Renasant Corp (RNST) 2014 Q4 法說會逐字稿

Good morning and welcome to the Renasant Corporation's 2014 fourth-quarter and year-end conference call. (Operator Instructions) Please note this event is being recorded.

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

Thank you, Zelda. Good morning and thank you for joining us for Renasant Corporation's 2014 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 the 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 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. Robin?

Thank you, John. Good morning, everyone, and thank you for joining us today. Our financial results for the fourth quarter of 2014 represent a strong finish to a great year.

During 2014, we grew non-acquired loans over 13%, increased our net interest margin, enhance efficiency, and also improved the credit risk of our portfolio. All of these accomplishments resulted in record earnings and superior returns on profitability metrics. As we look to 2015, we believe we are well positioned to continue to improve on profitability and earnings growth, which in turn will generate shareholder value.

Looking at our performance during the fourth quarter of 2014, net income was up approximately 39% to $15.6 million, as compared to $11.3 million for the fourth quarter of 2013. Basic and diluted earnings per share were $0.49, as compared to $0.36 for the fourth quarter of 2013.

Our return on average assets for this quarter was 1.08%, as compared to 78 basis points for the same period in 2013. Our return on average equity for the fourth quarter of 2014 was 8.72% compared to 6.71% for the same period in 2013. Our Q4 2014 return on average tangible assets and return on average tangible equity were 1.20% and 15.89%.

In December of 2014, we announced a definitive merger agreement to acquire in an all-stock merger Heritage Financial Group, Inc., or Heritage, a bank holding company headquartered in Albany, Georgia, and the parent of HeritageBank of the South. During the fourth quarter of 2014, we incurred merger expenses of approximately $500,000 or $0.01 in EPS, related to this Heritage merger.

Focusing on our balance sheet, total assets at year-end were approximately $5.80 billion, as compared to approximately $5.75 billion at December 31 of 2013. Total loans, including loans acquired due to the Company's acquisition of First M&F in the third quarter of 2013 or in FDIC-assisted transactions -- collectively referred to as acquired loans -- increased to approximately $3.99 billion at December 31 of 2014, as compared to $3.88 billion at December 31 of 2013.

Excluding acquired loans, loans grew over 13% to $3.27 billion, as compared to $2.89 million at December 31 of 2013. On a linked-quarter basis, non-acquired loans increased $102 million or 13% on an annualized basis.

Breaking down year-over-year non-acquired loan growth by market, our Alabama markets grew loans by 7.4% and have now grown loans 16 of the last 17 quarters. Our Mississippi markets increased loans by 15.9%.

Our Tennessee markets, which have grown loans for nine consecutive quarters, grew loans by 11%. In Georgia, we grew noncovered loans by $66 million, while covered loans decreased $38.6 million, giving us an increase of 7.6% of total loans and a 36.4% increase of noncovered loans for 2014.

Before we move away from our loan discussion, let me address a topic which has come into focus recently, which is our exposure to the energy sector. After review, we have virtually no exposure directly or indirectly to which the fluctuations in the price of oil would negatively impact.

We have analyzed our loan and investment portfolio and have identified only one related loan to a company that provides components to the oil and gas exploration sector. After stressing the cash flows, we do not have any concern about their ability to service their debt today or in the future. Given our lack of exposure, we view the drop in oil and related energy cost to actually be a positive benefit to our clients.

I'm going to let Kevin Chapman finish the rest of it.

Yes. Just continuing to focus on the balance sheet, as we look at total deposits, total deposits remained at $4.8 billion. And our non-interest-bearing deposits averaged approximately $937 million for the quarter, which represents 19.6% of our total average deposits, as compared to $889 million or 18.4% of average deposits for Q4 2013. Our cost of funds dropped 6 basis points and was 45 basis points for the fourth quarter of 2014, as compared to 51 basis points for the same quarter in 2013.

Looking at our capital ratios at year-end our TCE ratio, or tangible common equity ratio, was 7.52%. Tier 1 leverage capital was 9.53%; Tier 1 risk-based capital was 12.45%; and our total capital ratio was 13.54%. All of our regulatory capital ratios are in excess of regulatory minimums required to be classified as well capitalized.

Before leaving the topic of capital, I'd like to highlight the progress we've made in regenerating the capital we spent back in the third quarter of 2013 with the First M&F merger. As you'll remember, at the time of closing our TCE ratio dropped to approximately 6.5%, while our leverage ratio dropped to 8.7% and total capital declined to 12.5%. Over the last 15 months, we have grown the TCE ratio over 100 basis points and total capital ratio 100 basis points as well.

Net interest income was $50 million for the fourth quarter of 2014, as compared to $50.7 million for Q4 of 2013. Net interest margin was 4.09%, as compared to 4.16% for the same period in 2013.

Additional interest income we recognized in connection with the acceleration of paydowns and payoffs from the acquired loan portfolios increased net interest margin 11 basis points for the fourth quarter of 2014, as compared to 16 basis points in the fourth quarter of 2013.

Our noninterest income is derived from diverse lines of businesses, which primarily consist of mortgage, wealth management, and insurance revenues, along with income from deposit and loan products. For the fourth quarter of 2014, noninterest income increased to $20 million, as compared to $18.3 million for the same period in 2013.

Noninterest expenses were $46 million for the fourth quarter of 2014, as compared to $51.1 million for the fourth quarter of 2013. The reduction in noninterest expenses for the fourth quarter of 2014 compared to the same period in 2013 is primarily due to reductions of salaries and employee benefits and other real estate expenses, as well as a reduction in merger-related expenses.

In the fourth quarter of 2014, we recognized approximately $500,000 related to the pending Heritage merger, and in the fourth quarter of 2013, we recognized $1.9 million related to the First M&F acquisition, which closed during the third quarter of 2013.

Looking at our credit quality metrics and trends, total nonperforming loans were $55.1 million and OREO was $34.5 million at year-end. Our nonperforming loans and OREO acquired either through the First M&F merger or in connection with FDIC-assisted transactions, which we collectively refer to as acquired nonperforming loans, were $34.9 million and $17.4 million, respectively, at 12/31/14. Since acquired nonperforming assets are recorded at fair value at the time of acquisition and are subject to loss share agreements with the FDIC, which significantly mitigates our actual loss, the remaining information on nonperforming loans, OREO, and the related asset quality ratios exclude these acquired nonperforming assets.

Nonperforming assets decreased 20.17% to $37.3 million at year-end, as compared to $46.7 million at year-end of 2013. Nonperforming loans, which are those loans that are 90 days or more past due or on nonaccrual, were $20.2 million as compared to $19.2 million at 12/31/13.

Early-stage delinquencies, or loans 30 to 89 days past due as a percentage of total loans, were 32 basis points at December 31, 2014. The allowance for loan losses as a percentage of loans was 1.29% at year-end, as compared to 1.65% at 12/31/13. Our coverage ratio, or the allowance for loan loss as a percentage of nonperforming loans, decreased to 209% as compared to 249% at 12/31 of 2013.

Other real estate owned decreased 38% to $17.1 million, as compared to $27.5 million at the end of 2013. We continued to proactively market the properties held in OREO, as we sold approximately $28.8 million of OREO during 2014, with $6.1 million of sales occurring during the fourth quarter.

For the fourth quarter of 2014, we recorded a provision for loan losses of $1.1 million, compared to $2 million for the fourth quarter of 2013. And for the fourth quarter of 2014, net charge-offs were $3.3 million as compared to $584,000 in the same period of last year. Annualized net charge-offs as a percentage of loans for the fourth quarter of 2014 were 33 basis points compared to 6 basis points for the same period last year.

This concludes our prepared remarks, and I'll now turn the call back over to Zelda for any questions.

(Operator Instructions) Catherine Mealor, KBW.

Good morning, everyone. I want to see if we could dig into the expense decline a little bit. We saw this quarter the salaries were down, as you mentioned, Kevin, about $2 million linked-quarter. Is there anything one-time going on in that number, or is this $27 million a good base from which to grow, moving into 2015?

Yes, just specific to salaries and employee benefits, the $27 million does include, call it one-time adjustments. It's really commission costs or commission expense associated with production, specifically mortgage and insurance production.

If you look at Q4 commissions compared to Q3 commissions, they are down about $800,000, $900,000. Really what that reflects, it ties in some to the lack of revenue that we had up in noninterest income in those two areas. So it's really just a variable cost depending on the revenue generated, and so it will fluctuate.

So the run rate going forward would be in the $28 million range on salaries and employee benefits, as far as a good run rate going forward.

Okay, perfect. Then on the fees, clearly lower than your really strong third quarter. I guess maybe two questions with that is: any cyclicality that you saw happening this quarter in your fee line item? And can you remind us, everybody, the past couple quarters how hedging has impacted the mortgage line and if we saw any of that drive the linked-quarter decline in the mortgage line item? Thanks.

Yes. No, so talking about fee income, a couple of items in fee income that I think is worth noting. Let's first talk about service charges on deposits. That line item was down a couple of hundred thousand dollars, call it $200,000.

That's really attributable to the number of billable days. In Q3 we had 64 billable days; Q4 we had 62 billable days. If we look at our service charges per billable day, they were the same.

We just didn't have the opportunity to bill that same rate for the same amount of time that we did in Q3. So the service charges we're really just a timing aspect.

When we look at mortgage income, mortgage income compared to Q4 of 2013 was up significantly. It was up 40%.

It did pull back from Q3 levels, so it was slightly off. And that's reflective not only in the gains on settled mortgage loans but also some of the pullback in fees and commissions on loans.

Origination fees from our mortgage banking division does flow through that line item. So overall, mortgage income was down compared to Q3, but it was still what we view as a good month for mortgage or good quarter for mortgage, particularly compared to -- if you compare to Q4 of 2013.

I will say that if you look at our pipeline at the end of December, our pipeline for December was in the $40 million to $45 million range in mortgage. I'll tell you today that pipeline is in the $70 million to $75 million range.

Our mortgage group has had a strong January. Really, if we look at mortgage on a month-by-month basis, in Q4 we had strong October and November, and December tailed off a little bit around the holiday season.

But as we look at our pipeline, as we look at our production in the first 20 so days of this month, it has been strong production. I think they been averaging about $4 million to $5 million of interest rate locks per day.

So we expect Q1 to have a rebound on the mortgage business. And then some of the cyclicality in the fee income I discussed, in NSF fees being more billable days, and then the mortgage income being a slight pullback around December due to some holiday activity.

Okay, great. Very helpful, Kevin. Thank you.

Emlen Harmon, Jefferies.

Morning, guys. Just to quickly move back to the expense question, Kevin, you talked about that running -- the comp line specifically running around $28 million on a quarterly basis going forward. That is a little better I guess than we seen; over the course of the last year here that's tended to be in excess of $29 million.

I guess, was there any lingering expenses for M&F? Or just what's casting a lower run rate for that expense line going forward?

Just overall, the efficiency initiatives that we have -- some of our biggest efficiencies, quite frankly, they're going to come out of our largest expense line item, which is salaries and employee benefits. So starting to see some of that.

I discussed the commissions, as well as just getting future incentive accrual run rates correct. So not so much overhang coming out of M&F.

If you look at our expenses in fourth quarter of 2013, they're at that $29 million, $30 million range on salaries and employee benefits. That would include a large portion of M&F. We achieved the majority of those cost saves in Q1.

But really what the run rate in that $28 million range is going to be the effect realizing efficiencies in our largest expense line item.

Got it. Thank you. That's helpful. Then second question for me, starting the year off here with the 10-year down around 40 basis points so far in the year, could you talk a little bit about what you have due coming in the securities book? Just what re-investments are required near term, and how the 10-year is affecting your outlook for the NIM as we look out over 2015.

Yes. Just to give a general answer to that, and then I'm going to turn it over to Sam Potts, our Chief Investment Officer, to talk specific about what he's seeing on reinvestment rates. But, yes; I mean, the 10-year dropping below 2% -- I think we're sitting about a 1.75%, 1.80% right now -- puts pressure on the ability to reinvest that cash. And I guess also the forecast of when rates will move and which end of the curve will move seems to be in a constant state of discussion, which could impact our strategies for reinvesting excess cash as well.

But I'll turn it over to Sam to talk specifically about what we're seeing as far as new purchases.

Right. If you look at cash flow coming in for 2015, we expect to have approximately $10 million a month rolling out of the investment portfolio at a yield of just over 2.5%. If you look at purchases we made in the fourth quarter, the weighted average rate on new purchases was just over 2%.

So there is a slight give-up in terms of yield, so we do expect some pressure, downward pressure on the overall yield of the investment portfolio. If you average that out over the next year, you're looking at a 10 or so basis point squeeze on the overall yield of the portfolio, given where rates are today.

We look at both investing on the short end for cash flow and then going out on the curve, buying some munis for the yield. That's the balanced approach that we have taken and will continue to take in 2015.

Got it. So that 10 basis point squeeze on the overall yield of the portfolio, you're talking about the securities portfolio specifically and not the overall earning asset yield?

That is correct, yes.

Got it. All right. Perfect. Thank you very much, guys. Appreciate it.

Michael Rose, Raymond James.

Hey, good morning, guys. How are you? Just wanted to get a sense for where the pipeline stood at the end of the quarter and any sort of color by market. And I'm sorry if I missed it; I hopped on late. Thanks.

Yes, Mitch Waycaster will cover that.

Michael, the 30-day loan pipeline currently stands at $80 million. Breaking that down by state, 26% would be in Tennessee, 18% in Alabama, 20% in Georgia, and 36% in Mississippi.

Approximately 10% of the pipeline that's included in that Georgia total is ABL. And this pipeline should result in approximately $30 million in growth and non-acquired loans within 30 days.

If you compare the current pipeline back to the same period last year, we were at $65 million, and at $82 million in the last quarter. So we did not experience the decrease we typically see in the first quarter.

At $80 million we continue to experience a strong pipeline as we enter the first quarter and expect continued healthy loan growth.

Okay, that's helpful. Then as a follow-up, wanted to get a sense from when you think the M&F portfolio will begin to stabilize. And then as we move forward and we add in the new deal and the loans there, how should we think about the reserve and provisioning trends? Because once you layer in the new deal it's obviously going to bring down that reserve to total loans, and I just want to get -- or maybe where that bottoms.

And then maybe how you think about, as those loans migrate to, I guess, the core portfolio over time. And how should we think about that ABS reserve ratio? Thanks.

Mitch, you want to talk about M&F first?

Yes. Michael, as far as the payoffs and paydowns, as far as M&L's in the prior quarter, in large part it was through amortization. Just ordinary course of business.

We continued to see resolution of problem credits, a church portfolio that we originally had indicated that we would allow to run off. We continued to see some there. But by all indications it appears the pace of payoffs should begin to diminish going forward.

Michael, this is Kevin. Just going back to your question about the allowance and provisioning, both today and as well as looking at when Heritage comes on: at time of acquisition, Heritage will be -- we will classify and account for the Heritage loans similar to what we do with M&F. They will be an acquired bucket. The reason we do that is so that we can keep our credit quality ratios comparable on what the allowance is assigned to, which is the non-acquired loans.

So just looking at that line item, I think our allowance to loans ended the year at about a 129%. That could incrementally come down as new loan growth outpaces provisioning. We're provisioning about 65 basis to 70 basis points on new production, and so that number can come down.

Where the absolute bottom is, it's hard to tell. We look at a variety of metrics and internal calculations to see what our allowance needs are.

What we are experiencing are improving trends in all of our credit quality metrics, whether they are NPLs, NPLs to loans. Our internal watchlist continues to decline. We see upgrades and releases of allowance needs periodically throughout the year, throughout the quarters, throughout the months.

So we look at all those factors combined in determining what our allowance needs are. And as those credit quality trends improve, it does become harder to over-reserve for loan growth or for exposure.

Okay. That's helpful. Thanks for the color and thanks for taking my questions.

David Bishop, Drexel Hamilton.

Hey, good morning, gentlemen. Could you update us in terms of your positioning from an interest rate risk perspective? Exposure and sensitivity to -- if we do see some movement on the short end of the curve, maybe how sensitive you are there.

What are the -- how far do they have to move to penetrate floors and the like? Just curious if there's been any significant movement from quarter to quarter.

Yes, there really hasn't been any significant movement on the total Company. We still maintain a position of being rate-neutral and slightly asset-sensitive.

We are incrementally trying to embed more asset sensitivity into the balance sheet and not trying to do -- not trying to make wholesale changes in making a bet that rates will absolutely rise. We would've been proven wrong numerous times over the last seven years if we made that bet.

But what -- so some of the things we have been doing is continue to focus in on our funding mix, to have more stable funding mix, less reliance on wholesale funds that are more volatile in a rates-up or rates-down scenario.

If you look at our new and renewed loans for the quarter, our new and renewed rates came in at around a 430. That's about 20 basis points lower than where we have seen in the past several quarters, at a 450 rate. In the prior quarters at a 450 rate on new and renewed; this Q4 we were at around a 430.

However, our mix of fixed and variable was more 50/50 in Q4. In the past it had been about 40% variable, 60% fixed. So we saw a more favorable mix from an interest rate risk standpoint; it did result in about a 30 basis point lower yield on the absolute new and renewed rate for Q4.

And actually, that new and renewed rate is what led somewhat to a couple of basis points of margin compression if you back out the additional income from M&F. It's really just the repricing of new and renewed at a slightly lower rate than what we'd experienced in the past.

But overall from an interest rate risk perspective, we're still maintaining a rate-neutral position. If you look at our variable rate loans, about 80% of the loans are either at a floor or have no floor. So if the short-term end of the -- if short-term rates move then those will be variable rates.

You take that other 20%, the majority of that becomes variable rate within the first 100 basis points movement of the short end of the curve.

Great. Thank you.

Matthew Olney, Stephens.

Hey, thanks; good morning, guys. Hey, I want to go back to fee income. Kevin, I think you already addressed the impact of a number of items like service charges and the insurance and the mortgage.

Anything else unusual beyond that? Whether it's mortgage servicing, interchange, or anything beyond those items that you've already mentioned.

No, we really didn't have much of an impact from hedging or servicing. In our servicing portfolio, we account for that, the low of cost to market, with the movement in rates.

We did not have an impairment on that servicing. So it wasn't a servicing issue that was weighing on mortgage or mortgage income.

When we look at debit card income, debit card income was flat in Q4 compared to Q3. I'll be honest with you: that is a little bit of an anomaly. We typically see growth in Q4 compared to Q3.

But our transaction counts compared to -- between Q4 and Q3 were the same, roughly the same. They were less than a percentage off; and that's about how much we grew debit card income was about a percentage point.

To put that into perspective, we had been growing that line item about 4% to 5% per quarter. So we're digging into it; we don't know if there's been a behavior change in our customers with the usage of their debit cards. But that number did stick out a little bit because it was flattish.

Then outside of that, I can't think of -- I'm not aware of anything, any anomalies in noninterest income other than the billable days on NSF fees. If we had two more days, we'd have been flat on service charges. And then the uptick that we are seeing in January in the mortgage group, we're seeing a stronger pipeline build coming out of the mortgage group.

All right, that's helpful. Then going back to discussion on the allowance and provision. In the fourth quarter, a pretty light provision. Was that a result of anything specific in terms of individual credits? Or is it just a general improvement of the overall loan portfolio?

Overall loan portfolio. We really just provided for new loan growth is what we did.

It was really just -- our provisioning was overall improvement. The charge-offs for the past couple of quarters, we've been doing some cleanup on some loans, and just cleaning up some of our impaired loans in our allowance -- in our risk rating. Just cleaning up some impaired loans, and that's what we been doing in Q3 and Q4.

Okay. Then lastly, Kevin, any thoughts on tax rate going forward?

Yes. Tax rate in Q4 I think was right at 32%. In Q3, it was 31%.

I think a good tax rate as far as in 2015 goes is going to be in that 31% to 32% range. We've been trying on a year-to-date basis to get that around 30% to 31%, so that's why it was a little bit higher in Q3, Q4.

But as we look at 2015, it's going to remain in that 31%, 32% range. It's really just a function of, as we've grown pretax income, that income has been grown in taxable income sources. It's not coming through munis or other nontaxable loans, and so the effective tax rate as we grow pretax income is creeping up on us.

Got it. Thanks, guys.

Andy Stapp, Hilliard Lyons.

Good morning. Do you have the Q4 yield on loans?

Yes, I do. Give me one second. Andy, the growth for the absolute yield on loans was around -- is approximately a 490. If we back out the purchase accounting adjustments it was more -- the additional income from the accelerated accretion, it was more in the 475 range.

Okay, great.

Andy, one thing I would like to mention on loans -- and this is attributable to net interest income. If we look, our net interest income was down about $300,000 compared to Q3.

And one thing I think is important to note about that is, if you look at our loan growth from Q3 to Q4, we grew loans $30 million. One thing I want to point out is about $25 million of that growth came in the month of December. So we have the average -- we didn't have the ability to earn the average yield on that for two-thirds of the quarter.

So as we look at Q1, we are expecting ramp-up in net interest income just with the -- just having a higher average balance as we start the year. But there was some fluctuation in the net interest income just due to the timing of that growth. We did not have it equally or pro-ratably for the entire quarter.

Yes, that's helpful. Thank you. Average earning assets have been down for three consecutive quarters. Do you think you can reverse this trend?

Short answer is yes. Where we have been shrinking earning assets has really been in our excess liquidity. If you look at our mix of earning assets, we are increasing our proportion of loans as a percentage of our earning asset; and what we've been ebbing and flowing has just been excess cash.

But I still have to say, earning assets will be growing as we enter Q1 because of the buildup of seasonal public fund money. You will see earning assets increase.

But again, we keep a lot of that on the balance sheet in short-term assets or just in cash for liquidity purposes, because it will start flowing back out in Q2 and bottom out in Q3. But what we focus on is our percentage of loans -- our loans as a percentage of earning assets, which has been steadily growing.

Okay. All right, thanks. That's all I had. Rest of my questions were answered.

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

Thanks, everybody, for your time and interest today in Renasant Corporation. And we're looking forward to speaking with you again in the near future.

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