Renasant Corp (RNST) 2003 Q3 法說會逐字稿

Welcome to The Peoples Holding Company conference call. Today's call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to the Executive Vice President, Mr. Jim Gray. Please go ahead, sir.

Thank you, Stephanie. I'd like to welcome you to The Peoples Holding Company's third quarter 2003 earnings conference call. With me today are Robin McGraw, President and Chief Executive Officer, Stuart Johnson, Executive Vice President and Chief Financial Officer, Harold Livingston, Executive Vice President and Chief Credit Quality Officer, and Corky Springfield, Executive Vice President and Chief Credit Policy Officer.

Before we begin, let me remind you that some of our comments 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 fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission.

Now, our president and chief executive officer, Robin McGraw will begin our discussion.

Good morning. Thank you for joining us today. Our company performed well in the third quarter of 2003 despite continued sluggishness in the economy. We reported a slight improvement in earnings per share and continued strength in asset quality. Growth in non-interest income coupled with slower expense growth more than offset a slight decline in loans and a narrowing of our net interest margin.

Economic conditions in the primary markets of our 16 county operating region remain relatively strong with improvements in unemployment rates to begin in June. Since May of this year our Lee County home base has added 359 manufacturing jobs through the expansion of five plants and the addition of two new plants. In the next three months the Lee County area is expected to show further growth in manufacturing employment. Approximately 225 new jobs should come from new plants or expansions of existing facilities in the second tier automotive supply, plastics and furniture related sectors.

De Soto County, which is adjacent to Memphis, Tennessee, is another of our leading growth markets and one of Mississippi's top five in gross retail sales. De Soto County now has the state's second highest rate of growth in retail sales. Manufacturing and distribution sector job growth for De Soto County in fiscal 2003 exceeded that of the previous 10 years. That trend is expected to continue. In order to take advantage of this, we are expanding our presence in this market with a new location in Horn Lake, Mississippi. It's scheduled to open in the fourth quarter of this year.

For the quarter ended September 30, 2003, earnings per share increased to 82 cents per share from 81 cents per share last year. Net income at $4.516m was essentially unchanged from $4.544m for the previous year period. Year-to-date earnings per share increased 5.5 percent to $2.46 from $2.33 before the cumulative effect of an accounting change which we recognized in 2002. Year-to-date net income increased 4 percent to $13.624m from $13.098m before this accounting change. Non-interest income grew more than 15 percent for the third quarter of 2003, while net interest income was down 9 percent. These results produced an annualized return on average equity for the third quarter of 13.31 percent, compared with 14 percent for the prior year period. The annualized return on average assets for the third quarter was 1.31 percent, compared with 1.38 percent for the prior year period. Year-to-date return on average assets was unchanged at 1.33 percent for 2003, compared to 2002, before the previously mentioned cumulative effect of an accounting change. Year-to-date return on average equity was 13.45 percent for 2003, compared to 13.8 percent for 2002 before the accounting change.

Despite the current economic environment, the quality of our loan portfolio remains strong as evidenced by net charge offs. Net charge offs, as a percentage of average loans, remains steady at 0.23 percent annualized, compared to the third quarter of 2002. Year-to-date net charge offs decreased to 18/100 of a percent annualized from 38/100 percent in 2002.

Our increased emphasis over the past three years on strong credit quality through credit scoring and risk analysis has paid off in a steady and consistent reduction in the provision for loan losses. The provision for the third quarter of 2003 was $799,000, down approximately 30 percent from the $1.125m in the year earlier period. The allowance for loan losses, as percentage of total loans at the end of the third quarter, was 1.56 percent, compared to 1.44 percent as of September 30, 2002.

Non-performing loans, as a percentage of total loans, increased to 0.89 percent from 0.46 percent in the prior year period. The non-performing loan coverage ratio was 176 percent for the third quarter of 2003, compared with 310 percent for the year earlier period. I would like to mention that approximately two-thirds of the non-performing loan ratio relates to two credits. We believe that any losses from these credits will not be significant.

Net interest margin for the third quarter of 2003 declined to 4.08 percent from 4.68 percent due to a continuation of record low interest rates. During this time, we have continued to match fund loans with the Federal Home Loan Bank advances to lock in low-cost liabilities and reduce our exposure to interest rate risk when rates begin to rise.

One of the strongest areas of our business in the third quarter was the increase in non-interest income of more than 15 percent. Through selected acquisitions over the past several years and internal development, we have diversified our revenue stream to include trust revenue, loan fees, investment and insurance commissions, other service charges and debit card income. As a result, non-interest income represented approximately 40 percent of net operating revenue at the end of the quarter, confirming our effort to become less dependent on non-interest income.

Expense control has been an ongoing priority for the company and our team did a solid job of controlling expenses in the third quarter. The growth of non-interest expense slowed to 4.32 percent for the third quarter, resulting in a non-interest income outpacing expense growth by 100 percent. This resulted in a net overhead ratio of approximately 1.49 percent, compared to 1.74 percent in the third quarter of 2002. It should be noted that 50 percent of this expense increase for the quarter is attributable to marketing expenses related to a new strategic initiative for growing checking accounts.

In May of this year we implemented high-performance checking. This was a means to grow core deposits. Our goal was to double the account openings that we had had. I'm pleased to report that after 23 weeks our account openings have more than doubled over the same period in 2002.

Assets at September 30, 2003 were up over 5 percent from a year ago to just under $1.4b. Deposits grew over 4 percent during the last 12 months and loans declined slightly. The slow economy has had a negative impact on loan growth, however, our view is that the economy is showing signs of rebounding and with a strong capital and liquidity position, we're well positioned to take advantage of this improving environment and feel that this is having a positive impact on loan growth.

We'll be glad to answer any questions now that anyone has.

Ladies and gentlemen, we will now begin the question and answer session. If you would like to register for a question, please press the star followed by the one on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, if you would like to ask a question, please press star one on your touch tone telephone. Our first question comes from David Huddles [ph] with Keith Brett and Wood [ph]. Please go ahead.

Good morning. I jumped on the call a little late, so I apologize if you touched on one of these items. Could you talk a little bit about the Securities Portfolio, the yield has held up well, kind of what the duration is, what the strategy is there at this point?

David, our Security Portfolio, if you kind of look at the average call date where I've actually decreased that down for the last couple of quarters. We're standing at about a year and eight months in the duration of that portfolio. We've probably seen - - in the third quarter we saw some CMO's get into the window and saw a reduction of those. We're still buying some mortgage backs. Mortgage backs, typically, at this point, are a little bit lower coupon rate so that the pre-payment fee does slow down a little bit from what we've seen in, particularly, the second quarter of some pre-payment. We're running about, over the next 12 months, about $100m of cash flow that will be coming in from that portfolio.

Okay. Are you reinvesting in an incrementally higher or lower yield than what you're currently getting?

Right now, on the mortgage back, our coupon is a little lower but we believe the yield will end up a little bit higher because of the pre-payment fee. For example, in the month of September, we actually were able to increase our yields a little bit over what we did in the month of August on what we bought.

Great. Then, just a follow-up, how much of the margin compression this quarter would you say would be attributable to premium amortization on the MDFs or CMOs?

Are you talking about compared to 2000 - -

Just to the linked quarter, the linked quarter compression.

In this quarter, compared to last quarter?

Right.

OK. The bulk of our yield (indiscernible) has been in that.

In dollars or basis points, whatever.

We dropped, in our portfolio, about $600,000, not quite $600,000, in interest income. From the standpoint of margin, we dropped from prior quarter, I would say, probably, about 50 percent of that margin drop from 4.31 to 4.08 was due to our Security Portfolio and about half of it was due to loans. The bulk of that drop in the Security Portfolio, obviously, was due to mortgage backs because we're running about 48 percent of our portfolio in mortgage back.

As a 10-year yield, it has risen since then, you'd think some of the pre-payment fees would slow and the amortization - -

In fact, we saw, David, a significant drop in the cash flows we were receiving in the month of September, compared to, even, July numbers.

Right. So that's a benefit. OK. Great. Thank you.

Again, if you would like to ask a question, please press star one on your touch tone telephone. We'll pause for just a moment to give everyone an opportunity to signal for questions. Our next question comes from Peyton Greene with FTN Midwest Research. Please go ahead.

Has there been change in your commercial customer responses to the economic environment or is it still not really showing much signs of change?

Fortunately, we did not see a lot of real negative impact from our commercial customers. We're beginning to see some positive impact right now with the change. In fact, we're beginning to see a slight increase and we anticipate it being even better in loan opportunities right now. Again, this area of the state has been in pretty decent shape from the standpoint of continuing on. We have relatively low unemployment up here in comparison to some other areas, so we feel quite fortunate.

OK. Then, from a competitive perspective, is it harder to get the business today? Are there more people trying to go after it or is it about the same?

I would say more competitive today.

OK. How's the M&A environment?

We're working in that area. We've been pretty active in conversation and in activity. We don't have anything that we can report at this time.

Not necessarily specific to you, but do you get a sense that it's picking up or that it's heavy in conversation rather than action?

I said the conversation is heavy and I foresee action being heavier right now. All around us, I think we're seeing some activity now.

OK. Great. Thank you.

Again, if you would like to ask a question, please press star one. We'll have a follow-up question from David Huddles with Keith Brett and Wood. Please go ahead.

Just on the two credits that are making up about two-thirds in non-performers at this point, could you just give us a little color on those and what the resolution prospects are?

We have one customer - - I'll tell you what I'll do, I'll let Smoky answer, but let me just make an initial comment - - we have one customer that's in bankruptcy right now that we have a fairly significant credit exposure with. Then, we have another credit that's just about brought to resolution. We don't expect much of a loss at all from it, that are comprising a significant portion of it. I'll let Harold Livingston - -

Robin pretty much said what I was going to say. One of the credits has, virtually, been resolved with a minimal loss and we had already reserved, probably, even more than the loss actually ended up being. That has occurred since the end of the quarter. The other credit is still in the process of workout. We are encouraged by some developments this week on it. At this particular time, we feel like that that credit will eventually workout. There may be a possibility of no loss, but there's certainly a possibility of much less than we had originally expected and had reserved for.

In the first instance, we were more than double the reserve for what we'll actually probably see as a loss.

Thanks, and this is just a follow-up, it looks like there was a decent up tick in the Past Due category. Could you give us a little detail on that as well?

In the Past Due category?

Right.

We actually had a drop. We've had a decrease in Past Dues, David.

I have a bad number here. What were Past Dues during the quarter?

Non-performings were up now, but not Past Dues. In non-performance, we're up, actually, just because of those two credits. We would have actually been down in non-performing were it not for those two that we just mentioned. Actually, Past Dues were down.

What's he comparing to?

Accruing loans past due 90 days?

Yes, 90 days are up. We're taking over 30. Those two loans are it. Those two loans comprise any increase we have in over 90.

Actually, one of those loans is a make-up of a number of loans on certain properties. The total amount of that exposure is probably spread out over 60 loans.

Real estate secured?

All real estate secured.

Thanks, again.

It appears there are no further questions at this time. I'd like to turn the call - - Actually, we just had one come back in, a follow-up from Peyton Greene with FTN Midwest Research. Please go ahead.

Just to clarify, you're saying one credit relationship had about 60 different loans that were either NPA or somewhere in the 90-day past due, is that correct?

That's correct.

OK. Just wanted to be clear, but your 30-day past due level has actually improved, is that correct?

Overall, correct.

And what's the approximate level of that, say, year-over-year?

Our 30-day or more past dues at the end of the quarter on a number of loans were at an all-time low of 2.1 percent of the number of loans.

OK. Great. Thank you.

Again, if you would like to ask a question, please press star one at this time. It appears there are no further questions at this time. I'd like to turn the conference back over to Mr. Robin McGraw for any additional or closing remarks.

Thank you. We appreciate your time today and your interest in The Peoples Holding Company. We look forward to speaking with you again when we report our fourth quarter results in January. Good day.

This does conclude today's program. Thank you for your participation and you may now disconnect your lines.