Renasant Corp (RNST) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 2 2009 Renasant Corporation earnings conference call. My name is Janada, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Robinson McGraw, Chairperson and Chief Executive Officer. Please proceed, sir.

Thank you, Janada. Good morning, everyone, and thank you for joining us for Renasant Corporation's second-quarter 2009 earnings conference call. Participating on this call with me today are members of the Renasant Corporation 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 events 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.

Our second-quarter '09 results reflect our continued focus on controlling noninterest expense and capitalizing on our diversified revenue sources to continue to grow noninterest income. While the current economic environment continues to be a challenge, especially with respect to maintaining our credit quality, we are encouraged that our nonperforming loans and total past-due loans decreased on a linked-quarter basis.

Looking at our financial performance, net income was approximately $4.3 million for the second quarter of '09 as compared to approximately $8 million for the second quarter of '08. Second quarter '09 basic EPS and diluted EPS were $0.20 compared to basic and diluted EPS of $0.38 for the second quarter of '08. Total assets as of June 30 of '09 represented approximately $3.7 billion, representing a slight decrease from December 31st of '08 and a 2.12% decrease since June 30 of '08.

As of June 30 '09, the Company's Tier 1 leveraged capital ratio was 8.37%; its Tier 1 risk-based capital ratio was 10.95%; and its total risk-based capital ratio was 12.20%, in each case, in excess of regulatory well-capitalized ratios. The Company's tangible capital ratio increased to 5.94% at June 30 '09 as compared to 5.75% at March 31 of '09 and 5.83% on June 30 of '08.

Total loans were approximately $2.47 billion at the end of the second quarter of '09, a slight decrease from $2.53 billion at December 31 of '08 and $2.54 billion at June 30 of '08. We continue to reduce our exposure to construction and development loans, which have been adversely impacted by the current economic downturn more than other types of loans. The balance of our C&D loans decreased approximately 25% from the second quarter of '08 to the same period in '09, and decreased by $33.4 million on a linked-quarter basis.

Over a year ago, we implemented a plan to change the mix of the Bank's loan portfolio it by moving away from the CRE concentration that had been created by recent mergers within our metro locations. This initiative is reviewed monthly and thus far has been successful, as evidenced by our ability to lower our CRE concentrations, specifically our C&D loans, as previously discussed.

Our credit officers continue to aggressively analyze our entire loan portfolio and make adjustments as needed. As part of our analysis, we have established a portfolio management committee, whose primary purpose is to review selected [pass ready] credits on a weekly basis. The permanent members of the committee are not members of our retail banking department, but instead are members of the credit administration and loan review departments. We believe this process is a proactive program designed to uncover potential problems whereby the bank can quickly move to make a sound decision in the management of credit.

In addition, in order to focus a high level of scrutiny on loans that are performing, but have experienced signs of credit concerns, we have created an interim level of oversight between the relationship manager and special assets division whose sole function is to focus on improving the credit quality and overall performance of these loans. The division is managed by one of our most experienced credit officers and is staffed by other officers with years of experience in this area of banking.

Total deposits grew to $2.6 billion at June 30 of '09, an approximately 11% increase from December 31 of '08, and a 5.4% increase since June 30 of '08, driven in part by growth in nonpublic, money market and demand deposit accounts. Net interest income was $24.16 million for the second quarter of '09 compared to $27.5 million for the same period in '08.

Net interest margin was 3.04% for the second quarter of '09 as compared to 3.43% for the second quarter of '08 and 3.19% for the first quarter of '09. The linked-quarter decrease in net interest margin was in large part due to the accelerated prepayments on mortgage-backed securities and calls of government agency securities.

We elected to invest a high percentage of these cash flows in liquid investments in order to utilize them over the coming quarters to reduce more expensive debt and public funds. The balance of these cash flows were used to make loans and purchase investment securities that, due to the current interest rate environment, carried a lower interest rate than loans and investment securities being replaced.

Further impacting the Company's margin was an increase in nonaccrual loans in the second quarter of '09 as compared to the corresponding period in '08. Excluding the effect of nonaccrual loans on net interest income, we believe that our margin is positioned to improve during the second half of '09 as we continue to improve the yields on new and renewed loans and replace higher-cost funding with lower-cost deposits.

Annualized net charge-offs as a percentage of average loans were 93 basis points for the second quarter of '09, up from 75 basis points for the first quarter of '09 and up from 43 basis points from the second quarter of '08. The allowance for loan losses as a percentage of loans was 1.46% on June 30 of '09 as compared to 1.4% on March 31 of '09 and 1.05% on June 30 last year.

As mentioned in previous earnings calls, we believed charge-offs would be approximately $21 million for '09. However, we've been able to accelerate the resolution of some problem credits; thus, we believe our '09 total will be closer to $24 million.

Nonperforming loans as a percentage of total loans were 265 basis points as of June 30 of '09 compared to 269 basis points for March 31 of '08 and 105 basis points on June 30 of '08. In addition, we saw a linked-quarter decrease in loans 30 to 89 days past due during the second quarter of '09. Loans past due 30 to 89 days as a percentage of total loans decreased to 89 basis points on June 30 of '09 as compared to 104 basis points at March 31 of '09 and 123 basis points on June 30 of '08.

Nonperforming assets as a percentage of total assets increased to 259 basis points on June 30 of '09 compared to 244 basis points March 31 of '09 and 105 basis points on June 30 of '08, due to increases in (inaudible) real estate owned. As we continued to focus on our credit quality, we recorded a provision for loan losses of approximately $6.7 million for the second quarter of '09 as compared to approximately $5 million for the first quarter of '09 and $2.2 million for the second quarter of '08. The increase in the provision for loan losses during the second quarter of '09 is reflective of the higher amount of net charge-offs during the quarter, and is consistent with our practice of proactively providing for losses within our loan portfolio as we identify potential weaknesses.

Noninterest income increased approximately 12% to $15.4 million for the second quarter of '09 from approximately $13.8 million for the same period in '08. The growth in noninterest income was generated primarily through the Company's mortgage operations and gains from the sale of investment securities, coupled with the continued stability of our other sources of noninterest income.

Gains from the sale of mortgage loans increased $982,000 to approximately $2.3 million for the second quarter of '09 as compared to the same period in '08. Mortgage loan production increased approximately $56.7 million to approximately $260.6 million for the second quarter of '09 as compared to the second quarter of '08. Outstanding performance by our mortgage production department, coupled with the current low interest rate environment, has been the catalyst to our noninterest income growth.

Net gains from the sale of investment securities were approximately $1.1 million for the second quarter of '09. The Company did not record any gains from the sale of investment securities during '08.

In addition, we continue to experience a stable revenue stream from our various sources of noninterest income. Second quarter of '09 noninterest expense was approximately $27.1 million as compared to $27.7 million for the second quarter of '08. Noninterest expense for the second quarter of '09 included approximately $1.75 million for the specific -- special deposit insurance assessment levied by the FDIC on all insured institutions.

We were able to offset both the special FDIC assessment and the increase in our base FDIC insurance rate by controlling expenses. Staff reductions resulted in lower expenses related to salaries and benefits, and our occupancy expense also declined during the second quarter of '09. Expense control continues to be one of our top priorities.

We continue to believe that Renasant Corporation is well-positioned for long-term growth and viability. As previously mentioned, we have continued to implement initiatives to increase noninterest income and net interest income, keep noninterest expense growth to a minimum and maintain capital ratios in excess of regulatory well-capitalized thresholds.

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

(Operator Instructions) Brian Klock, KBW.

Good morning, guys. Robin, maybe we can hit a couple of the credit sort of inflows. Within the nonperforming loan category, you had just about what -- a $6 million linked-quarter drop. There is some movement into OREs. Maybe we can talk about kind of what moved in and out of those two buckets.

We had about -- you're talking about the nets. Coming from Alabama, we had moving in from Alabama about $3.6 million, about $4 million from Memphis, about $3.6 million from Mississippi and $1.8 million from Nashville. Moving out, we had about $1.5 million from Alabama, about $1.9 million from Memphis, about $3.5 million from Mississippi and about $5 million from Nashville, which showed nets of a negative in Nashville of about 3.3, pretty much flat in Mississippi, $126,000 increase. Memphis had a net increase of about $2.2 million, and Alabama, a net increase of about $2 million.

From the standpoint of what moved into ORE, Desoto County, we had about $1.5 million. Other Mississippi, we had about a little over $500,000. Memphis, we had about $700,000. Nashville, we had about $1.8 million. And the balance of, or about $2 million, came in from Birmingham -- or the Alabama region, but actually Birmingham.

Okay. So the inflow you are talking about, so like, for example, Alabama, $3.6 million of inflow, that went into NPLs?

That went into NPLs.

Okay. And the $1.5 million that is out --?

Yes, $1.2 million, $1.3 million went out. About $1.5 million went out, yes. And there was a net of about $2 million.

Okay. Then I guess when you think about that, what kind of collateral types are you seeing? Is it still residential construction being an issue? Anything with commercial construction or CRE yet in any of those --?

No, it is mainly residential construction. As I look at the additions, we are looking at residential construction, condo construction. In a couple of these, I think we will probably -- these are 90 days. These are not non-accruals. They are probably going to be current and moving back out again, as we've been working through some issues with these.

But mostly, we are talking about construction, land development and construction type lending pretty much.

And then with the net charge-offs, is that the same sort of story there? Do you have any --?

Yes, you've got about -- on your charge-offs, you are looking at, by collateral type, for the most part, about 3.2 of it was CRE, which is basically 2.5 was construction and development. About 800 was what we would classify as other commercial real estate. Then other real estate type credits were about 1.2, and other types about 1.3. So we are still talking about a high percentage of it being construction and development. Again, we are not seeing a lot of just commercial real estate retail space in these issues.

And the 2.5, that sounds like, of C&D that were in the net charge-offs, was that in any one region or --?

Overall about 45% of the charge-offs came from that Memphis MSA, which would include Desoto County. And about a quarter, 25%, came from Nashville. The balance was pretty much evenly divided between Mississippi and Alabama.

Okay. And I guess maybe generally what you are seeing across the regions, so Memphis/Desoto County, housing market has been a little softer for a little longer. How is Nashville hanging in there versus Birmingham?

Birmingham is hanging in there pretty well. Huntsville obviously is hanging in there real well. Nashville, we are seeing softness, but mainly in the Williamson County area, where less of our exposure is. Capital Bank & Trust had just put an office in the Williamson County area at Cool Springs. So they didn't have a great amount of exposure to Williamson County. In fact, our loan production office probably had more exposure to Williamson County than they did at the time of the merger. So of about $600 million in loans, a very significant majority of it is outside of Williamson County.

Okay. And I guess just two more questions, then I'll let one of the other guys jump on. So within the provision for the quarter, I think last quarter you talked about maybe somewhere thinking that it would be a normal -- somewhere around $4.5 million to $5 million a quarter.

Right.

Do you think we might see that be second half of the year closer to what you'd booked in the second quarter, or a combination, average of the two? Or would we think it might go back to the $5 million a quarter average?

It probably will be higher than the $5 million. As we look at -- and I mentioned that charge-offs for the year, we had revised that estimate to $24 million, which would put us at about $13 million for the second half of the year. Of the third-quarter charge-offs, we have some specific impairments on some of those credits that we've been wrestling with to be able to charge off for some time, just getting a foreclosure brought to fruition. So that won't have an impact on the provision.

It's just a question of how much we will provide for other credits during the second half of the year that could be downgraded as to what that run rate will be, Brian. But I anticipate that probably being in the third quarter maybe more than five and in the fourth quarter probably closer to the five.

Okay. And then just one question on the margin. Obviously, some impact. Stuart, do you have an actual number on what the impact was from the nonaccrual reversals within the quarter?

I can tell you -- it is nine basis points.

Nine basis points? Thanks, Robin. And I guess maybe what kind of -- you think that we may see this as the sort of bottoming of the margin at this point? It sounds like your comments were pretty bullish on getting some better loan pricing and pricing on the deposit side, as well.

Yes, we feel like we've bottomed -- and this is opinion -- we feel like we've bottomed in May. We saw an uptick in June of what we call core margins of a couple of basis points. Stuart, do you have a breakdown to kind of give Brian --?

What we did see, as Robin said, an uptick in March -- I'm sorry -- in June from May of a couple basis points. What we did see, which was important to us, is the improvement in our loan yields were slightly up over June over May. We also saw about a three basis point drop in our cost of funds from May to June, so that actually showed an improvement on a core basis of a couple or three basis points.

So we believe in looking at the way we are beginning to price our loan portfolio that we should continue to see improvement in that.

Okay, great.

Brian, we made a decision earlier this year to move away from some of the wholesale funding that we had moved to the second half of the year last year because of what we consider to be some fairly irrational rates being paid by some competitors. But we begin seeing the opportunity to acquire core deposits early this year.

And so we've put together a plan and have, in fact, been implementing it in order to see our wholesale funding reduced significantly over the course of this year through the first quarter of next year, and replace that with core deposits, which in turn is going to have a significant impact on our margin.

In addition to that, too, Brian, we've seen a change in the mix of our assets. During the quarter, we became more liquid from the standpoint of our short-term investments. And that, again, as we've discussed, is -- the use of that will be to pay off some higher-priced public fund dollars and some other borrowings, which will also enhance our margin going forward.

All right. Thanks, guys. I'll get back in the queue.

Michael Lipman, Sterne, Agee.

Good morning, guys. I just had a question on commercial real estate, kind of a follow-up on Brian. What was the portion of NPAs and NCOs that was related to commercial real estate in the quarter? Do you guys break that out by any chance?

Yes, I can give you a -- portion of the NPLs and NPAs.

Yes, and charge-offs, if possible.

On the charge-offs, I can give you that pretty easily. As far as commercial real estate on the charge-offs, we had actually none -- we had one industrial building. All the rest was basically either -- excuse me, I take that back. We had one SBA loan that was included in the additions to ORE with a small charge-off related there, one industrial building. The rest was basically C&D type and residential real estate.

Okay.

I'm going to let Harold answer, if he can answer your question on the balance of it.

(inaudible)

We don't -- we will probably have to get back to you on that, Michael.

It's pretty minimal, actually.

It's minimal as far as commercial.

Okay. Well then, I guess just more generally, what is your outlook on CRE? And if possible, could you kind of comment by market? I know we are just kind of in the initial stages of this deterioration. So any color would be great there.

One of the things, Michael -- and I'm going to let Harold Livingston make a comment -- one of the things that we are, I guess, at this stage fortunate in is that we don't have a real high percentage of other than owner-occupied commercial real estate. And in fact, a very low percentage of what we have is retail space. We have just a little over -- around $100 million that's retail space. And of that, about 35% is in retail strip centers. So with that in mind, we don't have a real high percentage of exposure there. Harold, do you want to make a comment?

Yes, just a general comment. We have seen some weakening in that market. A couple of small strip centers that we were dealing with were in difficulty. One had actually been on the books a long, long time, and it probably was way more than just the market that involved that one. We have seen some -- and that one happened also to be up in the Memphis/Desoto County market.

There were a couple of -- there are a couple of bigger strip centers in the Nashville Metro area that we know that are having difficulty filling their spaces. They were built and are not yet on a cash flowing basis with a tenant.

We also have seen very few requests in that area anymore. And we are very aware of it. We are extremely -- trying to be extremely careful with any kind of request in that area now. And if you look at our CRE, not counting construction and development, it actually has dropped off, too, in that particular part of it.

Okay, great. I guess another kind of general question. Do you have any color on expectations for when the loan-loss reserve may be peaking? It's impossible for that to be a 2009 event, or would that kind of matriculate into 2010 in your thoughts currently?

Let me make this comment, and I will speak more to nonperforming loans, as opposed to the actual allowance. We will -- we feel like it is somewhere between today and the end of this year, we will see the nonperforming loans peak. I would like to say it has peaked, but it possibly could go up, depending on what -- anything that may come in afterwards.

You know, our 30-to-89s have again been reduced on a linked-quarter basis. But you never know, obviously, in the climate that we are in if a performing loan may all of a sudden become a nonperforming loan tomorrow. But based on what we see as it stands right now, Michael, that could be -- that would be the case.

And we would project that our nonperforming assets would peak the quarter after the nonperforming loans.

Got you. I guess also, can you provide the level of 30-day past-dues? I guess you've probably done that the last few quarters.

Yes, it was $22 million.

22. Okay, great, so down slightly.

Let me answer one of your questions. As to nonperforming loans, about $43 million of that $65 million is in the C&D category. About $9 million of it is in residential. And about somewhere in the $10 million neighborhood is in that non-owner-occupied area that we were talking about a while ago, and about $7 million in owner-occupied. Those are approximations.

Okay, great. On the margin front, obviously, you had those nonaccruals and accelerated prepayments that account for a bit of the decline. But what is your outlook on the CD repricing front? What was kind of your average rate of CDs in the quarter? What portion will reprice over the back half of '09? Do you have any color on that front?

I'm going to let Stuart answer that.

We had about -- our pricing was just slightly less than 2.7%, was kind of what our weighted rate on our CDs were. We do have a significant number of CDs that will be coming due on our quarterly basis, I think right in the neighborhood of $200 million, $300 million -- yes, $200 million to $300 million that would be coming due to be repriced.

And right now, we are seeing some improvement, continued improvement. Even though it is not anything large, we are continuing to see some small improvement in the repricing of those CDs.

Jim, do you have a comment?

I was just going to say on a -- like over about a month period of time, we are seeing about a 15 basis point, 15 to 20 basis point improvement on our CD from those CDs that are maturing versus the CDs that are renewing.

Okay. And then I know Nashville is a very competitive market, but what is the pricing competition looking like? And if you have any color per market, that would be fantastic. But just a general answer would be wonderful, as well.

We've actually seen deposit growth in each of the markets. And beginning to see Nashville and Memphis, which were our two toughest markets, actually easing up a little bit, and beginning to see some opportunities there. Whereas last year, they were by far the toughest markets from a pricing standpoint, they are really not that much farther off everybody else at this stage of the game.

In relation to what Robin said, we did see, excluding Mississippi, growth in deposits, in all of the metro markets -- the Memphis, Nashville, and Birmingham markets for the quarter. Where our decline in deposits were came primarily from public funds and One-Way CDARS. So we had a growth in core deposits, and we are seeing rates get much more competitive in those metro markets than what we've seen.

So in times past, we've seen a little bit better rates in Mississippi than in some of those other markets. But the other markets are becoming more competitive with that.

We were able to see about $35 million on a linked-quarter basis in core deposit growth. Actually, that had to offset 100 -- it was offset by $109 million of public funds and CDs, CD-type investments moving out. Plus, as Stewart said, the CDARS One-Way, and another $24.5 million of interest-bearing public fund accounts. So our effort to reduce our reliance on public funds and wholesale funding is actually working.

I was going to add one comment, that we are being able to accomplish this core deposit growth by pricing pretty much in the middle of the pack in all of our markets. So we are not doing it with any kind of high special rate pricing.

Okay, great. But there should be some benefit going forward.

Right.

Okay. And lastly, on the expense front, we were -- I was certainly impressed in the quarter, especially on the personnel side. Is this sustainable? Would you say excluding the special assessment that this expense run rate is possible in the back half of '09?

I think when you start looking at some things that have gone in that particular sector of our expenses, what we are expecting is in third quarter of that number to be somewhere around $14 million.

Okay, great. That is all my questions. Thanks, guys.

Thank you, Michael.

(Operator Instructions) Albert Savastano, Fox-Pitt.

Good morning. It's actually Bill Young. How are you guys? Just one quick question for you. I was curious, is that national $8000 homebuyer tax credit, is that helping any of the homebuilders in DeSoto County reduce inventory levels? And conversely, is that helping you reduce your homebuilder exposure?

DeSoto County has been probably the area that has benefited most in our footprint, not only from the homebuilders, but also from us, as our inventory of ORE, actually, inventory's at the lowest point in two years in DeSoto County now. So we are seeing that really help. And hopefully they will extend it to the extent that will continue on.

Okay, great. Thank you.

Thank you.

Brian Klock, KBW.

Okay, guys. I just wanted a quick follow-up on -- it was a good mortgage quarter again; origination volumes are pretty good. Can you give us kind of an idea of what the pipeline looks like and where originations are going into the third quarter and second half of the year, where you think that might trend to?

I'm going to let Jim Gray answer that, Brian.

We are seeing about a -- initially, about a 30% drop in our pipeline when the rates went back up. But now that rates have kind of come back down a little bit and our turn times have improved, we are down maybe about 20% from our peak pipeline.

A couple of encouraging things. Refis had been running about 70%, 75% of our total volumes. What we've seen over the last few months is our purchase volume has picked up to a little north of 40% now. So a lot of that volume is coming in the form of purchase volume, which obviously is more sustainable. That has been due primarily to our ability to hire some top originators in some of our key markets. With the turmoil in the mortgage industry, that has been to our benefit.

Another thing we've seen is with all the more esoteric type product disappearing and FHA kind of taking up that vacuum, we've seen our FHA volume pick up to about 35%. Of course, we get a better margin on our FHA loans. So we consider all of that positive.

Okay. I don't know if you have the $260 million production number for the quarter, do you have that broken out by month or kind of what a trend was --?

Yes, I think I've got that.

Okay.

It was pretty consistent. April was $95 million, May was $81 million and June was $83 million.

Okay.

April was our peak volume month, but it hasn't fallen off much.

If we want to say it sounds like maybe you are down 20% starting into July from that $95 million number.

That would be pretty reasonable.

Okay. All right, thanks for taking the follow-up, guys. Thank you.

Matt Johnson, River Oaks Capital.

Hi, gentlemen. I just had, I guess, two quick questions. One is, you mentioned one of my hot buttons, which is condo construction. And I just wanted to know how big is that portfolio, and where are the loans located generally?

It's very small. Harold will answer that.

It is $14 million.

14 -- okay. Not a big deal at all.

The one I mentioned a while ago was a small project, and actually, we are probably going to collect 100 cents on the dollar on it.

Okay, great. My other question actually is related to the construction loan portfolio. In your GAAP numbers, you show a little bit under $200 million of construction loans. And in the call report, at least as of the end of March, it was a little over $500 million of construction and land development.

So I was just wanting to know what is the -- kind of the difference between the two? And in, I guess, what category is that $300 million or so put from a GAAP point of view?

From a GAAP point of view, as you are looking at the disclosure that we made in the press release, the construction has construction only in there. Land development would either be into the commercial or the residential portion. So that is the difference you would find if you reconciled back to the call report.

Okay, so the commercial -- or what was the other one -- if it is residential, just --?

If it's residential or commercial, it would be either in the one-to-four or the commercial real estate on the GAAP purposes. And the disclosure we make on construction is --

Is vertical.

(multiple speakers) typically construction.

And of the $300 million of kind of land development, do you have a rough breakdown in terms of what is raw land versus lots?

And then I guess my other question on it -- and this will be my last one -- is just given kind of what has happened in land prices, what -- how much of that have you done appraisals on over the last couple quarters or so? I am just -- we hear a lot of people get surprised when all of a sudden they do an appraisal on it. So I'm sure you guys are watching it closely, but --.

Let me give you a breakdown on the commercial. This would be construction and development. About $81 million of it on the commercial side would be construction. And the other $94 million would be either developed property or property that would be developed within a couple of years.

Okay.

On the residential side, you have about $14 million of it is condos. Another $82 million would be one-to-four, just as construction. $74 million would be residential developed lots. And then another $100 million plus would be lots to be developed within two years.

Okay. Perfect. Thank you very much.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Robinson McGraw for any closing remarks.

Thank you, Janada. We appreciate everyone's time today and your interest in Renasant Corporation. We look forward to speaking with you again when we report our third-quarter results for 2009. Thanks, everybody.

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