Renasant Corp (RNST) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Renasant Corporation earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn our presentation over to your host for today's call, Mr. E. Robinson McGraw, Chairman and CEO.

Thank you. Good morning, everyone. Welcome to Renasant Corporation's fourth quarter 2006 earnings conference call. With me today are Stuart Johnson, Senior Executive Vice President and Chief Financial Officer, Corky Springfield, Senior Executive Vice President and Chief Credit Policy Officer, Harold Livingston, Senior Executive Vice President and Chief Credit Officer, and Jim Gray, Senior Executive Vice President and Chief Information Officer.

Before we begin, let me remind you that some of the 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 SEC. 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.

Let me begin by stating that we're pleased with our company's 2006 fourth-quarter and year-end results. I am also proud to note that this was the second consecutive year Renasant has posted record earnings per share. During 2006, Renasant realized double-digit loan and deposit growth, expanded its mortgage operations, effected a three-for-two stock split, increased its cash dividend payout, opened a full-service banking office in Collierville, Tennessee, secured a new location for a full-service banking office in Oxford, Mississippi, and was recognized as a Global Select Market company by NASDAQ. As we have closed the books on another successful year, we look forward to expanding our market share in our company's key growth markets in 2007.

In Tennessee, the Nashville and Brentwood, Tennessee market has been ranked number one two years in a row in Expansion Management's annual Hottest Cities issue for business, relocation and expansion. And the Memphis MSA has grown 25% over the past 15 years. In addition, Memphis was recognized in the winter '06 edition of Southern Business and Development magazine as one of the top 10 cities in the United States for business and industry headquarters relocation.

In Tennessee, '06 loan growth was over $73 million, up 21%, and deposit growth was $50 million, up 17% as compared to '05.

Looking at Alabama, Birmingham enjoyed several high-profile job announcements in the fourth quarter of '06, while unemployment remained low at 2.8%, according to the Birmingham Chamber of Commerce. Due to the Birmingham-Hoover area's economic environment, our retail mortgage operation that we added in the middle of the third quarter of '06 is already breaking even.

With Renasant's five combined locations in the cities of Huntsville and Decatur, Alabama, the major focus continues to be on the potential influx of new residents from the BRAC Commission relocation assignments. In addition, during '06 we were able to take advantage of the banking consolidations within our Alabama market, as we added several new lenders, personal bankers and mortgage bankers from this region to our Renasant team.

In Alabama, '06 loan growth was over $82 million, or 17%, and deposit growth was $43 million, or 9%. Our strategic plan calls for expansion in our Huntsville and Birmingham, Alabama markets during '07 and '08, and we're presently analyzing multiple location alternatives.

In Mississippi, DeSoto County continues to be a rapidly expanding economic area, particularly in the cities of Horn Lake, Hernando and Southaven, located within DeSoto County. Horn Lake has posted a 57% population growth rate since 2000. Hernando is the second-fastest area in population growth within Mississippi at 45%, and Southaven ranks third with a 34% population growth since 2000 -- all of this according to the U.S. Census Bureau.

With four locations in DeSoto County, we are well positioned to gain from the top three areas in population growth in this key growth market. Because of the dynamic growth in this region, we recently acquired property for an additional location in DeSoto County.

In Oxford, Mississippi, we anticipate that our new full-service location on the historic Oxford Downtown Square will be opening by the end of the first quarter of '07. In addition, Oxford has recently announced the building plans for a cutting-edge technology park, which will attract researchers, biotech companies and small information technology startups to this already thriving university town.

In Tupelo, our corporate headquarters, the average household income grew over 70% from 1990 to 2006. Household income is projected to grow 7.4% over the next five years, according to the North Mississippi Community Development Foundation. In addition, the Renasant Center for IDEAs, the North Mississippi business incubator, is already at 34% capacity with its grand opening still over a month away. We believe that this new center for small-business startups and entrepreneurs will bring new jobs and industry to the region, as well as give us an opportunity to grow our small-business client base.

In Mississippi, 2006 loan growth was $32 million, up 3%, and deposit growth was $146 million, up 11% as compared to '05. It's important to note that now, approximately 73% of our loans and 60% of our deposits are in what we believe to be our key growth markets. Our strategy of leveraging our lower-cost Mississippi deposits in our growth markets continues to be successful.

Looking at our current locations and future plans of expansion within these key South growth markets, as well as the current banking consolidations taking place throughout the banking industry, we believe that our company is well-situated to build upon our current market share as we move into '07.

Reflecting our financial performance for '06, basic earnings per share were $1.75, up 12%, and diluted earnings per share were $1.71, up 11%, compared to basic earnings per share of $1.56 and diluted earnings per share of $1.54, respectively, for 2005. Basic earnings per share were $0.44 and diluted earnings per share were -- excuse me -- basic earnings per share were $0.45 and diluted earnings per share were $0.44 for the fourth quarter of '06, compared to basic and diluted earnings per share of $0.40 for the fourth quarter of '05.

Net income for '06 was $27,125,000, up 12%, or $2.9 million, from '05, and net income for the fourth quarter of '06 was approximately $6.9 million, up 12%, or approximately $731,000, for the fourth quarter of '05. Total assets were approximately $2.6 billion, an increase of 9% over the same period in '05.

Total loans grew approximately 11% to $1.8 billion at the end of the fourth quarter of '06. Total deposits grew 13%, to approximately $2.1 billion during the same period. On a linked-quarter basis, loans grew by $65 million from the end of the third quarter to the end of the fourth quarter of '06, more than doubling our loan growth from the third quarter of '06. Loan growth occurred in the areas of commercial mortgage, real estate construction, and one-to-four family mortgages.

Net interest income remained flat at $20.9 million for the fourth quarter of '06, as compared to $20.9 million for the same period in '05, while net interest margin increased -- decreased, excuse me, from 4.11% to 3.78% over the same period. I would, however, like to point out that net interest income for the fourth quarter of '05 included $740,000 of additional interest income from certain loans accounted for under SOP 03-3. Excluding the SOP 03-3 income, net interest income increased $736,000, reducing our net interest margin decline to 19 basis points.

Credit quality remained strong during the fourth quarter of '06. Annualized net charge-offs as a percentage of average loans were 12 basis points for the fourth quarter, as compared to 19 basis points for the fourth quarter of '05. Non-performing loans as a percentage of total loans were 62 basis points at December 34th '06, as compared to 38 basis points at December 31st '05.

The allowance for loan losses as a percentage of loans was 1.07% at December 31st of '06, as compared to 1.12% at December 31st '05, due partially to our strong loan growth, a low level of charge-offs, and the experiencing of excellent credit quality through 2006.

The increase in non-performing loans during the fourth quarter is attributed to three loans. The two most notable include the repurchase of a $1 million SBA guaranteed participation in order for us to follow the SBA liquidation guidelines, and a $2 million loan secured by $5 million of collateral and a $1 million second behind us. We expect to be paid off on this second loan by another financial institution as early as this Friday. Neither of these loans significantly increased our provision for loan losses during the fourth quarter.

Non-interest income increased 16% to $11.8 million from $10.1 million for the fourth quarter of '05, an increase of $1.6 million. Noninterest expense was approximately $22 million as compared to $21.5 million for the fourth quarter of '05, or an increase of only 2.33%. Noninterest expense average assets decreased to 3.40% for the fourth quarter of '06, compared to 3.59% for the fourth quarter of '05. It is important to note that as the entire banking industry continues to experience margin pressure, we are successfully offsetting its negative impact through growth in deposits, loans and fee income, and by controlling the growth of our noninterest expenses.

In concluding my prepared remarks, let me again reemphasize our enthusiasm for the growth markets that we are currently in, and our excitement about both are short and long-range de novo and expansion plans to further our presence in these markets. Now, Cheryl, I'll turn it back over to you for questions.

(OPERATOR INSTRUCTIONS). Barry McCarver, Stephens Inc.

Good quarter. Got a couple of questions for you. First off, I noticed that non-interest-bearing deposits jumped quite a bit from the fourth quarter over the third quarter. Can you give us an idea of what happened there?

Fourth quarter we had a large influx of public funds, quite frankly, more so than anything else coming in.

Those were non-interest-bearing?

Combination. Most of the public funds were interest-bearing funds, but we didn't -- we have had some non-interest-bearing deposits that are coming in as a result of our -- combination of things; our cash management program, treasury management program; we're seeing a lot of new business accounts come in. And in addition, through our checking account program we're seeing a lot of retail accounts come in.

If you go back and look at the last four quarters, and this is the point in time when you're looking at these numbers, if you look at the first, second quarter, it's pretty much in line with the fourth quarter. Third quarter is the one that's low at 257. It's just getting (inaudible) point in time.

I was wondering if just, kind of going forward for 2007, you could talk a little bit about how you feel that the margin is going to react during the year. It was off quite a bit in the fourth quarter. I know you're doing a good job making up for that. Just give us an idea of, sort of all things being equal with the yield curve and whatnot, how you feel like your margin can hold up in '07.

Historically, we -- our margin performs better in either up or down rate moving markets. When it flattens is when we have our margin compression, which has caught up with us now. We do see in all the markets that we're in -- and this is all coming, obviously, from the liability side. We saw a significant increase in our cost of liabilities during this quarter. A lot of it is cyclical, in that we do have -- as I said a while ago, we had about $48 million of new public funds come in during the third quarter -- I mean fourth quarter. We'll see this continue to rise a bit during the fourth quarter, and then it will start rolling off.

We do, however, and we have seen across our system a downward movement in rates from a lot of our competition, which we, too, are beginning to drop some rates on the deposit side. I think everybody is experiencing, obviously, the same thing we are, and philosophically everybody is on the same boat. We do still see some high pricing -- and I'm not going to call it irrational -- but some pricing from some of the startups that are kind of outside the ballpark that we're not going to follow that. But I think everyone is beginning to feel the same margin pressures that we are, and we're starting to see some of those deposit rates beginning to decline.

That's very encouraging.

It is to me. The last two weeks we have seen some competition lowering rates, which we were proud to see.

Lastly, and I'll let somebody else ask questions. You had a good, strong loan growth in '06. I wonder if you could talk about the pipeline going into '07.

Right now our pipeline looks good, actually, in all three states. Following up on it will be the key thing. But we've seen some pretty good opportunities over the latter part of '06 on loans that have yet to be closed, and some good activity thus far in '07. So, we have budgeted for some strong loan growth in our key markets over the course of the coming year.

Kevin Reynolds, Stanford Group.

Robin, I know you addressed the increase in non-performers for this quarter, but if we could sort of step back a little bit and let me ask a question about credit quality a little bit differently. It looks like since Q1 -- from Q1 until today, or at the end of Q4, period-end loans have increased roughly 10%, 9.5, 10%, yet the dollar loan loss reserve has only gone up about half that amount, despite the fact that you had a rise in non-performers. With the heightened regulatory scrutiny on companies -- at least on the surface have a very large percentage of commercial real estate, real estate development loans on the books -- are you guys concerned at all about the outlook for just provisioning levels, not necessarily credit quality, but provisioning levels for 2007 on a quarterly basis as you go forward?

We actually feel really good about our provisioning. A significant percentage -- and now I could almost say probably 75 to 80% of our non-performers are actually in the three loans that I mentioned, plus one other loan. One loan that I didn't mention is in bankruptcy. And as soon as we can get out from under the bankruptcy situation there, we'll bring that one to a close. The second one is involved in an estate. And then the other two that I mentioned, both of which look like that they will be brought to a close -- obviously, depending on the SBA red tape and whether or not the other one closes this, as we mentioned. So, once those four loans are brought to a close in some form or fashion, we will in fact see that number go down rather dramatically. And we don't see any negative impact on our provision as a result of it.

And then, I guess, beyond those specific credits, you don't anticipate at this time any pressure from a regulatory perspective to try to add to the reserves in anticipation of (multiple speakers) at some point?

It's actually just the opposite, as far as we are pressured from the regulatory folks. We are under pressure to keep our reserve as high as we're keeping it right now because of our quality and because of what we have in our reserve at this point in time. We have added some qualitative matters to our reserve to take care of any unforeseen circumstances, such as energy prices, real estate prices, things of that nature that are not associated with any particular loans in order that we can, in fact, get ourselves to a position of getting us to where we are today, quite frankly. And this is all based on our loan portfolio composition. We're comfortable. In fact, we have done all that we can do to get the -- to keep it at the present run rate.

Andy Stapp, Cohen & Company.

Just have a couple of questions. One, compensation expense was down quite a bit linked-quarter. I know $300,000 of it was due to a bonus accrual adjustment you made in the third quarter. Anything else going on in there?

Actually, if you'll look at quarters one, two, three and four, quarters one, two and four were very close to the same, and quarter three actually was a little bit higher. We did a catch-up accrual for both some -- both our incentive plan and also for restricted stock in the third quarter. Actually, the run rate is probably -- if you look at it now, it's probably closer to 12.5 to 12.6, as opposed to either the third or fourth quarter, if you want to look at an actual run rate. Next year you'll probably see in the second quarter of the year that go up by a couple hundred thousand dollars, or maybe a little more, because we will in fact see salary increases begin at that point in time, if you look at that run rate.

Great. That's helpful. Non-interest income was fairly flat linked-quarter. Anything going on there other than general lumpiness?

I think you hit it. I think you had last -- we've seen student loan fees drop by $100,000 from the third quarter because we sold some -- we sell those student loans annually. [They were] sold during the third quarter. That had a decline on our outstanding loans as a result of that. Just different things like that; it's lumpy. From quarter to quarter we'll see things happen. Insurance commissions were down from the third quarter. But if you'll look, they were in line for the first and second quarter. And again, insurance commissions are cyclical; it's depending on when renewals occur. Some items like that is where you see that.

Peyton Green, FTN Midwest Securities.

I was just wondering if you could comment a little bit. I don't see it in the press release, but what was the actual interest-bearing liability cost? Is there a particular component of it? Did you have more of a, I guess, a CD roll in the third or fourth quarter that kind of caught up to you in the fourth quarter more so than in quarters past? How optimistic are you that you can get some of the deposit cost issue back in '07 with a little bit softer rate environment?

I am guardedly optimistic, to answer the last question first. Again, going back, we had about $10 million that moved out of money market-type accounts into CDs during the fourth quarter, in addition to about $48 million of public funds coming in. So, that did have an impact. We do anticipate seeing, again, next week probably dropping again on some CD rates. Some of our specials that we've had out there, we've taken off. Again, at this point in time we're flooded with deposits, so we don't have to be quite as aggressive as we have been. We'll be pulling back in Alabama and Tennessee, too, and we have on our rates, Peyton. So, we look to get some relief. But again, a lot of it depends on competition. And the good news is we're starting to see a lot of competition doing the same thing that we are.

In terms of thinking of the growth outlook in '07, you mentioned where certainly you have a lot of things in the hopper in terms of planning to build out of various growth markets over the next two or three years. But specifically, how many branches do you think you'll end up getting fully opened in '07, such that it would affect occupancy and equipment and personnel expense in any kind of material way?

I think you can probably just count on actually a certain one opening in '07, that being the Oxford branch. And that will be late third quarter, if not early first quarter. And that's a very small facility, so that will have not much of an impact. Anything else would happen late this year, and earliest in early -- in the early '08, quite frankly.

That sounds like a pretty -- that sounds a lot slower pace than, I guess, I would have believed maybe two or three quarters ago. Is there anything in particular that's causing you to kind of hold off on that, or --?

A lot of it is finding real estate. That's kind of the key things. For example, in Birmingham and Huntsville, we have not entered into an agreement to purchase any real estate, just that type of situation. We -- the Oxford Square opportunity, obviously, we are in the process and in construction on it. But as far as anything else, we don't have ground at this point in time to actually put [to the] facility. And again, when we look for opportunities, we don't -- we try not to settle for something that we're not that excited about. We try to find what we believe to be the optimum spot at that time.

Maybe from another perspective, to what extent do you believe that the hiring pace will be either stronger, the same, or maybe less than it was in '06, and really working on operating leverage, I guess?

Any hiring will only be for producers. From that perspective, Peyton, we don't need any infrastructure hiring at this point. So, any hiring we do should in fact bring with it something on the income side. For example, the mortgage hires that we made in Alabama -- that has basically broken even at this point, and we would anticipate doing the same thing. So, anytime we have an opportunity for a key hire, a rainmaker as such, we certainly will take advantage that. But just hiring for the sake of hiring is not something that we'll be doing.

No, I understand. I just didn't know, I guess, if you could characterize the pipeline of rainmaker, so to speak, in '07 versus '06.

We would hope to see -- obviously, we had the big hires of mortgage people this year. We don't anticipate that large of a number of hires next year. But over the course of the year, we would hope for several hires if the right opportunities come up. And we're pursuing them in hopes that that would occur.

Great. And then, I guess, last question -- how do you feel? Like, do you think any M&A opportunities will pop up this year? Do you feel like pricing expectations are starting to come in from the seller side?

The M&A environment really hasn't changed much in the last several quarters, and you know what our expansion policy is. And we really haven't changed our policy in the last several quarters. So, we feel we're continuing along that same line.

(OPERATOR INSTRUCTIONS). Charlie Ernst, Sandler O'Neill Asset Management.

Can you actually give the dollar amounts of the [period end] for some of those deposit loans, like your -- I guess your -- I think your NOW accounts last quarter was around 87.5 million. Do you have that balance in your money market and savings?

I'm going to let Stuart give that to you. He has that in front of him right now.

Money market account --

The NOW accounts last quarter, I had 87.5 million. And then you have kind of a, I think, a money market and savings line, a period-end money market savings line of like 627 million last quarter.

What we've got in our total transaction accounts, which were including kind of what we -- our NOW accounts and [super] NOW accounts we call it -- did you want -- this would exclude public fund checking (multiple speakers) about this quarter, about $310 million in those accounts.

I guess there's a period-end balance sheet that you guys supply in your 10-Q, and you break out the various deposit accounts. And I was wondering if you have those items in a similar fashion that you represent them in the Q.

From the 87.5 from last quarter that you talked about, that is [100,805,000].

And then, the 626.743 from last quarter?

654.26.

654.26? Okay. So, the increase in the -- versus last quarter, would you say that those are partially related to the public funds, or how do you kind of qualify them?

What we have seen in that area -- the first one, from the 87 to 100, most of that is public fund [money]. In the -- yes. A good bit of that going from 626 -- I'm sorry. On the 626 to the 650, the bulk of that is coming from the consumer money market accounts. And -- yes.

Okay. With regards to the reserves, one other way of asking the question. Everybody talks about having a formulaic approach. And if your NPAs are going up in the quarter -- and I know that you feel good about them coming back down -- but doesn't that necessitate, according to your formula approach, an increase in the reserve to loans? And if not, what are the factors within the calculation that is causing you to be able to drop your reserve to loans?

What's being able to drop it is we can't substantiate anymore, Charlie. It's just the SEC requirements are such that we -- we have our qualitative and quantitative factors. Each loan is rated. And as a result of that rating, there's a reserve created for that. In addition to that, we do in fact have qualitative factors that we do take into account. And again, that has substantially increased our reserve. We have impairments, property impairments in the non-performing asset category that are included in there. Basically, let me -- Harold Livingston is over here. Let me let Harold, who is Chief Credit Officer, make a comment.

Can I ask one other questions that maybe you can incorporate in the answer? It seems to me that you probably had higher more higher-rated -- more loans rated in a negative direction because of the increase in NPAs. So, does that imply that the reduction of reserve to loans was due to the "qualitative factors?"

No. Harold (multiple speakers)

If you back out the four non-performing loans from our past-dues, we are below 1% past-dues over 30 days (indiscernible). And not to say that they aren't part of the computation; they certainly are. But we feel like our reserves are more than adequate on those loans. And then, when you factor in the low past-dues, that reduces the amount of reserves that are necessary on the remaining portfolio, along with a lot of other factors that go into that computation.

And I apologize; I think somebody might have asked this again. But can you just say how you feel about deals? I think last quarter you seemed like something was more imminent, but we've all, obviously, seen a big deal in the South. Was that maybe what you're referring to, or are there other things going on?

I don't think we've ever commented to indicate there was a deal imminent. So, I'll back away from that and just go back to what I said to Peyton. Nothing has changed as far as what our philosophy is on M&A, and we're continuing along that same line.

There are no further questions in the queue. I'd like to return the call to Mr. McGraw for closing remarks.

Thank you, Cheryl. We certainly appreciate everybody joining us today, and we appreciate the questions that were asked. And we look forward to everybody joining us again on our next conference call. Thank you again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Good day.