Renasant Corp (RNST) 2016 Q1 法說會逐字稿

Good morning and welcome to the Renasant Corporation 2016 first-quarter earnings conference call and webcast. All participants will be in listen-only mode. (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, Laura. Good morning and thank you for joining us for Renasant Corporation's 2016 first-quarter earnings webcast and conference call. Participating in this call today are members of Renasant's executive management team.

Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission. We undertake no obligation to update or revise forward-looking statements to reflect change assumptions, the occurrence of unanticipated events or changes to future operating results over time. I now will turn the call over to E. Robinson McGraw, Chairman and CEO of Renasant Corporation. Robin.

Thank you, John. Good morning, everyone and thank you again for joining us today. Our first-quarter 2016 financial results reflect a strong start to what we expect to be a great year. We are fortunate to operate in an economically vibrant market and our team is focused on capitalizing on opportunities throughout our footprint.

Our results include annualized linked-quarter non-acquired loan growth of 25% and a continuation of improving returns on profitability metrics as our return on average tangible assets was 1.20% and our return on tangible equity was 15.58%. Additionally, we are pleased to announce an increase in our quarterly dividend, which boosts our annual cash dividend from $0.68 to $0.72.

Looking at our financial performance for the first quarter of 2016, net income was $21.2 million or basic earnings per share of $0.53 and diluted earnings per share of $0.52 as compared to $15.2 million or basic and diluted EPS of $0.48 for the first quarter of 2015. Excluding the impact of after-tax merger and conversion expenses incurred during each quarter, basic and diluted EPS were $0.54 for the first quarter of 2016 compared to basic and diluted EPS of $0.49 for the first quarter of 2015.

Focusing on our balance sheet, total assets at March 31 of 2016 were approximately $8.15 billion as compared to $7.93 billion on a linked-quarter basis. Total loans, including loans acquired in previous acquisitions, or in FDIC-assisted transactions, which we collectively refer to as acquired lands, were up 12% on an annualized rate of $5.57 billion at March 31 of 2016 as compared to $5.41 billion at December 31.

Breaking down first-quarter net loan growth by market, our central division, which consists of Alabama and Georgia, grew loans by 21%. Our Mississippi markets increased loans by 3% and our Tennessee markets grew loans by 6%. In Georgia, during the first quarter of 2016, we grew loans by 15% annualized.

Included in the loan growth just discussed are loans generated within our specialty lines. For the quarter, loan growth from specialty lines totaled $35 million, of which $11 million came from healthcare, $8 million from asset-based lending and $7 million came from equipment financing.

Excluding acquired loans, loans grew at an annualized rate of 25.62% to $4.07 billion at March 31, 2016 as compared to $3.83 billion at year-end. Total deposits were $6.43 billion at March 31 of 2016 as compared to $6.22 billion at December 31. Our cost of funds were 37 basis points for the first quarter of 2016 as compared to 43 basis points for the same quarter in 2015.

Our non-interest-bearing deposits averaged approximately $1.32 billion or approximately 21% of average deposits for the first quarter of 2016 as compared to approximately 19% of average deposits for the first quarter of 2015.

Looking at our capital ratios at year-end, our tangible common equity was 7.52%; our tier 1 leverage capital ratio was 9.19%; our common equity tier 1 risk-based capital ratio was 9.88%; our tier 1 risk-based capital ratio was 11.38%; and our total risk-based capital ratio was 12.17%.

Net interest income was $70.1 million for the first quarter of 2016 as compared to $48.8 million for the first quarter of 2015. Additional interest income recognized in connection with the acceleration of paydowns and payoffs from acquired loans was $1.6 million in the first quarter of 2016 and increased net interest margin by 11 basis points compared to $590,000 and a 5 basis point increase in net interest margin during the same period in 2015. During the fourth quarter of 2015, we increased net interest margin by 21 basis points after recognizing $3.61 million in accelerated accretion.

Our non-interest income is derived from diverse lines of business, which primarily consists of mortgage, wealth management and insurance revenue, along with income from deposit and loan products. Total non-interest income was $33.3 million for the first quarter of 2016 as compared to approximately $21.9 million for the first quarter of 2015 and $31.4 million for the fourth quarter of 2015.

Our overall growth in non-interest income for the first quarter as compared to the same period in the prior year is primarily attributable to the Heritage acquisition and growth in our mortgage lending. Non-interest expense was $69.8 million for the first quarter of 2016 as compared to $47.3 million for the first quarter of 2015. We recognized merger expenses of approximately $948,000 and $478,000 during the first quarter of 2016 and 2015 respectively.

Looking at our credit quality metrics and trends, at March 31, 2016, we recorded a provision for loan losses of $1.8 million for the first quarter of 2016 as compared to $1.1 million for the first quarter of 2015. Annualized net charge-offs as a percentage of average loans declined to 10 basis points for the first quarter of 2016 as compared to 11 basis points for the same quarter in 2015.

The allowance for loan losses as a percentage of total loans was 1.05% at March 31, 2016 as compared to 1.29% at March 31, 2015. Excluding acquired assets, non-performing assets decreased 24.7% to $27 million at March 31, 2016 as compared to $35.6 million at March 31 of 2015. Non-performing loans were $14.2 million or 35 basis points of total non-acquired loans at March 31 of 2016 as compared to $18.9 million or 58 basis points of total non-acquired loans at March 31, 2015.

Early-stage delinquencies, or loans 30 to 89 days past due as a percentage of total loans, were 17 basis points at March 31, 2016 as compared to 37 basis points at March 31, 2015. We see many positives on the horizon, specifically healthy commercial loan pipelines and sustainable mortgage loan pipelines, which support our annual loan growth goals, both of which should drive continued revenue growth.

In closing my prepared remarks, it's worth noting that, on April 1, 2016, we completed our merger with KeyWorth Bank, our Georgia-based bank with six offices in the Atlanta metropolitan area and approximately $399 million in assets, $284 million in total loans and $347 million in total deposits as of March 31, 2016.

We are now working toward a successful conversion with KeyWorth, which we anticipate completing during the second quarter of 2016. Now I will turn the call back over to Laura for any questions that anyone may have.

(Operator Instructions). Catherine Mealor, KBW.

Good morning, everyone. A question first on mortgage. Can you give us just a little bit of color around the higher mortgage revenue this quarter, maybe what were the origination volumes and then how much of the revenue this quarter was just from gain on sale versus some hedging activity?

Catherine, I'm going to let Mitch Waycaster and Jim Gray answer those questions.

Before Jim highlights the results and success of the mortgage division this past quarter, I wanted to note that recently the former co-presidents and several production and support employees of the Heritage Bank mortgage division left our Company. However, due to recent hires and ongoing recruiting efforts in both Heritage Bank Mortgage markets and Renasant legacy markets, we are confident that we will be able to offset much of the projected loss of production volume, which, with the reduction in overhead related to the departed employees and anticipated margin improvement on the projected replacement volume, we believe that we will be able to mitigate the financial impact.

It should also be noted in addition to continued recruiting efforts, we are moving forward with our plan to consolidate the two mortgage divisions, and effective April 1, Heritage Bank Mortgage was rebranded as Renasant Mortgage and the conversion to a common loan origination platform is well underway and should be substantially complete by mid-May.

And also note the combined Renasant Mortgage division will continue under the leadership of David Mays who has been President of Renasant Mortgage for over 11 years. And Jim, if you want to highlight some of the production for the quarter and current pipeline.

Sure, Mitch. Catherine, our volume for the first quarter was $524 million, which was down from our volume in the fourth quarter of $562 million. However, the encouraging thing to us was that the way that volume broke down for the quarter was $139 million in January, $169 million in February and $227 million in March. And so, obviously, during the first quarter, you have a seasonal slowdown, but that pickup typically takes place in April. We started seeing that pickup take place a little earlier this year and that $227 million is pretty much on track with what we need to do to meet our production goals for this year.

The breakdown between wholesale and retail was roughly 31% wholesale, 69% retail, which is pretty much in line with where we've been in prior quarters and that's kind of where we see that mix in that 70/30 to 60/40 range. The breakdown between purchase and refi, we were 67% purchase, 33% refi. That's exactly the same as it was for fourth quarter; although I think you'll see the purchase percentage pick up (inaudible) as we are getting more into the buying season.

Our margin was strong for the quarter at roughly a 2% margin, which is up a little from the fourth quarter. That's kind of the breakdown of the income as far as related to gain on sale and pipeline mark. I don't have the exact breakdown on that, but we did have some pipeline mark. Our pipeline at the end of the fourth quarter was roughly $200 million. We are running now around $300 million in pipeline, so there has been some -- but we are being able to sustain that pipeline, as Robin mentioned in his remarks.

So with current rates where they are, even anticipating a little increase in rates, we feel we can sustain those pipelines. Mitch did mention our efforts to replace some of the volume that we do anticipate that we will lose because of some of those departures. Really not anything we are doing special or new because of that. It's just our ongoing efforts. We've had hires during the first quarter in the Atlanta and the Birmingham markets. We are talking to probably 15 to 20 producers and TPO reps within our footprint, and that's just an ongoing effort. We are always doing that. So a lot of opportunity there.

One of the markets that we will really be focusing on in the near future once we get through the conversion is our Florida market. We believe we have a lot of potential down there. We only have a few originators in the Florida market and believe we have a lot of potential to increase our presence down there on the mortgage side.

All right. Thanks for all the information. It was super helpful. And then maybe switching over to expenses too, expenses were flat linked quarter, which was great to see with the increased revenue. So can you help us think about the pace for expense growth going into this year partly just given loan growth should still be strong, mortgage should still continue to grow and then you've got some higher expenses nearing the $10 million [cross] threshold. So help us think about a good expense growth rate moving through this year.

Just looking at expenses and excluding KeyWorth, as Robin mentioned, we closed on KeyWorth April 1. KeyWorth will add somewhere between $2.5 million to $3 million in our quarterly run rate just for their additional expenses. So excluding that increase, we do anticipate our expenses to be relatively flat during the year.

A couple of things just in Q1, salaries and employee benefits are up compared to Q4 about $400,000 or $500,000 just purely due to FICA taxes. So as we get through the year, that expense will alleviate and so we do expect our expenses to be relatively flat. That doesn't mean that we will stop hiring producers. We continue to see opportunities to pick up team members and producers throughout the system. Expect us to be proactive in that and building out our teams throughout all of our markets. But that should lead to an expectation of higher revenue growth as well.

And is that expectation to continue to hire baked into your expectations for flat growth, or if you do pick up a couple extra teams then that may bump up the expense base a little bit?

It may cause it to be a little bit higher. But, again, we would be making investments, as we've done in the past, making investments in opportunities to grow revenues in the future.

Understood. All right, great. Thank you.

Emlen Harmon, Jefferies.

Good morning, guys. The loan growth this quarter, it looked really strong in what tends to be, I would say, a seasonally challenging quarter. Robin, you mentioned the commercial pipeline looked pretty good. What are the pipelines telling you about the rest of this year and was there anything unique in this first quarter, I would say, relative to what you would typically see?

Emlen, I'm going to let Mitch talk about pipelines and Mike talk a little bit about specialty lines and the geographies.

Emlen, at the beginning of the quarter, the 30-day loan pipeline stood at $150 million. That compares to $145 million last quarter and $85 million same period prior year. If you break the $150 million down by state, 18% would be in Tennessee, 16% in Alabama, 33% in Georgia, 21% in Mississippi and 12% in Florida. This pipeline should result in approximately $53 million in growth in non-acquired loans within 30 days and certainly at $150 million, we continue to experience a strong pipeline as we enter the third quarter and expect continued strong loan growth. Mike, do you want to --?

Yes, Emlen, and as far as your question on what we saw in the first quarter, we were in recognition that we have -- our growth has resulted in us being a much larger bank, we actually began some calling efforts back about a year ago on some relationships we had with some larger businesses and we were able to capitalize on landing some of those opportunities in some of our metropolitan markets. So that's the primary reason why we got off to such a quick start this year versus prior years.

And the other part was, as you heard Mitch and Robin refer to, we did have a solid quarter in terms of our specialty businesses. They contributed about $35 million in growth just from those specialty businesses. So those are in the process of continuing to ramp up. We've invested in those businesses and seeing good solid performance out of those and we anticipate that to continue as our pipelines look still very deep.

Got it. Thanks. Kevin, I guess we don't get all the balance sheet details until we see the Q, but give us a sense of how you thought the balance sheet reacted to the first rate hike, just kind of within your expectations, or were there any surprises that you saw there?

Not a lot of surprises. Our sensitivity was in line with what we anticipated. We saw a pickup just in annual run rate of net interest income due to the rate increase upwards of $1.5 million to $2 million and that's what we were anticipating given that it was a quarter point of an increase.

Just how we are managing our balance sheet is just continually trying to become more asset-sensitive. We are not trying to predict or time when the Fed is going to move rates, but we know that we are going to have to come off of and get into a higher rate environment in the future. So we are continually focused on more variable rate loans, as well as a continued focus on the stable sources of funding, so reducing reliance on hot-money deposits or wholesale-type borrowings.

Great. Thanks. I appreciate the questions. See you guys next week.

Michael Rose, Raymond James.

Good morning, guys. Just wanted to follow up on the expense question. I think you said FICA was $400,000 to $500,000. So if I layer in KeyWorth, which I think you said is going to add about 2.5 to 3.0, looks like we are at about a $71 million to $71.5 million run rate. Just want to make sure that's the math that you guys are looking at as well from a run rate perspective.

That is.

Okay. And then Mike had mentioned some hires that were brought on last year that's helped the loan growth. How should we think about the pace of hires as we move here? Obviously, Florida is a new market for you all. Are you looking to hire there and what's the hiring pipeline look like at this point? Thanks.

Michael, I will just take that specifically on Florida. We've actually just completed a round of new hires in Florida and if you will recall when Mitch started talking about pipeline, we've seen our pipeline in Florida as far as the percentage of the total pipeline move up rather significantly this quarter and that's primarily the result of those new hires coming in and generating some significant activity.

I think what you are going to see is that you will see a good bit of activity in lending in Florida in the next few quarters. And I do want to reiterate too or make sure it's clear that the people we've added in Florida are not a net increase in our expense run rate. They are actually replacements of some other team members, so we should see the efficiency of our Florida operation continue to improve.

All right. So some upgrading of talent there. Great. And then just one more for me. I know you don't really have any energy exposure to speak of, thank God, but are you guys seeing any sort of cracks on the credit side? Are you seeing any aggressive behavior that would cause you to think that maybe the credit cycle will turn next year and maybe you'd want to start building reserves a little bit more? I know your core credit quality is good at this point, but how should we think about what you guys are seeing on the credit front?

Michael, for the most part, if you look at our credit metrics, they are going the opposite way, they are going in a positive direction and we are continuing to provide, as you will note this quarter, we provided more than charge-offs to provide for some of the loan growth that we've had. So in that particular regard, I feel like that, from our point of view, we are not seeing any cracks on the credit side.

Another thing I was wanting to point out too -- Mike was talking about for the most part in Florida, those were replacements, so the expense rate won't change. By the same token, as we add these new mortgage originators, you are not going to see an increase in expenses because those for the most part are replacements also.

Just building on what Robin said, not only he expenses, but just going back to credit quality, I would just build on and just remind you of what we discussed last quarter as we talked about just what we went through in light of some of the concerns industrywide about energy. Although we don't have direct energy exposure, we were going through an entire process of trying to challenge not only what we knew, but really what we should know within our entire loan portfolio and that's really the mindset that we have is not try to manage through cycles based on the risk of the day, but really try to manage all of our risk throughout the year, or just throughout time.

To Robin's point on the provision, the $1.8 million that we recorded in provision, if you look at our internal watchlist, which aren't in the press release, but information will be in the Qs, we continue to see declines in our internal watchlist. You see what's happening as far as the NPLs, the 30 to 89 days past due, all of those continue to decline. We continue to see improvement in our credit quality, but, at the same time, we do think it's prudent to reserve for our growth and so that's largely what that $1.8 million in provision relates to is growth that we had during the quarter.

Not to beat a dead horse, but our coverage ratio on non-acquired loans is over 300% now for the first time in several years. And another point that, because of what you just said and in anticipation of are there cracks in the credit and in the underwriting process, I asked our Co-Chief Credit Officers to go back and look at those credits that don't reach their level and they went back and looked at all credits that were approved over the first quarter that were $1.5 million and above to see if, in fact, they would've had any different insight to those credits than our senior credit officers did. And to a credit, they felt very comfortable with all those credits and underwriting of those credits.

So going back to Kevin's point, we are very mindful of the fact that there could be some possibilities, and we have seen some others that may be loosening a little bit, and we are very mindful of that and very conscious of that, and for that reason, we are being very stringent about not changing our underwriting.

Guys, that's great color. Thanks for taking my questions.

Brad Milsaps, Sandler O'Neill.

Good morning. Kevin, it looks you may have changed at least how you present some of your fee income line items, specifically maybe mortgage. And then also wanted to ask, other income was up quite a bit linked quarter. Just kind of curious if there was anything specific in there, or if there may have been an offset also in non-interest expense that would offset some of that fee income. But just any kind of color there on some of the components of what may have changed in fee income would be great.

Yes, so let's start with the other non-interest income first. Really the increase that you see in Q1 compared to Q4 ties back to contingency income related to our insurance company. Brad, if you'll remember, the contingency income, it all comes in in Q1. Last year was a little bit low compared to historical. Given the fact that in Tupelo -- Tupelo had a tornado so loss experiences were higher, which led to contingency income being a little bit lower last year. The large increase that you see in Q1 compared to prior quarters is just contingency income. And Mitch, I think that number was about $700,000?

That's correct.

Brad, a couple of other things that we did in non-interest income this quarter compared to previous quarters is, historically, we had shown gains on sale of mortgage loans just as a standalone category and then other ancillary fees, origination fees, closing fees, we showed that up in the fees and commissions line item. Going back to our 10-K, we actually lumped all of that into one line item, mortgage banking income, which we think gives a much better indication of the total income that's driven out of the mortgage group.

With mortgage, they may -- what they are targeting is a set net margin and so they have flexibility in what they offer in rate versus what they collect on origination fee, but the two ultimately net down to a net margin number that reflects the true revenue driven off of the sale of that loan. So we felt it more appropriate to put all those revenue line items into one, which is that mortgage banking income line item. So that's really the main reclass that you see.

Another one I will mention is we did separately break out gains on our SBA loans. This is a division that we have had for several years and been ramping up production and are starting to see the gains materialize to the point that they are significant enough to break out in the non-interest income section. So this quarter, we broke that out separately as well. Historically, that was in other non-interest income as well. But we did go back and adjust for prior periods in the press release so that you have comparable numbers on a quarterly basis.

Right, that's helpful. Thanks for the color on that. And then just on expenses, you gave some good guidance there and it sounds like there's going to be a lot of moving parts with mortgage. Would your flattish expense guidance ex-KeyWorth, would that also be excluding if your mortgage production does pick up in the seasonally stronger months? Obviously you are going to have more variable comp, or would that be exclusive of that?

Great question. So the $71 million run rate, if mortgage has a stronger quarter than what they had in Q1, there will be some variability in that cost, but also you will see increases in the revenue to offset that cost.

Absolutely. Thank you, guys.

Kevin Fitzsimmons, Hovde Group.

Good morning, guys. I was hoping you could just give us a sense on your outlook for the margin here and if possible, if you could talk about it in terms of a core, in terms of reported. I know accretion is lumpy, and even with core, I know you guys pull out accelerated accretion, but if you could talk about it in terms of also pulling out all accretion in terms of where your margin stands at this point and where you expect it to go? Thanks.

Sure. So Kevin, just our all-in margin, I think, was a 421. 11 basis points of that was attributable to just accelerated income. So you strip that out and the margin, excluding the accelerated, is in the 410 range. We expect to remain roughly in that 410 range for this year. As we get into next year, that will change a little bit.

To your point, included in that 410, there is some purchase accounting adjustments that are related to interest rate marks. If we exclude all purchase accounting, our margin is in the 380 range; actually it's 380. That has been relatively flat over the last eight quarters. We have seen -- we do continue to expect to see outside of the accelerated. We think margin at best will be flat and continue to fight off just in the current rate environment that we have. We don't expect dramatic, and to define dramatic, I would say more than 2 to 3 basis points per quarter. But we do think that in the environment that we are in that off of that 380 is a reality.

So the 380 and the 410 will be highly correlated just as it relates to changes in compression. If we see compression at 380, you'll see compression in that 410 margin number as well.

As far as the additional income that we expect, that number -- the additional income from the accelerated accretion, that number is very volatile. It's highly dependent on accelerated payoffs or changes in cash flows. On the average throughout the year, we expect that to be about 10 basis points per quarter, but I will readily admit if you look at -- the volatility -- I will readily admit that that's a volatile number. It could be 21 basis points one quarter. It could be 3 basis points the next. So on the average, we expect it to be 10 basis points per quarter over the course of a year.

Got it. Okay. Very helpful. One additional follow-up and related to the margin, I noticed cost of funds ticked up this quarter. Can you just give a little color on what's driving that? Is that just the Fed rate hike flowing through or is that the deliberate efforts to lock in funding longer term? Thanks.

So it's a couple things, but it's primarily attributable to just the increase in the Fed rate. That 5 basis points increase from period-over-period in our total cost of funds really breaks down -- 3 basis points of that was just primarily due to liability-sensitive -- rate-sensitive liabilities that went up as the Fed moved rates 25 basis points.

Our focus is just to continue to build out core funding that's less rate-sensitive, so more of an effort on stable deposits or more stable funding. We are really not considering going out on the curve and locking in any longer-term wholesale funding, FHLB advances, although we wouldn't rule that out if it was opportunistic. We don't see that as a need or a necessity right now.

Okay. Thanks, Kevin.

Andy Stapp, Hilliard Lyons.

Good morning. Just another question on loan growth. I think last quarter you guided to annualized growth in non-acquired loans in the mid-teens. Is that still a good run rate going forward, or might it be a little bit higher?

We will stick with that for right now, Andy, I think as far as an average throughout the course of the year.

Okay. Sounds good.

We are not talking quarter to quarter, but on average throughout the year.

Yes, okay. And does the guidance for stable non-interest expenses, does that include the expense reductions you expect to result from the mortgage platform consolidations?

Yes. Back to mortgage again, Andy, we are looking at replacements for production people. There will be some reductions based on the consolidation of the platforms and consolidation of management, but there will be variable cost increases obviously with enhanced production too.

Okay. And what do you expect the effective tax rate to be for the balance of the year?

It should be in the 33% range, Andy.

Okay, great. Thank you.

And 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, Laura. We want to thank everybody for their time and interest in Renasant Corporation and we certainly look forward to speaking with all of you again in the near future.

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