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Renasant Corp (RNST -2.45%)
Q4Â 2018 Earnings Conference Call
Jan. 23, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning and welcome to the Renasant Corporation 2018 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (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 -- Senior Vice President, Director of Marketing and Public Relations
Thank you, Laura. Good morning and thank you for joining us for Renasant Corporation's 2018 fourth quarter and year-end webcast and conference call. Participating in this call today are members of Renasant's executive management team.
Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. 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.
In addition, some of the financial measures that we may discuss this morning may be non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measure can be found in our earnings release, which has been posted on our corporate site, renasant.com under the Investor Relations tab in the News & Market Data section.
And now, I will turn the call over to Renasant Corporation Executive Chairman, Robin McGraw. Robin?
Edward Robinson McGraw -- Executive Chairman
Thank you, John. Good morning everyone, and thank you for joining us today. During the quarter highlighted by increased volatility in financial markets and uncertainty surrounding the economic outlook, we once again closed the year with record results. We believe that although present, this uncertainty has been somewhat overreacted to in the light of the prevailing economic indicators and in fact we capitalized on the fluctuations in the financial markets in the fourth quarter to improve our shareholder value.
First, in October the Board authorized the repurchase of up to $50 million of the Company's outstanding common stock. During the fourth quarter of '18, we repurchased approximately $7.1 million of our common stock, leaving us plenty of availability for future repurchases in the financial markets as they return to conditions experienced in the fourth quarter. At the same time, we announced a $0.01 increase in our quarterly dividend bringing our annual dividend to $0.84. This represented the second dividend increase in 2018 and approximately 10% increase from 2017. We believe that '18 was a remarkable year for Renasant highlighted by record earnings and profitability metrics. The returns generated were predicated on our focus and attention to core operations of the buying, attracting talent in all of our markets and serving our clients and communities with a premier level of products and services. We anticipate this strategy will continue to maximize the return for our shareholders.
Now, I'll turn the call over to our President and Chief Executive Officer, Mitch Waycaster to discuss the greater details -- in greater detail this quarter's financial results. Mitch?
C. Mitchell Waycaster -- President and Chief Executive Officer
Thank you, Robin. Robin mentioned our record earnings and profitability metrics. Looking at our results for the fourth quarter of '18, net income was $44.4 million, as compared to $16.5 million for the fourth quarter of '17. Our basic and diluted EPS were $0.76 for the fourth quarter, as compared to $0.33 for the fourth quarter of '17.
During the fourth quarter, we incurred merger and conversion expenses associated with brand merger, which reduced our net income $1.3 million and EPS $0.02. You will remember our earnings in '17 like those of most other financial institutions were negatively impacted by the deferred tax asset writedown, stemming from the tax law changes enacted late in the year.
Our earnings for the fourth quarter of 2018 adjusted for merger and conversion expenses represent a return on assets of 1.43% and a return on tangible equity of approximately 18%. Both of these metrics are at or near the highest levels achieved in the Company's long history.
Turning our focus to our balance sheet. Total assets at December 31, '18 were approximately $12.9 billion, as compared to approximately $9.8 billion at December 31, '17. Total loans were approximately $9.1 billion at December 31, '18, as compared to $7.6 billion at December 31, '17.
Brand added approximately $1.3 billion in loans held for investment at the acquisition date. Along with the previously mentioned addition of Brand in Atlanta during the past quarter we've added new market leaders and producers throughout our footprint. We're also -- we've also brought in commercial banking talent with an emphasis on C&I lending and at the same time we've enhanced our treasury management offerings to support our commercial clients.
Loan production for 2018 was strong at $1.7 billion, as compared to $1.5 billion for '17. However, throughout 2018, we experienced elevated levels of payoffs and paydowns especially during the second half of the year. Still we remain disciplined in our pricing and underwriting standards, including margin and structure and will not compromise these standards due to competition if we believe the structure or terms are too aggressive for us.
Regardless, we do expect payoffs to normalize in 2019 and we've implemented strategies throughout our footprint, bolstered by our recent hires that we believe will help increase loan production, as well as gain market share in 2019. On the liability side of the balance sheet, we grew total deposits $2.2 billion to $10.1 billion at December 31, '18. The Brand acquisition added $1.7 billion on the acquisition date.
Non-interest bearing deposits averaged $2.4 billion or 24% of average deposits for the fourth quarter of '18, compared to $2.1 billion or 23% of average deposits on a linked quarter basis. We believe our strengthened consumer checking lineup along with our fintech offerings such as Zelle, mobile banking and improved digital and online account openings will give us an advantage as we deliver many of the product offerings of the large national financial institutions, but remain a service and client focused bank in each community we serve. These consumer product offerings coupled with our enhanced treasury management products have us positioned to continue to grow low costing stable deposits.
Looking forward, we are both excited and optimistic about future growth on both sides of our balance sheet, given the strength of our current pipeline, our markets, our existing and newly added talent in our core bank, as well as enhancements to our product offerings, commercial banking unit and specially lines of business.
With the integration of Brand's operations and team members now complete, we began 2019 with a renewed focus on understanding and meeting our customers' needs and continuing to deliver a first class lineup of products and services which earned us the designation of Best Bank in the South by Time Magazine's Money.com.
Now, I'll turn the call over to the Renasant's, Chief Operating and Financial Officer, Kevin Chapman for additional discussion of our financial results. Kevin?
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
Thank you, Mitch. My comments will be directed primarily to providing additional color on the income statement and operating results for the fourth quarter. Net interest income was $115.5 million for the fourth quarter of '18, as compared to $99.4 million in Q3 of '18 and $93.3 million year-over-year.
Reported net interest margin for the fourth quarter was up 17 basis points to 4.24% from Q3 of '18. Of the 17 basis points of increase in the linked quarter margin expansion, 10 to 12 basis points is attributable to expansion in our core margin with the remaining increase being the result of fluctuations in purchase accounting income. We experienced similar trends in our loan yields. Reported loan yields for the fourth quarter were 5.33%, compared to 5.10% in the previous quarter. Our core loan yields increased nearly 20 basis points from the third quarter of '18.
On the funding side, our total cost of funds for the fourth quarter was 81 basis points, an increase of 4 basis points from the third quarter, while our total cost for deposits increased 7 basis points and ended at 67 basis points.
Non-interest income for the fourth quarter of '18 was $36.4 million, which was down slightly from Q3 reported of $38.1 million. Mortgage banking income was down compared to third quarter of '18. However this was expected given the seasonality of the mortgage industry and the pullback in volume that we typically see in the fourth quarter. We divested Brand's mortgage operations during the fourth quarter. Mortgage banking income related to Brand mortgage was $2 million for the fourth quarter of '18 and $1.7 million for the third quarter of '18.
To close out the discussion on mortgage, we feel it is noteworthy that our mortgage banking income increased for the year of 2018, compared to the full year of 2017. Given the uncertainty and headwinds in the mortgage industry face coming into '18, we were able to outperform the industry's expectations and trends.
Non-interest expense was $93.3 million for the fourth quarter of '18. Excluding merger expenses of $1.6 million and expenses related to Brand mortgage of $2.4 million, our operating net interest expenses were $89.3 million.
Our reported efficiency ratio declined to 58.39% for the fourth quarter. Excluding Brand mortgage and basing our efficiency ratio off of our operating non-interest expenses, our efficiency ratio was in the mid 57% range for the quarter.
Shifting to our asset quality, at year-end our overall credit quality metrics continued to remain strong. As a percentage of total assets, all credit metrics, including NPAs, loans 30 to 89 days past due and our internal watch list remain at or near historical lows. Net charge-offs were $584,000 or 3 basis points annualized for the fourth quarter of '18, while we provided $1 million for future loan losses.
Our regulatory capital ratios remain in excess of regulatory minimums required to be classified, as well capitalized and our profitability continues to generate even higher levels of capital. Our tangible capital ratio of 8.92% is an increase of 12 basis points from the previous quarter, while each of our regulatory capital ratios increased between 25 basis points to 27 basis points. For more information on our financials, I refer you to our press release for specific numbers or ratios.
Now, I'll pass the call back to Robin for any closing comments.
Edward Robinson McGraw -- Executive Chairman
Thank you, Kevin. In closing we're proud of our efforts during 2018, which produced record results. To recap, during the fourth quarter we saw solid loan production, while credit quality metrics remained at or near historic lows. Looking forward we see a healthy loan pipeline at the start of 2019 and look to experience another strong year.
Now, I'll turn the call back over for Q&A.
Questions and Answers:
Operator
Thank you. (Operator Instructions) And our first question will come from Catherine Mealor of KBW.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Thanks. Good morning.
C. Mitchell Waycaster -- President and Chief Executive Officer
Good morning, Catherine.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
I want to start on the core margin. Really nice expansion there and Kevin you mentioned that you saw 20 bps of increase in your core loan yields linked quarter. Can you give us any sense of how much of that was just from Brand coming over, how much of it is from higher rates and then how you're thinking about that core margin moving into '19? Thanks.
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
Yeah, sure. So just breaking down the margin, the core margin expansion of 10 basis points to 12 basis points, a couple of things that impacted that. One was the rate increase that we experienced at the end of Q3, so a full quarter of that. We continue to remain asset sensitive and we have been all throughout the rate cycle. But the amount of our asset sensitivity is really dependent on what happens with the deposit betas and the funding cost. We saw a nice pullback or some relief in our funding cost with the deposit cost only being up 7 bps, and you compare that against Q2 and Q3, where I think Q2 was up 11 basis points to 12 basis points, and Q3 was up maybe 9 basis points to 10 basis points.
So one, just on the margin, some of the relief on the deposit side and the funding side helped with the margin. Brand, having a full-quarter impact of Brand did help with the margin. About 5 basis points to 6 basis points of the expansion is attributable to Brand with the other residual just being either asset sensitivity or repricing. We do continue to reprice our loans on the -- also talking about earning assets, we are repricing our loans 10 to 15 basis points higher than the rates that they're rolling out of or maturing from. So as it relates to the margin, several items that affect that. But again, just to sum it up we feel that we're well-positioned and we remain asset sensitive as rates continue to rise.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
So as we look at that core margin now at 3.95% (ph), do you -- I mean, do you see -- do you see upside, continued upside from here or are you more comfortable thinking that it will be stable at this higher level?
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
That's more comfortable stable, there could be some upside. But I think that where we are, there's more of an opportunity for stability, but also don't want to lose sight that we are working off of a 3.95% (ph) margin and have -- over the last 18 months we've seen 30 basis points to 35 basis points of expansion in that margin. Don't think we'll replicate 30 basis points to 35 basis points, but there's upside for -- there's small upside for expansion, but I think the fact that we've increased our margin 30 basis points to 35 basis points over the last 18 months, we shouldn't lose sight of that as well.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Right. And then just to be clear there weren't any one higher loan fees or anything like that in this quarter that would be temporary?
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
No.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Okay, great. And then also just on growth, Mitch you mentioned that you believe paydowns are going to be less in '19. What gives you confidence in that commentary and how are you thinking about growth, net growth, kind of net of acquired paydowns next year? Thanks.
C. Mitchell Waycaster -- President and Chief Executive Officer
Sure. Yeah, Catherine let me start first with growth and then circle back to the paydown. So if you just look at year-over-year improvement in production in '17, quarterly production was around $375 million. We've increased that on average to this year to about $415 million. And what gives us confidence is just looking at talent and markets. And particularly over this past quarter, if you just think about coming out of the conversion, integration at Brand, the commercial team that was -- that come and joined an already strong team in North Georgia also that team that joined our core bank there, we're well positioned in that market with talent, and we continue to see or expect increased production in North Georgia.
Also in the quarter in Nashville, we employed a middle Tennessee market leader, a strong leader, strong ability to recruit, feel really good going forward about Nashville. Also during the quarter, we employed a City President in the core banking side came to us from a regional bank, has a strong book, again very capable as far as recruiting as well.
And then in the third quarter you will remember we brought in a lead of our commercial operation in Tennessee based there in Nashville, offers us a very good opportunity in the C&I space there in middle Tennessee and across the state as well. Also in the third quarter, we had two new additions in Destin with producers. We added a commercial private producer in Memphis, as we continue to add in growth to our Memphis team. And then just looking throughout '18 other markets that I would highlight, Jackson, Mississippi, the commercial team there, very strong, strong pipeline. We've added talent in North Mississippi, central part of Georgia comes to mind, particularly the market of Macon where we've added some talent there as well. Same about State of Alabama, both North Alabama particularly the Huntsville, Dakota market. We continue to build out a good commercial team in Birmingham, as well as our private team and then southern part of Alabama. Continue to grow in Tuscaloosa with talent. Montgomery, we see potential as well as Mobile. You add to that our commercial specialty lines, which we continue to leverage and grow. All of those things brings confidence as we look forward in loan production. So I think in 2019 as realistic that we could see that production to move up in that $450 million range, let's say by mid-year.
As far as pay-offs and paydowns and that as I mentioned earlier, we saw those definitely increase in the second half of the year. And if you look at what primarily contributed to that and if you look at the percentage of the total payoffs/paydowns, we continue to see where the borrower either sold the underlying asset or business that represented in the fourth quarter about 32% of our payoffs/paydowns or paydowns. The one most notable there just lost to competition and that's a case where we chose to not match either a rate or loan structure, debt service coverage, loan to value some type covenants. We made the decision to allow those credits to roll out. Again, and all of that combined was about 48%. If you were to take that amount and equate it to net loan growth, it would add about 7.5% to 8%.
Looking forward, we do expect some of this to normalize, if you will. We do expect that going forward, but we're also equally confident in our ability to grow loan production. So both of those things together, we're very optimistic and again that tracks back to markets and talent and our ability to grow both in production, which would equate to net loan growth.
Bartow Morgan -- Chief Commercial Banking Officer
Catherine, this is Bartow. I'll (ph) jump in here, because, I think I can add a little bit more color on it with adding Brand into it. So a large portion of those paydowns came out of the Brand portfolio. I really delve down deep with our Head of Commercial, Mike Dunlap who is now Head of Commercial for Renasant. And through the conversations with Mike, we have not seen any customers leaving the bank through conversion. We are seeing some customers who have sold their businesses and sold assets and paying down loans. That was the largest portion of that. But those customers are the deal customers and they will come back to Renasant and look for new deals as we go into 2019.
In addition to that we had paid down onlines and just clearing cash out of their accounts in normal operating and that's -- the largest amount that we had seen of the added Brand, but we should not see that level of payoffs and paydowns. In addition to that we haven't seen lenders choosing to leave the bank. They've been -- they -- as I've gone across the footprint, we've been able to hire and look at new lenders in each of the markets. So whether that's Birmingham, Memphis or Nashville, we've been able to add senior management in those areas and those senior management -- those people in senior management have been able to start interviews with new RMs that are coming out of regionals where we have been successful at Brand -- where we were successful at Brand of bringing on new C&I lenders into Brand. So I think both on paydown/payoffs and from the production side, we're seeing the ability both to attract people and we're also -- have the ability to retain these customers and have not seen any situations where we have customers leaving.
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Got it. That's all really helpful color from both of you. Thank you.
Operator
And the next question will come from Michael Rose of Raymond James.
Michael Rose -- Raymond James -- Analyst
Hey guys. Good morning. How are you?
C. Mitchell Waycaster -- President and Chief Executive Officer
Good morning, Mike.
Michael Rose -- Raymond James -- Analyst
So just contextualizing all those comments on the loan outlook. So, if I'm hearing you straight it looks like non-acquired loans were up a little over 14% year-on-year in '18. Sounds like potentially that could be a little bit better and then the paydowns a little less. So if I -- I think if I balance all that together and put it into a net number I think you guys would be talking somewhere mid to high single-digit net loan growth for the year. Is that a fair way to kind of sum up all that great color you guys just provided?
C. Mitchell Waycaster -- President and Chief Executive Officer
Yeah, Michael -- this is Mitch, you would be correct. I would expect the non-acquired to be in that mid teen. Mid teen would equate with any normalization of payoff/paydowns, back to Catherine's question, in that mid single -- mid to high single-digit growth. You're correct.
Michael Rose -- Raymond James -- Analyst
Okay, that's helpful. Thank you for that. And then I just wanted to get a sense for what the starting expense base should be, Kevin. I know there's expenses associated with the Brand Mortgage Group. Can you kind of talk about what those were, and obviously with the cost saves that are really rolling in here what's a fair base to start off the expense run rate for the first quarter?
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
Yeah. So leaving -- just leaving Q4, again backing up Brand Mortgage and backing up the merger expenses that puts us in the $89.3 million, $89.5 million range. Included in fourth quarter we did not convert Brand until late October. And so just keeping a full team through October as well as staff asked or proposed conversion cleanup there are some duplicate expenses. In fourth quarter expenses that won't be in Q1 is approximately $1 million to $1.5 million. There's a little bit more expense that will relieve as we get into Q2 and that's another $200,000 to $300,000 as we get into Q2. So run rate coming out of Q4, $89.3 million, $89.5 million and that includes about $1 million to $1.5 million of duplicate expenses from Brand.
Michael Rose -- Raymond James -- Analyst
Okay, so somewhere in that kind of $88 million range is probably a fair jumping-off point?
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
It is. It is.
Michael Rose -- Raymond James -- Analyst
Okay. And then maybe just one follow-up here on the margin. I hear all the comments and you guys have done a great job on the deposit side. It seems like there's still some leverage to go there. If we don't get any rate hikes and the curve remains flat or flattish or even inverts, I mean is that core margin kind of remaining near current levels hold? I guess what I'am (ph) asking is are you baking in any rate hikes into your expectations? Thanks.
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
So, yeah, great question. So in our internal models, we have one more rate hike that we are assuming. If we do not see that rate hike then, yeah, the probability of margin expansion decreases and we're more in a stable -- we're more in a flattish environment. Well, we're assuming there is one more rate hike in '19.
Michael Rose -- Raymond James -- Analyst
Okay. Sorry for one more. Just -- do you have an estimate for what the scheduled accretion expectations are for this year?
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
If you look at just the -- if you look at the press release and what we showed for the accretable yield that's going to be fairly steady throughout the year. There won't be any significant fluctuations with that. A little bit harder to provide clarity as to what income will come through on the acceleration side.
Michael Rose -- Raymond James -- Analyst
Correct.
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
But we do expect some paydowns to subside. So that -- we would expect that number to come back or come down. Q4 may have been a little bit elevated, but if we look at just the accretable yield that's attributable to -- that's not related to the accelerated -- the acceleration, we expect that number to be fairly stable throughout the year.
Michael Rose -- Raymond James -- Analyst
Okay. Thanks for taking all my questions, guys.
C. Mitchell Waycaster -- President and Chief Executive Officer
Thank you, Michael.
Operator
And the next question comes from Matt Olney of Stephens.
Brandon Steverson -- Stephens Inc -- Analyst
Thanks. Good morning. This is Brandon Steverson on for Matt. I wanted to start off on the mortgage side. We've heard some of your peers mention seeing renewed strength in refi volumes. And then I just wanted to see is that consistent with what you've been seeing? And is there any other color around mortgage volumes and what you're seeing right now that you can add to that?
James W. Gray -- Executive Vice President
Hey, Brandon, this is Jim Gray. Really we've not seen an increase in refi. Although our refis has been fairly low and that's kind of attributed to the fact that we were able to stabilize and maintain growth during the -- during 2018. The little bit of pullback in rates has really increased both our purchase and refi. We did see locks tracking last year through the first part of January. We are seeing locks starting to pick up now, but it hasn't really changed that we really can attribute that all to refi.
As far as looking into this next year, we feel that we will track pretty well what we did last year even though rates are about 50 basis -- they are 50 basis points lower from -- in the third quarter or in the -- yeah, in the third quarter. But they're still 50 basis points higher than they were last year. But as we continue to focus on recruiting on all channels, correspond and wholesale, consumer direct and our retail markets, we anticipate that we'll be able to offset that 50 basis point higher rate environment and continue to grow throughout the course of this next year.
Brandon Steverson -- Stephens Inc -- Analyst
Got it. That's very helpful. Thank you. And then just moving over to M&A, could you give any color on your appetite for M&A this year now with Brand getting integrated and could you remind us what your parameters are as you're looking at M&A this year?
James W. Gray -- Executive Vice President
Really nothing has changed as far as our M&A criteria. We've stuck with it now for the last 10 years, and we feel like that it's been very successful along that line. We're obviously still in an acquisitive mode. We still are interested in the five-state footprint that we're currently in and we would venture outside that state for the right opportunity. But we still maintain the same criteria we have to continue to see the -- any type of merger that we do would need to be accretive on the outset from an earnings standpoint to earn back three years less and obviously it should have great returns for the Company. So we've not changed anything during that time frame, and we feel like that even though the pricing market has changed a little bit that we still think that there are opportunities out there for us.
Brandon Steverson -- Stephens Inc -- Analyst
Understood. Thanks a lot for taking my questions.
C. Mitchell Waycaster -- President and Chief Executive Officer
Thanks, Brandon.
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
C. Mitchell Waycaster -- President and Chief Executive Officer
Thank you, Laura. We appreciate everyone's time today and your interest in Renasant Corporation. We look forward to speaking with you again soon.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 32 minutes
Call participants:
John Oxford -- Senior Vice President, Director of Marketing and Public Relations
Edward Robinson McGraw -- Executive Chairman
C. Mitchell Waycaster -- President and Chief Executive Officer
Kevin D. Chapman -- Chief Operating Officer and Chief Financial Officer
Catherine Mealor -- Keefe, Bruyette & Woods, Inc. -- Analyst
Bartow Morgan -- Chief Commercial Banking Officer
Michael Rose -- Raymond James -- Analyst
Brandon Steverson -- Stephens Inc -- Analyst
James W. Gray -- Executive Vice President
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