Renasant Corporation (RNST) Q1 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Renasant Corporation 2017 First 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 like to turn the conference over to John Oxford, Director of Corporate Communication. Please go ahead.

Thank you, and good morning and thank you for joining us for Renasant Corporation's 2017 first 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 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. Now, I will turn the call over to E. Robinson McGraw, Chairman and CEO of Renasant Corporation. Robin?

Thank you, John. Good morning and thank you again for joining us today. Our first quarter was an active quarter and a great start to what we expect to be a great year. At the beginning of the quarter we announced proposed merger of our company with Metropolitan BancGroup, Inc. which will expand our presence in Mississippi and Tennessee. As we announced last week, we received all federal bank regulatory approvals and are focusing on securing the required approval from Metropolitan shareholders later this quarter. Both Metropolitan and we have experienced a positive reaction from our clients and associates in response to our proposed merger, and we look forward to an anticipated completion of the merger in July and a bank conversion during the third quarter of 2017. Looking at our results for the first quarter of 2017. Net income was a record $24 million, an increase of 13% as compared to the same quarter in 2016. Our basic and diluted EPS were $0.54 per share as compared to $0.53 and $0.52 respectively for the first quarter of 2016. During the first quarter of 2017, we incurred expenses and charges that are considered to be infrequent or non-recurring in nature. These expenses were associated with merger and conversion expenses and a penalty incurred with the redemption of high cost in trucks which on a combined basis impacted our EPS by $0.01. Our 2017 first quarter return on average tangible assets and return on tangible equity were 1.23% and 13.48% respectively. Focusing on our balance sheet, total assets as of March 31, 2017 were approximately $8.8 billion, as compared to $8.7 billion at December 31 of 2016. Total loans, which includes loans purchased in our previous acquisitions were approximately $6.24 billion as of March 31, 2017, as compared to $6.2 billion at December 31, 2016. Non-purchased loans grew $123.7 million to $4.8 billion at March 31, 2017 as compared to $4.7 billion at December 31, 2016 which represents an annualized growth rate of 11%. Total deposits were $7.2 billion at March 31, 2017 as compared to $7.1 billion at December 31, 2016, representing an annualized growth rate of 10%. Our non-interest bearing deposits averaged approximately $1.56 billion or 23% of average deposits for the first quarter of 2017 as compared to $1.3 billion or 21% of average deposits for the same period in 2016. Our cost to total deposits for the first quarter of 2017 was 29 basis points as compared to 25 basis points for the fourth quarter of 2016 and 25 basis points for the first quarter of 2016. Net interest income was $74 million for the first quarter of 2017 as compared to $70.1 million for the first quarter of 2016. Net interest margin was 4.01% for the first quarter of 2017 as compared to 4.21% for the same quarter in 2016. Non-interest income is derived from diverse lines of business which primarily consists of mortgage, wealth management, insurance revenue sources along with income from deposit and loan products. For the first quarter of 2017, non-interest income was $32 million as compared to $33.3 million for the same quarter in 2016. Non-interest expense was $69.3 million for the first quarter of 2017 as compared to $69.8 million for the same quarter in 2016. Excluding non-recurring charges for merger and conversion expenses and debt prepayment penalties, non-interest expense remained relatively flat when compared to the first quarter of 2016 and on a linked quarter basis. Looking at our credit quality metrics and trends. At March 31, 2017 overall credit quality metrics continued to remain at or near historic lows. Excluding purchase loans, non-performing loans as a percentage of total loans was 31 basis points and early-stage delinquencies or loans 30 to 89 days past due as a percentage of total loans were 16 basis points as of March 31 of 2017. The improvements in these metrics over the past year highlight our continued focus on asset and credit quality. Looking at our capital ratios, our tangible common equity ratio was 9.16%. Our tier 1 leverage capital ratio was 10.39%; our common equity tier 1 risk-based capital ratio was 11.69% and our tier 1 risk based capital ratio was 12.93%, and our total risk based capital ratio was 15.11% for the first quarter of 2017. Our regulatory capital ratios are all in excess of regulatory minimums required to be classified as well capitalized. For more information on our financials, I refer you to our press release for specific numbers or ratios. In closing, we're pleased with our first quarter 2017 results which highlights -- include our merger announcement with Metropolitan, record quarterly net income and a continuation of improving returns on profitability metrics, as our return on average tangible assets was 1.23%. These results have us all to a positive start to what we believe will be another strong year for Renasant Corporation. And Jessica, I'll turn it back over to you for questions and answers.

[Operator Instructions] The first question comes from Catherine Mealor of KBW.

Thanks, good morning. Robin, could you give us a little bit of some color around your loan growth outlook? It looks like loan growth slowed a little bit which I know is typical for a first quarter. But can you give us some color around how your pipeline is looking going into the second quarter and what your outlook for the legacy growth rate is for this year? Thanks.

I’ll let Mitch Waycaster give you that information, Catherine.

Good morning Catherine. Our current pipeline is $157 million, and while we did see some slowing in production early in the quarter, production picked up later in 1Q particularly in March, and which is reflected in our current pipeline of $157 million. That compares to $150 million same period prior year. So we continue to see a good pipeline actually in each region and state and business lines. So if we break that down by region and state, 29% would be in Tennessee, 22% in the Alabama, Florida region; 30% in Georgia and 19% in Mississippi. 20% of that pipeline is also in our commercial lines made up by ABL, health care, SBA leasing and middle market C&I. So our current pipeline of $157 million should result in approximately $55 million in growth in non-acquired loans within the next thirty days. If you look at our first quarter production, actually totaled $314 million, as Robin mentioned earlier that resulted in about 11% growth and non-acquired $124 million. If you look at that production by region and state, Central Alabama, Florida or the Alabama Florida region contributed 16% and if you'll remember their current pipeline is 22% so you can see that increasing trend. In Georgia they produced 31% of that production, currently have a pipeline of 30% and Mississippi produced 33% of the production in Q1 and Tennessee 20%, current pipeline at 29%. So we do have a good pipeline; year over year we saw a good increase and feel good about production going forward.

And then as I think about the acquired loan balances, how quickly should we see that pace over the next few quarters?

The acquired book -- I mean if you look at the run-off this prior quarter, it was pretty much in line with what we saw in Q4 and Q3, that’d be a little higher and that's probably given a pretty good run rate going forward.

Yeah. There is some lumpiness in that Catherine, just depending on the size of loans to pay down. But I think somewhere between the 75 million to 90 million per quarter is a metric run rate.

One more on expenses, at really nice production and expenses this quarter; was there anything temporary in there that will come back into the expense line next quarter or is this a good run rate to grow from? Thanks.

Catherine, Q4 -- just taking out some of the temporary items, that really one-time, the merger and the debt prepayment penalty on the trucks. As we look at Q2 -- and really Q2 we're going to have more merger expenses, so the number I won’t give you includes the merger expenses. We will see an uptick in non-interest expenses but that's primarily due to day count as well as merit increases that went into place late in the Q1. So we'll have a full quarter impact in Q2 of that as well as just again a day count differential, but we anticipate our expenses to be in the high $70 million, maybe $71 million range and could be higher than that. But that variability of being higher – that variability of it being higher is going to be mortgage driven. Mortgage income continues to pick up and we could see our non-interest expenses to be as high as 72 million, maybe 72.5 million but that difference is primarily going to come through mortgage commissions and will be more than offset with higher levels of mortgage income.

The next question comes from Brad Milsaps of Sandler O'Neill.

Kevin, just maybe stick with the mortgage theme, can you talk or Mitch, can you talk a little bit about what went on in mortgage banking this quarter? I know the fourth quarter is little bit of a transition quarter; revenue was up linked quarter where a lot of guys going the other way. Just kind of curious what additional color you could add there, kind of around mortgage banking in the first quarter?

Yes, Brad, this is Kevin. I'll give a general comment, then let Jim Gray give you some more details about mortgage. Overall we were pleased with mortgage; I mean, started out as a very slow quarter ended very strong. March was very strong for us as far as mortgage production and mortgage income and then also layering into that we did make more investments in mortgage into areas of the country that we expect higher levels of productions continue to drive mortgage revenue and sustain mortgage revenue throughout the year. Jim, you want to give some details?

Sure, a little more detail. Our locked volume for the first quarter of 2017 was 571 million versus 452 in Q4. Probably more important than that was how that came about, kind of echoing Mitch’s theme on portfolio loans, our locked volume for March was over 40% of our total locked volume for the quarter. Same with closings and same with mortgage banking revenues. So we see that trend continuing, our daily locked volume has improved and is at or above our target levels now. And most of that increase is coming through purchase. Our purchase volume was – or purchase percentage was 68% in Q1 versus 56% in Q4 and that's in line with -- some of that you could say was seasonality with -- as the spring comes on the purchase volume picks up. But as Kevin alluded to, we have increased our number of originators -- net new originators from end of Q4 to end of Q1, there was an increase of 10%, we're currently recruiting 10% to 15%, expect to pick up another 16%, this quarter we also brought on a wholesale team in out of Greensboro, North Carolina. We're getting the wholesale clients signed up now, we really have not started, even seeing any locked volume from that group at this point. And then as Kevin alluded to, the hires and investment in Mobile [ph], Jacksonville and Auburn and also are increasing our team in Atlanta.

That's very helpful and maybe just to switch gears to the margin. Kevin, a lot of moving parts this quarter that a lot of those you kind of call out in the press release. Maybe a couple of questions; one, how quickly do you anticipate the cash balances being reduced -- I know a lot of that was deposit driven, but it seemed a little bigger this quarter maybe than a year ago. And then secondly, just around the accretable yield, I know it's kind of hard to predict but kind of looking out for the remaining year what sort of pace would you expect kind of between the accretable and non-accretable to affect? And then finally, how do you expect kind of for the rate increases to kind of affect the margin going forward?

Yes. So let's talk about margin and just some of the moving parts. We did try to provide some detail, just again with the moving parts on margins. Our as reported margin with the 401, if we back out to get to a core margin, when we take core, we're really just taking out items that really aren’t driven off of our own loan or deposit production. And so as we've said the core margin in the past that really does exclude any purchase accounting as well as some other one-offs. One item we called out this quarter is just interest income that we collect on problem loans. Really that interest income that we collect on previously charged off loans, it does net out -- in that number we will net out any loans we put on nonaccrual. Any interest income we have to forgo the result of putting a loan on non-accrual, but for the most part that's interest income we collect on previously charged-off loans. As you can see, we had a large amount that we collected in Q4 and that did cause some volatility in the margin. So if we exclude all of that, our core margin from Q1 compared to Q4 was down 2 basis points. Now talking about deposits, you mentioned we did have -- we did have an influx of deposits. Our average balance of deposits were up $200 million. Most of that -- about 55% of that coming from public fund, that is some of the variability that we do anticipate seeing rolling out. As we get into Q2 -- the midpoint the halfway through Q2 we do expect some of that public fund money to start rolling out. That excess cash did weigh on margin at least compared to Q4, did weigh on margin 10 basis points. So as we look at our core margin we were pleased to see that our core margin increased 7 to 8 basis points, and positive signs that we're seeing in our margin is new and renewed loan yields are up ten to fifteen basis points from Q4. And more importantly, our cost of funding is staying very stable, it's up a basis point compared to Q4, and only up 4, 5 basis points compared to Q1 of last year. We've always viewed that one of our strengths is our deposit base. We feel that our data and our modeling are very conservative and in fact they're proving out as we've seen this 8 basis point – 7 to 8 basis point increase in core margin that’s largely being driven off, being able to hold that funding and those cost deposits stable. On the accretable yield, a couple of things I will mention, just as far as the non-accretable difference recapturing, that very volatile, it's hard to predict. I would just say that on the average there's probably about 10 basis points per quarter. On the accretable side, we anticipate that to at least in the short run for the rest of this year impact margin positively in the 17 to 20 basis point range, and that is down a couple of basis points from last year. Last year it averaged more in the 20 to 22 basis point range. And then last -- I think the last thing you mentioned was just our future rate increases, should impact us and again what we've been able to see with the rate increases we've had so far is a positive impact to net interest income. We would continue to anticipate the same driven off of an asset mix that our loan portfolio is 60% fixed, about 30% variable and 10% adjustable. We expect a positive variance on the asset side with again our focus on being containing and controlling the cost of funds as rates increase.

The next question comes from Michael Rose of Raymond James.

Maybe just switching gears a little bit to credit, we've seen some issues pop up in some areas this quarter like in healthcare and auto and retail. Can you kind of give us some color on those portfolios? I don't think you guys really have much of an auto portfolio, maybe on the health care side, remind us kind of what you have and then on the retail side it's getting so much attention. Thanks.

Michael, this is Mitch, you’re correct on all of those, that’s almost nonexistent as far as we're concerned. Really we've not seen any issues in either health care or retail. I mean we’re very focused in our health care division in senior housing, medical facilities and we've been really focused on that now little over a year. It is a good part of our pipeline. But input trend, very focused and selective on those originations but no issues. Retail, we've had no issues there but it's one area given what's occurring in that space that we're watching closely. And as a percent loan portfolio relatively small and -- but I mean good question, something we're focused on but approach very cautiously from an underwriting and as we continue to monitor that part of our portfolio. But we're not seeing issues to this point.

Michael, just one thing to add to that, particularly on the retail side we've been very very focused on just the impact of retail, not only coming out of the last holiday season but really this has been a focus of ours for a little bit longer than that. And we're just trying to remain very cognizant of how some of the bigger box stores as they collapsed stores closed doors, how that may impact rental rates of other commercial space. So we're staying close to that but don’t anticipate any problems or see any exposure or concentrations at this time. Mark, anything you want to add to –

This is Mark Williams. I'd just add that we routinely in the credit area track our national units, regional and across the U.S. and we limit our exposure to that. We equate them to bond rating and how we track that and we stay attuned with what you referenced in some of the slowdowns either in closings and pull out by regions of this national unit and we cross-check that to our exposure in our footprint.

That’s really helpful; maybe just another one on deposits. It looks like the costs were only up one basis point. Was there any sort of trends either higher or lower than that by market and what would you expect as we move through the year just in terms of the cost of funds given your EDM [ph] mix and low cost deposit composition?

So the only thing I think is really significant is just the influx of public funds. And again that will flow back out and so we typically don't tie that money up in long term asset, just due to the seasonality and the short term nature of it. We wouldn't anticipate hitting a bottom of public funds as we get into the – as we get into June and bottoming out really in early Q3, that’s the August range, just some positive trends that we see on the funding side is again a focus on low cost being stable deposits, good relationships. We see a lot of advertisements in the market today for teaser rates which will put pressure on funding but as we've discussed in the past we have really shied away from trying to garner deposits just purely off of rate. Our thought has always been, if you get it for a rate, you lose it for rate. And so our focus has really been on core deposits with relationships. And also this was tied to our asset growth strategy. As we grew assets we want to ensure that we're growing it with proper funding. That trend continues and if we look at our average deposits, again 55% came from public funds, 45% came from those types of relationships, those types of deposit accounts that I mentioned. And we feel -- one of our biggest strengths in addition to being able to grow on the asset side, our biggest strength we think is our funding and our ability to maintain a stable low costing funding base. And we think as rates rise, the value of that deposit franchise will continue to show itself in our number.

Maybe just one final one for me, just any updates on Metropolitan in terms of closing date and systems integration, all that stuff? Thanks.

We're looking, Michael, it’s closing on July 1. Systems conversions set for September 25. Integration is going very well. We've had a very positive response from team members at Renasant and Metropolitan. So we see that moving to a very positive closing and pick up during second half of the year.

The next question comes from Kevin Fitzsimmons of Hovde Group.

Just wanted to -- I have a follow up question on the margin. Kevin, how should we think about long term the moving both ways, one hand there's kind of a waning of accretion income that will occur at some point granted with future deals such as Metropolitan, I guess the buck gets refilled to some extent. But you have the positive effect of rising rates and that working through the balance sheet as well. Should we think long term about the long-term margin being modestly -- some modestly amount below where we are right now in terms of the reported margin but you're going to have the accretion income waning off but may be partly or mostly offset by the positives of rising rates? Is that a good way to think of it? How would you think about it?

Great question, so just looking at it right now, even pre-Metro and don't know what the purchase accounting adjustments will be on Metropolitan, but let’s just look at where we stand right now. Right now we have over 60 million of purchase accounting adjustments tied to acquired loan portfolio. About one-third of that is accretable yield, about two-thirds of it is non-accretable difference. And so that accretable yield piece, as I mentioned is coming in at about 17 basis points in Q1 on an annualized basis. So that, just that piece alone has a life of another 18 months, although it's going to continue to slowly come down as far as its contribution. The non-accretable difference is just hard to predict, and we just try to guide to about 10 basis points. To your question, as reported over time as we see rate increases, expect as reported in the core margin to start matching one another and those rate increases that we see, as we continually see modest steady improvement in our core margin, then that core margin will ultimately become -- and blend into that as reported margin. Again taking out the lumpiness of the non-accretable difference recapture where we stand right now in the 4% range as we see rate increases, those two should start blending into one another.

One just follow up question; I know we have the Metropolitan deal about to close. Robin, could you just remind us longer term how you're thinking about utilizing M&A, and maybe markets where you would look most to use it either whether it's in-market or entering markets that you're not in currently? Thanks.

Kevin, we continue to look to be acquisitive in the future. We feel like that we have proven ourselves to be excellent acquirers, that we feel like we have a team that’s done a great job with integration in these acquisitions and look forward to continuing with acquisitions in the not too distant future. We certainly would like to look within the states that we're currently in but at some point in the future, I think we would be looking to expand outside of that five-state area that we're currently in.

Any states, Robin, that would be higher on the priority list in terms of adjacent to the five states that would make more sense for you?

Yes, obviously adjacent states and the Carolinas probably would be more interested in going west or north. We only have a small presence in Florida, so we would continue to look at what the opportunities might be in that particular state.

The final question comes from Matt Olney of Stephens Inc.

Hey good morning guys. This is actually Matt Sealy on for Olney. Want to circle back on the margin, particularly around remaining loan forward. So it looks like core loan yields were up just modestly in 1Q. Should we expect this to take kind of another step up in 2Q with the March hike? Or would you say once these trends are pretty good indicator, any insight there on the core trends would be pretty helpful.

Matt, this is Kevin. We continue to expect to see loan yields increase. The number that you're looking at in the margin, that’s a total portfolio. What we are seeing, if we just look at our new and renewed loan yields for Q1, we're seeing larger increases in our new and renewed loan yields than we are seeing in the total portfolio. So the total portfolio is going to lag a little bit. You will see an uptick in Q2 compared to Q1 just with the rate increase being the latter, been in the latter part of the quarter. But our new and renewed loan yields are at 450 in Q1 of 2017, that's up 21 basis points from Q4, 2016 at 431. If we look back to this time last year, new and renewed loan yields were up almost 40 to 45 basis points. So we continue to see improvement on our new and renewed loan yields and are approaching a point where new and renewed loan yields are at or slightly higher than the maturing loan yields. So we're also reaching an inflection point on that loan portfolio where the roll-out rate is lower than the roll-in rate on new and renewed loans. So we see several positive trends in our margin, not only on the funding side but also an asset repricing side.

And staying on the margin with security yields, they were up pretty nicely during the quarter. Doesn’t look like composition changed much; are you just getting better pricing on new purchases? What’s the dynamic going on there?

Really just adjusting the prepayment speed, with just the movement in the rates. That's mainly what's causing that bump in the investment portfolio.

And lastly on mortgage, were there any valuation adjustments to the locked pipeline? I think last quarter there was a larger 5 million negative adjustment; anything this quarter worth noting?

We did have -- with our locked volume being up, we did have an improvement on our mark to market. Because our pipeline was actually up from -- I don't think I mentioned this earlier, pipeline at the end of Q4 was 148 million plant; pipeline at the end of Q1 was 232 million. So we did have some positive mark to market adjustment associated with that. End of Q&A

[Operator Instructions] This concludes our question and answer session. I would like to turn the conference back over to Robinson McGraw for any closing remarks.

Thanks everyone for joining us today. Let me leave you with these positive trends going into the second quarter. We have improved core margin, improved new and renewed loan rates, strong loan pipelines in both the commercial loans and the mortgage loan pipeline and relative stable expenses as we look into the quarter with the mortgage commissions being the only variable that we see going into the second quarter. So with that we appreciate everybody's time and interest in Renasant Corporation and look forward to speaking with you again. Thanks.

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