Renasant Corp (RNST) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2005 Renasant Corporation Earnings Conference Call. My name is Jackie and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a Q&A session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Jim Gray, SEVP and CIO. You may go ahead, sir.

Thank you, Jackie. I’d like to welcome you to Renasant Corporation’s Second Quarter 2005 Earnings Conference Call. With me today are Robinson McGraw, Chairman and CEO; Stuart Johnson, SEVP and CFO; Harold Livingston, SEVP and CCO; and Corkie Springfield, SEVP and CRPO.

Before we begin, let me remind you that some of our comments may be forward-looking statements, which involve risks and uncertainties. The 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 SEC. And now, Robinson McGraw will begin our discussion.

Thank you, Jim. Good morning, everyone, and thank you for joining us today. Renasant Corporation is continuing to expand in opportunity markets in Mississippi, Alabama, and Tennessee, and the economic activity in these new markets continues to accelerate. In Southwestern Tennessee, we enjoy a strong presence in the Memphis area cities of Germantown and Cordova, and in August we will open a full-service bank in East Memphis, adjacent to a mature, high-income neighborhood on one of the most highly traveled thoroughfares in Memphis.

During the first quarter of next year, we will open another full-service bank at the dynamic city of Collierville, adjoining Germantown. It will be located at the corner of the city’s busiest intersection. As mentioned in a previous conference call, we established an office this year in the affluent Brentwood area of Williamson County near Nashville. Average household income in the county is projected to reach $110,000 by 2009. In the same period, households are expected to total more than 67,000, up 22% from the current 55,000. This geographic area is expected to play a key role in our overall earnings performance going forward.

We continue to be highly enthusiastic about our established presence in DeSoto County, Mississippi, with 5 banking locations. The area joins Shelby County, Tennessee in the Memphis area cities I just mentioned. This means that our operations in this high-growth region will include 9 strategically placed offices by early next year. According to the DeSoto Economic Council, the county ended 2004 with $122 million in new capital investment and 1,200 new jobs, from 12 new locations and 3 expansions. Other indicators of the economy’s economic health show a current unemployment rate of 4.6%, the lowest in the state and lower than the U.S. rate of 4.9%.

We are proactively developing business in the thriving Alabama markets of Birmingham, Huntsville, and Decatur, where we now have 8 banking offices and a mortgage loan operation through our acquisition in the state earlier this year. The Birmingham area economy continues to grow steadily, with all local indicators showing positive gains for the previous 12 months. Housing starts and sales of existing homes show rapid growth, as the value of the new and existing homes move up this period.

We are extremely pleased to be part of the dynamic Huntsville market. Forbes and other national publications have held the city as the leader in quality of life, as the technology hotspot, and as one of the best cities for manufacturing expansions and relocations. The Decatur/Morgan County area, where we have 3 banking locations, continues to be one of the top counties in Alabama for recruitment and industry expansion and retention. According to an Alabama development office report, Morgan County ranked number 1 in total announced capital investment and ranked in the Top 5 in 4 other categories. The Decatur/Morgan County area is certainly one of our leading opportunity markets and one in which we have a significant market share in which to build. Our strategic plan calls for expansion in our Alabama markets in 2006 and we are presently analyzing location alternatives.

One of our newest opportunity markets is Oxford, Mississippi, where we established the [Denova] Limited Service Operation in 2004 and are opening a full-service bank in August at one of the city’s premiere retail business intersections. Oxford is home of the University of Mississippi, which has 13,000 students enrolled and is clearly one of the leading economic generators in the area. It is the second fastest in the state in the growth of housing starts, second only to our DeSoto County area of operations.

Our Company also enjoys a strong and diversified economy in our lead county home base of Tupelo, Mississippi. 138 new and expanded businesses have added 454 new jobs in Lee County since May 1, 2004. 871 jobs, representing 20 existing industry expansions and 6 new plan announcements have been created. This represents $29 million in new and capital investments. Expansion of our existing industries is responsible for 77% of the new jobs created.

Our financial performance for the second quarter of 2005 was indicative of the successful ongoing integration of our Tennessee division and our progress in the integration of our Alabama division. Net income for the second quarter of 2005 was up $1.1 million, or 23%, from the second quarter of 2004.

Basic earnings per share were $0.60 and diluted earnings per share were $0.59 for the second quarter of 2005, compared to basic and diluted earnings per share of $0.61 for the second quarter of 2004. As noted in our earnings release, second quarter of 2005 diluted earnings per share was increased $0.06, as the cash flows on certain hedges loans accounted for under AICPA’s Statement of Position 03-3 exceeded our initial estimates. This increase was partially set off by $0.03 decrease due to Heritage’s merger-related expenses and costs associated with our name change. Second quarter 2004 diluted earnings per share was increased $0.08, due to the sale of our merchant card business. Now that we’ve completed both the Renasant Bank Shares and hedged its financial holding corporation mergers, and have encouraged substantially all the merger-related and name change expenses, we are able now to focus our attention on franchise growth and expense control.

We experienced good loan and deposit growth during the first half of the year, with over $46 million in loan growth and $33 million in deposit growth coming from our Tennessee division. As we anticipated, it took about 6 months from our July 2004 merger date to integrate Renasant Bank Shares and shift our focus to growth. We believe we have successfully integrated and are now poised for additional growth in the dynamic Memphis market. We are also pleased that even though our main focus in Alabama this year has been on integrating Heritage, we still experienced healthy loan growth of $13 million and deposit growth of nearly $4 million, despite allowing $28 million of broker deposits to roll off.

Operating expenses increased $6.7 million for the second quarter 2005 compared to second quarter 2004. Over $6.1 million of this increase was related to the additional ongoing operating expenses incurred as a result of our acquisition of Renasant Bank Shares and Heritage and merger-related in name change expenses. Adjusting for this, second quarter 2005 operating expenses were only up about 3% over second quarter 2004. Second quarter operating expenses decreased over $100,000 compared to first quarter 2005, as a result of several factors. After converting Heritage in late first quarter 2005, we began a reduction of duplicate operation staff in Alabama. During this same period, we initiated a planned reduction in Mississippi staff. We also began to realize cost reductions related to a renegotiated contract with our data processing provider.

I would like to note that due to this, second quarter 2005 data processing expenses, which included the 2 acquisitions, were less than second quarter 2004, which did not. All of these expense reductions more than offset normal salary increases, which were effective at the beginning of the second quarter 2005.

Non-interest income increased $48,000 in the second quarter 2005, compared to first quarter 2005, due primarily to contributions from several diversified sources, such as deposit service charges, fees and commissions, trust revenue, and gains on the sale of mortgage loans. I would like to note that first quarter non-interest income included several items that weren’t included in the second quarter numbers. They included $264,000 for a member distribution from the Pulse Network, $246,000 of insurance and contingency income, $134,000 in security gains, and $113,000 in safe deposit rental income. Adjusting for this, non-interest income increased over $500,000 on a linked-quarter basis.

Credit quality continued to improve during the second quarter 2005. Our annualized net charge-off ratio was 19 basis points for the second quarter 2005, and 25 basis points for the 6 months ended June 30th. Net charge-offs for the second quarter 2005 included approximately $301,000, representing the remaining charge-off of the one problem credit relationship, as discussed in the first quarter earnings release. As you may remember, we charged off approximately $605,000 in the first quarter of 2005 related to this relationship. Excluding the charge-offs from this one relationship, annualized net charge-offs, as a percentage of average loans, were 12 basis points, and 13 basis points for the 3 and 6 months ended June 30, 2005, respectively. The allowance for loan losses, as a percentage of loans, was 1.14% on June 30th, as compared to 1.14% on March 31st, and 1.26% at December 31, 2004.

As discussed in my earlier remarks, SOP 03-3 had an impact on our net interest margin for the second quarter. Since the adoption of this accounting standard impacted our current quarter’s earnings, I feel it’s necessary to discuss the circumstances which resulted in the recognition of this interest income and the potential impact on future operating results.

When we acquired Heritage in the first quarter of 2005 and adopted the provisions of SOP 03-3, there were certain Heritage loans in which we felt it was probable, based on the facts and circumstances at that time, that we would not collect all the contractual amounts owed to us by the borrowers. At acquisition date, the balance of these loans was adjusted to the amount we expected to collect. SOP 03-3 provides for the recognition of interest income on amounts initially determined to be uncollectible, if the estimated cash flows on these loans improve, or it is probable the cash flows will improve. The interest income recognized during the quarter was the direct realization of improved cash flows in the form of principal reductions. In fact, the majority of the interest income resulted from our negotiation of a settlement with a guarantor on a single loan. Although we will recognize the interest income in the future quarters on these loans, we do not believe it will be at the level recognized in the current quarter.

This concludes my prepared remarks, and we’ll now be glad to answer any questions that you have.

[OPERATOR INSTRUCTONS]. David, your line is open. You may go ahead.

Good morning, gentlemen, David with FTN Midwest. I had a question regarding the integration of Heritage and how Birmingham is doing and when will we get a chance to see some more operating leverage in that region. Also, I was hoping you could touch on the Denova activity that’s been going on in that market and how you anticipate that’s going to affect the previous growth plans. Thank you.

The integration is going as planned. We feel real good about the fact that we actually grew loans in our Alabama market, a good portion of which, or a portion of which, was in the Birmingham market by $32 million. We let $28 million of brokerage CD’s that Heritage owned mature and we elected not to renew any of those. So we’ve experienced good growth in the market, even though we have been involved mainly in integration in that market at this point. We feel like that it will be very similar to the Tennessee market, where it took us about 6 months to integrate, and we showed substantial growth the first 6 months of this year in both loans and deposits in that market. We feel like we’ll experience a similar type result in the Alabama market, although it may take us, because of the difference in size, a little bit longer to complete the integration.

We do plan expansion in our Alabama markets, in particular, in the Birmingham and Huntsville market. We already have 3 locations in Decatur and doubt that we’ll expand in that market, although we may look for different locations or things of that nature in the future there. Huntsville, we are already looking for an additional location. And we plan to look for multiple locations in the Birmingham market. We’ll start this process during the 2006 year and we’ll continue for the next couple of years. We feel like that that’s a great expansion area for us.

As far as the Denova activity there, we are experiencing that not only in the Birmingham but also in the Memphis market, and it’s part of everyday banking. And what we do is try to hire the best possible employees that we can hire and hope to steal market share from other competitors, as opposed to our losing any market share. So we just see it as a good opportunity to continue competing in those new growth markets.

I guess I was, at least as far the Denova, I was curious about the pricing that you’re seeing out there and are they going in there and doing some things that are forcing you to really look at some loans and maybe price them a little lower or possibly on the front-end side, you know, similarly?

It is not unique to Birmingham. Pricing right now is competitive across our system. Birmingham is probably maybe a little more competitive than some other markets in the Alabama and Mississippi area, but not really any more competitive than the Memphis market.

Your next question comes from Andy Stapp from Cohen Brothers & Company.

Good morning. Late quarter loan growth was a bit lower than I anticipated. I know in the past you’ve talked about 8 to 10% annual loan growth. Is that still what you’re shooting for?

We are, Andy. If you will look, a lot of what occurred, we had really good loan growth, but we had some loans paid off for various reasons. Alabama, we didn’t get the growth that we anticipate getting in the future because we were involved in integration there. If you look back at 2004, in the second half of the year in Tennessee, we were basically flat in loan and deposit growth there. I think that’s just a natural part of an integration process. We look for the Alabama growth to pick up. As I mentioned, we are replacing the broker deposits with core deposits and we’re looking at loans, some of which we’re allowing to move or have preference, some of which we’re paying off in a natural course of business. And we are actually bringing in new loans, but at this point in time, in a transition period, the actual net gains in both loans and deposits in Alabama appear to be pretty flat as a result of this transition period of time as to how we are doing it.

By the same token, we’ve had some loans in Mississippi pay off that we feel like that we wanted to pay off and also that problem of credit that we’ve been talking about for awhile was finally foreclosed this year, which meant about $4 million in Mississippi loans that went by the wayside as a result of that. So we anticipate solid growth for the rest of the year and we plan to continue at a pretty high rate of growth. If you will look at the growth in Tennessee this year, it was rather substantial. So we’re looking for the same growth out of the Alabama markets in the future.

Okay, great. You had a very strong linked-quarter growth in fees and commissions. What was driving that?

It’s pretty much across the board, Andy. We have seen just a growth in our fees and commissions pretty much in all sectors. It wasn’t related to any one. It was just part of our operating process. Again, too, one of the things, as we continue to finish the integration of our new growth markets, we are beginning to experience some of the income growth, both interest and non-interest income, in these markets, so that has an impact on us.

Okay. So this is -- you should be able to realize continued strong growth?

We feel like we will.

Okay, good. And you may have touched on this earlier in your dialogue, but I missed it, occupancy and equipment expenses were down linked-quarter.

Yes. I’ll let Stuart answer that one, Andy.

Andy, the first quarter, we had not completed in the Heritage acquisition, we had not completed our fair value calculations at that time. We used a third party to do that for us. So we were estimating some depreciation based upon their records from their last quarter. And in doing that, we actually overestimated depreciation when we got our fair values, so we had to adjust that, and that’s primarily the difference.

And you mentioned that you’ll be focusing on growth and expense control. Does this mean you’ll be less active in the M&A arena?

Not necessarily. For the rest of this year, we’ve pretty much committed that we won’t have any deals happening. But we are certainly starting the process of looking and we’ll look into the markets that we’ve discussed in the past that we would like to expand into and we’ll begin that process a little more vigorously next year.

Your next question comes from Joe Stieven from Stifel Nicolaus.

First of all, good quarter. A little confusing, but it looks like it’s – actually, Andy went over some of my loan growth numbers, but let me ask you, throw out something that will even make you more excited. If you look at the margin for the quarter, the 414 margin, but then if you sort of try to cleanse through the margin and take out the accounting change and the acquisition, can you sort of tell us what the old Company core margin was and then what the acquisitions did to the margin, just to sort of help us on our model in going forward.

First, if you take out the -- it’s about 20 basis points that you take out for the 03-3, interest income.

Right. Obviously, a very helpful accounting change. Thank you.

And again, as I said, we don’t anticipate it quarter-to-quarter to be as good as this quarter was, but there will be some positive impact on it for the next several quarters going forward. We were obviously impacted significantly by the difference in the two markets. We’re looking at probably a 15, maybe a little more, 15 to 18 basis points maybe between the Mississippi and the 2 new markets of the impact of the margin.

We anticipate going forward, we won’t be the high margin bank that we were, obviously, because of the markets that we’re in. I think David hit on that earlier. The competitive nature of the growth markets, by their very nature, will make margin a little bit lower, a little bit lower run rate for us going forward. But we anticipate still being able to experience a nice high margin in the Mississippi markets, which will offset somewhat the lower margin in these growth markets.

Okay. I was just trying to get through it. Obviously, there is a lot of moving parts in the quarter for you guys.

I think you hit the net on it though. We feel real good about the quarter. We feel real good about where we are in our integration of our 2 acquisitions.

You have a follow-up question from Andy Stapp from Cohen Brothers & Company.

I just wanted to follow up on SOP whatever the numbers are. Is the 20 basis points margin enhancement that you realized, is that a one-time adjustment or is that going to be retained going forward?

Andy, it won’t be as high going forward.

Okay, that’s what I thought.

Yes, but we do anticipate additional income as part of it.

Okay, that’s what I thought. I just wanted to confirm.

You have a question from David Honold from KBW.

Nice quarter. My question has to do with the balance sheet remix that’s been going on. I jumped on late, so forgive me if you’ve already touched on it. But to what extent do you think you continue to reduce reliance on securities and wholesale funding sources going forward? You’ve made pretty good progress on that front already, but how much more of that can continue to take place on the balance sheet?

I’m going to let Stuart comment on that a little bit and then I’ll follow up.

David, we have seen in our markets very strong growth in deposits, particularly in our Germantown area. We’ve seen some deposit growth in Mississippi. And this was intentional in the fact that we wanted to start decreasing our reliance on debt. Short-term, our debt is down; long-term, we’re using federal home loan bank money to offset for the reprocessing loans or establishing a matched funding for those loans. Again, we’ve gotten in the right spirit, competitive. We’ve introduced high-performance checking into our Alabama market. That is going well at this point. So as far as an absolute dollar, I don’t have that, other than our direction is a significant growth in deposits over the quarter that we plan to continue to do. From our average deposit base, we’ve grown a significant amount over the prior quarter.

David, you mentioned securities. If you’ll look, our investment portfolio is basically the same size as it was pre-merger. We’ve gone from around an 80% loan deposit ratio, or maybe even a little less, to an excessive 90% loan deposit ratio. So we are getting higher earning assets on the books. We are also concentrating on bringing in more deposits, as opposed to relying on borrowings from that perspective. And as I’ve mentioned, we’ve been very successful in our new growth markets in bringing in additional deposits with the $33 million in the first half of the year in the Memphis area. Plus, we actually brought in $34 million of new deposits in the Alabama markets, after you take into consideration the $28 million of broker deposits that they had on their books that we let run off. So we’ll continue that same process. We’re looking to continue to attract deposits in some of our Mississippi markets, which are great funding sources for these growth markets.

And primarily, Dave, our growth on a consolidated basis for the year has been about a 3.79%, right at a 4%. And the bulk of that growth, obviously, comes from our Tennessee market. They’ve grown about 18.5% in deposits from the first quarter to the second quarter.

Okay, thank you for that. And then just as a quick follow-up. Expense control in the quarter was excellent. I think though that you do have a couple more branches coming on in the back half of this year. Can you comment on what we should expect out of the personnel and occupancy lines going forward?

The East Memphis office, for all practical purposes, personnel-wise, the staff, we, as part of the Memphis merger, we did not have any direct cuts in personnel expense. We anticipated at the time of the merger making these moves. And as you know, they were operated as a separately chartered company for a period of time, so therefore we had to retain some back office personnel. So we are utilizing some individuals who previously were in support positions in retail-type positions. Plus, through attrition, we’ve lost some personnel that we’ll replace or that we have replaced with actual retail-type personnel. So we won’t see any real cost impact from a personnel standpoint in East Memphis. We will have some occupancy expense that will go up, but by the same token, we’re going to be able to eliminate some of our space in Germantown, some immediately and some in the near future, as leases, short-term leases, expire in those markets. In Oxford, we’ve already had a loan production office there, so we’ll only be looking at an additional 3 or 4 people in that market. So it’s not going to be a significant impact in that respect.

I mentioned, David, that we had some planned reduction in Mississippi staff. We changed the way we’re doing business in some of our smaller locations. We’ve actually, when you take into consideration salaries and benefits both, have absorbed about $900,000 of expenses already in Mississippi on an annualized basis between January and June 30th. We are looking at some other attrition that will, in fact, totally offset any personnel expenses that we have in these new markets for the rest of this year.

[OPERATOR INSTRUCTIONS]. You next question comes from [David Skar] from [SCN Financial].

Just a follow-up question to that. So back office looks pretty good as far as support staff and then the rest, as far as your hires, you’ll do line hires, whether it be branches or production officers. Is that correct?

That’s correct. In fact, we’ll have a little more attrition in the back office staff, David.

Thank you very much. Great quarter.

At this time, you have no further questions, so I’ll turn the call back over to you for closing comments.

Thank you, Jackie. We appreciate everyone’s time today and your interest in Renasant Corporation. We look forward to speaking with everyone again when we report our third quarter results in October. Thanks again, everyone.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have great day, ladies and gentlemen.