Renasant Corporation (RNST) Q2 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Renasant Corporation's 2012 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 the Renasant Corporation. Mr. Oxford the floor is yours, sir.

Thank you, Mike. Good morning. Thank you for joining us for Renasant Corporation's Second Quarter 2012 Earnings Conference Call. Participating in this call 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 risks 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. And now, I'll turn the call over to Renasant Chairman and CEO, E. Robinson McGraw.

Thank you, John. Good morning, everyone, and welcome to our second quarter 2012 earnings conference call. During the second quarter of '12, net income was approximately $6.3 million as compared to approximately $5.7 million for the second quarter of '11. We continue to execute our plan of driving improvement in key areas, which should result in sustained long-term profitability. Our second quarter financial results, as compared to the same period in '11, reflects significant growth in loans and noninterest-bearing deposits, a 22 basis point increase in net interest margin and a 31% increase in noninterest income. In addition, we continue to experience significant improvement in our credit quality metrics, as our net -- as our nonperforming loans and nonperforming assets not covered by FDIC loss-share agreements decreased by 42% and 27%, respectively, as compared to the same period in '11. Basic and diluted EPS were $0.25 for the second quarter of '12 as compared to EPS of $0.23 in the same period in '11. Net interest margin increased to 3.98% for the second quarter of '12 as compared to 3.76% for the second quarter of '11. Net interest income increased to $33.4 million for the second quarter of '12, from $32.6 million for the second quarter of '11. The current interest rate environment continues to put pressure on all financial institutions' ability to grow net interest income and net interest margin. Despite this pressure, we have continued to increase our net interest income and net interest margin through the restructuring of our funding mix and through the deployment of cash in the higher-yielding alternatives. Noninterest income was $16.2 million, up 31% for the second quarter of '12 as compared to $12.4 million for the second quarter of '11. Contributing to this year-over-year increase in noninterest income was strong growth in mortgage production and an increase in wealth management income, primarily due to the additional revenue from the trust acquisition in the third quarter of '11. Also included within noninterest income for the second quarter of '12 was a gain of $869,000 resulting from the sale of securities as compared to a loss of $258,000 in the second quarter of '11. We sold securities in the second quarter of '12 because the effective yield has significantly declined as a result of accelerated prepayments. The proceeds from the sale of these securities were primarily deployed to fund loan growth. Noninterest expense was $36.7 million for the second quarter of '12 as compared to $31.6 million for the second quarter of '11. This increase in noninterest expense is primarily attributable to the additional personnel and facilities costs from our recent de novo branching activities, our previously-disclosed trust acquisition, expenses related to mortgage production and higher health insurance costs. Total assets at June 30 of '12, were approximately $4.11 billion as compared to $4.2 billion for the same period in '11. At quarter end, our Tier 1 leverage capital ratio was 9.68%, Tier 1 risk-based capital ratio was 13.14% and total risk-based capital ratio was 14.39%. In each case, in excess of regulatory well-capitalized thresholds. For prudent capital and balance sheet management, we continue to enhance our strong capital position, as evidenced by our tangible common equity ratio, which was 7.65% at June 30 of '12, a 54 basis point increase over the prior year. Our capital and related ratios continue to be at levels which we believe adequately support future growth while, at the same time, allowing us to maintain our dividends. Total loans which include both loans covered and not covered by FDIC loss-share agreements were approximately $2.68 billion at the end of the second quarter of '12 as compared to $2.56 billion for the same period in '11. Loans not covered under loss-share agreements were $2.39 billion at June 30 of '12, as compared to $2.18 billion from June 30 of '11. Our annualized loan growth rate of 19.35% during the second quarter of '12 represented one of the largest quarterly increases in loans in the history of our company. Furthermore, we are particularly pleased that each region within our footprint contributed to this growth, and it represents our fourth consecutive quarter of loan growth. With the contribution of each region and the additional loan volume from our de novo operations, we expect net loan growth to remain strong in future quarters. In our Alabama market, loans increased $46 million, which represents the ninth time in the last 10 quarters that Alabama has achieved net loan growth. In Georgia, net loan growth was $25 million, and in Tennessee, our net loan growth was $20 million for the second quarter of '12. Our Mississippi market also grew loans $15 million, representing its fourth straight quarter of net loan growth. Total deposits were $3.40 billion at June 30 of '12, as compared to $3.47 billion at June 30 of '11. Noninterest-bearing deposits increased $81 million, or 18%, at June 30 of '12, as compared to the same period in '11. This continued loan growth in noninterest-bearing deposits, coupled with reductions in borrowed funds, reduced the company's cost of funds 43 basis points, to 74 basis points for the second quarter of '12 as compared to 117 basis points for the second quarter of '11. The loans and other real estate owned acquired in FDIC-assisted transactions are recorded at fair value. Furthermore, the loss-share agreements with the FDIC, as well as our adjustments to the balances of these acquired assets, to record them at fair value, provides substantial protection against loss from these assets. Nonperforming assets covered under the FDIC loss-share agreements totaled $103.5 million at June 30 of '12, down from $149.2 million at June 30 of '11. Nonperforming loans covered under FDIC loss-share agreements totaled $65.6 million at June 30 of '12, as compared to $89.3 million for the same period in '11. OREO, covered under the FDIC loss-share agreements, was $37.9 million at June 30 of '12, down 36% as compared to the same period in '11. The remaining discussion in this release on nonperforming loans, OREO and the related asset quality ratios exclude these assets covered under FDIC loss-share agreements. Our coverage ratio, or the allowance for loan losses as a percentage of nonperforming loans, was approximately 149.45% at June 30 of '12, as compared to 91.52% for the same period in '11. The allowance for loan losses as a percentage of loans was 1.87% at June 30 of '12, as compared to 2.18% for June 30 of '11. We recorded a provision for loan losses of $4.7 million for the second quarter of '12, as compared to $5.3 million for the second quarter of '11. Annualized net charge offs as a percentage of average loans were 62 basis points for the second quarter of 2012 as compared to 82 basis points for the second quarter of '11. Nonperforming loans declined to $29.9 million at June 30 of '12, down from $51.9 million at June 30 of '11. Furthermore, loans 30 to 89 days past due as a percent of total loans were 60 basis points at June 30 of '12, as compared to 80 basis points at June 30 of '11. OREO was $58.4 million at June 30 of '12, as compared to $68.4 million at June 30 of '11. We continue to aggressively work to market our OREO and currently have approximately $8.4 million of OREO under purchase agreements scheduled to close during the third quarter of '12. During the second quarter of '12, we sold approximately $7.3 million of OREO. We continue to capitalize on opportunities in new markets as we entered into the Eastern Tennessee banking market via de novo branching and broke ground on our new Starkville, Mississippi location during the second quarter of '12. Overall, the positive trends we're experiencing in loan growth, change in our funding mix, increases in net interest income and margin, increases in mortgage revenue, as well as a decrease in nonperforming assets, have us well-positioned for what we believe will be a very strong second half of 2012. Now, Mike, I'll turn it back over to you for questions.

[Operator Instructions] The first question we have comes from Catherine Mealor of KBW.

Can you talk a little bit about the loan pipeline going into the third quarter?

Yes. Let me let Mitch answer that for you. Mitch Waycaster.

Catherine, the current 30-day pipeline is at $62 million, and if you break that down by state, 29% of that would be in Alabama, 10% in Georgia, 38% in Tennessee and 23% in Mississippi. And this pipeline should result in approximately $25 million in growth and non-covered loans in the next 30 days.

Okay. Great. And can you talk a little bit about loan pricing? I think your loan yield was right at about 5.3% last quarter. Do you have that number for this quarter, and can you just talk a little bit about what kind of pricing you're seeing with this level of loan growth?

Jim Gray will answer that one, Catherine.

Catherine, loan yields from new and renewed loans for the second quarter were about 4.76%. That was actually about 5 basis points higher than the new and renewed loan yield for the first quarter. That was broken down about a 4.90 for the fixed rate loans and a 4.40 average for the variable rate loans.

Okay. Great. And do you have what the average loan yield was for the quarter? So that's just for the new and renewed loans, correct?

Around 5.30 for the quarter. I think that was down from a 5...

5.19 for this quarter.

5.19 for this quarter, okay.

The next question we have comes from David Bishop of Stifel, Nicolaus.

A couple of questions. Number one, I see a little bit of a bump in expenses here this quarter, symptomatic of the hirings that you alluded to in terms of the new operations. Did you expect to see those sort of rein in, coming or flatlining as we look out into the second half of the year? Then I have a follow-up on credit as well.

Yes. I'm going to let Stuart answer that expense question. But, yes, that's coming mainly from our expansion, and also some health insurance cost well divided [ph] but Stuart Johnson will answer that for you today.

They -- as Robin said, the most of the expenses are primarily increased for in the salary and benefits, about $1.2 million up, about 30% of that would have been due to our expansion of expenses and variable, as well as some other salary adjustments. One of the primary elevated expenses right now due to our mortgage production, they were up about 24% over the prior quarter. And then we continue to have elevated health insurance costs. It's accounted for about -- our benefits accounted for about 45% of that increase, primarily driven by health insurance.

Dave, I think going back to the comment about the commission income, as you noticed, I think we had a very strong quarter in mortgage production. That higher commission expense is obviously variable and it depends on what that production is, and is offset, obviously, by much higher revenues on the income side.

Then looking at the loan loss provisions, still a little bit elevated relative to, I guess, your long term average. I think it's averaged about 7% of revenues. I think it's now a little bit over 9%. Given the direction in policiday [ph] delinquencies and nonperforming loans, do you think there's room to bring that over time, as maybe some of the clouds clear in terms of the economic outlook?

I'm going to let Kevin answer that one, Dave.

Yes, Dave. There is room to bring that down. I will say though that if you look at our provisions, some of the elevated provisions, maybe compared to other quarters, is going to be due to loan growth, just providing for that loan growth. But, yes, as some things kind of -- some of the volatility and just the overall, maybe national, global, macroeconomics, as we see some stability in that, you could see us bringing that provisioning down.

The next question we have comes from Robert Madsen of Stephens.

I just wanted to follow up on the last question with expenses. So do you feel like this is a good run rate going forward, or was this quarter a little elevated?

The quarter, we expect that our health insurance probably just to remain elevated through at least the next quarter. And then the other expenses are going to be contingent again on mortgage production. There is a good pipeline in our secondary market mortgage production. And then dependent upon our OR expenses, they were $3.3 million during the second quarter, and dependent upon those expenses, even though we do expect those to abate at some point.

I think those are the variables, Robert, I think the salary expense, obviously, in the new Eastern Tennessee market will continue, and we had pretty much a full -- not quite a full quarter of those new employees in that lipped [ph] out in the Maryville/Johnson City/Brissel [ph] area. Those will be consistent going forward, but those variables, obviously, as mortgage production continues to run at a high level, we'll see that commission expense continuing at that high level. By the same token, health insurance is a variable that we don't have any control over at this stage, and it just depends kind on how that levels out, then we think it probably will by the fourth quarter this year. A little bit somewhat lower levels than it was this part of the year, but we do expect third quarter to be somewhat similar. OREO expenses, I'm going to let Mark Williams make a comment about that, which is the third variable in this expense side.

In regard to our OREO expenses, we have had good traction in the sale of our OREO. As that continues, and we believe it will, as you can see by our contracts, it will close by the end of the third quarter, those expenses will trail off. One of the things that we actually charged our OREO manager and our director of our appraisal unit, in the first half of the year, we wanted to make sure, as we started to see in our markets stabilization on real property, and that has occurred, we wanted to make sure that our OREO inventory was properly veyed [ph], and so we set those 2 out to make sure that those values were there, so we did have some, perhaps elevated impairments in the first half. Still very confident that we are reflective of the market there so that expenses should stabilize and not be at the same levels it was in the first half.

Hopefully, that answered your question, Robert.

Yes. One more follow-up question on the OREO. Your balance was down 10%. Is this pace going to be sustainable going forward with the summer selling season coming up?

We think it will be sustainable. We've got some good contracts going. We've got some strong inquiry already out there that have not led to any contracts at this time. We certainly believe that OREO has room to come down. Obviously, as we enter that fourth quarter, into the November, December, it might slow at the end of the year. Interestingly enough, half of our OREO sales this year has been in lots and A&D. So that follows suit when we see stabilization in the market, the housing picking up, it's allowing us to start moving some of that product. And that's across all of our footing, even including in our DeSoto County. We had some DeSoto County sales in the second quarter, and we're receiving far more levels of interest, which is leading to viewings and showings of lots and raw land in that market.

The next question we have comes from Michael Rose of Raymond James.

I got on the call late, so sorry if I missed this. But how should we think about the runoff in covered loans, really, over the next year or 2? I mean, should it kind of continue at this pace, or will it kind of taper off as we get into later 2013, 2014?

Yes, Michael, this is Mark. And we do anticipate the runoff on those covered loans to remain at about the level it has been for the remainder of this year. That's about $25 million in a quarter. Our first 2 years, we projected to be the largest of where we're trying to right size and get those toxic loans either rehabilitated or out of our system, and naturally, some of that trails into our OREO and our loss-share. But we do anticipate that to be at the same level for the remainder of the year, and maybe a little bit in the first quarter of '13, and then level out.

Okay. That's helpful. And then on a secondary topic, and I'm sorry if I missed this. Can you kind of give us an update on the RBC Trust acquisition and on the wealth management's line item in fee income, I mean, is this sort of a good run rate until you've, I guess, more fully integrate that? And I guess continue to expand that business throughout your entire footprint?

Michael, before I let -- I'm going to let Mitch Waycaster answer that question. But let me add something to Mark's comments. The good news is with the runoff in that Georgia loss-share, we have just about gone dollar-for-dollar in loan production this quarter with the runoffs. So -- and this is just out of Georgia. So it's just about a push in Georgia. So we are, in fact, maintaining our loan balance in Georgia as a result of that. Mitch?

Michael, we -- that would be a good run rate going forward on wealth management, and just to give you an update on the operation in Alabama, we have retained 95% of the assets under management, which early on was much of our focus. But we have begun to grow assets under management in that market in Alabama, also leveraging the expertise there with other markets and growing assets as well. In addition, the hiring of trust professionals in our Columbus and our Starkville markets, all producing good results in that area. So yes, we believe that's a good run rate and could -- should continue to see improvement coming really from across the system.

Michael, we see that as a real growing area of the company. And as Mitch said, what we're trying to do is to export the expertise in the Birmingham unit to our other metropolitan markets. We feel like with -- we have a trust professional now in the Atlanta area. We're looking to do the same thing in the Nashville market. So we feel like that we should grow that business as a result of the expertise and the backbone that we've created in Birmingham. And let me make a comment, too, and Mike Ross is here. I'll let Mike talk a little bit about the cross-sale opportunity, and what they have been doing in that Birmingham area. As you know, Mike is our Regional President for the Eastern Region, which encompasses Alabama and Georgia. Mike, you want to comment on that?

I'd be delighted to, Robin. We feel like we can really leverage our commercial banking teams that are calling on companies that have assets under management, or needs for trust services, whether it be 401K administration or other types of services. And we have those people co-located in Birmingham, and because of that, we've actually seen some good success and some early growth in assets under management. And we anticipate accelerating that, not only in the Birmingham market but in our other markets, just due to participation in the same sales meetings and getting the teams educated on the fact that we have those products and services to sell.

The next question we have is a follow-up from David Bishop with Stifel, Nicolaus.

Yes, Robin, sort of just dovetailing with your comments about Georgia in terms of offsetting. Where are you seeing that growth coming from? Because obviously that's been sort of perceived as sort of a barren wasteland in terms of loan growth opportunities. And then I think you said you had $25 million in terms of Georgia. Just curious about the tender of those loans, and what you're actually seeing within those markets?

I'm going to let Mike Ross answer that.

I'd be delighted to. What we're doing is executing strategies in our Georgia market, not too dissimilar from what we began in Alabama a couple of years ago, which is to -- we've recruited some bankers that have good solid core relationships with solid companies that are in the marketplace, and our loan growth in Georgia is not indicative of growth in the overall economy in Georgia. But we are actually taking share from some of our competition, and most specifically, in the area of C&I or owner-occupied real estate type financings where you've got core solid businesses that have been around a long time that have dealt with the same bankers for a long time. And those bankers happen to be employed by us.

Dave, going back to when we purchased Crescent, if you will recall at that time, our stated strategy was that we would in fact quarantine the bad loans which we've done with our loss-share team, and it would go back to banking. We felt like that there were some really good markets there in that north of 285 part of Atlanta. And we've been able, as Mike was indicating, to pick up some very good bankers. There were about 36,000 small businesses in that market that we feel are under-banked at this time, and we feel that we are in fact filling that void. And as a result of it, we have basically come close to keeping pace with loan growth to offset that loss-share runoff.

The next question we have comes from Kevin Fitzsimmons of Sandler O'Neill.

Robin, I apologize if you covered this already, but I was curious what your latest thoughts were on expansion plans, whether that be through additional de novo entries into new markets and/or M&A opportunities. And within M&A, what specifically you're seeing and hearing on FDIC deals and live bank deals and whether there are conversations out there and whether you're sensing some of the live banks are becoming to -- coming to realize that it's just a tougher environment and it might be wise to join up with a player like yourself?

Kevin, to answer your question, we're interested in all of the above, and we're certainly pursuing all of the above. I'm going to let Kevin Chapman comment on the acquisition aspect of it, both from an FDIC and an open bank standpoint. And we -- and obviously, we're still open to further de novo branching, but it has to be under the same guidelines that we've gone in the past, not the field of dreams "you build it they will come", but just the exact opposite. We have to have a team first, and then we'll build. And that's, I think, why we've been as successful as we are. Going back to the 2 Alabama de novos are in fact -- have in fact crossed over to profitability. The 2 Mississippis will cross over, we feel, this quarter, the third quarter. And we're getting on our feet pretty well now with a nice pipeline in the East Tennessee market. But I'm going to let Kevin comment on the acquisition opportunities.

Yes, Kevin, we do think there's opportunity. Just -- and a specific comment to your question about open bank M&A, we don't think the headwinds in the smaller community banks are going to subside anytime soon. In fact, the new capital requirements are going to put more pressure on those smaller banks. So we still think there will continue to be conversations. Our strategy has been kind of three-pronged through -- in expansion, either through de novo, with open bank M&A or FDIC acquisitions. And we think that gives us a lot of flexibility, and aren't looking for any one of them to help drive the growth. We've got basically what we think 3 options that we can capitalize on opportunities throughout all of our markets, and we'll continue to look at those and look at the returns and most efficient use to deploy the capital in any of them.

Is there a certain size for a live bank deal that you feel you could go out today and do without needing more capital, and then, for something larger, do you feel comfortable that you can just go and do real-time, just-in-time capital like you've been doing over the last few years?

We'll manage that capital based on the projected growth and needs, but we think that we can -- in the smaller size, the smaller community bank space, that we can easily absorb an acquisition without the need for additional capital.

[Operator Instructions] The next question we have comes from Peyton Green of Sterne Agee.

Robin, I was wondering maybe if you could talk a bit, and I apologize if I missed this earlier in the call, but if you could talk a little bit about the growth certainly, that y'all have experienced in the past 4 to 6 quarters in terms of the de novo growth, and maybe when you take your foot off the gas and look more towards improving the overall profitability? I guess the way I'm looking at it is that over the year, the ROA has gone from about 55 basis points to 62 or 63 basis points. And what -- even though the margin has lifted pretty meaningfully, I'm just wondering what kind of prospect you might see over the next 1 or 1.5 years as rates still stay low driving the overall ROA up?

Good question, Peyton. We are -- feel like that -- well, we are in fact open to opportunities as they present themselves. We are going to be opportunistic, and we have done so, and as you said, probably at some sacrifice to profitability with the growth that we've had. Going back to the comment that I made to Kevin's in answer to his question, we have in fact seen both Alabama de novos move into the black, and we anticipate the same happening with Mississippi. We will have a drag for 2 or 3 more quarters possibly with the East Tennessee expansion that we've done. But what we're looking at right now, this quarter, we saw nice loan growth across the system. Of that growth, 44% of it was in Alabama, 14% of it was in Mississippi, with Tennessee and Georgia each having 21% of the growth. Now as we look at how that broke out, we saw about 48% of that growth occurring in our, what we'd say, legacy markets, those markets not including the de novos and Georgia, 31% of it came from the new markets and 21% of it came from Georgia. As we look at the new markets, I mentioned that Montgomery had gone black. Montgomery is 55% of that growth, Starkville and Tuscaloosa each represented about 15% of it, with Columbus and East Tennessee coming up with about 9% and 6%, respectively, in that particular regard. We're very pleased with the growth that we're seeing in these markets, and we feel like, as East Tennessee, obviously, we just opened up this quarter. So, therefore, we only booked a couple of million dollars or funded a couple of million dollars of loans and about $1.5 million of deposits. By the end of the quarter, we anticipate a really nice quarter coming up in those East Tennessee markets. And as we do so, profitability, obviously, will go straight to the bottom line, because of the fact that the expenses are all there as we look at it. We'll continue to see some balance sheet growth now. We're going to discontinue the de-leveraging and start growing deposits more. So -- and we feel like that we'll start seeing an improvement in our ROA as we move forward with it. But as of right now, as of the end of the quarter, we saw about, in Montgomery, about $48 million of loans on the books, Tuscaloosa had about $16.5 million, Columbus about the same, Starkville about $20 million. And again, we had a little over $2 million funded in Maryville at the end of the quarter. So $102 million of loan growth in since the beginning of those de novos. Those banks now represent about $102 million of loans and about $75 million of deposits in those banks. And interestingly enough, a very high percentage of that $75 million is in noninterest-bearing demand deposit. So we're very, very pleased with what we've seen happening in those markets at this point in time. So what we feel like is that we should start seeing profitability, both from an EPS, ROA, ROE standpoint continuing to rise in the last half of the year. Obviously, with that $110 million of net loan growth this quarter, for the most part, we had very little net interest income from those loans. We have, as Mitch mentioned a while ago, a very strong pipeline for the third quarter. So we should continue to see net interest income growth in subsequent quarters.

Okay. And just a follow-up, I apologize. To Mitch's comment, but to what degree is the pipeline the same, stronger or less than it was a quarter ago?

Peyton, it is stronger. Our current 30 day pipeline is at $62 million, and that should result in approximately $25 million growth in non-covered loans in the next 30 days.

Okay. And what was it a quarter ago?

I believe it's $48 million.

And Peyton, as further color to what Mitch added, I can tell you from talking to our bankers that we -- our actual pipelines of loans that are not already approved and accepted or in the process of closing is actually very elevated right now versus what it was back in the last quarter. And there obviously are no guarantees we're going to win all those, but certainly, we have shown that we will certainly get our share. And we feel very confident that we're going to convert a lot of those into new customers.

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

Thank you, Mike. We appreciate everybody's time and interest in Renasant Corporation. And we look forward to speaking to everyone again in the near future. Thank you, everyone.

We thank you, sir, and to the rest of the management, for your time. The conference 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.