Renasant Corp (RNST) 2015 Q3 法說會逐字稿

Good morning and welcome to the Renasant Corporation 2015 third-quarter earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Kevin Chapman. Please go ahead.

Thank you. Good morning, everyone, for joining us in our third-quarter 2015 earnings conference call. Participating in our call today are members of Renasant Corporation'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 risk 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 fluctuations, 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. And now I'd like to turn the call over to Renasant Chairman and CEO, Robin McGraw.

Thank you, Kevin; and good morning, everyone. Welcome to our third-quarter 2015 conference call.

During the third quarter we completed our merger with Heritage Financial Group along with the related systems conversions, and are well on the way to finalizing our integration. This, coupled with strong loan growth, improvement in our funding base, and a companywide focus on achieving excellent profitability metrics resulted in an exciting quarter for Renasant. In addition, last night we announced the signing of a definitive merger agreement to acquire KeyWorth Bank headquartered in Johns Creek, Georgia.

Looking at our third-quarter results, net income was $16.2 million or basic and diluted EPS of $0.40, as compared to $15.5 million or basic and diluted EPS of $0.49 for the third quarter of 2014. During the third quarter of 2015, we incurred pretax merger expenses related to the Heritage merger of approximately $7.8 million, or $5.2 million on an after-tax basis, which equated to a reduction of $0.13 in basic and diluted EPS for the third quarter of 2015. Excluding merger expenses, the net income was approximately $21.4 million or $0.53 per share.

For the third quarter of 2015, our return on average assets and return on average equity were 81 basis points and 6.28%, respectively. Including merger expenses, our return on average assets and return on average equity were 1.07% and 8.28%, respectively; and return on average tangible assets and return on average tangible equity were 1.14% and 14.95%, respectively, for the third quarter of 2015.

Total assets as of September 30 of 2015 were approximately $7.9 billion as compared to $5.8 billion at year-end. The Heritage acquisition added approximately $2 billion in assets.

Total loans, including loans acquired in either the Heritage merger, the First M&F Corporation merger, or in FDIC-assisted transactions -- collectively referred to as acquired loans -- were approximately $5.3 billion at September 30, 2015, as compared to $4 billion at year-end and $4.04 billion on a linked-quarter basis. The Heritage acquisition contributed $1.1 billion in loans at acquisition date.

Excluding acquired loans, loans grew approximately $340 million or 13.9% annualized to $3.6 billion at September 30 of 2015, as compared to year-end, and increased approximately $199 million or 20% annualized from $3.4 billion on a linked-quarter basis.

Breaking down loan growth on an annualized basis when compared to the previous quarter, excluding loans acquired in the Heritage merger, our Central region, which consists of Alabama and Florida, grew loans by 22%; our Western region, which is Mississippi, increased loans by 13%; and our Northern region, which is Tennessee, grew loans by 14%. In our Eastern region, which is Georgia, we grew loans by 26.7%.

Looking ahead, our loan pipelines remain strong. We continue to see opportunities for growth throughout all of our markets for the remainder of 2015.

Total deposits were $6.2 billion at September 30 of 2015, as compared to $4.8 billion at December 31, 2014, and $4.9 billion on a linked-quarter basis. Heritage contributed total deposits of $1.4 billion.

Non-interest-bearing deposits averaged approximately $1.3 billion, which represents 20.4% of our average deposits for the third quarter of 2015, as compared to $896.9 million or 18.7% of average deposits for the third quarter of 2014. Our cost of funds was 33 basis points for the third quarter of 2015 as compared to 47 basis points for the same quarter in 2014.

At September 30 of 2015, our Tier 1 leverage capital ratio was 8.94%. Our common equity Tier 1 based capital ratio was 9.82%. Our Tier 1 risk-based capital ratio was 11.32%; and our total risk-based capital ratio was 12.05%.

Our tangible common equity ratio stands at 7.40% at quarter end. All regulatory capital ratios continue to be in excess of regulatory minimums required to be classified as Well Capitalized.

Net interest income was $68.7 million for the third quarter of 2015, as compared to $50.5 million for the third quarter of 2014 and $51.7 million on a linked-quarter basis. Net interest margin was 4.09% for the third quarter of 2015, as compared to 4.12% for the third quarter of 2014 and 4.17% on a linked-quarter basis.

Additional interest income recognized in connection with acceleration of paydowns and payoffs from acquired loans increased net interest margin by 4 basis points in the third quarter, as compared to 28 basis points on a linked-quarter basis and 11 basis points in the third quarter of 2014. Non-interest income was $32.1 million for the third quarter of 2015, as compared to $22.6 million for the third quarter of 2014 and $22.9 million on a linked-quarter basis. The increase in non-interest income is primarily attributable to the Heritage acquisition and its mortgage operations.

Non-interest expense was $76.1 million for the third quarter of 2015, as compared to $48.2 million for the third quarter of 2014 and $51.2 million on a linked-quarter basis. The increase in non-interest expense when compared to the same period in 2014 as well as on a linked-quarter basis was primarily due to the expenses of acquired Heritage operations, as well as merger expenses incurred during the quarter in connection with the Heritage acquisition of $7.8 million.

At September 30 of 2015 total nonperforming loans, which are loans 90 days or more past due, and nonaccrual loans were $47.2 million; and OREO was $36.3 million. Our nonperforming loans and OREO that were acquired were $32 million and $22.4 million, respectively, at September 30, 2015.

Since the acquired nonperforming assets were recorded at fair value at the time of acquisition, we're subject to Loss Sharing Agreements with the FDIC which significantly mitigates our actual loss. The remaining information in this discussion on nonperforming loans, OREO, and related asset quality ratios excludes these acquired nonperforming assets.

Our nonperforming loans were $15.2 million as of September 30, 2015, as compared to $20.2 million at year-end. Nonperforming loans as a percentage of total loans were 42 basis points at September 30, 2015, compared to 62 basis points at year-end.

Annualized net charge-offs as a percentage of annual loans -- of average loans were 4 basis points for the third quarter as compared to 50 basis points for the third quarter of 2014. We recorded a provision for loan losses of $750,000 for the third-quarter 2015, as compared to $2.2 million for the same quarter in 2014.

The allowance for loan losses totaled $42.1 million or 1.2% of total loans at September 30, 2015, as compared to $42.3 million or 1.3% at year-end. Our coverage ratio, or our allowance for loan losses as a percentage of nonperforming loans, was 277.2% as of September 30, as compared to 209.5% at year-end. Loans 30 to 89 days past due as a percentage of total loans were 23 basis points at September 30 compared to 32 basis points at year-end.

OREO was approximately $14 million at quarter-end as compared to $17 million at year-end. OREO under contract to sell at quarter-end was $1.4 million. Total OREO sales, which includes acquired loans, is $2.2 million.

Before we take questions I'd like to end my prepared remarks with discussion of the previously mentioned proposed merger with KeyWorth Bank. KeyWorth operates six offices in the Atlanta metropolitan area and as of June 30, 2015, has approximately $400 million in total assets, which includes approximately $250 million in total loans and approximately $340 million in total deposits. When completed, we expect the transaction to enhance Renasant's existing presence in the northern suburbs of Atlanta, Georgia, by giving us approximately $1 billion in total assets and 26 total offices.

KeyWorth Bank is a high-quality commercial bank with a strong credit culture and an attractive customer base. We believe this combination will be additive to Renasant's growing Georgia franchise and will provide us with additional scale and accelerate opportunities to attract commercial banking expertise in the Atlanta market.

According to the terms of the merger agreement, which has been unanimously approved by the Boards of Directors of both companies, KeyWorth shareholders will receive 0.4494 shares of Renasant common stock for each share of KeyWorth common stock. Based on our 20-day average closing price of $33.38 per share as of October 2015, the aggregate deal value is approximately $58.7 million or $15.00 per share.

The transaction is expected to be immediately accretive to Renasant's estimated earnings and tangible book value per share, and has an IRR which exceeds our internal thresholds. The acquisition is expected to close during the first quarter of 2016 and is subject to KeyWorth shareholders approval, regulatory approval, and other conditions set forth in the merger agreement.

Again, we're pleased with our third-quarter results and have 2015 -- and for 2015 and our successful integration with Heritage. We believe these results, along with our recent announced intention to acquire KeyWorth Bank, have us poised for a strong finish to 2015 and provide momentum for a positive long-term outlook for our Company.

Now, Zelda, I'll turn the call back over to you for questions.

(Operator Instructions) Catherine Mealor, KBW.

Thanks. Good morning, everyone. Wanted to first dig into the margin a little bit. The margin came in a little bit higher than the guidance you all gave last quarter for it to be about 3.90% ex- any credit relief. So maybe my first question is, can you give us how much of this 4.05% margin is coming from the interest rate fair value accretion?

Yes. Catherine, let me walk you through from where our margin was, excluding the accelerated paydown from last quarter. So we were in the low 3.90%s last quarter if you exclude the accelerated accretion. The additional interest rate marks -- or the additional income from interest rate marks related to Heritage is providing about 15 basis points of additional margin, so that's really where the lift came from as it specifically relates to the Q3 margin.

That interest rate mark is covered in a couple of different components. You do have an interest rate mark on the loans. We also fair-valued the liabilities as well, so there's also an interest rate mark against the deposits.

The interest rate mark on the deposits decreased our cost of funds about 3 or 4 basis points -- the Heritage interest rate mark cost. Our cost of funds I think were 33 basis points compared to 40 basis points in Q2.

2 to 3 basis points of that is just due to our normal repricing. The other 2 to 3 basis points would be due to the interest rate mark associated with the Heritage acquisition.

How long do you forecast that 15 bps should last?

So, let's look at the components on the interest rate mark. On the loans it's going to be in excess of five years, and that really just matches up against the maturity of their portfolio. It was a heavily fixed-rate portfolio with maturities that were beyond five years.

On the time deposit side, we really look to the repricing of the time deposits. And that's more in the 18 months to two-year range.

Got it, okay. Then you had I think last quarter about 10 bps coming in from fair value accretion from the First M&F deal. Is that still about this level, or did that come down?

It came in right at 10 basis points.

Okay, cool. Then too, this is just housekeeping; do you have the CD breakdown of the loan yields, and maybe CD cost and borrowing cost for the quarter? Just so we can turn it back into -- can put it (multiple speakers) margins.

Sure. Total portfolio yield -- this is of the combined Company -- was a 4.88%. Heritage on a standalone basis came in at a 5.50%. And total legacy -- the portfolio excluding Heritage -- came in at a 4.70%.

Okay.

And then our total cost of deposits -- total cost of interest-bearing deposits were 28 basis points. Total cost of deposits including our non-interest-bearing DDA was 23 basis points.

Got it. Okay; very helpful. Thank you, Kevin.

Emlen Harmon, Jefferies.

Hey, good morning. Obviously really strong legacy loan growth from you guys this quarter. Sounds like Georgia was a meaningful component of that. Could you give us a sense of how much is just coming out of the acquired footprint in that first quarter that you had it, and how you are thinking about the sustainability of the growth rate?

Emlen, I'm going to let Mike Ross give you a breakdown on that.

Hi, Emlen. Yes, of the loan growth for the quarter, there was roughly $200 million in net loan growth for the quarter. Of that, roughly $40 million came from our new teammates from the Heritage acquisition.

Then the balance of the growth was $40 million or so came from our specialty units, and then the balance came from the rest of the general Renasant Bank, our legacy Bank.

And, Emlen, this is Kevin. Very little of the non-acquired loan growth would have come out of the acquired book. That acquired book stayed fairly static. We did have some normal paydowns, just the normal principal paydown that you would see in a portfolio. But we had very little shift from acquired to non-acquired out of the Heritage bucket.

Emlen, this is Mike again. As far as to your question on the sustainability of that, we feel very good about the sustainability of that and frankly, have a great opportunity to increase that. Our bankers, our Heritage teammates have done a great job of joining our Company and continuing to serve their customers, both existing and new. And we feel very good about the ability to sustain and grow that.

Got it. Maybe if I could flip the question to I guess the rest of the Bank outside of the specialty and that North Atlanta market. It still seems like the growth rate was pretty strong this quarter, Robin. I mean, any trends that you're seeing that also help support just the growth rate in the general Bank?

No, we were pleased to see the general growth rate in Tennessee and in Mississippi. Mississippi has had a very strong resurgence this year in loan growth, and we're pleased to see how well they've been doing.

Tennessee, obviously, with the -- the Nashville market is always strong. But our Memphis market has shown some resilience this year, so that's helped our legacy loan growth.

Then, Mike, you want to comment on the Central Region?

Yes, glad to, Robin. Yes, we had really strong loan growth in the Central Region for the third quarter on an annualized basis, up about 22%. Most of that came out of Alabama; however, we did have some growth out of our Florida market.

So the great thing -- and frankly the reason we achieved the loan growth that we did at the Company -- is, as you can probably tell, we have all of our regions and all of our bankers contributing to that growth.

Great, thanks. Then, Kevin, how should we thinking about the starting point for expenses here as we go into the fourth quarter? Obviously a lot of moving parts with the acquisition, but just how should we be thinking about the progression there?

So just taking our expenses for the third quarter, if you back out the merger expenses, that moves us into the $68 million, $69 million range. As it relates specifically to the Heritage operations, we do have some duplicate costs.

We converted Heritage in August of the third quarter. We did -- so we had duplicate operations in July and August, and then are continuing to maintain post-closing and post-conversion teams to just work that work through conversion items. I expect another $1 million to $1.2 million in expense saves coming out in Q4, and there might be another $250,000 as we get to Q1 of just some skeleton crew post-conversion cleanup.

I will also say that we have been active in looking to -- continuing to build out teams, so as we see opportunities throughout our market -- and this is outside of Heritage -- but just throughout our markets to pick up quality long-term bankers, we will execute on that.

We will do the same thing in the mortgage operations. We lifted out a team in Nashville that enhances our Nashville presence in our mortgage operations. That will offset some of those costs saves that I'd mentioned that will come out of the Heritage.

But again, we continue to look for opportunities to reinvest in quality teams and build more scale in some of our higher-growth markets. And we will -- we do expect Q4 to provide some opportunities for that.

Great, thanks.

Just, Emlen, to follow up what Kevin said, we do expect to add additional commercial banking teams or bankers in the Atlanta market, along with working with us on our specialty lending areas, and across our system in other markets also.

All right. Thanks, guys.

Kevin Fitzsimmons, Hovde Group.

Hey, guys; good morning. Hey, Robin, can you give us -- now with Heritage closing and now KeyWorth being announced, I guess on a pro forma basis this takes you up to about $8.3 billion or a little north of that in assets. So can you give us a sense on how you're thinking about M&A going forward from here?

With Heritage and now KeyWorth, do you take a pause? Or do you still see plenty of runway to do modest-sized deals like KeyWorth as you build up toward the $10 billion mark?

Or do you reach a certain point and sit tight for a larger, more meaningful deal to take you -- to vault you past that threshold? Just how you are thinking about that today.

I will say yes to both questions. I think we'll still continue to look for some modest-sized deals that gets us up close -- exceed $9 billion to $9.5 billion, in that general area. And we are looking for a meaningful transaction, whether or not it's one or two or more to get us across the $10 billion barrier in a meaningful manner.

As we stated previously, we started the process back after the First M&F merger of preparing ourselves for the $10 billion barrier. We already have significant costs in our run rate that puts our infrastructure in a position in order to be able to cross that barrier.

In addition to the infrastructure, we've hired the personnel that we feel like helps in the compliance area, the BSA area. And also we expanded our IT group significantly with what we think are quality IT individuals that can in fact carry us across the $10 billion barrier.

That being said, we're going to work our way up to the point of being able to cross it. We do feel like that there are quite a few opportunities out there that would be the size of KeyWorth, maybe a little larger, that would get us up close to that level and then look for that strategic acquisition that would get us across the $10 billion barrier.

Kevin, just to build on what Robin discussed, one thing that we're also looking at is not only what takes us over $10 billion, but what do we look like once we go beyond $10 billion. And do we have the right investments, the right density in areas that can continue growth beyond $10 billion.

So we continue to evaluate not only the operational side, but also our front line, and do we have the right teams in the right areas that can continue to provide above-average growth so that, when and if the day occurs that we go over $10 billion, that we can continue a trajectory beyond $10 billion.

And then -- a good point that Kevin makes, we don't want to get across the $10 billion line, even if we're $2 billion or $3 billion over that, and stop there. We need to continue the trajectory once we do it.

Let me point out, too, as we look at opportunities for expansion, we're not limiting ourselves just to banks. As Kevin mentioned a while ago, we've been doing some liftouts of teams in markets, which is what we've been doing now for several years. Not only on the commercial banking side, but we're doing it on the mortgage side; we're looking at Wealth Management team opportunities.

And we're not opposed to acquiring additional non-interest income type opportunities also. So we're looking along that line, too.

So we're not limiting ourselves just to banks. We're looking for ways to increase our revenue, increase our earnings per share and shareholder value. And I'd also diversify revenue to provide -- being a -- if you're a retail bank and you go over $10 billion, the Durban amendment costs you more than if you're a commercial bank. So we've invested in areas that provide less reliance on debit card or service charge fee income.

These other opportunities you refer to that are like KeyWorth size or larger, that take you up toward that $9 billion to $9.5 billion, can you give us a sense on what markets you're going to be looking at most closely? Like Metro Atlanta seemed very consistent with what you've said before.

Are you at a point where you've got what you need in terms of on-the-ground infrastructure? Or will you be looking for a lot more? And then if you could list a few other markets that are high on your wish list to build up in.

We've always said that we feel like Metro Atlanta was important to us. We like our footprint in Metro Atlanta today, but we would not pass on a real good opportunity there.

By the same token, we think that Tennessee is still fertile ground in that regard; and we think that there are areas of Alabama that would be important to us. We're not looking for generally a Mississippi expansion, but we wouldn't hesitate to acquire a bank that may have, in addition to a presence elsewhere, have some presence in Mississippi from that particular regard.

But Florida is an area that we're looking for expansion, basically right now through adding teams and/or commercial bankers in certain markets in Florida. We think that that's a real opportunity for us there.

Mike Ross is over the Central Region and his background has been both with SouthTrust and Regions. He's spent time in Florida, and Mike has been looking to add to our teams in the Florida market. You want to comment on that, Mike?

Yes, sure. I'm delighted to, Robin. Yes, we've been actively looking at adding bankers. As a matter of fact, we've already added -- just joined us a couple of weeks ago a gentleman by the name of Andy Toxey. We've opened up an LPO in Orlando, and that's -- and Andy's already looking at several deals.

Andy is a 30-plus-year banker in the Orlando market, primarily a commercial real estate banker. He's going to lead our commercial real estate businesses in the larger metropolitan markets in Florida, namely Orlando and, at some point hopefully, Tampa and Jacksonville.

Okay, great. Thanks, guys. Very helpful.

Michael Rose, Raymond James.

Hey, good morning, guys; how are you? Hey, just wanted to touch base on mortgage. It was a little bit stronger than I had modeled for, which is different than a lot of other banks that have reported.

Can you just give us the outlook? I know you've added some producers. Can you give us the outlook for mortgage into next year? At least what you can see today, thanks.

Yes, Michael; let me let Jim Gray comment on that.

Michael, this is Jim. Our production for the third quarter was $659 million combined. $275 million of that was Renasant legacy; but that's up about $10 million from Q2.

Heritage was $383 million, which based on prior quarters is what I would consider a fairly normal run rate for them. Although it probably did pull back a little bit, just getting through the merger and the conversion and a little disruption there; it kind of put them on hold on some of their recruitment efforts.

With that being said, during the quarter we did pick up additional originator hires in Jackson, Mississippi; Auburn, Alabama; Huntsville, Alabama; Nashville, Tennessee. And that was all on the legacy side.

On Heritage, we picked up some originators in Atlanta and Columbus. Also, the Colorado mortgage operation picked up some originators in Colorado Springs and Grand Junction.

Also, the Heritage wholesale group picked up some additional TPO relationships during the quarter. And now that we've gotten through the merger and the conversion, they are getting back on track as far as recruitment efforts, so we should see some continued growth and acquiring talent within -- particularly in the Atlanta, Colorado, and just the overall Georgia.

And we do have some opportunity in Florida. We did lose some Florida originators, and we are working on rebuilding in that Ocala/Gainesville area in Florida.

So, we had good production for the quarter. Our pipeline actually did drop a little during the quarter. Both divisions dropped a little bit as rates kicked up during the quarter.

But now that rates have come back down and we're getting back on stride on recruitment and starting to see the benefit of some of these, this talent we brought on in the third quarter, we're starting to see our pipelines build back up. Our daily lock volumes are up, so we're looking very positive right now into the fourth quarter and into 2016.

All right. Then just as a follow-up to that, do you have a sense for the split between legacy Renasant and HBOS, between purchase and refi?

Yes. Overall our purchase/refi for the third quarter, we were 73% purchase, 27% refi. But there is a little difference on the two divisions.

Renasant legacy purchase was 64%, refi 36%. Heritage -- and this is one of the real advantages of Heritage is they do have a higher -- or the Heritage division does have a higher purchase volume. For the third quarter Heritage was 80% purchase and 20% refi.

Going forward, we see pretty much staying in that range. Our pipeline mix for Renasant legacy was 70/30, so we're seeing -- that's probably going to be a pretty good run rate for Renasant legacy, the 70/30 range; and then the 80/20 for Heritage.

All right. Just one final question for me. You guys usually give your 30-day pipeline. I might've missed it if you gave it; but if you can give it to us, I think it was $146 million at the end of last quarter. Thanks.

Sure. Mitch Waycaster will give you that, Michael.

Michael, the 30-day-long pipeline at the beginning of the quarter was $111 million. And has been stated in the past, you break that down by state it reflects the potential that had been talked about earlier. 20% is in Tennessee; 23% in Alabama; 33% in Georgia; 21% in Mississippi; and 3% in Florida.

This pipeline should result in approximately $41 million in growth in non-acquired loans in the next 30 days. As Robin had mentioned earlier, of course at this level of pipeline, which does compare favorably to the same period prior year, seasonally adjusted, it's down a little from the third quarter; but to be expected.

But we should continue at this level to experience strong growth as we go into the fourth quarter.

Great. Thanks for taking my questions, guys.

Brad Milsaps, Sandler O'Neill.

Hey, good morning, guys. Kevin, I wanted to follow up on the expense question. You guys have talked a bit about hopefully pushing the efficiency ratio to below 60% maybe as early as the first quarter of 2016, certainly the first half of the year.

Do you still feel good about that? And if so, can you help me maybe understand how you get there?

I think you said maybe another $1 million to $1.5 million in costs coming out of the run rate. But just curious beyond that what you would see that would help drive that number materially lower.

Yes. A couple things will. The additional cost saves will help. That will take our current ratio, which is in the 64%, which has a 64% handle -- it will move it down to the low 63%s, just releasing those expenses.

To be honest with you, I underestimated the impact that the mortgage was going to have. I do think that this quarter it is magnifying -- just with the pullback we saw in the mortgage, it is amplifying the impact that mortgage is having our efficiency ratio. If I exclude mortgage, we're in a -- we have a 60% handle on our efficiency ratio, just for the Bank excluding the mortgage.

Our goal is to continue to as a total Company get down below 60%. Still think it's achievable in 2015. It may take us into the end of Q1 or the beginning of Q2 to achieve that.

We also have the opportunity to continue to grow into some of our expense base. As I mentioned earlier, we have hired additional lenders and there is opportunity for them to build scale into their book of businesses that will help on the efficiency as well.

Then also, the other thing -- Robin mentioned just some of the investments we've made and going over $10 billion. To put a little bit of a number behind that, I think it's important and relevant to talk about just some of the infrastructure we've built.

Robin mentioned the IT team that we've added. This year alone we've added in cybersecurity and IT annual expense upwards of $1 million. That's really just building infrastructure as an investment for future growth.

We're about to go online. We've completely rehauled our IT data center. We made a $4 million, $5 million investment in a new technology center. That will allow us to -- that will provide us enough infrastructure that we'll be able to grow to $15 billion at its current size; and it's scalable to where we can add on to that building very low cost, and it could take us well in excess of $20 billion just in that investment that we're making.

On the compliance side, over the last two to three years we've probably doubled the size of our compliance. We've added individuals that are high-caliber individuals that are astute and in tune with compliance, BSA, CRA, Fair Lending.

All of that is included currently in our run rate. That should help provide additional opportunity to lever up that expense base as we go in the future.

That's great. Then just in terms of the mortgage, is it fair to think about maybe for every $1 change in mortgage revenue maybe you get a $0.50 pickup in salary expense? Or is there a better way to think about it?

Just on salary expense related to mortgage, it's probably closer to 65% increase in expense for every $1 of revenue that comes through.

Okay. That sounds good.

Matt Olney, Stephens Inc.

Hey; thanks. Good morning, guys. Hey, most of my questions have been addressed, but I want to go back to loan growth. It sounds like the commentary there around new production sounds pretty positive. I wanted to ask about paydowns, though.

Paydowns were a problem it seems like last year and early this year. I'm sure the visibility there is rough. But what's the updated thoughts on the paydowns the next few quarters?

Matt, this is Kevin. We did see a slowdown in paydowns. just in Q3. I may have to follow up with you on exactly what the total paydowns were. But we did see a pullback in the level of paydowns.

Just going back to some of our prior quarters, to explain some of the volatility -- Q1, for example, we had a significant amount of paydowns, upwards of a 20%, 30% increase in paydowns as far as what we were projecting. This quarter was a little bit more in line with our projected paydowns.

We didn't have as many liquidations of property or sellers -- or borrowers selling their business. What we actually saw was a little bit more of a positive tone coming out of our borrower base, funding up on lines and looking to invest more in their operations rather than just liquidate and get out.

And Matt, just to add further to that, our bankers that focus more on real estate still have continued to produce really solid new loan volumes, outpacing the paydowns. Also, we continue to diversify our loan portfolio into other credit types, namely C&I and 1-to-4 family, and those are going to be a little less volatile in terms of paydowns than the commercial real estate bucket.

Okay. Thanks. That's all for me.

Andy Stapp, Hilliard Lyons.

Good morning. Nice quarter. How much do you expect in merger-related expenses in Q4?

Yes, our merger-related expenses, just specific to Heritage, we recognize the majority of the merger expenses either as an actual merger expense on Heritage books, our books, or that is flowing through purchase accounting adjustments. There will be some residual related to severance, some professional fees, that will flow through in Q4. I would estimate on the high end that to be between $1 million to $1.5 million.

Okay. I don't know if anybody cares anymore, but how has your interest rate sensitivity position changed after the Heritage acquisition?

Andy, this is Kevin. I'll let you know I still care. (laughter)

Well, I care, but it's just -- I don't know. It just seems to keep dragging out.

Yes. No, if we go back to September I think the consensus was everybody was fully expecting a rate change or a rate increase. Really overall, we haven't changed our position. We're still remaining neutral.

We continue to be slightly asset sensitive. Heritage did not change that significantly.

And we are still running our Bank, as I've discussed before, that we're asset neutral -- or that we're rate neutral, and there is an urgency to get more asset sensitive. That has not changed with us. That is still our mindset.

We all know rates are going to increase. The timing of it is a little bit fungible. But the urgency to get more asset sensitive or the need to get more asset sensitive is still relevant, and that's what our focus has been.

Okay, great. That's all for me. Thank you.

John Rodis, FIG Partners.

Good morning, guys. Just one quick question for me, Kevin. Just the tax rate was up to around 32% this quarter. Where do you see that going forward?

Going forward, that will pull back a little bit. We'll settle back into 31%, 31% to 32% range. It was a little bit elevated because some of those merger expenses were nondeductible, so it did push the tax rate up a little bit. But tax rate will come back down and settle into 31% to 32% range.

Okay. Then just one other question, on the Heritage loan portfolio. At July 1 you said that portfolio was right around $1.1 billion. Where did that end the quarter?

Just the acquired piece of it?

Yes. Was it -- it sounded like it was right around that level, too.

Yes, it was right around that level. It was -- I think it still rounded to $1.1 billion.

Okay. Fair enough. Thanks, guys.

This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Robin McGraw for any closing remarks.

Thank you, Zelda, and thanks, everybody, for joining our call today. We appreciate your time and interest in Renasant Corporation and look forward to speaking with you again in the near future. Thanks, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.