Renasant Corp
NYSE:RNST
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Renasant Corp
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Good day and welcome to the Renasant Corporation 2018 Third 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 with Renasant Corporation. Please go ahead.
Thank you, Allison. Good morning and thank you for joining us for Renasant Corporation’s 2018 third 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 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’d 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. We are pleased with our strong results for the third quarter of 2018, which are highlighted by a stable core margin and a significant improvement to our efficiency ratio. Excluding the impact for merger and conversion expenses, we once again achieved record earnings and earnings per share. Our profitability metrics are further evidence of our successful quarter as our returns on average tangible assets and average tangible equity, excluding merger and conversion expenses, improved to 1.59% and 17.28% respectively.
In addition, on September 1, 2018, we completed our merger with Brand Group Holdings, the parent company of Brand Bank of Atlanta, Georgia, which added 13 locations throughout the Greater Atlanta area and approximately $2 billion in assets prior to any purchase accounting adjustments. The balance sheet and results of operations of Brand mortgage are included in our results for the third quarter of 2018. As discussed in our earnings release, we currently anticipate completing the divestiture of Brand mortgage in the fourth quarter of ’18, following the receipt of all necessary regulatory approvals.
We are excited to welcome our new shareholders, clients and team members from Brand and we look forward to a smooth transition of client accounts and core banking systems during early fourth quarter of 2018.
Now, I'll turn the call over to our President and Chief Executive Officer, Mitch Waycaster to discuss this quarter's financial results. Mitch?
Thank you, Robin. Looking at our results for the third quarter of ’18, net income was $32 million as compared to 26.4 million for the third quarter of ’17. Our basic and diluted EPS were $0.61 for the third quarter as compared to $0.54 and $0.53 respectively for the third quarter of ’17. During the quarter, we incurred merger and conversion expenses associated with the Brand merger, which reduced our EPS $0.17.
Turning our focus to our balance sheet, total assets at September 30, ’18 were approximately $12.7 billion as compared to approximately 9.8 billion at December 31, ’17. Total loans were approximately $9.1 billion at September 30, ’18 as compared to 7.6 billion at December 31, ’17. Brand added approximately $1.3 billion in loans held for investment at the acquisition date.
Excluding the contribution of Brand, net loan growth for the first nine months of ’18 was 3.5% on an annualized basis. Loan production continues to be strong, as new production totaled $404 million for the third quarter of ’18 compared to $370 million in the third quarter of ’17 and $1.3 billion for the first nine months of ’18 as compared to $1.1 billion for the same period in ‘17.
Looking forward, we are optimistic about future loan production and growth, given our current pipelines, markets and talent and our core bank, commercial bank and commercial specialty lines, all of which were recently enhanced by the addition of talent and leadership from Brand. At the same time, we will remain disciplined in our pricing and underwriting to manage our margin and maintain strong credit quality, while we grow both sides of our balance sheet.
Total deposits increased to $10.2 billion at September 30, ’18 from 7.9 billion at December 31, ’17. Non-interest bearing deposits averaged $1.9 billion or 22.51% of average deposits for the first nine months of ’18 compared to 1.7 billion or 22.40% of average deposits for the same period in ‘17. As of the acquisition date, Brand added $1.7 billion in deposits, which included $433.4 million in non-interest bearing deposits.
Shifting to our asset quality, at September ’18, our overall credit quality metrics continued to remain strong. As a percentage of total assets, all credit quality metrics including NPAs, loans 30 to 89 days past due and our internal watchlist are at or near historic lows. Annualized net charge-offs were 5 basis points for the third quarter, while we provided 2.3 million in loan losses.
Looking at our capital ratios, our tangible capital ratio was 8.80%, our tier 1 leverage capital ratio was 9.85%, our common equity tier 1 risk based capital ratio was 10.80%, our tier 1 risk based capital ratio was 11.84% and our total risk based capital ratio 13.85% at September 30, ’18. Our regulatory capital ratios are all in excess of regulatory minimums, required to be classified as well capitalized.
Now, I will turn the call over to Renasant Chief Operating and Financial Officer, Kevin Chapman, for additional discussion of our financial results. Kevin?
Thank you, Mitch. Net interest income was $99.4 million for the third quarter of ’18 as compared to $92.4 million for the second quarter of ’18 and $90 million for the third quarter ‘17. Net interest income was 4.07% for the third quarter compared to 14.15% for the second quarter of ’18. Excluding the impact of purchase accounting adjustments, our margin was stable when compared to the second quarter of ’18.
Furthermore, the impact of our margin from purchase accounting adjustments continued to decline during the quarter. This impact was 24 basis points for the third quarter of ’18 compared to 30 basis points for the second quarter of ‘18. For the third quarter of ’18, the yield on total loans was 5.10% as compared to 5.05% for the second quarter of ’18. Excluding the impact of purchase accounting adjustments, our loan yield increased 11 basis points from the previous quarter.
For the third quarter of ’18, the cost of total deposits was 60 basis points as compared to 52 basis points for the second quarter of ’18 and 33 basis points for the third quarter of ‘17. Non-interest income for the third quarter was $38.1 million as compared to 35.6 million for the second quarter of ’18 and 33.4 million for the third quarter of ‘17. Our mortgage division continues to perform well. Mortgage banking income for the third quarter of ’18 was $14.4 million compared to 12.8 million for the second quarter of ’18 and 10.6 million for the third quarter of ’17.
Brand mortgage contributed $1.7 million to our mortgage banking income during the third quarter of ‘18. Non-interest expense was $94.7 million for the third quarter of ’18 as compared to 79 million for the second quarter of ’18 and 80.7 million for the third quarter of ’17. Included in our noninterest expense for the third quarter of ’18 includes $2 million attributable to the Brand Mortgage Group.
Our efficiency ratio was 58.84% for the third quarter of ’18 compared to 59.46% on a linked quarter basis, which represents a significant improvement in our core efficiency ratio and achieves our goal of maintaining an efficiency ratio below 60%.
Now, I’ll pass the call back to Robin for closing comments.
Thank you, Kevin. In closing, we believe the first nine months of 2018 produced strong results and we're well positioned for a strong finish to 2018.
Now, Allison, I'll turn the call back over to you for Q&A.
[Operator Instructions] Our first question today will come from Stuart Lotz of KBW.
First of all, congrats on closing the Brand deal back on September the 1. Yeah. My first question is just an outlook for the core margin. I know, there are a lot of moving pieces this quarter with smaller balance sheet and some real leverage with the mid quarter close. But Brand also brought over a higher legacy NIM. And so I just want to see where your outlook from here fourth quarter and as we go into 2019, for the core margin and how much of that compression this quarter was related to some of the temporary items?
Stuart, this is Kevin. So yeah, as we look at margin, we still project it to be flat with the opportunity for it to increase slightly. We still are -- we still maintain a slightly asset sensitive rate position. Brand was similarly positioned, in fact, they were a little bit more asset sensitive than we are. So we still view the opportunity for us, as rates rise, for it to be beneficial and positive to net interest income as well as to margin.
If we don't see rate movements or if we saw what we saw throughout Q3, which is a flatter yield curve, that will put pressure on it, but we’re particularly coming out of Q3, we did see some inflection on the longer end of the curve, we saw it move up a little bit. I think it's pulled back some, but we still view our opportunities on the margin to be flat with -- as rates increase for that to be positive to us.
And I would just add, as it relates to Brand, Brand had very little impact related to our core margin. Their core margins stay right on top of ours and so it did not put any pressure. And I got to just remind you that they are a little bit more asset sensitive than we are. So as we see rate increases, that will come through on their operations.
As we look at Brand’s balance sheet, we did reposition a couple of items in their balance sheet, the security portfolio, just with where we were at acquisition date 9/1. We typically do take the opportunity to reposition the securities and the wholesale borrowings, just based on purchase accounting and so we did liquidate about 150 million of their security portfolio that we did not reinvest in Q -- in September. We did not reinvest that. We would look to reinvest that throughout Q4.
So, there will be a little bit of leverage coming back into the balance sheet, just from the reinvestment of those securities that we liquidated.
And I guess one follow up on the margin. I know it's hard to predict any accretion income, but any estimate right now on an impact we'll see from that, as we go in to the fourth quarter.
It's hard to gauge [indiscernible] just how early on we are with Brand. Excluding Brand, we saw -- we were experiencing, as we noted in the comments that purchase accounting has been declining. We don't necessarily view that as a bad thing by the way. Our net interest income continues to grow, despite the contribution from purchase accounting continued to decline. Right now, it’s a little bit hard to gauge exactly what the contribution or at least a run rate will be, but I would expect it to continue to be at its current levels for the next couple of quarters.
And sorry, just one additional one. When could you really start to see the Brand cost saves come through on the expense of -- on the expense side? I know, you drove the tangible efficiency ratio below 64% this quarter, but just any clarity around when the conversion is taking place and when we can really expect other cost saves to start there?
Yeah. So the last question first, the conversion is scheduled for this weekend. So, a lot of effort has gone into preparing us for this weekend. We've got a lot of people that are working diligently to make sure it a success over the upcoming [Technical Difficulty] We won’t see the full run rate of the cost saves until Q1, but I can tell you that we are on target with our cost saves and we've actually realized a significant amount already in our run rate. The earnings that Brand delivered in September sits right on top of what we projected – of where we projected them to be during due diligence. So -- and that we've already realized some portion of those cost saves, if not a significant portion.
The next question will come from Michael Rose of Raymond James.
I just wanted to get the typical update on the loan pipeline, both with and without Brand and clearly you guys had some good non-purchase loan growth, certainly compares pretty favorably with a lot of other banks, just wanted to get some thoughts on how we think about growth, both at the core bank and then at Brand, now that they have a larger balance sheet to look at.
Sure, Michael. This is Mitch. Good morning. Our current pipeline stands at 195 million. That compares to 175 million prior quarter and to your point, Brand is adding $30 million to that 195 million pipeline and with that pipeline, we continue to see good deal flows, strong pipeline and I'll break it down in a minute by state, region and business line. And to your point, we did see good production in Q3, 404 million, which led to 10% or about 152.5 million growth in non-acquired.
And before I circle back to the pipeline, as we have seen in prior quarters, the geographic distribution of that production remains strong. If you combine Alabama and Florida, it was about 25%, 33% in Georgia, 25% in Mississippi and 17% in Tennessee. So as we've seen in the past, typically close to 20% or better of the production is coming throughout the geography. But circling back to the pipeline of 195 million, looking at that, 11% of the current pipeline is in Tennessee, 13% in Alabama, Florida, 37% in Georgia, 26% in Mississippi and 13% in the commercial specially lines.
The pipeline of 195 million should result in approximately 68 million in growth in non-acquired outstandings in 30 days. So, circling back, we continue to see a strong pipeline. We expect certainly good production as we go into Q4 and with normalization of paydowns, which continued to be somewhat elevated in the prior quarter, we would continue to guide to mid to high single net growth for 4Q.
Can you just talk on that last point, Mitch, about the normalization of payoffs, because it seems commentary from a lot of the banks out there, is this is -- this could be likely more structural in nature. I know you guys are – hold slightly smaller credits than some others out there, so maybe not as much non-bank competition, but it is very competitive out there. So I guess, as you talk about the production this quarter, relative to the net growth, it certainly seems like it was a little less than last quarter obviously. What makes you or what gives you confidence that the paydown could actually normalize over the next couple of quarters? Thanks.
Good question, good point, Michael. When we look at our payoffs, paydowns and it was similar to what we saw in Q3 and to your question, your point about trying to predict the outcome of those, that's somewhat hard to do, but as we sample those for the prior quarter, we continued to see a fairly high percentage of those being attributed to selling business or the underlying asset. As a matter of the fact, that was the larger the percentage that we saw of those payoffs pay downs.
Next would be loss to competition and that's simply where we chose not to match and match the terms, the rates or refis into the permanent market to a lesser extent. I guess what does give us confidence is our talent, our markets, our deal flow, our pipeline. We feel very good where we are positioned there, whether that be with talent that's -- and that we've added this year we've had 19 relationship managers, market leaders.
That's in addition to the team that’s joined us from Brand and just our focus within our core bank, our commercial specialty lines and the commercial bank and the larger metro markets where really we feel good about our pipeline. Again our talent in our markets and while it's hard to predict the payoffs, paydowns, it's logical that that would begin to subside as we go forward at some point.
That's great color. Maybe just one more from me on the mortgage business, appreciate you guys kind of breaking out the brand mortgage and the impact there. It looks like that's going to work itself out this quarter, but as we go forward, how are you guys thinking about the mortgage business. Clearly, volumes are projected to be down a little bit. I know you guys are mostly purchase, but any sort of color there and rates have come in a little bit here in the past week or so, any comments on activity since quarter end. Thanks.
Michael, this is Jim Gray. Yeah. Our volumes for the third quarter were down a little from the second quarter. Our mix was still at about 80% purchase, 20% refi. Wholesale is about 30%, which is down a little – as a percentage, retail is up to close to 70% now. Definitely seeing an impact of higher rates on our, particularly on our refinance, 20% is probably the lowest refinance percentage we've had in recent history that I can recall. Our focus is still on hiring seasoned originators with track records with relationship, with builders and realtors in our markets that have not relied on the refi market, have always had a good purchase line of business.
And then, we're also continuing to focus on, I think I mentioned in our last call that we had started our consumer direct channel and have built it up now to 6 originators, we will continue to grow that channel to supplement and complement our retail and wholesale lines of business. Just looking into the fourth quarter, we do anticipate a little more slowdown in our large volume, primarily due to seasonality, some due to higher interest rates and that we still face low inventories, particularly in our metro markets. We're up 112 originators and 6 wholesale AEs. We brought our 20 new originators over the course of 2018. We have 20 good prospects in the hopper now, which is about what we always have in the hopper and we will convert a good percentage of those into originators for our bank.
We've also just picked up a new top originator in the Savannah market and also in the Georgia market. And we really haven't even gotten any of the volume from them at this point. So, we're continuing to do what we've always done is continue to aggressively focus on recruiting new talent, both on the wholesale, retail and consumer direct side and a continued focus on what we've been doing, maintaining our margins. And we still see a good future in the mortgage business, even though we do understand that there is some impact on the higher rates.
Our next question will come from Brad Milsaps of Sandler O'Neill.
Kevin, just wanted to follow up on the expense discussion. I know, a lot of moving parts this quarter, particularly with the Brand mortgage piece sticking around or the part of the quarter. I was curious if you could just give us in dollars sort of what the expense contribution from Brand was this quarter in terms of expenses and dollars.
Yeah. The total expenses and this would include duplicate redundant or diplomatic expenses that will come out in our Q1 run rate after conversion, but they were 3.6, 3.7 excluding Brand mortgage and then Brand mortgage on top of that added another 2 million.
And so the hope would be that you kind of can hit the first quarter with a little cleaner runway -- run rate once you get the Brand mortgage out of there and then you start to – some of the cost saves that you saved already captured really start to show up.
Correct.
Okay. And then I know that Brand also had to -- as part of the deal was going to divest a 54 some odd million of non-performing loans, prior to the deal being completed. Did that happen? Were you able to move those off the books, prior to closing?
This is – Brad, yes, those were removed and we had a group of investors that we sold it to.
Brad, I would add that that was completed back in July. So, it was done well in advance of closing of the acquisition.
Our next question will come from Matt Olney of Stephens Inc.
This is Brandon Steverson on for Matt. I wanted to start off on deposit cost. In the second quarter, we saw that step up in deposit costs and you noted, that you expected the increase to moderate and that’s exactly what we saw this quarter. So I'm wondering is this level, I believe, it was 8 bps increase quarter-over-quarter. Is that a more sustainable pace of deposit cost increases going forward?
Yeah. This is Kevin. We think so. We did see deposit cost moderate and just going back to Q2, we had taken several steps at the end of Q1 and throughout Q2 just to be responsive to some of the competition and pressures we’re seeing on deposits and concerns of ours that it would start eating into our core deposits. So, we moved a significant portion of our deposit rates to address that. So going forward, we do anticipate that we would see more moderate levels of increases.
I still would say that when it comes to funding, funding is probably one of the most fierce competitions that we have right now, it’s the competition over funding, doesn't mean we're going full in the pal, but we'll just be smart and prudent about how we fund our balance sheet from here on out and it just puts more emphasis and more priority to continue to maintain a positive mix and continue to improve that. We did see our non-interest bearing DDA increase, not only in dollars but as a percentage and that's including and excluding Brand.
And our goal always has been to grow deposits with the core stable funding base. And that will continue to be our goal, but we recognize we’re in a rising rate environment and competition over funding is steep right now. I still think we have the opportunity to continue to grow our balance sheet properly with the proper funding. But we are going to see increases in our deposit costs from here on out. And as I mentioned, we do think that they'll be more moderate, in line with what we saw in Q3 compared to what we saw earlier in the year.
And then also I wanted to ask on the efficiency ratio, you mentioned before that you’ve again achieved the goal of being sub 60% efficiency ratio and it looks like that appears to be more sustainable now and with Brand coming in and achieving some cost saves there, is there any expectation for -- to take that goal lower, to sixty percent efficiency goal?
Yeah. So, it's always been our goal. That's one of our key indicators that constantly change, much like an ROA or an ROE. There's room for continual improvement and there's room for a continual improvement in our efficiency ratio. So, that -- our first goal is to get it below 60. I think we stated in the past that our goal is to be -- to continue to incrementally improve it from here to get leverage off the expense base to drive higher revenues. That goal hasn't changed. And so now that we are below, we're below 60, we've got a 58 handle right now, the goal would be to see incremental improvement off of that. But the stated number there, I will say, the stated number that we have of 58.8, that does include Brand mortgage. If you exclude the operations of the Brand mortgage, it puts it very close to a 57 handle. It's in the low-58. So, our baseline working off of here is a several basis points below what the current reported is. So we're very optimistic about the improvement that we’ll see in the efficiency ratio from here on out.
[Operator Instructions] Our next question will come from John Rodis of FIG Partners.
Kevin, you said mortgage expenses from Brand were roughly 2 million, is that netted, is that netted against the revenues because I know you guys said income from Brand mortgage was 1.7 million. So is that 1.7 net of the 2 million?
No, it's not. That's gross. So, gross income of 1.7 and gross expenses of 2 million.
So you lost money in the mortgage -- they lost money in the mortgage division?
That’s accurate. Yeah.
Kevin, the loan balances brought over held for investment, the 1.3 billion. If you look at June 30, they were – Brand’s loans were 1.7 billion held for investment, so you sold the 55 million. What's the difference? I'm assuming paydowns were elevated.
No, there's another component, at least compared to June 30 and what we've brought over. Brand had an indirect auto portfolio that totaled about 180 million. And we sold that portfolio prior to September 1. That's going to be your difference, John is the indirect auto portfolio that we sold prior to the close. The indirect auto business, it with a small portion of our – it would be a very small portion of our total balance sheet. It was a line of business that we probably weren't going to be in long term. So we went ahead and made the decision to go ahead and liquidate that portfolio, well similar to the security portfolio, we’ll take those funds in to future and leverage them back up in either other types of loan growth or maybe in the short term in the security portfolio if it makes sense.
So that portfolio has gone or is that in held for sale right now?
No, it's gone. It's gone.
So then the increase in held for sale, roughly 300 million of Brand is in held for sale of the 463 million. It looks like roughly 48 million or 50 million is mortgage. So what's the other 250 million and how should we think about?
Yeah. There is another portfolio of consumer loans that we’re evaluating. We've been evaluating this portfolio. As to whether or not we hold it for long term or whether we look at getting out of it over a quicker period of time, it's more consumer type paper and we're still evaluating that for purpose, so for purposes at 09/30, we included it in the held for sale bucket. Admittedly, as we evaluate this, we may move that over to the held for investment at a later date, but at this time, we felt appropriate to just include it in the held for sale bucket.
And how big is that portfolio?
Roughly the amount that you discussed, it’s over 200 million.
And so, okay, so, I mean, so, like you said, it could come back to hold for investment. I was just going to say, if you're going to sell it, what sort of timeline are you looking at?
It would be over a -- probably a two quarter timeframe at the earliest.
And then Kevin, just one other question, the effective tax rate going forward. I guess it was what, roughly 21% this quarter versus 22% last quarter. What sort of rate should we use going forward?
The 22% range we think is appropriate.
Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.
Thank you, Allison. We appreciate everyone's time today and your interest in Renasant Corporation. We look forward to speaking with you again soon.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.