Renasant Corporation (RNST) Q2 2017 Earnings Report, Transcript and Summary

Good morning. And welcome to the Renasant Corporation 2017 Second Quarter Earnings Conference Call and Webcast. 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 also note that today’s event is being recorded. I would now like to turn the conference over to Mr. John Oxford with Renasant Corporation. Please go ahead.

Thank you. Good morning. And thank you for joining us for Renasant Corporation's 2017 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 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 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. And 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. Looking at our results for the second quarter of ’17, net income was $25.3 million, an increase of 10.41% as compared to the same quarter in ’16. Our basic and diluted EPS were $0.57 per share, as compared to $0.54 for the second quarter of ’16. During the second quarter of ’17, we incurred expenses and charges in connection with certain transactions that are considered to be infrequent or non-recurring in nature. These expenses were primarily associated with merger and conversion expenses, which impacted our EPS by $0.04. Excluding these non-recurring items, our ’17 second quarter return on average tangible assets and return on tangible equity -- average tangible equity were 1.38% and 14.84%, respectively. On July 1, 2017, we completed our previously announced acquisition of Metropolitan Bancgroup in an all-stock merger. As of July 1st, Metropolitan operated eight offices in Nashville and Memphis, Tennessee; and the Jackson, Mississippi MSA, and had approximately $1.2 billion in assets, which included approximately $990 million in total loans and approximately $940 million in total deposits. The acquired operations and expenses of Metropolitan are not included in our second quarter ’17 reported results. Focusing on our balance sheet, total assets at June 30, 2017 were approximately $8.9 billion, as compared to approximately $8.7 billion at December 31, 2016. Total loans were approximately $6.4 billion at June 30, 2017, as compared to $6.2 billion at December 31, 2016, and $6.24 billion at March 31, 2017, which represents an annualized growth rate of approximately 9% on the linked-quarter basis. We continue to experience a strong pipeline as we entered the third quarter. Total deposits were $7.2 billion at June 30, 2017 as compared to $7.1 billion at December 31, 2016. Our non-interest bearing deposits averaged approximately $1.6 billion or 22.5% of average deposits for the second quarter of ’17, as compared to $1.5 billion or 21.98% of average deposits for the same period in ‘16. Our cost to funds for the second quarter of ‘17 was 30 basis points, as compared to 26 basis points for the same period in ’16. Looking at our capital ratios, our tangible common equity ratio was 9.31%, our Tier 1 leverage capital ratio was 10.68%, our common equity Tier 1 risk-based capital ratio was 11.65%, and our Tier 1 risk-based capital ratio was 12.86%, and our total risk-based capital ratio was 15% for the second quarter of ‘17. Our regulatory capital ratios are all in excess of regulatory minimums required to be classified as well capitalized. Net interest income was $96 -- excuse me, was $79.6 million for the second quarter of ’17, as compared to $77.2 million for the second quarter of ‘16. Net interest margin was 4.27% for the second quarter of ’17, as compared to 4.01% for the first quarter of ’17, and 4.29% for the second quarter of ‘16. Our net interest margin adjusted for purchase accounting adjustments and loans and income collected on problem loans was 3.84% for the second quarter of ’17 compared to 3.69% for the first quarter of ’17. For the second quarter of ’17, non-interest income was $34.3 million, as compared to $35.6 million for the same quarter in ‘16. The quarter was highlighted by increases in service charges on deposit accounts, fees and commissions on loans and deposits, and wealth management revenue. Mortgage loan originations were down when compared to the second quarter of ’16, due to a reduction in the refinancing of mortgage loans. Non-interest expense was $74.8 million for the second quarter of ’17, as compared to $77.3 million for the same quarter in ‘16. Excluding non-recurring charges for merger and conversion expenses, non-interest expense decreased when compared to the second quarter of ’16. The decrease is primarily attributable to the decrease in salary and employee benefits, data processing costs, which realized the contract renegotiations and expenses on OREO. Our efficiency ratio for the second quarter of ’17 was 60.75%, which reflects our continued focus on expense management. Shifting to asset quality at June 30, 2017, our credit quality metrics continued to remain at or near historic lows with improving trends in all credit quality metrics, including NPAs, loans 30 days to 89 days past due, and our internal watch list on both linked quarter basis and when compared to 12/31/16. For more information on financials, I will refer you to our press release for specific numbers and ratios. In closing, we are pleased with our second quarter ‘17 results, which are highlighted by record quarterly earnings, along with expanding net interest margins, strong fee income, improving credit metrics, and a continued focus on overall expenses. Our performance along with the recent completion of our merger with Metropolitan has provided us with great momentum at the midpoint of ’17, which we believe positions us well for a strong finish to ‘17 and another great year for our company. Now I will turn the call back over to you for Q&A.

[Operator Instructions] Our first question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.

Hey. Good morning, everybody. This is actually Peter Ruiz on for Brad.

Good morning, Peter.

Good morning. So maybe just if we can first touch on expenses and maybe just the cost saves related to Metro, where you guys are on that and kind of your thought process on what expenses look like going forward?

Hi. This is Kevin. I will handle expenses. Overall, we are pleased with our trajectory on expenses. We have seen two quarters to three quarters now of flat or slightly increasing expenses. As we look into Q3 from just a Renasant standalone side, we expect a similar type trend line to be relatively flat. We are expecting expenses to be up a little bit in Q3, so that’s going to be driven primarily off some variable costs coming out of mortgage and the expenses will be higher in correlation with mortgage income being higher in Q3. As we look at Metropolitan and their combining -- combining their expenses with ours and the cost saves, we’re on track with the projections that we gave, the estimates we gave on the cost saves in the 37.5% range. We are on track with that. Those will all be fully realized next year, so the cost saves will be completely in our run rate in Q1. We anticipate that in the back half of this year that we will realize about 75% of those cost saves and we're on track with each of those projections.

Yeah. That’s great. And maybe just touching on the margin, you think the core NIM here is, is kind of at a stabilizing point and maybe some further upside here depending on what happens with additional rate hikes later this year and maybe if you could speak about what new and renewed loan yields look like, I know they got a nice bump last quarter, did -- any similar bump this quarter or less so?

Yeah. So in margin -- let’s talk about the new and renewed first and then we will talk about where we go from here just on margin. We saw a similar type -- similar to what we saw in Q1 where we had a 20 basis point increase in our new and renewed in Q1 compared to Q4. We saw very similar trend line, new and renewed loan yields in Q2 compared to Q1 were up another 15 basis points to 16 basis points, so we saw another quarter of increasing loan yields on the new and renewed front. As we discussed last quarter, we hit an inflection point on our new and renewed or on our loan yields that our new and renewed loan pricing was coming in at or in some cases better than our rollout rates, what was paying off or what was rolling out, and so that in and of itself has had a positive impact on margin. As we look out into Q3 and margin, we would expect some positive benefit from the rate increase that occurred in late June. The last 25 basis point rate increase was not fully reflected in all of our results for Q2, so we would expect the positive benefit with that and any future rate increase would anticipate positive benefit. One thing I will mention is just with Metropolitan, adding Metropolitan to our margin will pull margin back a little bit. Their margin is in the low 3s. The 3.15% and 3.20% range. And so when we just add their margin to our margin, our core margin, it will pull that -- it will pull our core margin back. We are projecting right now about maybe 10 basis point to 12 basis points, but again we expect positive offset to that as we realize the full effect of the last 25 basis points and then any future rate increase would also be positive to margin.

Okay. And maybe lastly, if you just, that's great on the asset side, are you seeing any sort of deposit pricing pressure at all and anything on that will be great?

Yeah. So we are -- to answer the question shortlyy, yes. We are seeing stiffer competition and higher rate offerings in the market on funding -- on deposit costs. We are -- I think we are doing a good job of being competitive, maintaining relationships, as well as our team being focused on offsetting those higher rates to be competitive with mix change. You can see in our balance sheet, our mix right now, we have 22%, almost 23% in non-interest bearing DDA. That's up a 4 percentage point from Q1. So again we recognize that rates -- there may be more competitional funding now, but we can still offset that costs through mix change and keep the total cost to funding, may be moving or lagging at a lower level than what stated rates or what overnight rates are moving. I will say that as we get into Q3, typically Q3 is when we see some deposit outflows out of our public funds. We will be relying a little bit more on FHLB borrowings in Q3. Those FHLB borrowings will come at a higher cost than what our historical deposit costs have been. But we don't anticipate that having a dramatic impact on margin, although it may weigh -- it may weigh on margin a couple of basis points compared to Q2, we don't anticipate that weighing significantly and would anticipate of being short-term in nature as we get into Q4 and Q1 as we build public fund money back up.

Great. That’s it from me.

Our next question comes from Michael Rose of Raymond James. Please go ahead.

Hey. Good morning, guys. How are you?

Good morning, Michael.

Hey. I just wanted to kind of clarify on the non-interest expenses, just as a starting point for next quarter, if I assume you guys are flattish and I beacon some cost saves from Metropolitan's first quarter numbers, I don’t have the second quarter numbers. It looks like good run rate to start off might be around $78 million, is that a good kind of starting point?

Yeah. In the high 78s, maybe high 78s to mid 79s would be a good starting point.

High 78s, okay. Great. And then just wanted to get an update maybe from Mitch on the pipeline, where it stands and obviously, we’re coming to a seasonally stronger quarter for you guys, so just any thoughts there would be great? Thanks.

Sure, Michael. The current pipeline is $186 million, and we are beginning the third quarter, as you can see with a strong pipeline, Metropolitan added $26 million. So if you adjust that, the legacy pipeline would be at $160 million. That’s up from Q2 at $157 million. If we break that down by state, 26% would be in Tennessee, 21% in Alabama, Florida, 37% in Georgia, 16% in Mississippi. And as I mentioned at the beginning, $26 million added or about 14% to Metropolitan and the other thing, I would note our specialty lands, they’re adding about $41 million or about 22% to that 186 pipeline. So $186 million should result in about $65 million in growth in non-acquired outstandings within the next 30 days. So we are beginning the quarter with a strong pipeline. We see that again, which also reflects the strong production that we had in the second quarter. We’re seeing that across all markets and business lines and we do expect continued strong loan growth as we go into the third quarter.

Okay. That’s helpful. And then just maybe just one last one from me, lot of talks -- credit trends have been very good for you guys, but a lot of talk on retail. Can you just kind of size up your exposure for us and if you have any concerns at this point or going forward? Thanks.

Yeah. Michael, as we talked before retail if you looked at the term portion is about 8% of the total. At the end of the quarter, we had zero past use. We are not a big box lender if you look at our larger credits, it would be single national credit type tenants. We don’t have any reason for concern that’s why we continue to monitor that space just understanding what some of the closure of the big box how that get effect some rental rates in some of our markets. But we are not seeing any indications that would cause this concern at this point.

Okay. Thanks for taking my questions, guys.

Thank you.

Thanks, Michael.

Our next question comes from Matt Olney of Stephens. Please go ahead.

Hey. Thanks. Good morning, guys.

Good morning, Matt.

I want to go back to loan growth and I am -- I want to dig in on the impact of Metropolitan Bank and I’m curious what kind of growth Metropolitan see in the first half the year. Any due diligence you can give us on that. And then going forward how is Metropolitan going to kind of augment the loan growth outlook for Renasant combined? Thanks.

Sure. Matt let me start. I’ll go back to the pipeline. I mentioned they were adding about $26 million to the $186 million and if you break that down by market that would make up, their pipeline would be about 46% of that pipeline in Memphis, about 38% in Nashville, about 16% in Jackson, so definitely additive to all three of our markets. Their production would be as a percentage a little higher than ours. So far this year as we continue to get net loan growth in the high single low double-digits, Metropolitan will again support our growth within that same range probably more in the higher end of that range. So, their focus on C&I particularly the private client areas, will definitely additive in all three of those markets and to the company. They bring very good talent, very focused on the client and we look forward to combining these two teams, definitely will be a positive to loan growth and like I say keep us within the range that we’ve been guiding to this year.

Okay. That’s helpful, Mitch. Thank you. And then on the efficiency ratio, it looks like you guys have made some nice progress towards your sub 50% goal. Can you talk more about this trend into the back half of the year with Renasant’s standalone and obviously the impact of Metropolitan Bank, what’s your expectation for efficiency ratio?

Hey, Matt. I’ll start off some commentary, and Rob and Mitch want to add anything, I’ll let them add as well. But as we look at our efficiency trend, we’re seeing frankly nice improvement and steady improvement, really as the non-interest expense has leveled off. And due to an increasing margin, a growing balance sheet, nice production coming at the mortgage, all of that revenue lift on a flat expense base is really what’s causing the improvement in the efficiency. As we look at Renasant on a standalone basis, we expect a similar trend line in Q3 and Q4, just as margins hold, as balance sheet growth occurs and again building off of previous comments that we expect the Renasant expenses to be relatively flat compared to Q2 -- in Q3 compared to Q2. So we would expect the efficiency trend line to continue to improve. That’s going to be mass, as we look at or as we combine with Metropolitan in Q3, Q4 combining their operations, they are a little bit more inefficient than we are and not receiving all or not realizing all the expense sides until Q1, don’t really see a clean combined efficiency ratio on a fully realized, fully cost savings realized until Q1. But we’re anticipating Q1 that you would see improvement in Q1, compared to where we are at Q2. We are with the underlying Renasant efficiency ratio improving in Q3 and Q4 as we approach that clean look in Q1.

Just to clarify, Kevin, are you saying that by the first quarter of ‘18, when you have forecast saves with Metropolitan Bank, you expect to have efficiency ratio below where it’s at today or just below where it would be in the back half of the year?

Below where it’s at today.

Got it. Okay. And then, just lastly for me, as far as capital, please remind us where you expect the capital ratios to be in the third quarter with Metropolitan pulled in?

Sure. So, just taking a couple of ratios, our TTE and our leverage ratio when we add in Metropolitan would anticipate about total of 60 basis points to 65 basis points of compression. So, right now, the leverage ratio is north of 10.60%. We would expect leverage ratio to be the high 9s, maybe low 10s on a combined basis. The risk-based capital ratios will expand with little bit more compression. I would anticipate the compression in those to be in excess of 100 basis points, so total risk-based capital would be in the low 14, maybe high 13 and CET1, similar type trend line with the total risk-based capital about 100 basis points to 125 basis points of compression.

Okay. Great. Thanks, guys.

Thank you, Matt.

Thanks.

Our next question comes from Andy Stapp of Hilliard Lyons. Please go ahead.

Good morning.

Good morning, Andy.

With the linked quarter increase in core loan yields solely reflective of the fed rate hikes or were there other drivers?

Hey. Andy, I would say that it is -- it was definitely helped by the fed rate hike. We saw variable rate loans reprised almost immediately if you just, just to remind everybody. Our variable rate loans have very few that are subject to floors. So -- and variable rate loans approximate around 30% of our loan portfolio, those all reprised immediately, so that has helped. It’s been interesting as far as other factors. I think our team has done a tremendous job of being cognizant of pricing and maximizing returns on our capital and I think that’s reflective in our margin as well and in our loan yields. As I’ve mentioned earlier, we’ve seen our new and renewed loan pricing increased for about three or four consecutive quarters and that to me is as much attributable to our team being cognizant of yields and margins, and profitability as well. Breaking down some of the new and renewed, we saw our renewed -- new and renewed rate on fixed rates expand more than we’ve seen in several quarters. Our variable rate loans on new and renewed as well as just stated. They’ve been increasing in high correlation as the short end of the curve has moved. That hadn’t been the case -- that has not been the case on fixed rate loans up until this quarter. We saw a larger movement in fixed rate loans this quarter than we’ve seen in previous quarters. So I would choke it up some to fed, but I also give credit to the team members and their diligence on pricing and returns.

Okay. That’s helpful. And would you provide some color on a linked quarter decline in securities yields?

Yeah. So, couple things there is, we did have some calls of some municipal securities and we did not -- that the some calls that occurred and they were at higher yielding rate, we did not reinvest in munis, we either reinvest in a different types of security or held on to that cash. That would be one. And also in Q1 we had some -- Q1 compared to Q2, we had have some changes in prepayments, prepayments fees that affected the amortization is a little bit more beneficial in Q1 compared to Q2.

Okay. And what’s a good rate for the effective tax rate going forward?

A good rate would be zero.

Yeah.

And I’m not sure we’re going to get that though. We are -- our effective tax rate was a little north of 32% in Q2 and we are -- with the addition of Metropolitan, the additional income they bring we’d expect that that to be more in the 33% range on the back half of the year.

Okay. And last question, I’m just wondering you might have a breakout of the various components of mortgage banking, such as gain on sale, servicing, et cetera?

Hey Andy. This is Jim. Yeah. The majority of our -- the vast majority of our mortgage banking income is gain on sale and origination fee, representing roughly 99%, servicing is only about 1%, primarily because we are pretty aggressive on amortization of our servicing asset, we try to be very conservative there, make sure that we maintain a conservative book value on our servicing.

Okay. Great. Thank you.

[Operator Instructions] Our next question comes from John Rodis of FIG Partners. Please go ahead.

Good morning, guys.

Good morning, John.

Maybe -- Jim maybe a follow-up question for you on mortgage. Was this a fairly, I guess clean quarter for mortgage and it sounds like you guys alluded to maybe a better third quarter for mortgage. So I don’t know if you could just elaborate on that?

Sure. Yeah. It was a clean quarter. I think what we’re seeing now is kind of the efforts of our labor in the first quarter as we had mentioned really focusing on recruiting both on the retail side and the wholesale side. We had recruited let’s say one -- brought on 11 new hires on the retail side, two on the wholesale side during the quarter for a net of up six, because we did have five that left. So and we really focused on recruits that have purchase volume. They weren’t really just riding away with refis and as a result of that, our purchase volume for the second quarter was 77% versus 68% for the first quarter. I think as we move into the third quarter, we are continuing to recruit, we have right now about 13 in both retail and wholesale, another 13 projected hires that will -- throughout our markets really spread all across our markets with the purchase volume focus and so we would anticipate our closings for second quarter were $526 million, we’re projecting closings in the third quarter in the $500 million to $600 million range and mortgage banking revenue in the where it was $12.4 million for the second quarter in the $13 million to $15 million range.

$13 million to $15 million in revenues in the third quarter?

That’s what we’re projecting, yes.

And you guys, I guess this quarter, mortgage revenues were 10.5% to 11% of total revenues and I think you guys have talked about keeping it around 10%, is that sort of still the plan going forward?

Yes.

Okay. Okay. Kevin -- Kevin maybe just a follow-up questions for you on the margin, obviously a lot of moving parts and you guys benefited this quarter from I guess a little bit higher level of interest recoveries with $2.7 million. And then just given your comments on some of the, I guess, the impact from Metro, if you look at the all-in margin for the second half the year sort of does around the 4% level, seem to make sense, if you assume interest recoveries kind of trend back down and obvious yield accretion and so forth?

Yeah. I would -- that -- the purchase accounting is noisy, it’s lumpy. I would anticipate our reported margin to be in that 4% to 14% range. We’re still finalizing the Metropolitan fair values. So the -- those numbers will -- that the reported numbers will bring -- we will be possibly impacted by our purchase accounting adjustments made in the Metropolitan’s loan portfolio and liable -- interest rate sensitive liabilities as well. But we would anticipate our reported margin to be in the 4% to 14% range, just with normal levels of purchase accounting and normal levels of interest income recovered from previously charged off loans. You mentioned the large -- the item that -- the recovery and interest income, I will mention on that, provide a little bit of color. That actually goes back to a loan that was charged off in relation to the Crest and FDIC acquisition. So this was a loan from effort that we have been working to obtain moneys from a borrower. We were successful in that in the second quarter and that actually allowed us to be like to date recover any negative impacts that we incurred as far as terminating our loss-share agreement with FDIC. We anticipated a norm back of about 12 months when we elected to terminate the loss-share agreement. It actually took us about five months to six months to recoup any one-time hits the earnings to terminate that agreement. So we’re now on the black as far as terminating our loss-share and would still continue to expect future recoveries off of the FDIC acquisitions or in some cases previous Whole Bank acquisition.

Okay. But obviously lumpy going forward I guess obviously?

It seems to be lumpy going forward.

Okay. Robin, maybe just one final question for you, just your thoughts on the M&A environment going forward now that Metro is closed?

John, we feel like that there is lot of opportunity out there and we’ve been acquisitive for the last several years and we’ll continue with the same thought process we’ve had in the past. We feel like it would be opportunistic, look for opportunities that fit the parameters that we -- that previously quoted and hopefully we will be able to find some partners that are willing to work with us to receive that optimum pricing that we feel like we need in order to move forward with M&A activities.

Okay. Fair enough. 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 everybody’s time today and everyone’s interest in Renasant Corporation. And we certainly look forward to speaking with you again in the near future. Thanks, everyone.

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