Renasant Corporation

Good morning, everyone, and thank you for joining us for Renasant Corporation's third quarter 2012 earnings conference call. Participating in this call today are members of Renasant Corporation's executive management team.

Before we begin, let me remind you that some of our comments during the 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 to future operating results over time.

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

Thank you, John. Good morning, and welcome to our third quarter 2012 earnings conference call.

During the third quarter of '12, we continued to experience strong growth in loans, noninterest-bearing demand deposits and noninterest income, especially from our mortgage and wealth management divisions, all of which helped drive our increase in earnings per share.

We were especially pleased in accomplishing loan growth throughout all regions of our footprint for the second consecutive quarter. Although the majority of our loan growth came from our non-de novo markets, we're excited about the potential opportunity for future growth from all of our new market operations as they continue to build on their loan portfolios.

Looking at our financial performance for the third quarter of '12, net income was approximately $7 million, or basic and diluted earnings per share of $0.28, as compared to $65 million, or basic and diluted earnings per share of $0.26 for the third quarter of '11. Net interest income was $33.1 million for the third quarter of '12, as compared to $32.9 million for the same period in '11.

Net interest margin was 3.94% for the third quarter of '12 as compared to 3.92% for the third quarter of '11. In addition, our cost of funds decreased to 68 basis points as compared to 99 basis points for the third quarter of '11.

The reduction in our funding cost has been driven by the low interest rate environment and our focus on restructuring our deposit mix. Reflecting this, our noninterest-bearing deposits represent 16.3% of total deposits at September 30 of '12 as compared to 14.8% at September 30, '11.

Noninterest income was approximately $18 million for the third quarter of '12 compared to $18.4 million for the third quarter of '11. During the third quarter of '11, however, we had a gain on the sale of securities of approximately $5 million and a $570,000 gain from our RBC Birmingham-based trust unit acquisition.

It is worth noting that when excluding the gains from the sale of securities in the trust unit acquisition during the third quarter of '11, noninterest income grew approximately 41% during the third quarter of '12 as compared to the same period in '11.

We experienced strong revenue from diverse noninterest income sources, including fees and commissions from loans, mortgage operations, wealth management and insurance products, as well as service charges on deposit accounts.

Noninterest expense was approximately $38.6 million for the third quarter of '12 as compared to $36.9 million for the third quarter of '11. This increase in noninterest expense during the third quarter of '12 as compared to the third quarter of '11 is primarily attributable to commissions paid on mortgage loan originations and expenses related to the addition of our East Tennessee de novo operations.

The company's Tier 1 leverage capital ratio was 9.90%, and its Tier 1 risk-based capital ratio was 12.73% and total risk-based capital ratio was 14% at September 30 of '12. All of our regulatory capital ratios continue to be in excess of the required regulatory minimums to be classified as well-capitalized.

In addition, our tangible common equity ratio was 7.69% at September 30 of '12.

Total assets as of September 30 of '12 were approximately $4.16 billion, down slightly from the December 31, '11.

Although total deposits remain flat at $3.4 billion at September 30 of '12, we continue to experience an improvement in our mix of deposits during this period, as noninterest-bearing deposits increased $22.7 million or 4.3% as compared to December 31, '11.

Total loans, which include both loans covered and not covered under FDIC loss-share agreements were approximately $2.8 billion at September 30 of '12 as compared to $2.6 billion at December 31, '11. Loans not covered under loss-share agreements, or noncovered loans, were $2.5 billion at September 30 of '12, an increase of 13.3% for the first -- over the first 3 quarters of '12.

Our increase in loans for the third quarter of '12 represents the fifth consecutive quarter of loan growth. Furthermore, our annualized growth rate of 24% for the third quarter of '12 represents our second consecutive quarter of double-digit annualized growth for noncovered loans.

In addition, our new market operations in Alabama, Mississippi and Tennessee contributed $64.4 million in loan growth during the third quarter of '12.

In our Alabama market, loans increased $37.2 million, which represents the 10th time in the last 11 quarters that Alabama has achieved net loan growth. Net loans in our new Alabama markets of Montgomery and Tuscaloosa total $81 million.

In addition, Montgomery and Tuscaloosa has approximately $31 million in deposits at September 30 of '12, of which over 50% are non-interest-bearing.

In Georgia, noncovered loans totaled $124.5 million at quarter-end. Georgia's $26 million in loan growth during the quarter nearly offset the $29 million in runoffs of covered loans.

In Tennessee, our net loan growth was $40 million for the third quarter of '12. In our new Eastern Tennessee market, our loans totaled $28 million during the third quarter of '12.

It's worth noting that in Nashville, Tennessee, the Hospital Corporation of America, known as HCA, is creating roughly 2,000 jobs over the next 5 years as it expands in Davidson County. The development is estimated to be the largest creation of jobs in Nashville by a single economic expansion since the early '90's.

The project will allow for construction to begin on a high-profile commercial real estate project known as West End Summit. The twin 20-storey towers are a $200 million investment.

This is an exciting announcement for the future growth of our Middle Tennessee market, as we have a location in close proximity to the future towers.

Within our Mississippi market, loans grew $46 million, representing our fifth straight quarter of net loan growth. In our new Mississippi markets of Columbus and Starkville, loans totaled $57 million, and deposits totaled $60 million as of September 30 of '12.

In North Mississippi, Toyota recently announced the completion of its 100,000th Corolla being assembled in its plant. Toyota and its suppliers continue to provide a majority -- a major impact -- economic impact to our North Mississippi markets.

Looking at our loan pipeline and our new markets moving forward, we see a strong inventory that we expect will continue to provide new loan growth in future markets. Nonperforming loans and OREO, or nonperforming assets covered under the loss-share agreements, total $64.1 million and $41.6 million, respectively, at September 30 of '12, a decrease of approximately 20.1% from December 31 of '11.

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

We recorded a provision for loan losses of approximately $4.6 million for the third quarter of '12, as compared to $5.5 million for the third quarter of '11. Annualized net charge-offs as a percentage of average loans were 77 basis points for the third quarter of '12, as compared to 70 basis points for the third quarter of '11.

The allowance for loan losses as a percentage of loans was 1.74% on September 30 of '12 as compared to 1.98% at December 31, '11. Loans 30-to-89 days past due as a percentage of total loans were 56 basis points as of September 30 of '12 as compared to 71 basis points on December 31, '11.

Nonperforming loans declined to $32 million at September 30 of '12 as compared to $35 million at December 31, '11. Restructured loans totaled $30.9 million at December 31 -- excuse me, September 30 of '12 as compared to $36.3 million on December 31, '11.

On a linked-quarter basis, our nonperforming loans-to-total loans increased 1 basis point to 1.26%. This increase is attributable to 2 restructured loans being placed on nonaccrual during the third quarter of '12.

OREO was approximately $48.6 million on September 30 of '12 as compared to $70.1 million on December 31, '11, which is a 31% reduction in OREO over this same time period. During the third quarter, we sold a total of approximately $10.8 million in OREO, and currently have approximately $3.2 million under contract for sale during the fourth quarter of '12.

Moving into the fourth quarter, we're anticipating a strong finish to 2012 as we build up the momentum generated from our continued loan growth, increase in mortgage and wealth management revenue and our decrease in nonperforming assets. These positive metrics, along with the addition of our new markets, help us prepare to capitalize on future opportunities as they present themselves.

Now, Candice, I'll turn it back over to you for any questions anyone may have.

Robin, do you have what your loan yields did quarter-over-quarter and if we've got the average earning asset number.

Sure. Jim Gray will answer that, Catherine.

Catherine, our second quarter loan yield was 5.29%, third quarter was 5.16%, so 13-basis point decrease.

Got it. So then most of the decline in your asset yields and looks like it's coming from your securities portfolio.

That's correct, Catherine. We had pretty hefty prepayments on mortgage-backed securities, and the premium amortization associated with that brought down the yield on the investment portfolio.

And do you have that yield handy?

Yes. The portfolio yield for the third quarter was a 3.52% versus a 3.66% for second quarter.

Okay, great. And then any color on the tax rate?

It would seem very low this quarter at about 11%. Any color around that?

And then what do you expect for the fourth quarter tax rate?

Catherine, Stuart will answer that one.

Catherine, I'd like to tie a couple of things together in response to that. The tax rate is lower because we've taken -- we filed our tax return during the third quarter.

With that, we had received some late K-1s from some tax credits that were due, and we ended up having to file some amended returns to take care of that. So with that, we had about $400,000 and some odd credit to tax expense during the quarter.

We also trued-up some -- through filing that tax return some other adjustment that we had that we were able to take benefit from. Now those tax credits were somewhat offset in the other expense category.

That other expense category is up, primarily because of amortization of those tax credit, the investment of those tax credits, which was about $800,000 for the quarter. What we do expect going forward is to resume a more normal rate on the tax expense, being around 22% to 24%.

Saw good growth on the construction side of the ledger. Is any of that tied to the project you're talking about in Nashville?

And maybe get a little bit more detail about in terms of what's encompassing there, in terms of the buildout related to HCA?

No. None is connected to that.

In fact, that hasn't even started yet. Our main office is a couple of blocks away from where it is, and we feel like that we'll get the benefit of the extra activity as a result of that, plus the fact that West End Avenue, that's jumpstarting other projects that have been held off for some period of time.

But as far as the construction portion of our portfolio, let me let Mark Williams comment on that.

David, really that construction portfolio is kind of a twofold. We have some owner-occupied projects that are in there that are still in the construction phase.

Obviously, one knows the constructions over there are rolled into the owner-occupied on a more permanent basis. We do have some CRE loans that are in there, some office buildings, some strip centers, but they are national tenants.

We go into strong underwriting in that, and so we're very comfortable with that. So obviously, as those constructions go to mini perms, they will be classed in the appropriate CRE buckets.

Great. And Robin, as we look ahead here in terms of the growth on the loan portfolio, as it relates to the loan loss provision there, any sense in terms of how we should think about that as it relates to the provision here?

Let me go back and add one thing to what Mark said. All of the construction was for purpose, and none of it was speculative.

Those income-producing real properties are all for national. They already have leases with national tenants for them, so there's -- none of that is speculative type real estate.

To the question about the provision, we'll see the provision continue to run at about the same level that we've seen. We want to maintain -- as we've been saying, we built up.

But with the loan growth that we've had and otherwise, we've basically seen our allowance decrease as we figured that it would as a result of the production when you have $147 million of covered -- noncovered loan production in the quarter, and you'll see some -- you'll see the allowance going down. But we feel that for the limited future that we will, in fact, keep our provision at or around the same level that we've had it for the last several quarters.

Good to see the progress on the credit quality side in the noncovered portfolio, the OREO balances keen to decrease. Can this pace of OREO disposition continue the next few quarters, or are we going to see it slow down from a seasonality?

And I guess the second part, what do you guys consider a more normalized level of OREO balances? And how close are we to getting there?

We said that we had $3.2 million under contract this quarter. Not included in that Matt, we actually have an OREO of $4.4 million -- I believe it was in excess of $4 million, a subdivision in Alabama that's under contract, for every lot in the subdivision at a slight gain.

We're still wrestling with some issues from the former borrower even after a one year right of precision. There's some architectural rights that we're having to work our way through, and the slowness of the court system is -- has slowed that down.

But that is not included in that $3.2 million. So of that remaining OREO, we have -- already have approximately -- we only have $40 million of it that's not under contract at this point in time.

I don't anticipate another $10 million quarter. I do anticipate probably being higher than the $3.2 million that's under contract.

And going forward next year, I think that we'll continue to see it move at a much more rapid pace than we've seen in the past. The one thing that I think that we need to focus on too, is that this year, we're actually closing about -- we'll probably close about the same level of sales as we closed last year, but the difference is, is the roll-ins are not nearly as significant as they've been in the past.

And I don't anticipate that being the case in the future. We don't see the roll-ins into OREO being anywhere near the level that they were last year and in the prior year.

So the portfolio itself should be declining over that time frame. And normalized level will be $20 million or below it in the not-too-distant future, we feel.

Okay, that's helpful. And then I guess, Stuart, you mentioned your -- I think you addressed the issue about that on the securities book.

The prepayment from the premium amortization. Can you walk us through how much of the drop of the securities book size was from the prepayments versus the loan growth just being so strong?

And what should we expect for the size of that book going forward?

Jim actually addressed that. I'm going to let him talk about the prepayments of these securities.

Matt, I don't have the exact number on how much -- if I understood your question, how much of the cash flow out of our -- came out of the securities portfolio was directly related to mortgage prepayments. Was that your question?

Yes, partially. Or any other issues or any other reasons why it decreased so much?

Well, okay, over the quarter, yes. I'm understanding your question now.

Yes, the investment portfolio dropped significantly from the second to the third quarter. We had quite a bit of repayment out of the portfolio, and pretty much all of that cash flow out of the portfolio did go into loans.

So there was a big mix change during the quarter. We were able to shrink the portfolio.

We sold some securities out of the portfolio and did not reinvest all those securities back into the portfolio. We used those proceeds to fund loan growth.

And we've got the portfolio down now in the $675 million. We feel that, that's about as low as we can take the portfolio.

So we will be maintaining the portfolio at that balance. So as we have agency calls and repayments on mortgages and munis and the other securities in our portfolio, we will be replacing those with securities.

I apologize if you covered this already, Robin. But just wanted to hone in on the NII dynamics.

Second consecutive quarter, very strong loan growth, but we saw the margin tick down modestly. And as a result of all that, we saw the NII level tick down very slightly with, again, the securities book coming down as well.

Looking forward, how do you view that? I mean do you view -- we're just in an environment where the goal is trying to keep NII stable?

And we'll grow loans, we'll take market share, and if the margin contracts, then so be it? Or how do you view those 2 dynamics?

Is it -- is the goal to get a certain amount of loan growth, or is the goal to increase NII?

I'm going to let Kevin and Jim double-team on that one.

Yes. Kevin, the goal is to grow net interest income.

With that, we do have headwinds of just the right environment we're in. We've got existing loans that are repricing out of higher rates into a lower rate environment, as well as we're battling the mortgage-backed securities and just the repricing in the security portfolio.

But overall, the goal is to grow net interest income. A couple of things, in this quarter's net interest income, that did bring the footings of net interest income down.

Jim mentioned the mortgage-backed security prepayment. We also had an uptick on charge-off interest, and this was out of our covered loan book over in Georgia.

We view those as -- particularly the Georgia uptick in charge-off interest as a onetime item, and don't see that going forward. You unwind those 2 things, net interest income is growing on a quarter-over-quarter, year-over-year base, and the additional loan growth will just help that in the future.

But we do have the headwinds of interest rate environment that we're in.

So based on those 2 items going away and the pipelines that you talked about still being pretty good, you would expect, at this point or hope for NII to grow next quarter?

Correct.

Kevin, just to expand on what Kevin said, with -- using up our excess cash and our securities portfolio to fund loans, we've shrunk the balance sheet about as much as we can or could possibly do. So going forward with this loan growth, we will have to fund the loan growth with the increase in deposits or borrowings that will lead to a re-leveraging of the balance sheet.

So anticipating margin to stay relatively flat for the reasons that Kevin just mentioned, but with the re-leveraging of the balance sheet, we see the net interest income improving.

Okay, great. Robin, just one quick follow-up.

The de novo entries have obviously been something that has been progressing well. And I guess they're all about in the black at this point.

Do you have any that are on the drawing board or close to it? Or if not, new markets that would be at the top of your appetite, if you found the right people to enter?

I'll make a couple of comments about the de novos, and I'll mention about Mississippi, and then I'm going to let Mike Ross make a comment about Alabama, and then I'll come back to you -- to the Tennessee market. As we mentioned previously, last quarter, we had both Alabama markets cross over into the black, along with our Columbus, Mississippi market.

This quarter, the Starkville, Mississippi market crossed that threshold, and we saw some very nice loan and deposit growth in those Mississippi markets. I'm going to let Mike talk about Alabama because there's some exceptional progress in that market.

As far as our Montgomery and our Tuscaloosa de novos are concerned, both are progressing very well, both have grown loans quite significantly, and we anticipate that they will continue to grow loans. We are very encouraged though by the fact that our noninterest-bearing DDA has grown at a very significant pace.

And as those de novos continue to mature, we frankly anticipate that the noninterest-bearing DDA growth will accelerate in both markets. The one thing about Tuscaloosa that you have to keep in mind is we haven't even gotten a full service office.

We have a full service office, but it's located on the second story of a nondiscrete building. We are in the process of trying to get our new headquarters for Tuscaloosa opened.

And at that point, we will have -- we anticipate a lot of new customers opening their -- the deposit business with us.

And we opened up, as you know, in East Tennessee at the end of the second quarter, in June, late June and had minimal loan volume. But we've now have over $28 million of loans outstanding in East Tennessee, and between $8 million and $9 million of deposits, most of which are noninterest demand deposits.

At this stage of the game, the East Tennessee office is the only one that has not moved over into the black at this point in time, and we do anticipate that happening probably about the second quarter, and surely during the third quarter of next year. So we're pretty -- well I think it will happen during the second quarter of next year.

So we're pretty excited about the opportunities in those markets. To your other question, we are, in fact, exploring other markets.

At this time, we don't have anything that -- any plans to announce anything in the immediate future as to where we are. But we're always open to the possibility of moving into a new market, either -- by several methods, either through de novo openings or through acquisitions, whether they be either FDIC or through other open bank opportunities, Kevin.

So we are always exploring those options.

Just wanted to touch on the tax rate a little bit. Can you talk about maybe what it's going to be going forward?

It looked like it was a little bit low this quarter.

Yes, we expect a more normalized rate of 22% to 24% going forward.

Zach, were you on the line a while ago when Stuart answered that question?

No, I'm sorry, I missed that.

What we had, Zachary, were some -- we had filed our tax return during 3Q, and we had some K-1s that had come in late for some tax credits that we ended up filing amended returns to take advantage of those. So that's one of the reasons in recording those tax credits, your tax expense is low, plus we had some true-ups of some deductions we were able to take on the tax return that affected our tax expense.

So all-in-all, that dropped our tax expense probably around $1 million. Now, we had tied to that as those credits started being utilized.

We had some amortization on those investments on tax credits. That's in your other expense, and that was about a little over $800,000.

So the drop in the tax rate was offset by onetime expenses that should not be recurring at that level at the same time, so it's kind of a balancing act on that, Zachary.

Okay, well that was my other question, too, what the noninterest expense increase was about. So that -- okay, that answered that, too.

Thank you, Candice, and thank you, everyone, for joining us today. We appreciate your time and your interest in Renasant Corporation.

And we certainly look forward to speaking with you again when we report our fourth quarter and year-end results for 2012. Thanks again, everyone.