Renasant Corp (RNST) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen. And welcome to the Renasant Corporation First Quarter 2006 Earnings Conference call. My name is Janelle and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to your host for today, Mr. Jim Gray, Senior Executive Vice President and Chief Information Officer. Please proceed sir.

Thank you Janelle. I'd like to welcome you to Renasant Corporation's First Quarter 2006 Earnings Conference Call. With me today are Robinson McGraw, Chairman and Chief Executive Officer, Stuart Johnson, Senior Executive Vice President and Chief Financial Officer, Harold Livingston, Senior Executive Vice President and Chief Credit Officer and Corky 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 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. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

And now, Robinson McGraw will begin our discussion.

Thank you Jim. Good morning everyone. And thank you for joining us today for Renasant's First Quarter Earnings Conference Call. After a record year in 2005 for earnings, we are pleased to begin 2006 with a strong first quarter performance. To build upon last year's success, we are pursuing expansion of our market share by continually looking for growth opportunities throughout our footprint in Tennessee, Alabama and Mississippi.

In Tennessee, we've now opened our full service Collierville location and it has experienced success in the first full month of operation. We believe Collierville is a prime location for our new business as population growth for Collierville is outpacing that of Shelby County and the other surrounding metropolitan areas. Our Collierville location, along with the opening of our East Memphis office in the fourth quarter of 2005, now gives us a total of four full service locations within the Memphis area. Adding to our enthusiasm for the Memphis market, Memphis was recently ranked as number 7 in the hottest cities for 2006 business expansion and is number 7 in America's top 40 real estate markets by Expansion Management Magazine.

Nashville, another one of our key Tennessee growth markets was listed by Expansion Management Magazine for the second year in a row as the number 1 city in America for business expansion. We're continuing to establish ourselves in Nashville with our loan production office located in the affluent Brentwood area of Williamson County and are currently analyzing potential locations for a full service bank in this region. We believe this to be a strong growth market as Williamson County's population is projected to grow 15% and total households to grow 14% over the next 5 years. This is according to the Economic Council of Williamson County.

We continue to be highly enthusiastic about our six banking locations in the DeSoto County, Mississippi market. DeSoto County continues to be recognized as a rapidly expanding economic area. As the Memphis Business Journal reported in a March, 2006 article appropriately titled Money Pouring Into DeSoto County, that DeSoto County is now the third largest in Mississippi in total bank deposits, having grown 65% over the past 5 years.

In addition, DeSoto County also continues to be a major factor in the Memphis metro market accounting for 84% of the industrial square footage leased or sold during 2005. DeSoto County also accounted for 68% of the new and under construction square footage in the Memphis metro market. Our DeSoto County locations with the addition of our Collierville location mentioned earlier, gives us 10 strategically positioned offices in the high-growth region of Memphis and DeSoto County.

Moving on to our Alabama markets, the Birmingham area economy continues to show signs of growth as a 2006 Alabama economic outlook report from the University of Alabama Center for Business and Economic Research reported that the Birmingham metro area gained 4,900 new jobs in 2005. Unemployment rates in this area continue to remain at about 3.5%, which is 1.4% lower than the United States unemployment average. Birmingham was also recognized as the 8th best real estate market in the United States by Expansion Magazine. And the Birmingham Hoover MSA was ranked as the 10th hottest location for business expansion and relocation.

The City of Huntsville, Alabama, continues to be highly ranked in many business and economic studies. Over the past year, Huntsville was 3rd in job gains for all metro areas in Alabama, according to the University of Alabama Center for Business and Economic Research. Huntsville was also rated as the 22nd hottest city for business expansion. We also believe that due to the federal government's base realignment and closure decisions of 2005, approximately 5,000 military and 10,000 civilian jobs may be added to the Huntsville area, boosting this already strong housing market.

In the Decatur Morgan County area, we currently have 3 banking locations. Decatur is home to 20 Fortune 500 companies and is also positioned to join Huntsville in gaining from BRAC commission relocation of military and civilian jobs to Alabama.

Our strategic plans call for expansion in our Nashville, Tennessee, and Huntsville and Birmingham, Alabama growth markets for 2006 and 2007. And we are presently analyzing location alternatives.

In Oxford, Mississippi, we're seeing great success with our new full service bank that is located at one of Oxford's busiest intersections. This full service office compliments our ATM located on the campus of the University of Mississippi. We have also moved forward with the purchase of property on the historic Oxford Downtown Square, and will be opening our additional Oxford location there later this year. Oxford continues to experience one of the hottest housing and real estate markets in the country. Its total construction dollar volume in 2005 was almost $80 million, nearly twice the total for '04 and 25% greater than Oxford's previous record high in 2003.

In our corporate headquarter city of Tupelo, Renasant continues to enjoy strong market share. Tupelo and Lee County have recently been recognized by Site Selection Magazine as the nation's second most active micropolitan area for new and existing industries. This report states that Tupelo and Lee County have outpaced 672 out of 674 similarly sized areas in industrial development activity. Northeast Mississippi oversaw 20 industrial expansions and $40 million in capital investment during the past year. Along with this positive economic news, Tupelo will soon open a state-of-the-art business incubator to attract entrepreneurial start-ups and new businesses to the region.

In addition to our enthusiasm about these key growth markets, we once again want to recognize that 4 of our 7 strategic growth markets were ranked in the top 25 of Expansion Magazine's 2006 America's Hottest Cities for Business. And 3 of these were also ranked in the top 25 Hottest Real Estate Markets for the United States by the same publication. We believe these recognitions and rankings of our growth markets confirm that our operational footprint is located in expanding economic areas.

Reflecting our strong financial performance for the first quarter of 2006, basic earnings per share were $0.63, up 21% and diluted earnings per share were $0.62, up 19% compared to the basic and diluted earnings per share of $0.52 for the first quarter of 2005. Net income for the first quarter of 2006 were approximately $6.5 million, up 19% or approximately $1 million for the first quarter of 2005. Total assets as of March 31, 2006, were approximately $2.5 billion, an increase of 8% from March 31, 2005. Total loans grew 6% to approximately $1.7 billion at the end of this first quarter from $1.6 billion at the end of March 31, '05. Total deposits grew 17% to approximately $2 billion during this same period of time.

It is important to note that approximately 71% of our loans and 60% of our deposits are now in the key growth markets that I discussed earlier. Net interest margin remained flat at 3.99% for the first quarter of '06 as compared to the first quarter of '05, even though there was an increase in the cost of deposits and an exceptionally large increase in the short-term deposits which created temporary large positions in overnight investments.

Credit quality improved in the first quarter of 2006. Annualized net charge-offs as a percentage of average loans were 23 basis points for the first quarter of '06, down from 31 basis points as compared to the first quarter of '05. Non-performing loans as a percentage of total loans were 24 basis points as of March 31, '06, compared to 43 basis points in '05.

Non-interest income increased 15% to $11.4 million for the first quarter of 2006 from $9.9 million for the same period in 2005, primarily due to increases in service charges on deposit accounts, loan fees and commissions on investment products.

Non-interest income for the first quarter of '06 includes $558,000 gain recognized on the early extinguishment of a long-term debt and a $397,000 non-taxable death benefit from life insurance. In comparison, other noninterest income for the first quarter of 2005 included $264,000 from the sale of our Pulse Network to Discover.

Non-interest expense was $21.9 million for the first quarter, as compared to $20.9 million for the first quarter of '05. This increase to non-interest expense was primarily due to opening and operating 3 additional full service banking locations since the same period in '05.

In concluding my prepared remarks, let me re-emphasize our enthusiasm for the growth markets we are currently in and our excitement about our de novo and expansion plans to further our presence in these markets.

Now Janelle, I will turn it back over to you for any questions you may have.

[OPERATOR INSTRUCTIONS]

And your first question comes from Andy Stapp from Cohen Brothers. Please proceed, sir.

Hi guys.

Morning Andy.

Your debt interest margin had a nice linked quarter increase in the fourth quarter and then settled back down in the first quarter of '06. Can you help me understand what's causing the volatility there?

Yes, Andy. In the fourth quarter of '05, we had substantially more of our SOP03-3 net interest income, which made up for that difference.

Okay. And what are your expectations going forward for the margin?

We anticipate our margin ranging somewhere between, and this will be our core margin, between 390 to 395 basis points. Then any additional 03-3 income that comes in would inflate it a little bit from that.

Okay. And linked quarter loan growth was not as strong as I anticipated. Did you have some high prepayment activity or --?

Actually, we did in Mississippi. Let me give you a little information on that Andy. In our branch totals, as we look at it based by state, Tennessee grew from the first quarter of '05 to first quarter of '06, about $104 million, which was a 53% growth. Alabama grew a little over 5%, which was $20 million. And again, I think that we mentioned this previously, that in the fourth quarter of last year was when we started seeing some growth in Alabama in loans.

Right.

Mississippi actually experienced a decrease of about $30 million. But, a substantial portion of that increase came from several factors. Number one, we had about $10 million of loans that we wanted to see leave us. And we encouraged them to leave, which they did do in Mississippi. Also, we saw reductions in student loans that we sold. $5 million. We're moving out of a couple of lines of business such as leasing and toning down some others. And those two lines comprised about $7 or $8 million of loans that were a natural run-off. And all those are housed in Mississippi. So that had an impact on the Mississippi loan situation. But, Tennessee, again, has had substantial loan growth as has Alabama is starting to reflect some strong loan growth.

Okay. You still looking for loan growth to be in the neighborhood of 8 to 10% over the long term?

We do. We do. And we're starting, based on what we're seeing in our pipeline, we should be seeing some very good loan growth.

Okay. That's it for me. Thank you.

Thank you Andy.

Your next question comes from Charlie Ernst from RNST. Please proceed.

This is Charlie Ernst from Sandler Asset Management. A couple questions for you guys. How are you doing today? A couple questions. One, the period end balance sheet, the assets were up a little bit. I think you commented earlier that you had some deposits come in. And that you invested that in some short-term assets. Can you just add a little color to that?

For several reasons, we've -- especially in Mississippi and in Alabama, we've had some public funds that have had a huge bearing on -- We had substantial core deposit increases. But a large part of that increase came as the result of some public funds. And Mississippi, about $90 million of that $145 million deposit increase was public funds. And in Alabama, maybe 10, $15 million, $20 million of it came from public funds. The Tennessee deposit growth was pretty much non-public fund money. But a substantial portion of the Mississippi was public funds.

And was a lot of that during the first quarter?

It was. It's -- We have some public fund accounts and it was natural run up with tax collections during the first quarter of the year. So, we feel like a good portion of that will start its normal run-off for the balance of the year.

Okay. And then in terms of the net interest income, I'm forgetting the FASB number. But, was there any of the excess net interest income this quarter from the loans?

In the 03-3?

Yes.

Yeah. We had about five basis points that was attributable to that.

And how much in revenue was that?

It's a little over $200,000.

And --

$250 to $260,000.

Is there any sort of estimate as to how much you might have left in that account?

If that continues to come in, there's about I think somewhere in the neighborhood of 2.25 maybe up to $2.3 million left in there.

Okay. And could you talk about the profitability of the bank that you all bought in Alabama and kind of where that's running at now?

Pardon? I missed the first part of that.

The profit -- when you did the acquisition over in Alabama, you had laid out sort of one year profit targets and expectations. Can you just remind us where that stands now?

We're pretty much on track with both of the acquisitions. And let me point out something too Charlie, too. Of that $2.3 million of 03-3, all of that won't come back in the income. We do expect some of it to be, not lost, but not reappear, I guess is the best way to put it. But we do expect to collect a good -- a portion of that $2.3 million. By the same token, in Alabama, as we priced that acquisition, that 03-3 income, was one of the items that was priced in there. Plus the fact we felt like that there were some recoveries that were still available from some of the loans that they had previously charged off. And we have in fact seen some success in some of those recoveries. So, we're actually running pretty much on track on that merger. In Tennessee, one of the things that we anticipated in that acquisition was that we would see a fairly substantial increase in loan volume. And as I mentioned a while ago, we have seen from first quarter last year to first quarter this year, a 53% increase in loan volume up there. So we are pretty much on track in that market too.

In Tennessee, obviously profits are not that great up there because we have in fact put in two new banks since the third quarter of last year. So we are in fact paying a little bit of that right now. But we anticipate with the additional loan growth that we've had being well ahead of the game in the Tennessee market.

Okay. Great. Thanks a lot you guys.

Thank you Charlie.

And your next question comes from [Brian Klock] from KBW. Please proceed.

Good morning Robin.

Morning Brian.

I know you went over the loan and loan growth by market. Is there any way you can give me that growth from the fourth quarter of '05?

I can. But I tell you what I'll have to do. I'll have to get that for you because I don't have it right in front of me.

Okay.

Tennessee, I can say -- Let me just give it to you from memory.

Okay.

And don't hold me to this. Tennessee did have a fairly decent loan growth. I think it was about 5 or 6, maybe 9% for the -- from linked quarter.

Okay.

Alabama had a similar, I think about 3 to 5 to 6%. Similar to what we're talking about from third quarter -- first quarter to first quarter.

Okay.

And Mississippi did have a reduction. Those loans that I was talking about that we intentionally ran off, occurred during this first quarter. So we did in fact see that change there. But, for the most part, Tennessee again is continuing to give us some fairly substantial loan growth. And we're starting to see loan growth in Alabama. I was pretty close on Tennessee. It was about 9%. And Alabama was 3.5%.

Okay. And I guess when I look at line items, I see that the overall loan growth was driven by the construction line. And is that -- a lot of that construction in Tennessee? Or can you give us a color of where that is geographically?

It's in Tennessee.

Tennessee. Okay. So then the commercial industrial loan decline overall, most of that was Mississippi?

That's correct.

Okay. And I guess with the public funds, you mentioned that that was a good reason for why the demand deposits were up. So that's something that won't -- will stick around as those tax payments come out? I guess that may be another quarter or two that you'll still have those balances working for you?

A lot of those demand deposits, too, were in fact core demand deposits --

Okay.

-- in addition to the public funds.

Okay. And I guess on the income statement side, the expenses, just in the first quarter versus the fourth quarter.

A lot of our expenses is-- we're talking about, and again, I can go back to the first quarter of last year to the first quarter of this year, the salaries expense increased because of the addition of the new office in Nashville, the new offices in East Memphis and Collierville, plus a new office in Oxford. In addition to that, we have the expenses of the new locations also added on top of that.

Okay. How much is within the first quarter versus the linked quarter? It looks like personnel expenses were up about 27% annualized from about $760,000. I know the other operating expenses had some fourth quarter seasonal items in there. But those were up a little bit higher than we would have thought. Is there anything in both those line items that are just the first quarter event? And I guess how much maybe with the salaries and benefits, how much of that is sort of FICA food on the highly compensated that won't be there for the whole year?

I'm going to let Stuart, Stuart has an answer for you on that.

Okay.

On the salaries and benefits in the fourth quarter, when we trued up a number of our accruals for the end of the year, we had an over-accrual in our health and life insurance, as well as our pension, of approximately $400,000. So that's one of the biggest swings between fourth quarter and first quarter --

Okay.

-- in salaries and benefits.

Okay.

As far as salaries are actually pretty flat between fourth quarter and first quarter.

Okay. How about any other -- Stuart, is there anything in that 5.4 million of other operating expense that may be non-recurring or --

We did take an impairment on some ORE property in the first quarter.

Okay.

And then had some other, some legal expenses that I don't anticipate will be at that level into the next quarter.

We also created a legal reserve, the first quarter of this year, to better anticipate some of our legal expenses that we just have that are ongoing.

Okay. So it looks like the salaries and benefits in the new Collierville branch, when was that opened again, Robin?

It was opened in late February early March. The actual opening was in early March. But those employees were all on staff during that timeframe from a salary standpoint.

Okay. Then I guess the salaries and benefits is that $12.2 million is probably a good run rate going forward?

Yeah. The first quarter salaries and benefits would be a pretty good run rate.

Okay. And then that other, the $5.4 million of other operating expenses, that might be down just a little bit.

It should be.

Okay. Okay. And then maybe just one last question and I'll let someone else get in. Stuart, do you have the principal balances of loans sold? And then if you have the assets under management. And then I'll stop. Thank you.

In the mortgage area, and I'm comparing '05 to '06, we did first quarter about $94 million first quarter '06 compared to $90 million in '05 from a mortgage area. And then our assets under management is up about 5%. It is a little over $400 million, $420 million compared to I think 397 last year.

Okay. Thank you.

Thanks, Brian.

And your next question comes from Barry McCarver from Stephens, Incorporated. Please proceed.

Good quarter. Just a couple of sort of housekeeping questions here. Most of mine have been answered. But, first off, I guess just looking at expenses in total, sounds like the efficiency ratio should trickle down just a little bit every quarter in the year. Is that fair?

As we look at it, and again, you know that I look more at that operating expense to assets because it takes the margin question out of it.

Yeah.

That ratio is definitely going down. Depending on what happens with margins, we'll be -- the efficiency ratio should go down.

Okay. And then can you just review real quickly the expectations for the de novos for the rest of the year.

Great. We're, as we speak, we've looked at some potential locations in Huntsville. I doubt either of those -- I doubt if it will be possible to open either of those this year. Nashville, we're looking obviously to find a full service location there. I think we're getting relatively close. Oxford will probably open on the square with a small little boutique office on the square late fall of this year. Birmingham, we were looking for the opportunity to maybe consolidate into a new main office. But, the piece of property we were looking at fell through. So that has not come to pass. But we are still looking over there. Next year in '07 we'll look to possibly relocate at least one location in Birmingham and maybe look to adding additional locations in Birmingham over the next two to three years.

So, really nothing for the second quarter, possibly one in the third quarter, possibly another in the fourth quarter?

Possibly so. Yeah. Definitely the Oxford will come in the late fall, which would be the fourth quarter probably. And I doubt that we'll open anything during the third quarter.

Okay. Just in terms of acquisition opportunities, I know we talked before that you're seeing a few deals, but pretty pricey. Can you give us a little update on opportunities there?

Yeah. We're always looking for opportunities within our footprint. And if a special opportunity occurred outside the footprint, potentially on the Alabama coast or in Florida, those would be the areas that we would look. There's some Mississippi locations that if the right situation came up that we would look at moving into either through de novo expansion or potentially purchasing a bank or a branch or something of that nature. But they're very few.

Okay. And then just lastly, on the run-off of the loans, you talked about the $10 million of loans that ran off, can you give us a little more idea, was it the size of the loans or was it the type of loans that made you want to exit that --?

Our feeling was that the loans had deteriorated. And we encouraged them to find either a, in one case a buyer, and in some other cases other borrowers. And we would still look at some others under the same light that we would like to see that occur.

Okay. But the run-off in general from all 3 different areas is really more of a wanting to maintain great credit quality more than anything else?

Exactly. Exactly. It's just a different philosophy. And a couple -- two of them that we were talking about were lines of business that we inherited that we stayed in, but we've intentionally let run off. And then those loans were loans that we just felt were not loans we really wanted in our portfolio.

Any potential for the same kind of thing to happen in the second quarter?

To a much lesser degree. We have another loan or so that we're looking that hopefully that there may be a buyer or there may be another lender.

Okay. And then just this last one and I'll get off.

We pretty much narrowed it down though to about maybe one other loan, Barry.

Okay. Just lastly, can you refresh my memory on the margin in the fourth quarter taken out the 3-03, I think you said apples to apples margin would have been 397. Is that about right?

That's correct.

Okay. Thank you very much guys.

Thank you Barry.

And your next question comes from Mr. Peyton Green from FTN Midwest Securities. Please proceed.

Hi. Good morning. I just wanted to ask a couple questions. The quality of the funding base really seems to have improved significantly since you all made the acquisition in Alabama. And I was just wondering is-- I guess average borrowings dropped to about 11% of your overall interest bearing liabilities down from about 18% a year ago. And is that something that was exaggerated by the seasonal flow of deposits or do you think that that's sustainable?

I think it's a combination, Peyton, more than anything. It's somewhat exaggerated. But I do think that based on the level of deposits that will not run off, that it's relatively sustainable.

Okay. And then to get at the margin question a little bit further. How much do you kind of ballpark guesstimate that the seasonal deposit flows accounted for in the quarter and what kind of spread were you able to earn on those?

The spread, the average cost of those funds was about 380 basis points.

Okay.

And we made around 550 basis points.

Okay. And any ideas as to the average balance or period imbalance that that applied to?

Yeah. I would say on an average, probably about $60 million.

Okay. Okay. So I mean at least I guess about the normal kind of 20 to $30 million that you all have been clipping away at the borrowings occurred again in the first quarter. Is that fair?

The borrowings that we had had?

Yeah.

That's probably true.

Okay. And do you feel comfortable that that can happen going forward once you get past kind of the outflow of some of the seasonal deposits?

Yeah, I would think so Peyton.

Okay. Great. Any I guess commentary as to the competitive conditions in any of your markets? Are they changing that might make it more difficult to grow? Or have they lessened to any great degree that might make it a little bit easier to grow?

It's still very competitive. But, as you can see, we're still growing in those markets. So, we're in there with the competition.

Okay. And then what's your sense on the Mississippi piece as you kind of get through the housekeeping issues in terms of getting some stuff out the door? Do you feel like that's all behind you or is there going to be some more ongoing?

Peyton, the main reason that we felt inclined to move into some new markets was that so many of the Mississippi markets there's not a great opportunity for growth there. And if there is growth, it's in very much smaller incrementally than the opportunity for growth in some of these other markets. We do see in the Tupelo area, and we have several banks in this area that are not necessarily in the Tupelo, Lee County market, but in the surrounding counties, that there is a good opportunity in that area. We also see DeSoto County obviously being a good opportunity. And we're starting to see that activity pick back up. Some of the other markets, we don't anticipate a lot of growth, in Mississippi. There are some other isolated markets though that we do see some opportunity, but we don't see it at the same level as we see in the Tennessee and Alabama markets.

Okay. And then last question. I think you mentioned that there was about $2.3 million reserve related to the SOP 03 type situation. How much was the principal balance of the loans?

How much is the principal balance left on those loans?

Yeah. Yeah.

I think it's around $6 mill -- No that's about between $8 and $9 million. About $8.7 million.

Okay. And is the contractual maturity of those this year or does it extend out?

No. Some of them extend out.

Okay. Okay. Great. Thank you very much.

Thank you Peyton.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions. I would like to turn the call back over to the speaker today for closing remarks.

Thank you Janelle. We appreciate everyone's time and all of your interest in Renasant Corporation. And we look forward to speaking with you again when we report our second quarter results in July of '06. Thank you and goodbye.

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