Renasant Corp (RNST) 2013 Q2 法說會逐字稿

Good day and welcome to the Renasant Corporation 2013 second-quarter earnings conference call and webcast. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Oxford with Renasant Corporation. Mr. Oxford, the floor is yours, sir.

Thank you, Mike. Good morning and thank you for joining Renasant Corporation's second-quarter 2013 earnings call. Participating today are members of Renasant Corporation's executive management team.

Before we begin, let me remind you that some of our comments during the 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 to future operating results over time.

Now, I'll turn the call over to Renasant Chairman and CEO E. Robinson McGraw.

Thank you, John. Good morning and welcome to our second-quarter 2013 conference call.

Our second-quarter results reflect our continued efforts to grow net income, which increased for the sixth consecutive quarter. During the quarter, we achieved double-digit loan growth, while at the same time growing net interest and noninterest income. Additionally, we experienced a 37% decline in our nonperforming assets, resulting in improvements to our credit-related costs.

During the second quarter of 2013, net income was approximately $8 million, an increase of 26% as compared to approximately $6.3 million for the second quarter of 2012.

Basic and diluted EPS were $0.32 for the second quarter of 2013, as compared to EPS of $0.25 for the second quarter 2012. EPS for the second quarter of 2013 included pretax expenses related to our pending merger with M&F Corporation of $385,000. Excluding these merger-related expenses, EPS, both basic and diluted, was $0.33 for the second quarter of 2013.

Net interest income increased to $34.4 million for the second quarter of 2013 from $33.4 million for the second quarter of 2012 and $33.4 million on a linked-quarter basis. Net interest margin was 3.88% for the second quarter of 2013, as compared to 3.99% for the second quarter of 2012 and 3.89% on a linked-quarter basis.

Noninterest income increased 6.4% to $17.3 million for the second quarter of 2013, as compared to $16.3 million for the second quarter of 2012. Contributing to the growth in noninterest income were double-digit increases in mortgage-related income; fees and commissions associated with loans and deposits; and wealth management revenue.

Noninterest expense was $37.7 million for the second quarter of 2013, as compared to $36.8 million for the second quarter of 2012. This increase was attributable to the full quarter impact of de novo expenses and merger-related expenses, offset by a reduction in OREO-related expenses.

Total assets as of June 30, 2013, was approximately $4.24 billion, up 3.16% from June 30 of 2012 and 1.53% from year-end.

At quarter-end, our Tier 1 leverage capital ratio was 9.83%, Tier 1 risk-based capital ratio was 12.87%, and total risk-based capital ratio was 14.14%. All of our capital ratio categories increased during the quarter and continue to be in excess of the regulatory minimums required to be classified as well capitalized. In addition, our tangible common equity ratio was 7.66% as of June 30, 2013.

Total loans, which include both loans covered and not covered under FDIC loss share arrangements, were approximately $2.88 billion at June 30, 2013, as compared to $2.68 billion at June 30, 2012. Loans not covered under FDIC loss share agreements were $2.68 billion at June 30, 2013, an increase of 12.15% from June 30, 2012.

I would also point out that we continue to experience success with our de novo market entries. At quarter-end, loans and deposits in our de novo locations totaled $273 million and $171 million, respectively, evidencing the success we've achieved in these markets.

Looking at our success by market, the second quarter marks the one-year anniversary of our entrance into the east Tennessee market with a single location in the Knoxville MSA. After a year, we have four locations with $104 million in loans and $43 million in deposits.

Turning to our Alabama de novo locations of Montgomery and Tuscaloosa, we continue to experience tremendous growth. Both of these locations were profitable within six months of opening and now have crossed over to profitability from inception to date.

Our Mississippi de novo locations in Columbus and Starkville continue to be successful and we're poised for continued growth in both of these markets. After our pending merger with M&F and the opening of our new Starkville main office, both of which we expect during the third quarter of 2013, we will be one of the largest banks in the Golden Triangle region, based on market share.

Total deposits were $3.51 billion at June 30, 2013, as compared to $3.41 billion at June 30, 2012, and $3.46 billion at year-end. Noninterest-bearing deposits totaling approximately $561 million at June 30, 2013, and continue to represent 16% of our total deposits.

Our cost of funds were 60 basis points for the second quarter of 2013, as compared to 74 basis points for the second quarter of 2012 and 62 basis points on a linked-quarter basis.

Looking at our credit quality metrics during the second quarter of 2013, we experienced significant improvement in both covered and noncovered nonperforming loans, early-stage delinquencies, and our coverage ratio. Nonperforming loans and OREO covered under loss share agreements totaled $47.4 million and $27.8 million, respectively, at June 30, 2013, combining for a decrease of approximately 27.33% in nonperforming assets, subject to FDIC loss share agreements from June 30, 2012, and a decrease of approximately 23.78% from year-end.

Our legacy nonperforming loans, or loans not covered under loss share agreements, were $22.5 million at June 30, 2013, down from $30 million at June 30, 2012, and $30.2 million at year-end. Nonperforming loans as a percentage of total loans improved to 0.84% at June 30, 2013, as compared to 1.25% at June 30, 2012, and 1.17% at year-end. Our ratio of NPLs to loans is at the lowest level since the first quarter of 2008.

As further evidence of our continued improvement in credit quality, loans 30 to 89 days past due as a percentage of total loans remained at prerecession levels and were 27 basis points at June 30, 2013, as compared to 60 basis points at June 30, 2012, and 31 basis points at year-end.

Our coverage ratio, or allowance for loan losses as a percentage of nonperforming loans, also improved to 208.70% at June 30, 2013, as compared to 149.45% at June 30, 2012, and 146.90% at year-end.

The allowance for loan losses totaled $47 million at June 30, 2013, as compared to $44.8 million as of June 30, 2012, and $44.3 million as of December 31, 2012. The allowance for loan losses as a percentage of loans was 175 basis points as of June 30, 2013, as compared to 187 basis points on June 30, 2012, and 172 basis points at year-end.

Net charge-offs totaling $2.4 million for the second quarter of 2013, as compared to $4 million in the same period of 2012. Annualized net charge-offs as a percentage of average loans was 35 basis points for the second quarter of 2013, as compared to 63 basis points for the second quarter of 2012 and 53 basis points for the fourth quarter of 2012.

We recorded a provision for loan losses of $3 million for the second quarter of 2013, as compared to $4.7 million for the second quarter of 2012 and $4 million for the fourth quarter of 2012.

OREO was $33.2 million at June 30, 2013, as compared to $58.4 million at June 30, 2012, and $44.7 million at year-end. On a linked-quarter basis, OREO decreased approximately $6.5 million, and we currently have approximately $5 million of OREO under contract to sell during the third quarter of 2013.

We continued to see a strong loan pipeline as we moved into the second half of the year. We believe the growth from our recent de novo entries and the continued ability of our legacy markets to perform at a high level has us well positioned to maintain our positive momentum for 2013 and beyond.

Our pending merger with First M&F Corporation, which we anticipate completing during the third quarter of 2013, will only enhance our strong performance potential. Last quarter, both companies' shareholders overwhelmingly approved the proposed merger, and we are now waiting on final regulatory approval. Upon completion of the transaction, we'll have approximately $5.8 billion in total assets over 120 locations throughout Mississippi, Tennessee, Alabama, and Georgia.

Now Mike, I'll turn it back over to you for questions.

(Operator Instructions). Michael Rose, Raymond James.

I got on the call a little bit late, but I wanted to drill down a little bit into the loan growth this quarter. I know you mentioned last quarter that you'd expect things to accelerate or improve over the remaining three quarters, and that's exactly what happened. But I wanted to get a sense for how much of the growth came from some of the newer markets that you entered and where you think we are with each of those kind of de novo entries.

I mean, are we getting to a point where the growth rate in some of the first ones that you announced are starting to slow? And kind of what is the -- the legacy lenders, what do their pipelines look like? Any commentary there would be helpful. Thanks.

I'll make a couple of comments, and I'll let Mitch Waycaster talk a little bit on pipelines and then have Mike Ross with me talk a little bit about the Alabama de novos.

But obviously, we're still seeing some great growth in our east Tennessee markets. I think about -- around half of the growth was attributable to the de novos.

Obviously, we're having some nice growth in other markets. For example, in the second quarter we saw an increase in loans in Memphis at about $11.5 million; Nashville at over $16 million. And this is increase; these are not originations. East Tennessee was about $27 million; about $20 million in Alabama.

And here is a real positive, Michael. For one of the first times, we saw the growth in Georgia noncovered loans go up about $18 million, as compared to a runoff of about $12 million of covered loans. So we saw some -- across the spectrum, we saw some very nice loan growth, not just in de novos, but also in a lot of the legacy markets.

I'll let Mitch make a couple of comments about our pipeline, and then I'll let Mike Ross talk a little bit about what's happening in Alabama and Georgia.

Michael, the 30-day loan pipeline currently stands at $80 million. If you break that down by state, 37% would be in Tennessee, 18% in Alabama, 20% in Georgia, and 25% in Mississippi. This pipeline should result in approximately $30 million in growth in noncovered loans within 30 days.

Mike, do you want to make a comment about Georgia and Alabama, the eastern region?

Sure, I'd be happy to, Rob. Michael, as far as your question on the early de novos and have we hit a point where the growth has slowed down, actually we're seeing the growth continue and it is at a slower pace because early on we got some of the low-hanging fruit. But we're still seeing good, solid double-digit growth from our early de novos.

And frankly, we don't see anything out there on the horizon that would indicate to us that is going to change, certainly over the next nine to 12 months.

Michael, let me make a comment. The net growth, and obviously you get better net growth in the de novos than you do in the legacy markets because of payouts and runoffs, has been consistent about 50-50 throughout the process.

Let me give you a little idea about our production for the last quarter. In Alabama, production was about -- in Alabama, it was about 25.8% of our production. Georgia was about 9% of the total production, Mississippi about 27% of the total, Tennessee about 28% of the total production. But as we look at it on production only, about 25% of the production was in the new markets. The net growth was about 50-50.

Okay, that's helpful. And then, just switching gears a little bit, you guys obviously had a nice drop in nonaccrual loans and the 30-day to 89-day number again went down. How should we think about future provisioning and credit costs from here, particularly with the lift in real estate values in some of your markets? Thanks.

I'm going to make a comment, then I'm going to let Kevin follow up. But as we've said previously, we feel like we will start seeing a tapering of our provision. And I think that still follows to be the case. Kevin, do you want to comment?

Yes, I'll just add to that. As we continue to see credit quality trends improve, you mentioned real estate values improving. We're seeing that as well. Then our provisioning will taper off accordingly. And if you follow what our provision has done, it has tracked consistently with the credit quality improvement that we've seen over the past couple of years.

Great, thanks for taking my questions.

Thank you, Michael.

Catherine Mealor, KBW.

Can y'all comment a little bit on your outlook for the mortgage earnings, given the recent rise in rates? Maybe particularly, what did production look like over the past couple of months?

Sure, I'm going to let Jim Gray answer that for you, Catherine.

Yes, we actually had good loan -- or good production in the second quarter. Even though our fee income was up for the second quarter, our volume was actually even stronger than that. The rise in rates put a little crimp on margin, which should kind of even out and improve going forward. We actually were up about 37% in actual production in the second quarter.

And it was not all as you would think with rates rising, all the refis jump in and close. Actually, we had a drop in our refi percentage in the second quarter of 57% versus 65% in the first quarter, and our June monthly refi number was 47%.

So even though we saw a rise in volume, we continue to see our efforts to enhance our purchase volume through wholesale activity, particularly in Georgia, and the hiring of the originators that we mentioned in our last call, particularly in our Cahaba Heights location in Birmingham.

We actually had $10 million out of Cahaba Heights for the second quarter, and that's with several of those originators not even really getting up to full speed. It takes about 60 to 90 days for an originator to get their pipeline built, and so we expect that to continue.

Georgia wholesale, we're $46 million year to date in Georgia wholesale. Had a good second quarter and are continuing to see that ramp up.

And we're actually putting some more focus on our other wholesale markets. We actually have a wholesale rep that will be on full time probably in August to cover our Mississippi and Louisiana markets and are looking to hire a wholesale rep to cover Tennessee. So some of those markets, wholesale has been improving even without the day-to-day attention of a rep.

So we feel pretty positive about -- that we're positioned well for our purchase volume to continue to help offset the anticipated decline in refi activity.

Catherine, this goes back to our comments in previous quarters that we recognize the fact that refis will become less and less of a percentage. So therefore, we're doing everything we can to pick up the production on originating mortgages on purchased mortgages.

Great, thank you. That's very helpful.

Thank you.

Christopher Marinac, FIG Partners.

Rob and Kevin and others, just kind of curiosity and maybe big-picture question. Even though we might be several quarters away from any change in the short-term interest rates, I am just sort of wondering as you kind of look at the future, even if that's a year or a year and a half from now, whenever we see a move in rates of the prime and LIBOR and Fed funds, do you have a sense of how much of that you can retain? And given the core deposit base and even stronger base you'll have as you integrate First M&F, just sort of curious how you think about that as it pertains to future margin levels way beyond the next couple of quarters.

Yes, Chris, that's one of the biggest concerns that we've been trying to address is our deposit mix and the stability of those funds. It's hard to argue that anything's high rate in the low-rate environment we've been in, so all rates, all deposit rates, are low rates.

The question is, in a rising rate environment, how stable are those deposits and do they remain low cost? And that's been a focus of ours going on back to 2009 is reconstituting that mix of deposits in anticipation of a rise in rates.

We feel confident that we do have a good core deposit base. M&F will only enhance that. Several actions that we've taken as we have scrubbed our deposits, single service, high rate, particularly money market accounts. We've tried not to attract those and have tried to either attach additional services and relationships to those deposits or tried to move them out the door. So we've tried to streamline our deposit base in anticipation of rates going up and not be subject to volatile deposits.

And Chris, back to the M&F merger and the fact that it will only enhance our core deposits, in our previous acquisitions, whether it was Memphis, Nashville, or to some degree Alabama, especially the Birmingham aspect of it, and especially Georgia, we've seen a huge negative impact on the percentage of our noninterest demand deposits to total deposits.

First M&F is pretty much equal to Renasant as far as their percentage, and maybe even a little bit higher their percentage of noninterest demand to total deposits. So therefore, we won't see that decline that we have seen in past acquisitions and that was one of the very attractive aspects of the M&F merger.

I'll also add, in the de novo markets our focus on the front end has been more of a loan focus. As those de novos mature and as we execute our plans to add additional facilities in those markets, the deposit bases will start to come along with that as well. So those teams were not only lenders, they were relationship managers, and there is entire books of loans and deposits that will come with.

Okay, great. That's helpful color. I guess just one other quick, separate point was given what's happened with the longer end of the rates the last month or two, has that changed any attitudes among commercial borrowers? It might be too early to ask that, but I'm just kind of curious any observations you have on that front.

Actually, we are not seeing so far much change among our commercial borrowers or our competition in terms of the rate offering. However, we do anticipate that given the rate changes that we're seeing on the long end, we are hopeful that our competition will help in educating our borrowers that the past practices in loan pricing cannot continue forever.

Great, thanks again. Appreciate the color.

Thank you, Chris.

Kevin Reynolds, Wunderlich Securities.

Football season is approaching, so we're all doing a little better, right?

Hey, we're all undefeated right now, Kevin.

Well, hold onto that one. I know I will as we head into the (multiple speakers). Hey, a couple of questions on the quarter here. Good quarter. Looking at your loan growth, I'm just trying to get a feel out there for maybe new customers versus increased activity or borrowing from existing customers, and then maybe another way of kind of tackling that is, how much out there would you guess is share movement from other banks or other nonbanks and how much of it might reflect increased business activity, if that is happening at all in the local marketplace? That's my first question, then I'll have a follow-up.

Kevin, this is Mike Ross again. Most --- the overwhelming majority of our loan growth is coming from new customers and we continue to take share.

A little bit, but not much, of the growth is coming from existing customers that are growing their business and we see a little bit of increase in line utilization, but the overwhelming majority is coming from new customers, and we continues to have the ability to take share.

Next question is as you approach the closing, as you get closer and closer to the closing of M&F, has there been anything that you've learned or any opportunities that have presented themselves that maybe you weren't -- you didn't fully appreciate as you negotiated the deal and put it together a few months ago? Does it look like it's going to get better and have you found some of those new opportunities, or is it -- would you say it's just the same as it's always been?

We continue to be impressed with M&F's improvement. They have a very, very strong core bank. And they've done an excellent job of clearing up credit issues that they may have had in the past and continue to do so.

And we continue to be impressed with the team members at M&F that will be joining Renasant, so it's been just a great, great process. We continue to visit back and forth, visit their locations, they visit ours, and the integration process, while unofficial, has been an ongoing process ever since announcement. So I think that's been the real pleasure of the whole relationship, Kevin.

Okay. Any idea -- I apologize if you've already mentioned this, but any idea when you think in the quarter you might ultimately receive the approval and then ultimately close the deal? Is it just kind of mid-quarter or do you think it skews towards the back end of the quarter?

We still say third quarter. I'm not going to --- the shareholders have approved it. Everything is done, other than getting final regulatory approval, and we're going through the steps of getting all aspects of that regulatory approval taken care of. So we anticipate it definitely being during this quarter. We hope sooner rather than later, but I'm not going to jump out on a limb at this stage of the game.

Okay.

We have no reason to think it won't be sooner rather than later, let me put it that way.

Okay, thanks very much. Good quarter.

Thank you, Kevin.

Matt Olney, Stephens.

A lot of my questions have already been addressed. But I was hoping you could give some commentary around the First M&F credit quality. I mean, obviously, you can take the marks on those loans as you bring those over, but can you kind of give some commentary as far as do you see some workout assets that could take a few quarters to work through, once you get those on your books?

Mark Williams, as you know, one of his areas of responsibility is special assets of the real estate, so I'm going to let Mark comment on that.

Yes, Matt, and Robin touched on this just a little bit previously, that management and team members of M&F have done a very good job working through those credits.

I would say in probably their last two years as they were working and resolving their issues, they've done a very good job. They have current appraisals supporting all of their problem loans, their OREO. Similar to us, they've had good success in particularly the last 12 months of decreasing their OREO.

A lot of their problem loans in OREO are going to be in Mississippi and Alabama markets that we're very familiar with. They have very little in other areas. So with current appraisals supporting values and, as you suggest, the discount on the purchase accounting, we feel very good about that.

Matt, just to add to Mark's comments, part of our analysis in determining the amount of writedown included an estimate of cost to carry certain assets for a period of time, anticipating some of them will take time to work out.

Yes, okay. This is a follow-up, I guess, for you, Kevin, regarding the yield curve, and it's much more attractive now than it has been in the past. Can you just speak to the yield on the securities book and has the strategy changed and how close are we to seeing that inflection point of actually seeing the securities yield increasing for the first time in a while?

I'll let Jim correct me where I'm wrong, but I'm not sure I'm ready to step out on a limb on guesstimating when we'll see yields increase.

Particularly on the long end of the curve, just over the past quarter, I mean, you have seen the 10-year Treasury increase upwards of 80 basis points. So reinvestment rates are much higher than where they were just, say, three months ago.

So it is weighing on OCI. We did have a shift in our accumulated other comprehensive income, just as the current book, the market value fell. What hit equity was in the $6.5 million range.

As we look ahead, there could be some impact on yield as changes in mortgage-backed security prepayment speeds, as they change, as they lessen. That could impact yields, but I'm not sure when that will start being reflected. Typically, that lags.

Yes, this is Jim. Looking at the opportunities of the part of the curve we'd be buying in, in the agency and the five-year, 5-1, five-year, one-year type range, the mortgage backs, and the 10 to 15, and then the munis in the 10 to 15, looking at the average yields there I think we'd see more of a stabilization in the yield on our portfolio, with possibly a slight increase.

Okay, that's helpful. Thanks, guys.

Thank you, Matt.

Andy Stapp, Merrion Capital.

Good morning. (Technical difficulty).

I'm sorry, gentlemen. It looks like we lost Mr. Stapp for a moment. Mr. Stapp?

Yes.

I apologize; your question was cut off a little bit there. We lost it for a moment. If you could just start from the beginning again, sir.

Okay, sorry, I hopped on the call a little bit late. So if this question has been asked, you know, no need to answer it again. I can look at the transcript. But just if you could talk about your outlook for mortgage banking, plus the mix between refi versus purchase originations during the quarter, that would be great.

Andy, Jim answered that earlier.

Okay.

He can give you just a little synopsis, and then you can -- if you want to pick up the detail on the transcript. Jim?

Yes. Basically, Andy, the story is our refi as a percent of volume has declined from 65% in the first quarter to 57% in the second quarter. And actually our June refi percentage was 47%, while volumes increased about 37% from the first quarter.

And looking at our pipeline, our pipeline at the end of the second quarter was roughly equal to the pipeline at the end of the first quarter. So we continue to believe that our volume will be fairly stable, even considering an anticipated decline in refi activity.

Okay, great. No further questions, but just one request. If you guys could continue to deliver on clean quarters like this, that'd be great. It just makes our lives a lot easier.

Thank you, Andy (laughter). We'll do our best.

All right.

It appears that we have no further questions at this time. We'll go ahead and conclude our question-and-answer session. At this time, I'd like to turn the conference back over to management for any closing remarks. Gentlemen?

Thank you, Mike. And thanks, everybody, for tuning into our call today. We appreciate all of your time and interest in Renasant Corporation and we look forward to speaking with all of you again in the near future. Thank you, everyone.

And we thank you, sir, and to the rest of your management team for your time today. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and take care, everyone.