Renasant Corp (RNST) 2014 Q1 法說會逐字稿

Good morning and welcome to the Renasant Corporation 2014 first-quarter earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions) Please note this event is being recorded. Now I would like to turn the conference over to John Oxford. Mr. Oxford, please go ahead.

Thank you, Keith, and good morning, and thank you for joining us for Renasant Corporation's first quarter 2014 earnings conference call. Participating in this call today with me are members of Renasant Corporation'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. These 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 will turn the call over to Renasant Chairman and CEO, E. Robinson McGraw.

Thank you, John. Good morning, everyone, and welcome to our first quarter 2014 conference call. Our first quarter results represent a strong beginning to 2014 as net income and EPS increased 80% and 43% respectively as compared to the same quarter last year. With the operations of M&F now fully integrated, we believe that we have made a strong start toward achieving our key performance goals and increasing our profitability through 2014.

During the first quarter of 2014, net income was approximately $13.6 million as compared to approximately $7.6 million for the first quarter of 2013. Basic and diluted earnings per share were $0.43 for the first quarter of 2014 as compared to $0.30 for the first quarter of 2013.

Our balance sheet and results of operation as of and for the three months ending March 31, 2014 include the impact of our acquisition of M&F, which was completed on September 1, 2013. Periods discussed prior to September 1, 2013 do not reflect any impact from the First M&F acquisition.

For the first quarter of 2014, our return on average assets and return on average equity were 0.93% and 8.19% respectively, as compared to 0.73% and 6.12%, respectively, for the first quarter of 2013. Our return on average tangible assets and return on average tangible equity were 1.05% and 16.05%, respectively, as compared to 0.79% and 10.19% respectively for the first quarter of 2013.

Total assets as of March 31, 2014, were approximately $5.9 billion as compared to $5.7 billion at year-end. The increase in assets on a linked quarter basis is due to seasonal influx of deposits, primarily in public fund deposits. Due to the short-term nature of these deposit influxes, the funds from these deposits remained in liquid assets such as low yielding interest-bearing cash or short-term investments.

The excess cash and short-term investments negatively impacted net interest margin by 15 basis points, our leverage ratio by 16 basis points, tangible capital ratio by 12 basis points, and our return on average assets by 3 basis points.

Total deposits were $5 billion as of March 31, 2014, as compared to $4.8 billion at year-end. Our first quarter 2014 non-interest-bearing deposits averaged approximately $949 million or 19% of average deposits, as compared to $550 million or 16% of average deposits for the first quarter of 2013.

Our cost of funds was 48 basis points for the first quarter of 2014, as compared to 62 basis points for the same quarter in 2013 and 51 basis points for the fourth quarter of 2013. Total loans, including loans acquired in either the M&F merger or in FDIC-assisted transactions, collectively referred to as acquired loans, were approximately $3.87 billion as of March 31, 2014 as compared to $3.88 billion at year-end.

Excluding acquired loans, loans grew 13.6% to $2.95 billion as of March 31, 2014, as compared to $2.59 billion at March 31 of 2013. On a linked quarter basis, non-acquired loans grew $62 million or 9% annualized. We are pleased with our annualized loan growth rate after the first quarter of 2014 as we move into the second quarter and third quarters, which are traditionally our heavier loan production quarters for the year.

Breaking down year-over-year loan growth by market, our Alabama market grew loans 6.1% and have now grown loans 16 of the last 17 quarters. Our Mississippi markets grew loans by 9.5% and our Tennessee market grew loans by 19.3%, which is their ninth consecutive quarter of loan growth. In Georgia, we grew loans by 37.8% as compared to the first quarter of 2013.

Looking ahead, our loan pipelines and opportunities to grow throughout all of our markets more pronounced loan growth for the remainder of 2014. As of 3/31/14, our tier 1 leverage capital ratio was 8.56%. Tier 1 risk-based capital ratio was 11.55%, and total risk-based capital ratio was 12.72%. In all capital ratio categories, our regulatory capital ratios continue to be in excess of the minimums required to be classified as well-capitalized. In addition, our tangible common equity ratio was 6.68% as of March 31, 2014.

Net interest income was approximately $50 million for the first quarter 2014, up from $33.4 million for the first quarter of 2013. Net interest margin was 4.04% for the first quarter of 2014 as compared to 3.89% for the first quarter of 2013 and 4.16% as of December 31, 2013. The primary factor causing our linked quarter decline in net interest margin was the negative impact of the seasonal influx of public fund deposits and the resulting short-term liquidity which was previously mentioned.

Noninterest income was $18.6 million for the first quarter of 2014 as compared to $17.3 million for the first quarter of 2013 and $18.3 million for the fourth quarter of 2013. Our increase in noninterest income year-over-year is primarily attributable to the M&F merger, notably a 31.44% increase in service charges and doubling of our insurance commission and fees.

Contributing to the linked quarter increase in noninterest income was an increase in the gain on sale of mortgage loans, and fees and commissions received from the sale of insurance services. Noninterest expense was $47.6 million for the first quarter 2014 as compared to $37.6 million for the first quarter of 2013.

We recorded merger expenses associated with M&F acquisition of $195,000 and $1.9 million during the first quarter of 2014 and fourth quarter of 2013, respectively. We did not record any merger expenses during the first quarter of 2013. Our increase in noninterest expense as compared to the first quarter of 2013 was primarily due to the expenses of the acquired M&F operations.

Our total nonperforming loans, or loans 90 days or more past due and nonaccrual loans, were $74.1 million. And total OREO was $47.7 million at March 31, 2014. Our nonperforming loans and OREO that were acquired either through the M&F merger or in connection with FDIC-assisted transactions, collectively referred to as acquired nonperforming assets, were $54.4 million and $22.6 million, respectively, as of March 31, 2014.

Since the acquired nonperforming assets were recorded at fair value at the time of acquisition or subject to loss share agreements with the FDIC, which significantly mitigates our actual loss, the remaining information of this discussion on nonperforming loans and OREO and the related asset quality ratios exclude these acquired nonperforming assets.

Our nonperforming loans were $19.7 million as of March 31, 2014, as compared to $28 million as of March 31, 2013. Nonperforming loans as a percentage of total loans were 0.67% as of March 31, 2014, as compared to 1.08% as of March 31, 2013.

Annualized net charge-offs as a percentage of average loans were 0.11% for the first quarter of 2014 as compared to 0.13% for the first quarter of 2013. We recorded provision for loan losses at $1.5 million for the first quarter of 2014 as compared to $3.1 million for the first quarter of 2013.

The allowance for loan losses totaled $48 million as of March 31, 2014 as compared to $46.5 million as of March 31, 2013. The allowance for loan losses as a percentage of loans was 1.63% as of March 31, 2014 as compared to 1.79% as of March 31, 2013.

Our coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was 244.06% as of March 31, 2014 as compared to 166.19% as of March 31, 2013.

Loans 30 day to 89 days past due as a percentage of total loans remained at pre-recession levels, and were 0.25% as of March 31, 2014 as compared to 0.32% as of March 31, 2013.

OREO was $25.1 million as of March 31, 2014 as compared to $39.8 million as of March 31, 2013. Also, during the first quarter of 2014, we experienced a significant reduction in costs associated with OREO as OREO expenses decreased approximately 16.98% as compared to the first quarter of 2013.

Our key performance drivers, specifically loan pipelines, low-cost in deposits, credit metrics, and operational efficiencies, continue to show positive trends and healthy outlooks. In addition, now that the acquired First M&F operations are fully integrated, we believe we are beginning to experience the full synergies of our combined companies and we remain well-positioned to take advantage of strategic growth opportunities when available.

Now, Keith, I will turn it back over to you for any questions.

(Operator Instructions) Catherine Mealor, KBW.

Robin or Kevin, do you all have that fair value accretion impact for the quarter?

It's Kevin. We do. Let's talk about margin in total and then we will talk about purchase accounting adjustments.

Okay. Thanks.

We reported margin of a 4.04% and, as we have discussed and talked about on the last call, our reported margin is going to be in the high threes, low fours going forward. That is our range going forward. If you look at the 4.04%, there is a couple of things that impacted that number this quarter.

One, as Robin mentioned, is just a higher balance of the cash and low yielding investments. That is due to the deposits that were rolled out later in this quarter -- later in the second quarter. That weighed on margin by about 15 basis points. So if you add that back in, we were at a 4.18%, 4.19% compared to a 4.16% last quarter.

As we discussed last quarter, and as you can see, the M&F low loan portfolio did pay off. We did have some runoff in the M&F loan portfolio, and that did result in higher levels of accretion and higher levels of purchase accounting adjustments, and that, too, was about 15 to 16 basis points. So, the amount of additional purchase accounting adjustments this quarter was about 15 basis points on the margin.

Got it. And so, how should we think about the direction of the core margin? I guess we will probably get that 15 that's back after the seasonal deposits flow back out, but aside from that, what is your outlook for the direction of the core margin?

It will remain flat, excluding the unscheduled payoffs, accelerated purchase accounting fair value adjustment -- accelerated accretion. It will stay flat in that high 3 to low 4 range.

That high 3 to low 4, that includes fair value accretion.

Well, it includes -- it does not include accretion from accelerated payoffs.

Got it. Got it. Okay. Perfect. (multiple speakers) And then, you mentioned the [FMSC] balances paid off a little bit more than expected this quarter. How should we think about the pace at which that portfolio will run off? It has been about, call it, $70 million or so, on average, the past two quarters. Should that slow going forward, do you think?

Catherine, as we analyze that portfolio that came over, actually about $891 million came over. We are now down to a balance of about $746 million just in the acquired portfolio. We have actually added new loans to that.

For example, this quarter, the gross runoff actually -- as we look back over that $89 million runoff, there was about $56 million after you take into consideration new loans that came in; about $56 million over the two quarters from M&F. So that is a net reduction of about $89 million. Of that, we analyzed where it went. About $20 million were associated with watch list credit suite.

As we stated in the beginning, their ABL portfolio had a little bit different metrics than ours. And so, therefore, we were in the process of letting most of that run off. A good portion of that $20 million could be attributed to that portfolio. $9 million of that pay down was just seasonal pay downs as we have here in the legacy bank also, just regular lines that pay up and down. And there was a net $9 million pay down in those lines.

About $15 million actually moved out to nonrecourse lenders, which obviously we are not going to match those terms. By the same token, you had about $20 million of just standard term payments that came in that will impact and continue to be paid down.

The balance is about $25 million and, for the large part, those went to competitors for rates and maturities that we wouldn't match. They were outside the ranges that we traditionally will do, much lower rates, much longer terms in most part, maturities. So with that in mind, we feel like that we will see a little bit more runoff this quarter than normal, but for the balance of the year and going forward, runoff will be much, much less.

Yes, and Catherine, this is Kevin again. If you go back and look at some of our prior open bank acquisitions, the first few quarters -- the first two to three quarters after the acquisition, that is when we had the most pressure and runoff from those acquired portfolios. So it is not anything that we didn't anticipate.

The levels may be a little bit more than we anticipated, quite frankly, but also remember that in that -- we separately break out the loans acquired from M&F. Any new originations that come out of the M&F operations go in our non-acquired loan bucket. And the only reason we are separately breaking out the loans acquired from M&F is just due, quite frankly, the difference in accounting basis.

We put credit marks against that portfolio, and it just helps us identify how much allowance and how much our credit metrics are affected by a loan portfolio or accounted for at fair value as opposed to historical cost on anything that we originate organically.

That's helpful guys. Thank you very much.

Michael Rose, Raymond James.

A couple questions; where do we stand in terms of cost save achievability in regards to M&F? And are the cost saves that you originally laid out, are they -- I think you said last quarter that they are coming in a little bit higher than what you initially projected. And then, as we think about this quarter in terms of some seasonal items, is there anything in either the fee income or the expense run rates that maybe need to come out for seasonal purposes? Thanks.

Let me comment on M&F first. We are pretty much looking at maybe another $300,000 per quarter, based on this quarter, of expense saves. That comes to -- it is about $195,000 of merger expenses this quarter and about $100,000 of actual salary expense that was still in there this quarter, so about $300,000 per quarter in the future from M&F cost saves.

Seasonality -- Jim, do you want to talk a little bit about some seasonality of both the income annex -- or the income side? Kevin, on the expense side.

Right. Yes. On the seasonality of fee income, probably the only item that you would take out would be the contingency income from the insurance agency, roughly $500,000 that was in that other -- the line item of other. But, on the flip side of that, overdraft fees are always low in the first quarter due to number of days, for one, and just tax receipts -- tax refunds, rather. That is always down, so probably should pretty well make up what the contingency fee income was on overdraft fee income and other deposit service charges, interchange fee and so forth because of number of days.

And then, to some extent, mortgage gains in the first quarter; seasonally, that is our lowest quarter for mortgage volume. And based on what we are seeing in our mortgage pipeline at the end of the first quarter, and what we are seeing into April, we are anticipating higher mortgage volumes into the next quarter.

I would say, outside of that, wealth management and insurance, probably the line items for them are pretty good run rates for the year.

And I will let you address the expense side. I am not (multiple speakers).

Yes. Michael, on the expenses, as Robin mentioned, we do have some additional cost saves on the M&F side. What Robin mentioned was merger and mainly salary expense of individuals that have left during the quarter, just the remaining team that we had on board that were part of the effective group.

We are in the process of selling some -- when it comes to premises and equipment, we are in the process of selling some facilities. As those sales occur, there will be some pickup on some occupancy and equipment expense as well as there is a couple of vacant buildings that we have leases on. And as we sublease those or we exit out of the lease agreement, you will see some pickup there as well.

The only other seasonal item in the first quarter would be FICA taxes. We did have a pickup in FICA taxes and salary employee benefits to the tune of about $380,000 to $400,000. And that is about the only seasonal item of note in noninterest expenses.

Okay. And, just to be clear, the sale of the facilities and the leases, that is baked into the M&F cost saves, correct?

That was not baked into the cost saves.

Oh, it was not; so that is incremental. Okay.

And, Michael, one other point on the M&F cost saves. One of the things -- and we had mentioned this previously -- is we reduced the annual cost saves probably by about $1 million. We took advantage of the merger to substitute some IT personnel that we hired, a new Chief Information Officer and three or four new high-level IT individuals, and reduced cost saves by that $1 million as a result of that. We just kind of offset cost saves with that theme last year. So that is already in the mix and it had a little bit of an impact on the cost saves.

Yes. So we just closed cost saves of -- we targeted 25%. That number came in a little bit higher on actual. It came in about 28%. Just, right now, that doesn't include any future cost saves that we do yet. As Robin mentioned, some of the infrastructure we built in IT did pull that overall gross number back to the 28%.

And that is why, when we look at the runoff from the M&F loan portfolio, it doesn't overly concern us because, as we have mentioned, the metrics of the acquisition were built off profitability and efficiencies, not necessarily growing into the purchase price. And the way we viewed it is, any additional growth that we get out of the M&F group just helps -- that is just additional benefit on top of the transaction that was built on operational efficiency.

Okay. That's great color, and just one quick follow-up. I think the loan pipeline -- the [38] pipeline at the end of last quarter was about $65 million. Where does it stand today?

Mitch will answer that for you.

Michael, the 30-day pipeline today stands at $88 million. And if you break that down by state, 33% would be in Tennessee; 19% in Alabama; 14% in Georgia; 27% in Mississippi, with the remaining 7% in ABL credits. This pipeline should result in approximately $32 million in growth in non-acquired loans within 30 days.

And you are correct; last quarter, on a linked quarter basis we were at $65 million. If you go back prior year, same period, we were at $67 million.

Hang on, Michael. Just talking about loan growth, if you look at first quarter loan growth, and much like what Jim spoke on the noninterest income side, first quarter, you typically are seasonally low on the noninterest income and loan growth. If you annualized our non-acquired loan growth, it came out to almost 9%. If you compare that to first quarter of 2013 loan growth, first quarter of 2013 loan growth was 3%. And so we were well ahead of last year's pace in what is typically seasonally slow quarter.

Andy Stapp, Marion Capital.

Nice quarter. How should we look at your reserve coverage going forward?

Andy, what you will see -- in effect, our provisioning is covering charge-offs. And so, you will see the allowance staying relatively flat and stable. But coverage, it is our anticipation that the coverage ratio will continue to improve as NPLs decline.

So, to sum up what I am saying, the coverage ratio will continue to improve. And that would be more based on the credit quality metrics coming down -- the NPL metrics coming down.

Yes. From Kevin's comment on that, we pretty much are at a point where our allowance is at a level that should remain pretty constant going forward because of where we are, and we will cover charge-offs and maybe a little extra. But, other than that, we don't see any opportunity to increase the allowance but continue to see the coverage ratio improve.

Okay. And that is coverage of NPAs or--?

Nonperforming loans.

Nonperforming loans.

Nonperforming loans, okay. And then it should go down as a percentage of loans, just because of loan growth.

Exactly. Yes. Your denominated -- your loans are increasing. So, yes, it will -- that ratio will come down. The allowance for total loans will come down.

Okay. And I think you mentioned that the future occupancy and equipment cost saves are not baked into the $300,000 per quarter cost saves that you mentioned. How should we look at the occupancy and equipment cost saves?

As far as related to M&F, almost fully realized; we do have some small amounts. And once those buildings are sold, once those leases are either terminated or subleased, you might see a $50,000 pickup -- a $50,000 reduction in occupancy and equipment expense going forward. That is just purely related to M&F.

Okay. But not $50,000 per quarter, but $50,000 total.

No. $50,000 per quarter.

Okay great. Thanks.

(technical difficulty) David Hilder, Drexel Hamilton.

Robin, quick question. Could you update us on the end of period loan balances in the various de novo markets? I know you have shown that before in some of the presentations there; just trying to get a quick update how those have trended intra-quarter.

You bet. Continuing to see growth in each of those markets. In fact, every one of them had growth. Montgomery is now right at $80 million. Tuscaloosa is right at $40 million. Columbus, Mississippi, is right at $40 million.

Storyville, Mississippi is an anomaly in that, with the M&F merger, we almost doubled -- we actually doubled our size there. We are $90 million of loans and $158 million to $160 million of deposits overall there, just attributable to the de novo. And we do break that out; we are at about $43 million in loans and $95 million, $96 million in deposits in Storyville.

Maryville, which is our Knoxville MSA, is at $74 million of loans. The Johnson City area is at $50 million and Bristol at $30 million -- $31 million. Total of $355 million attributable to the de novo markets at this stage of loans (multiple speakers).

Are those (multiple speakers) $355 million?

Yes. It is $355 million, just attributable to de novo. That does not count an additional $45 million to $47 million in Storyville.

And, have you reached the point -- I know in Georgia it was -- I think you were at 85%, 95% of new production replacement runoff. Is that sort of across the threshold yet this quarter, or where are you standing there?

Yes. It has crossed the threshold. In fact, this quarter we grew loans -- noncovered loans by about $10.7 million and runoff was about $8 million. We are a year and three months away from -- a year and four months away from the end of the first loss share on the [non-1 to 4] portion of it. It may be a little lumpy in there as far as some higher levels of runoff in some quarters. But, for the most part, we have crossed that threshold.

Got you. And maybe just an update on some of the new lending divisions, equipment finance, asset-based lending. Have we started to see a bump up in loan balances there?

Yes. Let me turn that over to Mike Ross.

I'll give you some color on that. Our asset-based lending team has got a nice healthy pipeline now; as Mitch said, roughly 7% of the total of the Company in the second quarter. And that is -- and we have got a lot of other opportunities out there that we don't have firm commitments on yet, but that we feel fairly good about.

So, that group is starting to contribute and we should see additional leverage, because we have plenty of room to grow into that team. So we won't have to add any staff and we have plenty of capacity to grow that business.

Our equipment finance team is off to a really nice start. We did a little less than $1 million in production in first quarter, but we really only started marketing in the first quarter. They have another $6.5 million in leases that are in the pipeline that are approved, accepted, and in process of documentation. Those numbers are embedded within the regional numbers that you heard Mitch discuss earlier.

So, our SBA group had a significant increase in loan production in the first quarter. They also are sitting on a fairly deep pipeline. Now, you don't see those in balances as much because we are actually selling the guaranteed portions of those loans as they get funded and are available-for-sale, because the premiums in today's market are quite significant. So, that is more of a fee based business than a volume based business. And so overall, we feel very good about what our specialty businesses are doing as an additive to what our regions are doing.

Matt Olney, Stephens.

Most of my questions have been addressed. Thank you. I was just hoping Robin could give us an update on the M&A environment and your target markets. And, based off the integration of M&F, do you believe your team is ready for additional acquisitions in 2014?

I will answer the second question first. Yes, we do. We feel the integration is complete and we are, in fact, in a position that we can do acquisitions this year. There is a lot of chatter, a lot of activity. You have heard a lot of deals announced. And so, I think that there will be a considerable amount of opportunity during 2014 in the M&A market.

And then lastly, Kevin, can you give us a good tax rate that we should be using for 2014?

Yes, 29% to 30%.

Perfect, thanks guys, appreciate it.

Andy Stapp, Marion Capital.

I might have misheard something. I thought you mentioned that part of the increase in other noninterest income, $500,000 was contingent income on insurance. Is that correct? I'm just wondering why that wouldn't show up in insurance.

Andy, that is correct. That just happens to be the line item that gets classified on this report, but it does reflect in the first quarter.

Okay. Thank you.

You are correct. It does.

As there are no more questions at the present time, I would like to turn the call back over to management for any closing remarks.

Thank you, Keith. We appreciate everyone's time and interest in Renasant Corporation, and certainly look forward to speaking with everyone again next quarter. Thank you.

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