Renasant Corp (RNST) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth-quarter 2008 Renasant Corporation earnings conference call. My name is Channelle, and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Robinson McGraw, Chairman and CEO. Please proceed.

Good morning, everyone. Thank you for joining us for Renasant Corporation's fourth-quarter 2008 earnings conference call. Participating in this call with me today are members of Renasant Corporation's executive management team.

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 and the occurrence of unanticipated events or changes to future operating results over time.

Looking back over the past year, 2008 was a very trying year for the financial services industry. Our earnings insults were impacted by the ongoing economic downturn. In the fourth quarter of '08 we made a decision not to participate in the US Treasury Department's Capital Purchase Program, which is part of the federal government's TARP.

Our Board of Directors and senior management team extensively analyzed the terms and conditions of the program, and while we applied the -- applaud the Treasury Department's actions to help stabilize the financial markets, after careful consideration we ultimately decided that the costs, uncertainty, and potential restrictions associated with participating in the program outweighed the benefits to Renasant and our shareholders. Thus we made the decision that Renasant would not apply for the program's funds.

Renasant is well capitalized pursuant to the existing bank regulatory requirements, and based on projected balance sheet growth we believe that our capital position coupled with future earnings will allow us to deal with the effects of the downturn in the economy. The Company's Tier 1 leverage capital ratio was 8.34%. Its Tier 1 risk-based capital ratio was 10.85%, and its total risk-based capital ratio was 12.1% -- in each case, well in excess of regulatory minimums to be classified as well capitalized as of December 31, '08. I would like to point out that this is the fourth consecutive quarter in which we have grown in these capital ratios.

Reflecting on our financial performance for 2008, net income was $24 million as compared to $31.1 million for '07. Basic and diluted earnings per share were $1.15 and $1.14, respectively, for '08 compared to basic and diluted earnings per share of $1.66 and $1.64 for '07. For the fourth quarter of '08, net income was $232,000 as compared to $8,755,000 for the fourth quarter of '07.

Basic and diluted earnings per share were $0.01 in for the fourth quarter of '08 as compared to basic earnings per share of $0.42 and diluted earnings per share of $0.41 for the fourth quarter of '07.

Total assets as of December 31, '08 were $3.72 billion as compared to $3.61 billion December 31 of '07.

Total loans were $2.53 billion at the end of the fourth quarter '08 as compared to $2.59 billion at December 31, '07.

Total deposits were $2.34 billion at December 31, '08 as compared to $2.55 billion during the same period in '07.

As we discussed in prior calls, Management made the decision in the first quarter of '08 not to compete with those banks we believe are pricing their deposit above market rates. These higher deposit prices continued well into the fourth quarter of '08. During the last few weeks of the year and into the first few days of '09, we began to see signs that deposit pricing in our markets is returning to a more normal environment. We expect that in the near future, we will be able to actively garner deposits in our markets at rates up to 200 basis points below rates paid on deposits less than five months ago and more in line with rates on alternative funding sources.

In December Toyota Motor Manufacturing North America announced that it would suspend the start of production on the Prius hybrid in its new $1.3 billion automobile manufacturing facility. Construction is completed and the facility is now occupied by Toyota's current management team. Toyota has made assurances to the state and local governments that its arrival is imminent and just being delayed, giving further confidence Toyota is honoring its financial commitments by making its initial payment of $10 million in debt service to the state and $5 million for local education, as it had earlier announced.

The plant is still expected to initially supply 2,000 jobs with an estimated addition of additional 2,000 jobs provided by Tier 1 and other suppliers. It is unclear at this time what effect this delay will have on our mature northern Mississippi markets in the near term. Nevertheless, we still believe that the operation of the Toyota plant, Toyota Boshiku, Toyota Auto Body, and other anticipated Tier 1 and Tier 2 service providers enhance the future long-term growth prospects in these markets.

Despite Toyota's production delay there was positive news in north Mississippi. Cooper Tire, which conducted a capacity study to close one of its four plants, decided to keep its Tupelo manufacturing facility open. This represented approximately 1200 jobs staying in north Mississippi. Cooper may also move some of its production jobs from the factory it's closing in Georgia to the Tupelo plant in the near future.

In addition to the Cooper Tire announcement, a group of north Mississippi furniture manufacturers were designated to have foreign trade zone status by the federal government for 2009. This status helps these manufacturers avoid certain tariffs to stay competitive with foreign manufacturers and manufacturers and most importantly saves an estimated 950 jobs -- this according to the North Mississippi Community Development Foundation.

During the fourth quarter of '08, net interest income was $109,437,000, an increase of 14.2% from $95,821,000 for '07. Net interest margin was 3.44% for 2008 as compared to 3.57% for 2007. Net interest income was $26,842,000 for the fourth quarter of '08 compared to $26,943,000 for the fourth quarter of '07. During this same period, net interest margin decreased to 3.36% from 3.48%.

In looking at our asset quality data net charge-offs as a percentage of average loans for the year ending December 31 of '08, were 45 -- 55 basis points compared to 14 basis points for '07. Of these charge-offs, a sizable portion was related to a reduction of the large relationship we have discussed in previous conference calls. We concluded that the collection process for this relationship could be long, and therefore we believed it to be prudent to charge down these two loans at this time.

Nonperforming loans as a percentage of total loans were 1.58% at December 31 of '08 compared to 0.63% as of December 31, '07 and 1.17% on a linked-quarter basis. The Company recorded provision for loan losses of approximately $15 million and $22.8 million for the fourth quarter of '08 and the year ending December 31 of '08, respectively, as compared to approximately $2 million and $4.8 million, respectively, for the same period in 2007.

We increased the provision for loan losses during '08 in response to credit deterioration in our residential construction and land development loan portfolio. Some of this deterioration began servicing in the fourth quarter and much during the last half of that quarter as our credit staff continued to analyze the direct and residual effects of the current economic environment on our loan portfolio.

Our analysis also focused on the potential adverse effects on borrowers' liquidity from their operations based on the depth and length of the current recession coupled with the loss of liquidity from investments due to the downturn in the equity markets. In fact, we chose to increase our reserves on certain loans that were not or had just become 30 days past due based on foreseeable credit deterioration and liquidity concerns. The allowance for loan losses as a percentage of loans was 1.38% at December 31 of '08 as compared to 1.02% for December 31 of '07 and 1.11% at September the 30th of 2008.

During '08 and in the midst of growing credit deterioration, we continued to proactively and aggressively analyze our entire loan portfolio. Our ongoing analysis has resulted in a concerted effort to reduce our exposure to construction and development loans which have been adversely impacted by the current economic turndown. During 2008 we reduced construction and development loans in our portfolio by approximately 37% from '07. As we move into '09 we believe this effort could help us to mitigate some of the future risk in our loan portfolio.

In addition to reducing our exposure to construction and development loans, we have an ongoing evaluation of quantitative and qualitative elements of our reserve methodology to ensure it is appropriate for the current economy. Factors in this evaluation would include economic conditions, changes in our portfolio composition, and our exposure to construction and development loans. Looking into 2009, we believe that our allowance for loan losses combined with our projected quarterly provision for '09 will allow us to absorb potential 2009 losses without another extraordinary provision, absent any unprecedented or extraordinary events.

It has also been our policy to proactively provide and reserve for credit deterioration before it is reflected on our nonperforming loans or charge-offs. We will continue to maintain an allowance for loan losses at an adequate level to absorb credit deterioration.

Our other real estate owned was $25.1 million at the end of December 31 of '08, an increase of approximately $3.2 million during the fourth quarter. During the quarter we acquired approximately $7 million and sold approximately $3.1 million, actually recognizing a slight gain in the process. Year to date we have sold $11.2 million of other real estate owned, netting a slight recovery from the total sales. Presently we have either contracts or agreements to sell an additional $1.2 million of other real estate.

During the fourth quarter of '08, we recognized any impairment charge of $700,000 on property we acquired earlier in the year by accepting deeds in lieu. We continue to monitor real estate values, particularly in more stressed markets, and record valuation allowances as deemed necessary.

Non-interest income continues to provide a strong source of revenue in the currently volatile interest rate environment. Our non-interest income was $54,042,000 for '08 from $52,187,000 for '07. Non-interest income was $12,751,000 for the fourth quarter of '08 compared to $13,197,000 for the fourth quarter of '07.

Non-interest expense was $107,963,000 for '08, an increase of 10.1% from $98 million for '07. Non-interest expense was $25,688,000 for the fourth quarter of '08 compared to $25,443,000 for the fourth quarter of '07. On a linked-quarter basis, non-interest expense was down from $27,784,000 for the third quarter of '08. This link-quarter $2.1 million decrease in non-interest expense was a result of a reversal of previously accrued performance-based incentive payments, lower than anticipated health care costs, and salary savings from job attrition.

Also, early in '09 we had a small workforce reduction in areas where employee service capacity was greater than the projected growth in certain markets for the foreseeable future. This resulted in a reduction of 4% of our workforce. Although the aggregate amount of non-interest expense grew, the ratio of non-interest expense to average assets decreased to 2.76% for the fourth quarter of '08 from 2.8% for the same period in '07.

Looking into '09, during the second week of January we opened a new branch in the Greystone area of Shelby County south of Birmingham, which is a wealthy suburban shopping location. We believe this new location will serve us well as business grows in the Greystone area of Birmingham.

Also, Huntsville was recently named the best place in America to weather a recession, by Forbes Magazine. Huntsville, along with Decatur, is looking forward to an estimated 10,000 new jobs averaging over $80,000 per year -- through Barack -- that should be in effect by 2011.

In closing my prepared remarks, I would like to add that during our 104-year history we have faced many challenges. While the current national economic situation is definitely a major concern, we believe that our experienced banking team, strong capital position, and conservative business model should give confidence to both our shareholders and clients in the safety, security, and stability of Renasant Corporation.

Now, Channelle, I will turn it back over to you for questions.

(Operator Instructions). Brian Klock, KBW.

Robin, I know you went over some of the credit details already. But I was wondering if you could go over those again. I was looking for -- the inflow was into nonperforming loans and out. And what went into ORE and out? So maybe you can kind of go through those flows, inflows and outflows for the NPLs and OREs again.

Right. What -- OR -- okay. Let's go from nonperformers. We had about $5.5 million of nonperformers going into ORE. We charged off about $6.7 million of that. That was a reduction in the NPL category of a little over $13 million. We had about $21 million that went to non-accrual and about $1.3 million that went over 90 but not on non-accrual, or about $23 million that went in.

So with the $23 million that went into NPL, can you give us some granularity as to collateral type and geography?

Yes. Of that $23 million, basically about three-fourths of it I think you could safely say was construction and development, and the other was just kind of spread. I guess the -- maybe 10% of it would be owner occupied and commercial real estate.

Is there any one geography that you are seeing the weakness in?

Yes. You could look to probably about 75% of it being in the Memphis MSA, which includes DeSoto County, Mississippi.

Robin, would that be both on the C&D, which I know you've been talking about them for awhile, but also it seems like for the first time we may be seeing the commercial real estate starting to see a little bit of contagion.

Well, actually the commercial real estate, that $2.8 million, it really and truly -- I don't think any of it was in that geography. Quite frankly, one of them, the largest credit, which is about a little over a third of it, was a USDA guaranteed credit of a plan in Mississippi. Portions of it were Mississippi-type credits. I think in looking at it, one Nashville credit. So really and truly DeSoto County was not one of the areas of concern there.

Now, I guess with the charge-offs -- you mentioned the $6.7 million of what was already on NPL. You talked about that loan in the past. That was a C&D-related loan?

Correct. In the Memphis MSA. It's a relationship. It's two loans, and we felt -- and we are in litigation, and we feel that there will be a recovery at some point in time -- or anticipate just based on the facts of the case. But we just felt like it's going to be prolonged and that at this point we felt it best to go ahead and take a charge-down on that particular loan. That was over half of this quarter's -- I mean of that $6 million you were talking about.

I guess the rest of the charge-offs in the quarter -- so another $1.5 million or so of net charge-offs. Anything significant in there? Is it, again, C&D-related credit (multiple speakers)

A very, very high percentage of it was C&D. Actually, three-fourths of it was C&D, and the other was just kind of various and sundry -- some other real estate, just other types outside of the C&D and other real estate types was minimal.

So I guess sticking with the C&D theme, how was the national market holding up, and how are builders' balance sheets in that market?

Well, for the most part our builders that we are dealing with in the national market are doing relatively well. We're seeing medium priced homes have dropped in Nashville -- in double digits now. Sales have been down on a year over year type basis, but for the most part our exposure is not significant in the southern part, the Williamson County area. So therefore we're not experiencing a lot of that aspect of it. But we're right now -- although we have seen some of our Nashville loans past due, for the most part what we're seeing difficulties with are not necessarily C&D but some other types of credits.

And what kind of credits are those? Are those commercial related or C&I related credits you've seen (inaudible)?

Some of them are consumer related. Some of them you would consider commercial related. You are seeing a little bit owner occupied type properties up there. In fact, we don't have any real -- we -- some one house spec type situations, but not any significant C&D type exposure. And it's just a slowdown. It's a low percentage in comparison to what we're seeing. Again, in the DeSoto County and Memphis.

And I guess when you think about the allowance -- and obviously you guys did boost the provision, increased the reserve -- the loans ratio. And you talked earlier about the current allowance, where it is, and your projected quarterly provisions for 2009 would be enough to weather through. Can you give us kind of an idea what you are expecting your quarterly provisions to be in 2009?

We expect the run rate to probably be about 50% higher than what it was third quarter, which would be about a $4.5-million-a-quarter run rate. And again, the special provision that we made this quarter, of that a high percentage of it was not to any specific loan. As you know, we've had qualitative factors going in the past, and we increased the C&D qualitative factor to about half. In fact, about half of our allowance that is specific to any particular loan is related to C&D, and about half of the qualitative factors are specific to C&D.

And Brian, we're still running about 25% to 30% of our allowance as being qualitative as opposed to specific to any loan.

And I know you'll have -- when the 10-K comes out you'll kind of give us that, the specific allocations by category. With the specific allowance on the C&D, do you have an idea kind of what that ratio is, so to the specific allowance loan ratio?

50% of the total specific part, and 50% of the qualitative. So basically, 50% of our allowance is related to C&D, either specific or qualitative.

One last question, and I will let someone else get on. Actually when you think about the reserve and going forward, I guess we know the provision level that you're kind of guessing, so (inaudible) think that we should see some reserve build?

Well, we are looking at a run rate much higher than what we've had in the past let's say. But as you look, Brian -- and we did a pretty strong burn rate, looking at our past-dues that are over 30 days. And a lot of these are just blips that are renewals that didn't get in the bucket before the end of the quarter. But looking at the over-30 past-dues, we -- and with the current allowance and the projected provision for 2009, we could charge off 23%. We could have a 23% charge-off rate on that fourth quarter -- on our fourth-quarter past-dues over-30 and still not have to have any kind of extraordinary provision next year. We think that's very conservative in looking at our portfolio.

[Ben Harvey], [Stephens], Incorporated.

Most of my questions have already been answered. I've got a couple left here. Start off with Robin, your earlier discussion on the non-interest expense in the employee compensation. Is that something we should expect as a run rate going forward to stay fairly stable, or will it return closer back to those 3Q levels?

Yes. It should be in probably the $14.5 million range, give or take, on quarterly run rate.

Secondly, as far as the margin contraction goes, can you give me a little bit of color on how that breaks down from the increase in non-accruals we saw during the quarter combined with probably some of the compression from the Fed rate cuts? And then I guess going forward, you discussed that your deposit rate should be coming down, you know, the 200 basis points earlier. Kind of what do we see going forward as far as the margin?

In the fourth quarter 11 basis points of that decline -- of the margin was impacted by non-accruals. That compares to about three basis points the prior quarter. So as you kind of analyze it out, you're looking at pretty close to a flat core margin on a link-quarter basis, which we thought pretty good under the circumstances in the quarter.

We have seen finally some downward movement in rates in the metro markets. The most pressure we have experienced on the rate side has been in our Nashville, Memphis, and Birmingham markets. We're finally starting to see that rate pressure drop off to the extent we're seeing money market accounts now in the 1.5% to a little over 2.0% range, you know, depending on where it is. Even two-year CDs are in the 3% range.

We see one or two just out of market rates out there now, but it's not like before. So we've seen some significant drops, and we feel like, as we said, that over the course of the year we'll be back to growing deposits like we have in the past, as opposed to having to stay on the sidelines because of some of the pricing that's been so extraordinarily high.

Lastly, I know you talked about this a great deal already. Just in case I missed some of it. In terms of the ORE, is that still -- what's the composition there in terms of credit size? Is it several smaller credits? Or a little color on that?

Well, we have like one- to four-family from builders and developers, about -- a little under $10 million. About $9 million of residential lots. About $3.5 million of one- to four-family consumer mortgages and rental type properties. About $2.5 million of commercial income property.

And on some of those, are those larger credits? Are those kind of separated out between different, you know (multiple speakers)

Well, if you will remember back several quarters back, we took deeds in lieu of a fairly significant credit in DeSoto County, and that is a portion of both residential lots and the one- to four- -- and the homes. But the balance of it, none of the others are anywhere near that large. Some of them are in the $1 million, $1.5 million range on some lots that came in or with one or two houses on it. But for the most part, we don't have any substantial blocks.

Quite frankly, as I mentioned, we have seen about $11 million of sales over the course of the last year, and have another $1.2 million under contract right now. The good thing too in going back and looking is the fact that we've had a slight gain. My question was did we buy in too cheaply. But actually we went back and looked at those loans. We actually lost I think overall a little over 23% maybe. But if you take out one large credit, the actual loss was -- well, we actually lost about 20%. But if you take out that one large credit, the loss was about 17% on the balance of the portfolio. So we've done -- and that was from the amount of the loan at the time of foreclosure. So we actually have done pretty well with that portfolio over time.

Brian Klock.

Stuart, with maybe some sort of modeling questions. I know, Robin, you already talked about it, that sort of normalized run rate for the personnel expenses. Looking at the fee income line, we did see linked-quarter drop in service charge on deposits, and fees and commission revenues. Obviously, the recession is sort of playing into that. But maybe you can kind of give us some color on what to expect and maybe what kind of drove some of the linked-quarter variance in those fee lines.

Well, as you said, it's economy driven. The fees and commissions -- obviously loan production has been slower than in prior quarters, so your origination and processing fees are lower. And from the standpoint of service charges, that would have primarily come through the number of -- come through activity from deposit accounts primarily related to overdraft. We've seen a decline in that activity for the fourth quarter.

I think part that -- obviously the fourth-quarter decline in overdraft fees was economy based. There was less spending. And one of the other areas that we've seen a little drop-off in fee income is on mortgage loans. A lot of our mortgage loan activity in December was on the wholesale side, and so we'll see some of those fees appear this quarter.

I know that you did mention on the other expense side a $700,000 impairment on one of the deeds in lieu.

Right. That was that large deed in lieu that we took several -- a couple of quarters back in DeSoto County.

Right.

And we had it appraised, and for the most part the -- in fact, all the houses -- we were fine, but one of the developments we felt -- or the appraiser felt, and we had already felt the same way -- had declined in value. So we went ahead and took that impairment at the end of the year.

Can you give us kind of a range of sort of what that appraised value was brought down to as far as appraised value to the loan value sort of?

Well, other than that one lot, the appraised value was about 90% or close to it, you know, 80% or 90% of what the loan value was. That one subdivision was probably about -- I think about 65% of what the original amount was. And at the time, Brian, we had some real concern about that particular subdivision. It was the only one that had not -- we only had one house in it too, by the way. But it was the only one that did not appear to be moving like the rest of them were. So that was not unanticipated.

But the rest of it was spread across the other developments. That was $0.5 million. The rest of it was spread across the other developments, so it was not -- the rest of it was in pretty decent shape as far as what our loan to value was.

Okay. And then last question -- the tax rate. Obviously there's a lot of things -- moving parts -- in there. It looks like you had some tax credits. Maybe, Stuart, you can give us an idea of what sort of a normalized run rate would be I guess going forward for your tax rate.

Brian, that's going to be probably -- we've been running around a 30%. I don't see that changing a whole lot for our indicated tax rate. In the fourth quarter we had purchased a number of muni's as well (technical difficulty) [couple] the tax credit. I think our muni's were up on average about around $4 million over the third quarter. So that coupled with an additional tax credit that we were able to take advantage of in the fourth quarter, but I think we'll be somewhere in the range of the 30% going forward.

Brian, that takes in the caveat that there are no changes either direction by the current administration.

Right. Exactly. I guess we'll keep our eyes and ears open for that too. All right. Thanks for taking the follow-up guys. Appreciate it.

There are no further questions in the queue. I would now like to turn the call back over to Mr. McGraw.

Thank you, Channelle. We appreciate everybody's time today and your interest in Renasant Corporation. We look forward to speaking with you again in the near future. Goodbye everybody.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.