Renasant Corp (RNST) 2004 Q4 法說會逐字稿

My name is Anne Marie and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would like to turn the presentation over to Mr. Jim Gray, Executive Vice President. Please proceed sir.

Thank you Anne Marie. I would like to welcome you to the Peoples Holding Company's fourth quarter 2004 earnings conference call. With me today are Robinson McGraw, President and Chief Executive Officer; Stuart Johnson, Executive Vice President and Chief Financial 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 risks and uncertainties. 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. Now, our President and Chief Executive Officer, Robin McGraw, will begin our discussion.

Good morning. Thank you for joining us today. I would first like to make some comments regarding our markets. We are continuing to expand in opportunity markets adjoining those in our current operating region and the economic activity in those new markets continues to accelerate, particularly in the Memphis area cities of Germantown and Cordova, Tennessee where we have a presence through the July 2004 acquisition of Renasant Bank. In the Alabama markets of Birmingham, Huntsville and Decatur where we now have a presence through the January 2005 acquisition of Heritage Bank, and Oxford, Mississippi where we now have a limited service branch and are building a full service location.

Our Company also enjoys a strong diversified economy in our Lee County home base of Tupelo, Mississippi. The Tupelo/Lee County area was ranked the 18th strongest among the top 573 micropolitan areas in the nation and 8th in the southeast, according to a recent economic strengths ranking study which was conducted by the independent research firm, Polycom (ph) Corporation. Oxford, Mississippi was ranked 14th in this same study. A micropolitan is defined as an urban area with a population of between 10 and 50,000 people. 138 new and expanded businesses have added 454 new jobs in Tupelo and Lee County since May 1st of 2004. 817 jobs, representing 20 existing industry expansions and 6 new plant announcements, have been created in the calendar year 2004. This represents $29 million in new capital investment.

Expansion of our existing industries in 2004 is responsible for 77 percent of the new jobs created. A significant new addition is General Atomics, headquartered in San Diego, California. This is a leading technology company for the Department of Defense that will create high-tech jobs in the Tupelo area. As stated earlier, we continue to be enthusiastic about our expanding presence in DeSoto County, Mississippi and the adjacent Shelby County, Tennessee cities of Cordova and Germantown adjoining East Memphis. The DeSoto Economic Development Counsel reports that the county ended 2004 with $122 million in new capital investment and 1,200 new jobs from 12 new locations and 3 expansions. This will contribute 25 percent to the overall Memphis MSA and it has for the past two years done this.

DeSoto County was also fortunate to receive approval at the North Mississippi Foreign Trade Zone. This is the third general purpose Foreign Trade Zone in Mississippi. This new designation will continue to increase industrial activity in the area.

Diluted earnings per share for the fourth quarter 2004 were 44 cents compared to 55 cents for the fourth quarter of 2003. Included in this fourth quarter earnings were several onetime items, detailed in our earnings release, resulting in a negative adjustment of 12 cents. Excluding these adjustments, fourth quarter 2004 earnings per share were 56 cents. Net income for the fourth quarter 2004 was $4 million compared to $4.5 million for fourth quarter 2003. Included in fourth quarter net income were the previously mentioned items resulting in a negative adjustment of $1 million. Excluding these adjustments fourth quarter net income was $5 million. As you would expect, the adjustments I have already mentioned had a negative impact on return on assets and return on equity for the fourth-quarter 2004.

In the interest of time I will skip discussion on these ratios since they're detailed in our press release and I will move onto the various components of our earnings. Net interest margin improved to 420 basis points for the fourth quarter of 2004 from 416 basis points at the same time last year due to a shift in asset mix from investments to loans and repricing of variable rate loans. Net interest income grew 25 percent to $15.2 million for the fourth quarter of 2004, compared to $12.1 million for the same period in 2003. The economic improvement in our markets coupled with strategic hires, has led to a loan growth in all four quarters of 2004. This loan growth, along with several interest rate increases, has led to five consecutive quarterly increases in net interest income. We believe both the loan growth and the increase in net interest income are sustainable.

Noninterest income decreased to $6.6 million for the fourth-quarter 2004, from $7.8 million for the fourth quarter of 2003. Included in fourth-quarter noninterest income is an approximate $1 million impairment on Fannie Mae and Freddie Mac securities discussed in our press release. Excluding this adjustment, fourth-quarter 2004 noninterest income was $7.6 million. The remaining slight decline from 2003 is attributable to lower mortgage related revenue due to the slowdown in refinancing activity and the loss of merchant discount revenues as a result of our sale of the merchant business in June of 2004. Our comprehensive investment, insurance and traditional banking services have resulted in significant growth in noninterest income during the previous 16 quarters.

We continue to generate strong diversified fee income which represents over 33 percent of our net operating revenue reflecting our commitment to this strategic initiative. The allowance for loan losses as a percentage of loans was 126 basis points at the end of the fourth quarter of 2004, as compared to 153 basis points at the same time last year. Net charge-offs were $1.8 million for the fourth-quarter of 2004 compared to $549,000 last year. However, $1.6 million of the fourth-quarter 2004 charge-offs were related to the sale of approximately $10.4 million of loans that we had identified as being below our desired credit standards. Existing reserves on these loans exceeded the charge-off amount by $600,000. Excluding charge-offs on these sold loans, net charge-offs for the fourth-quarter 2004 were 7 basis points on an annualized basis, and 15 basis points for the year.

Nonperforming loans as a percentage of total loans decreased 76 basis points at the end of 2004 which was down from 85 basis points at the end of 2003. The nonperforming loan coverage ratio was 166 percent at the end of the fourth quarter, compared with 181 percent at the end of the third quarter 2003. Our continued relatively low level of charge-offs is consistent with our strategic goal. As mentioned in prior conference calls, over one-half of our nonperforming loan ratio is related to one credit which we are continuing to work to resolve. Noninterest expense was $16.6 million for the fourth quarter of 2004. This includes over $2 million of expenses from Renasant compared to $13.2 million in the fourth quarter of 2003. The balance of this increase was due to salary and benefit expenses related to strategic hiring of commercial lending and wealth management personnel, data processing expenses incurred due to the implementation of network enhancements, continued marketing expenses related to the successful checking account program introduced in the second quarter of 2003, the cost of opening new banks facilities, impairment of other real estate and loss on the disposition of obsolete assets, accounting and legal expenses, expenses related to the Renasant merger, and expenses related to the name change which I will discuss later.

With the exception of impairment charges, we believe these expenses to be investments in our future that are generating and will continue to generate significant revenue enhancements and/or cost savings. Reflecting the acquisition of Renasant, assets at the end of 2004 were up 20 percent from 2003, to over $1.7 million and deposits were up 16 percent to more than $1.3 billion. Loans grew 32 percent to $1.14 billion at the end of 2004, from $863 million at the end of 2003, including $181 million from Renasant. Excluding Renasant, loans grew at an annualized rate of over 11 percent from the end of 2003. With the acquisition of Renasant Bank we now have a presence in the affluent and fast-growing East Memphis suburbs of Germantown and Cordova. We will soon establish a third location in East Memphis along the highly traveled Poplar Avenue inside the I-240 loop, and a fourth location in the dynamic city of Collierville which adjoins Germantown.

We recently opened a limited service branch and announced plans to construct a full-service bank in Oxford, Mississippi where the University of Mississippi is located and we anticipate opening in the third quarter of 2005. Additionally, we opened a full-service ATM on the campus of the University of Mississippi in Oxford and plan to open an ATM this month at Mississippi State University in Starkville. On January 1st, we completed our merger with Heritage Financial Holding Corporation, the parent of Alabama based Heritage Bank. Heritage has 8 banking locations in Decatur, Huntsville and Birmingham, Alabama.

On December 31st, Heritage had totals assets of $541 million, total deposits of $380 million and total stockholders' equity of $45 million. The acquisition of Heritage will allow us to gain a presence in some of Alabama's most attractive markets and serve a broader customer base while enhancing shareholder value and future earnings potential. Heritage provides us with a natural extension of our current footprint and we're excited about the partnership as we share similar operating philosophies, cultures and values. Given our recent acquisition of two banks and our expansion into new markets outside of Mississippi, we announced in December that we will be changing our bank's name to Renasant Bank and our insurance agency to Renasant Insurance effective February 1st. This was necessary to remove any potential confusion resulting from the use of Peoples' name by other financial institutions in our expanded footprint. It also made sense for us to focus our resources around one unified brand-name instead of three.

In summing up my comments, I would like to note that although it is not fully reflected in our earnings, we are making great progress in several areas. First, we have experienced four consecutive quarters of loan growth and five consecutive quarters of improvement in net interest margin. We continue to improve our credit quality with the loan sale I mentioned earlier. With our two recent acquisitions, we have now expanded our footprint to include key markets in Tennessee and Alabama. With our forthcoming bank name change, we are now positioned and intend to continue our progress under one unified brand-name, that being Renasant Bank. Now, Anne Marie (ph), I would be happy to answer any questions that anybody has. I will turn it back over to you.

Thank you sir. (OPERATOR INSTRUCTIONS). Andy Stapp of Cohen Bros.

Good morning. Your press release indicated that the increase in net interest margin was due in part to a shift in asset mix. How much do you have remaining in unpledged securities?

I will at Stuart answer that Andy.

Most of our securities from the standpoint of the People's Bank, we probably got in the neighborhood around 50 percent of those securities that are unpledged at this point, (indiscernible).

Okay. You mentioned that you had some onetime items in some charges related to impairment with fixed assets in OREO and you also had some merger-related expenses. Do you know what the pretax dollar amount of that was?

Andy, let me go back to the ORE and fixed assets. We, as part of our 404 testing, discovered some assets that had basically become obsolete short of their full amortization, so we elected to go ahead and take an impairment on those particular assets. That was both in the ORE area, in the fixed asset area. That total amount of all of those I think on the pretax basis, was in the neighborhood of about $677,000 pretax. Then again, the merger-related expenses, you can look at it two ways. Actual dilution for the full half of the year for Renasant is around 9 cents a share. Just on the impact of our earnings for this particular quarter, we said about 2 cents a share.

That was just for the merger related --.

That's just the merger related expenses.

Okay.

-- that are taxable expenses. Nothing concerning other non-tax deductible expenses I guess.

Do you know what the pretax dollar amount was, or I can estimate it I guess.

Stuart would have that.

Andy, are you talking about on the fixed asset itself?

You gave me that, 677, (multiple speakers) merger-related expenses that you recorded in the fourth quarter.

$237,000.

You also had some nonrecurring expenses in the quarter related to the name change?

We will, advertising expenses. We started working with an ad agency toward that name change, and we have already started working toward sign exchanges and things of that nature.

Okay. How much did you have in Sarbanes-Oxley expenses in the quarter?

Andy, if you look at additional expenses for accounting firms --.

Yes, out-of-pocket expenses.

Law firms --.

Yes, in particular an amount -- I guess those expenses are all behind you. I'm just looking at the initial preparation costs and that portion that would not be recurring.

I can identify at least $200,000. It probably was more significant than that, but just off the top of my head, I can identify legal and accounting expenses of at least $200,000 that were directly related to Sarbanes-Oxley during the quarter. There were more expenses than that and obviously the impairments were as a result of that. A lot of these were expenses related strictly to stocks.

Okay. Did you have to -- did you raise rates any, or how much did you raise rates on non-maturity deposits during the quarter, approximately?

On non-maturity deposits, we did not.

Okay. I guess your position to hopefully continue the nice net interest margin expansion you have been enjoying?

We are. Obviously, there is anticipation of another rate change on February 1st -- or 2nd, I think is the date. We are looking toward that going forward.

To add, we continue to look at increased loan volume, particularly in some of our newer markets.

That is one of -- our strategic plan going forward for one to five years evidences significant improvement in outstanding loans not only in our markets but in our new growth markets, in Tennessee and Alabama. We anticipate the percentage of overall loans in the Company that are in the Mississippi market decreasing several percent over the course of the next year based on new loans that we plan to generate in our new markets.

Will you have to, to generate that growth do you think you will need to add to the loan staff in both Tennessee and Alabama?

Actually --

Or are you pretty well positioned in Tennessee now?

In Tennessee we have already added staff. We are only looking for one additional hire in the Tennessee market and that will be to staff one of our new locations. We already have the other staffing for those locations basically. In Alabama, we will be looking to possibly one city president that we will be hiring and possibly and probably a couple of corporate lenders. But in each of those cases, we would anticipate those individuals hired to be able to bring sufficient loan portfolio with them to pay for themselves easily within the first six months of their hire. That has been our experience with others we have hired under similar circumstances.

Okay. Very good, thank you.

David Honold of David Honold.

Good morning. I guess my question has to do generally with credit quality. Now that you have sold this one or I guess several commercial real estate credits out of the portfolio, what is the overall outlook in terms of the first nonperformer that is weighing down the asset quality metrics right now? And then just generally, the prospects for resolution or sale of some of the other problem credits?

Let me comment first and then I will let Corky follow-up if he has any additional comments on it. The problem credit mentioned is in the process of foreclosure. We have foreclosed almost all of the property in Lee County, Mississippi. There is additional property in Lafayette County where Oxford is located. We will be looking to foreclose it in the not-to-distant future. We feel as though that we had been adequately reserved through impairment and otherwise on this particular credit, and by the end of -- if not by the end of this month by the end of February, we would have finished that foreclosure process. The Fayette County property, we are very optimistic on how we come out on it and we feel comfortable now with where we are in Lee County on that particular loan.

Outside of it, we are pretty comfortable with the rest of the credits that we have and we feel extremely comfortable with the adequacy of our reserves for the credits that are still out there on the books. Most of those credits were old credits that we have had on our books for quite a few years that we have been struggling with in some way, form or fashion although only one of them was actually a nonperformer. We have been not real pleased with those credits I know since I took over as CEO, and maybe even before that. We saw an opportunity to get ourselves out of those credits, and we elected to do so.

I think going forward, you should be looking at a much cleaner portfolio for our Company. In addition to that at year-end, we had the lowest past-dues that we have ever had. We only had 150 basis points of past due loans, 158 at the end of the year, which is the best that we have seen, if not ever, in many many years in my memory. Let me put it that way. In addition to that, as you know, with Heritage, we feel very comfortable with the reserve that was brought over from there and with the either sale or impairment of any loans that we felt as though could cause us problems in the future.

Okay, thanks. Can you just touch on the trends on some of the fee income items in the quarter, particularly service charges and trust?

For the year, let me go back and I am going to be doing this from memory. For the year, we had records set in trust revenue. We were up, I think, $200,000 for the year in trust revenue. Revenue from our debit card was the highest we have ever had. We had a record year I think in insurance revenue, but I will throw a caveat in there. A good portion of that increase was a very good contingency year which we cannot expect year after year. All of our noninterest income drivers other than mortgage revenue had strong years if not record years. Next year we would anticipate mortgage revenue being equal to this year. I do not see another drop off in that. Actually it should be higher with the addition of Heritage because we are in some more dynamic markets and they have some strong mortgage loan revenue coming out of that area.

Back to your question, were it not for the impairment that we mentioned, were it not for the drop off in mortgage revenue and the decline in noninterest income as a result of the sale of the merchant card business, we would have once again been up in noninterest incomes. So our continuing noninterest income drivers should improve going forward. Back to your question on trust revenue, that is even becoming a more dynamic part of what we're doing with our wealth management group. We have seen some significant activity in that area and we expect that to continue.

In our retail investment area, we're also licensing some annuity agents in Tennessee. That is a businesses they have not been in up there, so that will be additional revenue to agents in Tennessee. Although Heritage in Alabama has been in that business, we're enhancing that business as well with the hiring of the dedicated security (indiscernible) in addition to their annuity agents.

Okay, so I was looking just at the link quarter change in service charges and fees and it looked down. I was just wondering if there was anything going on there other than seasonality?

It's seasonality David. For the year, we had a significant increase.

Thanks.

(OPERATOR INSTRUCTIONS). Joe Stieven of Stifel, Nicolaus.

A couple of my questions have been answered, but let me change directions a little bit. You guys have obviously been very business the last 12 to 18 months. Talk about the integration and where you stand with getting everything integrated. That is question number one, then I will follow it up with something else.

Integration with Renasant is moving extremely well. Obviously, we have already seen most of that come to fruition. We have converted their data system, other than their loan platform which will becoming this year. We started to integrate the processes. The Company is working extremely well together. That one is moving along quite nicely. We have got a good jump start on Heritage toward the end of the year. We will be converting it, its data systems core system, at the end of February. We feel very comfortable with the direction that we're going with that integration. We're, I would say, ahead of schedule there also.

We have had -- Jim Gray is heading up the integration team on the Heritage, and as you know Stuart Johnson headed up the one in Memphis that was Renasant. We of course have a lot of our people over there today on the loan side working with them on converting their loan processes to ours. We have, over the course of the end of the year, Corky Springfield, who is our Chief Credit Policy person, coordinated efforts with all three companies for a unified loan manual which comprises the best of each of three which we are bringing to fruition. I would say all in all, we are ahead of the game on integration. We obviously will not be looking toward any acquisitions in the near months ahead of us in order to be sure that we are fully integrated before we look toward anything else.

I guess that was with my question. When will you guys be fully integrated, all on the same kind of systems? Then what does this do for your acquisition outlook? You sort of started to get into that.

We will continue our visitation of process on trying to meet people and companies, buying companies, that fit the criteria of what we're looking for and start that dating relationship. But I don't see us closing the deal during 2005.

Okay. That was really it. Thanks guys.

Andy Stapp of Cohen Bros.

One more question I forgot to ask. You had like a 3 percent -- was it decline in compensation expense, I think? What was driving that?

I don't think we did, Andy.

You said from the third to the fourth quarter?

Yes, link quarter.

I don't know where it would be Andy. Stuart.

Andy, I will follow up and give you an answer on that.

All right, thanks.

David Welch of River Oaks Capital.

Good morning. Just had two housekeeping questions relating to the Heritage transaction, and I realize it closed a day after the numbers here. But how many shares, common shares, did you issue in the merger and do you have an estimate for pro forma tangible book per share?

We're going to issue about 1.369 million, I believe that is the number of shares in that transaction. When we got through with redesignation, that was about 65 percent of the -- under the terms of the agreement. We issued 65 percent of the transaction compensation in stock and 35 in cash.

Tangible book per share. (inaudible)

I can't give you it exactly at this moment, but it is in the 16 -- between 16 and $17 a share is tangible book. The book itself is in the, I think, 25. I can't give you that off the top of my head and I don't have it right in front of me.

I can see from the release it was 19.79 stated book before the new shares, but --.

(indiscernible) shares, right.

Thank you very much.

(OPERATOR INSTRUCTIONS). You have no further questions at this time.

Thank you Anne Marie. We appreciate everyone's time today, and we appreciate your interest in The Peoples Holding Company. We look forward, once again, to speaking with you when we report our first quarter 2005 results in April. Thanks again.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.