Renasant Corp (RNST) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, welcome to the Renasant Corporation fourth-quarter 2005 earnings conference call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Mr. Jim Gray, Senior Executive Vice President and Chief Information Officer. You may proceed, please.

Thank you. I would like to welcome you to Renasant Corporation's fourth-quarter 2005 earnings conference call. With me today are Robinson McGraw, Chairman and Chief Executive Officer; Stewart Johnson, Senior Executive Vice President and Chief Financial Officer; Harold Livingston, Senior Executive Vice President and Chief Credit Officer and Corkie Springfield, Senior Executive Vice President and Chief Credit Policy Officer.

Before we begin let me remind you that some of our comments during this call may be forward-looking statements, which involve risks and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Those factors include, but are not limited to, interest rate fluctuations, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission. And now, Robinson McGraw will begin our discussion.

Thank you, Jim. Good morning, everyone, and thank you for joining us today. 2005 was both a challenging and rewarding year for Renasant Corporation. We integrated our Tennessee and Alabama acquisitions, introduced new banking product lines and successfully changed our name from the Peoples Holding Company to Renasant Corporation. As we begin 2006 we are continuing to expand into opportunity markets in Mississippi, Alabama and Tennessee and the economic activity in these new markets continues to accelerate.

In southwestern Tennessee we have been experiencing great success with our full-service bank in East Memphis which has now been open for a little over three months. Our East Memphis location is a high income, high traveled area which makes for a prime wealth management business banking location.

The area of Germantown within the Memphis region is also a strong market as the U.S. Census Bureau reported that Germantown residents have the highest per capita income of all municipalities in Shelby County, to go along with the high median family income of nearly $100,000. During the first quarter of 2006 we will continue to build on our presence in this region by opening another full-service bank in the dynamic city Collierville which adjoins Germantown. According to the Collierville Chamber of Commerce the average household income for Collierville residents is over $100,000. In addition a new business, new businesses such as FedEx Technology Center and the Carrier Corporation providing thousands of jobs to the area, we see Collierville as a solid growth opportunity. We are very excited to be entering and expanding into this growth market region of Southwest Tennessee.

Another key growth market we are continuing to establish ourselves in is the affluent Brentwood area of Williamson County, near Nashville, Tennessee. We are currently analyzing potential locations for a full-service bank to complement our IPO in this region. We believe this to be a strong growth market as Williamson County has been ranked third in the United States with the most growth potential and prosperity by American City Business Journals. In addition, Williamson also enjoys a County growth rate in excess of 56%, which is number one in the State of Tennessee as well as the 27th highest household income per capita for the entire nation. This geographic area is expected to play a key role in our overall future expansion plans.

We continue to be highly enthusiastic about our well-established presence in De Soto County, Mississippi as we now have six banking locations. This area adjoins Shelby County, Tennessee and the Memphis area cities mentioned earlier. With the addition of our Collierville location our operations in this high-growth region will soon include 10 strategically positioned offices. According to the De Soto Economic Council this area saw over $150 million in new capital investments and 1200 new industrial jobs in 2005. De Soto continued its rapid economic growth by adding 8 completely new industries and 15 industrial expansions during the past year. Also according to De Soto housing permit records, seven families move to De Soto County each day creating a housing boom that continues to drive the local De Soto market.

With the completed integration of our 8 banking offices and mortgage operations in the thriving Alabama markets of Birmingham, Huntsville and Decatur, we are anticipating strong business growth. The Birmingham Hoover area ranks as the 8th best place in the nation for entrepreneurs, and Alabama stacks up as the 12th best among entrepreneurial friendly states according to Golden Guide as published by the National Policy Research Council. Even more recently entrepreneur.com rated Birmingham third among midsize U.S. cities for places to start and grow a business. The region is also expected to continue growing as the Birmingham Chamber of Commerce expects close to 3% growth in population and nearly 6% growth in housing in the Birmingham Hoover area during the next five years. The Birmingham regional Chamber of Commerce reports that Birmingham has absorbed 10,000 new people due to Hurricane Katrina while maintaining one of the lowest unemployment rates of any southeastern metro area. The Birmingham area also offers an opportunity to pick up additional business due to several recent major banking consolidations.

Huntsville is another Alabama market that continues to be highly rated by business publications. According to Southern Business and Development Magazine Huntsville is rated the number one midmarket in the south for 2005. Over the past year Huntsville was third in job gains for all the metro areas in Alabama according to the University of Alabama Center for Business and Economic Research. We also believe that due to the federal government's base realignment and closure decisions of 2005 it is still expected that approximately 2000 military personnel and their families will be relocating to the Huntsville area, adding to an already strong housing market.

The Decatur, Morgan County area we currently have three banking locations. Decatur is home to 20 Fortune 500 companies and according to national media outlets; Kia Automobiles is strongly considering locating a manufacturing facility there which would add up to 2500 new jobs. According to the Morgan County Economic Development Association the Decatur area added over $353 million in investments for new and expanding companies for 2005. We anticipate expansion in our Nashville, Tennessee and Huntsville and Birmingham, Alabama markets for 2005, 2006 and 2007 and we are presently analyzing location alternatives.

In our newest opportunity market of Oxford, Mississippi we are excited to announce that we have acquired a prime location on the Oxford Square, which will raise our profile in the historic downtown area. We are also seeing great success with our new full-service bank that is located at one of Oxford's busiest intersections which complements our ATM located on the University of Mississippi campus. The city of Oxford continues to be one of the hottest real estate markets in the State of Mississippi with assessed property value jumping 72% over the past five years. In addition, the University of Mississippi has recently announced that it is scheduled to receive a $20 million grant to build a research and technology park that may potentially provide up to 600 new jobs for Oxford and Lafayette County.

Renasant continues to retain a strong market share in the diversified economy of our Lee County home base of Tupelo, Mississippi. In the Lee County region gross sales were nearly 7% higher than in 2004, and sales tax diversions for the City of Tupelo were up 7% from a year ago. Thus indicating strong improvements in local consumer spending. Housing starts for Lee County in 2005 were 20% higher than in 2004 with the addition of a city housing summit gaining lots of local media, community and political attention, and we may soon see even more housing and economic development come into this region. It is also worth noting that the counties within the Tupelo MFA are currently seeking the State of Mississippi issuance of bonds that will provide financing to clear and partially develop a 1700 acre tract known as Well Spring to bring a major manufacturing plant that would add thousands of jobs to Tupelo and the Lee County region.

In addition to our enthusiasm about these key growth markets, we are excited about many new products and services Renasant is providing to the financial marketplace. Renasant has introduced and is in the process of developing a portfolio of cash management solutions such as merchant capture, wholesale and retail lockbox and enhanced business Internet banking. These products will help and gain new small business clients as well as adding new services to and retaining those business clients we currently serve.

This year we also introduced (indiscernible) savings accounts to our insurance and deposit products lines which we anticipate creating an entirely new avenue of deposit growth in the future. Our financial performance for 2005 was indicative of our successful integration of our Tennessee division and our continued progress in the integration of our Alabama division.

Diluted earnings per share were $2.31 for 2005, up approximately 8% compared to $2.14 in 2004. Net income for 2005 was $24,209,000, up over 31% from 2004. In quarterly comparisons diluted earnings per share were $0.60 for the fourth quarter of 2005 compared to diluted earnings per share of $0.45 for the fourth quarter of 2004. Net income for the fourth quarter of 2005 was $6,218,000 compared to $4,048,000 for the fourth quarter of 2004. With 2005 seeing the completion of integration of both Renasant Bancshares and Heritage Financial Holding Corp. we are now able to move forward in 2006 focusing our attention on franchise growth and expense control. We have realized strong growth in our Tennessee division with over $94 million in loan growth and $65 million in deposit growth in 2005.

We have successfully completed our Tennessee integration and now are positioned for additional growth in the dynamic Memphis market with the opening of our Collierville office. In our Alabama division we are also pleased with the integration of Heritage where we experienced loan growth of $13 million for 2005. Alabama deposit growth is been robust with growth of $43 million in 2005 that includes an intentional runoff of nearly $20 million in brokered deposits which Heritage had at the time of merger.

In Mississippi deposit growth has been strong at $61 million for 2005 while loans have grown $8 million for the same period of time. It is important to note that approximately 70% of our loans and 61% of our deposits are now in the key growth markets that I discussed earlier.

Net interest margin decreased to 4.11% for the fourth quarter of 2005 from 4.20% for the fourth quarter of 2004. The additional interest income from the Heritage loans accounted for on the SOP 03-3 increased the net margin for the fourth quarter of '05 by 14 basis points. Adjusting for this, margin for fourth-quarter '05 was 3.97%, up 3 basis points from 3.94% as compared to the third quarter of 2005.

Credit quality remains strong during the fourth quarter of '05. Annualized net charge-offs as a percentage of average loans were 19 basis points for the fourth quarter of '05 and 20 basis points for the year. Nonperforming loans as a percentage of total loans were 42 basis points as of December 31, '05 compared to 76 basis points for December 31 of '04. Non-interest income increased 53% to $10,118,000 for the fourth quarter of '05 from $6,619,000 for the fourth quarter of '04. This interest increase in non-interest income was due to the combination of the Heritage acquisition and improvements in service charges, fees and commissions generated on the Company's loan and deposit products, trust revenue and gains on the sale of mortgage loans. Diversified fee income continued to be a major source of strength for Renasant representing almost one-third of total revenue.

Noninterest expense to average assets decreased 33 basis points from 3.59% for the fourth quarter of '05 compared to 3.92% from the fourth quarter of '04. This decrease reflects the planned elimination of duplicate operations and staff as a result of the Heritage merger, reduced data processing costs through contract renegotiations with the Company's primary vendor and planned Mississippi staff reductions.

Total assets as of December 31, 2005 were $2.4 billion, approximately, an increase of 40% from December 31st of 2004. Reflecting primarily the acquisition of Heritage. Total loans grew 44% to 1.65 billion at the end of the fourth quarter 2005 from $1.14 billion at December 31, 2004 while deposits grew 42% to over $1.8 billion during the same period. The increase in total loans and deposits was primarily due to the Heritage acquisition. Excluding Heritage balances at the date of the acquisitions total loans and deposits at September 30, 2005 grew over $115 million or 10% and $168,776,000 or 13%, respectively, from December 31, 2004.

In concluding my prepared remarks let me reemphasize our enthusiasm for the growth markets we are currently in and our excitement about our de novo plans to further expand our presence into these markets. Now I will turn it back over to you for questions.

(OPERATOR INSTRUCTIONS) Barry McCarver, Stephens Inc.

Great quarter. A couple of questions. First off would you have Stewart run through the interest margin again in the SOP 03-3 to make sure I understand what is was going on there?

Sure.

Barry, we had in the fourth quarter, we had recorded about $740,000 on the 03-3 loans and these were the loans that were acquired through the acquisition with Heritage January first and in compliance with that statement of position, you don't bring your cost of reserve both loans once they bring over a net realizable value. And the amount of reserve that is set aside for those are netted against the balance of the loan. And can be accreted into income provided you collect; and in the fourth quarter we had some loans that happened to. We were able to look into interest income as an adjustment to the yield $740,000. That equated on to our margin about the 14 basis points for the fourth quarter. That carried our margin from a 411 to a 397 on a core base.

And I am not just real, real familiar with that rule, but is there potential for that to happen in future quarters?

Yes.

Okay, so that (indiscernible) one year out?

That's correct. We brought over -- I think there were -- yes, we brought over $18 million in loans. Of that, though, they were impaired by over $6 million. And as those loans are paid down, the 03-3 comes in to the extent of the amount impaired.

So how much more -- do you have a total of how much more can be recovered?

Up to about another -- there is about $4 million left out there on the $6 million that was impaired.

Okay. That makes more sense now. Thank you for that. Robin, can you talk a little bit about in your Alabama and Tennessee markets I think we have a pretty good idea of what the loan and deposit competition is like in Mississippi in the kind of rate you are getting there. Can you talk about your two new markets and kind of anything that has changed since the last quarter on the pricing both loan and deposits?

Well, the pricing is aggressive on both sides, Barry. In the Memphis market and the national market; obviously in the Huntsville and Birmingham markets it is the same. Decatur is close enough to Huntsville that I think thee are impacted by that Huntsville market in their pricing also. We are seeing a lot more aggressive pricing on all of those markets as compared to the Mississippi markets. That is one of the, or the major reason for our margin decline from 2004, early 2005.

There has been a significant change either way to any of those markets since the last quarter?

No change either way. Still about the same as far as the aggressiveness. I think we have seen on the deposit side, a little bit of relief in those markets. But on the loan side it's still just as aggressive.

Then last question -- I'll let somebody else get on -- sounds like three or so branches maybe this year, maybe a few more in '07 -- can you give us just a rundown of sort of what is in the pipeline in terms of new branches and new loan production offices?

Sure.

So we have the hard numbers.

We are for this year, for 2006, we will open up our Collierville office on February 1st, with a soft opening and have a grand opening a little bit later on. We will open up the location on the Oxford Square during the third quarter of 2006. We are presently in negotiations over a location in Birmingham. That won't open, though, probably until early 2007. And that would probably be a consolidation of some other offices as opposed to just an additional location.

We are also looking for and will probably be opening an additional location in the Huntsville market in 2007; we are in the process of finding that location right now. Nashville will be looking probably at opening up a full-service office there in the 2007 area, buying land for that location or securing land for that location sometime during 2006. In the not too distant future we will be looking at additional locations in the Birmingham market to complement the ones we already have there. And some of those may be relocations of existing branches, and some of them will be additional branches.

Okay. Thanks, guys.

Brian Klock, KBW.

Just wondered if you could add a little color on the operating expense. I noticed that occupancy and equipment were up and the other. Maybe you can start with that.

Obviously with the addition of the new banks that had an increase in the occupancy and equipment expense during 2005. During the latter part of 2005 we had the additional expense of our East Memphis location and our Oxford, Mississippi location which were added during the third and fourth quarters. I think that is for this year would be the major changes in the occupancy and equipment expenses would be related to those locations.

Okay and I noticed also the other operating expense in the fourth quarter from the third quarter was up about 500,000. Is there anything nonrecurring in there or is it just seasonal?

It is mostly non-recurring expenses that we had. Some of them related to mergers. We had a marketing build that came in at the end of the year that was larger than our accrual had been. We had some additional fees and other expenses related to mergers and other expenses. We had the -- yes, also in there was the cost -- we dropped the charter for our Tennessee Bank back at the end of the first quarter. We received a charge from our core provider for the conversion of this during that fourth quarter. So all that contributed to a fairly substantial increase of onetime fees for that particular quarter.

Okay, so I guess what would be a better sort of run rate for total non-interest expense going forward?

I am going to refer that one to Stuart.

I think if you go back and look more in line with the third quarter, however, we would probably need to add about another 200, $300,000 cost of these leases and depreciation on the new facilities we put into place. So you are looking probably 20.8, something of that, 20.9.

Okay, great. I guess just two other questions. Looked like the effective tax rate was up a little bit in the fourth quarter versus the third quarter of '05.

Right.

Maybe talk about how many shares you bought back and where the authorization stands.

Under effective tax rate we did have in the third quarter that benefit that did lower the tax rate. We are going to run somewhere between 28 and 29% for our indicated tax rate depending upon the quarters. From the standpoint of the shares that we bought back this year; on the year-to-date basis we bought back 288,000 shares.

Thank you very much.

Peyton Green, FTN Midwest.

A couple questions. One, the non-interest income revenue didn't trail off I guess as much as it normally does on a seasonal basis in the fourth quarter. If you could provide some color -- is that going forward and what your hopes and expectations are for non-interest income overall. Highlighting where the particular opportunities are in terms of doing business the way you all historically have done in your Tupelo franchise, across the new banks and then also what opportunities the new banks bring to the legacy franchise. Thanks.

Peyton, obviously we were running about 225 basis points of that non-interest income to assets on our legacy franchise. And we have dropped off on that. We look to in the future run at the about 175 basis point average range with the consolidation of the three markets. Obviously our assets have grown dramatically, and so therefore the impact of the wealth management income, insurance income is spread over a larger number of assets which will in fact drop it somewhat. But we will be starting to see some improvement in service charges and loan fees in our new markets. But we don't anticipate getting back up to that 225 basis point level overall. Good run rates in that 175 basis point range.

Then are there any particular initiatives that you rollout in '06 that might help the number one way or the other?

As we start spreading some of our wealth management products in the Memphis market, we have individuals in place in that market that should in fact enhance that income. We do have a strategic alliance with an insurance agency in the Memphis market. We do have one wealth management employee in the Alabama market that we've added a cash management specialist in that Alabama market. So we are seeing some opportunities in that market; we have not reached any strategic alliances with an insurance agency in that Alabama area to enhance that income. We are still looking to add someone else in the wealth management area in that Alabama market, hopefully to enhance that income over there.

And then back to the loan issue. You all had about 18 million in loans with about $6 million impairment that you took as of the date of acquisition of Heritage. You indicated that about 4 million remains on that. What is the balance of loans that that applies to?

Okay, we let me let Stuart -- Stuart is sticking something in front of -- let him answer that for you.

To kind of give you the balance on those, Peyton, we got a net of about $7.2 million left on those loans. That would include the impaired amount to gross amount of those loans is about $9.9 million. It was about 2.6 as aside under 03-3, it gives the net balance of those loans of about $7 million.

Okay, and I mean is there any particular I guess maturity structure on those that would lead you to lean one way about '06 or '07 in terms of getting the income in or I guess amortizing it all off?

The length of time of those loans do vary. And to pull that in to income it will depend upon the cash flow and it is accreted as that cash flow continues to improve. So at this point it is a little difficult to say how much of that we would have in 2006.

So I mean it is still a function of making principal paydowns on the loans?

Exactly that is where we do derive that income, Peyton, is as the principal paydowns come in.

Okay.

That's what happened this year. We had a couple of them paydown in full or in a large part. And so therefore there were some large paydowns this year. We don't anticipate any large paydowns of significance that we had this year in any one year going forward.

Great. And then Robin, just in terms of guiding the franchise over the next couple of years, I mean it sounds like you all certainly have a healthy dose of de novo activity plans or already nailed down. How do you view the M&A side of expansion?

The M&A side will be strategic in nature. We will look for opportunities. If the opportunity is one that we feel is in line with our strategic goals but also efficient from a cost standpoint we certainly will look to trying to put together a partnership. And we are in fact looking at this point in time, but will be very deliberate about what we do.

Okay, so less of a sense of urgency given your the unfolding plans in Tennessee and Alabama than say two or three years ago?

That's correct. We see less of a sense of urgency. That is a very good way of putting it. But because we see a tremendous amount of opportunity in the markets that we are in and the opportunity for de novo expansion in the areas that we are already in.

And just generically is your sense that that activity is going to pick up in '06 or that more people are kind of scratching their head or how do you feel about the overall M&A environment?

I think '06, people in or banks in general will be a little bit more deliberate than they were maybe in the '04, early '05 timeframe. I think as we look I am not sure, but maybe pricing may be a little bit less than what we saw a year or two ago as a result of that.

Okay. Great. Thank you very much.

(OPERATOR INSTRUCTIONS) Andy Stapp, Cohen Brothers.

On an operating basis your net interest margin rose 3 basis points. With a difficult interest rate environment out there do you think you can continue to get some modest increases in your margin or at least keep it stable?

We have seen a little bit of relief in our margin during the fourth quarter and anticipate our run rate being in that core area going forward. We don't anticipate ourselves getting back up to a 420 as it were in the past. But we do anticipate being able to kind of solidify ourselves around that 400 basis point area.

Okay and you mentioned there is about $13 million of loans generated in your Heritage footprint which equates roughly like 3% annual growth, something around like that. I don't know the exact number. I guess you -- was there some runoff there that is not real strong growth considering the nature of the market, and I am sure you added lenders. Just wondering if you could get some color on what you think a good run rate going forward might be.

Let me give you an analogy that compares that Alabama and Memphis situation. We consummated the merger in Memphis on July 1, 2004. Between July 1 and February 1 of 2005 we were totally flat. Our loan and deposit wise in the Memphis market during that integration period. The same basically was true except maybe it was about a nine-month flat rate as far as the loan side was in Alabama, although we were able to again bringing deposits in those Alabama markets a little bit faster than we did in the Tennessee markets. Loan volume was flat probably about nine months and during the fourth quarter we started to see it pick up; running along that same analogy I don't know that we will have the robust growth like we had in Tennessee. But we are starting to see growth in those Alabama markets, and we think our run rate will be somewhat less than the Tennessee markets but higher than the Mississippi markets.

And could you give me some color on your overall loan pipeline? How it stands now versus six months ago?

Without giving any specific numbers I will say it is -- our pipeline is a lot larger today than it was six months ago. We are still experiencing excellent loan growth in Tennessee and starting to pick up loan growth in Alabama and also seeing some in the Mississippi markets also.

And I think that is it on my end. I think the rest of my questions were answered.

Barry McCarver, Stephens Inc.

Just a couple of follow-up questions, guys. Now that we are a year and past the acquisition, taking a look at the reserve ratio, continued to tick down just a little bit, where does that start to level off? Are we at that point now?

We are at that point, Barry. With the SEC requirements as they are, we reserved as much as we can possibly reserve with our present portfolio.

Okay.

We think 110 basis points is about the bottom as far as low as we can go.

Lastly, would you just refresh my memory on your thoughts on the loan to deposit ratio? How high will you guys allow that to go? Where are you comfortable?

Our goal is somewhere in between 90 and 100%, in that 90 to 95% range; 95% is probably where our optimum level is.

When you say goal is that something you can do in '06? Or is that more of a long-term?

It's long-term but we anticipate that 90 to 95% range in '06.

Thank you, sir. And there are no further questions at this time. I like to turn the presentation back to Mr. McGraw for any closing comments.

Thank you. We appreciate everybody's time today. And your interest in Renasant Corporation. We look forward to speaking with you again when we report our 2006 first-quarter results in April of '06. Thank you, everybody, and good day.

Once again, ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.