Renasant's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.22.14 | About: Renasant Corporation (RNST)

Renasant Corporation (NASDAQ:RNST)

Q4 2013 Earnings Call

January 22, 2014 10:00 a.m. ET

Executives

John Oxford - Vice President, Director of External Affairs

E. Robinson McGraw - Chairman and CEO

Kevin Chapman - EVP, Chief Financial Officer

C. Mitchell Waycaster - Executive Vice President

James Gray - Executive Vice President

Analysts

Catherine Mealor – KBW

Michael Rose - Raymond James

Matt Olney - Stephens Inc.

Andrew Stapp - Merion Capital Group

Kevin Fitzsimmons - Sandler O'Neill

Operator

Good morning, and welcome to the Renasant Corporation 2013 Fourth Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

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

John Oxford

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

Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in forward-looking statements. Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

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

E. Robinson McGraw

Thank you, John. Good morning everyone. Thank you for joining us today. During the fourth quarter of 2013, we experienced a strong finish to a great year. Financial highlights for the full year of ’13 as compared to ’12 include a 26% increase in net income, a 38% increase in loans, and an increase in net interest margin and continued improvement to our credit risk profile.

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

Looking at performance during the fourth quarter of ’13, net income was up approximately 55% to $11.3 million as compared to $7.3 million for the fourth quarter of ’12. Basic and diluted EPS were $0.36 as compared to $0.29 for the fourth quarter of ’12. This quarter’s results included a $1.3 million or $0.04 per share after-tax merger expenses associated with M&F transaction. Excluding these merger expenses, net income was $12.6 million or $0.40 per share.

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

Our return on average assets for the quarter were 78 basis points or 87 basis points, excluding merger expense, as compared to 70 basis points for the same period in ’12. Our return on equity for Q4 ’13 was 6.71% or 7.51% excluding merger expense, as compared to 5.80% for the same period in ’12.

Total deposits, which include deposits acquired from M&F, were $4.8 billion as compared to $3.4 billion at December 31 of ’12. Our non-interest bearing deposits averaged approximately $888 million or 18.4% of average deposits as compared to $564 million or 16.5% of average deposits for Q4 of ’12.

Our cost of funds was 51 basis points as compared to 64 basis points for the same quarter in ’12. Total loans, which include loans acquired in either the M&F merger or in connection with our FDIC assisted transactions, increased 38.1% to approximately $3.9 billion as compared to $2.8 billion for December 31 of ’12.

Excluding acquired loans, loans grew over 12% to $2.89 billion as compared to $2.57 billion at December 31 of ’12. On a linked quarter basis, non-acquired loans increased $92 million or 13% on an annualized basis.

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

Total assets were approximately $5.746 billion as compared to approximately $4.182 billion at December 31 of ’12.

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

In addition, during ‘13, we maintained our annual dividend of $0.68, which at year end equated to a dividend yield of approximately 2.16%.

Net interest income was $50.7 million for the quarter, as compared to $34 million for Q4 ‘12. Net interest margin was 4.15%, as compared to 3.97% for the same period in ‘12.

Our noninterest income is derived from diverse lines of business which primarily consist of mortgage, wealth management and insurance revenue sources along with income from deposit and loan products. For the fourth quarter of ‘13, noninterest income increased to $18.3 million, as compared to $17.9 million for the same period in ‘12.

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

Although we experienced a decrease in mortgage volume during the quarter, we have seen a significant increase in daily lock [ph] volume during the first quarter of ‘14.

Non-interest expense was $51.1 million for the fourth quarter of ‘13, as compared to $38.3 million for the fourth quarter of ‘12. This increase in noninterest expense was primarily due to the inclusion of M&F's operational costs and one-time merger expenses associated with our fourth quarter 2013 conversion of M&F Bank. During the fourth quarter of ‘13, the company's salaries and employee benefits reflect a full quarter of M&F's operations.

The company’s non-interest expense for the fourth quarter of ’13 also includes $1.9 million in expenses related to the M&F merger.

At December 31, ‘13, total nonperforming loans were $76.5 million and OREO was $52.9 million. Our nonperforming loans and OREO acquired either during the M&F merger or in connection with the FDIC-assisted transactions which are collectively referred to as "acquired nonperforming assets" were $57.4 million and $25.4 million, respectively at December 31 of ‘13.

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

Nonperforming assets decreased 37.7% to $46.7 million at December 31, ‘13, as compared to $74.9 million at December 31 of ‘12.

Nonperforming loans – those loans which are 90 days or more past due and non-accrual loans -- were $19.2 million, as compared to $30.2 million at December 31 of ‘12. Early stage delinquencies, or loans 30-to-89 days past due, as a percentage of total loans remained unchanged at 31 basis points.

The allowance for loan losses as a percentage of loans was 1.64% at December 31 of ‘13, as compared to 1.72% at December 31 of ‘12. Our coverage ratio, or the allowance for loan losses as a percentage of nonperforming loans, increased to 248.9%, as compared to 146.9% at December 31 of ‘12.

OREO decreased 38.4% to $27.5 million as compared to $44.7 million at December 31 of ’12. We continue to aggressively market the properties held in OREO as we sold approximately $27 million of OREO during ‘13 with $4.9 million of sales – of these sales occurring during the fourth quarter.

During the conversion of M&F Bank into Renasant Bank, which was completed on December 9 of ‘13, we added more than 70,000 deposit relationships and 27 banking locations to our footprint while consolidating nine locations that overlapped in market coverage.

We remain well-positioned to take advantage of opportunities to enter new markets or expand our reach in existing markets. As we move into 2014, we look forward to enhancing our profitability by further realizing the benefits of the M&F acquisition, growing loan and deposit relationships and increasing our market share, to provide greater value for our shareholders.

Finally, before I turn the call back over to the moderator for questions, I will discuss the recent developments with the Volcker Rule, and its impact on some of our investments. As disclosed in previous filings with the SEC, we own interest in certain collaterized debt obligations backed by trust preferred securities or CDOs that are categorized as available for sale.

On December 10 of ’13, the regulators finalized the provisions of the Volcker Rule which at that time created risk in our ability to continue holding these investments. On January 14, 2014, the Federal Reserve, the SEC, and other federal agencies approved an interim rule authorizing banking entities to retain interest in certain covered funds notwithstanding the provisions set forth in the final rule.

All of our investments and CDOs meet the qualification for retention set forth in the interim final rule. Accordingly, we do not currently expect that we will be required to sell these investments or recognizing the impairment with respect to these securities due to the issuance of the Volcker Rule.

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

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from Catherine Mealor of KBW.

Catherine Mealor – KBW

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

Kevin Chapman

Hi Catherine, I won’t break it out into a couple of different buckets, because –

Catherine Mealor – KBW

Okay, great.

Kevin Chapman

We did have some accelerated payments, some unscheduled pay-offs during the quarter in the M&F portfolio. And that contributed probably around 12 basis points to 13 basis points to the margin. They were loans that – they were not non-performing but they are loans that we had put on our watchlist and were monitoring. And they just paid off little bit quicker than we expected.

Outside of that unexpected pay-off, margin this quarter included just on normal fair value margin and what would normally amortize all but it was another 14, 15 basis points. And so starting with our core margin, our core margin for the fourth quarter was around 382 and that’s up 3 basis points to 4 basis points from our core margin in Q3.

Catherine Mealor – KBW

And what’s your outlook on the direction of your core margin going into next year?

Kevin Chapman

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

Catherine Mealor – KBW

And then maybe a follow up which is on the expenses, how fast through [ph] would you say you are through your cost savings for First M&F, I think it was about 25% of their expense saves which was around $14 million, how fast through are you at this point in time?

Kevin Chapman

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

Operator

The next question comes from Michael Rose of Raymond James.

Michael Rose - Raymond James

Hey, I just wanted to get some context on the loan paydowns this quarter and if you see any other large paydowns on the horizon from the M&F book. And maybe if you can talk about what the core origination was from M&F and maybe what obviously the net impact was from the paydown. And then if you could talk about by market, I am sorry if I missed it; I got on the call little bit late – some of the pipelines by market and from your expansion markets?

E. Robinson McGraw

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

For the full months that M&F has been onboard, we saw loans that were in the Alabama markets. We saw production of about $2 million there. In Mississippi – our legacy Mississippi markets, we saw production of about $9 million, and in the new southern division, which includes that metro Jackson market, we saw about $21 million of new loans produced by that group. So we are seeing nice production there. Again those loans Kevin was talking about were unscheduled payoffs that came better than we anticipated. We thought those would be within that 18 month period but they actually came sooner than anticipated.

We will have some more of that to keep and we feel like that we probably will from September 1 through 12/31 probably be relatively flat but we think that we probably on a net basis during 2014 may actually see a little loan growth from that M&F portfolio as a result of those accelerated payoffs this quarter.

Kevin Chapman

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

E. Robinson McGraw

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

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

C. Mitchell Waycaster

Michael, our current 30 day pipeline stands at $65 million. If you break that down by state, 35% is in Tennessee; 10% in Alabama, 20% in Georgia and 35% in Mississippi. This pipeline should result in about $25 million in growth in non-acquired loans within 30 days. If you compare the current pipeline of $65 million to the prior year same period, that was $50 million and as we have seen in the past, the pipeline typically decreases end of the year, first quarter, due to cyclical demand for credit.

Michael Rose - Raymond James

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

I will let Jim Gray answer that, Michael?

James Gray

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

Looking at insurance, commissions and fees when you take out M&F, legacy was about flat. And when you take out the M&F related to wealth management, it was about flat. We will get to mortgage loans in just a minute. One thing in the third quarter under other non-interest income, we did have a significant BOLI claim in the third quarter and that was not precedent in the fourth quarter which led to some of the decline in the other non-interest income.

Specifically, talking about mortgage, at the time I gave the guidance, I will take full responsibility for that. In October, we were seeing the pipeline stabilized. Our volumes were still pretty strong. And of course, we did have a large negative fair value adjustment to the pipeline in the third quarter. So all things being equal through the fourth quarter we did anticipate some improvement there. Subsequent to the call, we did see our daily lock volumes slow down significantly. We got another quarter percent increase in rates after the Fed announced they were going to start tapering.

Our volume dropped for the fourth quarter about 20% from the third quarter. The most significant item though was our pipeline dropped about 37%, so we had additional negative fair value adjustment to the pipeline again in the fourth quarter. And due to that we saw a decline in the margin. So it was kind of the perfect storm for the fourth quarter of all, three of those things happening.

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

Kevin Chapman

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

E. Robinson McGraw

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

Operator

The next question comes from Matt Olney of Stephens.

Matt Olney - Stephens Inc.

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

Jim Gray

I believe it was around 400,000.

Matt Olney - Stephens Inc.

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

Kevin Chapman

So let’s break it down into three buckets. You have got your core margin which I mentioned is around 382 and then adding to that our normal recurring fair value adjustments for interest rate margins [ph], either on the loans or deposit side, and that’s contributing, let’s call the 15 basis points to the margin. And that’s going to be pretty stable for at least the next two years. And then after two years, we start -- this amortization will start expiring, and the wildcard is unscheduled payoffs that will be – the wildcard is what amount of accretable yield comes back in because of changes in cash flows from either unscheduled payoffs or improvement in the underlying credits. But as it stands right now about 15 basis points of enhancements that is fairly normal, fairly consistent and should last for the next 20 to 24 months.

Operator

The next question comes from Andy Stapp of Merion Capital Group.

Andrew Stapp - Merion Capital Group

Can I get your yield on loans for the quarter?

E. Robinson McGraw

Roll-in rates – actually I will give you the roll-ins, and Kevin I think will give you the actual. Our roll-ins for new production, new loans was like 45%, renewed loans were 57% for the quarter.

Kevin Chapman

On a combined basis, our new and renewed stayed flat compared to Q3 and let’s call it 450.

Andrew Stapp - Merion Capital Group

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

James Gray

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

Operator

(Operator Instructions) The next question comes from Kevin Fitzsimmons of Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill

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

E. Robinson McGraw

Yes, that’s correct. Going back to what was originally planned is basically flat for 18 months with M&F, but I think, part of that has already occurred. So we should see a little uptick on the acquired loans there on the covered portfolio. We should start seeing the runoff in covered start over the next – almost 18 months, I guess, start declining a little bit from what we have seen in the past as we get closer to the end of that. So yet, net, we should see some increase in loans over the course of the year.

Kevin Chapman

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

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

Kevin Fitzsimmons - Sandler O'Neill

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

Kevin Chapman

For the most part, yes.

Kevin Fitzsimmons - Sandler O'Neill

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

E. Robinson McGraw

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

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

Kevin Chapman

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

Operator

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

E. Robinson McGraw

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

Operator

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

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Renasant (RNST): Q4 EPS of $0.36 misses by $0.02.(PR)