Renasant Corporation (RNST) Q4 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Renasant Corporation 2018 fourth quarter earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to John Oxford. Please go ahead.

Thank you Laura. Good morning and thank you for joining us for Renasant Corporation's 2018 fourth quarter and year-end webcast and conference call. Participating in this call today are members of Renasant's executive management team. Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning may be non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measure can be found in our earnings release, which has been posted to our corporate site renasant.com under the Investor Relations' tab in the News & Market Data section. And now, I would 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 over-reacted to, in light of the prevailing economic indicators and in fact we capitalized on the fluctuations in the financial markets in the fourth quarter to improve our shareholder value. First, in October, the Board authorized the repurchase of up to $50 million of the company's outstanding common stock. During the fourth quarter of 2018, we repurchased approximately $7.1 million of our common stock, leaving us plenty of availability for future repurchases in the financial markets as they returned to conditions experienced in the fourth quarter. At the same time, we announced $0.01 increase in our quarterly dividend bringing our annual dividend to $0.84. This represented a second dividend increase in 2018 and approximately 10% increase from 2017. We believe that 2018 was a remarkable year for Renasant highlighted by record earnings and profitability metrics. The returns generated were predicated on our focus and attention to cooperation of the bank, attracting talent in all of our markets and serving our clients and communities with our premier level of products and services. We anticipate this strategy will continue to maximize the return for our shareholders. Now, I would turn the call over to our President and Chief Executive Officer, Mitch Waycaster, to discuss 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 fourth quarter of 2018, net income was $44.4 million, as compared to $16.5 million for the fourth quarter of 2017. Our basic and diluted EPS were $0.76 for the fourth quarter, as compared to $0.33 for the fourth quarter of 2017. During the fourth quarter, we incurred merger and conversion expenses associated with Brand merger which reduced our net income $1.3 million and EPS $0.02. You will remember, our earnings in 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 fourth quarter of 2018, adjusted for merger and conversion expenses, represent a return on assets of 1.43% and a return on tangible equity of approximately 80%. 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 $12.9 billion, as compared to approximately $9.8 billion at December 31, 2017. Total loans were approximately $9.1 billion at December 31, 2018, as compared to $7.6 billion at December 31, 2017. Brand added approximately $1.3 billion in loans held for investment at the acquisition date. Along with the previously mentioned addition of Brand in Atlanta, during the past quarter, we have added new market leaders and producers throughout our footprint. We have also brought in commercial banking talent, with an emphasis on C&I lending and at the same time, we have enhanced our treasury management offerings to support our commercial clients. Loan production for 2018 was strong at $1.7 billion, as compared to $1.5 billion for 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 will not compromise these standards due to competition, if we believe the structure or terms are too aggressive for us. Regardless, we do expect payoffs to normalize in 2019 and we have implemented strategies throughout our footprint, bolstered by our recent hires that we believe will help increase loan production as well as gain market share in 2019. On the liability side of the balance sheet, we grew total deposits $2.2 billion to $10.1 billion at December 31, 2018. The Brand acquisition added $1.7 billion on the acquisition date. Non-interest-bearing deposits averaged $2.4 billion or 24% of average deposits for the fourth quarter of 2018 compared to $2.1 billion or 23% of average deposits on a linked quarter basis. We believe our strength in consumer checking line up along with our fintech offerings such as Zelle, mobile banking and improved digital and online account openings will give us an advantage as we deliver many of the product offerings of the large national financial institutions but remain a service and client focused bank in each community we serve. These consumer product offerings, coupled with our enhanced treasury management products, have us positioned to continue to grow low costing stable deposits. Looking forward, we are both excited and optimistic about future growth on both sides of our balance sheet, given the strength of our current pipeline, our markets, our existing and newly added talent in our core bank, as well as enhancements to our product offerings, commercial banking unit and specialty lines of business. With the integration of Brand's operations and team members now complete, we began 2019 with a renewed focus on understanding and meeting our customer's needs and continuing to deliver a first class line up of products and services which earned us the designation of Best Bank in the South by Time Magazine's Money.com. Now, I will turn the call over to Renasant's Chief Operating and Financial Officer, Kevin Chapman, for additional discussion 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 fourth quarter. Net interest income was $115.5 million for the fourth quarter of 2018, as compared to $99.4 million in Q3 of 2018 and $93.3 million year-over-year. Reported net margin for the fourth quarter was up 17 basis points to 4.24% from Q3 of 2018. Of the 17 basis points of increase in linked quarter margin expansion, 10 to 12 basis points is attributable to expansion in our core margin with the remaining increase being the result of fluctuations in purchase accounting income. We experienced similar trends in our loan yields. Reported loan yields for the fourth quarter were 5.33% compared to 5.10% in the previous quarter. Our core loan yields increased nearly 20 basis points from the third quarter of 2018. On the funding side, our total cost of funds for the fourth quarter was 81 basis points, an increase of four basis points from the third quarter, while our total cost for deposits increased seven basis points and ended at 67 basis points. Non-interest income for the fourth quarter of 2018 was $36.4 million, which was down slightly from Q3 reported of $38.1 million. Mortgage banking income was down compared to third quarter of 2018. However, this was expected given the seasonality of the mortgage industry and the pullback in volume that we typically see in the fourth quarter. We divested Brand's mortgage operations during the fourth quarter. Mortgage banking income related to Brand Mortgage was $2 million for the fourth quarter of 2018 and $1.7 million for the third quarter 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 of headwinds in the mortgage industry faced coming into 2018, we were able to outperform the industry's expectations and trends. Non-interest expense was $93.3 million for the fourth quarter of 2018. Excluding merger expenses of $1.6 million and expenses related to Brand Mortgage of $2.4 million, our operating non-interest expenses were $89.3 million. Our reported efficiency ratio declined to 58.39% for the fourth quarter. Excluding Brand Mortgage and basing our efficiency ratio off of our operating non-interest expenses, our efficiency ratio was in the mid-57% range for the quarter. Shifting to our asset quality. At year-end, our overall credit quality metrics continued to remain strong. As a percentage of total assets, all credit metrics including NPAs, loans 30 to 89 days past due and our internal watchlist remain at or near historical lows. Net charge-offs were $584,000 or three basis points annualized for the fourth quarter of 2018 while we provided $1 million for future loan losses. Our regulatory capital ratios remained in excess of regulatory minimums required to be classified as well-capitalized and our profitability continue to generate even higher levels of capital. Our tangible capital ratio was 8.92% is an increase of 12 basis points from the previous quarter, while each of regulatory capital ratios increased between 25 to 27 basis points. For more information on our financials, I refer you to our press release for specific numbers or ratios. Now I will pass the call back to Robin for any closing comments.

Thank you Kevin. In closing, we are proud of our efforts during 2018 which produced record results. To recap, during the fourth quarter, we saw solid loan production while credit quality metrics remained at or near historic lows. Looking forward, we see a healthy loan pipeline at the start of 2019 and look to experience another strong year. Now I will turn the call back over for Q&A.

[Operator Instructions]. And our first question will come from Catherine Mealor of KBW.

Thanks. Good morning.

Good morning Catherine.

I wanted to start on the core margin. Really nice expansion there and Kevin, you mentioned that you saw 20 bips increase in your core loan yield linked quarter. Can you give us any sense how much of that was just from Brand coming over and how much of it is from higher rates? And then how you are 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 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 cost. We saw a nice pullback or some release in our funding cost with the deposit costs only being up seven bips. And you compare that against Q2 and Q3, where I think Q2 was up 11 to 12 and Q3 was maybe up 9 to 10. So one, just on the margin, some of the relief on the deposit side and the funding side helped with the margin. Brand, having a full quarter impact of Brand, did help with the margin. About five to six 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. Talking about earning assets, we are repricing are loans 10 to 15 basis points higher than the rate that they are rolling out of or maturing from. So as it relates to the margin, several items that affect that. But again, just to sum it up, we feel that we are well positioned and we remain asset sensitive as rates continue to rise.

And so as we look at that core margin now at 3.95, do you see continued upside from here? Or are you more comfortable thinking that it will be more stable at this higher level?

More comfortable stable. There could be some upside. But I think that where we are, there's more of an opportunity for stability, but also, don't want to lose sight that we are working off of the 3.95 margin and over the last 18 months, we have seen 30 to 35 basis points of expansion in that margin. Don't think we will replicate 30 to 35 basis points, but there's small upside for expansion, but I think the fact that we have increased our margin 30 to 35 basis points over the last 18 months, we shouldn't lose sight of that as well.

And then just to be clear, there weren't any one higher loan fees or anything like that in this quarter that will be temporary?

No.

Okay. Great. And then also just on growth, Mitch, you mentioned that you believe paydowns are going to be less in 2019. What gives you confidence in that commentary? And how are you thinking about net growth, net of acquired paydowns next year? Thanks.

Sure. Yes. Catherine, let me start first with growth and then circle back to the paydowns. So if you just look at year-over-year improvement in production in 2017, quarterly production was around $375 million. We have increased that on average this year to about $415 million and what gives us confidence is just looking at talent and markets. And particularly, over this past quarter, if you just think about coming out of the conversion, integration at Brand, the commercial team that come and joined an already strong team in North Georgia, also the team that joined our core bank there, we are well positioned in that market with talent and we continue to see or expect increased production in North Georgia. Also, in the quarter in Nashville, we employed a middle Tennessee market leader, a strong leader, strong ability to recruit, feel really good going forward about Nashville. Also, during the quarter, we employed a city president in the core banking side, came to us from a regional bank, has a strong book. Again, very capable as far as recruiting as well. And then in the third quarter, you will remember, we brought in a lead of our commercial operation in Tennessee, based there in Nashville, offers us a very good opportunity in the C&I space. They are in middle Tennessee and across the state as well. Also, in the third quarter, we had two new additions in Destin with producers. We added a commercial private producer in Memphis as we continue to add 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 pipeline. We have added talent in North Mississippi. Central part of Georgia comes to mind, particularly the market of Macon, where we have added some talent there as well. Same about the state of Alabama, both North Alabama, particularly the Huntsville and Decatur market. We continue to build out a good commercial team in Birmingham as well as our private team. And then southern part of Alabama, continued growth in Tuscaloosa with talent. In 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. And I think in 2019 it is realistic that we could see that production to move up in that $450 million range, let's say, about mid-year. 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 fourth quarter about 32% of our payoffs or paydowns. The one most notable there just loss to competition and that's the case where we chose to not match either a rate, a loan structure, debt service coverage, loan-to-value, some tight 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 are also equally confident in our ability to grow loan production. So both of those things together, we are 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.

Catherine, this is Bartow. I am jumping in here because I think I can add a little bit more color on it with adding Brand into it. So a large portion of those paydowns came out of the Brand portfolio. I really dove down deep with our head of commercial. Mike Dunlap is now head of commercial for Renasant. And through the conversations with Mike, we have not seen any customers leaving the bank through conversion. We are seeing some customers who have sold their businesses and sold assets and paying down loans. That was the largest portion of that. But those customers are deal customers and they will come back to Renasant and look for new deals as we go into 2019. In addition to that, we had paid down on lines and just clearing cash out accounts and normal operating and it was the largest amount that we had seen of that at Brand. But we should not see that level of payoffs and paydowns. In addition to that, we haven't seen lenders choosing to leave the bank. As I have gone across the footprint, we have been able to hire and look at new lenders in each of the markets. So whether that's Birmingham, Memphis or Nashville, we have been able to add senior management in those areas and those senior managements, those people in senior management have been able to start interviews with new RMs that are coming out of regionals where we were successful at Brand of bringing on new C&I lenders into Brand. So I think both on paydown, payoffs and from the production side, we are seeing the ability both to attract people and we 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.

Hi guys. Good morning. How are you?

Good morning Mike.

So just contextualizing all those comments on the loan outlook. So if I am hearing you straight and it looks like non-acquired loans were up a little over 14% year-on-year in 2018. It sounds like potentially that could be a little bit better and then the paydowns, 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 of 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 payoffs, paydowns, back to Catherine's question, in that mid to high single-digit growth. You are 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 expenses associated with the Brand Mortgage Group. Can you kind of talk about what those were? And obviously, with the cost saves that are really rolling in here, what's a fair base to start off the expense run rate for the first quarter?

Yes. So just leaving Q4, again backing out Brand Mortgage and backing out the merger expenses, that puts us in the $89 million, $89.3 million, $89.5 million range. Included in fourth quarter, we did not convert Brand until late October. And so just keeping a full team through October as well as staff after for post-conversion cleanup, there are some duplicate expenses. And in fourth quarter, expenses that won't be in Q1 is approximately $1 million to $1.5 million. There's a little bit more expense that will relieve as we get into Q2 and that's another $200,000 to $300,000 as we get into Q2. So run rate coming out of Q4, $89.3 million, $89.5 million and that includes about $1 million to $1.5 million of duplicate expenses from Brand.

Okay. So somewhere in that kind of $88 million range is probably a fair jumping off point?

It is.

Okay. And then maybe just one follow-up here in the margin. I hear all the comments and you guys have done a great job on the deposit side. It seems like there's still some leverage to go there. If we don't get any rate hikes and the curve remains flat or flattish or even inverts, is that core margin kind of remaining year current levels hold? I guess what I am asking is, are you baking in any rate hikes into your expectations? Thanks.

So, a great question. So in our internal models, we have one more rate hike that we are assuming. If we do not see that rate hike and the probability of margin expansion decreases and we are more and more in a flattish environment. But we are 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 the press release and what we showed for the accretable yield, that is 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, but we do expect some paydowns to subside. So we would expect that number to come back or come down. Q4 may have been a little bit elevated. But if you look at just the accretable yield, that's not related to the acceleration. We expect that number to be fairly stable throughout the year.

Okay. Thanks for taking all my questions guys.

Thank you Mike.

And the next question comes from Matt Olney of Stephens.

Thanks. Good morning. This is Brandon Steverson, on for Matt. I wanted to start off on the mortgage side. We have heard some of your peers mention seeing renewed strength in refi volumes. And I just wanted to see if that's consistent with what you have been seeing? And is there any color around mortgage volumes and what you are seeing right now that you can add to that?

Hi Brandon. This is Jim Gray. Really, we have not seen an increase in refi, although our refis has been a fairly low and that's kind of attributed to the fact that we were able to stabilize and maintain growth during 2018. A little bit of pullback in rates has really increased both our purchase and refi. We did see locks tracking last year through the first part of January. We are seeing locks starting to pick up now. But it hasn't really changed. 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 with what we did last year, even though rates are about 50 basis points lower in the third quarter. But they are 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 our retail markets, we anticipate that we will 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&A. Could you give any color on your appetite for M&A this year, now with Brand getting integrated? And could you remind us what your parameters are as you are looking at M&A this year?

Really nothing has changed as far as our M&A criteria. We have stuck with it now for the last 10 years and we feel like that it's been very successful along that line. We are obviously still in an acquisitive mode. We still are interested in the vast footprint that we are currently in and we would venture outside that state for the right opportunity. But we still maintain the same criteria we have to continue to see any type of merger that we do. We need to be accretive on the outset from an earnings standpoint, earn back three years or less and obviously should have great returns for the company. So we have 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.

Understood. Thanks a lot for taking my questions.

Thank you Brandon.

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 Renasant 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.