Renasant Corp
NYSE:RNST
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Renasant Corp
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Good morning, and welcome to the Renasant Corporation 2018 First 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. Please go ahead.
Thank you, Debbie. Good morning and thank you for joining us for Renasant Corporation’s 2018 first quarter webcast and conference call. Participating in this call today are members of Renasant’s executive management teams.
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 disclaim any 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 discuss this morning may be non-GAAP financial measures. A reconciliation of any such 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 Investor Relations’ tab in the News & Market Data section.
And now I’ll turn the call over to E. Robin McGraw, Chairman and CEO of Renasant Corporation. Robin?
Thank you, John. Good morning, everyone. Thank you for joining us today. Before moving into the discussion of our performance and financial results for the quarter, I’d like to take this opportunity to recognize a few key events taking place within our company.
First, on March 28, the Company and Brand Group Holdings, Inc., the parent company of The Brand Banking Company, jointly announced the signing of a definitive merger agreement pursuant to which the Company will acquire Brand for a combination of cash and Renasant common stock. Brand operates 13 locations throughout the greater Atlanta market.
As of December 31, 2017, Brand had approximately $2.4 billion in total assets, which included approximately $1.9 billion in total loans, excluding mortgage loans held for sale, and approximately $1.9 billion in total deposits.
We’re excited to partner with a 113-year old company with strong talent in one of the most attractive markets in the country. We believe this merger will significantly enhance our Atlanta presence, as our pro forma market share were ranked number 10 in deposits in the Atlanta MSA. It’s also worth noting that Atlanta is the largest MSA by GDP and the second largest MSA by population in the Southeast. We anticipate completing this merger during the third quarter of this year.
Secondly, yesterday, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid June 30, 2018 to shareholders of record as of June 16, 2018. The per share dividend represents a $0.01 increase from the dividend paid in the previous quarter and is the third increase to our quarterly dividend since March 31, 2016.
Finally, it’s my honor and privilege to announce that our President, Mitch Waycaster, will be moving into the role of Chief Executive Officer for our company on May 1, as previously announced in our Board Succession Plan. Mitch has an impressive banking career. He spends almost 40 years, and he has been an integral part of our company’s achievements.
In addition to Mitch becoming CEO, Kevin Chapman was formally – will formally assume the role of Chief Operating Officer, while maintaining his duties as Chief Financial Officer. Kevin who has already taken on many of the responsibilities of the COO has been essential in helping us meet or exceed our strategic goals and is well suited to oversee the daily operations of our company.
Let me add that although I’ll be relinquishing the duties of CEO, as Executive Chairman, I’ll remain active in our company strategic planning, investor relations, M&A process and Board-level oversight. I look forward to working with Mitch, Kevin and the rest of our senior executive management team in continuing to move our company forward.
Now I’ll turn the call over to Mitch Waycaster to discuss this quarter’s financial results. Mitch?
Thank you, Robin. Looking at our balance sheet, total assets at March 31, 2018 were approximately $10.2 billion, as compared to approximately $9.8 billion at December 31, 2017. Total loans were approximately $7.7 billion at March 31, 2018, as compared to $7.6 billion at December 31, 2017, which represents an annual linked-quarter growth rate of 4.14%.
Non-purchase loans increased to $5.8 billion at March 31, 2018 from $5.6 billion at December 31, 2017, or an 18% increase on an annualized basis. If we look at the first quarter of 2018, we had total new loan production of about $397 million, as compared to $314 million in the first quarter of 2017.
Looking at the markets that contributed to that production, 21% was from Alabama and Florida, 27% from Georgia, 29% in Mississippi, and 23% in Tennessee. As we’ve seen in the last number of quarters, we see each region and State continuing to produce 20% plus of our production.
Looking forward, our 30-day pipeline at March 31, 2018 is $163 million. That compares to $157 million at same period last year and $160 million at December 31, 2017. If we break down our pipeline by State or region, 28% is in Tennessee, 17% in Alabama and Florida, 28% in Georgia, 17% in Mississippi, and 10% in commercial specialty lines.
This pipeline should produce approximately $57 million in growth and non-acquired outstandings in the next 30 days. We continue to again see a strong pipeline and we expect high single to low double-digit loan growth throughout 2018.
For the first quarter of 2018, the yield on total loans was 4.95%, as compared to 5.07% for the fourth quarter of 2017 and 4.82% for the first quarter of 2017. Excluding purchase accounting adjustments and interest income collected on previously charged-off loans, our core loan yield was 4.61% for the first quarter of 2018, up from 4.52% for the fourth quarter of 2017 and 4.42% for the first quarter of 2017. Total deposits increased to $8.4 billion at March 31, 2018 from $7.9 billion at December 31, 2017.
Non-interest bearing deposits averaged $1.8 billion, or 22.4% of average deposits for the first quarter of 2018, compared to $1.6 billion, or 21.8% for average deposits for the same period in 2017.
For the first quarter of 2018, the cost of total deposits were 40 basis points, as compared to 36 basis points for the fourth quarter of 2017 and 29 basis points for the first quarter of 2017.
Looking at our capital ratios, our tangible common equity ratio was 9.4%, leverage ratio was 10.6%, and our total risk-based capital ratio was 14.4% at March 31, 2018. Our regulatory capital ratios are all in excess of regulatory minimums were required to be classified as well-capitalized.
Now I’ll turn the call over to Kevin for few – for further discussion of our first quarter results. Kevin?
Thank you, Mitch. Looking at our results for the first quarter of 2018, net income was approximately $34 million, as compared to $24 million for the first quarter of 2017. Our diluted EPS was $0.68 for the first quarter of 2018, as compared to $0.54 for the first quarter of 2017.
During the first quarter, we incurred merger cost related to the Brand merger, which impacted our diluted EPS for the first quarter of 2018 by $0.02. Net interest income was $89 million for the first quarter of 2018, compared to $93 million for the fourth quarter of 2017 and $17 million for the first quarter of 2017.
Excluding purchase accounting adjustments and any interest income we collected from previously charge-off loans, our net interest margin increased 12 basis points to 3.90% – 3.9% for the first quarter of 2018, compared to 3.78% for the fourth quarter of 2017.
Noninterest income for the first quarter of 2018 was $34 million, as compared to $32.4 million for the fourth quarter of 2017 and $32 million for the first quarter of 2017.
The addition of Metropolitan, coupled with growth in fee income on legacy Renasant loan and deposit products, contributed to the growth in service charges on deposits and fees and commissions on loans and deposits for the first quarter of 2018 compared to the same period in 2017.
Our mortgage division started the year strong, as mortgage banking income for the first quarter of 2018 was $11 million, compared to $9.9 million for the fourth quarter of 2017 and $10.5 million for the first quarter of 2017.
Noninterest expense was $77.9 million for the first quarter of 2018, compared to $76.8 million for the fourth quarter of 2017 to $69.3 million for the first quarter of 2017.
Shifting to our asset quality at March 31, 2018, our overall credit quality metrics continue to remain strong being at or near historical lows in all credit metrics, including nonperforming loans and nonperforming asset, as well as early warning indicator such as loans 30 to 89 days past due and our internal watchlist. For additional details on our financials, I’ll refer you to our press release for specific numbers or ratios.
Now Mitch, I’ll pass the call back to you.
Thank you, Kevin. Before moving the call into Q&A, on behalf of our company, our shareholders and Board of Directors, we thank Robin for his service and outstanding leadership as CEO of Renasant over the past 18 years. During this time, Robin led our company from $1.2 billion in assets to $10.2 billion from 41 locations in Mississippi to 180 locations throughout the Southeast and from less than 600 associates to more than 2,200.
Our market capitalization grew from a $120 million in November of 2000 to $2.3 billion today. With these accomplishments, it’s even to see Robin’s tenure as CEO, has been one of great success. Robin, we congratulate you on your success during your tenure as CEO, and we’re excited that you will remain as part of our team as Executive Chairman.
Now, I’ll pass the call back to Robin for closing remarks and the Q&A portion of our call.
Thank you, Mitch, for the kind remarks. I’m grateful for the opportunity to – our Board gave me nearly 18 years ago, and I’m proud of what we have accomplished together. I believe the future is bright for Renasant to maintain our strategic direction with Mitch at range and leading our current management team.
In closing, we opened the year with a very strong results. Our continued focus on profitability in this competitive interest rate environment, coupled with our strategies around expense containment were driving factors behind our record earnings for the quarter.
We believe the stage is set for another successful year for our company, as we add Brand to our Renasant family, continue to capitalize on strategic opportunities and maintain continuity in our leadership structure.
Now Debbie, I’ll turn the call back over to you for questions-and-answers.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Rose with Raymond James.
Hey, good morning, guys. How are you?
Good morning, Michael.
Hey, maybe for you, Kevin. Obviously, good improvement in the core margin. Give me expectations for, at least, one more rate hike this year. You guys had previously talked about the core NIM being flat to slightly up this year. It looks like that’s changed with this rate hike and potential for one in June. Can you give us some updated thoughts on the margin? And then, what are your expectations as we move through the year for, at least, the scheduled portion of the purchase accounting accretion? Thanks.
Sure. So, yes, as it relates to margin, Michael, just – if we look to what happened in Q1, we definitely benefited from the rate hikes that occurred in Q4. Also, the deleverage strategy did positively impact margin although a minimal amount only about 2 basis points, so whole margin did expand 10 basis points.
As we do re-lever the balance sheet that will bring margin down a little bit. And just on our re-leveraging strategy, our average earning asset is a little bit lower than what we anticipated in Q1, primarily due to the security portfolio. We’ve only repurchased about 60% of our re-leverage strategy. We purchased a little over $300 million in Q1 and still have another $200 million to $250 to repurchase.
And the reason we extended that timeframe is, we have found ourselves in a much steeper yield curve, particularly on the five and the 10-year point in the curve. And so we somewhat extended our time horizon on re-leveraging and just put into perspective what we’re doing there. We sell securities. They were yielding $240 million, $250 million back in Q4, and what we purchased in Q1 came in at an average rate of around $290 million.
In today’s terms, we have the tenure about 3%. And so we just – we didn’t – we felt it prudent to maintain a smaller balance sheet, at least, in Q1 just to take benefit – to take advantage and receive benefit from a steeper yield curve. As we look at – as we look out and what margin as we – as what we expect margin to do in subsequent quarters, it’s going to be heavily dependent on rate movements.
We do anticipate more rate movements during the year. We do anticipate that that will positively impact net interest income and as well as we maintain our position that we are slightly asset-sensitive. The thing that we are seeing in the market is cost of funds. We’re seeing pressure on cost of funds. We – I think, we did a very good job of containing controlling our cost of deposits and cost of funds in Q1, and that’s going to be our goal and mindset Q2, Q3 and beyond.
But as we look ahead, could probably see a little bit of margin compression just as we – as we re-lever and then the variables will be rate movements and then how we see the movement in funding costs going into Q2, Q3 and Q4.
Okay, that’s helpful. And Mitch, maybe just a follow-up, I appreciate the color on the loan pipeline. It looks like it’s relatively flattish quarter-to-quarter. You reiterated the guidance or the outlook for high single to low double-digit growth. And I assume, obviously, that excludes the Brand Bank deal? What would – excluding that deal, what would cause you to be kind of at the lower-end? And what would cause you to be at the upper-end? And are there any sites from your customers that gives you increased confidence that you could maybe get to the upper-end of the range? Thanks.
Sure. Michael, you are correct, that would not include Brand. And at $163 million I mentioned, it was at a $157 million prior year, $160 prior quarter. Customer sentiment what we’re hearing from all of our producers across footprint, including our commercial specialty lines continues to be very good.
So we’re very optimistic that, going forward, we will be in the high single, low double-digit. Of course, I guess, customers continuing to make a move on that optimistic outlook. Hopefully, that will continue. Certainly, we believe that the case, again, from what we’re seeing from all markets. And again, as I mentioned, if you look for the last several quarters, we continue to see consistent production throughout the total footprint and throughout the business lines.
So we feel good going forward. We had – I think, if you look at production in 1Q, where typically you would see a decrease in the first quarter. It compares well to prior Q1s and as we enter Q2, again, we feel good when you look at the 30-day pipeline, the 69 that you look out further you’re listening to clients. We feel comfortable where we are in – feel like we’ll continue to experience growth. And that, again, high single, low double-digit range.
Hey, Michael, one thing to add to that. If you just look at as Mitch mentioned, our production that did generate non-purchased growth of – annualized growth upwards of 18%. Now we did see a little bit of an uptick in our acquired portfolio runoff, which we did have some unexpected payoffs there. One thing that was prevalent in both the acquired and the non-acquired was line utilization was found compared to previous quarters. That is some seasonality we have in our portfolio. Typically, Q1, we do see some seasonality related to line utilization and that rebound as we get into Q2, Q3.
So the production was good, just some of the seasonality that we have in our portfolio did – should mute total loans. An example, I’ll give you just on HELOCs, for example. HELOCs typically, our HELOCs are growing about $8 million to $10 million per quarter, we actually saw HELOCs decline, they were flat to slightly declining, which is about a 25 – which is about a $15 million to $20 million swing just in one category, and it just really comes back to line utilization.
And Michael, one other thing I’ll mention is well [ph]. During the first quarter, as in the past, we continue to recruit and have new talent join the company. We had 11 new producers or market leaders joined the company during the first quarter: two in Tennessee, four in Georgia, three in Mississippi markets, two in our specialty line units. And that in itself is well will continue to drive new production as we go forward.
Okay, that’s helpful. Maybe if I can just follow-up on the line utilization comment. What gives you confidence that’s actually going to come back? We’ve heard that from a lot of banks this quarter. But clearly, with the Tax Cuts, it seems like, at least, in the near-term, there could be some deleveraging on the commercial side.
And then on the consumer side, as it relates to HELOC specifically, the interest deductibility of that phases out over the next five years. So what gives you confidence that you could actually see line utilization increase from here? Thanks.
Michael, I’ll start with some comments on that. I think, one thing that that brings comfort is just what we’re hearing from our clients. And line utilization, we have typically seen that pulled back in 1Q. So that’s not that unusual, as Kevin mentioned, a little more pronounced Q1.
So the availability of cash maybe from the tax change certainly could have impacted that. I think, from the HELOC standpoint, there may have been some question early on about the treatment of HELOCs. And again, we’re at this point expecting that to return in each quarters as well just listening and seeing our pipelines and listening to client sentiment.
Okay, guys. Thanks.
Michael, this is Rob. Going back to his – just going back and looked, the first quarter that the line utilization issue has always been prevalent. The last year or two were anomalies in that we did see more line utilization in the first quarter than in the past. But if you go back and look historically, we have seen a very light utilization underlines first quarter of the year then it picks up for the balance of the year.
Thanks for taking my questions, guys.
Thank you.
The next question comes from Matt Olney with Stephens.
Hey, good morning, guys. This is Brandon Steverson on for Olney.
Good morning.
Hey, I wanted to ask you guys a question on mortgage. I’m sorry if I missed this in the opening remarks. But did you all give the number of purchase versus refi this quarter?
No, this is Jim Gray. And as far as our closed volume, we were 73% purchase, 27% refi during the first quarter. But I’ll give you our log volume percentages, because as you know, closed volumes were a little bit of a lagging indicator. Our log volume for the first quarter was $671 million. And our purchase volume was 76%, our refi was 24%. So we are seeing, as anticipated, a little bit more of a shift from refi to purchase and we anticipate that that will continue.
Got it, okay. And then I also wanted to jump back over to securities. Kevin, I think, there’s a question for you. You mentioned that you still have $200 million to $250 million left to repurchase on securities. So it’s fair to say that we’ll see that go back up over $1 billion?
Yes.
And also back that $1 billion was before is not the level that you’re targeting?
We’re looking at giving it close to the levels where we were in Q3.
Understood. Thanks, guys.
Thank you.
[Operator Instructions] The next question comes from Brad Milsaps with Sandler O’Neill.
Hey, good morning guys.
Hi, Brad.
Hi, Brad.
Kevin, just to follow-up on the bond question. Most of those purchase coming in the taxable book, or would you see, given the tax change, do you see the muni book coming back up to where it was as well?
Yes, it’s a good question. No, we have not been purchasing in the muni book. This is primarily becoming in the security better taxable really, because we haven’t seen. We anticipated a little bit of a change in yields and we haven’t seen that in the muni book. So we haven’t, but we really been focusing, but we haven’t been building our concentration back in the muni book as we did prior to the tax change. And unless we see a change in yields probably won’t change that position. We’ll keep that position and look more at the taxable securities as opposed to the muni book.
Great, that’s helpful. And would we expect the borrowed signs also to you kind of move back to the third quarter level. It didn’t look like, you actually look like period-end was down even in this period-end security, but was up. Just kind of curious how you plan kind of the fund, the remainder of those purchases?
Well, that that’s another reason why we’ve also somewhat extended the time horizon is just to continue to focus on our goal of funding deposit growth and not funding a long-term asset, long-term being four to five years with short-term FHLB borrowing.
So we’re also focused on core deposit growth, core funding driving balance sheet growth, while that’s in security book of a loan growth – loan book. Admittedly, that’s not going to be dollar for dollar, you will see our FHLB advances come up. But long-term, the goal is to have less reliance on the wholesale funds and more growth on the deposit side. And that by the way, I’ll say it’s everybody’s goal, not just Renasant, but that’s every bank’s goal.
We saw good growth in our deposits in Q1. Even if you exclude, we did repatriate some of the deposits that brought balance sheet at year-end. In fact, 99% of them have come back with the other 1% coming back in April. But even if you exclude that, deposit growth was still good in Q1 and we have to continue that momentum in future quarters.
Thank you. That’s helpful.
Thanks, Brad.
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, Debbie. We appreciate everyone’s time and interest in Renasant Cooperation and look forward to speaking with you again soon. Thanks.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.