Renasant Corp (RNST) 2016 Q4 法說會逐字稿

Good day and welcome to the Renasant Corporation 2016 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 Mr. John Oxford with Renasant. Please go ahead.

Thank you, Austin. Good morning and thank you for joining us for Renasant Corporation's 2016 fourth-quarter and year-end earnings webcast 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. 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 change 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, everybody, and thank you again for joining us today. We have a lot of exciting things to talk about, so let's get started with our financial results for the fourth quarter of 2016, which represented a strong finish to another great year. Results include our completion of the KeyWorth acquisition and approximately 16.2% annualized linked quarter legacy loan growth. Our diluted EPS of $0.55 per share represents some of our highest reported quarterly earnings, which were driven by the strong performance of our Renasant team members.

Looking at our performance during the fourth quarter of 2016, net income was up approximately 11.7% to $23.6 million, as compared to $21.2 million for the fourth quarter of 2015. Basic and diluted EPS were $0.56 and $0.55, respectively, as compared to $0.53 and $0.52, respectively, for the fourth quarter of 2015. During the current quarter, we recognized a one-time charge of a little over $2 million or $0.04 of after-tax impact on diluted EPS to effectively terminate four FDIC loss-share agreements. Excluding the after-tax impact of the FDIC termination, diluted EPS was $0.59. No such charge was incurred during the fourth quarter of 2015.

Our 2016 fourth-quarter turn on average tangible assets and return on average tangible equity were 1.22% and 14.90% respectively. Focusing on our balance sheet, total assets at year-end were approximately $8.70 billion as compared to approximately $7.92 billion at December 31, 2015. Our balance sheet and results of operations as and of for year ending December 31, 2016, include the impact of our acquisition of KeyWorth Bank, a Georgia State bank headquartered in Atlanta, Georgia, which was completed on April 1.

Total loans, which includes loans purchased in the Company's previous six acquisitions, collectively referred to as purchase loans, increased 14.52% to approximately $6.2 billion at December 31, 2016, as compared to $5.41 billion at December 31, 2015. Excluding purchase loans, loans grew 22.97% to $4.71 billion at December 31, 2016, as compared to $3.83 billion at December 31, 2015. Total deposits were $7.06 billion at December 31, 2016, as compared to $6.22 billion at December 31, 2015.

Our non-interest-bearing deposits averaged approximately $1.47 billion or 22% of average deposits for the year ended 2016, as compared to $1.13 billion or 20.29% of average deposits for the same period in 2015. Our cost of funds for the year ended December 31, 2016, was 39 basis points, as compared to 37 basis points for the same period in 2015.

Looking at our capital ratios at year-end, our tangible common equity ratio was 9%, our Tier 1 leverage capital ratio was 10.59%, our common equity Tier 1 risk-based capital ratio was 11.48%, and our Tier 1 risk-based capital ratio was 12.86%. Our total risk-based capital ratio ended the year at 15.03%.

Our revenue to our capital ratios are all in excess of regulatory minimums required to be classified as well capitalized.

Net interest income was $78 million for the fourth quarter of 2016 as compared to $72.4 million for the fourth quarter of 2015. Net interest margin was 4.24% for the fourth quarter of 2016 as compared to 4.33% for the fourth quarter of 2015.

Additional interest income recognized in connection with the acceleration of paydowns and payoffs of purchased loans increased net interest margin 25 basis points in the fourth quarter of 2016 as compared to 22 basis points in the same period in 2015. 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 2016, noninterest income was $30.1 million as compared to $31.4 million for the fourth quarter of 2015. Noninterest expense was $71.4 million for the fourth quarter of 2016 as compared to $70.7 million for the fourth quarter of 2015.

After considering these expenses, which are nonrecurring, our overall growth in noninterest expense for the fourth quarter as compared to the same period in the prior year, is primarily attributable to the addition of KeyWorth operations and strategic growth to the Company's infrastructure.

Looking at our credit quality metrics and trends, at December 31 of 2016, overall our credit quality metrics continue to remain at historic lows. Furthermore, we continue to experience improving trends in all our credit quality metrics, whether looking at the MPLs or MPAs, 30 to 89 day past dues and our internal watchlists. During the quarter, our charge-offs were elevated due to a charge-off resulting from the resolution of a prolonged problem credit. The resolution accounted for approximately 42% of our charge-offs for the quarter and was fully reserved in our allowance.

Although we experienced this uptick, our annualized charge-offs for 2016 were 12 basis points, well below the historical averages.

For the sake of time, I will refer you to our press release for specific numbers or ratios. To conclude the discussion on our earnings, we made significant achievements in 2016, and our financial results are a testament to our well-executed plan. Our diluted EPS of $2.17 per share represents some of the highest reported yearly earnings for the Company and were driven by the strong performance of our legacy company, coupled with the successful conversion of KeyWorth's operations.

Furthermore, the continued sustainability of this profitability is reflected in our return on average assets, excluding merge and conversion expenses, debt repayment penalties, and loss share termination charges on an after-tax basis of 1.16% for the quarter, marking the 11th consecutive quarter we have achieved greater than 1% return on average assets.

As we look to 2017, we believe that we are well-positioned to continue to improve on profitability and earnings growth, which, in turn, would generate shareholder value.

Now let's discuss our merger announcement with us -- and with us today from Metropolitan in Memphis, Tennessee, is Curt Gabardi, who is President and CEO of Metropolitan, and members of his team. Today, it is with great excitement and anticipation that we announce Renasant's merger -- definitive merger agreement where Metropolitan BancGroup, Inc. and Metropolitan Bank will be merged into Renasant Corporation and Renasant Bank. We believe this merger will continue to solidify Renasant as one of the strongest regional banks operating in the Southeast and will provide the Metropolitan team with significant other business lines, including insurance, mortgage and wealth management. This strategic merger between Renasant and Metropolitan will add to our leadership team and will add talented members to our Nashville and Memphis, Tennessee, and Jackson, Mississippi, teams.

Now I will turn the call over to Mitch Waycaster, our President and Chief Operating Officer, for a few comments. Mitch?

Thank you, Robin. We believe this merger will expand our market share, earnings growth and profitability and is expected to greatly benefit our current and future clients with expanded locations, services and products in the aforementioned markets. We believe Metropolitan is a growing bank with a proven track record of success and serving their clients and markets, especially within the commercial and private banking space, and we look forward to completing this merger.

On behalf of Renasant, we welcome Curt and the other team members to our Renasant family, and we look forward to serving Metropolitan's clients in the near future.

And, now, I will turn the call back over to Robin.

Thank you, Mitch. And with this being our 10th merger since July of 2004, we have a proven successful track record in our previous Mississippi, Tennessee, Alabama, and Georgia mergers, and a consistent transition process that will help mitigate integration risks during the Metropolitan merger. This acquisition accelerates Renasant's long-term earnings growth, provides us with you experienced banking team members, and quality bank branches, along with the opportunity to sell Renasant's broad array of banking and insurance products to Metropolitan's current client base. We are excited that Curt will join our executive management team as President and Chief Banking Officer with responsibilities (inaudible) mortgage banking, as well as other financial services. He will add considerable depth to our executive management team, and his banking knowledge will be a great benefit to our Company.

Now, I will introduce Curt Gabardi, President and CEO of Metropolitan, for a few comments. Curt?

Thank you, Robin. We are, indeed, very excited about joining with Renasant. The merger is strategically and culturally compelling to both companies. It is a very proud and successful young company with tremendous banking talent, and we look forward to the unique opportunity of leveraging Metropolitan's commercial banking niches with enhanced (inaudible) and specialized lines of business provided by Renasant.

So we are very excited for our associates, our clients and shareholders for the immediate long-term benefits and shareholder value creation opportunities we, indeed, believe this merger provides.

So I will turn it back to you, Robin, for closing comments.

Thank you, Curt. We welcome your leadership and look forward to this successful partnership as well.

Looking at the merger, excluding one-time transaction costs, the merger is expected to be immediately accretive to Renasant's estimated earnings, its approximately 2.9% diluted to project intangible book value, which is earned back within three years, and has an IRR, which exceeds our internal thresholds. We anticipate the merger to close early in the third quarter of 2017, and it is subject to Metropolitan shareholder approval, regulatory approval and other conditions that are set forth in the merger agreement.

Pursuant to the terms of the merger agreement, Metropolitan Bank will merge with and into Renasant Bank immediately after the merger of Metropolitan Bank Group with and into Renasant Corporation.

Now, Austin, we will be happy to take any questions about our 2016 fourth-quarter earnings or our merger announcement.

(Operator Instructions) Catherine Mealor, KBW.

Congrats on the deal. I wanted to start with just a question on your slide deck. In slide 8, you talk a little bit about some of the details with crossing $10 billion, and you mentioned that there is approximately $10 million in costs associated with crossing, which includes both Durbin and higher regulatory expenses. And then, you kind of list out a lot of infrastructure expenses that you have already built into the run rate.

And so I guess my question is, just looking at that $10 million number and how much of that $10 million is Durbin versus expenses, and then does that include some of these expenses that you have already built into your infrastructure, or is that $10 million incremental from the current run rate? Thanks.

I will let Kevin answer, Catherine. Catherine, Kevin. The $10 million, that is the incremental increase, and the majority of that -- 80% to 82% of that number is going to be Durbin related. The other 15% to 20% is going to be increased FDIC insurance premiums, as well as an increase in operational costs of finalizing either compliance programs, DFAST stress testing. That is what that remaining amount would relate to is the residual costs to go over.

As we detailed out on page 8, we have started this process in 2013, really tying it back to the M&F transaction acquisition when we went from $4 billion to $6 billion. That, at that time, is when we really started to prepare. We already had several programs in place from a risk management standpoint taking that, taking what we felt was a robust compliance program, and adding to that the ability to access information from not only a technological standpoint, but also from a human capital standpoint. We felt those were kind of our three pillars that we needed to focus on and invest in to prepare to go over $10 billion when we looked at it back in 2013. And as we discussed in previous calls, this has been an effort where we have been increasing and building in costs of going over $10 billion as we went from $6 billion up to this point.

So what we estimate in costs to go over $10 billion, there will be some costs, but it does not include the costs that we have occurred so far.

Got it. Okay. That is helpful. And then, just a way to think about the acquisition with and without the $10 billion mark, I mean, you mentioned also in the slide deck that you expect the deal to be accretive, including both cost savings and growth from the deal, and the capital raised, and this $10 million additional of costs. Can you talk a little bit about percentage accretion that you are thinking about with and without all these offsets, just so that we can think about what the deal looks like standalone, and then what the deal looks like in Renasant real-life views?

Sure. So, in evaluating Metropolitan, we looked at it as a standalone basis, but also including the cost of going over $10 billion. Now, I don't think it is necessarily fair to allocate $8 billion worth of growth and earnings and an impact that comes to that to one acquisition, but it was absolutely part of our mindset to ensure that, as we contemplated a transaction that took us [to] or above, that we had to consider the implications of our existing operations, as well as any target operations. Going over $10 billion, we will have a small impact on Metropolitan's income stream, but it is a very small number and it is baked into our projections as well.

In looking at EPS, including all the costs of going over $10 billion, it results in low single digit EPS accretion. On a standalone basis, excluding the cost of going over $10 billion, it basically doubles that number and puts us into the mid-single digit EPS accretion. So it has an impact, but what we felt was compelling with Metropolitan is their ability to grow our existing overlap, which would allow us to lever talent on both sides to maintain growth rates, as well as, on a combined basis, being able to overcome the one-time costs of going over $10 billion, it met all of our metrics. And we feel that going over, covering the costs with the ability to continue to grow profitably beyond going over $10 billion, was as important as just covering the cost of simply going over $10 billion.

Got it. That makes sense. Thank you very much.

Michael Rose, Raymond James.

Just a couple questions here, just going back to the deal. I appreciate all the comments you just gave. It answered a lot of my questions, but just wanted to see how this merger came about from a strategic point of view. Have you guys been talking for a long time, negotiating a deal directly, and then any sorts of products or special lines of business that they have that maybe can be folded into and expanded throughout the Renasant organization as we move forward?

Yes, Michael, a lot of things. We have had a lot of conversations over time. We think that this is kind of one of those cultural fits that everybody looks for, and we felt like this was an opportunity that we could, in fact, work this out along the way.

To get into any of the details or conversations, we will have to wait until we do our filings. We will have to kind of maybe evade that to some degree. But, let's talk a little bit about what we did not bake into the numbers that Kevin was just talking about with Catherine.

One of the things that we felt like is, number one, going back to Kevin's point, when we crossed over that $10 billion range with a merger, we needed to find a strategic partner that could, in fact, not only, through their present income stream, help us cover the cost of going over $10 billion, but that they have a growth engine that can, in fact, continue that growth. And as you look at it, we used a conservative estimate as to what the future growth for Metropolitan would be. Right now, they are looking at 18% to 20% compounded annual growth rate. We cut that back just to be safe. But, also, we did not take into consideration the fact that Metropolitan has a great team of commercial and private bankers that will be able to utilize a lot of our products that they don't currently have. We have a very robust wealth management team, which will complement their private banking group rather significantly, going forward. We have tremendous opportunities with our specialty commercial lines that they are not currently utilizing in the way of our asset-based lending group, our healthcare group, our SBA group. They have a good treasury management team, and we think that our treasury management products will fit well into what they are already doing, but would also enhance what the Metropolitan team is doing in that particular line.

So, as we look for the opportunities that we have as a combined company, we think that we can complement each other in many ways going forward and look forward to bringing on a very talented group of managing directors that Curt has assembled over time and have been with him for many years, even proceeding the time that they have been together at Metropolitan. So we think this is a great opportunity.

Did I lose you?

Yes. We lost you for a second. Can you hear us?

Yes, I can. Sorry about that. Robin, that is great color. That folds into my second question. You guys had, at least by my math, about 23% non-purchase loan growth this year. How should we think about the addition from Metropolitan as it relates to your combined -- your non-purchased loan growth as we move into next year with the addition of Metropolitan? I mean, do you think you guys can continue to grow at a high teens rate organically? And, obviously, I think metropolitan would bolster that growth outlook. Is that a good way to kind of think about initial expectations for 2017?

Yes. Going back to what I was saying a while ago, Michael, that was one of the -- we thought a real positive as we looked at Metropolitan as that partner to cross over $10 billion with, is they really looked like that they are or have the growth engine that puts us in a position to sustain that growth and, over time, enhance what our growth already is. We felt like, again, going back to another comment I didn't make in that respect, is that, obviously, the hold limit at Metropolitan is much lower than ours. By basically doubling their hold limit, there are opportunities that they may have with some clients that they have had to work out the participations with other banks in the past that they will be able to hold on their own now and only expand those relationships that we already have.

So, yes, we basically put as we budgeted with them, basically at the same run rate as we have for 2017, but we look forward to seeing an expansion of that in future years. And we really believe that they have the team that can, in fact, do that, as we get together and combine into one Renasant team.

Okay. That's helpful, Robin. Maybe just one last one for me. The drop in mortgage income was a little steeper than I would have expected. Can you just kind of give some of the puts and takes there and how we should think about 2017, just in light of the NBA's forecast for volumes? Thanks.

Yes, Michael. Let me let Jim Gray talk about that.

I got voted on to talk about mortgage. Yes, definitely, obviously, mortgage income was down in the fourth quarter. Part of it is seasonality. We do have a drop in mortgage income in the fourth quarter. Add to that almost 100 basis point increase in mortgage rates and not just the magnitude of the rate increase, but almost the immediacy of it right after the election I think kind of stunned a lot of our borrowers and kind of put everyone on hold to some extent. And it resulted in a pretty dramatic drop in our block volume, particularly after the election and particularly into December. And so that resulted in a mark-to-market adjustment on our top line of a negative $5.4 million, which reflected -- that accounted for a lot of the decline in the banking income -- mortgage banking income for the fourth quarter.

Looking at 2017, I can certainly address more detail on Q4, if you want to, but really talking about 2017, we are very -- although disappointed in the fourth quarter, we are very encouraged by what is going on already in 2017. We utilized this slowdown during the fourth quarter as an opportunity to amplify our recruiting efforts, which were already in effect, and we were able to bring on a producing manager, not just a nonproducing manager, but actual producing manager, in Jacksonville, Florida. He is onboard and actively recruiting down in the Jacksonville, Gainesville, and possibly over into the Orlando area. So we anticipate dramatically increasing our production in the northern Florida market.

We also brought on a producing manager in Destin, Florida. And the ones I am talking about now are already on board, and they are actively recruiting to bring on other production team members over the course of the first quarter and particularly weighted to the first half of the first quarter.

In addition to Destin, we brought on a producing manager and an originator in Mobile, Alabama, having an office there and added to our Auburn production team with a producing manager and two originators in Auburn, Alabama.

In addition to that, in Atlanta, we have hired -- we have a commitment from a production manager in our Buckhead market and should be coming on shortly and has targeted two or three to be bringing with him. Also have hired a production manager in our John's Creek office in Atlanta and has two targeted to come with him. We recently hired a production manager for Huntsville, Decatur, Alabama, and targeted producers to come on with him. We recently hired a production manager in Jackson, Mississippi, and have several targeted to come along with him.

So that is kind of where we are from a retail standpoint. So that, I think, accounts for right around nine or 10 that we have actually brought on board during the first two weeks of January. And we are seeing our daily locks or backup into the range they were prior to the election and the increase in rates, and headed back to that target range that we need to be in. This is even without the contributions of these that we talked about that we just hired.

Shifting gears just a minute to the wholesale side, we are actively recruiting some additional wholesale reps within our footprint and actually outside of our footprint in some contiguous markets. So, again, disappointed with the fourth-quarter results. The increase in rates definitely had an impact on us, but we are seeing the fruits of our labors in the recruiting arena and starting to bring those people on board and should be seeing the results of that shortly in our daily lot numbers.

Michael, it seems like fourth quarter is maybe a low [0.4] for the gains.

Yes. I would definitely say so.

Yes, and, again, as you hear what Jim was talking about what we are doing is, we realize that, with rates are going up, refi has been going down. So we are trying to replace that all with the retail type of mortgage originations over the course of 2017.

Great. I will hop out. Thanks for taking my questions.

John Rodis, FIG Partners.

Congrats on the deal. Maybe just back to mortgage for a quick second. Is a better way to look at the quarter to add back -- I am not saying it is one time, but the $5.4 million mark-to-market adjustment, is it better to add that back just to look at a good run rate, or is that not the right way to look at it?

I don't think you can completely add it back because it is a reflection of the decline in the top line that was a result of the reduction in daily lots. But the way mortgage accounting is done is you take all those gains on the front end, basically when the lock occurs. So, as that decrease in volume kind of rolls through our system, during the first quarter, those gains or reduction in gains have already been taken into account.

So, as we -- if we can continue increasing locks through the first quarter, I think we will see a more positive number on the pipeline mark to market. And then, as we close and sell loans, the income off of those will come in as well.

So generally speaking, that is correct. But I don't think you can totally -- you can't totally discount the mark to market for the fourth quarter.

John, this is Kevin. Just to add to what Jim mentioned, I don't know if you can necessarily back out the mark to market, but I do think one thing that may be worth considering is, really, if you look at third quarter, third quarter might have been abnormally high given the rate environment we found ourselves in, as well as the timing of the year. So it just amplified the impact as we got into the seasonality of mortgage, coupled with almost an immediate rise in interest rates. It makes the difference more pronounced, maybe. (technical difficulty)

If you take the whole year, it kind of -- the third and the fourth quarter kind of balanced each other out, and if you kind of took the average of those two quarters, you were more in line with what you were in the first and the second quarter.

Okay. That makes sense. Kevin, just a couple questions for you. Operating expenses came down. I am assuming that is probably partially driven by mortgage. I know last quarter you said sort of $73 million, I think, was sort of a good run rate. Can you just talk about expenses going forward without the acquisition?

Sure. So we did. Last quarter we guided to $73 million. If you look at our current run rate or if you look at what we reported, we were in the $71 million range, and that included the loss share terminations. So, if we back that out, our run rate really is in the $69 million range. Mortgage has an impact in that. With mortgage being down, just commissions and salaries and employee benefits tied to mortgage are down $2 million.

The other piece of it, really, is a lot of our -- is attributable to our efforts to focus on either driving more revenue off of our expenses or looking for ways to reduce expenses, whether that is operating expenses or in headcount or replacing somebody that may retire. If we just look at our salaries, our salary line item, salaries from Q4 compared to Q3 are down about $1 million. And, also, tied to that and really talking about the leverage that we are starting to see coming from the revenue side, if we look at net interest income and exclude all purchase accounting, just exclude the noise of purchase accounting, net interest income for Q4 compared to Q3 was up $2 million. And so we are starting to realize what we have talked about not only this year, but in previous years, of getting to the inflection point we are able to perceive the benefit of the leverage off of our expenses, as well as realize the benefit of our initiatives that reduce overall costs. And you are starting to see that in Q4.

As we look into Q1, as mortgage normalizes, I do expect expenses to come up maybe at a little bit quicker pace, but also revenues will come up as well. So, as far as guidance, I was still guide us towards that $72 million to $73 million run rate, but that also includes an assumption of mortgage income picking up in Q1.

Okay. That makes sense, Kevin. As far as back to the acquisition and low single digit EPS accretion, how much in yield accretion is built into that assumption of low single digit accretion?

Right now, very little. When we look at our acquisitions, we base the acquisitions off of -- really, the true operating income that the acquisition can provide, we try not to -- we do not make our decision off of purchase accounting or accretable yield or items that may tail off over time.

Now, as we get into purchase accounting and we finalize all of our assumptions closer to the date, that may change. Some of our assumptions, those will absolutely change. But we don't anticipate any changes of those assumptions to affect our EPS accretion, negatively affect our EPS accretion or extend our earnback. If anything, it would enhance both of those numbers. But to answer your question, we do not -- when we look at M&A, we do not build that M&A model off of purchase accounting.

Okay. So the low single digit accretion, basically, no yield accretion in there.

Correct.

And then, just staying on the yield accretion topic, I guess yield accretion for the year was around, what, $29.6 million. That was up from $20 million last quarter. And, obviously, you guys continue to benefit from the yearly payoff of loans or paydowns. Any sense for where that $29 million goes in 2017? I know it is a guess, but maybe your best guess.

Yes. So let's break that down into two components, really, for 2016, it was evenly split between just normal interest rate yield adjustment and then early paydowns. So acceleration of amortization, it is fairly evenly split between that $29 million. It is really hard to gauge what the acceleration will be. But, as we look out to next year, I would expect the normal accretion to be fairly stable as we get into the back half of this year. It might decline a little bit, but we are expecting it to be fairly stable. The accelerated accretion, again, it is hard to tell. It is more of a facts and circumstances and what happens during the quarter. But I would think that, for 2016, just based on our historical run rate, that we would be in the 60% to 70% range of what we recognize this year.

Okay.

On the non -- on the accelerated. Recapturing non-accretable difference.

2017 would be 60% to 70% of 2016.

Of the non-accretable difference, correct.

Yes. The $14.7 million. Okay.

Correct.

And then, Kevin, just one final question. On the tax rate, where we are at today, the effective tax rate for the quarter was, what, about 33%. What should we use going forward? And then, if we do get a reduction in the tax rate, do you think Renasant can -- if we get a 5 percentage point reduction or a 10 percentage reduction in the federal tax rate, do you think you can realize most of that reduction? That will be it for me.

Sure. So right now, we are not of the opinion that there is enough clarity as to where tax policy is going or what potential changes may occur in future rates. So we are still assuming current statutory rates, and believe that, as we look in 2017, our current effective tax rate is a good run rate. That 33% to 33.5% run rate.

To your question, if we do see a change in tax policy or the statutory tax rates, we have looked at that, and so it is a give and a take between deferred tax assets. If we do see a reduction, we will have impairment on our deferred tax assets. That is roughly, for every 5 percentage point movement in the tax rate, that creates about a $6 million impact to our deferred tax assets. But we would recoup all of that in the first year as a result of the lower effective tax rate. So any -- based on our projections, any impact to a deferred tax asset would be mitigated in the first year of receiving that benefit.

Okay. Makes sense. Thanks, Kevin.

Andy Stapp, Hilliard Lyons.

Quick question on Metropolitan -- actually, a couple of them. The CDI, will it be advertised straight line or accelerated?

Andy, right now, we are assuming straight line. As we get into an actual calculation and look at the results, that may change. But, right now, for our assumption, we are assuming 10 years straight line.

Okay. And any thoughts on when the conversion might occur?

We are assuming the third quarter.

Okay. And then, the cost saves at 37.5% is higher than what we typically see. Can you just talk about the drivers that gives you confidence that you can achieve these expense reductions?

Sure. Andy, I will start it off, and I will let Mitch and Robin provide any additional color. Probably a little bit higher than typically what we would model. We typically model more in the 25% range. But what is causing a little bit of an increase here, really, is primarily the overlapping markets, and where that cost savings is being generated is occupancy expense, the occupancy and equipment. So I think four of their locations are within a mile of one of our existing branches, or one of our locations is within a mile -- four of our locations are within a mile of their location. And so that -- just the redundant occupancy expense and the elimination of that would cause an elevated assumption as opposed to previous acquisitions.

Robin, Mitch, any comments on the (multiple speakers)?

No, I think the big differential there, as opposed to looking at it from a people standpoint, that run is probably pretty consistent. But the fact that we overlap in all three markets: the Jackson MSA, the Memphis MSA, and the national MSA. There are opportunities for consolidation of physical facilities that we normally would not see in a situation like this.

(inaudible - microphone inaccessible)

I will just add to that, and nothing really to add to the cost saves. But, as we always do, we will begin to plan carefully an integration where we focus on the tremendous talent that is coming over joining ours and to minimize any customer impact to make sure this is a seamless transition.

Okay. All right. Great. And just another question on mortgage banking, the Q4 mortgage banking. Can you give us a breakout of some of the components such as gain on sales, servicing income, et cetera?

Sure. The servicing income for the quarter was right at $1 million. Of course, most of the amortization was pretty close to that. So net of about $100,000 in net servicing income after amortization.

I kind of gave you the breakout on the pipeline adjustment. The overall total mark to market was a negative $4.3 million. Negative $5.4 million of that was related to the pipeline. Mortgage income, which includes mortgage admin fees and origination, was $6.5 million. And then, total gain on sale, which includes the MSR, would be $6.3 million.

Okay. Great.

Andy, one thing I will mention on the mortgage servicing rights, as a reminder, we account for our mortgage servicing rights as the lower cost to market. And so any market -- any change in value related to mortgage servicing rights is really not reflective in our revenue or our expenses, only to the extent that we have impairment. And so the numbers Jim gave really are the servicing income less the cost of service. It does not include any adjustments for valuation.

Okay. Great. Thanks.

Matt Olney, Stephens.

I want to go back to the net interest margin, and we have seen a steeping of the yield curve over the last few months. Can you speak to if there was any impact of the steepening yield curve in the Q4 results and any change in the outlook for the margin, given the steep yield curve? Thanks.

So yes, a couple of things with margin. And I guess what I would say is, where we started the quarter and where we end the quarter, not only from the shape of the curve, but maybe even mindset, is different.

So, as far as positive benefit to the margin, as a result of the yield curve, there is some, but I am not sure it is very pronounced. I will say we did see some positive signs that we see in our margin is -- we did see margin coming in relatively flat. Core margin -- margin excluding all the purchase accounting coming in relatively flat, if not up a basis point or two.

A couple of things that drove that. In Q4 we had a full quarter impact of the sub debt compared to half a quarter. So that put pressure on the margin, but even though we had that pressure and that headwind, our margin was still flat to up. We are seeing new and renewed loan pricing. We are seeing an uptick in new and renewed loan pricing. That is having a positive impact on margin.

So I would say, as far as outlook, I believe we might be at a point where, with the shape of the yield curve, with the efforts of our lenders, our regional presidents, to focus not only on the growth, but also the yields, and in managing interest rate risk, that we are starting to see signs that we may have plateaued on margin compression with the opportunity in the future to start seeing modest increases in margin expansion. If we continue to carry on what we saw from November 9 through the end of the quarter.

Okay. That's helpful. And, Kevin, if I think about that commentary and your commentary on expenses, if I roll that into the efficiency ratio, can you talk more about it in that context as it relates to your goal of getting that below 60%? And then, of course, once you layer on Metropolitan, what the impact of that would be.

So just layering on of Metropolitan will not -- will assist. It will not hinder us from our goal of going below 60%. They run at an efficiency ratio of about 70%. Combined cost saves would bring just that number -- I am not saying all the cost saves are going to come on their side, but it brings their number well below 60%. So they will assist in that effort.

But just to your point about the leverage, just the expense -- the revenue leverage that we have on our expenses, that maybe wasn't as pronounced or evident in 2016 because throughout 2016, we saw the shape of the yield curve. With the yield curve being flat, we saw margin compression every quarter. And as we had double-digit loan growth, the impact in net interest income wasn't as pronounced as it would have been if we wouldn't have been fighting the margin compression. So, if we enter an environment with a steeper yield curve and maintain that growth, then the compounding effect on net interest income, I think, will be more than evident to see which will absolutely have a positive impact on our efficiency ratio.

Okay. All right. That's very helpful. Thanks for answering my questions, and congrats on the deal.

(Operator Instructions) Andy Stapp, Hilliard Lyons.

I accidentally cut myself off. So if I am redundant, just let me know. I can look at the transcript. But just wanted some color on the linked quarter increase in the core margin.

Yes. Matt only just asked that question. Let me give you a couple of comments on it, and I will try not to be too redundant. But what we did see -- so we are starting to see positive signs in our margin. Really attributable to a couple of things. One, a continued focus and effort on behalf of -- just throughout the Company to really focus on yield fees and revenue generation off of the loan growth. And then, as we got into -- or as we ended Q4, just the shape of the yield curve, is starting to help provide some benefit with that initiative.

Those two items really are what are helping what you see when it comes to the core margin of it flatlining and starting to see signs of it increasing.

Okay. And so that -- if it is -- 3.81% is a good starting point. I think, if memory is correct, that is what your core Q4 margin was. That is a good starting point to build off of?

Yes.

Okay. And what do you expect the impact of the loss share termination to be on the identification asset amortization?

Andy, let me go back to that core margin. That core margin would be more of a 3.70%.

3.70%. Okay. I thought it may be (multiple speakers).

So the impact of the loss share, we incurred a $2 million charge to terminate. Part of our rationale to do that was we felt that, as we projected out recoveries, that it would be more beneficial to us to terminate and receive full benefit of those recoveries and then, also, not have the compliance costs, the rigor of the exam, to maintain the loss share coverage on really what was now down to the single-family portfolio to begin with. Commercial loss share had already expired.

So we just felt it was the right time as we looked at our recoveries, and looking at a cost-benefit at the $2 million charge, we felt that we would recover that in a 12- to 18-month period. I tell you with experience that we have had since termination, we are going to be on the 12-month side of that range, if not within 12 months.

Okay. That gives me what I need now. Thanks.

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

Thank you, Austin. I want to thank everybody for joining us today. Once again, we are looking forward to visiting with you again in our first-quarter 2017 conference call.

Thanks, everyone.

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