Renasant Corporation
Q3 2008 Earnings Call Transcript

Published: 22 Oct 2008

[Operator:]

Good day ladies and gentlemen and welcome to the Q3 2008 Renasant Corporation earnings conference call. My name is Sandy and I will be your coordinator for today. At this time all participants are in a listen-only-mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference Mr. E. Robinson McGraw, Chairman and CEO; please proceed.

[Robinson McGraw:]

Thank you, Sandy. Good morning everyone and thank you for joining us for Renasant Corporation’s third quarter 2008 earnings conference call. With me today are Stuart Johnson, Chief Financial Officer; Harold Livingston, our Chief Credit Officer; C.H. Springfield, our Chief Credit Policy Officer; Mitch Waycaster, our Chief Administrative Officer; Mark Williams, Credit Administration Officer; and Kevin Chapman, our Chief Accounting Officer. 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 that could cause actual results to differ materially from the anticipated results or the 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 SEC. We undertake no obligation to update or revise the forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. Despite the current financial crises impact on the banking industry, we were pleased to see past strategies resulting in growth in both our net interest income and our non-interest income during the third quarter 2008 as compared to the third quarter of 2007. We are also taking steps that we believe are prudent in today’s economic environment and enhance our earnings in the future. Specifically we continue to reduce our construction loan portfolio, provide it nearly twice as much provision for loan losses over actual charge offs and managed our funding sources to preserve margin. The global financial crisis has obviously had an affect on the credit markets, both locally and regionally. Although we’ve seen the negative impact that sub-prime lending has had on the financial institution sector of our country, we’re pleased that we’ve had no direct exposure to sub-prime lending and do not have any equity exposure to either Fanny Mae or Freddie Mac. Our middle Tennessee market is seeing much of the same economic downturn as the rest of the country. We do however believe that Nashville’s diverse economy and its lack of dependency on any one industry should help its business and commercial market to recover faster than other metro areas of the country. In looking to our West Tennessee market of Memphis, according to the sparks bureau of business in economic research at the University of Memphis, the local economy remains in fairly good shape despite the fact that growth in the Memphis economy has been relatively slow and average. While Memphis and Nashville are both experiencing a slowdown in real estate construction activities, we believe our strategic locations and some banking practices will sustain our banking and financial services in these markets moving forward. As mentioned in previous calls, we’ve consolidated our Alabama corporate headquarters, corporate mortgage and downtown Watts Branch to the Park Place Tower in downtown Metro-Birmingham. We believe that this strategic move adds to our presence in Birmingham and creates better continuity among our Alabama operations. Foreclosure rates in the Birmingham metro area remains stable during August compared to the previous year and remained below the national average according to First American Chorology, a firm that collects housing market data. Looking into our other Alabama markets, Huntsville was named the number one mid-market in the south by Southern Business and Development Magazine in August of ’08 and one of Americas top five cities for job opportunities by the Wall Street Journal Smart Magazine in September. Home sales in Madison County were Huntsville’s located; continue to see declines in the third quarter of ’08, but selling prices rose according to a September 21, 2008 article in the Huntsville Times. The Huntsville market continues to appear better than other parts of the country where sales and prices of homes have dropped by double digits. In Mississippi, DeSoto County continues to be the fastest growing County in Mississippi and one of the fastest growing counties in the entire United States according the census bureau. DeSoto County maintains lower and informal than the rest of the state and nation according to the Mississippi Department of Employment and Security. DeSoto has however seen a drop off in building permits and an increase in foreclosures over the past several months. In Oxford, the University of Mississippi recently enjoyed the national spotlight as host of the first 2008 Presidential debate. It was a great event for the city and Mississippi’s Flagship University. In our corporate headquarter city of Tupelo we continue to see progress on the $1.3 billion Toyota hardware manufacturing facility. Operations are expected to commence during the second half of 2010. We believe that the construction and operation of the Toyota plant and tier 1 and tier 2 service providers enhances the future growth prospects in our mature Northern Mississippi markets and may have specially helped to insulate the Tupelo market from future downturns in the Mississippi or national economy. Recently tier 1 supply Toyota Auto Body announced that it would begin production in parts for the highlander SUV in July of ‘07 and then the preview in July ‘10. Reflecting in our financial performance for the third quarter of ‘08, net income was approximately $7.6 million compared to $8.3 million for the third quarter of ‘07. Basic and diluted earnings per share were $0.36 for the third quarter of ‘08 compared to basic and diluted EPS of $0.39 for the third quarter of ‘07. The decrease in our third quarter ‘08 EPS compared to the third quarter of ‘07 can be attributed to the increase in our provision for loan losses. This increase in our third quarter provision reduced our third quarter ‘08 EPS by approximately $0.05 as compared to the third quarter of ‘07. Total assets as of September 30, ’08 were approximately $3.7 million as compared to approximately $3.6 million at December 31, ‘07. Shareholder’s equity was approximate $406.3 million on September 30, ‘08 compared to $399 million at December 31, ‘07. Changes in shareholder’s equity reflect earnings, dividends paid and changes in unrealized gains and losses on investments securities available for sale. As of September 30, ‘08 the company’s regulatory capital ratios were in excess of well capitalized regulatory requirements. We are committed to growing shareholder’s equities for the future dividend payments and balance sheet growth. This commitment has proven to be valuable in the current economic environment and in protecting shareholders value. Although we don’t have any issues with our capital levels, we are evaluating strategic merits of the government stock, but we are not ready to make any recommendations to our Board of Directors at this time. Total loans were approximately $2.5 billion at the end of the third quarter of ’08 as compared to approximate $2.6 billion on December 31, ’07. I would like to point out that over the last three quarters we focused on reducing our construction lending portfolio without a comparable reduction in our loan portfolio. As a result our construction loan portfolio was reduced by $94 million during the third quarter of ’08 and $145 million year-to-date versus a decrease of the total portfolio of $15 million in the third quarter and $61 million year-to-date. Total deposits were approximately $2.4 billion on September 30, ’08 as compare to $2.5 billion of December 31, ’07. In a more aggressive competition for deposits in some of our markets, we have intentionally replaced higher costing deposits with lower costing alternatives. As a result our interest expense is down approximately $900,000 on a linked quarter basis and down approximately $7.9 million for the third quarter of ’08 as compared to the same period the last year. Net interest margin was 3.45% for the third quarter of ’08 as compared to 3.52% for the third quarter of ’07 and 3.43% on a linked quarter basis. Given the current economic environment, we as with most financial institutions have experienced an increase in non-performing loans and net charge-offs during 2008. Annualized net charge-offs as a percentage of average loans were 25 basis points for the third quarter of ’08 as compared to 43 basis points on a linked quarter basis; six basis points for the third quarter of ’07 and 36 basis points for the fourth quarter of ’07. Year-to-date annualized charge offs as a percentage of average loans totaled 32 basis points. The provision for loan losses was $3 million for the third quarter of ’08 as compared to $1.3 million for the same period in ‘07. This provision is approximately twice the size of the charge-offs for the third quarter of ‘08 and allowance for loan losses as a percentage for total loans increased to 1.02% at December 31 ’07, 1.05% on June 30 ‘08 to 1.11% at September 30 ‘08. Non-performing loans, that is loans 90 days or more past due and non-accrual loans totaled $29.6 million on September 30 ‘08 as compared to $26.6 million on a linked quarter basis and $16.2 million on December 31 ‘07. As we’ve stated in previous earnings calls, we continue to actively monitor all relationships which we may be at risk of deterioration. Furthermore, we are persistently tracking our current non-performing loans and are seeking to bring these credits to a resolution by identifying a stable payout stream, taking additional collateral or moving towards foreclosures. Renasant has evaluated all the NPLs and we believe that all the NPLs have been adequately reserved for in the allowance for loan losses on September 30 ‘08. Non-performing loans as a percentage of total loans were 1.17% at September 30 ‘08 as compared to 1.05% on a linked quarter basis and 0.63% on December 31 ’07. Although non-performing loans increased, the company’s loans past due for 30 to 89 days as a percentage of total loans were 1.17% at the end of the third quarter of ’08, as compared to 1.23% on a linked quarter basis and 1.08% on December 31 ‘07. Another positive report relating to past due loans is that our [elite] portfolio which reflects only 67 basis points of total loans over 30 days past due on September the 30, a decrease of 21 basis points from the previous quarter end. Other real estate owned was $21.9 million at September 30 ‘08 compared to $13.1 million on a linked quarter basis and $8.6 million on December 31 ‘07. On a linked quarter basis the increase in OEO was primarily due to the company taking the position of property securing a single relationship totaling $7.8 million which you may remember we discussed in our second quarter conference call. At quarter end we had $3.6 million in OEL sales to close out over the next sixty days. Non-interest income was $13.6 million for the third quarter of ‘08 as compared to $13.4 million for the third quarter of ‘07 and $13.8 million on the linked quarter basis. Our non-interest income continues to be a stable source of revenue as our diversified range of products provides us ways to increase our non-interest income through fees from loans, deposits, insurance, wealth management, treasury management and our mortgage lending division. Non-interest expense was $27.8 million for the third quarter of ‘08 as compared to $26.7 million for the third quarter of ‘07 and $27.7 million on a linked quarter basis. In conclusion, let me reemphasize that we remain ever vigilant in watching our credit relationships and we have implemented strategies to proactively manage the challenges presented by the current economic conditions. We believe that we have the right team in place with the proper tools and prudent lending policies to manage this economic downturn. Finally, we maintain that we are well positioned to sustain long term growth and profitability. Now Sandy I’ll turn it back over to you for questions.

[Operator:]

(Operator Instructions) Your first question comes from Brian Klock - KBW.

[Brian Klock:]

Thanks for taking the call. It looks like the net interest margin was pretty stable this quarter. If maybe you can talk about the outlook with recent FED funds changes and I guess how should we factor that in going forward?

[E. Robinson McGraw:]

I’ll comment and then I’ll let Stewart comment. I think you will see some obviously immediate compression on the margin as a result, but we are obviously working towards mitigating that over the course of the quarter. Stuart I’ll let you make some specific comments.

[Stuart Johnson:]

The comment that I would make obviously goes in line with what Robin said. I think it’s well said, if with a flash rate cut and anticipation at this point of another rate cut that when you look at the liability file and managing it, that you are going to see it much more difficult for a lower rate. That’s two fold; one being that the core deposits are already at a fairly low rate and then secondly is the competitive factors out there. If you look at each of our markets, we have got some banks particularly from the large banks if liquidity tends to be an issue of paying 5% and over 5% currently on certificates of deposits. To be competitive, that’s obviously going to call to other banks to raise their rates as well. So having said that I think it will be difficult to maintain that margin in the fourth quarter.