Renasant Corporation

Good morning, this is John Oxford with Renasant Corp., and thank you for joining us for Renasant Corp.' s first quarter 2012 earnings conference call.

Participating in this call with us today are members of Renasant Corp.' s executive management team.

Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risks and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.

Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results over time.

And now, I'll turn the call over to Renasant Chairman and CEO, E. Robinson McGraw.

Good morning, and welcome to our first quarter 2012 conference call. We believe our first quarter 2012 financial results reflect our continued focus in several key areas, specifically generating new business and working aggressively through the remainder of our problem credits.

Looking back at the progress we've made over the last 12 months, it's noteworthy that we have grown loans for 3 conservative quarters and increased noninterest-bearing core deposits over 10% while reducing our nonperforming loans 47%. We also experienced a decrease in our 30 to 89 days past due loans in other real estate owned during the same period.

Capitalizing on new market entrances over the past 12 months, we've taken advantages of many opportunities to enhance our long-term profitability and expand our footprint in product delivery by way of de novo and acquisitions throughout the Southeast.

In recapping our new market opportunities over the past 12 months, during the first quarter of '11, the company successfully completed its conversion of the operations of Crescent Bank & Trust of Jasper, Georgia, which was acquired in '10. In February '11, the company acquired the former American Trust Bank in Roswell, Georgia from the FDIC as the receiver of American Trust.

On July 1 of '11, the company announced its entrance into the Montgomery, Alabama market just 2 days after it announced that it entered into an agreement to acquire RBC Birmingham-based trust division. Finishing out our new market entrances, the company entered both the Starkville, Mississippi and Tuscaloosa, Alabama markets in late '11.

During the first quarter of '12, net income was approximately $5.9 million as compared to approximately $5.7 million for the fourth quarter of '11 and $7.5 million for the first quarter of '11.

Let me remind you that during the first quarter of '11, we recognized a pretax gain of $8.8 million and a pretax merger-related cost of $1.3 million in connection with the American Trust FDIC-assisted acquisition. Basic and diluted EPS were $0.24 for the first quarter of '12 as compared to EPS of $0.23 for the fourth quarter of '11 and $0.30 for the first quarter of '11.

Net interest margin increased 30 basis points to 3.85% for the first quarter of '12 as compared to 3.55% for the first quarter of '11. Net interest income was $32.8 million for the first quarter of '12, a 5.62% increase from $31 million for the first quarter of '11.

Our increase in margin and net interest income was partly due to improvements in asset mix, including an increase in loans, a decrease in nonaccrual loans and a decrease in cash. We also saw improvements in our liability mix, which included an increase in DDA, savings and money market balances and a decline in borrowed funds and time deposits.

Noninterest income was $16.4 million for the first quarter of '12 as compared to $21 million for the first quarter of '11. Noninterest income for the first quarter of '11 included a onetime gain of $8.7 million recognized in connection with the American Trust acquisition.

Included in first quarter '12 noninterest income was a $904,000 gain from the sale of mortgage-backed securities that were at risk of accelerated prepayments. We utilized these funds to pay our Federal Home Loan Bank borrowings that included an $898,000 prepayment penalty.

Wealth management income totaled $1.9 million for the first quarter of '12, up $885,000 as compared to $1.1 million for the same period in '11, reflecting the full impact of the company's trust acquisition. Our diversified sources of noninterest income, such as mortgage and wealth management, have helped augment reductions in other areas of noninterest income due to recently enacted regulatory requirements.

Noninterest expense was $36.6 million for the first quarter of '12 as compared to $35.9 million for the first quarter of '11. Included in the first quarter of '12 and '11 were $898,000 and $1.9 million, respectively, in prepayment penalties related to the early extinguishment of high cost borrowings.

Salaries and employee benefits were $18.6 million during the first quarter of '12 as compared to $16.2 million during the first quarter of '11. This increase is primarily attributable to the additional personnel from our de novo branching activities and our trust acquisition.

Also contributing to this increase was higher-than-anticipated health insurance costs. Total assets at March 31, '12, were approximately $4.18 billion as compared to $4.2 billion on a linked quarter basis.

At quarter end, our Tier 1 leverage capital ratio was 9.38%, Tier 1 risk-based capital ratio was 13.34% and total risk-based capital ratio was 14.59%, and each case, in excess of regulatory well-capitalized thresholds.

Through prudent capital and balance sheet management, we continue to enhance our strong capital position as evidenced by our tangible capital ratio which was 7.47% at March 31 of '12, an 81 basis point increase over the prior year. Our capital and related ratios are at levels which we believe adequately support future growth while at the same time allowing us to maintain our dividend.

Total loans, which include both loans covered and not covered under FDIC loss-share agreements were approximately $2.6 billion at the end of the first quarter of '12 as compared to $2.58 billion at December 31 of '11. Loans not covered under loss-share agreements were $2.28 billion at March 31, '12, as compared to $2.24 billion at December 31 of '11, representing a 1.8% linked quarter growth, which annualizes to an approximate growth rate of 7.20%.

Loans covered under the FDIC loss-share agreements decreased to $318 million at March 31 of '12 as compared to $339 million on December 31 of '11.

In our Alabama market, loans increased $17 million, which represents the eighth time in the last 9 quarters that Alabama has achieved net loan growth. Our Mississippi market also grew loan $17 million, representing its third straight quarter of net loan growth.

In Georgia, new loan production is keeping pace with intended runoffs from the loss-share portfolios. And in Tennessee, our loan production is close to offsetting payoffs and paydowns.

Total deposits were $3.47 billion at March 31 of '12, as compared to $3.41 billion at December 31 of '11. We continue to improve our deposit mix by replacing higher costing funds with lower costing core deposits as evidenced by 10.13% growth in noninterest-bearing deposits as of March 31 of '12 compared to March 31 of '11.

The result of these continued changes to our funding mix, coupled with a reduction in borrowed funds, has reduced our cost of funds 47 basis points to 84 basis points for the first quarter of '12 as compared to 131 basis points for the first quarter of '11. So loans and other real estate owned acquired and FDIC-assisted transactions recorded a fair value, which includes an estimated impairment.

Nonperforming assets covered under FDIC loss-share agreements totaled $115.3 million at March 31 of '12, down from $132.3 million at December 31 of '11 and $145.8 million at March 31 of '11. Furthermore, the loss-share agreements with the FDIC as well as our adjustments to the balances of these acquired assets to record them at fair value provide substantial protection against loss on these assets.

Nonperforming loans covered under FDIC loss-share agreements totaled $79.8 million at March 31 of '12, down 8% year-over-year and 10.5% quarter-over-quarter. OREO under FDIC loss-share agreements was $35.5 million on March 31 of '12, down 40% year-over-year and 18% quarter-over-quarter.

The remaining discussion in this call on nonperforming loans, OREO and related asset quality ratios exclude these assets covered under FDIC loss-share agreements.

The company's coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was approximately 145% on December 31 (sic) [March 31] of '12, as compared to 127% on December 31 of '11 and 83% at March 31 of '11. The allowance for loan losses as a percentage of loans was 1.94% on March 31 of '12, as compared to 198 basis points on December 31 '11 and 2.17% at March 31 of '11.

We recorded a provision for loan losses of $4.8 million for the first quarter of '12 as compared to $6 million for the fourth quarter of '11 and $5.5 million for the first quarter of '11. Annualized net charge-offs as a percentage of average loans were 0.76% for the first quarter of '12 as compared to 1.56% for the fourth quarter of '11 and 0.54% for the first quarter of '11.

Our nonperforming loans were at $30.4 million March 31 of '12, down from $34.9 million December 31 of '11, and $57.2 million on March 31 of '11.

Furthermore, loans 30 to 89 days past due as a percent of total loans remained at precredit cycle levels and were 59 basis points on March 31 of '12, compared to 71 basis points on December 31 of '11 and 86 basis points on March 31 of '11.

OREO was $64.9 million March 31 of '12, compared to $70 million on December 31 of '11, and $71.4 million on March 31 of '11. We continue to aggressively work to market OREO and currently have approximately $9.5 million of OREO under purchase agreements of which $33.6 million scheduled to close during the second quarter of '12.

We're especially pleased to continue to see positive trends in our credit quality. During the first quarter of '12, nonperforming loans decreased 13% and 47% on a linked quarter and year-over-year comparison, respectively, and nonperforming assets decreased 9% and 26% on a linked quarter and year-over-year comparison, respectively.

In addition, our nonperforming loans as compared to total loans are at their lowest level since the second quarter of '07. At the same time, our coverage ratio, which was approximately 145%, is at its highest level since the fourth quarter of '07.

In conclusion, we are pleased with our first quarter of '12 results as we grew loans and core deposits, improved our credit metrics, maintained capital ratios and excessive ratios considered to be well capitalized, and began to see the positive impact of our new hires and new market entrances.

Now, Emily, I'll turn it back over to you for questions.

Robin, I want to see if you could talk a little bit about the movement in OREO. What type of OREO properties were you able to move out this quarter?

I know last quarter, you had about $36 million in residential land development properties in OREO. Are you able to move these properties out or are you seeing more movement in your vertical properties?

Catherine, actually we're seeing a combination. A lot of the property that we have under contract that closed this quarter and will close in future quarters, a large portion of that $9 million, and then we have additional contractual property to close in, in 2013.

Over and above that $9 million is in fact coming from our land development area. We are in fact seeing nice movement in lots across the system.

Recently, Memphis has been a really good area that we've seen lots moving. In fact, we've had some undeveloped land under contract in Memphis for next quarter also, which is the second phase of a subdivision, which all the lots have either closed or will close during the course of the second quarter this year.

This is starting to actually, say, roll over into DeSoto County as we're beginning to see contracts come in on some lots in the DeSoto County market also. Not to the large extent that we're seeing in Memphis, in Nashville, in Birmingham and some of the other areas, but we are in fact seeing that happen.

In addition to property, we've mentioned that we have under contract in the noncovered area, we have about $7.9 million -- $8.9 million under contract in Georgia to close. So we're seeing under last year [ph], we are in fact seeing some real progress in that area, in all places, Catherine.

And maybe as a follow-up, did your classified loans also see a positive decline?.

Yes, we have. Let me let Claude Springfield comment on our watchlist.

Actually, our watchlist over the past 2 years has decreased, dollar-wise, about 33%. Of that decrease, 20% came in a year-over-year basis, so it's been trailing down rather nicely.

I think with the decline in the watchlist that we're seeing, which is -- has been rather substantial over that timeframe. And obviously, our early stage delinquencies are at extremely low levels for the times that we're in.

And the decline in our nonperforming loans -- we're optimistic on the direction we're going from a credit standpoint.

A couple of questions, just first on the expenses. If we take out the debt extinguishment penalty, I guess, on a core basis, you're at roughly $31.7 million in noncredit expenses for the quarter.

I know seasonally sometimes the first quarter is a little high. How should we think about that run rate?

Is that a good run rate? Should we be thinking it'll be at lower in the next quarter as we model going forward?

Kevin, I'm going to let Stuart answer that.

Kevin, this is Stuart. On our run rate going forward, the 36 that we were using, that's going to be a little higher.

We expect -- even considering other real estate at the amount that we had expensed during the quarter, we'll be -- we should be down $600,000, $700,000 we expect in the second quarter versus the first quarter.

Okay, so that's including the OREO expenses in there as well?

That's leaving those because that's the expense that will vary from quarter to quarter. We typically run about $300,000, $350,000 cost of carry.

So -- but dependent upon the sales that we've got and what those gains and/or losses would be, that's leaving that number at about $3.5 million that's embedded in the second quarter that we incurred in the first quarter.

And, Kevin, on that OREO, the $3.6 million under contract for the second quarter is basically at a breakeven. And one other item, you'd mentioned the seasonality.

In the first quarter, we also had a tick up in FICA taxes compared to the fourth quarter. That was up about $260,000.

That will trend down during the year.

Okay. Good.

And I just want to clarify, Stuart, your comments about it being down $600,000 to $700,000, that's excluding the debt extinguishment penalty, right, from this quarter?

That would be taking that one out, yes.

Right. Okay.

And then just as a quick follow-up, I noticed other noninterest income jumped up a little over $1 million linked quarter. Just trying to get a feel for what that is.

I don't know if that's just more of the follow-on from some of the past acquisitions or market entries, or if it's having to do with the FDIC-assisted deals?

Okay. On the fee income?

Yes, the other noninterest income on a linked quarter basis? Other, other?

I guess part of that is going to be some seasonal stuff too. For example, our site deposit March ramp, we normally get the bulk of that in the first quarter compared to other quarters.

We did have a claim settlement -- insurance settlement on our Smithville branch that's embedded into those numbers as well. That's roughly about $0.5 million.

So we shouldn't assume next quarter it's going to be necessarily this high, right?

No.

And lastly just -- if you guys could give us a sense on your outlook for the margin going forward. You guys have been focusing a lot on reducing funding cost, but I know it's a difficult environment on the yield side.

So if you can just give us a sense for how you're thinking there.

Kevin, this is Jim Gray. I think we should see pretty much through the year what we saw in the first quarter margin being flat but net interest income improving as we grow loans and grow core deposits and kind of releverage our balance sheet and continue improving our mix.

Of course, I believe we'll continue to see nonaccrual loans go down, so reducing those nonearning assets. We have continued to see a conversion of FDIC loss-share receivables -- reimbursement receivables into cash.

We'll continue to get those certificates funded from the FDIC. I think in the second quarter particularly, we'll get the full impact of the $50 million borrowing that repaid, basically, the last day of March.

So we got basically no benefit from that in the first quarter. With the -- unwind on the home loan bank strategy, we did -- where we sold the bonds and repaid the advances, that's another $24 million in borrowings that we won't have in the second quarter.

And we have -- although not reflecting completely for the first quarter numbers, we have brought our cash down significantly, down to target levels, and so we should realize the benefit of the redeployment of that cash. And one other point, mentioning the liability side, the CD repricing, we do surprisingly continue to benefit on CD repricing about 50 basis points from what is repricing.

When we look at what's repricing over the next 90 days versus what we are -- what our new and renewed CD rates are, about 50 basis points improvement there, although that's primarily offsetting the decline on the loan yields. I think again, just margin flat, but net interest income continuing to improve throughout the course of the year.

Just a follow-up to the fee income and expense questions from Kevin. As I look at the wealth management income, it was up obviously pretty nicely this quarter.

How much of the sequential increase in expenses was kind of tied to that in salaries expense?

Are you talking specifically to the wealth management?.

Yes. I mean, was there operating leverage in the wealth management business or did you see a commensurate increase in salaries expense with the growth in trust income.

Yes. In salaries, you are going to see a little bit of a lift, some from trust but also in mortgage.

It being commission based, you are going to see a little bit of lift, particularly if you look at our mortgage income compared to prior years. As it relates to the trust, if you look at that $1.5 million run rate from the fourth quarter, in the first quarter, we had $1.9 million.

We did have -- we have the receivable that we were able to collect on that came from the acquisition, so that receivable is roughly $300,000. That will not be -- we will not have that run rate in future periods.

Okay. So it would be closer to the $1.5 million then is kind of what you're saying.

Yes.

And then kind of -- what's the outlook there in kind of expanding the trust business, and kind of where do you stand now that you've had a couple of months behind you since the acquisition?

Actually, in both Mississippi market and the Alabama Georgia markets, we are in fact seeing new trust income coming in as we bring in new accounts in both areas. We've expanded the Mississippi to our Columbus and Starkville markets with hiring of some trust professionals in those markets.

And we're beginning to see quite a bit of assets under management moving in those markets. In addition to that, prior to our acquisition of the RBC division, they basically were kept from expanding their assets under management there, and they've been out bringing in new business in those markets too.

So not only in the RBC acquisition, but we should see additional income revenue coming in from that trust and investment area across our system.

Okay. And then if I can just on a separate topic, one final question.

Obviously, loan growth is picking up a little bit here for you guys and credit is improving. So how should we think about the pace of provisioning in relation to charge-offs?

I mean, would we actually expect to see you provision for growth or would you actually expect to see more reserve release as the credit improves over the next couple of quarters?

I think what you will be seeing is we feel like our charge-offs will be on a decline during the course of the year. I think we'll be more heavily weighted in charge-offs the first half of the year than the second half of the year.

We will, in fact, obviously continue to provide for loan growth. And you should see or continue to see a gradual decline in provision.

We're not going to have a huge reserve release at any point in time, I don't believe, but you'll continue to see a gradual as we're continuing to be very conservative as we look at the future. We're pleased to have seen our coverage ratio almost double over the past 12 months, and so we want to be able to continue to keep that at a pretty good level, but we will, based on the loan growth we anticipate, continue to provide for the new loans more so than for problem credits, I guess would be the best way to say it.

So far during the earnings season, you have heard a lot of your competitors sort of bemoan the fact that some of the super regionals are sort of diving down for some of the more prime credits on the commercial side there. I'm just wondering if you could maybe give us an update on what you're seeing on loan yields on your legacy portfolio versus the cover portfolio and how the pipeline is looking across your various markets?

Well, talk a little bit about pipelines, Mitch, you want to mention pipelines and then we'll give you a little rundown on the roll-in rates on new loans?

Sure, Dave. Currently in the 30-day pipeline, we have $48 million.

And if you break that down by state, 34% of that would be in Alabama, 14% in Georgia, 23% in Tennessee and 29% in Mississippi.

And talking about loan rates as we look at our roll-in levels. Stuart?

Yes. What we're seeing, and this is both blended on a fixed and variable basis, we're seeing roll-in rates in the 480s on a composite basis.

Obviously, fixed rate has been higher and durable but on a blended basis, that's about what we're seeing. We are seeing competition certainly in some of the Metropolitan areas more aggressively than some of the less urban areas.

Basically, Dave, we're seeing in Tennessee, still competitive -- actually Nashville had net loan growth this quarter. Memphis was down a bit.

They had about $8 million of loans paid off for other banks, but in Memphis especially, we've seen cash-rich customers coming in and paying down their lines. We saw about $4 million or $5 million of lines paid down in Memphis due to excess cash there.

I'm going to let Mike Ross talk a little bit about Alabama and Georgia.

In terms of loan yields, we're seeing -- we're certainly seeing pricing pressure. However, a lot of the business that we are getting is -- in the commercial and industrial area is more relationship driven.

And with a lot of our new bankers that we have added to our teams, they have long relationships with customers that are not nearly as price sensitive as they are relationship oriented, and so we're seeing nice growth from those areas. And frankly, as we're looking on our pipelines, we don't see that trend.

We don't see that trend changing certainly in the foreseeable future.

Is there any sort of like a commonality in terms of the types of borrowers that are starting to draw down lines or seeking out for loans? I mean, you mentioned Memphis having some improvement there, anything happening I guess just specifically to those markets in terms of the economic environment?

Or is it the low-cost environment that's enticing borrowers off the sidelines? Any sort of commonality you're seeing?

We are seeing the economy improve in Tennessee, and I think we're seeing it improve in all of our states quite frankly. I think this is evidenced by the movement we're seeing in our OREO portfolio, and also in our development loans, we're seeing a lot of lot sales and pick up in those areas also.

So we are feeling some improvement across the 4 state region that we're in. And I believe that has a bearing on some of the -- with the low rate environment we're in, we're finding a lot of our customers are deciding that, "I can't do anything with the cash so might as well pay down my loans."

Robin, the bank has been pretty active in hiring new lenders over the last few years, core markets, newer markets, all over your footprint. Do you think the bank is now at a point where you want to kind of pause and see some more production out of these new teams?

Or would you say you're still out there hitting the pavements and looking for new lenders in some of your markets today?

Well, a combination, Matt. We're looking for -- in a lot of our markets, we're replacing -- what we're seeing happen is, as our credit situation improves, we're seeing a lot of our workout people, some of whom were seeing C&D-type lenders, moving out and we're seeing more relationship managers coming in.

So that's not -- that's more of a replacement into a producer because we're not looking for construction -- I mean, development-type lenders right now. So in that particular case, it's through attrition we're replacing in.

And for the most part, we'll see that in our existing markets. Obviously, if an opportunity presents itself for a similar type of situation as to what we've had in some other markets, we'll take advantage of it.

We've been more in a position where we've been sought out than we're out just actually looking. So we're -- obviously, we'll take advantage of any opportunities as they present themselves on relationship managers in or outside of our markets.

But as we look within, it would be more of a replacement-type situation with a producer as opposed to someone whom in the past is -- or the last few years has been working on the work outside.

Okay. That's helpful.

And then this is a follow-up on the credit side. I may have missed this, but did you give us an update on the current balance of the TDRs as of March 31?

Sure. Corky will give you that.

Matt, our TDRs are virtually flat from the prior quarter. We showed a balance at the end of first quarter of about $35.7 million, and this was down from $36.3 million the prior quarter.

These are all accruing and are performing. I don't think they're any -- over 30 days past due in that group.

Oh, there were none.

There were none past due.

I think you've touched on loan demand by region and all that, but can you maybe talk a little bit about your outlook for acquisitions. And I apologize if you already have to some extent, but -- again, I called a little bit late.

But if you look across your footprint, where do you think there might be opportunities down the line to pick up additional pieces of franchise at the margin? And then I've got a follow-up question about the local conditions in and around Memphis.

Okay. We, obviously, we would be interested in either open or FDIC-assisted opportunities across our 4 state region.

We're obviously like a lot of others. Receiving inbound calls, most of which we don't follow up on.

And we're still looking to see if, in fact, there will be some opportunities on the FDIC-assisted side, although those have become very competitive at this stage of the game. So we do think that there will be, over the next 6 to 18 months, opportunities that will present themselves on the open side.

Okay. And then I guess a question on the local conditions around here in Memphis and North Mississippi, DeSoto County, I know that actually over the past several quarters, if you've been tracking the unified school system battle in Memphis or what that would -- may or may not mean.

But if you're recently seeing sort up 100% sales volumes in some of the municipalities, at some point, does that -- do you think that does spill over into a DeSoto County and as people move from Shelby County down there to avoid the school system situation? And what do you think that does to sort of the inventories down there?

We're starting to feel a trickle down there, and I guess trickle would be the best word for it. We're very pleased with what we're seeing in Memphis right now, which has been a very pleasant change on a year-over-year basis.

But we are beginning to see just a little trickle-down effect into DeSoto County. So in answering your question, I think that, that will accelerate as time goes on based on the school situation that you mentioned.

Thank you, Emily. We appreciate everyone's time and interest in Renasant Corp.

and look forward to speaking with each of you again in the future. Bye-bye.