
$
3,847

 
$
—

 
$
3,847

Interest rate contracts
—

 
2,143

 
—

 
2,143

Forward commitments
—

 
303

 
—

 
303

Total derivative instruments
—

 
6,293

 
—

 
6,293

Total financial liabilities
$
—

 
$
6,293

 
$
—

 
$
6,293


The Company reviews fair value hierarchy classifications on a quarterly basis. Changes in the Company’s ability to observe inputs to the valuation may cause reclassification of certain assets or liabilities within the fair value hierarchy. Transfers between levels of the hierarchy are deemed to have occurred at the end of period. There were no such transfers between levels of the fair value hierarchy during the nine months ended September 30, 2015.

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


The following tables provide a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, during the three and nine months ended September 30, 2015 and 2014, respectively:
 
 
Securities available for sale
Three Months Ended September 30, 2015
Trust preferred
securities
 
Total
Balance at July 1, 2015
$
19,127

 
$
19,127

Accretion included in net income
8

 
8

Unrealized gains included in other comprehensive income
(200
)
 
(200
)
Purchases
—

 
—

Sales
—

 
—

Issues
—

 
—

Settlements
(45
)
 
(45
)
Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Balance at September 30, 2015
$
18,890

 
$
18,890

 
 
Securities available for sale
Three Months Ended September 30, 2014
Trust preferred
securities
 
Total
Balance at July 1, 2014
$
18,309

 
$
18,309

Accretion included in net income
—

 
—

Unrealized gains included in other comprehensive income
1,896

 
1,896

Reclassification adjustment
—

 
—

Purchases
—

 
—

Sales
—

 
—

Issues
—

 
—

Settlements
(632
)
 
(632
)
Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Balance at September 30, 2014
$
19,573

 
$
19,573


 
 
 
 
 
Securities available for sale
Nine Months Ended September 30, 2015
Trust preferred
securities
 
Total
Balance at January 1, 2015
$
19,756

 
$
19,756

Realized gains included in net income
(70
)
 
(70
)
Unrealized gains included in other comprehensive income
822

 
822

Purchases
—

 
—

Sales
(1,117
)
 
(1,117
)
Issues
—

 
—

Settlements
(501
)
 
(501
)
Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Balance at September 30, 2015
$
18,890

 
$
18,890


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


 
 
 
 
 
Securities available for sale
Nine Months Ended September 30, 2014
Trust preferred
securities
 
Total
Balance at January 1, 2014
$
17,671

 
$
17,671

Realized gains included in net income
16

 
16

Unrealized gains included in other comprehensive income
2,695

 
2,695

Reclassification adjustment
—

 
—

Purchases
—

 
—

Sales
—

 
—

Issues
—

 
—

Settlements
(809
)
 
(809
)
Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Balance at September 30, 2014
$
19,573

 
$
19,573


For the three or nine months ended September 30, 2015 and 2014, there were no gains or losses included in earnings that were attributable to the change in unrealized gains or losses related to assets or liabilities held at the end of each respective period that were measured on a recurring basis using significant unobservable inputs.
The following table presents information as of September 30, 2015 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a recurring basis:
 
Financial instrument
Fair
Value
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Range of Inputs
Trust preferred securities
$
18,890

 
Discounted cash flows
 
Default rate
 
0-100%

Nonrecurring Fair Value Measurements
Certain assets may be recorded at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically are a result of the application of the lower of cost or market accounting or a write-down occurring during the period. The following table provides the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheets as of the dates presented and the level within the fair value hierarchy each is classified:
 
September 30, 2015
Level 1
 
Level 2
 
Level 3
 
Totals
Impaired loans
$
—

 
$
—

 
$
3,467

 
$
3,467

OREO
—

 
—

 
11,817

 
11,817

Total
$
—

 
$
—

 
$
15,284

 
$
15,284

 
December 31, 2014
Level 1
 
Level 2
 
Level 3
 
Totals
Impaired loans
$
—

 
$
—

 
$
12,360

 
$
12,360

OREO
—

 
—

 
4,460

 
4,460

Total
$
—

 
$
—

 
$
16,820

 
$
16,820


As of September 30, 2015 and December 31, 2014, there were no liabilities measured at fair value on a nonrecurring basis that were still held on the Consolidated Balance Sheet.

The following methods and assumptions are used by the Company to estimate the fair values of the Company’s financial assets and liabilities measured on a nonrecurring basis:

Impaired loans: Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited

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


to equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on changes in market conditions from the time of valuation and management’s knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified as Level 3. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Impaired loans covered under loss-share agreements were recorded at their fair value upon the acquisition date, and no fair value adjustments were necessary for the nine months ended September 30, 2015 and 2014, respectively. Impaired loans not covered under loss-share agreements that were measured or re-measured at fair value had a carrying value of $3,746 and $13,349 at September 30, 2015 and December 31, 2014, respectively, and a specific reserve for these loans of $279 and $989 was included in the allowance for loan losses as of such respective dates.
Other real estate owned: OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. OREO covered under loss-share agreements is recorded at its fair value on its acquisition date. OREO not covered under loss-share agreements acquired in settlement of indebtedness is recorded at the fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. Accordingly, values for OREO are classified as Level 3.
The following table presents OREO measured at fair value on a nonrecurring basis that was still held in the Consolidated Balance Sheets as of the dates presented:
 
 
September 30,
2015
 
December 31, 2014
OREO covered under loss-share agreements:
 
 
 
Carrying amount prior to remeasurement
$
1,380

 
$
3,162

Impairment recognized in results of operations
(38
)
 
(185
)
Increase in FDIC loss-share indemnification asset
(152
)
 
(742
)
Receivable from other guarantor
—

 
(422
)
Fair value
$
1,190

 
$
1,813

OREO not covered under loss-share agreements:
 
 
 
Carrying amount prior to remeasurement
$
12,284

 
$
3,513

Impairment recognized in results of operations
(1,657
)
 
(866
)
Fair value
$
10,627

 
$
2,647


The following table presents information as of September 30, 2015 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:
 
Financial instrument
Fair
Value
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Range of Inputs
Impaired loans
$
3,467

 
Appraised value of collateral less estimated costs to sell
 
Estimated costs to sell
 
4-10%
OREO
11,817

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

Fair Value Option
The Company elected to measure all mortgage loans originated for sale on or after July 1, 2012 at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.
Net gains of $1,023 and net losses of $58 resulting from fair value changes of these mortgage loans were recorded in income during the nine months ended September 30, 2015 and nine months ended September 30, 2014, respectively. The amount does

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


not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Gains on sales of mortgage loans held for sale” in the Consolidated Statements of Income.
The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on mortgage loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income on the Consolidated Statements of Income.
The following table summarizes the differences between the fair value and the principal balance for mortgage loans held for sale measured at fair value as of:
 
September 30, 2015
Aggregate
Fair  Value
 
Aggregate
Unpaid
Principal
Balance
 
Difference
Mortgage loans held for sale measured at fair value
$
317,681

 
$
310,256

 
$
7,425

Past due loans of 90 days or more
—

 
—

 
—

Nonaccrual loans
—

 
—

 
—


Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company’s financial instruments, including those assets and liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis, were as follows as of the dates presented:
 
 
 
 
Fair Value
As of September 30, 2015
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
203,849

 
$
203,849

 
$
—

 
$
—

 
$
203,849

Securities held to maturity
476,752

 
—

 
490,233

 
—

 
490,233

Securities available for sale
662,801

 
—

 
643,911

 
18,890

 
662,801

Mortgage loans held for sale
317,681

 
—

 
317,681

 
—

 
317,681

Loans covered under loss-share agreements
100,839

 
—

 
—

 
134,962

 
134,962

Loans not covered under loss-share agreements, net
5,135,070

 
—

 
—

 
5,100,022

 
5,100,022

FDIC loss-share indemnification asset
8,044

 
—

 
—

 
8,044

 
8,044

Mortgage servicing rights
28,268

 
—

 
—

 
28,559

 
28,559

Derivative instruments
12,575

 
—

 
12,575

 
—

 
12,575

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
6,234,561

 
$
4,200,398

 
$
1,546,930

 
$
—

 
$
5,747,328

Short-term borrowings
402,122

 
402,122

 
—

 
—

 
402,122

Federal Home Loan Bank advances
54,456

 
—

 
58,439

 
—

 
58,439

Junior subordinated debentures
94,958

 
—

 
79,053

 
—

 
79,053

Derivative instruments
12,462

 
—

 
12,462

 
—

 
12,462

 

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


 
 
 
Fair Value
As of December 31, 2014
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
161,583

 
$
161,583

 
$
—

 
$
—

 
$
161,583

Securities held to maturity
430,163

 
—

 
442,488

 
—

 
442,488

Securities available for sale
553,584

 
—

 
533,828

 
19,756

 
553,584

Mortgage loans held for sale
25,628

 
—

 
25,628

 
—

 
25,628

Loans covered under loss-share agreements
143,041

 
—

 
—

 
143,487

 
143,487

Loans not covered under loss-share agreements, net
3,844,833

 
—

 
—

 
3,751,727

 
3,751,727

FDIC loss-share indemnification asset
12,516

 
—

 
—

 
12,516

 
12,516

Mortgage servicing rights
11,662

 
—

 
—

 
12,378

 
12,378

Derivative instruments
3,731

 
—

 
3,731

 
—

 
3,731

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
4,838,418

 
$
3,532,266

 
$
1,309,421

 
$
—

 
$
4,841,687

Short-term borrowings
32,403

 
32,403

 
—

 
—

 
32,403

Federal Home Loan Bank advances
61,611

 
—

 
92,532

 
—

 
92,532

Junior subordinated debentures
94,574

 
—

 
80,971

 
—

 
80,971

Derivative instruments
6,293

 
—

 
6,293

 
—

 
6,293


The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or nonrecurring basis were discussed previously.
Cash and cash equivalents: Cash and cash equivalents consist of cash and due from banks and interest-bearing balances with banks. The carrying amount reported in the Consolidated Balance Sheets for cash and cash equivalents approximates fair value based on the short-term nature of these assets.
Securities held to maturity: Securities held to maturity consist of debt securities such as obligations of U.S. Government agencies, states, and other political subdivisions. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.
Loans covered under loss-share agreements: The fair value of loans covered under loss-share agreements is based on the net present value of future cash proceeds expected to be received using discount rates that are derived from current market rates and reflect the level of interest risk in the covered loans.
Loans not covered under loss-share agreements: For variable-rate loans not covered under loss-share agreements that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values of fixed-rate loans not covered under loss-share agreements, including mortgages and commercial, agricultural and consumer loans, are estimated using a discounted cash flow analysis based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
FDIC loss-share indemnification asset: The fair value of the FDIC loss-share indemnification asset is based on the net present value of future cash flows expected to be received from the FDIC under the provisions of the loss-share agreements using a discount rate that is based on current market rates for the underlying covered loans. Current market rates are used in light of the uncertainty of the timing and receipt of the loss-share reimbursement from the FDIC.

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



Mortgage servicing rights: The Company retains the right to service certain mortgage loans that it sells to secondary market investors. These servicing rights are carried at the lower of amortized cost or fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. Because these factors are not all observable and include management’s assumptions, mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Mortgage servicing rights were carried at amortized cost at September 30, 2015 and December 31, 2014, and no impairment charges were recognized in earnings for the three or nine months ended September 30, 2015 and 2014, respectively.
Deposits: The fair values disclosed for demand deposits, both interest-bearing and noninterest-bearing, are, by definition, equal to the amount payable on demand at the reporting date. Such deposits are classified within Level 1 of the fair value hierarchy. The fair values of certificates of deposit and individual retirement accounts are estimated using a discounted cash flow based on currently effective interest rates for similar types of deposits. These deposits are classified within Level 2 of the fair value hierarchy.
Short-term borrowings: Short-term borrowings consist of securities sold under agreements to repurchase and overnight borrowings. The fair value of these borrowings approximates the carrying value of the amounts reported in the Consolidated Balance Sheets for each respective account given the short-term nature of the liabilities.
Federal Home Loan Bank advances: The fair value for Federal Home Loan Bank (“FHLB”) advances is determined by discounting the expected future cash outflows using current market rates for similar borrowings, or Level 2 inputs.
Junior subordinated debentures: The fair value for the Company’s junior subordinated debentures is determined by discounting the future cash flows using the current market rate.

Note J – Derivative Instruments
(In Thousands)
The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company also from time to time enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At September 30, 2015, the Company had notional amounts of $68,197 on interest rate contracts with corporate customers and $68,197 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed-rate loans.

In June 2014, the Company entered into two forward interest rate swap contracts on floating rate liabilities at the Bank level with notional amounts of $15,000 each. The interest rate swap contracts are each accounted for as a cash flow hedge with the objective of protecting against any interest rate volatility on future FHLB borrowings for a four-year and five-year period beginning June 1, 2018 and December 3, 2018 and ending June 2022 and June 2023, respectively. Under these contracts, Renasant Bank will pay a fixed interest rate and will receive a variable interest rate based on the three-month LIBOR plus a pre-determined spread, with quarterly net settlements.
In March and April 2012, the Company entered into two interest rate swap agreements effective March 30, 2014 and March 17, 2014, respectively. The Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures.
In connection with its merger with First M&F, the Company assumed an interest rate swap designed to convert floating rate interest payments into fixed rate payments. Based on the terms of the agreement, which terminates in March 2018, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The interest rate swap is accounted for as a cash flow hedge to reduce the variability in cash flows resulting from changes in interest rates on $30,000 of the junior subordinated debentures assumed in the merger with First M&F.

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


The Company enters into interest rate lock commitments with its customers to mitigate the interest rate risk associated with the commitments to fund fixed-rate residential mortgage loans. The notional amount of commitments to fund fixed-rate mortgage loans was $376,824 and $62,288 at September 30, 2015 and December 31, 2014, respectively. The Company also enters into forward commitments to sell residential mortgage loans to secondary market investors. The notional amount of commitments to sell residential mortgage loans to secondary market investors was $409,000 and $52,000 at September 30, 2015 and December 31, 2014, respectively.
The following table provides details on the Company’s derivative financial instruments as of the dates presented:
 
 
 
 
Fair Value
 
Balance Sheet
Location
 
September 30,
2015
 
December 31, 2014
Derivative assets:
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Other Assets
 
$
3,282

 
$
2,142

Interest rate lock commitments
Other Assets
 
9,293

 
1,584

Forward commitments
Other Assets
 
—

 
5

Totals
 
 
$
12,575

 
$
3,731

Derivative liabilities:
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
Interest rate swap
Other Liabilities
 
$
5,284

 
$
3,847

Totals
 
 
$
5,284

 
$
3,847

Not designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Other Liabilities
 
$
3,282

 
$
2,143

Interest rate lock commitments
Other Liabilities
 
30

 
—

Forward commitments
Other Liabilities
 
3,866

 
303

Totals
 
 
$
7,178

 
$
2,446


Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows as of the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
Included in interest income on loans
$
576

 
$
750

 
$
1,677

 
$
2,296

Interest rate lock commitments:
 
 
 
 
 
 
 
Included in gains on sales of mortgage loans held for sale
2,326

 
(261
)
 
3,783

 
1,232

Forward commitments
 
 
 
 
 
 
 
Included in gains on sales of mortgage loans held for sale
(2,999
)
 
460

 
(1,288
)
 
15

Total
$
(97
)
 
$
949

 
$
4,172

 
$
3,543


For the Company's derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method. There were no ineffective portions for the three or nine months ended September 30, 2015 and 2014. The impact on other comprehensive income for the three and nine months ended September 30, 2015 and 2014, can be seen at Note K, "Other Comprehensive Income."


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


Offsetting

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

 
Offsetting Derivative Assets
 
Offsetting Derivative Liabilities
 
September 30,
2015
 
December 31, 2014
 
September 30,
2015
 
December 31, 2014
Gross amounts recognized
$
—

 
$
5

 
$
11,214

 
$
5,182

Gross amounts offset in the consolidated balance sheets
—

 
—

 
—

 
—

Net amounts presented in the consolidated balance sheets
—

 
5

 
11,214

 
5,182

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

 
5

 
—

 
5

Financial collateral pledged
—

 
—

 
7,747

 
4,879

Net amounts
$
—

 
$
—

 
$
3,467

 
$
298

 



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


Note K – Other Comprehensive Income
(In Thousands)
Changes in the components of other comprehensive income were as follows for the periods presented:
 
 
Pre-Tax
 
Tax Expense
(Benefit)
 
Net of Tax
Three months ended September 30, 2015
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains on securities
$
6,029

 
$
2,312

 
$
3,717

Reclassification adjustment for gains realized in net income
—

 
—

 
—

Amortization of unrealized holding gains on securities transferred to the held to maturity category
(42
)
 
(16
)
 
(26
)
Total securities available for sale
5,987

 
2,296

 
3,691

Derivative instruments:
 
 
 
 
 
Unrealized holding losses on derivative instruments
(1,752
)
 
(677
)
 
(1,075
)
Total derivative instruments
(1,752
)
 
(677
)
 
(1,075
)
Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
Amortization of net actuarial loss recognized in net periodic pension cost
114

 
59

 
55

Total defined benefit pension and post-retirement benefit plans
114

 
59

 
55

Total other comprehensive income
$
4,349

 
$
1,678

 
$
2,671

Three months ended September 30, 2014
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains on securities
$
1,402

 
$
536

 
$
866

Reclassification adjustment for gains realized in net income
(375
)
 
(143
)
 
(232
)
Amortization of unrealized holding gains on securities transferred to the held to maturity category
(61
)
 
(23
)
 
(38
)
Total securities available for sale
966

 
370

 
596

Derivative instruments:
 
 
 
 
 
Unrealized holding gains on derivative instruments
68

 
26

 
42

Total derivative instruments
68

 
26

 
42

Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
Amortization of net actuarial loss recognized in net periodic pension cost
76

 
29

 
47

Total defined benefit pension and post-retirement benefit plans
76

 
29

 
47

Total other comprehensive income
$
1,110

 
$
425

 
$
685




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


 
 
 
 
 
 
 
Pre-Tax
 
Tax Expense
(Benefit)
 
Net of Tax
Nine months ended September 30, 2015
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains on securities
$
4,066

 
$
1,561

 
$
2,505

Reclassification adjustment for gains realized in net income
(96
)
 
(36
)
 
(60
)
Amortization of unrealized holding gains on securities transferred to the held to maturity category
(139
)
 
(53
)
 
(86
)
Total securities available for sale
3,831

 
1,472

 
2,359

Derivative instruments:
 
 
 
 
 
Unrealized holding losses on derivative instruments
(1,437
)
 
(556
)
 
(881
)
Total derivative instruments
(1,437
)
 
(556
)
 
(881
)
Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
Amortization of net actuarial loss recognized in net periodic pension cost
316

 
136

 
180

Total defined benefit pension and post-retirement benefit plans
316

 
136

 
180

Total other comprehensive income
$
2,710

 
$
1,052

 
$
1,658

Nine months ended September 30, 2014
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains on securities
$
7,864

 
$
3,008

 
$
4,856

Reclassification adjustment for gains realized in net income
(375
)
 
(143
)
 
(232
)
Amortization of unrealized holding gains on securities transferred to the held to maturity category
(196
)
 
(75
)
 
(121
)
Total securities available for sale
7,293

 
2,790

 
4,503

Derivative instruments:
 
 
 
 
 
Unrealized holding losses on derivative instruments
(1,252
)
 
(479
)
 
(773
)
Total derivative instruments
(1,252
)
 
(479
)
 
(773
)
Defined benefit pension and post-retirement benefit plans:
 
 
 
 
 
Amortization of net actuarial loss recognized in net periodic pension cost
222

 
85

 
137

Total defined benefit pension and post-retirement benefit plans
222

 
85

 
137

Total other comprehensive income
$
6,263

 
$
2,396

 
$
3,867


The accumulated balances for each component of other comprehensive income, net of tax, were as follows as of the dates presented:
 
 
September 30,
2015
 
December 31, 2014
Unrealized gains on securities
$
19,433

 
$
17,759

Non-credit related portion of other-than-temporary impairment on securities
(16,789
)
 
(17,474
)
Unrealized losses on derivative instruments
(2,514
)
 
(1,633
)
Unrecognized losses on defined benefit pension and post-retirement benefit plans obligations
(6,070
)
 
(6,250
)
Total accumulated other comprehensive loss
$
(5,940
)
 
$
(7,598
)


Note L – Net Income Per Common Share
(In Thousands, Except Share Data)
Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the pro forma dilution of shares outstanding assuming

38
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


outstanding stock options were exercised into common shares, calculated in accordance with the treasury method. Basic and diluted net income per common share calculations are as follows for the periods presented:
 
 
Three Months Ended
 
September 30,
 
2015
 
2014
Basic
 
 
 
Net income applicable to common stock
$
16,220

 
$
15,535

Average common shares outstanding
40,265,941

 
31,526,423

Net income per common share - basic
$
0.40

 
$
0.49

Diluted
 
 
 
Net income applicable to common stock
$
16,220

 
$
15,535

Average common shares outstanding
40,265,941

 
31,526,423

Effect of dilutive stock-based compensation
252,472

 
192,106

Average common shares outstanding - diluted
40,518,413

 
31,718,529

Net income per common share - diluted
$
0.40

 
$
0.49


 
 
 
 
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Basic
 
 
 
Net income applicable to common stock
$
46,854

 
$
43,985

Average common shares outstanding
34,521,255

 
31,486,767

Net income per common share - basic
$
1.36

 
$
1.40

Diluted
 
 
 
Net income applicable to common stock
$
46,854

 
$
43,985

Average common shares outstanding
34,521,255

 
31,486,767

Effect of dilutive stock-based compensation
277,863

 
207,834

Average common shares outstanding - diluted
34,799,118

 
31,694,601

Net income per common share - diluted
$
1.35

 
$
1.39


Stock options that could potentially dilute basic net income per common share in the future that were not included in the computation of diluted net income per common share due to their anti-dilutive effect were as follows for the periods presented:
 
 
Three Months Ended
 
September 30,
 
2015
 
2014
Number of shares
—
 
109,068
Range of exercise prices
$—
 
$29.57 - $30.63

 
 
 
 
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Number of shares
99,852
 
109,068
Range of exercise prices
$30.63
 
$29.57 - $30.63





39

Note M – Mergers and Acquisitions
(In Thousands, Except Share Data)
Acquisition of Heritage Financial Group, Inc.

Effective July 1, 2015, the Company completed its acquisition by merger (the “Merger”) with Heritage Financial Group, Inc. (“Heritage”), pursuant to the Agreement and Plan of Merger by and among Renasant, Renasant Bank, Heritage and HeritageBank of the South ("HeritageBank") dated as of December 10, 2014 (referred to as the “Merger Agreement”), in a transaction valued at $297,260. The Company issued 8,635,879 shares of common stock and paid $5,915 to Heritage stock option holders for 100% of the voting equity interest in Heritage. At closing, Heritage merged with and into the Company, with the Company surviving the Merger. On the same date, HeritageBank was merged into Renasant Bank. On July 1, 2015, Heritage operated 48 banking, mortgage and investment offices in Alabama, Georgia and Florida.

Pursuant to the Merger Agreement, holders of Heritage common stock had the right to receive 0.9266 of a share of Company common stock for each share of Heritage common stock held immediately prior to the effective time of the Merger, plus cash in lieu of fractional shares. All unvested shares of Heritage restricted stock and all unvested options to purchase Heritage common stock vested upon the closing of the Merger. Each share of vested Heritage restricted stock converted into the right to receive 0.9266 of a share of Company common stock merger consideration, reduced by applicable tax withholding, while in-the-money Heritage stock options converted into the right to receive a cash payment equal to (1) the total number of shares subject to such Heritage stock option multiplied by (2) the difference between $27.00 and the exercise price of the Heritage stock option, less applicable tax withholding. Out-of-the-money Heritage stock options were cancelled. The Company's outstanding common stock was unaffected by the Merger.

The Company recorded approximately $189,589 in intangible assets which consist of goodwill of $177,333 and a core deposit intangible of $12,256. Goodwill resulted from a combination of revenue enhancements from expansion into new markets and efficiencies resulting from operational synergies. The fair value of the core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately 10 years. The intangible assets are not deductible for income tax purposes.


40

The following table summarizes the allocation of purchase price to assets and liabilities acquired in connection with the Company's acquisition of Heritage based on their fair values on July 1, 2015. The Company is finalizing the fair value of certain assets and liabilities. As a result, the adjustments included in the following table are preliminary and may change.

Purchase Price:
 
 
Shares issued to common shareholders
8,635,879

 
Purchase price per share
$
32.60

 
Value of stock paid
 
$
281,530

Cash paid for fractional shares
 
26

Cash settlement for stock options, net of tax benefit
 
3,697

Compensation expense incurred from the termination of Heritage's ESOP
 
4,930

Deal charges
 
7,077

  Total Purchase Price
 
$
297,260

Net Assets Acquired:
 
 
Stockholders’ equity at acquisition date
$
160,652

 
Increase (decrease) to net assets as a result of fair value adjustments
to assets acquired and liabilities assumed:
 
 
  Securities
(1,401
)
 
Mortgage loans held for sale
(2,481
)
 
Loans, net of Heritage's allowance for loan losses
(15,803
)
 
  Fixed assets
(7,253
)
 
Intangible assets, net of Heritage's existing core deposit intangible
18,193

 
Other real estate owned
1,390

 
FDIC loss-share indemnification asset
(15,247
)
 
Other assets
1,293

 
  Deposits
(3,776
)
 
  Other liabilities
(2,329
)
 
  Deferred income taxes
(13,311
)
 
     Total Net Assets Acquired
 
119,927

Goodwill resulting from merger(1)
 
$
177,333

(1) The goodwill resulting from the merger has been assigned to the Community Banks operating segment.

The following table summarizes the fair value of assets acquired and liabilities assumed at acquisition date in connection with the merger with Heritage. The Company is finalizing the fair value of certain assets and liabilities. As a result, the values included in the following table are preliminary and may change.

Cash and cash equivalents
 
$
35,787

Securities
 
177,849

Mortgage loans held for sale
 
348,505

Loans, net of unearned income
 
1,111,617

Premises and equipment
 
42,080

Other real estate owned
 
9,972

Intangible assets
 
189,589

Other assets
 
102,509

Total assets
 
2,017,908

 
 
 
Deposits
 
1,372,515

Borrowings
 
314,656

Other liabilities
 
41,438

Total liabilities
 
1,728,609



41

The following unaudited pro forma combined condensed consolidated financial information presents the results of operations for the nine months ended September 30, 2015 and 2014 of the Company as though the Merger had been completed as of January 1, 2014. The unaudited estimated pro forma information combines the historical results of Heritage with the Company's historical consolidated results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the periods presented. The pro forma information is not indicative of what would have occurred had the acquisition taken place on January 1, 2014. The pro forma information does not include the effect of any cost-saving or revenue-enhancing strategies. Merger expenses are reflected in the period in which they were incurred.

 
Nine Months Ended
 
September 30,
 
2015
 
2014
Interest income
$
225,985

 
$
222,055

Interest expense
16,494

 
22,302

Net interest income
209,491

 
199,753

Provision for loan and lease losses
3,300

 
6,401

Noninterest income
103,888

 
85,774

Noninterest expense
238,947

 
201,166

Income before income taxes
71,132

 
77,960

Income taxes
22,597

 
24,106

Net income
48,535

 
53,854

 


 


Earnings per share:
 
 
 
Basic
$
1.12

 
$
1.34

Diluted
$
1.12

 
$
1.34


Acquisition of First M&F Corporation

On September 1, 2013, the Company completed its acquisition by merger of First M&F, a bank holding company headquartered in Kosciusko, Mississippi, and the parent of Merchants and Farmers Bank, a Mississippi banking corporation. On the same date, Merchants and Farmers Bank was merged into Renasant Bank. On August 31, 2013, First M&F operated 43 banking and insurance locations in Mississippi, Alabama and Tennessee. The Company issued 6,175,576 shares of its common stock for 100% of the voting equity interests in First M&F. The aggregate transaction value, including the dilutive impact of First M&F’s stock based compensation assumed by the Company, was $156,845.

The Company recorded approximately $115,159 in intangible assets which consist of goodwill of $90,127 and core deposit intangible of $25,032. The fair value of the core deposit intangible is being amortized on an accelerated basis over the estimated useful life, currently expected to be approximately 10 years. The intangible assets are not deductible for income tax purposes.

The Company assumed $30,928 in fixed/floating rate junior subordinated deferrable interest debentures payable to First M&F Statutory Trust I that mature in March 2036. The acquired subordinated debentures require interest to be paid quarterly at a rate of 90-day LIBOR plus 1.33%. The fair value adjustment on the junior subordinated debentures of $12,371 will be amortized on a straight line basis over the remaining life.

Acquisition of RBC Bank (USA) Trust Division

On August 31, 2011, the Company acquired the Birmingham, Alabama-based trust division of RBC Bank (USA), which served clients in Alabama and Georgia. Under the terms of the transaction, RBC Bank (USA) transferred its approximately $680,000 in assets under management, comprised of personal and institutional clients with over 200 trust custodial and escrow accounts, to a wholly-owned subsidiary, and the Bank acquired all of the ownership interests in the subsidiary, which was subsequently merged into the Bank.


42

FDIC-Assisted Acquisition

On February 4, 2011, the Bank entered into a purchase and assumption agreement with loss-share agreements with the FDIC to acquire specified assets and assume specified liabilities of American Trust Bank, a Georgia-chartered bank headquartered in Roswell, Georgia (“American Trust”). American Trust operated 3 branches in the northwest region of Georgia. In connection with the acquisition, the Bank entered into loss-share agreements with the FDIC that covered $73,657 of American Trust loans (the “covered ATB loans”). The Bank will share in the losses on the asset pools (including single family residential mortgage loans and commercial loans) covered under the loss-share agreements. Pursuant to the terms of the loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses with respect to covered ATB loans, beginning with the first dollar of loss incurred. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered ATB loans. The claim periods to submit losses to the FDIC for reimbursement ends February 5, 2016 for nonsingle family ATB loans and February 28, 2021 for single family ATB loans.

On July 23, 2010, the Bank acquired specified assets and assumed specified liabilities of Crescent Bank & Trust Company, a Georgia-chartered bank headquartered in Jasper, Georgia (“Crescent”), from the FDIC, as receiver for Crescent. Crescent operated 11 branches in the northwest region of Georgia. In connection with the acquisition, the Bank entered into loss-share agreements with the FDIC that covered $361,472 of Crescent loans and $50,168 of other real estate owned (the “covered Crescent assets”). The Bank will share in the losses on the asset pools (including single family residential mortgage loans and commercial loans) covered under the loss-share agreements. Pursuant to the terms of the loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses with respect to covered Crescent assets, beginning with the first dollar of loss incurred. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered Crescent assets. The claim periods to submit losses to the FDIC for reimbursement ended July 25, 2015 for non-single family Crescent assets and ends July 31, 2020 for single family Crescent assets.




43
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Note N – Regulatory Matters
(In Thousands)
Renasant Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Renasant Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Renasant Bank must meet specific capital guidelines that involve quantitative measures of Renasant Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Renasant Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that banks must maintain. Those guidelines specify capital tiers, which include the following classifications:

Capital Tiers
Tier 1 Capital to
Average Assets
(Leverage)
 
Common Equity Tier 1 to
Risk - Weighted Assets

 
Tier 1 Capital to
Risk – Weighted
Assets
 
Total Capital to
Risk – Weighted
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%

The following table provides the capital and risk-based capital and leverage ratios for the Company and for Renasant Bank as of September 30,

 
2015
 
2014
 
Amount
 
Ratio
 
Amount
 
Ratio
Renasant Corporation
 
 
 
 
 
 
 
Tier 1 Capital to Average Assets (Leverage)
$
665,707

 
8.95
%
 
$
495,168

 
8.91
%
Common Equity Tier 1 Capital to Risk-Weighted Assets
576,360

 
9.92
%
 
—

 
—
%
Tier 1 Capital to Risk-Weighted Assets
665,707

 
11.46
%
 
495,168

 
11.82
%
Total Capital to Risk-Weighted Assets
712,737

 
12.27
%
 
543,103

 
12.96
%
Renasant Bank
 
 
 
 
 
 
 
Tier 1 Capital to Average Assets (Leverage)
$
639,189

 
8.75
%
 
$
467,944

 
8.64
%
Common Equity Tier 1 Capital to Risk-Weighted Assets
639,189

 
11.02
%
 
—

 
—
%
Tier 1 Capital to Risk-Weighted Assets
639,189

 
11.02
%
 
467,944

 
11.46
%
Total Capital to Risk-Weighted Assets
685,565

 
11.82
%
 
515,993

 
12.59
%

In July 2013, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”) that call for broad and comprehensive revision of regulatory capital standards for U.S. banking organizations. The Basel III Rules implemented a new common equity Tier 1 minimum capital requirement (“CET1”), a higher minimum Tier 1 capital requirement and other items affecting the calculation of the numerator of a banking organization’s risk-based capital ratios. Additionally, the Basel III Rules apply limits to a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of CET1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.

The new CET1 capital ratio includes common equity as defined under GAAP and does not include any other type of non-common equity under GAAP. When the Basel III Rules are fully phased in in 2019, banks will be required to have CET1 capital of 4.5% of average assets, Tier 1 capital of 6% of average assets, as compared to the current 4%, and total capital of 8% of risk-weighted assets to be categorized as adequately capitalized.

44
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)



Further, the Basel III Rules changed the agencies’ general risk-based capital requirements for determining risk-weighted assets, which affect the calculation of the denominator of a banking organization’s risk-based capital ratios. The Basel III Rules have revised the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity and to incorporate certain international capital standards of the Basel Committee on Banking Supervision set forth in the standardized approach of the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”.

The calculation of risk-weighted assets in the denominator of the Basel III capital ratios has been adjusted to reflect the higher risk nature of certain types of loans. Specifically, as applicable to the Company and Renasant Bank:

— Residential mortgages: Replaces the current 50% risk weight for performing residential first-lien mortgages and a 100% risk-weight for all other mortgages with a risk weight of between 35% and 200% determined by the mortgage’s loan-to-value ratio and whether the mortgage falls into one of two categories based on eight criteria that include the term, use of negative amortization and balloon payments, certain rate increases and documented and verified borrower income.

— Commercial mortgages: Replaces the current 100% risk weight with a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

— Nonperforming loans: Replaces the current 100% risk weight with a 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on nonaccrual status.
The Final Rules also introduce a new capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. In addition, the Final Rules provide for a countercyclical capital buffer applicable only to certain covered institutions. It is not expected that the countercyclical capital buffer will be applicable to Renasant Corporation or Renasant Bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a 4-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

Generally, the new Basel III Rules became effective on January 1, 2015, although parts of the Basel III Rules will be phased in through 2019.


45
Renasant Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)


Note O – Investments in Qualified Affordable Housing Projects
(In Thousands)

The Company has investments in qualified affordable housing projects (“QAHPs”) that provide low income housing tax credits and operating loss benefits over an extended period.  At September 30, 2015 and December 31, 2014, the Company’s carrying value of QAHPs was $8,021 and $8,993, respectively. The Company has no remaining funding obligations related to the QAHPs.  The investments in QAHPs are being accounted for using the cost method. The investments in QAHPs are included in “Other assets” on the Consolidated Balance Sheets.

Components of the Company's investments in qualified affordable housing projects were included in the line item “Income taxes” in the Consolidated Statements of Income for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Tax credit amortization
$
324

 
$
289

 
$
972

 
$
866

Tax credits and other benefits
(471
)
 
(403
)
 
(1,412
)
 
(1,300
)
Total
$
(147
)
 
$
(114
)
 
$
(440
)
 
$
(434
)


Note P - Subsequent Events
(In Thousands)

Merger with KeyWorth Bank
On October 20, 2015, the Company and KeyWorth Bank ("KeyWorth"), a Georgia state bank headquartered in Atlanta, Georga, jointly announced the signing of a definitive merger agreement pursuant to which the Company will acquire KeyWorth in an all-stock merger in a transaction valued at approximately $58,700. Under the terms of the agreement, KeyWorth will be merged with and into Renasant Bank, with Renasant Bank continuing as the surviving institution in the Merger.
According to the terms of the merger agreement, each KeyWorth common shareholder will have the right to receive 0.4494 shares of Renasant common stock for each share of KeyWorth common stock, and the merger is expected to qualify as a tax-free reorganization for KeyWorth shareholders.
KeyWorth operates six offices in the Atlanta metropolitan area and as of September 30, 2015, had approximately $392,101 in total assets, which included approximately $249,578 in total loans, and approximately$339,143 in total deposits.
The acquisition is expected to close in the first quarter of 2016 and is subject to regulatory approval, KeyWorth shareholder approval, and other customary conditions set forth in the merger agreement.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
This Form 10-Q may contain or incorporate by reference statements regarding Renasant Corporation (referred to herein as the “Company”, “we”, “our”, or “us”) which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements usually include words such as “expects,” “projects,” “proposes,” “anticipates,” “believes,” “intends,” “estimates,” “strategy,” “plan,” “potential,” “possible” and other similar expressions. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include (1) the Company’s ability to efficiently integrate acquisitions into its operations, retain the customers of these businesses and grow the acquired operations; (2) the effect of economic conditions and interest rates on a national, regional or international basis; (3) the timing of the implementation of changes in operations to achieve enhanced earnings or effect cost savings; (4) competitive pressures in the consumer finance, commercial finance, insurance, financial services, asset management,

46

retail banking, mortgage lending and auto lending industries; (5) the financial resources of, and products available to, competitors; (6) changes in laws and regulations, including changes in accounting standards; (7) changes in policy by regulatory agencies; (8) changes in the securities and foreign exchange markets; (9) the Company’s potential growth, including its entrance or expansion into new markets, and the need for sufficient capital to support that growth; (10) changes in the quality or composition of the Company’s loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers; (11) an insufficient allowance for loan losses as a result of inaccurate assumptions; (12) general economic, market or business conditions; (13) changes in demand for loan products and financial services; (14) concentration of credit exposure; (15) changes or the lack of changes in interest rates, yield curves and interest rate spread relationships; and (16) other circumstances, many of which are beyond management’s control. Management undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Financial Condition
The following discussion provides details regarding the changes in significant balance sheet accounts at September 30, 2015 compared to December 31, 2014.

Acquisition of Heritage Financial Group, Inc.

On July 1, 2015, the Company completed its acquisition of Heritage Financial Group, Inc. (“Heritage”), a bank holding company headquartered in Albany, Georgia, and the parent of HeritageBank of the South. On the same date, HeritageBank of the South was merged into Renasant Bank. See Note M, “Mergers and Acquisitions,” in the Notes to Consolidated Financial Statements included in Item 1, “Financial Statements,” for details regarding the Company’s merger with Heritage.
Assets
Total assets were $7,918,732 at September 30, 2015 compared to $5,805,129 at December 31, 2014. The acquisition of Heritage increased total assets $2,017,908 at July 1, 2015.
Investments
The securities portfolio is used to provide a source for meeting liquidity needs and to supply securities to be used in collateralizing certain deposits and other types of borrowings. The following table shows the carrying value of our securities portfolio by investment type and the percentage of such investment type relative to the entire securities portfolio as of the dates presented:
 
September 30, 2015
 
Percentage of
Portfolio
 
December 31, 2014
 
Percentage of
Portfolio
Obligations of other U.S. Government agencies and corporations
$
126,850

 
11.13
%
 
$
131,228

 
13.34
%
Obligations of states and political subdivisions
356,150

 
31.25

 
305,082

 
31.01

Mortgage-backed securities
613,577

 
53.84

 
506,152

 
51.45

Trust preferred securities
18,890

 
1.66

 
19,756

 
2.01

Other debt securities
20,135

 
1.77

 
17,930

 
1.82

Other equity securities
3,951

 
0.35

 
3,599

 
0.37

 
$
1,139,553

 
100.00
%
 
$
983,747

 
100.00
%

The balance of our securities portfolio at September 30, 2015 increased $155,806 to $1,139,553 from $983,747 at December 31, 2014. During the nine months ended September 30, 2015, we purchased $192,032 in investment securities. Mortgage-backed securities and collateralized mortgage obligations (“CMOs”), in the aggregate, comprised 28.25% of the purchases. CMOs are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. U.S. Government Agency securities and municipal securities accounted for 52.08% and 19.67%, respectively, of total securities purchased in the third quarter of 2015. Proceeds from maturities, calls and principal payments on securities during the first nine months of 2015 totaled $204,926.
The Company holds investments in pooled trust preferred securities. This portfolio had a cost basis of $24,807 and $26,400 and a fair value of $18,890 and $19,756 at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the investment in pooled trust preferred securities consists of three securities representing interests in various tranches of trusts collateralized by debt issued by over 250 financial institutions. Management’s determination of the fair value of each of its holdings is based on the current credit ratings, the known deferrals and defaults by the underlying issuing financial institutions and the degree to which future deferrals and defaults would be required to occur before the cash flow for our tranches is negatively

47

impacted. The Company’s quarterly evaluation of these investments for other-than-temporary-impairment resulted in no additional write-downs during the three or nine months ended September 30, 2015 or 2014. Furthermore, the Company's analysis of the pooled trust preferred securities during the second quarter of 2015 supported a return to accrual status for one of the three securities (XXVI). During the second quarter of 2014, the Company's analysis supported a return to accrual status for one of the other securities (XXIII). An observed history of principal and interest payments combined with improved qualitative and quantitative factors described above justified the accrual of interest on these securities. However, the remaining security (XXIV) is still in "payment in kind" status where interest payments are not expected until a future date and therefore, the qualitative and quantitative factors described above do not justify a return to accrual status at this time. As a result, pooled trust preferred security XXIV remains classified as nonaccruing asset at September 30, 2015, and investment interest is recorded on the cash-basis method until qualifying for return to accrual status. For more information about the Company’s trust preferred securities, see Note B, “Securities,” in the Notes to Consolidated Financial Statements of the Company in Item 1, “Financial Statements,” in this report.

Over the past several quarters, pricing on the Company's pooled trust preferred securities has improved such that the amortized cost on one of its securities (XIII) had been fully recovered as of March 31, 2015. As such, during the second quarter of 2015, the Company sold one of its pooled trust preferred securities (XIII) with a carrying value of $1,117 at the time of sale for net proceeds of $1,213, resulting in a gain of $96.

In addition to the sale of the trust preferred security in the second quarter of 2015, the Company sold certain investments acquired from Heritage shortly after the acquisition date with a carrying value of $7,231 at the time of sale for net proceeds of $7,231, resulting in no gain or loss on sale.
Loans
The table below sets forth the balance of loans, net of unearned income, outstanding by loan type and the percentage of each loan type to total loans as of the dates presented:
 
September 30, 2015
 
Percentage of
Total Loans
 
December 31, 2014
 
Percentage of
Total Loans
Commercial, financial, agricultural
$
621,121

 
11.77
%
 
$
483,283

 
12.12
%
Lease financing
24,698

 
0.46

 
10,114

 
0.26

Real estate – construction
339,370

 
6.43

 
212,061

 
5.32

Real estate – 1-4 family mortgage
1,662,505

 
31.50

 
1,236,360

 
31.00

Real estate – commercial mortgage
2,516,889

 
47.69

 
1,956,914

 
49.07

Installment loans to individuals
113,377

 
2.15

 
89,142

 
2.23

Total loans, net of unearned income
$
5,277,960

 
100.00
%
 
$
3,987,874

 
100.00
%

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At September 30, 2015, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans separate from the categories listed above.
Total loans at September 30, 2015 were $5,277,960, an increase of $1,290,086 from $3,987,874 at December 31, 2014. The Heritage acquisition increased total loans $1,111,617 at July 1, 2015. Loans covered under loss-share agreements with the FDIC (referred to as “covered loans”) were $100,839 at September 30, 2015, a decrease of $42,202, or 29.50%, compared to $143,041 at December 31, 2014. For covered loans, the FDIC will reimburse Renasant Bank 80% of the losses incurred on these loans. Renasant Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to these loans. Management intends to continue the Company’s aggressive efforts to bring those covered loans that are commercial in nature to resolution and thus the balance of covered loans is expected to continue to decline. The loss-share agreements applicable to this portfolio provide reimbursement for qualifying losses on single-family residential loans for ten years, which ends on July 31, 2020 for loans acquired from Crescent Bank & Trust Company ("Crescent") and February 28, 2021 for loans acquired from American Trust Bank ("American Trust"), and on commercial loans for five years, which ended July 25, 2015 for Crescent loans and ends February 5, 2016 for American Trust loans. As a result of the expiration of the loss-share agreement on Crescent commercial loans, the Company reclassified loans totaling $54,495 from acquired covered loans to acquired non-covered. The Company's acquisition of Heritage added two FDIC loss-share agreements. The loss-share agreements provide reimbursement for qualifying losses on single-family residential loans for ten years, which ends on February 28, 2021 for loans acquired from Citizens Bank of Effingham ("Citizens Effingham") and August 31, 2021 for loans acquired from First Southern National Bank ("First Southern"), and on commercial loans for five years, which ends February 18, 2016 for Citizens Effingham loans and August 19, 2016 for First Southern loans. The Heritage acquisition increased the Company's loans covered under loss sharing agreement by $46,307 at September 30, 2015.

48

Loans not covered under loss-share agreements with the FDIC at September 30, 2015 were $5,177,121, compared to $3,844,833 at December 31, 2014. Loans acquired and not covered under loss sharing agreements totaled $1,570,116 at September 30, 2015 compared to $577,347 at December 31, 2014. Excluding the loans acquired from Heritage, First M&F or in FDIC-assisted transactions (collectively referred to as "acquired loans"), loans increased $339,519 during the nine months ended September 30, 2015. The Company experienced loan growth across all categories of loans with loans from our new commercial business lines, which consist of asset-based lending, equipment leasing and healthcare banking groups, contributing $52,231 of the total increase in loans from December 31, 2014.
Looking at the change in loans geographically, non-acquired loans in our Mississippi markets increased by $146,114 while non-acquired loans in our Alabama, Tennessee, Georgia, and Florida markets increased by $47,911, $73,620, $35,679, and $14,127, respectively, when compared to December 31, 2014 (the Company entered its Florida markets on July 1, 2015 as a result of the Heritage acquisition).
The following tables provide a breakdown of covered loans and loans not covered under loss-share agreements as of the dates presented:
 
September 30, 2015
 
 Not Acquired
 
 Acquired and Covered Under Loss Share
 
 Acquired and Non-covered
 
Total
Loans
Commercial, financial, agricultural
$
450,688

 
$
2,467

 
$
167,966

 
$
621,121

Lease financing
24,698

 
—

 
—

 
24,698

Real estate – construction:
 
 
 
 
 
 
 
Residential
114,650

 
94

 
44,975

 
159,719

Commercial
153,820

 
43

 
24,247

 
178,110

Condominiums
335

 
—

 
1,206

 
1,541

Total real estate – construction
268,805

 
137

 
70,428

 
339,370

Real estate – 1-4 family mortgage:
 
 
 
 
 
 
 
Primary
628,906

 
29,050

 
358,420

 
1,016,376

Home equity
283,043

 
9,607

 
70,692

 
363,342

Rental/investment
175,911

 
7,593

 
29,113

 
212,617

Land development
40,696

 
2,529

 
26,945

 
70,170

Total real estate – 1-4 family mortgage
1,128,556

 
48,779

 
485,170

 
1,662,505

Real estate – commercial mortgage:
 
 
 
 
 
 
 
Owner-occupied
708,109

 
14,887

 
316,503

 
1,039,499

Non-owner occupied
826,147

 
28,867

 
447,457

 
1,302,471

Land development
119,278

 
5,628

 
50,013

 
174,919

Total real estate – commercial mortgage
1,653,534

 
49,382

 
813,973

 
2,516,889

Installment loans to individuals
80,724

 
74

 
32,579

 
113,377

Total loans, net of unearned income
$
3,607,005

 
$
100,839

 
$
1,570,116

 
$
5,277,960



49

 
December 31, 2014
 
 Not Acquired
 
 Acquired and Covered Under Loss Share
 
 Acquired and Non-covered
 
Total
Loans
Commercial, financial, agricultural
$
418,501

 
$
6,684

 
$
58,098

 
$
483,283

Lease financing
10,114

 
—

 
—

 
10,114

Real estate – construction:
 
 
 
 
 
 
 
Residential
92,183

 
—

 
1,090

 
93,273

Commercial
116,129

 
—

 
134

 
116,263

Condominiums
2,525

 
—

 
—

 
2,525

Total real estate – construction
210,837

 
—

 
1,224

 
212,061

Real estate – 1-4 family mortgage:
 
 
 
 
 
 
 
Primary
563,750

 
15,827

 
122,158

 
701,735

Home equity
256,321

 
8,875

 
30,840

 
296,036

Rental/investment
153,230

 
15,618

 
22,031

 
190,879

Land development
41,111

 
3,697

 
2,902

 
47,710

Total real estate – 1-4 family mortgage
1,014,412

 
44,017

 
177,931

 
1,236,360

Real estate – commercial mortgage:
 
 
 
 
 
 
 
Owner-occupied
649,402

 
47,658

 
168,301

 
865,361

Non-owner occupied
775,364

 
29,737

 
139,327

 
944,428

Land development
114,184

 
14,909

 
18,032

 
147,125

Total real estate – commercial mortgage
1,538,950

 
92,304

 
325,660

 
1,956,914

Installment loans to individuals
74,672

 
36

 
14,434

 
89,142

Total loans, net of unearned income
$
3,267,486

 
$
143,041

 
$
577,347

 
$
3,987,874


Mortgage loans held for sale were $317,681 at September 30, 2015 compared to $25,628 at December 31, 2014. The increase in mortgage loans held for sale is attributable to the addition of the Heritage mortgage operations, increased production in Renasant's existing mortgage operations coupled with the Company's election to carry these loans on the balance sheet for a longer period of time to collect additional interest payments while the market for the sale of these loans did not decline such that our gains from the eventual sales of these loans would be negatively impacted. Originations of mortgage loans to be sold totaled $992,555 in the nine months ended September 30, 2015 compared to $408,863 for the same period in 2014. The increase in mortgage loan originations is due to an increase in mortgage activity driven by historically low mortgage rates and the addition of Heritage's mortgage operations. For the nine months ending September 30, 2015, originations of mortgage loans from the Company's existing mortgage operations were $627,616 while originations from Heritage's mortgage operations during the three months after the acquisition date were $364,939.

Mortgage loans to be sold are sold either on a “best efforts” basis or under a mandatory delivery sales agreement. Under a “best
efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and the Company is obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within thirty days after the loan is funded; however, in recent quarters, the Company has elected to hold these loans longer than thirty days to collect additional interest payments. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.
Deposits

The Company relies on deposits as its major source of funds. Total deposits were $6,234,561 and $4,838,418 at September 30, 2015 and December 31, 2014, respectively. Noninterest-bearing deposits were $1,303,884 and $919,872 at September 30, 2015 and December 31, 2014, respectively, while interest-bearing deposits were $4,930,677 and $3,918,546 at September 30, 2015 and December 31, 2014, respectively. The acquisition of Heritage increased total deposits by $1,372,515 at the acquisition date. This consisted of noninterest-bearing deposits of $276,284 and interest-bearing deposits of $1,096,231. Management continues to focus on growing and maintaining a stable source of funding, specifically core deposits, and allowing more costly deposits, including certain time deposits, to mature. The source of funds that we select depends on the terms and how those terms assist us

50

in mitigating interest rate risk, maintaining our liquidity position and managing our net interest margin. Accordingly, funds are only acquired when needed and at a rate that is prudent under the circumstances.

Public fund deposits are those of counties, municipalities or other political subdivisions and may be readily obtained based on the Company’s pricing bid in comparison with competitors. Since public fund deposits are obtained through a bid process, these deposit balances may fluctuate as competitive and market forces change. The Company has focused on growing stable sources of deposits which has resulted in the Company relying less on public fund deposits. However, the Company continues to participate in the bidding process for public fund deposits when it is reasonable under the circumstances. Our public fund transaction accounts are principally obtained from municipalities including school boards and utilities. Public fund deposits were $786,956 and $654,423 at September 30, 2015 and December 31, 2014, respectively. The acquisition of Heritage contributed $80,090 to the increase in public fund deposits from December 31, 2014

Looking at the change in deposits geographically and excluding the deposits from the Heritage acquisition, deposits in our Alabama and Georgia markets decreased $39,980 and $44,186, respectively, from December 31, 2014, while deposits in our Mississippi and Tennessee markets increased $119,861 and $35,334, respectively, from December 31, 2014. However, as noted above, the Company has been allowing higher cost time deposits to mature and is also relying less on public fund deposits.
Borrowed Funds

Total borrowings include securities sold under agreements to repurchase, overnight borrowings, advances from the FHLB and junior subordinated debentures and are classified on the Consolidated Balance Sheets as either short-term borrowings or long-term debt. Short-term borrowings have original maturities less than one year and typically include securities sold under agreements to repurchase, federal funds purchased and FHLB advances. There was $402,122 of short-term borrowings, consisting of security repurchase agreements of $25,022 and overnight borrowings from the FHLB of $377,100, at September 30, 2015 compared to security repurchase agreements of $6,103 and overnight borrowings from the FHLB of $26,300 at December 31, 2014. The increase in short-term borrowings from the prior year-end is attributable to the increased production of Renasant's existing mortgage operations as well as the addition of Heritage's mortgage operations as overnight borrowings are often used to fund these short-term assets.

At September 30, 2015, long-term debt totaled $149,618 compared to $156,422 at December 31, 2014. Funds are borrowed from the FHLB primarily to match-fund against certain loans, negating interest rate exposure when rates rise. Such match-funded loans are typically large, fixed rate commercial or real estate loans with long-term maturities. Long-term FHLB advances were $54,456 and $61,611 at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, $1,133 of the total FHLB advances outstanding were scheduled to mature within twelve months or less. The Company had $1,299,220 of availability on unused lines of credit with the FHLB at September 30, 2015 compared to $1,592,550 at December 31, 2014. The cost of our FHLB advances was 4.16% and 4.17% for the first nine months of 2015 and 2014, respectively.

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 Company's junior subordinated debentures totaled $94,958 at September 30, 2015 compared to $94,574 at December 31, 2014.

Results of Operations
Three Months Ended September 30, 2015 as Compared to the Three Months Ended September 30, 2014
Net Income

Net income for the three month period ended September 30, 2015 was $16,220 compared to net income of $15,535 for the three month period ended September 30, 2014. Basic and diluted earnings per share for the three month period ended September 30, 2015 were $0.40, compared to basic and diluted earnings per share of $0.49 for the three month period ended September 30, 2014. During the three months ended September 30, 2015, the Company recognized $7,746 in pre-tax merger expenses. No merger expenses were incurred during the same period in 2014.

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 68.74% of total net revenue for the third quarter of 2015. Total net revenue consists of

51

net interest income on a fully taxable equivalent basis and noninterest income. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.

Net interest income increased to $68,680 for the third quarter of 2015 compared to $50,472 for the same period in 2014. On a tax equivalent basis, net interest income was $70,621 for the third quarter of 2015 as compared to $52,211 for the third quarter of 2014. Net interest margin, the tax equivalent net yield on earning assets, decreased to 4.09% during the third quarter of 2015 compared to 4.12% for the third quarter of 2014. Additional interest income recognized in connection with the acceleration of pay downs and payoffs from acquired loans increased our net interest margin by 4 basis points for the three months ended September 30, 2015. Additional interest income recognized in connection with the acceleration of pay downs and payoffs from acquired loans increased our net interest margin by 11 basis points for the three months ended September 30, 2014. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve.


52

The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented:
 
 
Three Months Ended September 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) 
$
5,621,753

 
$
67,853

 
4.79
%
 
$
3,968,974

 
$
50,088

 
5.01
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable(2)
791,269

 
3,910

 
1.96

 
689,872

 
3,873

 
2.23

Tax-exempt
352,308

 
4,427

 
4.99

 
311,676

 
4,062

 
5.17

Interest-bearing balances with banks
77,122

 
51

 
0.26

 
57,283

 
74

 
0.51

Total interest-earning assets
6,842,452

 
76,241

 
4.42

 
5,027,805

 
58,097

 
4.58

Cash and due from banks
103,900

 
 
 
 
 
85,136

 
 
 
 
Intangible assets
456,811

 
 
 
 
 
300,725

 
 
 
 
FDIC loss-share indemnification asset
9,171

 
 
 
 
 
18,686

 
 
 
 
Other assets
493,204

 
 
 
 
 
325,731

 
 
 
 
Total assets
$
7,905,538

 
 
 
 
 
$
5,758,083

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand(3)
$
2,893,950

 
$
1,227

 
0.17
%
 
$
2,157,648

 
$
1,091

 
0.20
%
Savings deposits
496,653

 
90

 
0.07

 
348,327

 
78

 
0.09

Time deposits
1,582,114

 
2,230

 
0.56

 
1,383,158

 
2,746

 
0.79

Total interest-bearing deposits
4,972,717

 
3,547

 
0.28

 
3,889,133

 
3,915

 
0.40

Borrowed funds
556,269

 
2,073

 
1.48

 
214,017

 
1,971

 
3.65

Total interest-bearing liabilities
5,528,986

 
5,620

 
0.40

 
4,103,150

 
5,886

 
0.57

Noninterest-bearing deposits
1,272,714

 
 
 
 
 
896,856

 
 
 
 
Other liabilities
79,926

 
 
 
 
 
60,974

 
 
 
 
Shareholders’ equity
1,023,912

 
 
 
 
 
697,103

 
 
 
 
Total liabilities and shareholders’ equity
$
7,905,538

 
 
 
 
 
$
5,758,083

 
 
 
 
Net interest income/net interest margin
 
 
$
70,621

 
4.09
%
 
 
 
$
52,211

 
4.12
%
 
(1) 
Includes mortgage loans held for sale and shown net of unearned income.
(2) 
U.S. Government and some U.S. Government agency securities are tax-exempt in the states in which we operate.
(3) 
Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.
The average balances of nonaccruing assets are included in the table above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 35% and a state tax rate of 3.4%, which is net of federal tax benefit.

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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 third quarter of 2015 compared to the third quarter of 2014:

 
Volume
 
Rate
 
Net(1)
Interest income:
 
 
 
 
 
Loans (2)
$
19,875

 
$
(2,110
)
 
$
17,765

Securities:
 
 
 
 
 
Taxable
208

 
(171
)
 
37

Tax-exempt
503

 
(138
)
 
365

Interest-bearing balances with banks
57

 
(80
)
 
(23
)
Total interest-earning assets
20,643

 
(2,499
)
 
18,144

Interest expense:
 
 
 
 
 
Interest-bearing demand deposits
255

 
(119
)
 
136

Savings deposits
23

 
(11
)
 
12

Time deposits
501

 
(1,017
)
 
(516
)
Borrowed funds
163

 
(61
)
 
102

Total interest-bearing liabilities
942

 
(1,208
)
 
(266
)
Change in net interest income
$
19,701

 
$
(1,291
)
 
$
18,410

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

Interest income, on a tax equivalent basis, was $76,241 for the third quarter of 2015 compared to $58,097 for the same period in 2014. This increase in interest income, on a tax equivalent basis, is due primarily to the acquisition of Heritage offset by a decrease in loan yields which is a result of replacing higher rate maturing loans with new or renewed loans at current market rates which are generally lower due to the current interest rate environment. The decrease in loan yields is also driven by smaller amounts of accelerated accretion caused by a slowdown in the number of loan payoffs from the First M&F portfolio. For the quarter ended September 30, 2015, excluding the contribution from Heritage, the Company also experienced a decrease in the average balance of the securities portfolio when compared to the same period in 2014 as proceeds from maturities and calls were used to fund loan growth rather than be reinvested in the securities portfolio.

The following table presents the percentage of total average earning assets, by type and yield, for the periods presented:
 
 
Percentage of Total
 
Yield
 
Three Months Ended
 
Three Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Loans
82.16
%
 
78.94
%
 
4.79
%
 
5.01
%
Securities
16.71

 
19.92

 
2.89

 
3.14

Other
1.13

 
1.14

 
0.26

 
0.51

Total earning assets
100.00
%
 
100.00
%
 
4.42
%
 
4.58
%

For the third quarter of 2015, loan income, on a tax equivalent basis, increased $17,765 to $67,853 from $50,088 compared to the same period in 2014. The average balance of loans increased $1,652,779 from third quarter of 2015 compared to the third quarter of 2014 due primarily to the acquisition of Heritage. Furthermore, increased production in the commercial and secondary mortgage loan markets contributed to the increase. The tax equivalent yield on loans was 4.79%, a 22 basis point decrease from the third quarter of 2014. The decrease in loan yields was a result of the continued repricing of higher rate maturing loans with new or renewed loans at current market rates which are typically less than the maturing loans due to the current low interest rate environment. Furthermore, lower levels of accelerated accretion were recognized during the third quarter of 2015 when compared to the same period in 2014 resulting from lower levels of payoffs from the acquired loan portfolio. The accelerated accretion on acquired loans produced by higher levels of payoffs increased our loan yield by 5 basis points for the third quarter of 2015 compared to 14 basis points for the third quarter of 2014.

54


Investment income, on a tax equivalent basis, increased $402 to $8,337 for the third quarter of 2015 from $7,935 for the third quarter of 2014. The average balance in the investment portfolio for the third quarter of 2015 was $1,143,577 compared to $1,001,548 for the same period in 2014. The tax equivalent yield on the investment portfolio for the third quarter of 2015 was 2.89%, down 25 basis points from the same period in 2014. Excluding the contribution from Heritage, the average balance in the investment portfolio decreased when compared to the same period in 2014. Proceeds from maturities and calls of higher yielding securities were either redeployed to fund loan growth or reinvested in lower earning securities accounting for both the decrease in the average balance of investments and tax equivalent yield thereon when compared to the same period in the prior year. The reinvestment rates on securities were lower due to the generally lower interest rate environment.

Interest expense was $5,620 for the third quarter of 2015 as compared to $5,886 for the same period in 2014. The acquisition of Heritage contributed to a shift in the mix of our deposits from higher costing time deposits to lower costing interest-bearing deposits and non-interest bearing deposits, and when combined with the declining interest rate environment, resulted in an overall decrease in interest expense. The Company continues to seek changes in the mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities, specifically time deposits. The cost of interest-bearing liabilities was 0.40% for the three months ended September 30, 2015 as compared to 0.57% at September 30, 2014.

The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
 
 
Percentage of Total
 
Cost of Funds
 
Three Months Ended
 
Three Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Noninterest-bearing demand
18.71
%
 
17.94
%
 
—
%
 
—
%
Interest-bearing demand
42.55

 
43.15

 
0.17

 
0.20

Savings
7.30

 
6.97

 
0.07

 
0.09

Time deposits
23.26

 
27.66

 
0.56

 
0.79

Long-term Federal Home Loan Bank advances
0.85

 
1.36

 
4.16

 
4.11

Other borrowed funds
7.33

 
2.92

 
1.17

 
3.44

Total deposits and borrowed funds
100.00
%
 
100.00
%
 
0.33
%
 
0.47
%

Interest expense on deposits was $3,547 and $3,915 for the third quarter of 2015 and 2014, respectively. The cost of interest-bearing deposits was 0.28% and 0.40% for the same periods. Interest expense on total borrowings was $2,073 and $1,971 for the third quarter of 2015 and 2014, respectively. A more detailed discussion of the cost of our funding sources is set forth below under the heading “Liquidity and Capital Resources” in this item.

Noninterest Income
 
Noninterest Income to Average Assets
(Excludes securities gains/losses)
Three Months Ended September 30,
2015
 
2014
1.61%
 
1.53%

Total noninterest income includes fees generated from deposit services, mortgage loan originations, insurance products, trust and other wealth management products and services, security gains and all other noninterest income. Our focus is to develop and enhance our products that generate noninterest income in order to diversify our revenue sources. Noninterest income was $32,117 for the third quarter of 2015 as compared to $22,563 for the same period in 2014. The increase in noninterest income and its related components is primarily attributable to the Heritage acquisition, Heritage's mortgage operations and a significant increase in mortgage revenue from the Company's existing mortgage operations due to increased production as a result of continued decreases in interest rates and recent mortgage originator hires.

Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. Service charges on deposit accounts were $8,151 and $7,107 for the third quarter

55

of 2015 and 2014, respectively. Overdraft fees, the largest component of service charges on deposits, were $5,896 for the three months ended September 30, 2015 compared to $5,181 for the same period in 2014.

Fees and commissions decreased to $5,704 during the third quarter of 2015 as compared to $5,877 for the same period in 2014. Fees and commissions include fees related to deposit services, such as interchange fees on debit card transactions, as well as fees charged on mortgage loans originated to be sold, such as origination, underwriting, documentation and other administrative fees. Mortgage loan fees decreased to $1,425 during the third quarter of 2015 as compared to $1,781 for the same period in 2014. For the third quarter of 2015, fees associated with debit card usage were $3,935 as compared to $3,086 for the same period in 2014.

Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers.
Income earned on insurance products was $2,381 and $2,270 for the three months ended September 30, 2015 and 2014, respectively. Contingency income, which is included in "Other noninterest income" in the Consolidated Statements of 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.
The Trust division within the Wealth Management segment operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The division manages a number of trust accounts inclusive of personal and corporate benefit accounts, self-directed IRAs, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. Additionally, the Financial Services division within the Wealth Management segment provides specialized investment products and services to our customers, which include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was $2,871 for the third quarter of 2015 compared to $2,197 for the same period in 2014. The market value of trust assets under management was $3,003,550 and $2,635,634 at September 30, 2015 and September 30, 2014, respectively.

During the third quarter of 2015, the Company sold certain investments acquired from Heritage shortly after the acquisition date with a carrying value of $7,231 at the time of sale for net proceeds of $7,231, resulting in no gain or loss on sale. Gains on sales of securities for the three months ended September 30, 2014 were $375, resulting from the sale of approximately $724 in securities during the period.

Gains on the sale of mortgage loans held for sale were $10,578 and $2,635 for the three months ended September 30, 2015 and 2014, respectively. Originations of mortgage loans to be sold totaled $584,662 for the third quarter of 2015 as compared to $154,285 for the same period of 2014. The increase in gains on sale of the mortgage loans is due to an increase in mortgage originations driven by historically low mortgage rates and the addition of Heritage's mortgage operations. For the third quarter of 2015, originations of mortgage loans from the Company's existing mortgage operations were $219,723 while originations from Heritage's mortgage operations were $364,939.
Noninterest Expense
 
Noninterest Expense to Average Assets
Three Months Ended September 30,
2015
 
2014
3.82%
 
3.32%

Noninterest expense was $76,085 and $48,175 for the third quarter of 2015 and 2014, respectively. The increase in noninterest expenses and its related components is primarily attributable to the Heritage acquisition. Merger expense related to our acquisition by merger of Heritage was $7,746 for the three months ended September 30, 2015, while there were no merger-related expenses for the three months ended September 30, 2014.

Salaries and employee benefits increased $13,479 to $43,048 for the third quarter of 2015 as compared to $29,569 for the same period in 2014. The increase in salary and employee benefits was primarily attributable to the Heritage acquisition along with higher levels of commissions paid in our mortgage banking division due to the increased levels of mortgage loan production.

Data processing costs increased to $3,773 in the third quarter of 2015 from $2,906 for the same period in 2014. The increase for the third quarter of 2015 as compared to the same period in 2014 was primarily attributable to the acquisition of Heritage as well as increased volume in mobile banking, which was made available to customers in March 2014, and increased volume on our small business internet banking platform.


56

Net occupancy and equipment expense for the third quarter of 2015 was $7,733, up from $5,353 for the same period in 2014. The increase is primarily attributable to the Heritage acquisition coupled with the completion of full service banking facilities and an operations annex location during the fourth quarter of 2014 and the first quarter of 2015.

Expenses related to other real estate owned for the third quarter of 2015 were $861 compared to $1,101 for the same period in 2014. Expenses on other real estate owned for the third quarter of 2015 included write downs of $527 of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $5,406 was sold during the three months ended September 30, 2015, resulting in a net gain of $16. Expenses on other real estate owned for the three months ended September 30, 2014 included a $856 write down of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $8,360 was sold during the three months ended September 30, 2014, resulting in a net gain of $85.

Professional fees include fees for legal and accounting services. Professional fees were $1,242 for the third quarter of 2015 as compared to $1,018 for the same period in 2014. Professional fees remain elevated in large part due to additional legal, accounting and consulting fees associated with compliance costs of newly enacted as well as existing banking and governmental regulation. Professional fees attributable to legal fees associated with loan workouts and foreclosure proceedings remain at higher levels in correlation with the overall economic downturn and credit deterioration identified in our loan portfolio and the Company’s efforts to bring these credits to resolution.

Advertising and public relations expense was $1,567 for the third quarter of 2015 compared to $1,133 for the same period in 2014.

Amortization of intangible assets totaled $1,803 and $1,381 for the third quarter of 2015 and 2014, 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 two years to eleven years. The increase in amortization expense for the third quarter of 2015 as compared to the same period in 2014 is attributable to the amortization of the core deposit intangible recognized in connection with the Heritage acquisition.

Communication expenses, those expenses incurred for communication to clients and between employees, were $2,339 for the third quarter of 2015 as compared to $1,079 for the same period in 2014. The increase can be attributed to the Heritage acquisition as well as expenses incurred to increase the bandwidth of data lines throughout our footprint.

Efficiency Ratio
Three Months Ended September 30,
2015
 
2014
74.06%
 
64.43%

The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. Merger expenses incurred in connection with the Heritage acquisition contributed approximately 754 basis points to the efficiency ratio for the third quarter of 2015. The remainder of the increase from the same period in 2014 is primarily attributable to the Heritage acquisition and increased production in our mortgage operations which is ordinarily a less efficient line of business. We remain committed to aggressively managing our costs within the framework of our business model. We expect the efficiency ratio to improve from levels reported in 2015 and 2014 from revenue growth while at the same time controlling noninterest expenses.

Income Taxes

Income tax expense for the third quarter of 2015 and 2014 was $7,742 and $7,108, respectively. The effective tax rates for those periods were 32.31% and 31.39%, respectively. The increased effective tax rate for the third quarter of 2015 as compared to the same period in 2014 is the result of the Company experiencing improvements in its financial results throughout 2014 and into 2015, including the contribution from Heritage, resulting in higher levels of taxable income.
 
Results of Operations
Nine Months Ended September 30, 2015 as Compared to the Nine Months Ended September 30, 2014
Net Income

57


Net income for the nine months ended September 30, 2015 was $46,854 compared to net income of $43,985 for the nine months ended September 30, 2014. Basic and diluted earnings per share for the nine months ended September 30, 2015 were $1.36 and $1.35, respectively, as compared to basic and diluted earnings per share of $1.40 and $1.39, respectively, for the nine months ended September 30, 2014. During the nine months ended September 30, 2015 the Company recognized $9,691 in pre-tax merger expenses as compared to $195 in the same period in 2014.
 
Net Interest Income

Net interest income increased to $169,192 for the nine months ended September 30, 2015 compared to $152,612 for the same period in 2014. On a tax equivalent basis, net interest income was $174,625 for the nine months ended September 30, 2015 as compared to $157,719 for the nine months ended September 30, 2014. Net interest margin, the tax equivalent net yield on earning assets, decreased three basis points to 4.10% during the nine months ended September 30, 2015 compared to 4.13% for the nine months ended September 30, 2014. The accelerated accretion on the acquired loan portfolios increased our net interest margin by 12 basis points for the nine months ended September 30, 2015 compared to 20 basis points for the nine months ended September 30, 2014. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve.


58

The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented:

 
Nine Months Ended September 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1) 
$
4,575,155

 
$
166,332

 
4.86
%
 
$
3,927,187

 
$
151,375

 
5.15
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable(2)
722,200

 
11,836

 
2.19
%
 
707,857

 
12,191

 
2.30

Tax-exempt
322,791

 
12,346

 
5.11

 
302,478

 
12,018

 
5.31

Interest-bearing balances with banks
76,010

 
154

 
0.27

 
164,164

 
335

 
0.27

Total interest-earning assets
5,696,156

 
190,668

 
4.48

 
5,101,686

 
175,919

 
4.61

Cash and due from banks
91,934

 
 
 
 
 
88,918

 
 
 
 
Intangible assets
350,231

 
 
 
 
 
302,158

 
 
 
 
FDIC loss-share indemnification asset
9,345

 
 
 
 
 
22,554

 
 
 
 
Other assets
384,911

 
 
 
 
 
324,917

 
 
 
 
Total assets
$
6,532,577

 
 
 
 
 
$
5,840,233

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand(3)
$
2,507,455


$
3,279

 
0.17
%
 
$
2,209,358

 
$
3,338

 
0.20

Savings deposits
412,335

 
232

 
0.08

 
344,422

 
224

 
0.09

Time deposits
1,350,912

 
6,644

 
0.66

 
1,440,418

 
8,862

 
0.82

Total interest-bearing deposits
4,270,702

 
10,155

 
0.32

 
3,994,198

 
12,424

 
0.42

Borrowed funds
311,390

 
5,888

 
2.53

 
184,655

 
5,776

 
4.18

Total interest-bearing liabilities
4,582,092

 
16,043

 
0.47

 
4,178,853

 
18,200

 
0.58

Noninterest-bearing deposits
1,059,413

 
 
 
 
 
916,925

 
 
 
 
Other liabilities
64,372

 
 
 
 
 
58,722

 
 
 
 
Shareholders’ equity
826,700

 
 
 
 
 
685,733

 
 
 
 
Total liabilities and shareholders’ equity
$
6,532,577

 
 
 
 
 
$
5,840,233

 
 
 
 
Net interest income/net interest margin
 
 
$
174,625

 
4.10
%
 
 
 
$
157,719

 
4.13
%
 
(1)
Includes mortgage loans held for sale and shown net of unearned income.
(2)
U.S. Government and some U.S. Government agency securities are tax-exempt in the states in which we operate.
(3)
Interest-bearing demand deposits include interest-bearing transactional accounts and money market deposits.
The average balances of nonaccruing assets are included in the table above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 35% and a state tax rate of 3.4%, which is net of federal tax benefit.

59

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 nine months ended September 30, 2015 compared to the same period in 2014:

 
Volume
 
Rate
 
Net(1)
Interest income:
 
 
 
 
 
Loans (2)
$
22,706

 
$
(7,749
)
 
$
14,957

Securities:
 
 
 
 
 
Taxable
266

 
(621
)
 
(355
)
Tax-exempt
731

 
(403
)
 
328

Interest-bearing balances with banks
(182
)
 
1

 
(181
)
Total interest-earning assets
23,521

 
(8,772
)
 
14,749

Interest expense:
 
 
 
 
 
Interest-bearing demand deposits
(863
)
 
804

 
(59
)
Savings deposits
49

 
(41
)
 
8

Time deposits
(530
)
 
(1,689
)
 
(2,219
)
Borrowed funds
266

 
(153
)
 
113

Total interest-bearing liabilities
(1,078
)
 
(1,079
)
 
(2,157
)
Change in net interest income
$
24,599

 
$
(7,693
)
 
$
16,906

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

Interest income, on a tax equivalent basis, was $190,668 for the nine months ended September 30, 2015 compared to $175,919 for the same period in 2014. This increase in interest income, on a tax equivalent basis, is due primarily to the acquisition of Heritage offset by a decrease in loan yields which is a result of replacing higher rate maturing loans with new or renewed loans at current market rates which are generally lower due to the current interest rate environment. The decrease in loan yields is also driven by smaller amounts of accelerated accretion caused by a slowdown in the number of loan payoffs from the First M&F portfolio. For the nine months ended September 30, 2015, excluding the contribution from Heritage, the Company also experienced a decrease in the average balance of the securities portfolio when compared to the same period in 2014 as proceeds from maturities and calls were used to fund loan growth rather than be reinvested in the securities portfolio.

The following table presents the percentage of total average earning assets, by type and yield, for the periods presented:
 
 
Percentage of Total
 
Yield
 
Nine Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Loans
80.32
%
 
76.98
%
 
4.86
%
 
5.15
%
Securities
18.35

 
19.80

 
3.09

 
3.20

Other
1.33

 
3.22

 
0.27

 
0.27

Total earning assets
100.00
%
 
100.00
%
 
4.48
%
 
4.61
%


For the nine months ending September 30, 2015, loan income, on a tax equivalent basis, increased $14,957 to $166,332 from $151,375 in the same period in 2014. The average balance of loans increased $647,968 for the nine months ended September 30, 2015 compared to the same period in 2014 primarily due to the acquisition of Heritage as well as increased production in the commercial and secondary mortgage loan markets. The tax equivalent yield on loans was 4.86% for the nine months ending September 30, 2015, a 29 basis point decrease from the same period in 2014. The decrease in loan yields was primarily a result of replacing higher rate maturing loans with new or renewed loans at current market rates which are generally lower due to the current interest rate environment. Furthermore, lower levels of accelerated accretion have been recognized in the first nine months of 2015 when compared to the same period in 2014 resulting from lower levels of payoffs from the acquired loan portfolio. The

60

accelerated accretion on the acquired loan portfolio increased our loan yield by 14 basis points for the first nine months of 2015 compared to 26 basis points for the nine months ended September 30, 2014.

Investment income, on a tax equivalent basis, decreased $27 to $24,182 for the nine months ended September 30, 2015 from $24,209 for the same period in 2014. The average balance in the investment portfolio for the nine months ended September 30, 2015 was $1,044,991 compared to $1,010,335 for the same period in 2014. The tax equivalent yield on the investment portfolio for the first nine months of 2015 was 3.09%, down 11 basis points from 3.20% in the same period in 2014. The contribution from Heritage was nearly offset by a reduction in the balance of the securities portfolio. Proceeds from maturities and calls of higher yielding securities were either redeployed to fund loan growth or reinvested in lower earning securities accounting for both the decrease in the average balance of investments, excluding the impact from Heritage, and tax equivalent yield thereon when compared to the same period in the prior year. The reinvestment rates on securities were lower due to the generally lower interest rate environment.

Interest expense for the nine months ended September 30, 2015 was $16,043 as compared to $18,200 for the same period in 2014. The acquisition of Heritage contributed to a shift in the mix of our deposits from higher costing time deposits to lower costing interest bearing and non-interest bearing deposits, and when combined with the declining interest rate environment, resulted in an overall decrease in interest expense. The Company continues to seek changes in the mix of our interest-bearing liabilities in which we utilized lower cost deposits to replace higher costing liabilities, specifically time deposits. The cost of interest-bearing liabilities was 0.47% for the nine months ended September 30, 2015 as compared to 0.58% for the same period in September 30, 2014.

The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
 
 
Percentage of Total
 
Cost of Funds
 
Nine Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Noninterest-bearing demand
18.78
%
 
17.99
%
 
—
%
 
—
%
Interest-bearing demand
44.44

 
43.36

 
0.17

 
0.20

Savings
7.31

 
6.76

 
0.08

 
0.09

Time deposits
23.95

 
28.27

 
0.66

 
0.82

Long-term Federal Home Loan Bank advances
1.06

 
1.39

 
4.16

 
4.17

Other borrowed funds
4.46

 
2.23

 
2.14

 
4.19

Total deposits and borrowed funds
100.00
%
 
100.00
%
 
0.38
%
 
0.48
%

Interest expense on deposits was $10,155 and $12,424 for the nine months ended September 30, 2015 and 2014, respectively. The cost of interest bearing deposits was 0.32% and 0.42% for the same periods. Interest expense on total borrowings was $5,888 and $5,776 for the first nine months of 2015 and 2014, respectively. A more detailed discussion of the cost of our funding sources is set forth below under the heading “Liquidity and Capital Resources” in this item.

Noninterest Income
 
Noninterest Income to Average Assets
(Excludes securities gains/losses)
Nine Months Ended September 30,
2015
 
2014
1.55%
 
1.31%

Noninterest income was $76,938 for the nine months ended September 30, 2015 as compared to $60,650 for the same period in 2014. The increase in noninterest income and its related components is primarily attributable to the Heritage acquisition, Heritage's mortgage operations and a significant increase in mortgage revenue from the Company's existing mortgage operations due to increased production as a result of continued decreases in interest rates and recent mortgage originator hires.

Service charges on deposit accounts include maintenance fees on accounts, per item charges, account enhancement charges for additional packaged benefits and overdraft fees. Service charges on deposit accounts were $21,008 and $19,851 for the nine months

61

ended September 30, 2015 and 2014, respectively. Overdraft fees, the largest component of service charges on deposits, were $14,915 for the nine months ended September 30, 2015 compared to $14,456 for the same period in 2014.

Fees and commissions decreased to $15,150 for the first nine months of September 30, 2015 as compared to $15,729 for the same period in 2014. Fees and commissions include fees related to deposit services, such as interchange fees on debit card transactions, as well as fees charged on mortgage loans originated to be sold, such as origination, underwriting, documentation and other administrative fees. Mortgage loan fees decreased to $3,589 during the nine months ended September 30, 2015 as compared to $4,839 for the same period in 2014. Fees associated with debit card usage were $10,291 for the nine months ending September 30, 2015 as compared to $8,833 for the same period in 2014.

Through Renasant Insurance, we offer a range of commercial and personal insurance products through major insurance carriers. Income earned on insurance products was $6,467 and $6,221 for the nine months ended September 30, 2015 and 2014, respectively. Contingency income, which is included in "Other noninterest income" in the Consolidated Statements of Income, was $489 and $528 for the nine months ended September 30, 2015 and 2014, respectively.

The Trust division within the Wealth Management segment operates on a custodial basis which includes administration of benefit plans, as well as accounting and money management for trust accounts. The division manages a number of trust accounts inclusive of personal and corporate benefit accounts, self-directed IRAs, and custodial accounts. Fees for managing these accounts are based on changes in market values of the assets under management in the account, with the amount of the fee depending on the type of account. Additionally, the Financial Services division within the Wealth Management segment provides specialized products and services to our customers, which include fixed and variable annuities, mutual funds, and stocks offered through a third party provider. Wealth Management revenue was $7,309 for the nine months ended September 30, 2015 compared to $6,511 for the same period in 2014. The market value of trust assets under management was $3,003,550 and $2,635,634 at September 30, 2015 and September 30, 2014, respectively.

Noninterest income for the nine months ended September 30, 2015 include the Company's sale of its pooled trust preferred security XIII in the second quarter of 2015 with a carrying value of $1,117 at the time of sale for net proceeds of $1,213 resulting in a gain of $96. Furthermore, the Company sold certain investments acquired from Heritage shortly after the acquisition date with a carrying value of $7,231 at the time of sale for net proceeds of $7,231, resulting in no gain or loss on sale. Gains on sales of securities for the nine months ended September 30, 2014 were $375, resulting from the sale of approximately $724 in securities during the period.

Gains on the sale of mortgage loans held for sale were $20,618 and $6,226 for the nine months ended September 30, 2015 and 2014, respectively. Originations of mortgage loans to be sold totaled $992,555 for the nine months ended September 30, 2015 as compared to $408,863 for the same period of 2014. The increase in gains on sale of the mortgage loans is due to an increase mortgage originations driven by historically low mortgage rates and the addition of Heritage's mortgage operations. For the nine months ending September 30, 2015, originations of mortgage loans from the Company's existing mortgage operations were $627,616 while originations from Heritage's mortgage operations during the three months since the acquisition date were $364,939.
Noninterest Expense
 
Noninterest Expense to Average Assets
Nine Months Ended September 30,
2015
 
2014
3.34%
 
3.33%

Noninterest expense was $174,675 and $145,216 for the nine months ended September 30, 2015 and 2014, respectively. The increase in noninterest expenses and its related components is primarily attributable to the Heritage acquisition. Merger expense related to our acquisition of Heritage was $9,691 for the nine months ended September 30, 2015 compared to $195 of merger expenses related to the First M&F acquisition for the same period in 2014.

Salaries and employee benefits increased $13,895 to $101,702 for the nine months ended September 30, 2015 as compared to $87,807 for the same period in 2014. The increase in salaries and employee benefits is attributable to the addition of the Heritage operations and higher levels of commissions paid in our mortgage banking division.

Data processing costs increased to $10,106 in the nine months ended September 30, 2015 from $8,451 for the same period in 2014. The increase for the nine months ended September 30, 2015 as compared to the same period in 2014 was primarily attributable

62

to the Heritage acquisition and the addition of enhancements to our products and services, including mobile banking and small business internet banking platform.

Net occupancy and equipment expense for the first nine months of 2015 was $18,816, up from $15,106 for the same period in 2014. In addition to the occupancy and equipment expense of Heritage operations, the increase in occupancy and equipment expense is attributable to the completion of full service banking facilities placed into operation during the fourth quarter of 2014 and an operations annex location placed into operation in the first quarter of 2015.

Expenses related to other real estate owned for the first nine months of 2015 were $2,347 compared to $3,870 for the same period in 2014. Expenses on other real estate owned for the nine months ended September 30, 2015 included write downs of $1,922 of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $18,062 was sold during the nine months ended September 30, 2015, resulting in a net gain of $499. Expenses on other real estate owned for the nine months ended September 30, 2014 included a $1,901 write down of the carrying value to fair value on certain pieces of property held in other real estate owned. Other real estate owned with a cost basis of $22,702 was sold during the nine months ended September 30, 2014, resulting in a net gain of $97.

Professional fees include fees for legal and accounting services. Professional fees were $3,238 for the nine months ended September 30, 2015 as compared to $3,607 for the same period in 2014. While the Company experienced a decrease in professional fees year over year, professional fees remain elevated in large part due to additional legal, accounting and consulting fees associated with compliance costs of newly enacted as well as existing banking and governmental regulation. Professional fees attributable to legal fees associated with loan workouts and foreclosure proceedings remain at higher levels in correlation with the overall economic downturn and credit deterioration identified in our loan portfolio and the Company’s efforts to bring these credits to resolution.

Advertising and public relations expense was $4,351 for the nine months ended September 30, 2015 compared to $4,549 for the same period in 2014.

Amortization of intangible assets totaled $4,317 and $4,279 for the nine months ended September 30, 2015 and 2014, 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 two years to eleven years. The increase in amortization expense for the nine months ended September 30, 2015 as compared to the same period in 2014 is attributable to the amortization of the core deposit intangible recognized in connection with the Heritage acquisition.

Communication expenses, those expenses incurred for communication to clients and between employees, were $5,263 for the nine months ended September 30, 2015 as compared to $4,462 for the same period in 2014. The increase can be attributed to the Heritage acquisition as well as expenses incurred to increase the bandwidth of data lines throughout our footprint.

 
Efficiency Ratio
Nine Months Ended September 30,
2015
 
2014
69.44%
 
66.50%

The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. The Company calculates this ratio by dividing noninterest expense by the sum of net interest income on a fully tax equivalent basis and noninterest income. Merger expenses incurred in connection with the Heritage acquisition contributed approximately 385 basis points to the efficiency ratio for the third quarter of 2015. We remain committed to aggressively managing our costs within the framework of our business model. We expect the efficiency ratio to continue to improve from levels reported in 2014 from revenue growth while at the same time controlling noninterest expenses.

Income Taxes

Income tax expense for the nine months ended September 30, 2015 and 2014 was $21,601 and $18,944, respectively. The effective tax rates for those periods were 31.56% and 30.10%, respectively. The increased effective tax rate for the nine months ended September 30, 2015 as compared to the same period in 2014 is the result of the Company experiencing improvements in its financial

63

results throughout 2014 and into the nine months ended September 30, 2015, including the contribution from Heritage, resulting in higher levels of taxable income.

Risk Management

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

Inherent in any lending activity is credit risk, that is, the risk of loss should a borrower default. Credit risk is monitored and managed on an ongoing basis by a credit administration department, senior loan committee, a loss management committee and the Board of Directors loan committee. Credit quality, adherence to policies and loss mitigation are major concerns of credit administration and these committees. The Company’s central appraisal review department reviews and approves third-party appraisals obtained by the Company on real estate collateral and monitors loan maturities to ensure updated appraisals are obtained. This department is managed by a licensed real estate appraiser and employs an additional three licensed appraisers.

We have a number of documented loan policies and procedures that set forth the approval and monitoring process of the lending function. Adherence to these policies and procedures is monitored by management and the Board of Directors. A number of committees and an underwriting staff oversee the lending operations of the Company. These include in-house loan and loss management committees and the Board of Directors loan committee and problem loan review committee. In addition, we maintain a loan review staff to independently monitor loan quality and lending practices. Loan review personnel monitor and, if necessary, adjust the grades assigned to loans through periodic examination, focusing their review on commercial and real estate loans rather than consumer and consumer mortgage loans.

In compliance with loan policy, the lending staff is given lending limits based on their knowledge and experience. In addition, each lending officer’s prior performance is evaluated for credit quality and compliance as a tool for establishing and enhancing lending limits. Before funds are advanced on consumer and commercial loans below certain dollar thresholds, loans are reviewed and scored using centralized underwriting methodologies. Loan quality or “risk-rating” grades are assigned based upon certain factors, which include the scoring of the loans. This information is used to assist management in monitoring credit quality. Loan requests of amounts greater than an officer’s lending limits are reviewed by senior credit officers, in-house loan committees or the Board of Directors.

For commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. Loan grades range from 1 to 9, with 1 being loans with the least credit risk. Allowance factors established by management are applied to the total balance of loans in each grade to determine the amount needed in the allowance for loan losses. The allowance factors are established based on historical loss ratios experienced by the Company for these loan types, as well as the credit quality criteria underlying each grade, adjusted for trends and expectations about losses inherent in our existing portfolios. In making these adjustments to the allowance factors, management takes into consideration factors which it believes are causing, or are likely in the future to cause, losses within our loan portfolio but which may not be fully reflected in our historical loss ratios. For portfolio balances of consumer, consumer mortgage and certain other similar loan types, allowance factors are determined based on historical loss ratios by portfolio for the preceding eight quarters and may be adjusted by other qualitative criteria.

The loss management committee and the Board of Directors’ problem loan review committee monitor loans that are past due or those that have been downgraded and placed on the Company’s internal watch list due to a decline in the collateral value or cash flow of the debtor; the committees then adjust loan grades accordingly. This information is used to assist management in monitoring credit quality. In addition, the Company’s portfolio management committee monitors and identifies risks within the Company’s loan portfolio by focusing its efforts on reviewing and analyzing loans which are not on the Company’s internal watch list. The portfolio management committee monitors loans in portfolios or regions which management believes could be stressed or experiencing credit deterioration.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for problem loans of $500 or greater by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For real estate collateral, the fair market value of the collateral is based upon a recent appraisal

64

by a qualified and licensed appraiser of the underlying collateral. When the ultimate collectability of a loan’s principal is in doubt, wholly or partially, the loan is placed on nonaccrual.

After all collection efforts have failed, collateral securing loans may be repossessed and sold or, for loans secured by real estate, foreclosure proceedings initiated. The collateral is sold at public auction for fair market value (based upon recent appraisals described in the above paragraph), with fees associated with the foreclosure being deducted from the sales price. The purchase price is applied to the outstanding loan balance. If the loan balance is greater than the sales proceeds, the deficient balance is sent to the Board of Directors’ loan committee for charge-off approval. These charge-offs reduce the allowance for loan losses. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through the provision for loan losses.

Net charge-offs for the third quarter of 2015 were $587, or 0.04% of average loans, compared to net charge-offs of $4,952, or 0.50% of average loans, for the same period in 2014. The levels of net charge-offs reflect the improved credit quality measures and the Company's continued efforts to bring these problem credits to resolution

The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under the Financial Accounting Standards Board Accounting Standards Codification Topic (“ASC”) 450, “Contingencies.” Collective impairment is calculated based on loans grouped by grade. Another component of the allowance is losses on loans assessed as impaired under ASC 310, “Receivables.” The balance of these loans and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. Other considerations in establishing the allowance for loan losses include economic conditions reflected within industry segments, the unemployment rate in our markets, loan segmentation and historical losses that are inherent in the loan portfolio. The allowance for loan losses is established after input from management, loan review and the loss management committee. An evaluation of the adequacy of the allowance is calculated quarterly based on the types of loans, an analysis of credit losses and risk in the portfolio, economic conditions and trends within each of these factors. In addition, on a regular basis, management and the Board of Directors review loan ratios. These ratios include the allowance for loan losses as a percentage of total loans, net charge-offs as a percentage of average loans, the provision for loan losses as a percentage of average loans, nonperforming loans as a percentage of total loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by officer, community bank and the Company as a whole.

The following table presents the allocation of the allowance for loan losses by loan category as of the dates presented:
 
 
September 30,
2015
 
December 31, 2014
 
September 30,
2014
Commercial, financial, agricultural
$
3,613

 
$
3,305

 
$
3,171

Lease financing
329

 
—

 
2

Real estate – construction
1,661

 
1,415

 
1,382

Real estate – 1-4 family mortgage
13,911

 
13,549

 
10,613

Real estate – commercial mortgage
21,328

 
22,759

 
28,180

Installment loans to individuals
1,209

 
1,261

 
1,221

Total
$
42,051

 
$
42,289

 
$
44,569


For impaired loans, specific reserves are established to adjust the carrying value of the loan to its estimated net realizable value. The following table quantifies the amount of the specific reserves component of the allowance for loan losses and the amount of the allowance determined by applying allowance factors to graded loans as of the dates presented:
 
 
September 30,
2015
 
December 31, 2014
 
September 30,
2014
Specific reserves for impaired loans
$
7,797

 
$
10,762

 
$
8,080

Allocated reserves for remaining portfolio
32,304

 
29,802

 
36,489

Acquired with deteriorated credit quality
1,950

 
1,725

 
$
—

Total
$
42,051

 
$
42,289

 
$
44,569


The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for loan losses at a level that is believed to be adequate to meet the inherent risks of losses in our loan

65

portfolio. Factors considered by management in determining the amount of the provision for loan losses include the internal risk rating of individual credits, historical and current trends in net charge-offs, trends in nonperforming loans, trends in past due loans, trends in the market values of underlying collateral securing loans and the current economic conditions in the markets in which we operate. The Company experienced lower levels of classified loans and nonperforming loans in 2014 and through the first nine months of 2015. In combination with lower levels of classified loans and nonperforming loans, the Company experienced improving credit quality measures that justified a decrease in the provision for loan losses for the nine months ended September 30, 2015 as compared to the same period in 2014. The provision for loan losses was $3,000 and $5,117 for the nine months ended September 30, 2015 and 2014, respectively. For the third quarter, September 30, 2015, the Company recorded $750 of provision expense compared to $2,217 for the same period in 2014

A majority of the loans acquired in the Company’s FDIC-assisted acquisitions and certain loans acquired and not covered under the Company's FDIC loss sharing agreements are accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), and are carried at values which, in management’s opinion, reflect the estimated future cash flows, based on the facts and circumstances surrounding each respective loan at the date of acquisition. As of September 30, 2015, the fair value of loans accounted for in accordance with ASC 310-30 was $329,922. The Company continually monitors these loans as part of our normal credit review and monitoring procedures for changes in the estimated future cash flows; to the extent future cash flows deteriorate below initial projections, the Company may be required to reserve for these loans in the allowance for loan losses through future provision for loan losses. As of September 30, 2015, the Company has increased the allowance for loan losses by $1,950 for loans accounted for under ASC 310-30. First M&F loans covered under ASC 310-30 accounted for $864 of the allowance.

The table below reflects the activity in the allowance for loan losses for the periods presented:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
41,888

 
$
47,304

 
$
42,289

 
$
47,665

Charge-offs
 
 
 
 
 
 
 
Commercial, financial, agricultural
143

 
1,206

 
501

 
1,325

Lease financing
—

 
—

 
—

 
—

Real estate – construction
—

 
—

 
26

 
—

Real estate – 1-4 family mortgage
251

 
1,271

 
1,605

 
4,143

Real estate – commercial mortgage
430

 
3,513

 
2,287

 
4,056

Installment loans to individuals
132

 
112

 
238

 
404

Total charge-offs
956

 
6,102

 
4,657

 
9,928

Recoveries
 
 
 
 
 
 
 
Commercial, financial, agricultural
82

 
103

 
221

 
215

Lease financing
—

 
—

 
—

 
—

Real estate – construction
3

 
6

 
16

 
14

Real estate – 1-4 family mortgage
145

 
751

 
515

 
1,108

Real estate – commercial mortgage
112

 
267

 
581

 
325

Installment loans to individuals
27

 
23

 
86

 
53

Total recoveries
369

 
1,150

 
1,419

 
1,715

Net charge-offs
587

 
4,952

 
3,238

 
8,213

Provision for loan losses
750

 
2,217

 
3,000

 
5,117

Balance at end of period
$
42,051

 
$
44,569

 
$
42,051

 
$
44,569

Net charge-offs (annualized) to average loans
0.04
%
 
0.50
%
 
0.10
%
 
0.28
%
Allowance for loan losses to:
 
 
 
 
 
 
 
Total loans not covered under loss share agreements
0.81
%
 
1.17
%
 
0.81
%
 
1.17
%
Nonperforming loans not covered under loss share agreements
105.68
%
 
121.73
%
 
105.68
%
 
121.73
%


66

The following table provides further details of the Company’s net charge-offs (recoveries) of loans secured by real estate for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Real estate – construction:
 
 
 
 
 
 
 
Residential
$
(3
)
 
$
(6
)
 
$
12

 
$
(14
)
Commercial
—

 
—

 
—

 
—

Condominiums
—

 
—

 
(2
)
 
—

Total real estate – construction
(3
)
 
(6
)
 
10

 
(14
)
Real estate – 1-4 family mortgage:
 
 
 
 
 
 
 
Primary
119

 
337

 
755

 
457

Home equity
(3
)
 
508

 
172

 
830

Rental/investment
12

 
23

 
74

 
453

Land development
(22
)
 
(348
)
 
89

 
1,295

Total real estate – 1-4 family mortgage
106

 
520

 
1,090

 
3,035

Real estate – commercial mortgage:
 
 
 
 
 
 
 
Owner-occupied
283

 
968

 
1,700

 
992

Non-owner occupied
42

 
1,898

 
188

 
1,962

Land development
(7
)
 
380

 
(182
)
 
777

Total real estate – commercial mortgage
318

 
3,246

 
1,706

 
3,731

Total net charge-offs of loans secured by real estate
$
421

 
$
3,760

 
$
2,806

 
$
6,752

Nonperforming Assets

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

Debt securities may be transferred to nonaccrual status where the recognition of investment interest is discontinued. A number of qualitative factors, including but not limited to the financial condition of the underlying issuer and current and projected deferrals or defaults, are considered by management in the determination of whether a debt security should be transferred to nonaccrual status. The interest on these nonaccrual investment securities is accounted for on the cash-basis method until qualifying for return to accrual status. Nonaccruing securities available-for-sale consist of one of the Company’s three investments in pooled trust preferred securities issued by financial institutions, which are discussed earlier in this section under the heading "Investments".


67

The following table provides details of the Company’s nonperforming assets that are not acquired and not covered by FDIC loss-share agreements (“Not Acquired”), nonperforming assets that have been acquired and are covered by loss-share agreements with the FDIC (“Acquired Covered Assets”), and nonperforming assets acquired and not covered by loss-share agreements with the FDIC (“Acquired Non-covered”) as of the dates presented:
 
 
 Not Acquired
 
Acquired Covered Assets
 
 Acquired Non-covered
 
 Total
September 30, 2015
 
 
 
 
 
 
 
Nonaccruing loans
$
14,394

 
$
3,270

 
$
15,924

 
$
33,588

Accruing loans past due 90 days or more
1,133

 
4,143

 
8,338

 
13,614

Total nonperforming loans
15,527

 
7,413

 
24,262

 
47,202

Other real estate owned
13,936

 
3,183

 
19,215

 
36,334

Total nonperforming loans and OREO
29,463

 
10,596

 
43,477

 
83,536

Nonaccruing securities available-for-sale, at fair value
9,963

 
—

 
—

 
9,963

Total nonperforming assets
$
39,426

 
$
10,596

 
$
43,477

 
$
93,499

Nonperforming loans to total loans
 
 
 
 

 
0.89
%
Nonperforming assets to total assets
 
 
 
 

 
1.18
%
 
 
 
 
 

 
 
December 31, 2014
 
 
 
 
 
 
 
Nonaccruing loans
$
18,782

 
$
24,172

 
$
1,443

 
$
44,397

Accruing loans past due 90 days or more
1,406

 
48

 
9,259

 
10,713

Total nonperforming loans
20,188

 
24,220

 
10,702

 
55,110

Other real estate owned
17,087

 
6,368

 
11,017

 
34,472

Total nonperforming loans and OREO
37,275

 
30,588

 
21,719

 
89,582

Nonaccruing securities available-for-sale, at fair value
12,347

 
—

 
—

 
12,347

Total nonperforming assets
$
49,622

 
$
30,588

 
$
21,719

 
$
101,929

Nonperforming loans to total loans
 
 
 
 
 
 
1.38
%
Nonperforming assets to total assets
 
 
 
 
 
 
1.76
%

Due to the significant difference in the accounting for the loans and other real estate owned covered by loss-share agreements and loss mitigation offered under the loss-share agreements with the FDIC, the Company believes that excluding the covered assets from its asset quality measures provides a more meaningful presentation of the Company’s asset quality. The asset quality measures surrounding the Company’s nonperforming assets discussed in the remainder of this section exclude covered assets relating to the Company’s FDIC-assisted acquisitions.

Another category of assets which contribute to our credit risk is restructured loans. Restructured loans are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition and are performing in accordance with the new terms. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. Restructured loans that are not performing in accordance with their restructured terms that are either contractually 90 days past due or placed on nonaccrual status are reported as nonperforming loans.


68

The following table shows the principal amounts of nonperforming and restructured loans as of the dates presented. All loans where information exists about possible credit problems that would cause us to have serious doubts about the borrower’s ability to comply with the current repayment terms of the loan have been reflected in the table below.
 
 
September 30,
2015
 
December 31, 2014
 
September 30,
2014
Nonaccruing loans
$
30,318

 
$
20,225

 
$
21,061

Accruing loans past due 90 days or more
9,471

 
10,665

 
15,552

Total nonperforming loans
39,789

 
30,890

 
36,613

Restructured loans in compliance with modified terms
18,881

 
14,337

 
15,604

Total nonperforming and restructured loans
$
58,670

 
$
45,227

 
$
52,217


Acquired nonperforming loans that are not covered by FDIC loss sharing agreements totaled $24,262 at September 30, 2015 which consisted of $15,924 in loans on nonaccrual status and $8,338 in accruing loans past due 90 days or more. The recent acquisition of Heritage added 24% or $5,729 acquired, non-covered, nonperforming loans at September 30, 2015. At December 31, 2014 nonperforming loans from the acquired non-covered portfolio were $10,702. Excluding the nonperforming loans from acquisitions, nonperforming loans were $15,527 at September 30, 2015 and $20,188 at December 31, 2014. The following table presents nonperforming loans, not subject to a loss-share agreement, by loan category as of the dates presented:

 
September 30,
2015
 
December 31, 2014
 
September 30,
2014
Commercial, financial, agricultural
$
1,649

 
$
1,279

 
$
1,147

Real estate – construction:
 
 
 
 
 
Residential
—

 
200

 
—

Commercial
—

 
—

 
281

Total real estate – construction
—

 
200

 
281

Real estate – 1-4 family mortgage:
 
 
 
 
 
Primary
6,875

 
5,616

 
6,639

Home equity
891

 
944

 
866

Rental/investment
4,138

 
2,884

 
3,397

Land development
1,983

 
558

 
1,458

Total real estate – 1-4 family mortgage
13,887

 
10,002

 
12,360

Real estate – commercial mortgage:
 
 
 
 
 
Owner-occupied
9,030

 
5,413

 
3,688

Non-owner occupied
7,966

 
10,506

 
10,222

Land development
6,731

 
3,398

 
8,790

Total real estate – commercial mortgage
23,727

 
19,317

 
22,700

Installment loans to individuals
107

 
91

 
125

Lease financing
419

 
—

 
—

Total nonperforming loans
$
39,789

 
$
30,889

 
$
36,613


Total nonperforming loans as a percentage of total loans were 0.77% as of September 30, 2015 compared to 0.80% as of December 31, 2014 and 0.96% as of September 30, 2014. The Company’s coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was 105.68% as of September 30, 2015 as compared to 136.91% as of December 31, 2014 and 121.73% as of September 30, 2014. Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at September 30, 2015.

Management also continually monitors past due loans for potential credit quality deterioration. Total loans 30-89 days past due increased to $15,964 at September 30, 2015 as compared to $15,501 at December 31, 2014 and $14,507 at September 30, 2014. The acquisition of First M&F contributed $3,431 to loans 30-89 days past due at September 30, 2015 as compared to $5,132 at December 31, 2014 and $6,691 at September 30, 2014. The acquisition of Heritage contributed $3,934 to loans 30-89 days past due at September 30, 2015.

69


As shown below, restructured loans totaled $18,881 at September 30, 2015 compared to $14,337 at December 31, 2014 and $15,604 at September 30, 2014. At September 30, 2015, loans restructured through interest rate concessions represented 56% 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:

 
September 30,
2015
 
December 31, 2014
 
September 30,
2014
Commercial, financial, agricultural
$
460

 
$
507

 
$
—

Real estate – 1-4 family mortgage:
 
 
 
 
 
Primary
4,091

 
3,230

 
2,992

Home equity
—

 
—

 
—

Rental/investment
1,472

 
1,337

 
1,360

Land development
—

 
—

 
813

Total real estate – 1-4 family mortgage
5,563

 
4,567

 
5,165

Real estate – commercial mortgage:
 
 
 
 
 
Owner-occupied
3,058

 
2,896

 
4,017

Non-owner occupied
9,199

 
5,973

 
6,019

Land development
534

 
394

 
403

Total real estate – commercial mortgage
12,791

 
9,263

 
10,439

Installment loans to individuals
67

 
—

 
—

 
 
 
 
 
 
Total restructured loans in compliance with modified terms
$
18,881

 
$
14,337

 
$
15,604


Changes in the Company’s restructured loans are set forth in the table below:
 
 
2015
 
2014
Balance at January 1,
$
14,337

 
$
21,478

Additional loans with concessions
12,662

 
2,622

Reductions due to:
 
 
 
Reclassified as nonperforming
(331
)
 
(1,895
)
Paid in full
(4,820
)
 
(6,008
)
Charge-offs
(56
)
 
—

Transfer to other real estate owned
—

 
—

Paydowns
(688
)
 
(593
)
Lapse of concession period
—

 
—

       TDR reclassified as performing loan
(2,223
)
 
—

Balance at September 30,
$
18,881

 
$
15,604


Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Other real estate owned” in the Consolidated Statements of Income. Other real estate owned with a cost basis of $10,794 was sold during the nine months ended September 30, 2015, resulting in a net gain of $499, while other real estate owned with a cost basis of $13,564 was sold during the nine months ended September 30, 2014, resulting in a net gain of $97.
The following table provides details of the Company’s other real estate owned as of the dates presented:
 

70

 
September 30,
2015
 
December 31, 2014
 
September 30,
2014
Residential real estate
$
4,452

 
$
4,549

 
$
4,993

Commercial real estate
12,583

 
9,179

 
8,783

Residential land development
4,729

 
4,990

 
6,837

Commercial land development
11,387

 
9,386

 
9,413

Total other real estate owned
$
33,151

 
$
28,104

 
$
30,026


Changes in the Company’s other real estate owned were as follows:
 
2015
 
2014
Balance at January 1,
$
28,104

 
$
39,945

Acquired OREO
6,250

 
—

Transfer of balance to non-covered(1)
3,431

 
—

Additions
8,016

 
5,090

Capitalized improvements
—

 
—

Impairments
(1,831
)
 
(1,315
)
Dispositions
(10,794
)
 
(13,564
)
Other
(25
)
 
(130
)
Balance at September 30,
$
33,151

 
$
30,026


(1)
Represents a transfer of balance on non-single family assets of Crescent Bank & Trust Company. The claims period to submit losses to the FDIC for reimbursement ended July 25, 2015 for non-single family assets.

Interest Rate Risk

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

We have an Asset/Liability Committee (“ALCO”) which is authorized by the Board of Directors to monitor our interest rate sensitivity and to make decisions relating to that process. The ALCO’s goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.

We monitor the impact of changes in interest rates on our net interest income and economic value of equity (“EVE”) using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.

The following rate shock analysis depicts the estimated impact on net interest income and EVE of immediate changes in interest rates at the specified levels for the dates presented:

 

71

 
 
Percentage Change In:
 
 
Net Interest Income(2)
 
Economic Value
of Equity (3)
Change in Interest Rates(1)
(In Basis Points)
 
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
+400
 
2.10
 %
 
0.11
 %
 
14.89
%
 
11.42
 %
+300
 
2.05
 %
 
0.21
 %
 
13.36
%
 
11.53
 %
+200
 
1.64
 %
 
0.12
 %
 
13.50
%
 
10.72
 %
+100
 
0.93
 %
 
(0.03
)%
 
12.81
%
 
9.11
 %
-100
 
(3.86
)%
 
(2.06
)%
 
1.54
%
 
(3.84
)%
 
(1)
On account of the present position of the target federal funds rate, the Company did not perform an analysis assuming a downward movement in rates of more than 100 bps.
(2)
The percentage change in this column represents the projected net interest income for 12 months on a flat balance sheet in a stable interest rate environment versus the projected net interest income in the various rate scenarios.
(3)
The percentage change in this column represents our EVE in a stable interest rate environment versus EVE in the various rate scenarios.

The rate shock results for the net interest income simulations for the next twelve months produce a slightly asset sensitive position at September 30, 2015 as compared to December 31, 2014. The Company’s interest rate risk strategy is to remain in a slightly asset sensitive position with a focus on balance sheet strategies that will result in a more asset sensitive position over time. To accomplish this strategy, the Company has focused on increasing variable rate loan production and generating deposits that are less sensitive to increases in interest rates.  In the third quarter of 2015, variable rate loans as a percentage of total loans originated during the quarter increased as compared to previous periods. Additionally, strong deposit growth in transactional deposits, which are typically less rate sensitive than time deposits, outpaced the runoff in fixed rate time deposits. As demonstrated by the rate shock results for the EVE simulations, our long term interest rate risk position at September 30, 2015 when compared to December, 31, 2014, reflects improved earnings potential and an overall balance sheet shift to a more asset sensitive position.
The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. Thus, the measures do not reflect actions the ALCO may undertake in response to such changes in interest rates. The above results of the interest rate shock analysis are within the parameters set by the Board of Directors. The scenarios assume instantaneous movements in interest rates in increments of 100, 200, 300 and 400 basis points. With the present position of the target federal funds rate, the declining rate scenarios seem improbable. Furthermore, it has been the Federal Reserve’s policy to adjust the target federal funds rate incrementally over time. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results will differ from simulated results.

The Company utilizes derivative financial instruments, including interest rate contracts such as swaps, caps and/or floors, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. The Company also enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At September 30, 2015, the Company had notional amounts of $68,197 on interest rate contracts with corporate customers and $68,197 in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed rate loans.

In March and April 2012, the Company entered into two interest rate swap agreements effective in March 2014. Under these agreements, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest. The agreements, which both terminate in March 2022, are accounted for as cash flow hedges to reduce the variability in cash flows resulting from changes in interest rates on $32,000 of the Company’s junior subordinated debentures. In connection with its acquisition of First M&F, the Company assumed an interest rate swap designed to convert floating rate interest payments into fixed rate payments. Based on the terms of the agreement, which terminates in March 2018, the Company receives a variable rate of interest based on the three-month LIBOR plus a pre-determined spread and pays a fixed rate of interest.

72

The interest rate swap is accounted for as a cash flow hedge to reduce the variability in cash flows resulting from changes in interest rates on $30,000 of the junior subordinated debentures assumed in the merger with First M&F.

On June 5, 2014, the Company entered into two forward interest rate swap contracts on floating rate liabilities at the Bank level with notional amounts of $15,000 each. The interest rate swap contracts are each accounted for as a cash flow hedge with the objective of protecting against any interest rate volatility on future FHLB borrowings for a four-year and five-year period beginning June 1, 2018 and December 3, 2018 and ending June 2022 and June 2023, respectively. Under these contracts, Renasant Bank will pay a fixed interest rate and will receive a variable interest rate based on the three-month LIBOR plus a pre-determined spread, with quarterly net settlements.

The Company also enters into interest rate lock commitments with its customers to mitigate the Company’s interest rate risk associated with its commitments to fund fixed-rate residential mortgage loans. Under the interest rate lock commitments, interest rates for mortgage loans are locked in with the customer for a period of time, typically thirty days. Once an interest rate lock commitment is entered into with a customer, the Company also enters into a forward commitment to sell the residential mortgage loan to secondary market investors. Accordingly, the Company does not incur risk if the interest rate lock commitment in the pipeline fails to close.

For more information about the Company’s derivative financial instruments, see Note J, “Derivative Instruments,” in the Notes
to Consolidated Financial Statements of the Company in Item 1, “Financial Statements,” in this report.

Liquidity and Capital Resources

Liquidity management is the ability to meet the cash flow requirements of customers who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Management continually monitors the Bank's liquidity through review of a variety of reports.

Core deposits, which are deposits excluding time deposits and public fund deposits, are a major source of funds used by Renasant Bank to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring Renasant Bank’s liquidity.

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 21.13% of the carrying value of the total securities portfolio. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At September 30, 2015, securities with a carrying value of $759,810 were pledged to secure public fund deposits and as collateral for short-term borrowings and derivative instruments as compared to securities with a carrying value of $633,599 similarly pledged at December 31, 2014.

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 $377,100 in overnight borrowings from the FHLB at September 30, 2015 compared to $26,300 at December 31, 2014. The increase is attributable to the increased production in Renasant's existing mortgage operations as well as the addition of Heritage's mortgage operations as overnight borrowings are often used to fund these short-term assets. Long-term funds obtained from the FHLB are used primarily 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 September 30, 2015, the balance of our outstanding long-term advances with the FHLB was $54,456. The total amount of the remaining credit available to us from the FHLB at September 30, 2015 was $1,299,220. We also maintain lines of credit with other commercial banks totaling $70,000. These are unsecured lines of credit maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit at September 30, 2015 or December 31, 2014.

The following table presents, by type, the Company’s funding sources, which consist of total average deposits and borrowed funds, and the total cost of each funding source for the periods presented:
 

73

 
Percentage of Total
 
Cost of Funds
 
Nine Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Noninterest-bearing demand
18.78
%
 
17.99
%
 
—
%
 
—
%
Interest-bearing demand
44.44

 
43.36

 
0.17

 
0.20

Savings
7.31

 
6.76

 
0.08

 
0.09

Time deposits
23.95

 
28.27

 
0.66

 
0.82

Long-term FHLB advances
1.06

 
1.39

 
4.16

 
4.17

Other borrowed funds
4.46

 
2.23

 
2.14

 
4.19

 
100.00
%
 
100.00
%
 
0.38
%
 
0.48
%

Our strategy in choosing funds is focused on minimizing cost along with considering our balance sheet composition and interest rate risk position. Accordingly, management targets growth of non-interest bearing deposits. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. We constantly monitor our funds position and evaluate the effect that various funding sources have on our financial position. Our cost of funds has decreased 10 basis points for the nine months ended September 30, 2015 as compared to the same period in 2014 as management improved our funding mix using non-interest bearing or lower costing deposits and repaying higher costing funding including time deposits and borrowed funds.

Cash and cash equivalents were $203,849 at September 30, 2015 compared to $141,594 at September 30, 2014. Cash used in investing activities for the nine months ended September 30, 2015 was $139,531 compared to $157,561 for the nine months ended September 30, 2014. Proceeds from the maturity or call of securities within our investment portfolio were $204,926 for the nine months ended 2015. These proceeds from the investment portfolio were primarily used to fund loan growth or reinvested back into the security portfolio. Proceeds from the maturity or call of securities within our investment portfolio during the nine months ended September 30, 2014 were $190,408. These proceeds were primarily reinvested in the securities portfolio. Purchases of investment securities were $192,032 for the first nine months of 2015 compared to $254,255 for the same period in 2014. The Company had proceeds of $8,444 from the sale of securities available-for-sale during the nine months of 2015 compared to proceeds of $1,099 for the same period in 2014.

Cash provided by financing activities for the nine months ended September 30, 2015 was $52,627 compared to cash used for financing activities of $37,350 for the same period in 2014. Deposits increased $22,035 for the nine months ended September 30, 2015 compared to a decrease in deposits of $78,242 for the same period in 2014.

Restrictions on Bank Dividends, Loans and 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 Bank to transfer funds to the Company in the form of dividends, loans and advances. Under Mississippi law, a Mississippi bank may not pay dividends unless its earned surplus is in excess of three times capital stock. A Mississippi bank with earned surplus in excess of three times capital stock may pay a dividend, subject to the approval of the Mississippi Department of Banking and Consumer Finance. Accordingly, the approval of this supervisory authority is required prior to Renasant Bank paying dividends to the Company.

Federal Reserve regulations also limit the amount Renasant Bank may loan to the Company unless such loans are collateralized by specific obligations. At September 30, 2015, the maximum amount available for transfer from Renasant Bank to the Company in the form of loans was $68,799. The Company maintains a line of credit collateralized by cash with Renasant Bank totaling $3,030. There were no amounts outstanding under this line of credit at September 30, 2015. These restrictions did not have any impact on the Company’s ability to meet its cash obligations in nine months ended September 30, 2015, nor does management expect such restrictions to materially impact the Company’s ability to meet its currently-anticipated cash obligations.

Off-Balance Sheet Transactions
The Company enters into loan commitments and standby letters of credit in the normal course of its business. Loan commitments are made to accommodate the financial needs of the Company’s customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Both arrangements have credit risk essentially the

74

same as that involved in extending loans to customers and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the customer.
Loan commitments and standby letters of credit do not necessarily represent future cash requirements of the Company in that while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. The Company’s unfunded loan commitments and standby letters of credit outstanding were as follows for the periods presented:
 
September 30, 2015
 
December 31, 2014
Loan commitments
$
1,079,625

 
$
706,972

Standby letters of credit
35,921

 
31,804


The Company closely monitors the amount of remaining future commitments to borrowers in light of prevailing economic conditions and adjusts these commitments as necessary. The Company will continue this process as new commitments are entered into or existing commitments are renewed.

Shareholders’ Equity and Regulatory Matters

Total shareholders’ equity of the Company was $1,032,699 at September 30, 2015 compared to $711,651 at December 31, 2014. Book value per share was $25.65 and $22.56 at September 30, 2015 and December 31, 2014, respectively. The growth in shareholders’ equity was primarily attributable to the acquisition of Heritage as well as earnings retention and changes in accumulated other comprehensive income offset by dividends declared.

On September 15, 2015, the Company filed a shelf registration statement with the Securities and Exchange Commission (“SEC”). The shelf registration statement, which the SEC declared effective on that same date, allows the Company to raise capital from time to time through the sale of common stock, preferred stock, depository 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 be required to file with the SEC at the time of the specific offering. The proceeds of the sale of securities, if and when offered, will be used for general corporate purposes as described in any prospectus supplement and could include the expansion of the Company’s banking, insurance and wealth management operations as well as other business opportunities.

The Company has junior subordinated debentures with a carrying value of $94,958 at September 30, 2015, of which $91,770 are included in the Company’s Tier 1 capital. The Federal Reserve Board issued guidance in March 2005 providing more strict quantitative limits on the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital. The new guidance, which became effective in March 2009, did not impact the amount of debentures we include in Tier 1 capital. In addition, although our existing junior subordinated debentures are unaffected, on account of changes enacted as part of the Dodd-Frank Act, any trust preferred securities issued after May 19, 2010 may not be included in Tier 1 capital.

The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that banks must maintain. Those guidelines specify capital tiers, which include the following classifications:
 
Capital Tiers
Tier 1 Capital to
Average Assets
(Leverage)
 
Common Equity Tier 1 to
Risk - Weighted Assets

 
Tier 1 Capital to
Risk – Weighted
Assets
 
Total Capital to
Risk – Weighted
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%



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The following table provides the capital and risk-based capital and leverage ratios for the Company and for Renasant Bank as of the dates presented:
 
 
Actual
 
Minimum Capital
Requirement to be
Well Capitalized
 
Minimum Capital
Requirement to be
Adequately
Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Renasant Corporation:
 
 
 
 
 
 
 
 
 
 
 
Risk-based capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital ratio
$
576,360

 
9.92
%
 
$
377,511

 
6.50
%
 
$
261,354

 
4.50
%
Tier 1 risk-based capital ratio
665,707

 
11.46
%
 
464,629

 
8.00
%
 
348,742

 
6.00
%
Total risk-based capital ratio
712,737

 
12.27
%
 
580,786

 
10.00
%
 
464,629

 
8.00
%
Leverage capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
665,707

 
8.95
%
 
371,970

 
5.00
%
 
297,576

 
4.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Renasant Bank:
 
 
 
 
 
 
 
 
 
 
 
Risk-based capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital ratio
$
639,189

 
11.02
%
 
$
376,872

 
6.50
%
 
$
260,911

 
4.50
%
Tier 1 risk-based capital ratio
639,189

 
11.02
%
 
463,842

 
8.00
%
 
347,882

 
6.00
%
Total risk-based capital ratio
685,565

 
11.82
%
 
579,803

 
10.00
%
 
463,842

 
8.00
%
Leverage capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
639,189

 
8.75
%
 
365,395

 
5.00
%
 
292,316

 
4.00
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Renasant Corporation:
 
 
 
 
 
 
 
 
 
 
 
Risk-based capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital ratio
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
Tier 1 risk-based capital ratio
$
521,135

 
12.45
%
 
$
251,129

 
6.00
%
 
$
167,419

 
4.00
%
Total risk-based capital ratio
566,515

 
13.54
%
 
418,548

 
10.00
%
 
334,839

 
8.00
%
Leverage capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
521,135

 
9.53
%
 
273,289

 
5.00
%
 
218,631

 
4.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Renasant Bank:
 
 
 
 
 
 
 
 
 
 
 
Risk-based capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital ratio
N/A
 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
Tier 1 risk-based capital ratio
$
503,316

 
12.06
%
 
$
250,381

 
6.00
%
 
$
166,921

 
4.00
%
Total risk-based capital ratio
548,124

 
13.13
%
 
417,302

 
10.00
%
 
333,841

 
8.00
%
Leverage capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
503,316

 
9.23
%
 
272,529

 
5.00
%
 
218,023

 
4.00
%

In July 2013, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”) that call for broad and comprehensive revision of regulatory capital standards for U.S. banking organizations. The Basel III Rules implemented a new common equity Tier 1 minimum capital requirement (“CET1”), a higher minimum Tier 1 capital requirement and other items affecting the calculation of the numerator of a banking organization’s risk-based capital ratios. Additionally, the Basel III Rules apply limits to a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of CET1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.

The new CET1 capital ratio includes common equity as defined under GAAP and does not include any other type of non-common equity under GAAP. When the Basel III Rules are fully phased in in 2019, banks will be required to have CET1 capital of 4.5%

76

of average assets, Tier 1 capital of 6% of average assets, as compared to the current 4%, and total capital of 8% of risk-weighted assets to be categorized as adequately capitalized.

Further, the Basel III Rules changed the agencies’ general risk-based capital requirements for determining risk-weighted assets, which affect the calculation of the denominator of a banking organization’s risk-based capital ratios. The Basel III Rules have revised the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity and to incorporate certain international capital standards of the Basel Committee on Banking Supervision set forth in the standardized approach of the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”.

The calculation of risk-weighted assets in the denominator of the Basel III capital ratios has been adjusted to reflect the higher risk nature of certain types of loans. Specifically, as applicable to the Company and Renasant Bank:

— Residential mortgages: Replaces the current 50% risk weight for performing residential first-lien mortgages and a 100% risk-weight for all other mortgages with a risk weight of between 35% and 200% determined by the mortgage’s loan-to-value ratio and whether the mortgage falls into one of two categories based on eight criteria that include the term, use of negative amortization and balloon payments, certain rate increases and documented and verified borrower income.

— Commercial mortgages: Replaces the current 100% risk weight with a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

— Nonperforming loans: Replaces the current 100% risk weight with a 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on nonaccrual status.
The Final Rules also introduce a new capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. In addition, the Final Rules provide for a countercyclical capital buffer applicable only to certain covered institutions. It is not expected that the countercyclical capital buffer will be applicable to Renasant Corporation or Renasant Bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a 4-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

Generally, the new Basel III Rules became effective on January 1, 2015, although parts of the Basel III Rules will be phased in through 2019.


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk since December 31, 2014. For additional information regarding our market risk, see our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

As previously disclosed, on December 31, 2014, a putative stockholder class action lawsuit, Stein v. Heritage Financial Group, Inc. et al., was filed in the Circuit Court for Baltimore City, Maryland, Civil Division (the “Court”), against Heritage Financial Group, Inc. (“Heritage”), the members of its board of directors, HeritageBank of the South, the Company and Renasant Bank. The complaint, which was amended on February 18, 2015, alleged that the Heritage directors breached their fiduciary duties and/or violated Maryland law in connection with the negotiation and approval of the merger agreement by failing to maximize shareholder value and failing to disclose material information in the February 9, 2015 preliminary joint proxy statement/prospectus and that Heritage, HeritageBank of the South, the Company and Renasant Bank aided and abetted those alleged breaches of fiduciary duties. In addition to monetary damages in an unspecified amount and other remedies, the lawsuit sought to enjoin Heritage and Company stockholders from voting on the merger at their respective special meetings and to otherwise enjoin the directors from consummating the merger.

While the defendants believed these actions were without merit, in order to avoid the expense of litigation, Heritage, HeritageBank of the South, the Company and Renasant Bank entered into a Stipulation and Agreement of Compromise and Settlement (“Settlement Agreement”) with the plaintiff in which Heritage, without admission of liability, agreed to make certain disclosures related to the merger agreement in supplemental materials which were filed with the SEC in a Form 8-K on May 18, 2015.  The Settlement Agreement is subject to Court approval after notice to the former shareholders of Heritage. The parties have finalized the settlement documents and submitted the Settlement Agreement to the Court for approval, which may lead to payment of attorney’s fees and costs of $262,500, which would conclude the litigation if accepted by the Court. A hearing is scheduled in November 2015 for the Court to determine if the Settlement Agreement should be approved.

Item 1A. RISK FACTORS
Information regarding risk factors appears in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes in the risk factors disclosed in the Annual Report on Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The Company did not repurchase any shares of its outstanding stock during the three month period ended September 30, 2015.
Please refer to the information discussing restrictions on the Company’s ability to pay dividends under the heading “Liquidity and Capital Resources” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this report, which is incorporated by reference herein.


















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Item 6. EXHIBITS
 
Exhibit
Number
 
Description
 
 
(2)(i)
 
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, First M&F Corporation and Merchants and Farmers Bank dated as of February 6, 2013(1)
 
 
(2)(ii)
 
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, Heritage Financial Group, Inc. and HeritageBank of the South (2)
 
 
 
(2)(iii)
 
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, and KeyWorth Bank dated as of October 20, 2015
 
 
 
(3)(i)
 
Articles of Incorporation of Renasant Corporation, as amended(4)
 
 
(3)(ii)
 
Restated Bylaws of Renasant Corporation, as amended (5)
 
 
(4)(i)
 
Articles of Incorporation of Renasant Corporation, as amended(4)
 
 
(4)(ii)
 
Restated Bylaws of Renasant Corporation, as amended (5)
 
 
 
(31)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(31)(ii)
 
Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(ii)
 
Certification of the Principal Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(101)
 
The following materials from Renasant Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited).
 
(1)
Filed as exhibit 2.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on February 11, 2013 and incorporated herein by reference.
(2)
Filed as exhibit 2.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on December 15, 2014 and incorporated herein by reference.
(3)
Filed as exhibit 2.1 to the Form 8-K of the Company filed with the Securities and Exchange Commission on October 23, 2015 and incorporated herein by reference.
(4)
Filed as exhibit 3.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 9, 2005 and incorporated herein by reference.
(5)
Filed as exhibit 3(ii) to the Company's Form 10-Q filed with the Securities and Exchange Commission on May 8, 2013 and incorporated herein by reference.
The Company does not have any long-term debt instruments under which securities are authorized exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will furnish to the Securities and Exchange Commission, upon its request, a copy of all long-term debt instruments.

79

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
RENASANT CORPORATION
 
 
(Registrant)
 
 
 
Date:
November 9, 2015
/s/ E. Robinson McGraw
 
 
E. Robinson McGraw
 
 
Chairman of the Board, Director,
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date:
November 9, 2015
/s/ Kevin D. Chapman
 
 
Kevin D. Chapman
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)

80

EXHIBIT INDEX
 
Exhibit
Number
 
Description
 
 
(31)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(31)(ii)
 
Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(i)
 
Certification of the Principal Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(32)(ii)
 
Certification of the Principal Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(101)
 
The following materials from Renasant Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited).

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