Renasant Corp (RNST) 2014 Q2 法說會逐字稿

Good morning and welcome to the Renasant Corporation second-quarter earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) Please note: this event is being recorded.

I would now like to turn the conference over to John Oxford. Please go ahead, sir.

Thank you, Betty. And good morning and thank you for joining us for Renasant Corporation's second-quarter 2014 earnings conference call. Participating in this call today are members of Renasant Corporation's executive management team.

Before we begin, let me remind you that some of our comments during 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 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 recurrence of unanticipated events, or changes to future operating results over time.

And now I will turn the call over to our Chairman and CEO, E. Robinson McGraw. Robin?

Thank you, John. Good morning, everyone, and welcome to our second-quarter 2014 conference call. Our second-quarter financial results reflect the achievement of several key short-term initiatives and continued progress on long-term strategies, specifically, a return to higher levels of sustainable profitability and replenishing the capital that we deployed in the First M&F acquisition.

Focusing first on sustainable profitability, our earnings per share of $0.47 represent our highest quarterly earnings in the 110-year history of our Company, excluding quarters where we recognized one-time gains associated with acquisitions. In addition, our return on assets was 1.02% for the quarter, marking the first time our return on assets exceeded 1% since the economic downturn. These accomplishments were driven by annualized linked-quarter loan growth in our non-acquired portfolio of 20.1% and a continued focus on generating revenues from our diversified lines of business, while at the same time managing expenses to ensure future revenue growth is maximized.

In regards to capital levels, our TCE ratio stands at 7% at June 30, 2014, which, coupled with a strong regulatory capital ratios, will continue to support future balance sheet growth, whether that growth is organic or the result of an external opportunity. During the second quarter of 2014, net income was approximately $14.8 million as compared to approximately $8 million for the second quarter of 2013. Basic and diluted EPS were $0.47 for the second quarter of 2014 as compared to $0.32 for the same period in 2013.

Let me remind you: our balance sheet and results of operations as of and for the three months ending June 30, 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 second quarter of 2014, our return on average assets and return on average equity were 1.02% and 8.7%, respectively, as compared to 0.76% and 6.4%, respectively, for the second quarter of 2013. Our return on average tangible assets and return on average tangible equity were 1.15% and 16.55%, respectively, as compared to 0.87% and 10.5%, respectively, for the second quarter of 2013.

Total assets as of June 30, 2014, were approximately $5.8 billion as compared to $5.7 billion on December 31, 2013, and $5.9 billion on a linked-quarter basis. The decrease in assets on a linked-quarter basis is due to the seasonal runoff of deposits, primarily in public fund deposits; and the related sale of the liquid assets in which these seasonal deposits were invested, such as low yielding interest-bearing cash or short-term investments.

Total deposits, including deposits required in the First M&F acquisition, were $4.9 billion at June 30, 2014, as compared to approximately $4.8 billion on December 31, 2013, and $5 billion on a linked-quarter basis. Non-interest-bearing deposits averaged approximately $905 million, which represents 18.4% of our average deposits for the second quarter of 2014 as compared to approximately $562 million or 16% of average deposits for the second quarter of 2013.

A continued improvement in our funding mix, along with continued downward repricing of time deposits, resulted in our cost of funds declining to 48 basis points for the second quarter of 2014 as compared to 60 basis points for the same quarter in 2013. Total loans, including loans acquired in either the First M&F merger or in FDIC acquisitions, which we collectively refer to as acquired loans, were approximately $3.96 billion on June 30, 2014, as compared to $3.88 billion at December 31, 2013, and $3.87 billion on a linked-quarter basis.

Excluding acquired loans, nonacquired loans grew 7.3%, or 14.6% annualized, to $3.1 billion at June 30, 2014, compared to $2.8 billion on December 31, 2013, and increased 5% or 20.1% annualized on a linked-quarter basis. Breaking down year-over-year nonacquired loan growth by market, our Alabama market grew loans by 9.1% and has now grown loans in 17 of the last 18 quarters.

Our Mississippi market increased loans by 14.4%. Our Tennessee market grew loans by 17.9%, which is their 10th consecutive quarter of loan growth. And in Georgia we grew loans by 30% as compared to the second quarter of 2013.

Looking ahead, our loan pipelines and opportunities for growth throughout all of our markets project healthy loan growth for the remainder of 2014. As of June 30, 2014, our Tier 1 leveraged capital ratio was 8.91%. Tier 1 risk-based capital ratio was 11.82%, and total risk-based capital ratio was 12.96%. In all capital ratio categories our regulatory capital ratios continued to be in excess of the regulatory minimum required to be classified as well capitalized.

Net interest income was $52.2 million for the second quarter of 2014 as compared to $34.4 million for the second quarter of 2013 and $50 million for the first quarter of 2014. Net interest margin was 4.24% for the second quarter of 2014 as compared to 3.88% for the second quarter of 2013 and 4.04% for the first quarter of 2014.

Noninterest income was $19.5 million for the second quarter of 2014 as compared to $17.3 million for the second quarter of 2013 and $18.6 million on a linked-quarter basis. On a linked-quarter basis our growth in noninterest income was driven by higher levels of deposit and loan fees and increased revenues generated from our insurance, wealth management, and mortgage banking divisions.

For the second quarter of 2014, our mortgage production volume increased 49%. Our gain on sale of mortgage loans increased 26%, and our overall pipeline of mortgage loans increased 12% on a linked-quarter basis. It's worth pointing out that near the end of the quarter, we hired a seasoned team of mortgage bankers in Birmingham and Montgomery, Alabama, that we expect to greatly enhance production in those markets in the near future.

In addition, we are looking to add to our retail mortgage production capacity in Huntsville; Nashville; the Memphis/DeSoto County area; Atlanta; and Jackson, Mississippi; and also continuing to focus on wholesale production across our footprint and in contiguous states. Noninterest expense was $49.4 million for the second quarter of 2014 as compared to $37.7 million for the second quarter of 2013. The increase in noninterest expense as compared to the same period in 2013 was primarily to the expenses of the acquired M&F operations.

This increase in expense was offset, however, by a significant reduction in costs associated with our OREO, as OREO expense decreased approximately 40% as compared to the second quarter of 2013. On a linked-quarter comparison noninterest expense increased, primarily due to higher levels of salaries and employee benefits as a result of higher commissions on mortgages and higher insurance production -- and also, higher-than-anticipated health insurance claims, which we consider to be a one-time event. Our nonperforming loans, or loans 90 days or more past due and nonaccrual loans, were approximately $73 million; and total OREO was approximately $42 million at June 30, 2014.

Our nonperforming loans and OREO that were acquired either in the M&F merger or in connection with FDIC-assisted transactions, collectively referred to as acquired nonperforming assets, were approximately $52 million and approximately $18 million, respectively, at June 30, 2014. Since the acquired nonperforming assets were recorded at fair value at the time of acquisition or are subject to loss share agreements with the FDIC, which significantly mitigates our actual loss, the remaining information in this discussion on nonperforming loans, OREO, and the related asset quality ratios exclude these acquired nonperforming assets.

Our nonperforming loans were approximately $21 million as of June 30, 2014, as compared to $19 million as of December 31, 2013. Nonperforming loans as a percentage of total loans were 67 basis points as of June 30, 2014, as compared to 66 basis points as of December 31, 2013.

Annualized net charge-offs as a percentage of average loans were 23 basis points for the second quarter of 2014 as compared to 35 basis points for the second quarter of 2013. We recorded a provision for loan losses of $1.5 million for the second quarter of 2014 as compared to $3 million for the second quarter of 2013.

The allowance for loan losses totals $47.3 million or 1.53% of total loans at June 30, 2014, as compared to $47.7 million or 1.65% at December 31, 2013. Our coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was approximately 228% at June 30. Loans 30 to 89 days past due as a percentage of total loans declined to 25 basis points at June 30, 2014, as compared to 31 basis points December 31, 2013. OREO declined 13% to $23.9 million at June 30, 2014, as compared to $27.5 million on December 31, 2013.

In closing, our quarterly results are representative of our efforts to increase profitability in an economic period where composition results in thin margins. Despite these headwinds, our strong commercial and mortgage loan pipelines and our continued focus on improving our efficiency positions us to be opportunistic and drive higher levels of future profitability.

Now, Betty, I will turn it back over to you for any questions that anyone may have.

(Operator Instructions)

Michael Rose, Raymond James.

I'm sorry if I missed this. I got on the call a little bit late, but I wanted to drill into the expenses a little bit. Obviously, the revenue growth was pretty good this quarter; I'm happy to see it. But wanted to drill into maybe some of the things you mentioned in the press release about some elevated health care costs, you know, things like that. How should we think about what is really the core kind of run rate of expenses as we move forward? Thanks.

Kevin, do you want to answer that?

Yes, I will. So Michael, I think we reported noninterest expenses around $9.3 million for the quarter. If you look, the increases came primarily in salaries, employee benefits, and other non-interest expenses. Salaries and employee benefits -- the majority of that increase can be summed up in two areas, as Robin mentioned: the commission expense from production -- and that's going to vary with and be offset by the revenue that drives that expense; it's a variable expense.

The other is we did see a spike in Q2 on health and life insurance claims. We had an extraordinary event where we had three individuals hit the reinsurance limit all in one quarter. I think that's the first time where we have had three individuals hit the limit in the same quarter. We've had -- over the course of a year, in previous periods in the course of the year where we've had four or five individuals meet that in a yearly time frame; this was the first time we experienced it on a quarterly basis.

And we are self-funded.

And we are self-funded, so we had to incur all of that expense in Q2. We do expect health insurance claims to level out for the remainder of the year. We don't expect events to the magnitude we had in Q2.

When you look at other noninterest expenses, we did have -- other noninterest expenses increased about $1 million, and the majority of that is due to -- I would label it as one-time or nonrecurring expenses. We were able to bring to resolution to several ongoing matters, some in problem loan expense, that will reduce the run rate in that expense going forward. So a run rate -- it would not be unrealistic to expect a run rate on future noninterest expenses below $9 million.

Okay. And what was the impact of the healthcare costs?

It was about $400,000 to $500,000.

Okay. And then can we just get an update on your loan pipeline? And then maybe if you can talk about some of the trends by market -- particularly as it relates to Georgia? Thanks.

Sure. I'll let Mitch Waycaster answer the first part of that question and then Mike Ross may join in afterwards.

Michael, the 30-day loan pipeline currently stands at $88 million. If you break that down by state, 23% would be in Tennessee; 15% in Alabama; 24% in Georgia; and 38% in Mississippi. This pipeline should result in approximately $32 million in growth in nonacquired loans within 30 days, which would equate to a low double-digit annualized growth rate in nonacquired loans.

An equivalent pipeline in the second quarter resulted in a somewhat higher growth in unacquired, given lower-than-expected payoffs and paydowns. The current pipeline of $88 million -- if you look back to the end of the prior quarter, it equated to $88 million on the linked-quarter; prior-year same period was $80 million. So the $88 million pipeline that we continue to experience is a strong pipeline as we enter the third quarter. And we expect continued healthy loan growth.

Michael, this is Mike. Specifically to your question on Georgia, we are very bullish on what we're seeing going on in Georgia -- specifically, some of the bankers that we've referred to in the past that we had hired as replacements to our existing team that we acquired in our acquisitions are continuing to see solid results. And as you heard Mitch talk about in our pipelines, our Georgia pipeline is actually quite healthy going into the third quarter.

Great. Thanks for taking my questions, guys.

Catherine Mealor, KBW.

Can we dig into the margin a little bit? And Kevin, I wanted to see if you could give us the core margin for the quarter and break out how much of accelerated accretable yield that you saw?

Yes. So reported margin was 4.24%. On the acceleration of discount, credit discount due to payoffs and paydowns, that was 28 basis points for the quarter. We also had -- if you remember, we had an overhang -- well, we had the excess liquidity in Q1 that weighed on margin in Q1. That liquidity started to roll out, but we still in Q2 had elevated levels of liquidity. And that pulled margin back about 9 basis points. So you net those two items together, and you get back to that margin in that 3.99% to 4.02% range.

Got it. Okay. And is it fair to say that you will continue to deploy that excess liquidity going into next quarter? So we should probably get some of that 9 bps back going into third quarter, but the accretable yield is probably going to pull back from that 28 bps range; so the reported margin still is going to be coming down, but the core margin still has a little bit of upside?

That's correct. If you look at the liquidity on a quarterly basis, it did impact margin. But if you look at period end, for the most part that liquidity was off the balance sheet. And on the excess accretion, it's hard to predict the paydowns. For example, in Q2 we had a large loan that we had concerns about credit deterioration. We received a payoff in full on the second to last day of the quarter. It's just hard to predict those unexpected payoffs.

What I would say is that I do expect us to continue to have unexpected payoffs in the M&F portfolio. I just don't think it's going to be at the magnitude of 28 basis points per quarter, but we will continue to have unexpected payoffs, and we'll accrete back additional levels of income through margin.

Okay. Great. And then can you talk about loan pricing? I mean, the growth this quarter was just phenomenal. What are you seeing on the pricing side? Are you still able to hold your core loan yields relatively stable? Or are you seeing more pressure there, given this amount of growth?

I'm going to let Mike Ross give you a little color on Georgia and Alabama; and then, Kevin, if you want to, just on the Company as a whole.

Catherine, we're seeing a -- I mean, there's no doubt we're seeing intense pricing pressure out there in the marketplace. But if you look at what we've done as a Company, we have managed to grow the loans in the quarter. Our overall yields have come down a little bit, but we have also had a favorable variance in terms of more variable and less fixed than we had been having.

So we feel like at this stage of the rate cycle, that that's the right way to approach it. As we've already talked about, we are seeing the loan yields -- even though they have declined a little bit overall, we are still growing margin.

Yes. And Catherine, for the quarter on new and renewed total Company, it came in right at that 4.50% level which we have been holding for the last several quarters. And to Mike's point, that 4.50% is supporting what we think is very robust and strong loan growth. We could have stronger levels of loan growth if we gave on some of those pricing metrics; we just don't feel the risk/reward is worth tying up capital in low levels of return.

So that's why we've been sticking to those pricing metrics and making sure we stay in the mid-4s. To Mike's point, we are doing more variable rate loans. Just the overall concern about interest rate risk -- we're cognizant of that, with tying up money in long-term fixed assets. So we have made a concerted effort to do more variable-rate loans.

And if you look at that weighted average rate of a 4.50%, that consisted of a 60%/40% mix for the quarter -- 60% fixed, 40% variable. If we go back to previous quarters where we were maintaining a 4.50% or higher, that would have been more heavily weighted to fixed rate loans. So we're seeing a stabilization of the new/renewed rates, and from an interest rate standpoint, more favorable mix of variable-rate loans.

And Catherine, one thing that we consider advantageous -- if you have seen, there has been significant loan growth in Mississippi. Most of our Mississippi loans are small business and consumer oriented type credits that carry much higher rates than we see in some of our metropolitan markets. So that does, in fact -- even with the higher amount of variable rate loans that obviously are at lower rates -- that Mississippi portfolio is able to bring up that average and keep us at that 4.50% level.

Got it. Very helpful. Thanks and congrats on a great quarter.

David Bishop, Drexel Hamilton.

Robin, maybe talk about the -- you know, obviously credit is bumping along very nicely here in terms of NPAs and card losses still remaining very manageable. But how about in terms of provisioning here? Obviously, with the loan growth here, how should we think about provisioning relative to losses moving forward?

You know, David, over the first two quarters we basically offset charge-offs with provision. We actually saw -- we had at the end of the quarter -- we took a charge-off on a loan that actually paid off in the third quarter. But we went ahead and took the charge-off on it, but we were able to claw back a very significant provision on this impaired credit, which was a nonperforming loan.

So from that standpoint, our allowance is still extremely strong. Going forward, again, we should be looking at covering charge-offs basically in loan growth with the provision.

And Dave, also, just to add on that, our reported credit quality metrics are improving -- they are flat to improving, but our watchlist is improving at a much more dramatic pace. We've seen a significant improvement in our watchlist loans, which is what's driving the flat-to-improving reported nonperforming loans and 90 days past-due.

We are at the point on some of our nonaccrual loans where we are finally able to work through the court system, and we do expect to move off several nonperforming loans, specifically our nonaccrual loans, as a result of bringing some ongoing litigation to an end. And you will see that for the remainder of the year.

In addition to that, on our TDRs one of the credits that was paid off was a nonperforming loan; another was a TDR, [up] about $1.3 million in that regard. And then if the payoff comes that's anticipated, there is another rather large -- probably, in fact, our largest TDR should in fact be paid off during the course of this quarter. So we could see TDRs in fact drop by about 25% over the course of the quarter, if things go as anticipated there. So we see, actually, looks are deceiving. I think we are seeing credit quality actually improving as opposed to deteriorating in that regard.

Got you. Great. Thank you for the color, guys.

Matt Olney, Stephens Inc.

I want to circle back on the expense discussion, but I want to get your thoughts kind of longer-term. I'm curious what kind of opportunities you think you have to really slow expense growth the next several years and produce some positive operating leverage?

Matt, again, we have talked previously about our opportunities there. We still are right on track for our efficiency ratio to drop below the 60% level at the end of 2015, if not before. We still have a lot of credit expense that we are seeing going away from the standpoint of both the OREO and special assets. Kevin mentioned a while ago, we've brought to fruition some litigation that we have had ongoing for quite some time on some of these problem credits that should be cleared up.

Expenses associated with OREO should be dropping -- we have more OREO under contract. We're seeing that drop this quarter. It will continue to drop.

Our loss share -- obviously, we'll be seeing some decrease in loss share expense as it goes away in a year from this month, as matter of fact. We are also continuing our efficiency initiatives. We have an efficiency task force that Jim Gray heads up for me; we're looking at every contract that comes up for renewal. We've identified opportunities as we have people retiring, without any kind of downsizing in force, but we are seeing attrition and taking advantage of those opportunities as they come up.

So, yes, we still see some real opportunities for a decrease in expense. And as Kevin pointed out a while ago, we had some pretty good one-timers this particular quarter that we don't see as recurring in future quarters.

Okay. That's great color, Robin. Thanks for that. And then as far as M&A, I think in the press release you noted that the TCE ratio now is 7%. How are you thinking about M&A relative to your capital levels, and what size are you targeting right now? It seems from our point of view that M&A is getting more expensive. Can you talk more about your financial metrics? And have those changed at all over the last few months?

Really, Matt, we're still holding at this stage to what our previously stated metrics are. I agree with you, we are seeing some higher prices being paid; but we think there are still opportunities out there.

We still feel that for the right deal, for $1 billion or less, we are okay from a capital standpoint. A larger transaction would result in a capital raise, but we feel like just-in-time capital would be available for us in that particular situation.

And we're still looking at and under three-year payback as far as tangible book value. We are looking for immediate accretion as far as earnings go. And somewhere in the high teens, low 20s on an IRR on any transaction that we would, in fact, do.

Obviously, as we look at opportunities, we are seeing budgets being a little bit inflated today along that line. So we have to adjust accordingly. We are very disciplined in what we are doing in that regard. Kevin, do you want to make any comments?

Just briefly, talking about the M&A: the pricing has come up since -- to set a time frame, since the M&F transaction, pricing has come up. So what that has caused us to do is to kind of reevaluate the opportunities that are available and ensuring that the quality of the earnings -- to the point Robin was making -- the quality of the earnings and the stability and the sustainability of the earnings of the seller support the price. And that's really where our biggest focus is, and that's where we are somewhat refiltering the opportunities, is making sure that the price supports the earnings lift that we get.

In regards to the capital, one point I will make is: we did get back to a 7% TCE this quarter. When we announced M&F, we knew we would be spending some capital. The TCE ratio specifically dropped below 7%, and we were comfortable with that, because we felt we would grow it back in a year's time frame.

We beat that time frame by a quarter; we actually grew it back in nine months. If you look at our other capital ratios, we are just a couple of basis points away from a 9% leverage, and even fewer basis points away from a 13% total capital. So the capital levels are rebuilding quickly, which we think will just allow us to support higher balance sheet, higher total assets of potential acquisitions without having to tap the capital markets to support the acquisition.

Okay. Thanks, guys.

(Operator Instructions) John Rodis, FIG Partners.

Good morning, guys. Nice quarter. I guess most of my questions were asked and answered; maybe just a couple thoughts, maybe if you could give on fee income line items. It looks like you saw a nice little increase in insurance, and then the other noninterest income line item dropped a little bit linked-quarter. Can you talk a little bit about those two items?

Mitch, do you want to talk a little bit about insurance, and then you and Jim talk a little bit about mortgage?

Yes. John, with the merger with M&F, we actually doubled the size of our insurance company -- actually more than doubled commissions, given that M&F had a higher percentage of property and casualty commissions. So the combined Company -- there was a run rate of about 1.8%, 1.9%. And you can see, this quarter we are up to $2 million.

Our business has continued to grow, growing existing accounts, developing new business. Bank integration with commercial RMs is playing a role with that as well. Of course, we did improve contingency income as well with the merger. And between the two companies, we utilized many of the same insurance companies. So that increased volume and experience is helping to drive contingency income.

Mitch, before Jim talks about mortgage, talk a little bit about wealth management and if that increased revenue.

Yes. You will notice -- I mean, we have hit a run rate of $2 million to $2.1 million a quarter in revenue. That growth, being driven, again, by adding new relationships, expanding existing relationships. Again, integration throughout commercial and private banking is helping in that arena. And we're seeing that growth across all lines, whether that be trust services, asset management, employee benefits, and brokerage services. We expect to continue to see that growth throughout the footprint.

John, before talking about mortgage, your comment about the other income dropping in the second quarter -- that was mostly attributable to contingency income from insurance. That all -- seasonally, well, it comes in in the first quarter. So that was expected there.

On the mortgage front, Robin mentioned in some of his prepared comments that our volumes were up pretty significantly. Our gain on sale was up, and our pipeline was up.

We are continuing to see that move forward into the third quarter, as some of the recent hires that he also mentioned -- the team that we lifted out in the Birmingham/Montgomery area -- start to build a pretty good pipeline and actually starting to close some of those loans. We are also focused on increasing and improving our retail origination teams, particularly in the Jackson market; the Atlanta market; the Huntsville market; and also possibly some other markets within our footprint, where we might have a banking presence.

Also, on the wholesale side we have hired some wholesale reps that are starting to build some good increases in clientele. And that's primarily focused in our four-state footprint as well as some of the contiguous states.

Okay. So the other income line item -- so it's about $1.5 million. Is that sort of a -- absent to contingent income, I guess, is that sort of a good level going forward?

Yes.

Okay. And then just one other question, Kevin, on the tax rate. It dipped a little bit in the second quarter. Is sort of that 29% to 29.5% level still a good run rate going forward?

John, this is Stuart. We made an adjustment to true-up some tax accruals in the second quarter. First quarter we were running a little over a 30% indicated tax rate, and, of course, we dropped below that in the second quarter due to some tax adjustments. Expect third-quarter to resume to about the 30% range.

Okay, 30%. Okay. Thanks, guys.

This concludes our question-and-answer session. I would like to turn the conference back over the management for any closing remarks.

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

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