Renasant Corporation (RNST) Q1 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Renasant Corporation 2014 First Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. Now I would like to turn the conference over to John Oxford. Mr. Oxford, please go ahead.

Thank you, Keith, and good morning. And thank you for joining us for Renasant Corporation's First Quarter 2014 Earnings Conference Call. Participating in this call with me 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. These factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the 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, everyone, and welcome to our first quarter 2014 conference call. Our first quarter results represent a strong beginning to 2014 as net income and EPS increased 80% and 43%, respectively, as compared to the same quarter last year. With the operations of M&F now fully integrated, we believe that we've made a strong start toward achieving our key performance goals and increasing our profitability through 2014. During the first quarter of '14, net income was approximately $13.6 million as compared to approximately $7.6 million for the first quarter of '13. Basic and diluted earnings per share were $0.43 for the first quarter of '14 as compared to $0.30 for the first quarter of '13. Our balance sheet and results of operation as of and for the 3 months ending March 31, '14, include the impact of our acquisition of M&F, which was completed on September 1, '13. Periods discussed prior to September 1, 2013, do not reflect any impact from the First M&F acquisition. For the first quarter of '14, our return on average assets and return on average equity were 0.93% and 8.19%, respectively, as compared to 0.73% and 6.12%, respectively, for the first quarter of '13. Our return on average tangible assets and return on average tangible equity were 1.05% and 16.05%, respectively, as compared to 0.79% and 10.19%, respectively, for the first quarter of '13. Total assets as of March 31, '14, were approximately $5.9 billion as compared to $5.7 billion at year end. The increase in assets on a linked-quarter basis is due to a seasonal influx of deposits, primarily in public fund deposits. Due to the short-term nature of these deposit influxes, the funds from these deposits remained in liquid assets, such as low-yielding interest bearing cash or short-term investments. The excess cash and short-term investments negatively impacted net interest margin by 15 basis points, our leverage ratio by 16 basis points, tangible capital ratio by 12 basis points and our return on average assets by 3 basis points. Total deposits were $5 billion as of March 31, '14, as compared to $4.8 billion at year end. Our first quarter '14 noninterest-bearing deposits averaged approximately $949 million or 19% of average deposits as compared to $550 million or 16% of average deposits for the first quarter of '13. Our cost of funds was 48 basis points for the first quarter of '14 as compared to 62 basis points for the same quarter in '13 and 51 basis points for the fourth quarter of '13. Total loans, including loans acquired in either the M&F merger or in FDIC-assisted transactions, collectively referred to as acquired loans, were approximately $3.87 billion as of March 31, '14, as compared to $3.88 billion at year end. Excluding acquired loans, loans grew 13.6% or -- to $2.95 billion as of March 31, '14, as compared to $2.59 billion at March 31, of '13. On a linked-quarter basis, non-acquired loans grew $62 million or 9% annualized. We're pleased with our annualized loan growth rate for the first quarter of '14 as we move into the second quarter and third quarters, which are traditionally our heavier loan production quarters for the year. Breaking down year-over-year loan growth by market, our Alabama market grew loans 6.1% and have now grown loans 16 of the last 17 quarters. Our Mississippi markets grew loans by 9.5%, and our Tennessee market grew loans by 19.3%, which is the ninth consecutive quarter of loan growth. In Georgia, we grew loans by 37.8% as compared to the first quarter of '13. Looking ahead, our loan pipelines and opportunities for growth throughout all of our markets more pronounced loan growth for the remainder of '14. As of 3/31/14, our Tier 1 leverage capital ratio was 8.56%, Tier 1 risk-based capital ratio was 11.55% and total risk-based capital ratio was 12.72%. In all capital ratio categories, our regulatory capital ratios continue to be in excess of the minimums required to be classified, as well capitalized. In addition, our tangible common equity ratio was 6.68% as of March 31, '14. Net interest income was approximately $50 million for the first quarter of '14, up from $33.4 million for the first quarter of '13. Net interest margin was 4.04% for the first quarter of '14 as compared to 3.89% for the first quarter of '13 and 4.16% as of December 31, '13. The primary factor causing our linked-quarter decline in net interest margin was the negative impact of the seasonal influx of public fund deposits and the resulting short-term liquidity, which was previously mentioned. Noninterest income was $18.6 million for the first quarter of '14 as compared to $17.3 million for the first quarter of '13 and $18.3 million for the fourth quarter of '13. Our increase in noninterest income year-over-year is primarily attributable to the M&F merger, notably a 31.44% increase in service charges and doubling of our insurance commission and fees... Contributing to the linked quarter increase in noninterest income was an increase in the gain on sale of mortgage loans and fees and commissions received from the sale of insurance services. Noninterest expense was $47.6 million for the first quarter of '14 as compared to $37.6 million for the first quarter of '13. We recorded merger expenses associated with M&F acquisition of $195,000 and $1.9 million during the first quarter of '14 and fourth quarter of '13, respectively. We did not record any merger expenses during the first quarter of '13. Our increase in noninterest expense, as compared to the first quarter of '13, was primarily due to the expenses of the acquired M&F operations. Our total nonperforming loans or loans 90 days or most past due and nonaccrual loans were $74.1 million, and total OREO was $47.7 million at March 31, '14. Our nonperforming loans and OREO that were acquired either through the M&F merger or in connection with FDIC-assisted transactions, collectively referred to as acquired nonperforming assets, were $54.4 million and $22.6 million, respectively, as of March 31, '14. Since the acquired nonperforming assets were recorded at fair value at the time of acquisition were subject to loss-share agreements with the FDIC, which significantly mitigates our actual loss, the remaining information in this discussion on nonperforming loans and OREO and the related asset quality ratios exclude these acquired nonperforming assets. Our nonperforming loans were $19.7 million as of March 31, '14, as compared to $28 million as of March 31, '13. Nonperforming loans as a percentage of total loans were 0.67% as of March 31, '14, as compared to 1.08% as of March 31, '13. Annualized net charge-offs as a percentage of average loans were 0.11% for the first quarter of '14 as compared to 0.13% for the first quarter of '13. We recorded provision for loan losses of $1.5 million for the first quarter of '14 as compared to $3.1 million for the first quarter of '13. The allowance for loan losses totaled $48 million as of March 31, '14, as compared to $46.5 million as of March 31, '13. The allowance for loan losses as a percentage of loans was 1.63% as of March 31, '14, as compared to 1.79% as of March 31, '13. Our coverage ratio, or its allowance for loan losses as a percentage of nonperforming loans, was 244.06% as of March 31, '14, as compared to 166.19% as of March 31, '13. Loans 30 to 89 days past due as a percentage of total loans remained at prerecession levels and were 0.25% as of March 31, '14, as compared to 0.32% as of March 31, '13. OREO was $25.1 million as of March 31 '14, as compared to $39.8 million as of March 31, '13. Also, during the first quarter of '14, we experienced a significant reduction in cost associated with OREO, as OREO expenses decreased approximately 16.98% as compared to the first quarter of '13. Our key performance drivers, specifically loan pipelines, low-costing deposits, credit metrics and operational efficiencies, continue to show positive trends and healthy outlooks. In addition, now that the acquired First M&F operations are fully integrated, we believe we are beginning to experience the full synergies of our combined companies, and we remain well positioned to take advantages of strategic growth opportunities when available. Now, Keith, I'll turn it back over to you for any questions.

[Operator Instructions] And the first question comes from Catherine Mealor with KBW.

Robin or Kevin, do you all have the fair value accretion impact for the quarter?

Catherine, this is Kevin. We do. Let's talk about margin in total and then we'll talk about purchase accounting adjustments. We reported margin of 4.04%. And as we've discussed and talked about on the last call, our reported margin is going to be in the high 3s, low 4s going forward. That's our range going forward. If you look at the 4.04%, there's a couple things that impacted that number this quarter. One, as Robin mentioned, is just a higher balance of the cash and lower-yielding investments that is due to the deposits that will roll out later in this quarter, later in the second quarter. That weighed on margin by about 15 basis points. So if you add that back in, we're at a 4.18%, 4.19% compared to a 4.16% last quarter. As we discussed last quarter and as you can see, the M&F loan portfolio did pay off. We did have some runoff in the M&F loan portfolio, and that did result in higher levels of accretion, higher levels of purchase accounting adjustments. And that, too, was about 14 -- I'm sorry, 15 to 16 basis points. So the amount of additional purchase accounting adjustments this quarter was about 15 basis points on the margin.

Got it. And so how should we think about the direction of the core margin? I guess we'll probably get that 15 bps back after the seasonal deposits flow back out. But aside from that, what's your outlook for the direction of the core margin?

It will remain flat, excluding the unscheduled payoffs, accelerated purchased accounting, fair value accelerated accretion. It will stay flat in that high 3 to low 4 range.

But that high 3 to low 4, that includes fair value accretion.

Well, it does -- it includes -- it does not include accretion from accelerated payoffs.

Got it, got it, got it. Okay, perfect. And then you mentioned the FMFC balances paid off a little bit more than expected this quarter, how should we think about the pace at which that portfolio will run off? It's been about, call it, 70 million or so for the -- on average, the past 2 quarters. Should that flow going forward do you think?

Catherine, as we analyzed that portfolio that came over, actually, about $891 million came over. We're now down to a balance of about $746 million, just in the acquired portfolio. We've actually added new loans to that. For example, this quarter, the gross runoff actually -- as we look back over that $89 million runoff, there was about $56 million after you take into consideration new loans that came in, about $56 million of the 2 quarters from M&F. So that's a net reduction of about $89 million. Of that, we analyzed where it went. About $20 million were associated with watch list credit suite. As we stated in the beginning, their ABL portfolio had a little bit different metrics than ours. And so, therefore, we were in the process of letting most of that run off. A good portion of that $20 million could be attributed to that portfolio. $9 million of that paydown were just seasonal paydowns, as we have here in the legacy bank also just regular lines that pay up and down, and there was a net $9 million paydown in those lines. About $15 million actually moved out to non-recourse lenders, which, obviously, we're not going to match those terms. About the same token, you had about $20 million of just standard term payments that came in that will, in fact, continue to be paid down. The balance is about $25 million. In the large part, those went to competitors for rates and maturities that we wouldn't match. They were outside the ranges that we traditionally will do, much lower rates, much longer terms, in most part, maturities. So with that in mind, we feel like that we'll see a little bit more runoff this quarter than normal. But for the balance of the year and going forward, runoff would be much, much less.

And, Catherine, this is Kevin again. If you go back and look at some of our prior open bank acquisitions, the first few -- the first 2 to 3 quarters after the acquisition, that's when we had the most pressure in runoff from those acquired portfolios. So it's not -- it's not anything that we didn't anticipate. The levels may be a little bit more than we anticipated, quite frankly. But also remember that in -- in that we separately break out the loans acquired from M&F. Any new originations that come out of the M&F operations go in our non-acquired loan bucket. And the only reason we're separately breaking out the loans acquired from M&F is just do -- quite frankly, just a difference in accounting basis. We put credit marks against that portfolio, and it just helps us identify how much allowance and how much our credit metrics are affected by a loan portfolio accounted for at fair value, as opposed to historical calls on anything that we originate organically.

And the next question comes from Michael Rose of Raymond James.

A couple of questions. Where do we stand in terms of cost save achievability in regards to M&F? And are the cost saves that you originally laid out, are they -- I think you said last quarter that they're coming in a little bit higher than what you initially projected. And then as we think about this quarter in terms of some seasonal items, is there anything in either the fee income or the expense run rates that maybe need to come out for seasonal purposes?

Let me comment on M&F first. We're pretty much looking at maybe another $300,000 per quarter, based on this quarter of expense saves that comes to -- it's about $195,000 of merger expenses this quarter, about $100,000 of actual salary expense that was delineated this quarter. So about $300,000 per quarter in the future from M&F cost saves. Seasonality, Jim, you want talk a little bit about some seasonality of the -- both the income and -- or the income side; Kevin on the expense side.

Yes. On the seasonality of fee income, I'd probably only add on that you would take out would be the contingency income from the insurance agency, roughly 500,000 that was in that other cadre, the line item of other. But on the flip side of that, overdraft fees are always low in the first quarter due to number of days, for one, and just tax receipts -- tax refunds rather. That's always down. So probably should pretty well make up what the contingency fee income was on overdraft fee income and other deposit service charges, interchange fee and so forth because of number of days. And then to some extent, mortgage gains in the first quarter, seasonally, that's our lowest quarter for mortgage volume. And based on what we're seeing in our mortgage pipeline at the end of the first quarter and what we're seeing into April, we're anticipating higher mortgage volumes into the next quarter. I would say outside of that, wealth management and insurance, probably the line items for them are pretty good run rates for the year. And I'll let you address the expense side. I'm not...

Yes. Michael, on the expenses, and as Robin mentioned, we do have some additional cost saves on the M&F side. What Robin mentioned was merger and, mainly, salary expense of individuals that have left during the quarter, just the remaining team that we had onboard that were part of the affected group. We are in the process of selling some -- when it comes to premises and equipment, we're in the process of selling some facilities. As those sales occur, there will be some pickup on some occupancy and equipment expense, as well as there's a couple of vacant buildings that we have leases on. And as those -- as we sublease those or we exit out of the lease agreement, you'll see some pickup there as well. The only other seasonal item in the first quarter would be FICA taxes. We did have a pickup in FICA taxes and salary employee benefits to the tune of about $380,000 to $400,000. And that's about the only seasonal item of note in noninterest expenses.

Okay, and just to be clear, the sale of the facilities and the leases, that's baked into the M&F cost saves, correct?

That is -- that was not baked into the cost...

It was not. So that's incremental. Okay.

And, Mike, one other point on the M&F cost saves. One of the things and we've mentioned this previously is we reduced the annual cost saves probably by about $1 million. We took advantage of the merger to substitute some IT personnel, that we hired a new Chief Information Officer and 3 or 4 new high-level IT individuals as -- and reduced cost saves by that million dollars as a result of that. We just kind of offset cost saves with that team last year. So that's already in the mix, and it had a little bit of impact on the cost saves.

Yes. So we disclosed cost saves. We targeted 25%. That number came in a little bit higher on actual, came in around 28%. Just right now, that doesn't include any future cost saves that we do get. As Robin mentioned, that some of the infrastructure we built in IT did pull that overall gross number back to the 28%. And that's why when we look at the runoff from the M&F loan portfolio, it doesn't overly concern us because, as we've mentioned, the metrics of the acquisition were built off of profitability and efficiency, not necessarily growing into this -- growing into the purchase price. And the way we viewed it is any additional growth that we get out of M&F group just helps. That's just additional benefit on top of a transaction that was built on operational efficiency.

Okay, that's great color. And just one quick follow-up. I think the loan pipeline, the 30-day pipeline at the end of last quarter was about $65 million. Where does it stand today?

Mitch will answer that for you, Michael.

Yes. Michael, the 30-day pipeline today stands at $88 million. And if you break that down by state, 33% would be in Tennessee, 19% in Alabama, 14% in Georgia, 27% in Mississippi, with the remaining 7% in ABL credits. And this pipeline should result in approximately $32 million in growth in non-acquired loans within 30 days. And you are correct, last quarter, linked-quarter basis, we were at $65 million. A year back, prior year same period, we were at $67 million.

Hang on, Michael.

Michael, just talking about loan growth. If you look at first quarter loan growth and much like what Jim spoke on the noninterest income side, first quarter, you typically are seasonally low on noninterest income and loan growth. If you annualize our non-acquired loan growth, that came out to almost 9%. If you compare that to first quarter of '13 loan growth, first quarter of '13 loan growth was 3%. And so we're well ahead of last year's pace in what is typically a seasonally slow quarter.

And the next question comes from Andy Stapp with Merion capital.

How should we look at your reserve coverage going forward?

Andy, what you'll see -- in effect, our provisioning is covering charge-offs. And so you'll see the allowance staying relatively flat, stable. But coverage, it's our anticipation that the coverage ratio will continue to improve as NPLs decline. So to sum up, what I'm saying is the coverage ratio will continue to improve and that'll be more based on the credit quality metrics coming down -- the NPL metrics coming down.

From Kevin's comment on that, we're pretty much are at a point where our allowance is at a level that should remain pretty constant going forward because of where we are. And we will cover charge-offs and maybe a little extra. But other than that, we don't see any opportunity to increase the allowance, but continue to see the coverage ratio improve.

Okay. And that's coverage of NPAs or...?

Nonperforming loans.

Nonperforming loans.

Nonperforming loans, okay. And then as you go down as a percentage of loans, it's just because of loan growth.

Exactly, yes. Your denominator -- your loans are increasing. So yes, it'll -- that ratio will come down. The allowance for total loans will come down.

Okay. And I think you mentioned that the future occupancy and equipment cost saves are not baked into the $300,000 per quarter cost saves that you mentioned. How should we look at the occupancy and equipment cost saves?

As far as related to M&F, almost fully realized. We do have some small amounts. And once those buildings are sold, once those leases are either terminated or subleased, you might see a $50,000 pickup -- a $50,000 reduction in occupancy and equipment expense going forward. That's purely related to M&F.

Okay. Not $50,000 per quarter, but $50,000 total.

No, $50,000 per quarter.

And the next question comes from David Bishop with Drexel Hamilton.

Quick question. Could you update us on the end-of-period loan balances and the various de novo markets? I know you've shown that before in some of the presentations there. Just trying to get a quick update other than trying to sense your quarter.

You bet. Continuing to see growth in each of those markets. In fact, everyone of them had growth. Montgomery is now right at $80 million. Tuscaloosa is right at $40 million. Columbus, Mississippi is right at $40 million. Start with Mississippi's anomaly, in that with the M&F merger, we almost doubly -- actually, doubled our size there. We're $90 million of loans and $158 million to $160 million of deposits overall there, just attributable to the de novo. We do break that out. We're at about $43 million in loans and $95 million, $96 million in deposits [indiscernible]. Maryville, which is at Knoxville MSA, is at $74 million of loans. The Johnson City area is at $50 million and Bristol at $30 million -- $31 million. Total of $355 million attributable to the de novo markets at this stage of loans.

$355 million.

Yes, $355 million, just attributable to de novo. That doesn't account an additional $45 million to $47 million [indiscernible].

Okay. And have you reached the point -- I know in Georgia was, I think you were at 85%, 95% of new production were placed in the runoff. Is that sort of across the threshold yet this quarter or where you're standing there?

Yes, it has crossed the threshold. In fact, this quarter we grew loans, non-covered loans by about $10.7 million and runoff was about $8 million. We're 1 year and 3 months away from -- 1 year and 4 months away from the end of the first loss share, on the 9 - 1 to 4 portion of it. It maybe a little lumpy in there as far as some higher levels of runoff in some quarters. But for the most part, we've crossed that threshold, Dave.

Got you. And then maybe just an update on some of the new lending division, equipment, finance, asset-based lending, if we start to see a bop up in loan balances there.

Yes. Let me turn that over to Mike Ross.

Dave, yes, I'll give you some color on that. Our asset-based lending team has got a nice healthy pipeline there. They've -- wind, as Mitch said, roughly 7% of the total of the company in the second quarter. And that's -- and we've got a lot of other opportunities out there that we don't have firm commitments on yet, that we -- but that we feel fairly good about. So that growth is starting to contribute. And we should see additional leverage because we have plenty of room to grow into that team. So we won't have to add any staff, and we have plenty of capacity to grow that business. Our equipment finance team is off to a really nice start. We did little less than $1 million in production the first quarter, but we really only started marketing in the first quarter. They're -- they have another $6.5 million in leases that are in the pipeline that are approved, accepted and in the process of documentation. Those numbers are embedded within the regional numbers that you heard Mitch discuss earlier. So yes, our SBA group had a significant increase in loan production in the first quarter. They also are sitting on a fairly deep pipeline. Now you don't see those in balances as much because we're actually selling those -- the guaranteed portions of those loans as they are -- as they get funded and are available for sale because the premiums in today's market are quite significant. So that's more of a fee-based business than a volume-based business. And so overall, we feel very good about what our specialty businesses are doing as an additive to what our regions are doing.

And the next question comes from Matt Olney with Stephens.

Most of my questions have been addressed. I was just hoping, Robin, can give us an update on the M&A environment and your target markets? And based off the integration of M&F, do you believe your team is ready for additional acquisitions in 2014?

I'll answer the second question first. Yes, we do. The -- we feel the integration is complete, and we are, in fact, in a position that we can do acquisitions this year. There's a lot of chatter, a lot of activity. You've heard a lot of deals announced. And so I think that there will be a considerable amount of opportunity during 2014 in the M&A market.

And then lastly, Kevin, can you give us a good tax rate that we should be using for 2014?

Yes, 29% to 30%.

And we have a follow-up question from Andy Stapp with Merion Capital.

Yes, I might have misheard something. I thought you mentioned that part of the increase in other noninterest income, $500,000, was contingent income on insurance. Is that correct? And just wondering why that wouldn't show up in insurance.

Andy, that is correct. That just happens to be the line item that is -- gets classified on this report, but it does reflect in the first quarter. So you're correct, it does.

And as there are no more questions at the present time, I would like to turn the call back over to management for any closing remarks.

Thank you, Keith. We appreciate everyone's time and interest in Renasant Corporation and certainly look forward to speaking with everyone again next quarter. Thank you.

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