Renasant Corporation (RNST) Q2 2013 Earnings Report, Transcript and Summary

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 '13 net income was approximately $8 million, an increase of 26% as compared to approximately $6.3 million for the second quarter of '12. Basic and diluted EPS were $0.32 for the second quarter '13 as compared to EPS of $0.25 for the second quarter of '12. EPS for the second quarter of '13 included pre-tax 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 '13. Net interest income increased to $34.4 million for the second quarter of '13, from $33.4 million for the second quarter of '12, and $33.4 million on a linked quarter basis. Net interest margin was 3.88% for the second quarter of '13 as compared to 3.99% for the second quarter of '12, and 3.89% on a linked quarter basis. Noninterest income increased 6.4% to $17.3 million for the second quarter '13 as compared to $16.3 million for the second quarter of '12. 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 '13 as compared to $36.8 million for the second quarter of '12. 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, '13, was approximately $4.24 billion, up 3.16% from June 30, '12, 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 continued 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, '13. Total loans, which include both loans covered and not covered under FDIC loss-share arrangements were approximately $2.88 billion at June 30, '13, as compared to $2.68 billion at June 30, '12. Loans not covered under FDIC loss-share agreements were $2.68 billion at June 30, '13, an increase of 12.15% from June 30, '12. I would also point out that we continued 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 that we've achieved in these markets. Looking at our success by market, the second quarter marks the 1-year anniversary of our interest into the East Tennessee markets with a single location in the Knoxville MSA. After a year, we have 4 locations with $104 million in loans and $43 million in deposits. Turning to our Alabama de novo locations of Montgomery and Tuscaloosa, we continued to experience tremendous growth. Both of these locations were profitable within 6 months of opening, and now have crossed over profitability from inception to date. Our Mississippi de novo locations in Columbus and Starkville continued to be successful, and were 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 '13, we'll be one of the largest banks in the Golden Triangle region based on market share. Total deposits were $3.51 billion at June 30, '13, as compared to $3.41 billion at June 30, '12, and $3.46 billion at year end. Noninterest-bearing deposits totaling approximately $561 million at June 30, '13, and continued to represent 16% of our total deposits. Our cost of funds were 60 basis points for the second quarter of '13 as compared to 74 basis points for the second quarter of '12, and 62 basis points on a linked quarter basis. Looking at our credit quality metrics during the second quarter of '13, we experienced significant improvement in both covered and non-covered 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, '13, combining for a decrease of approximately 27.33% in nonperforming assets subject to FDIC loss-share agreements from June 30, '12, 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, '13, down from $30 million at June 30, '12, and $30.2 million at year end. Nonperforming loans as a percentage of total loans improved to 0.84% at June 30, '13, as compared to 1.25% at June 30, '12, 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 by 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, '13, as compared to 60 basis points at June 30, '12, and 31 basis points at year end. Our coverage ratio or allowance for loan losses as percentage of nonperforming loans also improved to 208.70% at June 30, '13, as compared to 149.45% at June 30, '12, and 146.90% at year end. The allowance for loan losses totaled $47 million at June 30, '13, as compared to $44.8 million as of June 30, '12, and $44.3 million as of December 31, '12. The allowance for loan losses as a percentage of loans was 175 basis points as of June 30, '13, as compared to 187 basis points on June 30, '12, and 172 basis points at year end. Net charge-offs totaling $2.4 million for the second quarter of '13 as compared to $4 million in the same period of '12. Annualized net charge-offs as a percentage of average loans was 35 basis points for the second quarter of '13 as compared to 63 basis points for the second quarter of '12, and 53 basis points for the fourth quarter of '12. We recorded a provision for loan losses of $3 million for the second quarter of '13 as compared to $4.7 million for the second quarter of '12, and $4 million for the fourth quarter of '12. OREO was $33.2 million at June 30, '13, as compared to $58.4 million at June 30, '12, 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 '13. We continue to see a strong loan pipeline as we move into the second half of the year. We believe the growth from our recent de novo interest and the continued ability of our legacy markets to perform at a high level is as 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're 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 it back over to you for questions.

[Operator Instructions] And the first question we have comes from Michael Rose with Raymond James. Michael Rose - Raymond James & Associates, Inc., Research Division: 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 3 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 do 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 legacy lenders, what are their pipelines look like? Any commentary there will be helpful.

Mike, 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 novo. But obviously, we're still seeing some great growth in our East Tennessee markets. 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, 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's a real positive, Michael, for one of the first times, we saw the growth in Georgia, non-covered 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 the 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 non-covered 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, Robin. Michael, the -- as far as your question on the de novo, 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 to -- that would indicate to us that, that is going to change certainly over the next 9 to 12 months.

Michael, let me make a comment. The net growth, obviously, you get better net growth in 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, 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. Michael Rose - Raymond James & Associates, Inc., Research Division: Okay, that's helpful. And then you guys obviously had -- just switching gears a little bit, you guys obviously had a nice drop in your non-accrual loans and the 30-day, 90-day [ph] 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?

I would like to comment, and then I'll let Kevin follow-up. But as we have said previously, we feel like that we will start seeing a tapering of our provision, and I think that still follows to be the case. Kevin, 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.

The next question we have comes from Catherine Mealor of KBW. Catherine Mealor - Keefe, Bruyette, & Woods, Inc., Research Division: Can you comment a little bit on your outlook for the mortgage earnings, given the recent rise in rates? Maybe, particularly, what does 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 at all as you would -- you would think with rates rising, all the refi is jumping in 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've seen -- 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 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, wholesalers 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 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. And so, therefore, we're doing everything we can to pick up the production on originating mortgages, on purchase mortgages.

And the next question we have comes from Christopher Marinac of FIG Partners.

Robin, Kevin and others, just kind of curiosity and maybe kind of a big picture question. Even though we might be several quarters away from a change in the short-term interest rates, I'm just sort of wondering as you kind of look at the future, even if that's a year and a year and a half from now. Whenever we see a move in rates of the prime LIBOR and Fed funds, do you have a sense of kind of how much of that you can retain? And then 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 kind of 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 high rate at this in the lower 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, reconstituting that mix of deposit 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 is we 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 try 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.

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 non-interest 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 non-interest demand to total deposits. And so therefore, we won't see that decline that we've seen in the past acquisitions, 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 base will start to come along with that as well. And so those teams were not only lenders, there were relationship managers, and there's entire books of loans and deposits that will come with.

Okay, great. That's helpful color. And I guess just one other quick sort of separate point was, given what's happened with the longer end of the rates in the last month or 2, does that change any attitude among commercial borrowers? It might be too early to ask that. Just kind of curious, any observations do you have on that front?

Actually, we're 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 will not -- cannot continue forever.

Next, we have Kevin Reynolds of Wunderlich Securities.

Hey, a couple of questions on the quarter here, a good quarter. Looking at your loan growth, just kind of 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 do you -- would you guess if share movement from other banks or other nonbanks, and how much of it might reflect increased business activity if that's happening at all in the local marketplace? That's my first question, and I'll have a follow-up.

Hey, Kevin. This is Mike Ross, again. 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 continue to have the ability to take share.

Okay. And the next question is, as you approach the closing -- as you get closer and closer to the closing of the M&F. Has there been anything -- is there anything that you've learned, or any opportunities that have presented themselves that may be 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 a sort of the same as ever as it's ever -- 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 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 -- and I apologize you 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 kind of mid-quarter, or do you think it skews toward the back end of the quarter?

We still say third quarter. I'm not going to -- we're -- 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 go out on a limb at this stage of the game. We have no reason to think it won't be sooner rather than later, let me put it that way.

Next, we have Matt Olney of 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 of 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, it's one of his areas of responsibilities, special assets and other real estate. And so I'm going to let Mark comment on that.

Yes, Matt. And Robin touched on this just a little bit previously. The management and the team members of M&F have done a very good job working through those credits. I would say and, probably, there are last 2 years as they were working in 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 the last, particularly, last 12 months of decrease in their OREO. A lot of their problem loans and OREO are going to be in the 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 write-down included an estimate of cost to carry certain assets for a period of time, anticipating that some of them will take time to work out.

Okay. And then, 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 yields increasing into the first time in a while?

Yes. I'll let Jim correct me where I'm wrong. But I'm not sure I'm ready to step out on a limb, I guess maybe when we'll see yields increase particularly in the long end of the curve just over the past quarter. I mean, you've seen the 10-year Treasury increase upwards of 80 basis points. So reinvestment rates are much higher than where they were, just say, 3 months ago. So it is weighing on OCI. We did have a shift in our accumulated other comprehensive income just as the current book that 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.

This is Jim. Looking at the opportunities of the part of the curve we'd be buying in, in the agency and the 5-year 5-1, 5-year 1-year type range and 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.

Next, we have Andy Stapp with Merion Capital Group. I'm sorry, gentlemen, looks like we lost Mr. Stapp for a moment. [Technical Difficulty]

Okay. Sorry, I hopped on the call a little bit late, so if this question has been asked, 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. 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 top line, our top line at the end of the second quarter is roughly equal to the top line into 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. And no further questions, but just one request. If you could -- if you guys could continue to deliver on clean quarters like this, that'd be great. Just makes our lives a lot easier.

Thank you, Andy.

We'll do our best.

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 in to 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 is 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.