Renasant Corp (RNST) 2016 Q2 法說會逐字稿

Good day and welcome to the Renasant Corporation 2016 second-quarter earnings conference call and webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Oxford. Please go ahead.

Thank you. Good morning and thank you for joining us for Renasant Corporation's 2016 second-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.

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.

Now I 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 for joining us again today. We are very pleased with our second-quarter financial results. Annualized linked-quarter non-acquired loan growth of 21.5% and strong revenue growth driven from our mortgage operation were large contributing factors to our record level quarterly net income of $22.9 million.

These results also include our completion of the KeyWorth acquisition along with the successful conversion of its operations. Continued growth in our profitability metrics and continued improvement in the credit quality of our non-acquired assets highlight the successful first half of 2016.

Looking at our financial performance for the second quarter of 2016, net income was $22.9 million or diluted EPS of $0.54, an increase of 49% as compared to $15.4 million or diluted EPS of $0.48 for the second quarter of 2015. We incurred pre-tax merger and conversion expenses of $2.8 million or $1.9 million on an after-tax basis for the second quarter of 2016, which reduced diluted EPS by $0.05 as compared to pre-tax merger and conversion expenses incurred in the second quarter of 2015 of $1.5 million or $904,000 on an after-tax basis, which reduced diluted EPS by $0.03.

Excluding the impact of after-tax merger and conversion expenses incurred during each quarter, diluted EPS was $0.59 for the second quarter of 2016 as compared to $0.51 for the second quarter of 2015.

Our return on average assets and return on average equity, excluding merger expenses for the second quarter 2016, were 1.17% and 8.89%, respectively. Excluding merger expenses, our 2016 second-quarter return on average tangible assets and return on tangible -- average tangible equity were 1.30% and 16.79%, respectively.

Focusing on our balance sheet, total assets at June 30 were approximately $8.53 billion as compared to approximately $7.93 billion at December of 2015. Total loans, including loans acquired in our KeyWorth, Heritage, and First M&F acquisitions and FDIC-assisted transactions, which we collectively refer to as acquired loans, were approximately $5.97 billion at June 30, 2016, as compared to $5.41 billion at December 31, 2015. Excluding acquired loans, loans grew at an annualized rate of 24% to $4.29 billion at June 30, 2016, as compared to $3.83 billion December 31, 2015.

Breaking down year-to-date net loan growth by market, our Alabama markets grew loans at an annualized rate of 16%, our Mississippi markets increased loans by 4%, while our Tennessee and Georgia markets both grew loans by 11%. This loan growth includes our specialty lines, which include healthcare, equipment financing, and asset-based lending.

Total deposits were $6.70 billion at June 30, 2016, as compared to $6.22 billion at December 31. Our cost of funds, which were at 38 basis points for the second quarter of 2016 is compared to 41 basis points for the same quarter in 2015 and 32 basis points when compared to December 31, 2015.

Our non-interest-bearing deposits averaged approximately $1.48 billion or approximately 22% of average deposits for the second quarter of 2016 as compared to $970 million or approximately 20% of average deposits for the second quarter of 2015.

Looking at our capital ratios at June 30, our tangible common equity ratio was 7.79%, our T-1 leverage capital ratio was 9.18%, our common equity Tier 1 risk-based capital ratio was 10.12%, our Tier 1 risk-based capital ratio was 11.55%, and our total risk-based capital ratio was 12.31%. Net interest income was $77.16 million for the second quarter of 2016 as compared to $51.6 million for the second quarter of 2015. Net interest margin was 4.29% for the second quarter of 2016 as compared to 4.17% for the second quarter of 2015.

Additional interest income recognized in connection with the acceleration of paydowns and payoffs from acquired loans was $3.96 million in the second quarter 2016 and increased net interest margin 25 basis points as compared to $3.60 million and a 28-basis-point increase in net interest margin in the same period of 2015. Our noninterest income is derived from diverse lines of business, which primarily consist of mortgage, wealth management, and insurance revenue along with the income from deposit and loan products. Total noninterest income was $35.59 million for the second quarter of 2016 as compared to approximately $22.88 million for the second quarter 2015.

During the current quarter, we realized a gain of $1.26 million in connection with the sale of certain equity securities with a carrying value of $2.77 million at the time of sale compared to a gain of $96,000 realized on the sale of securities during the second quarter of 2015. After considering this realized gain, our overall growth in noninterest income for the second quarter as compared to the same period last year is primarily attributable to the Heritage and KeyWorth acquisitions and increases in the sales of mortgage loans which we originate.

Noninterest expense was $77.26 million for the second quarter of 2016 as compared to approximately $51.08 million for the second quarter of 2015. We recorded merger and conversion expenses of approximately $2.81 million and $1.47 million during the second quarters of 2016 and 2015, respectively.

During the current quarter, we recognized a penalty charge of $329,000 in connection with the prepayment of approximately $3.5 million of borrowings from the Federal Home Loan Bank. No such charge was incurred during the second quarter 2015. In addition, during the current quarter, we recognized a $750,000 impairment charge related to a single property held in other real estate owned. This property is currently under contract to sell.

After considering these expenses, which are typically nonrecurring, our overall growth in noninterest expense for the second quarter as compared to the same period in the prior year is primarily attributable to the addition of Heritage and KeyWorth operations.

Looking at our credit quality metrics and trends at June 30, 2016, we recorded a provision for loan losses of $1.43 million for the second quarter as compared to $1.18 million for the second quarter of 2015. Annualized net charge-offs as a percentage of average loans declined to 1 basis point for the second quarter 2016 as compared to 16 basis points for the same quarter in 2015.

Total nonperforming assets, which are loans 90 days or more past due, nonaccrual loans, and OREO, was $72.5 million on June 30, 2016, as compared to $80 million at year-end. And nonperforming loans in OREO that were acquired through previous acquisitions, which we refer to as acquired nonperforming assets, were $50.9 million at June 30 as compared to $52.9 million at year-end.

Since acquired nonperforming assets were recorded at fair value at the time of acquisition, all are subject to the loss share agreements with the FDIC, which significantly mitigates our actual loss. Unless otherwise noted, the remaining information on nonperforming loans, OREO, and the related asset quality ratios excludes these acquired nonperforming assets.

The allowance for loan losses as a percentage of total loans was 1.03% for June 30, 2016, as compared to 1.23% at June 30, 2015. Nonperforming assets decreased 23% to $21.6 million at June 30, 2016, as compared to $28.4 million at December 31, 2015.

Early-stage delinquencies, or loans 30 to 89 days past due, as a percentage of total loans were 22 basis points at June 30, 2016, as compared to 19 basis points at June 30, 2015. OREO was $9.58 million at June 30, 2016, as compared to $12.99 million December 31, 2015.

We continue to proactively market the properties held in OREO, as evidenced by the sale of approximately $2.5 million of OREO during the second quarter 2016. 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.

This now concludes my prepared remarks and I will turn the call back over to Andrea for any questions. Andrea?

(Operator Instructions) Catherine Mealor, KBW.

Should we see any additional cost savings coming out of the expense base next quarter from the KeyWorth deal?

Hi, Catherine; it's Kevin. Yes, we should and we will. We have realized a significant portion of those cost saves really leading up to the acquisition even before we closed. And so their run rate as we entered Q2 already reflected a significant amount of cost saves, but we still have on an annualized basis, about another $1 million to recognize in cost saves. So that would equate in the $250,000 to $300,000 range on the low end on a quarterly basis.

Okay, great. And then with that in mind, how should -- how does that play into how we should think about the pace for the efficiency ratio decline over the next couple of quarters?

So the efficiency pace is a broader conversation, taking into consideration KeyWorth and the cost saves, but also other factors. Just the environment we find ourselves in with the flattening of the yield curve, that has put pressure on the efficiency ratio as well as -- as we've talked about in the past, just our contribution from mortgage.

That being said, we still are targeting and expecting improvements in the efficiency ratio, but achieving our goal of a 60% efficiency ratio, again in today's current environment and the difficulty in driving revenue, we are going to have to extend that into next year, into 2017.

Got it. Yes, that makes sense. And maybe that dovetails into the NIM question. Has your outlook for the margin changed at all, given the move-in rates and the lower-for-longer scenario that we'll probably be in for a while longer?

I think our outlook is the same. We've been just -- in the current rate environment -- the rate environment for the majority of Q2 before we saw what happened to the yield curve after Brexit, we saw a flattening in the yield curve and that was -- we were already experiencing pressure on the NIM at that time. I think we've guided in the past that NIM compression on a quarterly basis could be a couple of basis points per quarter.

It was a little bit more pronounced this quarter. I think we had -- if we exclude the accelerated accretion, the margin compressed about 4 basis points to 5 basis points. That's really a direct reflection of what we experienced: the more flattening of the yield curve in Q2.

You take mortgage loans held for sale, for example. Our yield on our mortgage loan held for sale portfolio, it decreased about 70 basis points to 80 basis points in Q2 compared to Q1. That line item alone compressed margin 2 basis points.

In looking at what current rates are in the mortgage production, the rates that we had in Q2 -- or the rates we might experience in Q3 might be at the Q2 levels, if not slightly lower. So until we see some steeping of the yield curve just in mortgage loans held for sale, that's going to continue to put more pressure on the margins.

So I say all this to say I think our outlook is still the same; margin compression is something we will have to contend with and battle. I think we can mitigate that in the long run. In the short run with where the curve is, we could have on a quarterly basis rather than 1 basis points to 2 basis points of compression, possibly 3 basis points to 4 basis points in Q3 and then we will have to see what the yield curve looks like in Q4.

Got it. That's helpful, Kevin. Thank you.

Emlen Harmon, Jefferies.

I guess one final point on the NIM. I think last quarter, you guys had talked about kind of a 380 core NIM, X any of the accretion effects from deals. So it would be safe to say that that's probably a little closer to 375 this quarter and then you are talking about a few basis points of compression on that core number. Is that a fair way to think about it?

That's the appropriate way to think about it, Emlen. And you are exactly right. If we strip out all purchase accounting, the margin went from a 380 to a 375.

Perfect, thank you. And then I was surprised to see the service fees down quarter over quarter. Are there any unique effects in that line this quarter?

Not really any unique effects. Q1 might've been abnormally high. We've been looking at that. We did see some large -- a large increase in service charges. That was an anomaly for Q1. Typically, Q1 is more of our weakest quarter as it relates to service charges. And we did have a -- we had a little bit of a spike in service charges.

And so the reduction in Q2 may just be more normalizing of that spike that we saw in Q1. But as we look at our consumer-based fees, our consumer-base fees, including ATM fees, service charges, all of those were down compared to Q1. So there was some softness just in our consumer-based fees.

And I think, too, Emlen, we have safe deposit box fees come in in the first quarter, which that does give them a little bit of a when added earnings that quarter, but that's not significant.

On the offset, if you look at fees and commissions on loans and deposits, we actually saw an uptick in debit card usage and debit card income as well as an uptick in fees collected on loan originations.

Got it. Okay, thanks. One last quick one, if I could. Could you just quantify the mortgage and commercial loan pipelines -- the mortgage origination pipeline and the commercial loan pipeline?

Sure. Emlen, this is Jim Gray. Our mortgage pipeline is still hanging in that $275 million, $300 million range; is actually picking up as we speak with the lower rates. We are getting some bump in refi, so we are seeing a pickup in the pipeline.

Right now, our purchase pipeline is about 60% and our refi pipeline is about 40% where it was in the closer to 70/30 -- or about -- yes, roughly 70/30 range for the actual production in the second quarter. So we are seeing a little benefit from the refi.

And Emlen, this is Mitch. I will touch on the commercial pipeline. As Robin mentioned in his opening comments, it remains healthy and strong. At the beginning of the quarter, it was at $195 million. That compares to $150 million at the begin of the second quarter.

And if I break down the $195 million by state or business line, 19% is in Tennessee, 19% in Alabama, 18% in Georgia, 13% in Mississippi, and 2% in Florida, with 29% being in our commercial specialty lines. So if you take the $195 million pipeline, that should result in about $68 million in growth in non-acquired loans within 30 days.

So at $195 million, we continue to experience strong, healthy pipeline across the market, as you can see from those percentages that spread geographically as well as the commercial lines.

Perfect. Thanks, guys.

Michael Rose.

Just wanted to circle back to expense, and I appreciate the comments before. Just as we look kind of sequentially in the salaries line, how much of that increase was from the increased contribution from mortgage bank? I know it's a little skewed because of the KeyWorth deal this quarter, but any color there would be helpful.

Just trying to assume if mortgage lines remain relatively strong, which it sounds like they are, would you expect a similar run rate for salaries in the third quarter? Thanks.

Yes, let's talk salaries, but let's also talk total noninterest expense. Just on the salary line item, as you see, we did have an increase of about $3 million. A little less than half of that is attributable to KeyWorth. And the contribution -- the increase just specifically related to mortgage in that line item was about $800,000 and that is a result of an increase in commissions.

And if you look at mortgage banking income, our mortgage banking income compared to Q1 is actually up $1.5 million. And so just the commission increase related to that additional income is about $800,000.

Another thing that is in that salaries and employee benefit that's an anomaly -- or at least stands out in Q2 -- is that we did experience an increase in our claims experience on our health and life insurance expense. We are a self-funded plan and we've just seen an increase in claims experience.

That had a significant impact on the quarter. That increase compared to Q1 was an increase of about $900,000. As we break that out, we saw that increase start to occur in March and it really held at elevated levels in April and May.

We saw it pull back a couple hundred thousand dollars in June, which was positive; we were glad to see that. But at the same time, we want to see a couple of months of that declining trend before we truly call it a trend. But we just -- in Q2, we did see some elevated health and life expense that is skewing and are showing up in that increase in salaries and employee benefits quarter over quarter.

But if we look at our total expenses at $77 million, if we back out the one-time items that Robin mentioned -- the merger, the debt extinguishment penalty, and then the OREO impairment that we took on that large piece of OREO property -- our expenses were $73.3 million with -- and that would include the increase of $800,000 from the commission -- from the mortgage commissions tied to that $1.5 million increase in income.

Okay. So if I'm hearing you correctly, it sounds like that salaries line could actually come down with the cost savings. And then if those elevated insurance costs abate a little bit.

It could, correct.

Okay. And then just as a follow-up, just touching back on the loan pipeline -- appreciate the color by market. Where are you guys seeing the greatest opportunities for growth?

Obviously, you've made a pretty significant investment in and around the Atlanta market. Florida is new territory for you. Just kind of any updates there. And then what has the outlook been for lending hires and maybe how many have you hired year to date versus last year. Thanks.

Michael, this is Mike. We have -- as far as the first part of your question, we think we have a lot of opportunity in the Georgia market. Obviously, we have made some nice investments in the Georgia market and we are -- and as a matter of fact, the Georgia market was a significant contributor to our second-quarter loan growth.

I think what you are also going to see is on a go-forward, we are seeing really solid loan growth in Alabama. We are seeing really good growth in Tennessee. Florida is set based upon some loans that have -- some construction loans that have closed in the last quarter that are scheduled to start funding up. In the third and fourth quarters, you are going to see some nice growth in the Florida market. And of course, our Mississippi market is just as steady as it's always been.

As far as the number of lenders that we have hired Company-wide during the first part of the year, that's going to be -- and I'm excluding acquisitions here. I'm talking about new hires. That's going to be in the 10 to 12 range Company-wide.

We have just brought on several bankers that are specifically dedicated to the middle market banking space. And so we anticipate that we are going to start seeing some growth in the middle market C&I arena that we had not seen previously.

Okay, guys. Thanks for taking my questions.

Brad Milsaps, Sandler O'Neill.

Most of my questions have been addressed, but I'm sorry if I missed it, but just curious. Could you give me the actual mortgage volumes or mortgage loans you sold during the quarter?

Sure. I actually have the mortgage loans closed during the quarter. $605 million; that was versus $525 million in the first quarter. And I'll just go ahead and give you a breakdown of purchase refi. We were 73% purchased in Q2 versus 67% in Q1. Obviously, 27% refi in Q2 versus 33% refi in Q1.

Great. And are you guys -- in terms of mortgage business, have you backfilled and got that business back in terms of -- with the departures, have you brought in -- do you have the people you want and the business stabilized where you want at this point in terms of -- trying to think about additional expenses or anything else that might be coming?

We are still working on that. Obviously, the departures of those employees in the first quarter -- or into the second quarter was painful, but we were very fortunate in that our remaining originators on both the Renasant and those that remained on the HBS side really stepped up their production.

And so we were able to offset that lost in production and we also were able to improve our margins by better pricing and by better execution. So a combination of those factors were able to help us offset those actually pretty strong headwinds we had in the second quarter.

Great. And then just kind of one final housekeeping question for Kevin. Are you through all the restructuring charges on KeyWorth? I know you estimated it kind of -- maybe $7.3 million or $7.4 million when you announced the deal. Should we expect any additional restructuring there or are you pretty much through those?

So the $7.3 million, that included both the merger charges KeyWorth would take and Renasant will take. We have recognized the majority. There will be some merger expenses -- merger and conversion expenses that we will recognize through the remainder of the year.

As far as amounts for the remainder of the year that we will recognize through expense, Q3 and Q4, I don't see that exceeding more than $750,000 to $1 million. That would be for both Q3 and Q4.

Okay. Because it looks like, Kevin, their first quarter, they took about $6 million expenses or so above kind of their normal run rate. I assume that was some of the expense run rate that you discussed kind of -- that they were taking before the merger is completed?

Correct, correct.

Okay, great. Thank you, guys.

Hi, Brad. This is Jim Gray again; I didn't answer the second part of your question as far as new hires. We are not through rehiring, I guess you could say. We actually had to get that we were going through conversion during the second quarter moving both HBS and Renasant to a common loan origination platform.

But we have completed that conversion now and we are very focused now on recruiting on both the TPO side and the retail side, particularly in the Georgia and Florida markets. So we are hoping to gain some more production in those markets through that.

Great, thank you.

Matt Olney, Stephens Inc.

I want to go back to the write-down on the OREO property that you guys highlighted. Can you tell us what market this was in and is there anything indicative of what's going on in that specific market?

No, Matt. This was a hotel property that we had to operate while trying to sell it for a couple of years. We had an offer, so we went ahead and took the one-time charge this quarter. Because based on what the offer was, this is after -- basically the operating income offset the operating expenses, but we are still out a couple hundred thousand dollars a year for insurance and taxes. And that doesn't count any additional funds that would have to be put into remodeling and other aspects of it. So we felt it a prudent move to go ahead and sell or sign the contracts to sell this property.

And it's not indicative to market. If you'll look, right now, we had closing the quarter for our legacy markets, in OREO, we were below $10 million. With the sale of this property, we will be in the $8 million neighborhood of total properties in the legacy markets at this stage of the game. So this isn't indicative of anything else; it's just an anomaly.

Okay, that's great color. Thanks for that, Robin. And then secondly on the deposit side, it looks like the loan deposit ratio continues to creep up. Remind me of where your internal policies are on loan deposit ratio and where you see that ratio migrating to the next few quarters?

Really, I'm not sure we have an internal policy limit per se. Just some guidelines that we look at internally. We've been working to get that loan-to-deposit ratio up to the mid to high 80%s. I think if we would go over 90% and continue a trajectory towards 100% that we would want to check up and ensure that we are not taking on too much risk or specifically too much liquidity or interest rate risk.

So just as a guideline, maybe 90%, although we don't have a direct policy. But that is a number that we managed to and internally talk about. And really ongoing conversations internally are not only loan growth, but also and as important to that loan growth is how we fund that loan growth. Are we funding it properly. So there's been a lot of effort internally to ensure that we are funding our growth with the proper sources.

If you look at our mix of deposits, we continue to experience an improvement in our mix of deposits. I think at the end of Q2, our non-interest-bearing DDA provided about 22% of our total deposits and about 19% of our total funds. And that is some of the highest levels that we've had in our balance sheet funding coming from non-interest-bearing DDA.

Okay, that's great color. Thank you.

Andy Stapp, Hilliard Lyons.

Given the flattening of the yield curve, what are your thoughts regarding purchases of securities going forward? For example, you had planned to maintain a relatively static level and just reinvest cash flows?

Yes, Andy. This is Kevin. That's been our plan throughout this year and the back half of last year is really just taking the liquidity that comes off the security portfolio and reinvest it in loans rather than the security portfolio.

Okay.

So the strategy you described about just maintaining a flattish tight security portfolio is a strategy we have been employing and will continue to employ.

Okay. And I hopped on the call late, so I may have missed this. But any color you can provide regarding the increase in fees and commissions?

Yes, Andy; this is Kevin again. Couple of things drove that. One: we did see an uptick in debit card income and income in utilization of debit cards. That accounted for about $100,000 to $200,000 of the increase. Really the large increase came from fee collections on loan originations that passed through straight to the bottom line.

Okay. And I think that's it for me.

(Operator Instructions) John Rodis, FIG Partners.

Kevin, just maybe a quick question on the acquired portfolios. If you back out the KeyWorth loans that you added in the quarter, it looks like runoff ran a little bit higher versus the first quarter, around $100 million. Can you just talk about what sort of pace you see going forward?

So I will give some commentary and then I will let Mitch and Mike chime in. Really our decline in our acquired portfolio was in line with our expectation. We will see that portfolio -- that's a portfolio that we are not adding dollars to. Again, we separately break out that acquired portfolio just because of the different type of accounting we have to apply to it.

So you will see that portfolio decline just due to paydowns, normal principal amortization, as well as payoffs. And if we make a renewal and we significantly change the credit decision on that renewal, then you might see it reclass over to the non-acquired bucket.

But typically, those loans stay -- if we are renewing a loan, typically they do stay in the acquired bucket. So that's -- what you are seeing in the decrease is just normal principal paydowns and payoffs.

Mitch, Mike?

Yes, and John, just to follow up Kevin's comment, I will go back to the pipeline and just reinforce the production that we are seeing out of that Georgia market, where it is making up 18% of our pipeline inclusive of KeyWorth. KeyWorth remains very focused on their client base and is a healthy percentage of that Georgia pipeline as well.

Yes, and just the last bit of color is with -- our focus is really on net loan growth when you add them all together. And so if you look net, we are growing loans in the low- to mid-double digits -- well, in the 12% to 13% range net. Based upon what we are seeing in pipelines and anticipated paydowns for the balance of the year, we don't see that changing.

Okay, okay. Thanks, guys.

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, Andrea. We appreciate everyone's time and interest in Renasant Corporation and look forward to speaking with you again in the near future.

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