Renasant Corp (RNST) 2011 Q2 法說會逐字稿

Good morning and welcome to Renasant Corporation 2011 second-quarter earnings call and webcast.

All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Renasant Chairman and CEO Robin McGraw. Please go ahead, sir.

Good morning, everyone, and thank you for joining us for Renasant Corporation's second-quarter 2011 earnings conference call. Participating in this call with me today are members 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, the occurrence of unanticipated events, or changes in future operating results over time. As a result of that now I would like to talk with you about the quarter.

We are very pleased with our solid financial performance for the second-quarter of 2011. Looking at our financial performance for the second quarter of 2011, net income was $5.8 million or $0.23 per basic and diluted share, as compared to $3.8 million or $0.18 per basic and diluted share for the second quarter of 2010.

Net interest income was $32.6 million for the second quarter of 2011, a 4.86% increase as compared to the first quarter of 2011 and over 37% for the second quarter of 2010. We grew net interest margin to 3.76% from 3.15% for the second quarter of 2010.

Our improvement in net interest income and net interest margin was largely driven by our continued strategic efforts to restructure our funding mix and deploy cash into higher-yielding alternatives. We continue to focus on changing our deposit mix by replacing higher costing deposit with lower costing retail deposits which resulted in our cost of funds declining to 1.17% for the second quarter of 2011, as compared to 1.31% for the first quarter of 2011 and 1.86% for the second quarter of 2010.

We expect these continued strategic efforts to result in further improvement in net interest income and net interest margin during future quarters.

Our non-interest income continues to be derived primarily from multiple lines of recurring income which include, but are not limited to, wealth management, treasury management, insurance, and mortgage, along with income from deposit and loan products. Non-interest income was $13.3 million for the second quarter of 2011, as compared to $21.8 million for the first quarter of 2011 and $14.3 million for the second quarter of 2010.

Non-interest income for the first quarter of 2011 included a bargain purchase gain of $8.8 million, while non-interest income for the second quarter of 2010 included a $2 million gain from the sale of securities. Excluding these items, which are non-recurring in nature, non-interest income for the first quarter of 2011 and second quarter of 2010 was approximately $13 million and $12.3 million, respectively.

Non-interest expense was $32.6 million for the second quarter of 2011, as compared to $36.7 million for the first quarter of 2011 and $26.2 million for the second quarter of 2010. The increase in non-interest expense during the second quarter of 2011 as compared to the same period in 2010 is primarily due to the operations acquired in our FDIC acquisition.

Furthermore, non-interest expense for the first quarter of 2011 included expenses related to the early extinguishment of debt and American Trust acquisition-related expenses.

Our Tier 1 leverage capital ratio was 9.10% and our total risk-based capital ratio was 14.83%. Our tangible common equity ratio was a 7.11%. In all capital ratio categories our regulatory capital ratios increased and continue to be in excess of regulatory minimums required to be classified as well capitalized.

Total deposits were $3.48 billion, which was relatively unchanged in comparison to December 31, 2010. Total loans, which include both loans covered and not covered under FDIC loss share agreements, were approximately $2.56 billion at the end of the second quarter of 2011 as compared to $2.58 billion at March 31, 2011, and $2.52 billion at December 31, 2010.

Loans not covered under FDIC loss share agreements were $2.185 billion as of June 30, 2011, down slightly as compared to both March 31, 2011, and December 31, 2011, as loan production basically offset loan run-off during the quarter. We continued to improve credit quality as non-performing loans, past-due loans, and non-performing assets each decreased on a linked-quarter and yearly basis. In fact, our non-performing loans were at their lowest level in two years and our 30- to 89-day past dues were at their lowest level in four years.

The loans and other real estate owned acquired in FDIC-assisted transaction are recorded at fair value which includes an estimated impairment. Furthermore, the loss share agreements with the FDIC, as well as adjustments to the balances of these acquired assets to record them at fair value, mitigate the impact of further loss on these assets.

Non-performing loans and other real estate owned covered under the loss share agreements totaled $89.4 million and $59.8 million, respectively, as of June 30, 2011. Our remaining discussion on non-performing loans, other real estate owned, and the related asset quality ratios exclude these covered assets from further conversation.

We recorded a provision for loan losses of $5.35 million for the second quarter of 2011 as compared to $5.5 million for the first quarter of 2011 and $7 million for the second quarter of 2010. Annualized net charge-offs, as a percentage of average loans, were 82 basis points for the second quarter of 2011 as compared to 54 basis points for the first quarter of 2011 and 80 basis points for the fourth quarter of 2010.

The allowance for loan losses as a percentage of loans was 2.18% on June 30, 2011, as compared to 2.17% on March 31, 2011, and 2.07% on December 31, 2010. Our non-performing loans were $51.9 million at June 30, 2011, as compared to $57.25 million on March 31, 2011, and $53.86 million on December 31, 2010.

Loans 30 to 89 days past due as a percent of total loans was 81 basis points on June 30, 2011, compared to 86 basis points March 31, 2011, and 98 basis points December 31, 2010.

Other real estate owned was $68.4 million on June 30, 2011, compared to $71.4 million on March 31, 2011, and $71.8 million on December 31, 2010. During the second quarter we sold approximately $7.4 million of other real estate owned. In addition, we currently have approximately $2 million of other real estate under contract expected to close during the third quarter of 2011, which we anticipate will result in a minimal loss.

We expect a strong second half of 2011 as we build on the momentum of our increase in net interest margin, capital ratios, and net interest income during the second quarter.

Looking at recent opportunities in which we took advantage during the second quarter, we entered into an agreement to acquire RBC Bank USA's Birmingham-based $689 million -- $680 million asset trust division. The transaction is expected to close during the third quarter of 2011.

Under the terms of this purchase agreement we will pay 60% of the purchase price at closing. Payment of the remaining 40% of the purchase price and one-third of the initial payment are contingent on the retention of the former RBC trust accounts for one year after closing.

On July 1, 2011, we announced our entrance into the banking market of Montgomery, Alabama, by hiring an established banking team. The entry into Montgomery adds to Renasant's current Alabama footprint of multiple full-service locations in Birmingham, Huntsville, Decatur, and Madison, which have over $600 million in assets.

The Montgomery market entrance is our seventh expansion and the third in Alabama over the past 12 months. We project this new Alabama location to be profitable in less than [four] months.

Over the past 12 months we have taken advantage of many opportunities to improve our profitability and expand our footprint throughout the Southeast. And we look to capitalize on future growth opportunities as they become available.

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

(Operator Instructions) Joe Stieven, Stieven Capital.

Good morning, Robin.

Morning, Joe.

First of all, good quarter. I guess still one of the buzz words out there is everybody wants to know about the regulatory exams and how the examiners are looking at stuff. So can you tell us, have you guys had your current or your sort of exam thus far this year? That is question number one.

Question number two, what is sort of the mood of the examiners? If you can sort of just give generalities.

Joe, let me just give a general answer to your question. I don't know how specific I can get on questions about examiners, but we are current on our regulatory exams through this year. I don't know that I can comment on the moods at this stage in the game, but we have completed our most recent exam through 2011.

Okay. Robin, on top of that though now, your tangible common is now sort of getting -- it has actually been increasing very nicely. You guys still have a plethora of FDIC deals potentially coming down in sort of that region. How much room do you think you have to expand and look at FDIC deals without even having to come back to the market? Thanks.

Joe, looking at the smaller deals that come around I think we can take advantage of those and let themselves capitalize as we did with American Trust. Obviously, if we did a larger deal, we probably would have to go back to the market as we did with the Crescent transaction. But on the smaller deals they pretty much will self-capitalize themselves if in fact your bid is the way we would be making our bids in those situations.

Quite frankly, right now there aren't any real big deals left out there in Georgia. I am not sure about in other states, if in fact there are some that start coming down, but we don't really see any large deals in Georgia at this stage of the game.

Robin, thank you. Good quarter.

Thank you a bunch, Joe.

Catherine Mealor, KBW.

Good morning, guys.

Morning, Catherine. How are you?

I am great. How are you?

Great, thank you.

I wanted to follow up on some comments you made last quarter and on a slide that you had in your most recent slide deck where you showed how your NPL inflows were coming mostly from residential mortgage and owner-occupied properties and your outflows were coming mostly from construction. Are you seeing that trend continue this quarter?

Smokey, you want to answer that?

The answer is yes.

That does continue. I don't know if you could hear Harold Livingston, but the answer is yes they are continuing in the same categories from the prior quarter.

And do you have the absolute level of inflows of NPL's this quarter?

We do. Let Harold give you that information.

Okay, thank you.

Catherine, on our total inflows for the second quarter we had $7.7 million flow in and we had $12.9 million that actually flowed out. The net decrease was from $53.9 million down to $51.9 million.

Most of the in -- well, the predominant inflow was in an owner-occupied residential mortgage out of Middle Tennessee which is a large residence. Some additional inflows out of Mississippi accounted for about another 20% of that and that was in one-to-four family rental properties.

Then on the outflow side we had a large loan out of Middle Tennessee that has been a non-performing problem for a long time where the properties are sold. And that was about $2.2 million that has left the books.

Then we had a commercial property out of Alabama that was approximately $800,000 that has, I think, sold, as I recall. And then we had one more commercial property out of Mississippi that accounted for some additional -- and it was a commercial property -- some additional outflow.

Then, finally, we had two loans -- well, some groups of loans out of Georgia and one loan out of West Tennessee that totaled about $1.245 million of that. And that was just various other types of real estate.

Catherine, let me correct one thing Harold said. The last quarter was $57.25 million, not the $53.86 million; that was December of 2010.

Okay. So you are saying the inflows were $7.7 million, which is a fairly large decline from last quarter's $17 million of inflows. So you are seeing some really nice improvement in your NPL inflows. Are you seeing the same kind of trends in inflows into your watchlist and classified?

Catherine, this is Corky Springfield. Our watchlist has remained relatively constant during the quarter. That watchlist has not changed more than $3 million or $4 million up and down at month end any of the last three months.

Of the watchlist, about 27% of our watchlist is what we would call substandard or worse. The rest of it would be classified just as watch.

Okay.

Corky, you might want --

And then do you have your TDR balance as of the quarter?

Yes, I was getting ready to ask Corky to comment on that while we were on that topic.

Yes, our TDRs ended the quarter right at $40 million. We had -- during the quarter we had two credits roll-off totaling close to $1 million and they, unfortunately, went from a TDR down to an NPL.

We had prolonged -- basically the credits that rolled on were out of our Tennessee markets. It was the single-family residence out of a national market of $1.2 million, church facility in Nashville of $1.7 million, a motel in Mississippi of $1.3 million, and then there was a funding we did of an existing ADR to finish out a subdivision in Nashville of about $1.8 million.

All these TDRs there because of rate concession and they are all performing as of right now and all are current.

Do you all have an estimate of what you think the redefault rate is going to be in your TDR portfolio?

Well, it has been historically running 30%.

Okay, great. Thanks for all that color on credit and maybe turning one last question just on growth from here.

I think turning the Montgomery portfolio profitable in four months I think is pretty impressive. What kind of loan pipeline do you have with this new team that you are bringing on?

Catherine, we are looking at up to $40 million conservatively. We say 50% of that, $20 million, but very strong pipeline from that group already.

As we said, we are able to lift out a very experienced team that had a very strong market share in the Montgomery market. We feel very, very confident about our ability to grow that operation rather dramatically in pretty fast fashion.

Great. Thank you for the color.

You bet. Thank you.

Bill Young, Macquarie.

Good morning, guys. How are you?

Morning, Bill.

Just kind of following up on that loan growth question. Last quarter you guys were pretty optimistic about potentially seeing growth sooner than later, so I just kind of want to follow-up to see how loan commitments, how growth there is trending.

And secondly, if you can kind of comment on C&I growth during the quarter. It looks like C&I balances came down a fair amount, down 3%, so could you just talk about if whether that is a timing issue in terms of paydowns? Thanks.

Let me make a general comment; then I am going to let Mitch Waycaster talk a little bit about pipeline and Harold Livingston talk a little bit about the paydown question that you asked.

We have been saying, basically, all along that we felt like that we would see somewhere around 2.5% growth in the second half of the year. We were pretty much on target in that we were flat first quarter in non-covered loans and we were down $5 million in non-covered loans this quarter.

Basically, give you a little comment on the paydown this quarter. We were hit pretty big in Nashville on some non-recourse and low fixed-rate, long-term financing coming from some larger regionals and institutional insurance type lenders, which we would not -- we kept our discipline and didn't match what they did. This basically offset the $17 million of growth that we had first quarter in Nashville.

By the same token, we were able to again to see our Alabama operation with the net $17 million growth for the quarter. Our Georgia group grew loans over $6 million for the quarter and we talked a little bit about and Mitch will talk about their pipeline in a minute. We once again saw a run-off in Mississippi of about $4 million, but it's getting smaller there and we feel like Mississippi is getting close to crossing the line.

Memphis, again, had about an $8 million run-off there for the quarter, but we do feel really good about opportunities coming our way. Then you throw in the added benefit of Montgomery, plus new relationship managers in some other areas, and we feel like we will be able to meet that 2.5% growth goal in the second half of the year.

Mitch, why don't you talk a little about the pipeline?

Bill, to follow up on your question about C&I, I will just touch on our current pipeline of new loans. And this would be closing in the next 30 to 60 days; we currently have 40 million and this is made up primarily of C&I owner-occupied CRE.

If you break that $40 million down by region, about 23% of that would be in Alabama. About 26% of that in the state of Georgia and in addition to that with some recent strategic hires in the state of Georgia, you could probably add about $10 million or $15 million additional dollars to that Georgia pipeline. In the state of Tennessee at about 28% of that total and then in Mississippi about 23%.

All of that $40 million, again, in addition to Robin's comment regarding Montgomery and the opportunities there.

Basically that $40 million does not include anything for Montgomery, Bill, nor did it include the additional pipeline that we are starting up with the additional lenders that are just coming in now into the Atlanta markets.

Let me point out too that this does not include other opportunities we see for some additional new markets during the course of the second half of the year also that we are presently looking at and working on.

Great. Thanks a lot for the color there, guys.

And [on a] different topic, kind of in the margin outside of loan growth, what other kind of positive drivers do you see to kind of help drive further margin expansion? And what kind of pace do you expect going into the next few quarters?

I will let Jim Gray answered that one, Bill.

Bill, I wish I could say that we could experience 21 basis points per quarter going forward; that is probably a little optimistic. I think the 5 basis points per quarter is pretty realistic. As we said before, we will have some quarters where we will be less than that, some quarters that will be more.

I did comment the last conference call that we had a large public fund coming up for rebid at the end of the second quarter. We did not win the bid on that public fund. As you recall also, we had quite a bit of excess cash so we utilized a lot of our excess cash to fund that withdrawal of that public fund that actually went out the first week of July.

That was about a $130 million public fund that was paying -- we were paying 3.25% on. Of course, the cash was earning us 0.25%. We figured that is worth probably 3-plus basis points in margin for the second quarter and we will get the full benefit of that -- for the third quarter rather -- full benefit of that for the full quarter.

In addition to that on an ongoing basis we have about $90 million a month in CDs that are maturing, retail CDs that are maturing. Those are maturing in the 130, 140 basis point range. All of those that we are retaining we are repricing and then new CDs that we are bringing on are in the 70 basis points range. So we are still getting a lot of benefit there.

So I think both of those things combined, a good benefit in the third quarter and then ongoing really just on out several quarters in the future. Then, of course, any loan growth would be a bonus on top of that.

Bill, I do think that we probably will see that pricing on the CDs up a little bit from that 70 basis points on the renewals this quarter. Not significantly, but there will be probably a little uptick there.

Great, thanks. Then do you -- I mean I guess from the second quarter you would kind of expect average earning assets to stabilize to potentially rise depending on loan growth in the back half of the year?

Average assets will probably decline during the third quarter because of the run-off of the deposits and the cash, so we won't see an increase in average assets during the third quarter. But as loans grow maybe in the fourth quarter you probably would see that increase, Bill.

Jim is going to make another comment.

Kind of on Robin's comment that the 70 basis points might be a little higher, we are allowing rate-sensitive CDs to run-off but we are very mindful in our markets of relationships. So we have discretion at the platform to pay higher rates to retain relationships.

Obviously, the relationship would be a CD customer that has other deposits with us -- money market, DDA, or so forth. So that could cause a little bit of an increased there.

Great, I appreciate the color. And then just one last question; could you quantify what oil-related costs were this quarter?

Bill, this is Stuart. We had about $1 million of carry cost related to other real estate, we had about $200,000 of losses in the sale of about $7 million of real estate, and then we had an impairment recognition of about $655,000. So that is about $2.1 million in total cost. About half of that is just the cost of carry.

Great. Thanks a lot, guys.

Thank you, Bill.

(Operator Instructions) David Bishop, Stifel Nicolaus.

Good morning, gentlemen. A follow-up in terms of the margin and maybe as it relates to the price of competition out there. As you go about repricing new lending relationships or renewing relationships, what are you seeing in terms of your pricing your spreads over underlying indices? Are they holding stable or are you having to give a little bit here in terms of retaining clients?

Having to give is pretty much market sensitive, Dave, for the most part. I think in a lot of our metro markets we are seeing some pressure. We are seeing -- again we are talking about Nashville. We saw -- you had a lot of pressure there with fixing some rates.

What we are trying to do as opposed to fixing rates for longer terms, we will fix them for a shorter period of time but we will go back more to a variable type rate that is competitive but we have not locked ourselves in. We try in those instances maybe to increase the margin to the index in order to help ourselves in a rising rate environment especially.

But also we are relatively competitive, close enough to being competitive with some of these larger lenders that we are able to retain the relationship. But it's not hitting us that badly as far -- from a margin standpoint.

And in terms of the new entrants in terms of Montgomery, are there any sort of specific niches that you are targeting that you had not had a presence or a vertical in before that this team brings an expertise in? Or is it pretty much just general --?

No, these guys are commercial lenders. They are C&I-related, commercial real estate related so it's the type of credits that we want. Obviously we don't have any credits in that market at this stage of the game so it's a good opportunity for us.

It has been a well-received transition as far as they are concerned. They have heard from their customers and they are getting a good reception, so I think we are very optimistic about this particular lift out that we have done.

Great. Thanks, Robin.

Thank you, Dave.

Matt Olney, Stephens Inc.

Good morning, gentlemen. Robin, in your comments on loan growth you mentioned something about looking at some new markets. Were you referring to the Montgomery team that you just talked about or were you talking about maybe some additional new markets in the near term?

About some additional new markets in the near-term.

And would this be more of a fill-in from the current footprint or a expansion? And would it be a similar lift out, or are you talking M&A at that point?

No, this would be de novo, would be lift out, and it would be within our four-state footprint.

Okay. And last question. As far as the next of the current OREO balance, has there been any mix shift I guess in the second quarter?

Really not. Mitch, you want to make any kind of --?

Matt, there hasn't been significant changes in mix. If you look at the outflows and inflows, it's basically the same.

I guess one positive there, of course, overall ORE balance is down $3 million and the outflow was made up primarily of residential vertical properties, which is obviously what is selling. And, likewise, the inflows for the quarter was made up primarily of that same category. So no major changes within the quarter.

Okay, great. Thanks for the color, guys.

Thank you, Matt.

And I am showing no further questions in the queue at this time; that will conclude our question-and-answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.

Thank you, Denise. We appreciate everyone's time today and your interest in Renasant Corporation. We are looking forward to speaking with you again when we report our third-quarter results for 2011.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.