Renasant Corporation (RNST) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Renasant Corp. 2013 Third 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 with Renasant Corp. Please go ahead, sir.

Thank you, Chad, and good morning, and thank you for joining Renasant Corporation's Third Quarter 2013 Earnings Call. Participating today are members of Renasant Corporation's executive management team. Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. And now I'll turn the call over to Renasant Chairman and CEO, E. Robinson McGraw.

Thank you, John. Good morning, and welcome to our third quarter 2013 conference call. We're pleased with the results for the third quarter, which includes the completion of our merger with First M&F Corporation, our largest acquisition to date. In addition to the merger, we continue to experience strong loan growth and significant improvements to our credit risk profile. Looking at our financial performance, net income for the third quarter of '13 was $6.6 million or basic and diluted earnings per share of $0.24 as compared to $7 million or basic and diluted EPS of $0.28 for the third quarter of '12. On September 1 of '13, we completed our merger with M&F. Our results of operation do not reflect M&F's results prior to the date of merger completion. Our '13 third quarter results include $2.7 million or $0.10 a share in after-tax expenses associated with the M&F transaction. Excluding these merger expenses, net income was $9.3 million or basic and diluted earnings per share of $0.34 for the third quarter of '13. Our results of operation do not reflect M&F's results prior to date of merger completion, but balances as of September 30, 2013 incorporate the impact of M&F acquisition, including approximately $1.4 billion in assets; $890 million in loans; $1.3 billion in deposits; and $115 million in goodwill and other intangibles, along with 35 branches and 8 insurance offices as the completion -- as of the completion date of the merger. We issued approximately 6.2 million shares of stock in connection with this acquisition. The assets acquired and liabilities assumed are recorded at estimated fair value and subject to change pending finalization of all these valuations. Net interest income increased to $38.7 million for the third quarter of '13 from $33.1 million for the third quarter of '12. Net interest margin was 3.86% for the third quarter '13 as compared to 3.94% for the third quarter of '12. The competitive pricing pressure on loan growth, which continues to cause margin compression remains a real risk. To combat the long-term interest rate risk associated with low rate loans for extended periods of time, we've made a concerted effort to shorten our repricing terms while maintaining new and renewed rates. As a result of these efforts, the yields on our new and renew loan production improved slightly during the quarter and -- as compared to recent quarters, while reducing the weighted average of pricing term. Noninterest income was $18.9 million for the third quarter of '13 as compared to $18 million for the third quarter of '12. Gain on the sale of mortgage loans was $2.8 million for the third quarter of '13 as compared to $4.4 million for the third quarter of '12 due primarily to a decline in the mortgage pipeline and increased pricing pressure as a result of the slowdown in refinanced volume caused by the recent increase in mortgage rates. While we experienced a slowdown in mortgage volume in the third quarter as compared to an exceptionally strong recent quarter, we have seen both our mortgage pipeline and competitive pricing stabilize. We were particularly pleased to see our purchase volume increase 41% from the third quarter of '12 as we continue to see results from our efforts to increase both retail and wholesale purchase volume to offset the reduction in refinanced volume. Noninterest expense was $46.6 million for the third quarter of '13 as compared to $38.7 million for the third quarter of '12. The increase in noninterest expense during the third quarter of '13, as compared to the third quarter of '12, is primarily attributable to $3.8 million in pre-tax merger expenses and additional personnel related to new lines of business and end market lift-outs. Total assets as of September 30 of '13 was approximately $5.74 billion as compared to $4.18 billion at December 31 of '12. As of September 30 of '13, our Tier 1 leverage capital ratio was 8.66%. Our Tier 1 risk-based capital ratio was 11.40% and our total risk-based capital ratio was 12.53%. Our tangible common equity ratio was 6.49%. All of our regulatory capital ratios continue to be in excess of the regulatory minimums required to be classified as well capitalized and are in line with our premerger projections. Total loans, which include both loans covered and not covered on the FDIC loss-share agreements and the M&F acquired loans were approximately $3.86 billion at September 30 of '13, as compared to $2.81 billion at December 31 of '12. Excluding loans from M&F, loans not covered under FDIC loss-share agreements were $2.79 billion at September 30 of '13, an increase of 8.59% from December 31 of '12. I would also like to point out that we continue to experience success with our de novo market interest. During the third quarter, we officially opened our new Starkville, Mississippi location; finished the construction of our new Montgomery, Alabama branch, which will open later this month; and expect to complete our land acquisition for our new Tuscaloosa location during the fourth quarter. In addition, we're pleased with our new East Tennessee markets as they now have over $100 million in loans and $61 million in deposits. Total deposits, which include deposits from M&F were $4.83 billion at September 30 of '13, as compared to $3.46 billion at December 31 of '12. Our cost of funds decreased 11 basis points to 57 basis points for the third quarter of '13 as compared to 68 basis points for the third quarter of '12. Our loans and other real estate owned, or OREO, acquired under FDIC-assisted transactions are recorded at fair value. Furthermore, the loss-share agreements with FDIC, as well as adjustments to the balances of these acquired assets to record them at fair value mitigate the impact of further losses on these assets. Nonperforming loans and OREO covered under loss-share agreements totaled $50.1 million and $16.6 million, respectively as of September 30 of '13, combining for a decrease of approximately 32.47% in nonperforming assets subject to FDIC loss-share agreements from December 31 of '12. The remaining information in this release on nonperforming loans, OREO and the related asset quality ratios exclude the assets covered under loss-share agreements. Nonperforming loans were $30.9 million at September 30 of '13, which include $8.8 million of nonperforming loans in M&F as compared to $30.2 million on December 31 of '12. The company's coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was 150% as of September 30 of '13, as compared to 147% as of December 31 of '12. Excluding M&F's nonperforming loans, which are carried at fair value and therefore do not have any allows for loan losses assigned at September 30 of '13, the coverage ratio was approximately 210%. We recorded a provision for loan losses of $2.3 million for the third quarter of '13 as compared to $4.6 million for the third quarter of '12. Annualized net charge-offs as a percentage of average loans were 38 basis points for the third quarter of '13 as compared to 78 basis points for the third quarter of '12. The allowance for loan losses as a percentage of loans including the acquired M&F loans was 1.25% at September 30 of '13, as compared to 1.72% at December 31 of '12. Excluding the M&F loans, the allowance for loan losses as a percentage of loans was 1.66% at September 13 -- September of '13. OREO, including $13.2 million in OREO acquired from M&F, was $40.6 million at September 30 of '13, as compared to $44.7 million at December 31 of '12. Excluding the OREO acquired from M&F, OREO totaled $27.4 million at September 30, a decrease of approximately 39% from year end. During the third quarter, the company sold approximately $6.4 million of OREO. We continue to see a strong loan pipeline as we move into the final quarter of the year. We believe the growth of our recent de novo interest and end market lift-outs and the continued ability of our legacy markets to perform at high levels has us very well-positioned to maintain our positive momentum for 2013 and beyond. As we move toward the full integration of M&F in the fourth quarter, we remain excited about our new market entries, our additional banking talent and our legacy market expansions provided by this merger. In addition, we believe the M&F merger complements all of our other external growth initiatives, all of which will continue to enhance our profitability. Now Chad, I'll turn it back over to you for any questions.

[Operator Instructions] Our first question comes today from Dave Bishop with MLV & Company. David J. Bishop - MLV & Co LLC, Research Division: I was wondering if you can talk about, obviously, commercial loan growth again, robust there, the breakdown in terms of some of the contribution from some of the de novo efforts there and maybe what the 30-day pipeline looks this quarter relative to the end of last quarter.

Yes. Let me give you an idea as to where we are with some of the de novo entries. We actually, to date now, in both loans and deposits of de novos have crossed over $250 million of deposits and the loans are over $300 million to date on the combined total. East Tennessee is now up to $129 million of loans, $60 million of deposits. We're seeing really tremendous activity there. Starkville, Mississippi actually crossed over the $80 million barrier in deposits over the course of the quarter, and we're seeing loan growth in each of those categories at this point in time. Some of what we've seen, Tuscaloosa is still growing at $2.6 million this quarter. Columbus, Mississippi had over $2 million of loan growth; Starkville had $2.5 million of growth. East Tennessee had another really strong quarter. We had about $24 million of growth in those markets this quarter. Montgomery actually had some of the best originations we had. But we had 2 of our larger credits there totaling, combined, about $7 million or $8 million were paid off with long-term fixed rates by 2 other banks over the course of the quarter. One of them was, I think, in the 3.25% range for maybe 10 years and another one was below 3%, at about the 2.99% range for, I think, 7 years over that timeframe. So we had nice loan growth in Montgomery absent that. But deposit-wise, we're seeing nice growth across the board with about $80 million of deposit growth in the de novos. Now this is premerger, Dave. M&F is going to add considerably to some of our markets. For example Starkville, Mississippi, they'll end up at about $90 million of loans and about $160 million in deposits post merger. So a lot of activity in quite a few of our markets as a result of that merger. Mitch Waycaster can give you the pipeline information, then we'll call on Mike Ross to give any other -- Mike's our Chief Commercial Officer. He can talk a little bit about the commercial loans.

Dave, as Robin mentioned earlier, the pipeline remains strong at $85 million. If you break that down by state, 36% would be in Tennessee; 22% in Alabama; 13% in Georgia; and 29% in Mississippi. And that pipeline should result in approximately $32 million in growth in non-covered loans within 30 days. That current pipeline compares to $80 million in the prior quarter and $63 million same period prior year.

And Dave this is Mike Ross. We are still seeing, our bankers are still seeing very active activity out there. The numbers Mitch gave you are deals that are approved and accepted or in process of closing. But in addition to that, we're always working a lot of additional opportunities, and we're still seeing a robust overall pipeline of additional opportunities that we've not gotten over the finish line yet but we feel very good about a lot of them.

Dave to point out just something we think important, Starkville, Mississippi, we opened up in November of '11. And our growth, coupled with M&F, when you take into consideration only end market deposits, not deposits from the external sources in the market, we've just about achieved #1 market share in that market now along with some of our legacy markets that M&F deposits have also enhanced. So from a loans and deposits standpoint, we feel very good about what we achieved during the course of the quarter.

Our next question comes from Stephen Scouten with KBW. Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division: Forgive me if some of this was potentially covered in your comments, Rob, I jumped on a second late here. But I was looking at your comments in the release regarding, obviously, you had really strong loan production but you mentioned that you were reducing the average -- weighted average of the loan terms and I was wondering how you guys were able to maintain kind of competitively with that reduction in terms or is that something you're seeing from peers as well?

We, I think, have put a concentrated effort to do that, Stephen. I'm going to let Kevin Chapman -- he can give you a little bit more color on that.

Yes, Stephen, we've been talking for several quarters now just about the competitive pricing and how we respond to that. And we've -- to Robin's point, we've made a concerted effort to rather than go longer on the curve, we've made a concerted effort to go shorter or variable. And so the comment in the release just shows what that effort has been over the last several quarters and we actually saw loan yields on our new and renewed production increase slightly over second and first quarter. But our term, we shaved off about a quarter off of our repricing term. We shaved off about 3 months. Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So would you say you're able to compete a little bit more aggressively on pricing while reducing the terms, so you still feel comfortable what -- your sensitivity moving forward as rates do eventually rise?

Yes. And I'll let Mike weigh in related to what he's seen on the ground related to competition. But overall, what we are trying to do is start to move and embed some asset sensitivity into our balance sheet. We're not doing it aggressively. Where we have been maintaining a neutral position, we are starting to move more towards an asset sensitivity position. And this is one strategy to do that.

And Stephen, this is Mike Ross. To your point or your question on competition, there are a lot of assets that we look at and we choose not to pursue because of competition. But we pursued the strategy that Kevin discussed, and we've still been able to grow loans with that strategy. And frankly, if we had chose to compete on longer tenor on some of the loans that we're seeing out there in the market, we would have grown that much more. But we didn't feel like it was a prudent way to grow our balance sheet with that type of asset with a long tenor and a long-term low fixed-rate, and so we chose not to compete on that basis. But we try to compete more with relationship than price, and we try to pursue overall relationships and we recognize we have to be competitive on price to some extent. But we're trying to do -- we're trying to manage our assets such that we're being -- we're trying to build assets instead at the end of the balance sheet. Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And just 1 other question if I could. On the expenses in the quarter, I know you touched on it slightly in the release. Obviously, it looks personnel and occupancy costs were up a little bit. Is that predominantly on the expansion into the ABL business? Or were there other lift-outs or business line expansions that materially affected that as well?

We have mentioned previously that we've added staffing in both Memphis and Nashville, about 4, 5 people in each of those 2 markets as additional lift-outs. Mike, you want to comment on the ABL and the Equipment Finance?

Yes. The -- our ABL front, which you -- the ABL run rate, as far as expenses are concerned, were already embedded in the numbers from the same quarter. However, we have recently entered the Equipment Finance and leasing business, and we hired a couple of veteran bankers in that space and they have just joined us toward the end of the fourth quarter -- or excuse me, end of the third quarter. So you see some of the cost, some of the additional expenses related to that.

. Of course, paying mortgage commissions have comprised a big part of that additional expense this year also especially through the first 2 quarters and actually through July, well, actually through August, because we paid commissions a month late. So 8 months of the year we've had pretty elevated mortgage commissions also.

Our next question comes from Andy Stapp with Merrion Cap Group.

What was your yield on loans in Q3?

Hey, Andy, this is Kevin. Q3, our yield on loans business in our portfolio are not new and renewed, but it was 4.82%.

Okay. And how much of your mortgage banking volume was purchased versus refi-ed during the quarter?

Hey, Andy, this is Jim Gray. Our purchase volume for the quarter was 53%, and that is up from the third quarter of 2012 was 31%. As we noted in the -- as Robin noted, our purchase volume was up 41% or approximately $39 million between the third quarter of '12 and third quarter of '13.

And could you also tell me what the purchase volume was at quarter end?

The purchase volume at quarter end was -- or for the third quarter was $99 million.

I mean the percentage, did it change by quarter end?

No. The percentage was roughly 53%, and it was pretty stable through the entire quarter at -- right at 53%.

Okay. Got you. And were there any one-timers in other noninterest income?

Yes, Andy, we did have a fully debt claimed in other noninterest income, but that was almost completely offset with some accelerated benefit owed to that individual's estate. It basically netted against one another, but the onetime in noninterest income was roughly $600,000 to $700,000. But again, that was offset in salary and employee benefits with an accelerated benefit to his beneficiaries.

Our next question comes from Michael Rose with Raymond James. Michael Rose - Raymond James & Associates, Inc., Research Division: Just following up on the mortgage question, how much of the gain on sale this quarter came from M&F versus legacy Renasant? And again, just trying to get a sense for you going forward, it seems like the refi mix is still pretty high and probably should fall as we move into the back half of next year. Just trying to get a good sense from a run rate perspective, post the fourth quarter what we could expect on an ongoing basis between the 2 companies.

Yes. Michael, this is Jim Gray again. M&F, we really kind of merged M&F into our operation back prior to merger. We're actually bundling them through our wholesale division. And so most of that -- most of the revenue from the M&F originators, the retail originators has been coming through into Renasant through the wholesale channel for at least through the second quarter. So M&F really did not have much in the way of wholesale business and we are kind of replenishing some of the wholesale that they had. But -- so most of that has already been incorporated into Renasant. Kind of looking at going forward, our volume for the third quarter of $188 million was down from our volume in the second quarter. The second quarter was $246 million, which is really a very high quarter because we did have a lot of refi activity with people kind of getting their loans closed under the gun. Going forward, we would anticipate volume has somewhat stabilized. It may be a little below the $188 million, but it still should be fairly strong. Our pipeline has stabilized back to the pre-second quarter levels and our margins have stabilized as well. One thing that did play in to the third quarter is we did -- since our pipeline dropped and because of derivative accounting, we did have a large negative accrual in the third quarter of approximately $800,000 reflecting the adjustment down in our pipeline. With our pipeline appearing to have stabilized and it has been stable the first 15 days of this quarter, we would not anticipate a large negative accrual coming in the fourth quarter. And without that negative accrual and with margin stabilized, we should see -- I believe there is some upside potential to the gain on sale number in the fourth quarter provided all those things take place. Michael Rose - Raymond James & Associates, Inc., Research Division: Okay, that's very helpful. And then, I'm sorry if I missed this. I got on the call a little bit late. Is there any change or update to any of the cost saves -- the cost-saving assumptions and would you expect the efficiency target post the M&F deal to be in line with what you originally laid out?

Hey, Michael, this is Kevin. Short answer is no. We're in line with our expected cost saves and we're in line with what we expected to realize this year, and we still expect to fully realize all cost saves beginning Q1 of '14. Michael Rose - Raymond James & Associates, Inc., Research Division: Okay, that's helpful. Just 1 final question. How much of the pipeline, as it stands today, is from some of the de novo activity, including the Atlanta ABL team relative to kind of the core franchise?

As far as the pipelines on the de novos, roughly 30% of the pipeline is coming from the de novos. And as far as ABL is concerned, roughly 10% of the pipeline now is coming from ABL. And as we've said for all year, that the ABL team got all their systems in place in the first part of the year and they've been actively prospecting for business since beginning about third quarter. The first deal should close before the end of the month and they've got an active, active list of term sheets out there in the market and we feel very good about a lot of them. Michael Rose - Raymond James & Associates, Inc., Research Division: Okay, so I should read that commentary as other places that your core markets are actually starting to show, perhaps, a little bit more growth than some of the de novo? Because if I go back a couple of quarters ago, I think the pipeline contribution was much larger from some of the de novos. Is that kind of a correct assumption?

Yes. I think that's a safe assumption.

Our next question is from Matt Olney from Stephens.

Piggybacking on Michael's questions a few minutes ago on the cost saves from the M&F deal, I know in the past you've talked about focusing on the overall profitability of the bank in core operations, some of which is going to be cost saves from M&F. But you've also talked about the normalizing expenses from the OREO, the de novos coming online. So I guess my question is, how should we be thinking about the efficiency ratio beyond just the integration of M&F over the next few years?

We -- one of our biggest initiatives, which you know, Matt, is getting our efficiency ratio down. And as we work through 2014 and 2015, our goal is to get that efficiency ratio down closer to that 60% level and eventually cross over the barrier of being in the 50s.

And Robin, does that goal -- are you assuming you need higher rates to get there? Or is that just based off of what you see today within the core operation?

Obviously, higher rates will have a big impact on accelerating that timeframe. We think it will be much more difficult to get there without higher rates. But that would extend the term past that 15-year timeframe.

Okay. That's helpful, Robin. And then as far as your focus today, obviously, on the integration of the acquisition, but moving forward, it seems to me you're in a good spot for additional M&A. So can you talk about your M&A strategy? When will you be back acquiring? And I guess, how would you characterize the overall M&A chatter since you've announced that M&F deal a few months ago?

Obviously, we've received inbound calls from both commercial bankers and investment bankers. We are looking forward next year to start the process of looking into potential opportunities, visiting, hopefully, with some potential opportunities over the course of the year. And when the feeling is right and when the deal works, we would look forward to future acquisitions in 2014 as a possibility.

Robin, just to add to that. Matt, this is Kevin. And I guess going back to future opportunities, as Robin mentioned, what we're looking for are transactions that are beneficial to both sides, much like with M&F. I think we can say that equally both shareholders benefited from this acquisition. And that's the type of opportunities that we're looking for.

Our next question is from Kevin Fitzsimmons with Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: I apologize if you've covered this already. But just on the margin, if you could just address whether there was any accretion income in there related to the deal, and then, looking forward, what your general outlook is for the margin?

Kevin, in Q3, we did have some purchase accounting accretion related to the M&F book. That 3.86% reported includes about 8 basis points of accretion. And as we mentioned earlier, we are fighting margin compression through pricing, through loan pricing. Even though the yield curve has steepened starting back in June, we saw loan yields compared to pre-June to now being flat to declining. And we've been fighting that pressure. We mentioned that we've been going shorter on our repricing term and trying to maintain yield. We also are trying to bank both sides of the relationship, doing a better job of doing that. We've grown noninterest bearing DDA. With M&F, our non-interest bearing DDA now stands at 18% of our total deposits. Excluding M&F, the legacy side, we actually grew it 150 basis points. The legacy side, we're at 16.5% noninterest bearing DDA compared to a run rate of around 15%. So margin outlook, depending on how loan pricing plays out in the fourth quarter, we've been fighting margin compression. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: Okay. And just to follow on, I believe, Matt's earlier question on efficiency. So is -- it seems to be when you take a step back that loan growth has been very solid and have been a big part of the story especially with the de novo entries. But as we look forward in coming quarters, is it fair to say efficiency and building back the capital ratios is going to be more the intermediate focus especially as loan growth, I would assume, still stays strong, but as your de novo markets get larger and more substantial, just law of large numbers, tougher to drive that percentage of growth and the expense -- the revenues start to catch up with the expenses at that point, and we start to see some real traction on efficiency coupled with the cost saves?

I think you're right on all points, Kevin. And one thing that we want to continue doing is reconstituting our deposit mix. As Kevin mentioned, we're now up to 18% noninterest demand. Again, we're continuing to concentrate on changing that mix also. So, yes on all counts and we do feel that not only through our de novos and some end market lift-outs that we should continue to see nice loan growth comparable to others, but we'll also see some positive activity in the efficiency ratio.

Our next question is from John Rodis with FIG Partners.

Just a quick question on can you just break out what the contribution was from First M&F to fee income and operating expenses in the third quarter, I guess, for the 1 month?

Kevin?

John, on the expense side it was around -- in between $1 million and a million -- let's call it $1.5 million on the noninterest income side. On the expense side, it's a little bit more difficult to break out because we were doing some hiring on our end in anticipation of people in Kosciusko or on the M&F side leaving. The income -- or the expense contribution was in the $3 million range, $3 million to $3.5 million range from M&F.

Okay. No, I was just sort of trying to get a ballpark. So and again, that was just for 1 month, obviously, since the deal closed on September 1?

Correct.

And just real quick, I wanted to go back to the comment on mortgage banking and I guess the negative accrual. I think you said it was $700,000 to $800,000, I guess, and you don't expect that. So is the right way to look at mortgage without that accrual, I guess, the 2.8 would have been closer to $3.5 million? I just want to make sure I'm looking at that right.

That is correct. And let me just qualify that statement. That is correct -- looking at our fourth quarter number, that is correct assuming that same volume in the third quarter. However, the volume will probably be down just a little bit from that. But -- so it's going to be somewhere in the -- I believe somewhere in that $2.7 million to $3.5 million range.

We also have a follow-up question from Stephen Scouten with KBW. Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division: Just one quick follow-up question on the mortgage in terms of the fair value adjustment. I'm not sure if you said it, but what was that in maybe the previous quarter just for comparison purposes? I mean, was that an upward adjustment previously?

I think it was an upward adjustment. But let's talk about the accrual adjustment. What that accrual adjustment reflects is just changes in the fair value. And what we had was a reduction in production and also a reduction in spreads. The second quarter spreads were higher than the third quarter. So it's really just a rate and volume adjustment compared to what we projected them to be in the second quarter and what we actually realized in the third quarter.

There appears to be no further questions at this time, so I'd like to turn the conference back over to management for any closing remarks.

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

Thank you very much. The conference is now concluded. Thank you for attending. You may now disconnect.