Good morning, and welcome to the Renaissance Corporation 2018 4th Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to John Oxford.
Please go ahead.
Thank you, Laura. Good morning, and thank you for joining us for Amazon Corporation's 2018 Q4 near end webcast and conference call. Participating in this call today are members of Renasant's executive management team. 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 of 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. 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 and Market Data section. And now, I will turn the call over to Renasant Corporation Executive Chairman, Robin McGraw.
Robin? 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 4th quarter to improve our shareholder value. 1st, in October, the Board authorized the repurchase of up to $50,000,000 of the company's outstanding common stock.
During the Q4 of 2018, we repurchased approximately $7,100,000 of our common stock, leaving us plenty of availability for future repurchases in the financial markets, as they've returned to conditions experienced in the Q4. At the same time, we announced a $0.01 increase in our quarterly dividend, bringing our annual dividend to $0.84 This represented the 2nd dividend increase 2018 and approximately 10% increase from 2017. We believe that 2018 was a remarkable year for Renaissance, highlighted by record earnings and profitability metrics. The returns generated were predicated on our focus and attention to cooperations of the bank, 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 Waycast, to discuss the greater details in greater detail this quarter's financial results. Mitch?
Thank you, Robin. Robin mentioned our record earnings and profitability metrics. Looking at our results for the Q4 of 2018, net income was 44,400,000 dollars as compared to $16,500,000 for the Q4 of 2017. Our basic and diluted EPS were $0.76 for the 4th quarter as compared to $0.33 for the Q4 of 2017. During the Q4, we incurred merger and conversion expenses associated with brand merger, which reduced our net income $1,300,000 and EPS $0.02 You will remember, our earnings in 2017, like those of most other financial institutions, were negatively impacted by the deferred tax asset write down, stemming from the tax law changes enacted late in the year.
Our earnings for the Q4 of 2018 adjusted for merger and conversion expenses represent a return on assets of 1.43 percent and a return on tangible equity of approximately 18 percent. 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, 2018 were approximately $12,900,000,000 as compared to approximately $9,800,000,000 at December 31, 2017. Total loans were approximately $9,100,000,000 at December 31, 2018, as compared to $7,600,000,000 at December 31, 2017.
BRAN added approximately $1,300,000,000 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've also brought in commercial banking talent with an emphasis on C and 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 $1,700,000,000 as compared to $1,500,000,000 for 2017.
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 we'll 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 $2,200,000,000 to $10,100,000,000 at December 31, 2018. The brand acquisition added $1,700,000,000 on the acquisition date.
Non interest bearing deposits averaged $2,400,000,000 or 24% of average deposits for the Q4 of 2018 compared to $2,100,000,000 or 23% of average deposits on a linked quarter basis. We believe 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 specialty lines of business.
With the integration of Brands 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 Renaissance Chief Operating and Financial Officer, Kevin Chapman, for additional discussions of our financial results. Kevin?
Thank you, Mitch. My comments will be directed primarily to providing additional color on the income statement and operating results for the 4th quarter. Net interest income was $115,500,000 for the Q4 of 2018 as compared to $99,400,000 in Q3 of 2018 $93,300,000 year over year. Reported net interest margin for the 4th quarter was up 17 basis points to 4.24 percent from Q3 of 2018. Of the 17 basis points of increase in the linked quarter margin expansion, 10 basis points 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 4th quarter were 5.33% compared to 5.10% in the previous quarter. Our core loan yields increased nearly 20 basis points from the Q3 of 2018. On the funding side, our total cost of funds for the 4th quarter was 81 basis points, an increase of 4 basis points from the 3rd quarter, while our total cost of deposits increased 7 basis points and ended at 67 basis points. Non interest income for the Q4 of 2018 was $36,400,000 which was down slightly from Q3 reported of $38,100,000 Mortgage banking income was down compared to Q3 of 2018.
However, this was expected given the seasonality of the mortgage industry and the pullback in volume that we typically see in the Q4. We divested Brands mortgage operations during the Q4. Mortgage banking income related to Brand Mortgage was $2,000,000 for the Q4 of 2018 and $1,700,000 for the Q3 of 2018. To close out the discussion on mortgage, we feel that 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 faced coming into 2018, we were able to outperform the industry's expectations and trends.
Non interest expense was $93,300,000 for the Q4 of 2018, excluding merger expenses of $1,600,000 and expenses related to brand mortgage of $2,400,000 our operating net interest expenses were $89,300,000 Our reported efficiency ratio declined to 58.39% for the 4th quarter. Excluding brand mortgage and basing our efficiency ratio off of our operating non interest expenses, our efficiency ratio was in the mid-fifty 7 percent range for the quarter. Shifting to our asset quality, at year end, our overall credit quality metrics continue to remain strong. As a percentage of total assets, all credit metrics, including NPAs, loans 30 days 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 Q4 of 2018, while we provided $1,000,000 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 percent 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'll refer you to our press release for specific numbers or ratios. Now, I'll pass the call back to Robin for any closing comments.
Thank you, Kevin. In closing, we're proud of our efforts during 2018, which produced record results. To recap, during the Q4, 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 and A.
Thank And our first question will come from Catherine Mealor of KBW.
Thanks. Good morning.
Morning, Catherine.
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 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 2019?
Thanks.
Yes, sure. So just breaking down the margin, the core margin expansion of 10% to 12%. 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 asset sensitivity is really dependent on what happens with the deposit betas and the funding costs. We saw a nice pullback or some relief in our funding costs with the deposit costs only being up 7 bps. And you compare that against Q2 and Q3, where I think Q2 was up 11% to 12% and Q3 was up maybe 9% to 10%. So one, just on the margin, the 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 to 6 basis points of the expansion is attributable to brand, but the other residual just being either asset sensitivity or repricing.
We do continue to reprice our loans. On the so talking about earning assets, we're repricing our loans 10 basis points to 15 basis points higher than the rates that they're rolling out of or maturing from. So as it relates to the margins, 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.
And so as we look at that core margin now at 395%, I mean, do you see upside continued upside from here? Or are you more comfortable thinking that we'll be stable at this higher level?
More comfortable stable, there could be some upside, but think that where we are, there's more of an opportunity for stability, but I also don't want to lose sight that we are working off of a 3.9 5 margin and have over the last 18 months, we've seen 30 to 35 basis points of expansion in that margin. Don't think we'll replicate 30 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 to 35 basis points over the last 18 months, we shouldn't lose sight of that as well.
Great. 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? No. Okay, great. And then also just on growth, Mitch, you mentioned that you believe pay downs are going to be less in 2019.
What gives you confidence in that commentary? And how are you thinking about gross net growth kind of net of acquired paydowns next year? Thanks.
Sure. Yes, 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 2017, quarterly production was around 375,000,000 dollars We've increased that on average this year to about 415,000,000. 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 Citi 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 Q3, 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 and I space there in Middle Tennessee and across the state as well.
Also in the Q3, we had 2 new additions in Destin with producers. We added a commercial private producer in Memphis as we continue to add and grow to our Memphis team. And then just looking throughout 2018, 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. Think about State of Alabama, both North Alabama, particularly the Huntsville, Decatur market.
We continue to build out a good commercial team in Birmingham as well as 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 and I think in 2019, it's realistic that we could see that production to move up in that $450,000,000 range, let's say, by midyear. As far as payoffs 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 Q4 about 32% of our payoffs paydowns or paydowns. The one most notable there just lost the competition and that's a case where we chose to not match either a rate, a loan structure, debt service coverage, loan to value, some type covenants.
We made the decision to allow those credits to roll out. Again, 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.
Yes. And this is Bart. So I'm I can 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 pay downs came out of the brand portfolio. I really dove down deep with our Head of Commercial, Mike Dunlap, who's now Head of Commercial for Renasant.
And we 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 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 pay down on lines and just clearing cash out of the accounts and normal operating.
And that's that was the largest amount that we had seen of that at Bryan, 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 Newsy and Islanders into brand. So I think both on pay down 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.
Got it. That's all really helpful color from both of you. Thank you.
And the next question will come from Michael Rose of Raymond James.
Hey, guys. Good morning. How are you?
Good morning, Mike. Good morning,
Mike. 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 2018. Sounds like potentially that could be a little bit better and then the pay downs a little less. So 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 that you guys just provided?
Yes. Michael, this is Mitch. You would be correct. I would expect the non acquired to be in that mid teen, which would equate with any normalization of payoff, pay downs, back to Catherine's question, in that mid single mid to high single digit growth. You're correct.
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 expense 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 Q1?
Yes. So leaving just leaving Q4, again, backing out brand mortgage and backing out the merger expenses, that puts us in the $89,300,000 $89,500,000 range. Included in Q4, we did not convert brand until late October. And so just keeping a full team through October as well as staff after for post conversion cleanup, there are some duplicate expenses. In Q4, expenses that won't be in Q1 is approximately $1,000,000 to 1,500,000 dollars 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 $89.5 000000000 and that includes about $1,000,000 to $1,500,000 of duplicate expenses from brand.
Okay. So somewhere in that kind of $88,000,000 range is probably a fair jumping off point?
It is. It is.
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 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 am asking. Are you baking in any rate hikes into your expectations? Thanks.
So yes, no, great question. So just in our internal models, we have one more rate hike that we are assuming. If we do not see that rate hike, then yes, the probability of margin expansion decreases and we're more in a stable we're more and more in a flattish environment. But we're assuming there is one more rate hike in 2019.
Okay. Sorry for one more. Just do you have an estimate for what the scheduled accretion expectations are for this year?
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. Correct. We do expect some pay downs 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. Thank you, Mark.
And the next question comes from Matt Olney of Stephens.
Thanks. Good morning. This is Brandon Steverson on for Matt. I want to start off on the mortgage side. We've heard some of your peers mentioned seeing renewed strength in refi volumes.
And 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?
Brandon, this is Jim Gray. Really, we've not seen an increase in refi, although our refi has been fairly low and that's kind of attributed to the fact that we were able to stabilize and maintain growth 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 1st part of January. We are seeing locks starting to pick up now, but it hasn't really changed that we really can't 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're 50 basis points lower from in the Q3 or in the Q3, but they're still 50 basis points higher than they were last year. But as we continue to focus on recruiting on all channels, correspondent, wholesale, consumer direct and in 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.
Got it. That's very helpful. Thank you. And then just moving over to M and A, could you give any color on your appetite for M and A this year now with brand getting integrated? And could you remind us what your parameters are as you're looking at M and A this year?
Really nothing has changed as far as our M and A criteria. We've stuck with it now for the last 10 years, and we felt like that it's been very successful along that line. We're obviously still in an acquisitive mode. We still are interested in the 5 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. So the any type of merger that we do would need to be accretive on the outset from an earnings standpoint, earn back under 3 years or less and obviously 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.
And this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, Laura. We appreciate everyone's time today and your interest in Renaissance Corporation. We look forward to speaking with you again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.