Renasant Corp

F:RN6

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to the Renasant Corporation 2018 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 note this event is being recorded.

I would now like to turn the conference over to John Oxford with Renasant Corporation. Please go ahead.

[John Oxford]

Thank you, Gary. Good morning and thank you for joining us for Renasant Corporation’s 2018 second quarter 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 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. We incur expenses in connection with certain transactions with respect to which management may be able to echo the predicted timing of when these expenses will be incurred or when it occurs they manage such expenses. These include merger conversion costs, prepayment penalties among other items.

In addition, some of the financial measures that we may discuss this morning may be non-GAAP financial measures. A reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release, which has been posted to our corporate site renasant.com under Investor Relations’ tab in the News & Market Data section.

Now I’ll turn the call over to Renasant Corporation Executive Chairman Robin McGraw. Robin?

[Edward Robinson McGraw, Chairman]

Thank you, John. Good morning, everyone. Thank you for joining us today. First of all on behalf of our Board, I would like to congratulate Mitch, Kevin, and our team on our successful transition, which I believe is evident in our second quarter 2018 results as we once again achieved record earnings. Our profitability metrics continue to improve as our returns on average tangible assets and average tangible equity excluding merger and conversion expenses were 1.59% and 16.92% respectively.

Now I'll turn our call over to President and Chief Executive Officer, Mitch Waycaster to discuss this quarter's financial results. Mitch?

[Mitch Waycaster, President and Chief Executive Officer]

Thank you, Robin. Looking at our results for the second quarter of 2018 net income was $36.7 million as compared to $25.3 million for the second quarter of 2017. Our basic and diluted EPS were $0.74 for the second quarter as compared to $0.57 for the second quarter of 2017. Merger and conversion costs impacted our diluted EPS by 1% during the quarter.

Turning our focus for our balance sheet, total assets at June 30, 2018 were approximately $10.5 billion as compared to approximately $9.8 billion at December 31, 2017. Total loans were approximately $7.8 billion at June 30, 2018 as compared to $7.7 billion at March 31 2018 and $7.6 billion at December 31, 2017. This represents annualized loan growth of approximately 4% on a linked quarter basis. Loans not purchased were $6.1 billion at June 30, 2018 up from $5.6 billion at December 31 2017 compared to $5.8 billion at March 31 2018. This represents approximately 16% annualized growth on a linked quarter basis.

Our growth in loans for the quarter was driven by strong new loan production of approximately $460 million. As we have seen over the last several quarters, this growth was geographically diverse as each of the banks four regions accounted for more than 20% of this loan production. Although production was strong we also experienced high levels of pay downs in payrolls in previous quarters. The majority of the payment during the quarter were due to either the sale of business or refinancing the underlying property to the permanent market.

For the second quarter of 2018 the yield on total loans was 5.05% as compared to 4.95% for the first quarter of 2018 and 5.03% for the second quarter of 2017. The impact of purchase accounting adjustments on our loan yield was 35 basis points for the second quarter of 2018 as compared to 34 basis points for the first quarter of 2018 and 52 basis points for the second quarter of 2017.

Total deposits increased to $8.4 billion at June 30, 2018 from $7.9 billion at December 31, 2017. Noninterest bearing deposits averaged $1.8 million or 22.31% of average deposits for the first six months of 2018 compared to $1.6 billion or 22.17% of average deposits for the same period in 2017. For the second quarter of 2018 the cost of total deposits were 52 basis points as compared to 40 basis points for the first quarter of 2018 and 30 basis points for the second quarter of 2017. Our capital ratios remained strong where the tangible common ratio was 9.35% Tier 1 leverage ratio of 10.65% and the total risk-based capital ratio were 14.75% at June 30, 2018.

Now I'll turn the call over to Renasant Chief Operating and Financial Officer, Kevin Chapman to discuss our additional financial results. Kevin?

[Kevin Chapman]

Thank you, Mitch. Net interest income was $92.4 million for the second quarter of 2018 as compared to $89.2 million for the first quarter of 2018 and $79.6 million for the second quarter of 2017. Net interest margin was 4.16% for the second quarter of 2018 compared to 4.20% for the first quarter of 2018 and 4.27% for the second quarter of 2017. The impact of purchase accounting adjustments on our margin was 30 basis points for the second and first quarter of 2018 and 43 basis points for the second quarter of 2017.

Excluding purchase accounting adjustments core margin for the second quarter of 2018 was 3.86% down 4 basis points on a linked quarter basis. During the second quarter we completed our releveraging strategy by purchasing approximately $200 million of investment securities. The releveraging contributed to approximately 2 basis points of linked quarter margin compression.

Noninterest income for the second quarter of 2018 was $35.6 million as compared to $34 million in the first quarter of 2018 and $34.3 million for the second quarter of 20. Mortgage banking income was strong for the second quarter of 2018 at $12.8 million compared to $11 million for the first quarter of 2018 and $12.4 million for the second quarter of 2017. Noninterest expenses were $79 million for the second quarter of 2018 compared to $77.9 million for the first quarter of 2018 and $74.8 million for the second quarter of 2017.

Salary and employee benefits accounted for the linked quarter increase in noninterest expenses which was driven primarily by two items; first higher levels of mortgage banking salaries and commissions tied to the increase in mortgage banking income and annual merit increases which took effect in mid March of Q1.

Shifting to our asset quality, at June 30, 2018 our overall credit quality metrics continued to remain strong at or near historical lows in all credit quality metrics and including nonperforming loans, nonperforming assets and predictive indicators, such as loans 30 to 89 days past due or our internal watchlist. For more information on our financials, I’ll refer you to our press release for additional specific numbers or ratios.

Now I’ll pass the call back to Robin.

[Edward Robinson McGraw, Chairman]

Thank you, Kevin. In closing we believe the first six months of 2018 has shown strong results. Our continued focus on profitability in this competitive interest rate environment were driving factors behind another quarter of record earnings. We believe the state is set for another successful year or our company as we add BrandBank to the Renasant family during the third quarter and continue to capitalize on strategic opportunities as they avail themselves.

Now Gary, I'll turn the call back over to you for Q&A.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brad Millsaps with Sandler O'Neill. Please go ahead.

[Peter Ruiz, Sandler O'Neill]

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

[Edward Robinson McGraw, Chairman]

Good morning, Peter.

[Mitch Waycaster, President and Chief Executive Officer]

Good morning, Peter.

[Peter Ruiz, Sandler O'Neill]

So I guess, just maybe first touching on growth obviously net-net growth after accounting for the pay downs and the acquired book there was still a little bit sluggish here relative to maybe that previous high single low double-digit loan growth. Do you still think that that level is kind of attainable here in the second half? What are you kind of seeing, the press release kind of seemed a little optimistic here or maybe production ramping back up or is it more a just paydown subsiding?

[Mitch Waycaster, President and Chief Executive Officer]

Yes Peter, this is Mitch and good question, good point and we do feel good about our current pipeline is at $175 million, that's an increase from $163 million and as you just referred, as I mentioned earlier production at $460 million was very strong last quarter geographically across the four regions of the company as well as in our business lines. With our current pipeline we do expect that to continue. This was an unusual quarter as we saw things like sale of business, sale of property, refinance to the secondary market.

Some of those things are very hard to predict, but what we do feel good about is the current pipeline coming off of a strong quarter and really where we end up as far as net growth going forward and large part is maybe dictated by some of the things we saw this quarter that are hard to predict. But we don’t expect many of those things going forward and I'd like to say given the current pipeline feel very good about the next quarter and production.

One area in particular that we saw in those payoffs and pay downs in particular is in the 1-4 family. We had some credits priced with three handles that we actually saw competition move at lower rates. And one thing we will certainly do is remain disciplined when it comes to pricing and underwriting and that also contributed to some of the payoffs and pay downs we saw this quarter.

[Peter Ruiz, Sandler O'Neill]

Okay that’s great, I appreciate that. Maybe just on the NIM, I guess your commentary there in your prepared remarks kind of implied that you’re done with the balance sheet leveraging here with the securities book. Is that correct?

[Kevin Chapman]

That’s correct.

[Peter Ruiz, Sandler O'Neill]

Okay and then I guess just on deposit costs, obviously deposit betas are increasing industry-wide and I think you've kind of had a deposit beta closer to maybe 50% this quarter. Can you talk about the dynamics here, are you going to ratchet deposit pricing a little bit more and how does that - could you lean maybe on your low 90s loan to deposit ratio, what are the dynamics there and how do think about that as you fund growth here in the second half?

[Kevin Chapman]

Yeah so, our philosophy just on how we fund that growth really hasn’t changed and the fact that we are targeting funding sources that support our interest rate position. So we continue to maintain a slightly asset sensitive interest rate position and that’s largely going to be driven off the funding. So we will continue to fund with funding sources that we think is appropriate based on what’s going on, on the asset side of the balance sheet.

As we look at just our cost of deposits on a linked quarter basis, we did step up 12 basis points in total cost of deposits. A couple things drove that; one, we felt that with the advertising and the competition around deposits that we needed to take steps, proactive steps to really solidify our core – our base of our deposits. So the majority if not all of our deposits we looked at the rates and in most cases changed some of those rates for almost all of our deposits. Really in an effort to in a defensive measure to just solidify our core base, so that we didn’t have any decay or attrition of that base.

And then on top of that, it’s really just going back to our strategy of finding stable local funding sources to fund future balance sheet growth. As we look down the future quarters, we do think deposit betas are going to be higher than what they were last year. But we also view this quarter as a little bit of a stair step and would anticipate that future quarters cost of deposit of future quarters to not be at levels that we had this quarter.

[Peter Ruiz, Sandler O'Neill]

Okay that’s great. I’ll step back for now. Thanks.

[Operator]

The next question comes from John Rodis with FIG Partners. Please go ahead.

[John Rodis, FIG Partners]

Good morning, guys.

[Edward Robinson McGraw, Chairman]

Hi John.

[John Rodis, FIG Partners]

Kevin, you mentioned in your prepared remarks I think in operating expenses you said salary expense, so the increase linked quarter was about a little over $3 million and you said that was primarily driven by mortgage commissions and merit increases. Can you sort of break that out how much of it was merit increases versus mortgage commissions which obviously or fluctuate some?

[Kevin Chapman]

Sure so the mortgage accounted for about 40% of that increase, merit increases accounted for another 30% of it with the residual just being a different day count an additional day in second quarter compared to Q1.

[John Rodis, FIG Partners]

Okay, okay so sort of assuming the seasonality in mortgage, you could see operating expenses overall sort of pullback a little bit ex the Brand merger and ex the $500,000 in merger expenses this quarter. So do you sort of see $77 million to $78 million being sort of good run rate for operating expenses before the Brand acquisition?

[Kevin Chapman]

If you normalize the mortgage commissions, yes.

[John Rodis, FIG Partners]

Okay, okay. And then Kevin just one other question on the tax rates, roughly 22% for the last two quarters is that sort of a good run rate to use going forward and then what’s the impact from the Brand acquisition?

[Kevin Chapman]

Yes, so tax rate 22.5% to 23%, Brand the impact of Brand they run at a very similar tax rate, so net-net we don’t think it moves our effective tax rate significantly.

[John Rodis, FIG Partners]

Okay sounds good, thanks guys.

[Operator]

[Operator Instructions] The next question comes from Matt Olney with Stephens. Please go ahead.

[Unidentified Analyst]

Hey, good morning guys, this is Brian Stephenson on for Olney.

[Edward Robinson McGraw, Chairman]

Hi Brain.

[Brian Stephenson, Stephens]

Hey, on the Brand acquisition I was wondering if you guys could provide any comments on may be some preliminary 2Q results and any updates on the approval process, when you expect to close and maybe conversion time line?

[Edward Robinson McGraw, Chairman]

Sure, yes so we’ll talk about the last questions first. Just we’ve indicated that we anticipate closing on the Brand acquisition in Q3. Everything is in line for us to be able to do that. So we are still targeting a Q3 close. Conversion is still set for Q4 and we’re still targeted and gearing up for a conversion in early to mid-Q4. As it relates just how Brand did during the quarter, I’ll give some general commentary. They have not released any of their numbers via the call report or internally to their shareholders.

So I’ll just give some general comments overall. Their operating results, their pretax income is in line or better than what we projected. So generally overall they continue to operate as we expect if not better in that Atlanta market.

[Brian Stephenson, Stephens]

That’s helpful thank you. And then just moving over back to the NIM discussion, you mentioned that a couple of the core NIM a couple basis points were just due to the completion of the releveraging strategy. As far as going forward when you take into account the deposit beta discussion that you just kind of laid out for us, what do you expect as we move into 3Q and 4Q this year in terms of core NIM?

[Kevin Chapman]

We continue to expect core NIM to be flat.

[Brian Stephenson, Stephens]

Got it, okay, thank you. And maybe if I could sneak in one more on mortgage, is there anything you could provide as far as volume and what the gain on sale margins did from 1Q to 2Q this year?

[James Gray]

Yes this is Jim Gray. Our volume for the second quarter was $610 million that is up from $438 million in the first quarter. 82% purchase and 18% refi in the second quarter. That mix changed the first quarter, it was 73% purchase and 27% refi. And then the mix between wholesale and retail was 31% in the second quarter versus 39% in the first quarter and retail 69% versus 61% in the first quarter.

[Brian Stephenson, Stephens]

Great, thanks for the color.

[Operator]

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

[Edward Robinson McGraw, Chairman]

Thank you, Gary. We appreciate everyone’s time today and your interest in Renasant Corporation. We look forward to speaking with you again soon. Thanks everyone.

[Operator]

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