Renasant Corporation (RNST) Q2 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Renasant Corporation 2016 Second Quarter Earnings Conference Call and Webcast. All participants will be in listen only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Oxford. Please go ahead.

Thank you, and good morning and thank you for joining us for Renasant Corporation’s 2016 second quarter earnings webcast and conference call. Participating in this call today are members of Renasant’s executive management team. Before we begin, let me remind you that some of our comments during this call maybe 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. Now, we'll turn the call over to E. Robinson MacGraw, Chairman and CEO of Renasant Corporation. Robin?

Thank you, John. Good morning, everyone and thank you for joining us again today. We are very pleased with our second quarter financial results. Annualized linked quarter non-acquired loan growth of 21.5% and strong revenue growth driven from our mortgage operations were large contributing factors to our record level quarterly net income of $22.9 million. These results also include our completion of the KeyWorth acquisition along with the successful conversion of its operations. Continued growth in our profitability metrics and continued improvement in the credit quality of our non-acquired assets highlight the successful first half of 2016. Looking at our financial performance for the second quarter of 2016, net income was $22.9 million or diluted EPS of $0.54 an increase of 49% as compared to $15.4 million or diluted EPS of $0.48 for the second quarter of 2015. We incurred pretax merger and conversion expenses of $2.8 million or $1.9 million on an after-tax basis. For the second quarter of 2016 diluted EPS about $0.05 as compared to pretax merger and conversion expenses incurred in the second quarter of 2015 of $1.5 million, or $904,000 on an after-tax basis, which reduced diluted EPS by $0.03. Excluding the impact of after-tax merger and conversion expenses incurred during each quarter, diluted EPS was $0.59 for the second quarter of 2016, as compared to $0.51 for the second quarter of 2015. Our return on average assets and return on average equity excluding merger expenses for the second quarter of 2016 were 1.17% and 8.89%, respectively. Excluding merger expenses our 2016 second quarter return on average tangible assets and return on average tangible equity were 1.30% and 16.79% respectively. Focusing on our balance sheet, total assets at June 30, were approximately $8.53 billion, as compared to approximately $7.93 billion as of December 31, 2015. Total loans, including loans acquired in our KeyWorth, Heritage and First M&F acquisitions, in FDIC-assisted transactions which we collectively referred to as acquired loans, were approximately $5.97 billion at June 30, 2016, as compared to $5.41 billion at December 31, 2015. Excluding acquired loans, loans grew at an annualized rate of 24% to $4.29 billion at June 30, 2016, as compared to $3.83 billion at December 31, 2015. Breaking down year-to-date net loan growth by market, our Alabama markets grew loans at an annualized rate of 16%. Our Mississippi markets increased loans of about 4% while our Tennessee and Georgia markets both grew loans about 11%. This loan growth includes our specialty lines which include healthcare, equipment financing and asset based lending. Total deposits were $6.70 billion at June 30, 2016, as compared to $6.22 billion at December 31, 2015. Our cost of funds which were 38 basis points for the second quarter of 2016, as compared to 41 basis points for the same quarter in 2015 and 32 basis points when compared to December 31, 2015. Our noninterest-bearing deposits averaged approximately $1.48 billion, or approximately 22% of average deposits, for the second quarter of 2016, as compared to $970 million, or approximately 20% of average deposits, for the second quarter of 2015. Looking at our capital ratios at June 30, 2016 our tangible common equity ratio was 7.79%, our Tier 1 leverage capital ratio was 9.18%, our common equity Tier 1 risk based capital ratio was 10.12%, our Tier 1 risk based capital ratio was 11.55%, and our total risk based capital ratio was 12.31%. Net interest income was $77.16 million for the second quarter of 2016, as compared to $51.6 million for the second quarter of 2015. Net interest margin was 4.29% for the second quarter of 2016, as compared to 4.17% for the second quarter of 2015. Additional interest income recognized in connection with the acceleration of pay downs and payoffs from acquired loans was $3.96 million in the second quarter of 2016 and increased net interest margin 25 basis points as compared to $3.60 million and a 28 basis point increase in net interest margin in the same period of 2015. Our noninterest income is derived from diverse lines of business which primarily consist of mortgage, wealth management and insurance revenue along with the income from deposit and loan products. Total noninterest income was $35.59 million for the second quarter of 2016, as compared to approximately $22.88 million for the second quarter of 2015. During the current quarter, we realized a gain of $1.26 million in connection with the sale of certain equity securities with a carrying value of $2.77 million at the time of sale compared to a gain of $96,000 realized on the sale of securities during the second quarter of 2015. After considering this realized gain, our overall growth in noninterest income for the second quarter, as compared to the same period last year, is primarily attributable to the Heritage and KeyWorth acquisitions and increases in the sales of mortgage loans which we originate. Noninterest expense was $77.26 million for the second quarter of 2016, as compared to approximately $51.08 million for the second quarter of 2015. We recorded merger and conversion expenses of approximately $2.81 million and $1.47 million during the second quarter of 2016 and 2015, respectively. During the current quarter, we recognized a penalty charge of $329,000 in connection with the prepayment of approximately $3.5 million in borrowings from the Federal Home Loan Bank. No such charge was incurred during the second quarter of 2015. In addition, during the current quarter, we recognized a $750 thousand impairment charge related to a single property held in other real estate owned. This property is currently under contract to sell. After considering these expenses, which are typically nonrecurring, our overall growth in noninterest expense for the second quarter, as compared with the same period in the prior year, is primarily attributable to the addition of Heritage and KeyWorth operations. Looking at our credit quality metrics and trends, at June 30, 2016, we recorded a provision for loan losses of $1.43 million for the second quarter as compared to $1.18 million for the second quarter of 2015. Annualized net charge-offs as a percentage of average loans declined to 1 basis point for the first quarter of 2016 as compared to 16 basis points for the same quarter in 2015. Total nonperforming assets which are loans 90 days or more past due, nonaccrual loans and OREO were $72.5 million at June 30, 2016 as compared to $80 million at year end. Our nonperforming loans and OREO that we acquired through previous acquisitions which we refer to as acquired nonperforming assets were $50.9 million at June 30, as compared to $52.9 million at year end. Since acquired nonperforming assets were recorded at fair value at the time of acquisition, all are subject to the loss-share agreements with the FDIC, which significantly mitigates the our actual loss, unless otherwise noted the remaining information on nonperforming loans, OREO and the related asset quality ratios excludes these acquired nonperforming assets. The allowance for loan losses as a percentage of total loans was 1.03% for June 30, 2016 as compared to 1.23% at June 30, 2015. Nonperforming assets decreased 0.3% to $21.6 million at June 30, 2016 as compared to $28.4 million at December 31, 2015. Early stage delinquencies or loans 30 days to 89 days past due as a percentage of total loans were 22 basis points at June 30, 2016 as compared to 19 at June 30, 2015. OREO was $9.58 million at June 30, 2016 as compared to $12.99 million at December 31, 2015. We continue to proactively market the properties held in OREO as evidenced by the sales of approximately $2.5 million OREO during the second quarter of 2016. We see many positives on the horizon, specifically healthy commercial loan pipelines and sustainable mortgage loan pipelines which support our annual loan growth goals, both of which could drive continued revenue growth. This now concludes my prepared remarks and now I'll turn the call back over to Andrea [ph] and any questions. Andrea?

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Katherine Miller from KBW. Go ahead Katherine.

Thanks, good morning everyone.

Good morning, Katherine.

I mean should we see any addition cost savings coming out of the expense space next quarter from the KeyWorth deal?

Hi Katherine, it is Kevin.

Hey, Kevin.

Yes, we should and we will. We've realized a significant portion of those cost that is really leading us to the acquisitions even before we closed and so they run right as we entered Q2 already reflected a significant amount of cost saves, but we still have on an annualized basis about another million dollars to recognize in cast saves, so that would equate 2.5 to 300, 000 range on the low end on a quarterly basis.

Okay great, and then with that in mind, how should – how does that point to how we should think about the taste for the efficiency ratio decline over the next couple of quarters?

So the efficiency pace is a broader conversation taking into consideration KeyWorth and then the costs added. There are also other factors. The adjusting bond that we found ourselves in with a flattening of the yield curve, that has put pressure on the efficiency ratio as well as, as we talked about in the past the contribution from mortgage. That being said, we still are targeting and expecting improvements in the efficiency ratio, but achieving our goal of 60% efficiency ratio, again in today's current environment and the difficulty in driving revenue, we don’t have to extend that into next year, into 2017.

Got it, that makes sense. And maybe that got you up into the NIM question is, has your outlook for the margin changed at all given the rates in the low to longer scenario that will probably be in for a while longer?

I think our outlook is the same. We've been - in the current rate environment the right environment for the majority of Q2 before we saw what happened to the yield curve after Brexit. We saw a flattening in the yield curve and that was we were already experiencing pressure on the NIM effect, I think we've guided in the past that NIM compression on a quarterly basis could be a couple of basis points per quarter. It was a little bit more pronounced this quarter. I think we had, if we exclude the accelerated rated accretion that the margin compressed about 4 to 5 basis points, that's really a direct reflection of what we experienced in more flattening of the yield curve in Q2. You take mortgage loans held for sale for example, our yield on our mortgage loans held for sale portfolio decreased about 70 to 80 basis points in Q2 compared to Q1. That line item alone compressed margin 2 basis points. And looking at what current rates are in the mortgage production, the rates that we have in Q2 or the rates we might experience in Q3 might be at the Q2 levels if not slightly lower. So until we see some steeping of the yield curve just in mortgage loans held for sale, that's when we continue to put more pressure on the margins. I think this is to say I think our outlook is still the same. Margin compression is something that we'll have to contend with and battle. I think we can mitigate that in the long run. In the short run with where the curve is we could have on a quarterly basis rather than 1 to 2 basis points of compression possibly 3 to 4 in Q3 and then we'll have to see what the yield curve looks like in Q4.

Got it, that's helpful Kevin. Thank you.

Our next question is from Emlen Harmon from Jefferies, go ahead.

Hey good morning guys.

Good morning, Emlen.

So, just I guess one final point on the NIM, I think in the last quarter you guys had talked about kind of a 380 core NIM ex-any of the accretion effects from deals. So will it be safe to say that that's probably a little closer to 375 this quarter and then you are talking a few basis points of compression on that core number, is that a fair way to think about it?

That is the appropriate way to think about it Emlen and you are exactly right, if we strip out all purchase accounting, the margin went from 380 to 375.

All right, perfect. Thank you. And then I was surprised to see that the service fee down quarter-over-quarter. Are there any unique effects in that line this quarter?

Not really any unique effects, Q1 might have been abnormally high. We've been looking at that. We did see some large increase in service charges. That was an anomaly for Q1, and typically Q1 is more of our weakest quarter as it relates, yes [indiscernible] and we did have – we had a little bit of a spike in service charges and so the reduction in Q2 may just be more normalizing that spike that we saw in Q1. But as we look at our consumer based fees, our consumer based fees including ATM fees, service charges, all of those were down compared to Q1. So there was some softness just in our consumer based fees.

Yes, that too, and then we have safe deposit box fees come in the first quarter which does give them a little bit of added earnings that quarter, but that's not significant.

On the off side if you look at fees and commissions on loans and deposits, we're actually saw an uptick in debit card usage and debit card income as well as an uptick in fees collected on loan originations.

Got it, okay, thanks. And one last quick one if I could, could you just quantify the mortgage in commercial loan pipelines, the mortgage origination pipeline and thecommercial loan pipeline?

Sure Emlen, this is Jim Gray. Our mortgage pipeline is still hanging in that 275, 300 million range. It is actually picking up as we speak with the lower rates we are getting some bumping rate bias, so we are seeing a pickup in the pipeline. Right now our purchase pipeline is about 60% and our repar pipeline is about 40% where it was in the closer to 70:30 about 70, roughly 70:30 range for the actual production in the second quarter, so we are seeing a little benefit from the repar.

Emlen, this is Mitch. I'll touch on the commercial pipeline. As Robin mentioned in his opening comments it remains healthy and strong. At the beginning of the quarter it was at $195 million; that compares to a $150 million at the beginning of the second quarter. And if I breakdown the 195 by state or business line, 19% is in Tennessee, 19% in Alabama, 18% in Georgia, 13% in Mississippi and 2% in Florida with 29% being in our commercial speciality clients. So if you take the $195 million pipeline that should result in about $68 million in growth in non-acquired loans within 30 days. So, at a $195 million, we continue to experience strong healthy pipeline across the market as you can see from those percentages that’s spread geographically as well as the commercial lines.

Perfect, thanks guys.

Our next question comes from Michael Rose. Go ahead.

Hey, good morning guys. How are you?

Good morning Michael.

Just wanted to circle back to expenses, I appreciate the comments before. Just as we look consequentially in the salaries line, how much of that increase was from the increased contribution from mortgage bank? I know it’s a little skewed because of the KeyWorth you have this quarter, but anyhow they would kind of be helpful, just trying to assume if mortgage volumes remain relatively strong with the time like they are would you expect kind of similar run rate for salaries in the third quarter? Thanks.

Yes, so let’s talk about salaries, let’s also talk total non-interest expense. Just on the salary line item, if you see, we did have an increase of about $3 million, a little less than half of that is attributable KeyWorth and the contribution, the increase just specifically related to the mortgage in that line item was about $800,000 and that’s a result of an increase in commissions. And if you look at mortgage banking income or mortgage banking income compared to Q1 is actually up $1.5 million. And so the just a commission increase related to that additional income is about $800,000. Another thing that’s in that, that salaries and employees benefits that’s an anomaly or at least stands out in Q2 is that we did experience an increase and our client experience on our health and life insurance experience. We are self funded plan and we've just seen an increase in clients' experience. That had a significant impact on the quarter. That increase compared to Q1 was an increase of about $900,000. As we break that out we saw that increase start to occur in March and it really held at elevated levels in April and May. We saw it pull back a couple of hundred thousand dollars in June which was positive, we revised, but at the same time we want to see a couple of months that that decline in trends before we truly call it a trend. But we just - in Q2 we did see some elevated health and life expense that is skewing, it is showing up in that increase in salaries employees benefits quarter-over-quarter. But if you look at our total expenses at $77 million, if we back up the one-time items that Robin mentioned, the merger, the debt extinguishment penalty and then the OREO impairment that we took on that large piece of OREO property, our expenses were $73.3 million with – and that would include the increase of 800,000 from the commission, from the mortgage commissions tied to that $1.5 million increase in income.

Okay, so if I'm hearing you correctly it sounds like that that salaries line could actually come down with the cost savings and those elevated insurance costs data a little bit.

You’re correct.

Okay. And then just as a follow-up, just across some back on the loan pipeline I appreciate the color by market. Where are you guys seeing kind of the greatest opportunities for growth? Obviously, you've made a pretty significant, that's been in and around the Atlanta markets for as new territory for you, just kind of any updates there? And then, what’s the outlook been for lending hires and maybe how many you've hired year-to-date versus last year? Thanks.

Michael, this is Mike. We have, as for as the first part of your question, we think we have a lot of opportunity in the Georgia market. Obviously, we've made some nice investments in the Georgia market and we are and as a matter of fact the Georgia market was a significant contributor to our second quarter loan growth. I think what you're also going to see is on a go forward we're seeing really solid loan growth in Alabama. We're seeing really good growth in Tennessee. Florida is – it is based upon some loans that have some construction loans that have closed in the last quarter that are scheduled to start funding up in the third and fourth quarters you're going to see some nice growth in the Florida market. And of course our Mississippi market is just as steady as it's always been. As far as the number of lenders that we have hired companywide during the first part of the year that's going to be in the – and I'm excluding acquisitions here, I'm talking about new hires, that's going to be in the 10 to 12 range companywide. We have just brought on several bankers that are specifically dedicated to the middle market banking space. And so we anticipate that we're going to start seeing some growth in the middle market C&I arena that we did not see previously.

Okay guys. Thanks for taking my questions.

Our next question comes from Brad Milsaps from Sandler O'Neill. Go ahead.

Hey good morning guys. Most of my questions have been addressed, but sorry if I missed it, but just curious, could you give me the actual mortgage volumes, I guess the mortgage loans you sold during the quarter?

Sure, I actually have mortgage loans closed during the quarter, yes its $605 million that was versus $525 million in the first quarter. And I'll just go and give you a breakdown of purchase and repar we were 73% purchase in Q2, purchase 67% in Q1. Obviously 27% repar in Q2 versus 33% repar in Q1.

Great. And are you guys in terms of mortgage business have you kind of back filled and got that business kind of back in terms of with the departures have you brought in, do you have the people you want the business to kind of stabilized, where do you want it at this point in terms of trying to think about additional expenses or anything else that might be coming?

Yes, we're still working on that. Obviously, the departures of those employees in the first quarter or into the second quarter was painful, but we were very fortunate in that our remaining originators on both Renasant and those that remained on the HPAR [ph] side really stepped up their production. And so we were able to – we were able to offset that loss of production and we also were able to improve our margins by better pricing and by better execution. So, a combination of those factors were able to help us offset those actually pretty strong headwinds we had in second quarter.

Great, and then just kind of one final housekeeping question for Kevin. Are you through all the restructuring charges on KeyWorth? I know you estimated kind of maybe $7.3 million or $7.4 million when you announced the deal, should we expect any additional restructuring there or are you pretty much through those?

So, the $7.3 million that included both the merger charges KeyWorth would take and Renasant would take. We have recognized the majority. There will be some merger expenses, merger and conversion expenses that we we'll recognize through the remainder of the year. As far as amounts for the remainder of the year that we will recognize, the expense, Q3 and Q4 I don’t see that exceeding more than $750,000 to $1 million that is for both Q3 and Q4.

Okay, because it looks like Kevin, there first quarter they took about $6 million in expenses or so above kind of a normal run rate, I assume that was some of the expense run rate that you discussed kind of that they were taking before the merger was completed?

Correct, correct.

Okay, great. Thank you, guys.

Hi Brad, this is Jim Gray. I didn’t answer the second part of your question as far as new hires. We are not rehiring, I guess you would say we actually had to get – we were going through a conversion during the second quarter moving both [indiscernible] and Renasant to a common loan origination platform, but we have completed that conversion now and we are very focused now on recruiting on both the TPO side and the retail side, particularly in the Georgia and Florida markets and so we are hoping to gain some more production in those markets through that.

Great, thank you.

Our next question comes from Matt Olney from Stephens Incorporated. Go ahead.

Hey thanks, good morning guys.

Good morning, Matt.

I want to go back to the write-down on the OREO properties that you guys highlighted, can you tell us what market this was in and is there anything indicative of what is going on in that specific markets?

No that this was a hotel property that we had operated well trying to sell it for a couple of years. We had an offer that, so we went ahead and took the one-time charge this quarter because based on what the offer was, this after basically the operating income offset operating expenses, but we are still out a couple of hundred thousand dollars a year for insurance and taxes and that doesn’t count any additional funds, it would have to be put into remodeling and other aspects of it. So we felt it a prudent move to go ahead and sell – or sign the contract to sell this property.

And it’s not indicative of the market. If you look right now we had closer in the quarter for our legacy markets, in OREO we were below $10 million. With the sale of this property we will be in the $8 million neighborhood of total properties in the legacy markets at this stage of the game. So this is an indication of anything else, it is just an anomaly.

Okay. That is great color. Thanks for that Robin. And then secondly, on the deposit side, it looks like the loan deposit ratio continues to creep up, remind me of where your internal policies are on loan deposit ratio and where you see that ratio migrate into the next few quarters?

Really I’m not sure we have an internal policy loan per se, just some guidelines that we look at internally. We have been working to get that loan to deposit ratio stood at mid to high 80s. I think if we would go over 90% and continue a trajectory towards 100% that we want to check up and ensure that we are not taking on too much risk or specifically too much liquidity or interest rate risk. So just as a guideline maybe 90%, although we don’t have a direct policy. But that is a number that we managed to and internally talked about and really ongoing conversations and internally are not only loan growth but also and as important to that loan growth is how we fund that loan growth, are we funding it properly. And so there has been a lot of effort internally to ensure that we are funding our growth with proper sources. If you look at our mix of deposits, we continue to experience an improvement in our mix of deposits. I think at the end of Q2 non-interest bearing DBA provided about 22% of our total deposits and about 19% of our total funding and that is some of the highest level that we’ve had in our balance sheet funding coming from non-interest paying DBA.

Okay. That is great color, thank you.

Thank you, Matt.

Our next question comes from Andy Stapp from Hilliard Lyons. Go ahead.

Good morning.

Good morning, Andy.

Given the flattening of the yield curve, what are your thoughts regarding purchases of securities going forward? For example, the plan to maintain a relatively static level and just reinvest cash flows?

Yes Andy, this is Kevin. That's been our plan throughout this year and at the back half of last year is really just taking the liquidity comes of the security portfolio and reinvested in loans rather than the security portfolio.

Okay.

The strategy described about just maintaining a flattish tight security portfolio is the strategy we have been employing and we'll continue to employ.

Okay. You know I hopped on the call late and I may have missed this, but any color you can provide regarding the increase in fees and commissions?

Yes Andy and this is Kevin again. Couple of things drove that, one we did see an uptick in debit card income.

Okay.

And income in utilization of debit card that accounted for about 100,000 to 200,000 of the increase. Really the large increase came from fee collections on loan originations that passed through straight to the bottom line.

Okay. And I think that’s it for me.

Thank you, Andy.

Thanks.

[Operator Instructions] Our next question comes from John Rodis from FIG Partners. Go ahead.

Good morning guys.

Good morning, John.

Kevin, just maybe a quick question on the acquired portfolios. If you back out the KeyWorth loans that you added in the quarter it looks like runoff ran a little bit higher versus the first quarter around $100 million. Can you just talk about sort of what sort of pace you see going forward?

Yes, so I’ll give some commentary and then I'll let Mitch and Mike chime in. Really our decline in our card portfolio was in line with our expectations. We will see that portfolio, that’s a portfolio that we are not adding dollars. Again, we separately breakout that card portfolio just because of the different type of accounting we have to apply to it. So you'll see that portfolio decline just due to pay downs, normal principal amortization, as well as payoffs and if we make a renewal we significantly change the credit decision on that renewal. Then you might see it re-crossover to the non-acquired bucket. But typically those loans stay if we already renewing a loan typically they do stay in the acquired bucket. So that's what you're seeing in the decrease is just normal principal pay downs and pay offs. Mitch, Mike?

Yes, and John just to follow-up to Kevin's comment, I'll go back to the pipeline and just kind of reinforce the production that we're seeing out of that Georgia market where it's making up 18% of our pipeline inclusive of KeyWorth. KeyWorth remains very focused on their client base and there's a healthy percentage of that Georgia pipeline as well.

Yes, and just the last bit of color is with our focus is really on net loan growth when you add them all together, and so if you look at where net we're growing loans that in the low to mid double digits in the 12% to 13% range net. Based on what we're seeing in pipelines and anticipated pay downs for the balance of the year we don't see that changing.

Okay, thanks guys.

Thanks John.

This concludes our question-and-answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.

Thank you, Andrea. We appreciate everyone's time and interesting in Renasant Corporation and look forward to speaking with you again in the near future.

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