Renasant Corp (RNST) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Renasant Corporation 2013 fourth-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 John Oxford. Please go ahead.

Thank you, Andrew, and good morning. And thank you all for joining us for Renasant Corporation's 2013 fourth-quarter and year-end earnings webcast and conference call. Participating in this call today are members of Renasant's executive management team.

Before we begin, let me remind you that some of our comments during this call may be forward-looking statements which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in 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 forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time.

Now, I will turn the call over to E. Robinson McGraw, Chairman and CEO of Renasant Corporation.

Thank you, John. Good morning, everyone. Thank you for joining us today.

During the fourth quarter of 2013, we experienced a strong finish to a great year. Financial highlights for the full year of 2013 as compared to 2012 include a 26% increase in net income, a 38% increase in loans, and an increase in net interest margin, and continued improvement to our credit risk profile.

In addition, one of our most significant accomplishments was our successful completion of the M&F merger, which is the largest merger in the history of our Company.

Looking at our performance during the fourth quarter of 2013, net income was up approximately 55% to $11.3 million as compared to $7.3 million for the fourth quarter of 2012. Basic and diluted EPS were $0.36 as compared to $0.29 for the fourth quarter of 2012. This quarter's results included a $1.3 million, or $0.04 per share, after-tax merger expenses associated with M&F transaction. Excluding these merger expenses, net income was $12.6 million, or $0.40 per share.

As a reminder, we completed our merger with M&F on September 1, 2013. As such, our results for this quarter reflect our first full quarter of M&F's operations.

Our return on average assets for the quarter was 78 basis points, or 87 basis points excluding merger expense as compared to 70 basis points for the same period in 2012. Our return on equity for Q4 2013 was 6.71%, or 7.51% excluding merger expense, as compared to 5.80% for the same period in 2012.

Total deposits, which include deposits acquired from M&F, were $4.8 billion as compared to $3.4 billion at December 31 of 2012. Our noninterest-bearing deposits averaged approximately $888 million, or 18.4% of average deposits, as compared to $564 million, or 16.5% of average deposits for Q4 of 2012.

Our cost of funds was 51 basis points as compared to 64 basis points for the same quarter in 2012.

Total loans, which include loans acquired in either the M&F merger or in connection with our FDIC-assisted transactions, increased 38.1% to approximately $3.9 billion as compared to $2.8 billion for December 31 of 2012. Excluding acquired loans, loans grew over 12% to $2.89 billion as compared to $2.57 billion at December 31 of 2012. On a linked-quarter basis, non-acquired loans increased $92 million, or 13% on an annualized basis.

Breaking down year-over-year loan growth by markets, our Alabama markets grew loans by 6.1% and have now grown loans 15 of the last 16 quarters. Our Mississippi markets increased loans by 3.1%, and our Tennessee markets grew loans by 20.1%, which is their eighth consecutive quarter of loan growth. In Georgia, we essentially have placed 85% of the decline in covered loans with new loan production, primarily from the small business sector.

Total assets were approximately $5.746 billion as compared to approximately $4.182 billion at December 31 of 2012.

Looking at our capital ratios at year end, our tangible common equity ratio was 6.64%. Tier 1 leverage capital ratio was 8.68%; Tier 1 risk-based capital ratio was 11.52%; and our total risk-based capital ratio was 12.69%. Our regulatory capital ratios are all in excess of regulatory minimums required to be classified as well capitalized, and we continue to build capital ratios in line with projections at the time of the announcement of the M&F acquisition.

In addition, during 2013 we maintained our annual dividend of $0.68, which at year end equated to a dividend yield of approximately 2.16%.

Net interest income was $50.7 million for the quarter as compared to $34 million for Q4 2012. Net interest margin was 4.15% as compared to 3.97% for the same period in 2012.

Our noninterest income is derived from diverse lines of business which primarily consists of mortgage, wealth management, and insurance revenue sources along with income from deposit and loan products. For the fourth quarter of 2013, noninterest income increased to $18.3 million as compared to $17.9 million for the same period in 2012.

During the fourth quarter, we experienced strong growth in service charges and wealth management insurance fees and commissions, which offset a reduction in mortgage-related income. The strong growth in these noninterest income categories was driven by the addition of M&F and stronger consumer activity. The reduction in mortgage income was attributable to higher mortgage rates and fewer homeowners refinancing than they did in previous periods.

Although we experienced a decrease in mortgage volume during the quarter, we have seen a significant increase in daily lock volume during the first quarter of 2014. Noninterest expense was $51.1 million for the fourth quarter of 2013 as compared to $38.3 million for the fourth quarter of 2012. This increase in noninterest expense was primarily due to the inclusion of M&F's operational costs and one-time merger expenses associated with our fourth quarter 2013 conversion of M&F Bank.

During the fourth quarter of 2013, the Company's salaries and employee benefits reflect a full quarter of M&F operations. The Company's noninterest expense for the fourth quarter of 2013 also includes $1.9 million in expenses related to the M&F merger.

At December 31, 2013, total nonperforming loans were $76.5 million and OREO was $52.9 million. Our nonperforming loans and OREO acquired either during the M&F merger or in connection with the FDIC-assisted transactions, which are collectively referred to as acquired nonperforming assets, were $57.3 million and $25.4 million, respectively, at December 31 of 2013. Since acquired nonperforming assets were recorded at fair value at the time of acquisition and subject to loss-share agreements with the FDIC, which significantly mitigates our actual loss, unless otherwise noted, the remaining information on nonperforming loans, OREO, and the related asset quality ratios exclude these acquired nonperforming assets.

Nonperforming assets decreased 37.7% to $46.7 million at December 31, 2013, as compared to $74.9 million at December 31 of 2012. Nonperforming loans, those loans which are 90 days or more past due at non-accrual loans, were $19.2 million as compared to $30.2 million at December 31 of 2012. Early-stage delinquencies or loans 30 to 89 days past due as a percentage of total loans remained unchanged at 31 basis points.

The allowance for loan losses as a percentage of loans was 1.64% at December 31 of 2013 as compared to 1.72% at December 31 of 2012. Our coverage ratio, or the allowance for loan losses as a percentage of nonperforming loans, increased to 248.9% as compared to 146.9% at December 31 of 2012. OREO decreased 38.4% to $27.5 million as compared to $44.7 million at December 31 of 2012.

We continued to aggressively market the property held in OREO as we sold approximately $27 million of OREO during 2013 with $4.9 million of these sales occurring in the fourth quarter. During the conversion of M&F Bank into Renasant Bank, which was completed on December 9 of 2013, we added more than 70,000 deposit relationships and 27 banking locations to our footprint while consolidating nine locations that overlapped in market coverage. We remain well positioned to take advantage of opportunities to enter new markets or expand our reach in existing markets. As we move into 2014, we look forward to enhancing our profitability by further realizing the benefits of the M&F acquisition, growing loan and deposit relationships, and increasing our market share to provide greater value for our shareholders.

Finally, before I turn the call back over to the moderator for questions, I will discuss the recent developments with the Volcker Rule, and its impact on some of our investments.

As disclosed in previous filings with the SEC, we own interests in certain collateralized debt obligations backed by trust-preferred securities, or CDOs that are categorized as available for sale. On December 10 of 2013, the regulators finalized the provisions of the Volcker Rule which at that time created risk in our ability to continue holding these investments. On January 14, 2014, the Federal Reserve, the SEC, and other federal agencies approved an interim rule authorizing banking entities to retain interest in certain covered funds notwithstanding the prohibitions set forth in the final rule. All of our investments and CDOs meet the qualification for retention set forth in the interim final rule. Accordingly, we do not currently expect that we will be required to sell these investments or recognized any impairment with respect to these securities due to the issuance of the Volcker Rule.

This now concludes my prepared remarks, and I will turn the call back over to Andrew for any questions. Andrew.

(Operator Instructions) Catherine Mealor, KBW.

Can you give us the number of the accretion that you saw this quarter?

Kevin.

I am going to break it out into a couple of different buckets.

Okay, great.

Because we did have some accelerated payments, some unscheduled payoffs during the quarter on the M&F portfolio. And that contributed probably around 12 to 13 basis points to the margin. They were loans that weren't -- they were not nonperforming, but they are loans that we had put on our watch list and were monitoring. And they just paid off a little bit quicker than we expected.

Outside of that unexpected payoff, the margin this quarter included just on normal fair value margin, what would normally amortized off was another 14, 15 basis points. And so, starting with our core margin, our core margin for the fourth quarter was around a 3.82 and that is up 3 to 4 basis points from our core margin in Q3.

All right, great. And what is your outlook on the direction of your core margin going into next year?

Flat. We did see an improvement in the margin this quarter, and that is the first time in, call it, five or six quarters that our core margin wasn't under significant pressure, downward pressure. And so right now, I would just say that it is flat and it is all depending on competition over loan rates.

All right, great. And then maybe I will follow up just on the expenses, how far through would you say you are through your cost savings for First M&F. I think it was about 25% of the [excess] base, which was around $14 million. How far through that are you at this point in time?

Catherine, the only expenses we have left to cost savings we have left to realize are just a handful of people that will remain on through the first quarter to help with a couple of post-conversion items. That is the only residual of our cost saves. We are tracking a little bit higher than our 25% cost saves that we projected back at acquisition. And so, the majority of our cost saves during the fourth quarter occurred in December. So, they are not really reflected in the Q4 run rate, but they will be fully reflected in Q1 excluding those handful of employees that are still on board.

Okay, that is very helpful. Thanks, guys.

Michael Rose, Raymond James.

I just wanted to get some context on the loan pay downs this quarter and if you see any other large pay downs some the horizon from the M&F book. And maybe if you can talk about what the core origination was from M&F and maybe what obviously, the net impact was from the pay down.

And then if you can talk about by market, I'm sorry if I missed it I got on the call little bit late, some of the pipelines by market and from your extension markets. Thanks.

Let me make a couple of comments first, Michael. Again, those were extraordinary pay downs. We do expect continuing pay downs. If you will recall, as we have budgeted we budgeted M&F for the first 18 months to basically be flat, which would be pay downs on loans that we wanted to try to move out but still have some nice loan growth in other markets from our M&F acquisition.

For the four months that M&F has been on board, we saw loans that were in the Alabama markets we saw production of about $2 million there. In Mississippi, our legacy Mississippi markets, we saw production of about $9 million. And in the new Southern division, which includes that metro Jackson market, we saw about between $20 million in $21 million of new loans produced by that group. So we are seeing nice production there.

Again, those loans Kevin was talking about were unscheduled payoffs that came faster than we anticipated. We thought those would be within that 18-month period, but they actually came sooner than anticipated. We will have some more of that to keep, and we feel like we probably will, from September 1 through 12/31, probably be relatively flat. But we think that we'd probably, on a net basis during 2014, may actually see a little loan growth from that M&F portfolio as a result of those accelerated payoffs this quarter.

Michael, this is Kevin. Just to jump in, going back to the previous acquisitions that we have done, your first two to three quarters are pretty noisy when it comes to unscheduled payoffs, and then it is quiets down. M&F, as Robin was mentioning, M&F since acquisition has had about $60 million of payoffs. And their normal portfolio is going to [am] out around $20 million to $25 million per month. And if we look at their production, just totaling the numbers that Robin gave you, they had production in between $30 million and $35 million. And so, they are keeping pace with their normal amortization. It's just we had several unscheduled payoffs, and quite frankly, one of them was relatively large of the $12 million to $13 million loan that paid off. Again, we expected it to pay off. We just did not expect to pay off in the first quarter of the acquisition.

And something I want to point out too, Michael, that I think is pretty impressive which we have not had occur in prior mergers is we saw about $40 million of production out of a group involved in a combination integration and conversion, which I think is rather impressive that they were able to do that.

As far as the rest of our pipeline, I am going to let Mitch Waycaster give you some color on that.

Michael, our current 30-day pipeline stands at $65 million. If you break that down by state, 35% is in Tennessee; 10% in Alabama; 20% in Georgia; and 35% in Mississippi. This pipeline should result in about $25 million in growth in non-acquired loans within 30 days.

If you compare the current pipeline of $65 million to the prior year same period, that was at $50 million. And as we have seen in the past, pipeline typically decreases end of year, first quarter due to cyclical demand for credit.

Okay, that is great color. And if I could just ask one follow-up question, moving on to fee income, the service charges were little bit less than what I was forecasting. Was there any -- can you just explain what happened there? And then on your outlook for mortgage, obviously, mortgage was down sequentially but a little bit more than I was looking for. What is the outlook on mortgage from here? Thanks.

I will let Jim Gray answer that, Michael.

First on the fee income, when you look at the different line items the fee income and break it and pull out the M&F income, we actually showed an improvement in legacy fee income, particularly related to deposit fees. The fees and commissions on loans and deposits were down -- well, actually they were up, but one thing you may not see and that number is there was a decrease of about $250,000 in mortgage origination fees out of that number.

Looking at insurance, commissions and fees, when you take out M&F, legacy was about flat. And when you take out the M&F related to wealth management, it was about flat. We will get to mortgage loans in just a minute.

One thing in the third quarter under other noninterest income we did have a significant BOLI claim in the third quarter, and that was not present in the fourth quarter, which led to some of the decline in the other noninterest income.

Specifically talking about mortgage, at the time we gave our -- not we, I gave the guidance -- I will take full responsibility for that -- in October, we were seeing the pipeline stabilize. The volumes were still pretty strong. And of course, we did have the large negative fair value adjustment to the pipeline in the third quarter. So all things being equal, through the fourth quarter we did anticipate some improvement there.

Subsequent to the call, we did see our daily lock volumes slow down significantly. We got another 0.25% increase in rates after the Fed announced they were going to start tapering. Our volume dropped for the fourth quarter about 20% from the third quarter. The most significant item though was our pipeline dropped about 37%. So we had additional negative fair value adjustment to that pipeline gain in the fourth quarter. And due to that we saw decline in the margin.

So it was the perfect storm in the fourth quarter of all three of those things happening.

Of course, looking at where we are now, we have seen our daily locks increase fairly significantly since the end of the year. And per the daily lock report, our margins are stabilized. So we would project into the -- I am a little hesitant to make a projection on gain, but we should see some improvement in the first quarter provided we don't see further rate increases with our volume stabilizing with the daily locks. We should see some improvement in our pipeline and with our margin stabilizing.

Great. Thanks for taking my questions, guys.

Michael, this is Kevin. One thing to follow up on what Jim said on the noninterest income, I think it is important to note that we completed the conversion in mid-December. And at that time, that is when we converted all the deposit accounts to a uniform fee schedule. Prior to that, we were operating off of two different fee schedules. So starting in first quarter in the fact, it will be a same type of fee schedule for all of our deposit accounts.

And I think part of it too, Michael, with disclosures it will push back some of those fee changes until the second quarter.

Great, thanks.

Matt Olney, Stephens.

Just follow-up on the whole mortgage discussion, Jim. I believe you mentioned there was a fair value adjustment in the fourth quarter. Do you have a dollar amount of that?

I believe it was around $400,000.

Okay. And next question is for Kevin. You gave us some comments on your core margin outlook. How should we be thinking about the purchase accounting income the next few years, over the next few quarters and the next few years? I know it is tough to predict, but what would you say the impact would be and how big would that margin drop off be on an absolute basis?

Let's break it down into three buckets. You've got your core margin, which I mentioned is around a 3.82%. And then adding to that, our normal recurring fair value adjustments for interest rate marks, either on the loans or the deposit side. And that is contributing, let's call it, 15 basis points to the margin. And that is going to be pretty stable for at least the next two years.

And then after two years we start -- these amortizations start expiring. And the wildcard is unscheduled payoffs. That will be though wildcard is what amount of accretable yield comes back in because of changes in cash flows from unscheduled payoffs or improvements in the underlying credits. But as it stands right now, about 15 basis points of enhancement, that is fairly normal, fairly consistent, and should last for the next 20 to 24 months.

Okay, thank you.

Andy Stapp, Merion Capital Group.

Can I get your yield on loans for the quarter?

Roll-in rates or actual yield? I will give you the roll-ins, and then Kevin I think is going to give you the actuals.

Our roll-ins for new production, new loans was 4.45%. Renewed loans were at 4.57% for the quarter.

On a combined basis, our new and renewed stayed flat compared to Q3, and let's call it 4.50%.

Okay. And can I get the mix between on your mortgage banking originations, refi versus purchase?

Sure, Andy, this is Jim. For the fourth quarter, refi was 43%, and that was down from 47% in the third quarter.

Okay. That is it for me. Thank you.

(Operator Instructions) Kevin Fitzsimmons, Sandler O'Neill.

I just wanted to follow-up on your comments on loan growth. It looked like -- I know on average basis it is very noisy on a linked quarter comparison but end of period looked like it was basically flattish as you had decent growth on legacy, but it was offset by declines in covered and acquired loans. So looking ahead at the prospect of that continuing, it sounded, Robin, like you said that since you have such a big drop off in the acquired loans this quarter you would expect that amount of quarterly decline to be less and that maybe on a net basis on the total portfolio you could actually show growth in coming quarters. Just wanted to make sure that was correct and if I was looking at that right.

Yes, that is correct. Going back to what we originally planned is basically flat for 18 months with M&F, but I think part of that has already occurred so we should see a little uptick on the acquired loans there.

On the covered portfolio, we should start seeing the runoff in coverage start over the next almost 18 months I guess, start declining a little bit from what we have seen in the past as we get closer to the end of that. So, net we should see some increase in loans over the course of the year.

Yes, if you go back and look at total loans, I think we were basically flat compared to third quarter. One thing I would like to point out, on the two acquired portfolios, those portfolios will be declining. Any new originations out of those operations, whether it is M&F or Georgia, are not included in those two buckets. That is just the portfolio we acquired at the date of acquisition. And the reason we are separately breaking them out is it is just a different basis of accounting for those two portfolios compared to anything we originate.

But just echoing Robin's comments, we've got a lot of opportunity for growth. We saw, if you look at the quarterly -- if we annualized the quarterly growth rate, that is 13%. We do have some headwinds with the M&F roll off, but we think over -- in the near-term, short-term, that will stabilize. I think I mentioned to Michael Rose on his question that the normal pay down is about $20 million to $25 million of principle amortization. I think I mentioned per month -- that is actually a quarterly number; that is not a monthly number; it is a quarterly number. But we have growth and M&F; we have growth coming out of Georgia. Those acquired portfolios are only going to be declining from here on out.

Right. So the acquired portfolio is declining and that is just a fact. But any new loans you make or refinance or restructure in that M&F footprint is going into non-acquired loans essentially, right?

For the most part, yes.

Okay. And then just a follow-up, I know, Robin, you have talked about wanting to take some time to get this fully integrated, build the capital ratios backup. If you can just give us an update on where you want to take that TCE ratio back to, when you think it can get there. And then what kind of level of conversations of other opportunities you are sensing that are out there today and where you might be interested. Thanks.

I think we still are on our original target for getting TCE back up into the 7 range by the end of this year. As you saw, we had a nice about what -- 17, 18 basis point increase this quarter. So we anticipate that, barring some unforeseen action, being back at that 7 level by the end of the year.

In answer to your other question, there is a lot of noise out there on the M&A front. You have seen several acquisitions announced. We have had a considerable number of calls and opportunities there. So we definitely feel like that we have integrated the M&F merger to the extent that we are in a position that we can start talking about opportunities.

And Kevin, just following up on Robin, we are targeting 7%. We're not necessarily saying we have to be at 7% before we do any other type of external opportunity. We will look at it. If any opportunity allows us to continue on the pace to get back to 7%, we would definitely look at it.

Understood. Okay, thank you, guys.

This concludes our question-and-answer session. I would like to attend the conference back over to E. Robinson McGraw, Chairman and CEO, for any closing remarks.

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

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