Renasant Corp (RNST) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2008 Renasant Corporation earnings conference call. My name is Sandy, and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of today's 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 conference, Mr. E. Robinson MacGraw, Chairman and CEO. Please proceed.

Thank you, Sandy. Good morning, everyone, and thanks for joining us for Renasant Corporation's third-quarter 2008 earnings conference call. With me today are Stuart Johnson, Chief Financial Officer; Harold Livingston, our Chief Credit Officer; C.H. Springfield, our Chief Credit Policy Officer; Mitch Waycaster, our Chief Administrative Officer; Mark Williams, Credit Administration Officer and Kevin Chapman, our Chief Accounting 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 uncertainties. A number of factors that 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.

Despite the current financial crisis's impact on the banking industry, we were pleased to see past strategies resulting in growth in both our net interest income and our non-interest income during the third quarter 2008 as compared to the third quarter of 2007. We also are taking steps that we believe are prudent in today's economic environment to enhance our earnings in the future. Specifically, we continue to reduce our construction loan portfolio, provided nearly twice as much provision for loan losses over actual charge offs and managed our funding sources to preserve margin.

The global financial crisis is obviously had an effect on the credit markets both locally and regionally. Although we've seen the negative impact that subprime lending has had on financial institutions sector of our country, we are pleased that we've had no direct exposure to subprime lending and do not have any equity exposure to either Fannie Mae or Freddie Mac. Our middle Tennessee market is seeing much of the same economic downturn as the rest of the country. We do, however, believe that Nashville's diverse economy and its lack of dependency on any one industry should help its business and commercial market to recover faster than other metro areas of the country.

Looking to our west Tennessee market of Memphis, according to Sparks Bureau of Business and Economic Research at the University of Memphis, the local economy remains in fairly good shape despite the fact that growth in the Memphis economy has been relatively slow on average. While Memphis and national are both experiencing a slowdown in real estate construction activities, we believe our strategic locations and sound banking practices will sustain our banking and financial services in these markets moving forward.

As mentioned in a previous call, we've consolidated our Alabama corporate headquarters, corporate mortgage and downtown Watts branch to the Park Place Tower in downtown metro Birmingham. We believe that this strategic move adds to our presence in Birmingham and creates better continuity among our Alabama operations. Foreclosure rates in the Birmingham Metro area remained stable during August compared to the previous year and remain below the national average according to First American CoreLogic, a firm that collects housing market data.

In looking into our other Alabama markets, Huntsville was named the number one midmarket in the South by Southern Business and Development Magazine in August of '08 and one of America's top five cities for job opportunities by the Wall Street Journal Smart Money Magazine in September. Home sales in Madison County where Huntsville is located, continued to see declines in the third quarter of '08 but selling prices rose according to a September 21, 2008 article in the Huntsville Times. The Huntsville market continues to fare better than other parts of the country where sales and prices of homes have dropped by double digits.

In Mississippi, De Soto County continues to be the fastest-growing county in Mississippi and one of the fastest growing counties in the entire United States according to the Census Bureau. De Soto County maintains lower unemployment than the rest of the state in the nation according to the Mississippi Department of Employment Security. De Soto has however seen a drop-off in building permits and an increase in foreclosures over the past several months.

In Oxford, the University of Mississippi recently enjoyed the national spotlight as host of the first 2008 presidential debate. It was a great event for the city and Mississippi's flagship university. In our corporate headquarter city of Tupelo we continue to see progress on the $1.3 billion Toyota Prius hybrid manufacturing facility. Operations are expected to commence during the second half of 2010. We believe that the construction and operation of the Toyota plant and Tier 1 and Tier 2 service providers enhances the future growth prospects in our mature northern Mississippi markets. And may especially help to insulate the Tupelo market from future downturns in the Mississippi or national economy. Recently Tier 1 supplier Toyota auto body announced that it would begin production on parts for the Highlander SUV in July of '07 and then the Prius in July of '10.

Reflecting on our financial performance for the third quarter of 2008 net income was approximately $7.6 million compared to $8.3 million for the third quarter of '07. Basic and diluted earnings per share were $0.36 for the third quarter of '08 compared to basic and diluted EPS of $0.39 for the third quarter of '07. The decrease in our third quarter '08 EPS compared to the third quarter of '07 can be attributed to the increase in our provision for loan losses. This increase in our third quarter provision reduced our third-quarter '08 EPS by approximately $0.05 as compared to the third quarter of '07.

Total assets as of September 30, 2008 were approximately $3.7 billion as compared to approximately $3.6 billion at December 31 of '07. Shareholders equity was approximately $406.3 million on September 30 of '08 compared to $399 million December 31 of '07. Changes in shareholders equity reflects earnings, dividends paid and changes in unrealized gains and losses on investment securities available for sale. As of September 30 of '08 the Company's regulatory capital ratios were in excess of well capitalized regulatory requirements.

We are committed to growing shareholders equity to support future dividend payments and balance sheet growth. This commitment has proven to be valuable in the current economic environment and in protecting shareholders value. Although we don't have any issues with our capital levels we are evaluating the strategic merits of the government's [start] but we are not ready to make any recommendations to our Board of Directors at this time.

Total loans were approximately $2.5 billion at the end of the third quarter of '08 as compared to approximately $2.6 billion on December 31 of '07. I would like to point out that over the last three quarters we've focused on reducing our construction lending portfolio without a comparable reduction in our loan portfolio. As a result, our construction loan portfolio was reduced by $94 million during the third quarter of '08 and $145 million year-to-date versus a decrease of the total portfolio of $15 million in the third quarter and $61 million year to date.

Total deposits were approximately $2.4 billion on September 30 of '08 as compared to $2.5 billion at December 31 of '07. [Seeing] more aggressive competition for deposits in some of our markets we have intentionally replaced higher costing deposits with lower-costing alternatives. As a result our interest expense is down approximately $900,000 on a linked quarter basis and down approximately $7.9 million for the third quarter of '08 as compared to the same period last year.

Net interest margin was 3.45% for the third quarter of 2008 as compared to 3.52% for the third quarter of 2007 and 3.43% on the linked quarter basis. Due to the current economic environment we, as with most financial institutions, have experienced an increase in nonperforming loans and net charge-offs during 2008. Annualized net charge-off as a percentage of average loans were 25 basis points for the third quarter of '08 as compared to 43 basis points on a linked quarter basis. Six basis points for the third quarter of '07 and 36 basis points for the fourth quarter of '07.

Year-to-date annualized charge-offs as a percentage of average loans totaled 32 basis points. The provision for loan losses was $3 million for the third quarter of 2008 as compared to $1.3 million for the same period in '07. This provision is approximately twice the size of charge-offs for the third quarter of '08 and the allowance for loan losses as a percentage for total loans increased from 1.02% at December 31 of '07, 1.05% on June 30 of '08 to 1.11% at September 30 of '08.

Nonperforming loans, that is loans 90 days or more past due and nonaccural loans totaled $29.6 million on September 30 of '08 as compared to $26.6 million on a linked quarter basis, and $16.2 million on December 31 of '07. As we have stated in previous earnings calls, we continue to actively monitor all relationships which we may be at risk of deterioration. Furthermore, we are persistently tracking our current nonperforming loans and are seeking to bring these credits to a resolution by identifying a stable payout stream, taking additional collateral or moving towards foreclosure. Management has evaluated all NPLs, and we believe that all NPLs have been adequately reserved for in the allowance for loan losses on September 30 of '08.

Nonperforming loans as a percentage of total loans were 1.17% at September 30 of '08 as compared to 1.05% on a linked quarter basis and 0.63% on December 31 of '07. Although nonperforming loans increased, the company's loans past due for 30 to 89 days as a percentage of total loans were 1.17% at the end of the third quarter of '08 as compared to 1.23% on a linked quarter basis and 1.08% on December 31 of '07.

Another positive report relating to past-due loans is that our HELOC portfolio, which reflects only 67 basis points of total HELOC loans over 30 days past due on September 30, a decrease of 21 basis points from the previous quarter end. Other real estate owned was $21.9 million at September 30 of '08 compared to $13.1 million on a linked quarter basis; and $8.6 million on December 31 of '07. On a linked quarter basis the increase in OREO was primarily due to the company taking possession of property securing a single relationship totaling $7.8 million, which you may remember we discussed in our second-quarter conference call. At quarter end we have $3.6 million in OREO sales to close out over the next 60 days.

Non-interest income was $13.6 million for the third quarter of '08 as compared to $13.4 million for the third quarter of '07 and $13.8 million on a linked quarter basis. Our non-interest income continues to be a stable source of revenue as our diversified range of products provides us ways to increase our non-interest income through fees from loans, deposits, insurance, wealth management, treasury management and our mortgage lending division. Non-interest expense was $27.8 million for the third quarter of 2008 as compared to $26.7 million for the third quarter of '07 and $27.7 million on a linked quarter basis.

In conclusion, let me re-emphasize that we remain ever vigilant and watching our credit relationships and we have implemented strategies to proactively manage the challenges presented by the current economic conditions. We believe that we have the right team in place with the proper tools and prudent lending policies to manage through this economic downturn. Finally, we maintain that we are well-positioned to sustain long-term growth and profitability. Sandy, I will turn it back over to you for questions.

(Operator Instructions) Brian Klock, KBW.

Thanks for taking the call. It looks like the net interest margin was pretty stable this quarter. I guess maybe we can talk about the outlook with recent Fed funds changes and how should we factor that in going forward.

Let me make a comment, then I will let Stuart comment. I think you will see some obviously immediate compression on the margin as a result of the Fed cuts. But we are obviously working toward mitigating that over the course of the quarter. Stuart, I will let you make some specific comments.

The comment that I would make, obviously goes in line with what Robin said. I think as the Fed, with this last rate cut and anticipation at this point of another rate cut, that when you look at the liability aside and managing it that you are going to see it much more difficult to lower rates. That is twofold, one being that the core deposits are already at a fairly low rate and then secondly is the competitive factors out there. If you look at each of our markets, we've got some banks particularly some of the large banks as liquidity tends to be an issue of paying 5 and over 5% currently on certificates of deposit.

To be competitive, that is obviously going to cause other banks to raise their rates, as well. So having said that, I think it will be difficult to maintain that margin in the fourth quarter.

Brian, let me make a comment, too. We some time back instituted a policy of putting floors on our variable rate loans. So we should be seeing a lot of those floors helping us to mitigate some of the issues that we are seeing. Kind of get a little more granular on what Stuart was talking about. In Alabama, we have banks paying as high as 4.75% interest on the five-year CD. We have in Memphis some 5% CDs; even in Mississippi some 4.75%. And in Nashville a couple in the 5%, several in the 5% range, actually; and one even at 5.05%. So we are, like a lot of other banks our size that are trying to be prudent in what we do, we are experiencing the same issues that they are in that we have some large super regionals with liquidity issues that are really kind of setting the tone in these markets on a pricing basis.

One of the things we did or getting right now, and that is early into this quarter is right now obviously those loans that are tied to LIBOR we are getting a lift on that but I suspect that may be short-lived.

Stuart, how much of the loan portfolio that is variable is tied to LIBOR versus prime?

I think we got around -- it is less than 10%, maybe about 8% -- no, 10%.

Okay, and I'll just ask one other quick question here and I will let someone else get on. Can you talk a little bit about the movement into the NPLs and the ROE, so the in's and out's, and you did not mention that one big relationship you talked about last quarter.

You remember at the end we talked -- about two days after the end of the quarter we had we took deeds in lieu on a property in De Soto County that was about $7.8 million, which represented the largest migration into the other real estate category. We have had some others go in and some others out. As I said we have about $3.6 million under contract. We do have, we have sold one of the pieces, one of the houses that went into that $7.8 million and we have in the negotiating stage about four or five other pieces of that property right now.

That is not in that $3.6 million that I mentioned. And we do anticipate that closing within the next 60 days. On the other side of the ledger as far as nonperforming loans go, we had about $4 million of loans, nonperforming loans move out and about 7, almost $7.9 million move in. Most of which was development, construction development loans. And they were both of which were in that Memphis De Soto County area.

So within the next 60 days that $3.6 million is ROE property that you --

Yes, that's under contract. We have about a little over $2 million that is from residential builders that we have contracts on, $230,000 that is one four family, 1. -- almost $1.2 million of commercial properties and $130,000 in multifamily in that $3.6 million.

And I guess just last question, I guess you added to the reserve this quarter because charge-offs were 25 basis points and obviously there was an increase in the NPAs. I guess how should we think about the reserve? Should we expect more reserve building here in the quarters to come or I guess how should we think about that?

Brian, as you know, we have for the past almost three years now maintained qualitative reserves over and above our specific reserves. And we just feel that in order to be comfortable in the times that we are in that we needed to, I guess increase that allowance a little bit just for, as you notice some more loans migrated in that nonperforming loan category. Some of those loans we actually don't anticipate losses on, some we do. And we feel like we are more than adequately reserved on those loans. You just never know in the economic times that we are in what is going to occur. And we would rather be prepared for it up front than after the fact.

I guess within the quarter you did another good job of bringing down that construction exposure, which I guess is generating a lot of the NPAs for you. So I guess bringing down that risk exposure helps with the reserve coverage.

That has been one of our goals is, obviously we love loan growth, but we are experiencing growth but on the other side of the ledger we are seeing some go out the door that we'd like to see go out the door. Let me remind you, too, that if you unwrapped our 03-3, our allowance would be at about 118.

That's right. Thanks for reminding me about that. Thanks, guys. I'll let someone else jump on.

Matt Olney, Stephens Inc.

I hopped on the call a few minutes late and the first thing I heard was something about a strategic move in Alabama, and I missed the details on that. Could you go over that again?

You are going to be disappointed when I tell you this, Matt. This was reiterating that last quarter we have consolidated our corporate headquarters of Alabama, our corporate mortgage group, and our relationship managers into a downtown presence in Birmingham. That was just a reiteration of that.

Okay, yes, I do recall that. Could you give us more details on the loan portfolio in terms of where some of the paydowns are and where some of the positive loan growth is? I know you've mentioned Memphis and the De Soto County is some of the paydowns. What else are you seeing?

The actual growth we are seeing is in that Nashville market probably more so than anywhere else. We are a little bit in Memphis, but and just recently we started seeing a little Alabama growth. And there has been some Mississippi growth, but Nashville has been mainly where our growth has been. And again, we are trying to stay away from residential construction and development type loans as we look at where we are going and looking at our pipeline going forward.

Are there paydowns anywhere else?

I'll give you a little idea about our pipeline. We have right now in Nashville and Mississippi, loans are where most of the growth is showing in the pipeline about $62 million in Mississippi, about $54 million in Nashville, about $33 million in Memphis and about $27 million in Alabama. Of that it is negligible as far as any C&D.

And how is that pipeline compare to previous quarters that we've seen, Robin?

It is down about $30 million from last quarter, about $23 million. It was a couple hundred million dollars last quarter.

And what types of loans are those that are in there?

Well, it is a combination. We are seeing some C&I type loans, seeing some commercial type properties we are seeing. We are seeing some C&I, some small-business type lending. We are trying to get the -- a lot of our newer markets. Going back, Matt, before the acquisitions that we had we were a big, small-business lender. We did and continue to do a lot of small business lending in Mississippi. Alabama has picked up on the small-business lending. And now we are starting to pick up a little in the small-business lending in our Memphis and Nashville markets, which we see as a great opportunity for our bank as we migrate away from residential construction development type lending it is a good alternative source of loans for us in the future. In fact, we have a gentleman that we have just who was actually with us in Nashville that we just dedicated to the small-business effort as a coordinator across our system. And we feel like this, along with most other banks, our commercial industrial type lending, C&I lending will be a big factor in the future for us.

Robin, what opportunities are you seeing out there in terms of increasing the pricing on some of these loans as they come up for renewal?

We have been doing that, especially any residential construction and development loans that we are renewing as we go forward. We are increasing the pricing on those loans. We have been pretty active in repricing pretty much all our loans as I mentioned to Brian. One of the things that we have done is we put floors in on our variable loans, whether they be either prime or LIBOR-based we started inserting floors. We started doing that a while back in anticipation of potential rate drop. So in this declining rate environment those loans should, with the floors on them should be beneficial to us and our margin issues. But we have, in fact, been able to increase rates. It's kind of an educational process, Matt. A lot of times relationship managers don't feel like you can do it, but actually I think our customers are anticipating those rate increases.

And your relationship managers have any incentive themselves to increase the pricing? Obviously the holding company does through the margin, but is that also reflected in the -- for the manager himself?

Yes, they have ROE hurdles that they have to hit in order to get an incentive. So if they don't hit the ROE hurdle it is as though they did not make the loan.

Okay. Thanks, guys.

(Operator Instructions) I am not showing any further questions at this time. I return the call back over to Mr. McGraw for closing remarks.

Thank you, Sandy, and thank you, everybody, for joining us today. We appreciate your time and interest in Renasant Corporation. We look forward to speaking with you again when we report our fourth quarter and year-end results for 2008. Thanks, everyone.

Thank you for your participation in today's conference. Please this concludes the presentation, and you may now disconnect. Have a great day.