Renasant Corp (RNST) 2017 Q4 法說會逐字稿

Good day, and welcome to the Renasant Corporation 2017 Fourth Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kevin Chapman. Please go ahead, sir.

Good morning, and thank you for joining us for our -- for Renasant Corporation's 2017 Fourth Quarter Earnings Webcast and Conference Call. Participating with me 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 fluctuations, 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.

In this quarterly call, in particular, our statements about the outlook and expectations with respect to the recent enactment of the Tax Cuts and Jobs Act, effective January 1, 2018, including, among other things, the expected impact of this legislation on our net deferred tax assets, the impact of the revaluation of the net deferred tax assets on our fourth quarter '17 earnings and our effective tax rate in future years are forward-looking statements.

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 already been posted to our website at www.renasant.com in the Press Releases section under the Investor Relations tab.

And now I'll turn the call over to Robin McGraw, Chairman and CEO of Renasant Corporation. Robin?

Thank you, Kevin. Good morning, everyone, and thank you for joining us today. Looking at our results for the fourth quarter of '17, net income was approximately $16.5 million as compared to $23.6 million for the fourth quarter of '16. This decrease is a result of the immediate impact of the Tax Cuts and Jobs Act, which was enacted into law on December 22, '17. While we expect to see significant long-term benefits from this law, we were required to revalue our net deferred tax assets on the date of enactment as a result of the new law. This revaluation, full details of which are provided in our earnings release, resulted in a write-down of the company's net deferred tax assets of approximately $14.5 million, which was charged against fourth quarter earnings.

Our basic and diluted EPS were $0.33 for the fourth quarter as compared to $0.56 and $0.55, respectively, for the fourth quarter of '16. Excluding the write-down of our net deferred tax asset and the merger expenses incurred during the quarter, net income for the fourth quarter of '17 was $31.5 million or $0.64 per share. Net income for the year ending December 31, '17, was $92.2 million as compared to $90.9 million for the same period in '16. Basic and diluted EPS were $1.97 and $1.96, respectively, for '17 as compared to basic and diluted EPS of $2.18 and $2.17, respectively, for the same period in '16. Excluding the write-down of our net deferred tax assets and other nonrecurring expenses incurred during the year, net income for the year was $113.7 million or $2.42 per share. Our results of operations as of and for the year ended December 31, '17, included the impact of our acquisition of Metropolitan BancGroup Inc., which was completed on July 1, '17. The assets acquired and the liabilities assumed had been recorded at estimated fair value and are subject to change pending finalization of all valuations.

Turning our attention to the recently enacted Tax Cuts and Jobs Act. Among other things, the new legislation permanently lowers the federal corporate tax rate effective for years including or beginning January 1, 2018. United States generally accepted accounting principles require the company to revalue our net deferred tax asset on the date of enactment based on the reduction of the overall future tax benefit expected to be realized by the lower tax rate. After reviewing our inventory of deferred tax assets and liabilities on the date of enactment and giving consideration to the future impact of the lower corporate tax rates and other provisions of the new legislation, we estimated the write-down of our net deferred tax assets to be approximately $14.5 million, which is inclusive of a $2 million write-down of deferred tax items accounted for in accumulated other comprehensive income. This write-down is included in our operating results for the fourth quarter of '17 and is an increase to the provision for income taxes. Our initial estimates may be adjusted in future periods based on a number of factors and uncertainties, including the finalization of our '17 tax returns, further clarification from the Financial Accounting Standards Board and the proper treatment of tax effects of items presented in accumulated other comprehensive income and additional guidance released on the new legislation.

As a result of the acquisition of Metropolitan, coupled with organic balance sheet growth, our asset exceeded $10 billion at the end of the third quarter of '17. In order to delay the adverse impact of the Durbin Amendment to the Dodd-Frank Act, which, among other things, imposes limitations on the amount of debit card interchange fees certain bank institutions may collect, we initiated several strategic initiatives to manage our consolidated assets below $10 billion at December 31, '17, which is the threshold at which bank holding companies are subject to the Durbin Amendment.

More specifically, we sold certain investment securities and shortened the holding period of our mortgage loans held for sale. The proceeds from these initiatives were used to reduce certain wholesale funding sources. The pretax cost of the overall initiative for the fourth quarter of '17, which includes interest income foregone on securities and mortgage loans sold, approximated $450,000 and was slightly offset by a pretax gain of $91,000 resulting from the sale of investment securities. We have previously disclosed the estimated impact of the Durbin Amendment on our interchange fee income in 2018 would be approximately $2.1 million to $2.3 million per quarter beginning in the third quarter of this year. During the first quarter of '18, we intend to lengthen the holding period of our mortgage loans held for sale portfolio and purchase securities to reestablish the balance of our investment securities portfolio at a level consistent with the amounts recorded in previous periods.

Turning our focus to our balance sheet. Total assets at December 31, '17, were approximately $9.8 billion as compared to approximately $8.7 billion at December 31, '16. Total loans were approximately $7.6 billion at December 31, '17, as compared to $6.2 billion at December 31, '16 and $7.4 billion at September 30, '17, which represents an annualized growth rate of 9.15% on a linked-quarter basis.

Loans not purchased increased to $5.6 billion at December 31, '17 from $4.7 billion at December 31, '16, which represents an annual growth rate of 18.56%. For the fourth quarter of '17, the yield on total loans was 5.07% as compared to 4.88% for the third quarter of '17 and 5.07% for the fourth quarter of '16. Excluding purchase accounting adjustments, our core loan yield was 4.52% for the fourth quarter of '17, up from 4.49% for the third quarter of '17 and 4.40% for the fourth quarter of '16.

Total deposits increased to $7.9 billion at December 31, '17, from $7.1 billion at December 31, '16. Noninterest-bearing deposits averaged $1.9 billion or 23.3% of average deposits for the fourth quarter of '17 as compared to $1.6 billion or 22.6% of average deposits for the same period in '16. For the fourth quarter of '17, the cost of total deposits was 36 basis points as compared to 33 basis points for the third quarter of '17 and 28 basis points for the fourth quarter of '16.

Looking at our capital ratios. Our tangible common equity ratio was 9.56%. Our Tier 1 leverage capital ratio was 10.16%. Our common equity Tier 1 risk-based capital ratio was 11.32%. Our Tier 1 risk-based capital ratio was 12.37%, and our total risk-based capital ratio was 14.43% as of December 31, '17. Our regulatory capital ratios are all in excess of regulatory minimums required to be classified as well capitalized.

Net interest income was $93.3 million for the fourth quarter of '17 as compared to $90 million for the third quarter of '17 and $78 million for the fourth quarter of '16. Excluding purchase accounting adjustments, our net interest margin increased to 3.78% for the fourth quarter of '17 compared to 3.76% for the third quarter of '17 and 3.69% for the fourth quarter of '16. Our noninterest income is derived from diverse lines of business, which primarily consist of mortgage, wealth management and insurance revenue sources, along with income from deposit loan products.

Noninterest income for the fourth quarter of '17 was $32.4 million as compared to $30.3 million for the fourth quarter of '16. Noninterest expense was $76.8 million for the fourth quarter of '17 as compared to $71.6 million for the fourth quarter of '16. For the fourth quarter and full year '17, we have exceeded our stated goal of achieving a sub-60% efficiency ratio as our efficiency ratio was 57.75% and 59.55% for the fourth quarter and full year of '17, respectively.

Shifting to our asset quality. At December 31, '17, our overall credit quality metrics continue to remain strong at or near historic lows in all credit quality metrics, including NPAs, loans 30 to 89 days past due and our internal watch list. For more information on our financials, I'll refer you to our press release for specific numbers and ratios.

In closing, excluding the immediate impact from the Tax Cuts and Jobs Act, we closed 2017 with very strong results. Our continued efforts to grow net interest income while focusing on expense containment contributed to our profitability during the year. Furthermore, neither our strategies to deleverage the balance sheet during the fourth quarter nor the conversion and integration of Metropolitan's operations during the third quarter significantly impacted our day-to-day operations, as evidenced by our strong loan growth during the year. This strong finish to '17 was a leading factor considered by our Board of Directors when approving an increase in our quarterly dividend, which was payable on January 2, 2018. The $0.01 increase to $0.19 increased our annual cash dividend from $0.72 to $0.76.

Our strong performance in 2017, along with the recent conversion and integration of Metropolitan, have positioned as well at the start of 2018. The expected future benefits from the Tax Cuts and Jobs Act and continued focus on our key strategic initiatives will contribute to the further success in 2018.

Now Rachel, I'll turn the call back over to you for questions and answers.

(Operator Instructions) The first question comes from Stuart Lotz with KBW.

Sorry, I'm on for Catherine. We were just looking for some commentary around what you're expecting for your tax rate for 2018 given the Tax Cuts and Jobs Act and if any of that was going to be offset either on the expenses or if you thought it would be more computed away from lower loan yields or higher deposit costs?

I'll let Kevin answer that.

Just as we look at our effective tax rate for 2018 and periods beyond, right now, we're targeting and project our effective tax rate to be in the 23%, 24% range and would expect that -- but just based on what we know, would expect that to start occurring in Q1 and hold throughout the year. Just as we learn more about the jobs tax cut and the detail behind that, that may change our estimates, but that's where we are right now, in the 23%, 24% range. Going through your second part of your question about what happens to that, the computed away. We do think that just competition, overall competition around loans, deposits may prevent all of that from trickling through to the bottom line. We're anticipating that there could be some margin pressures, whereas we have been expanding margin the last quarter, we expanded margin 2 to 3 basis points all of last year each quarter. I think we expanded margin if we look at it. Not sure that's going to hold. We'll need a quarter or 2 to see what competitive reaction is to say that we'll have margin expansion. But we do think that margin at a minimum will be flat and would be variable upon competitive pressures around what's done with the tax increase. Robin, Mitch, anything else to discuss just specific to the jobs -- or the tax rate or the tax savings?

No, I think that is good.

The next question comes from Brad Milsaps with Sandler O'Neill.

Kevin and Robin, I know you guys -- you made some smart moves at the end of the year to reduce the size of the balance sheet. Can you give us a sense of how large it might balloon to sort of in the first quarter and going forward? I know, typically, the first part of the year, you also get in some, I think, seasonal tax from municipal deposits, so that could help you. But just kind of curious, kind of give a sense of the size of the balance sheet and how that might impact them? I know you got a lot of moving parts there with what you did in the fourth quarter and then probably what you've already put back on.

Yes, Brad, it's Kevin. So just to give a little bit of color of the amount of deleverage that occurred, as Robin mentioned, we ended 9/30 a little over $10.3 billion. And as we got into the fourth quarter, we saw that some of our security portfolio, the pledging of our securities had freed up a little bit. And so we -- the actual assets that we liquidated to convert to cash, we sold about $450 million of securities. And then the other thing that we looked at was increasing the turnover time in our mortgage loans held for sale portfolio. We typically hold those mortgages for about 45 to 60 days. We reduced that to about 25 to 30 days, and that allowed us to reduce the mortgage loans held for sale portfolio about $100 million. We're currently in the process of -- well, we've already started lengthening the time of our mortgage loans held for sale portfolio, so that will cause a little bit of increase, as I mentioned. We sold -- the reduction that we had was $100 million, so we'll start extending that portfolio in Q1. Our intent is to replenish our security portfolio to get liquidity – the on-balance sheet liquidity levels to amounts where we had them back in Q3 and would anticipate that occurring in the latter part of this quarter. Just with great movements with the tax change that occurred, we're looking at which securities we want to purchase and also waiting to see, particularly on the municipal security portfolio, what happens with yields in light of the recent tax change. But overall, as we get towards the end of Q1, we would anticipate our security portfolio getting back close to levels where we were at the end of Q3.

Okay. That's helpful. And then in terms of expenses, you touched on this a little bit, but do you feel like you have most of the cost savings in the run rate from Metropolitan? And then just sort of your outlook around sort of what you're thinking kind of a run rate for expenses in the fourth quarter. A pretty good starting point, I know you got -- the rate is coming through, et cetera, but just kind of curious what your thoughts are around the expense growth rate.

Yes. So just specific to Metropolitan, when we have realized the majority of those, there's a small amount that we will realize in Q1. But the majority of those we realized in Q4, and we are ahead of our expectations as far as the total cost base we were in Q4. The remaining amount in Q1 will just allow us to continue to exceed that. As we look at our expenses into Q1, into 2018, just using fourth quarter excluding the merger as the baseline, that's going to be relatively close. We did have a couple of upticks in our expenses, in occupancy and equipment expense as well as some salaries and employee benefits just adjusting our incentive accruals to year-end payouts. So just the incentive accruals at the end of the year were slightly higher than the run rate for the previous 9 months. Our increase in occupancy and equipment expense, we brought several software initiatives online in Q4. Those -- they weren't 4D fast or anything like that. It's really just software that we brought on to improve operational performance. We will see reductions in expenses in future periods. Not next quarter, not in Q2, but as we get into the latter part of '17 -- latter part of '18, we'll see some expense reductions as that software replaces existing software. So our run rate -- I would anticipate our run rate in Q1 as well as in '18 to be consistent with Q4, excluding the merger expenses.

The next question comes from Michael Rose with Raymond James.

Just wanted to touch on maybe some initial expectations for loan growth this year. Clearly, you guys have done a fantastic job growing the portfolio. So maybe if you can -- as Mitch normally does with the pipeline and maybe some initial expectations for this year.

Let me start with the pipeline, and then I'll talk a little about the production in Q4 and maybe come back to what we're expecting going forward. The current 30-day pipeline at the beginning of the quarter is $160 million. That compares to $145 million same period prior year. As we typically see, beginning Q1, the pipeline pulls back a little bit. At $160 million, we're beginning the year with a strong pipeline. That does compare, prior quarter, to $190 million. As I say, we typically see that pull back some, but we continue, in each state, region, in our business lines, to see a strong pipeline. We also continue to see good production and pipeline from the Metropolitan Bank markets as they represent about 20% of this current pipeline of $160 million. If we further break that down by state and region, 26% would be in Tennessee, 17% in Alabama and Florida, 29% in Georgia and 28% in Mississippi. Again, Metropolitan making up about 20% Metropolitan Bank markets and close to 10% in our commercial business lines, all of those continue to grow and produce well. This pipeline should produce about $56 million in growth in non-acquired outstandings in the next 30 days. If we look at Q4, we had total new loan production of about $445 million. That compared to $395 million in Q3. And if we look at the markets that contributed to that production, 30%, Alabama, Florida; 26% from Georgia; 24%, Mississippi; and 20% 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. That production resulted in growth in non-acquired on an annualized basis, linked quarter, 22%; as Robin mentioned earlier, year-over-year, over 18%; and annualized net loan growth for the quarter around 9%; and course per year, over -- a little over 7%. We continue to, again, see a strong pipeline. We expect high single, low double-digit growth in 2018. We see that to continue.

Okay. It's very helpful. And maybe if I can follow up on the tax rate question for Kevin. A lot of banks talk about the FTE adjustments. As you think about the tax rate going down, as an offset, it was about 3.3% this quarter. Do you have a sense for what that drops to next -- or in the first quarter?

As far as an impact on margin, we would anticipate that to have a couple of basis point impact just on the total margin just due to the change in FTE rate. So not significant, but just a couple of basis of impact.

Okay. That's helpful. And then just on the fee piece, do you guys expect any impact on mortgage banking from any of the tax stuff? Or what are you seeing from your clients as clearly a bigger piece of the revenue pie for you guys? So any color would -- there would be great.

This is Jim Gray. Really not anticipating any impact on mortgage from the tax fees. Most of -- our average mortgage loan is $200,000, and the tax cut laws don't really impact the deduction of interest loans below that. So I mean, above -- at that level or it's at the $1 million. So don't really anticipate any impact from the tax cut law on mortgage production other than just continued reduction in refinance. The Mortgage Bankers Association is projecting about a 29%, 30% reduction in refinance this next year, and so we would anticipate continuing to see a reduction in refinance.

And remind me what your split is between purchase and refi.

Yes, we were 72% purchase, 28% refi for the fourth quarter. For the year, we were 74% purchase and 26% refi. And to kind of put that in perspective, last year, we were 65% purchase and 35% refi, so about a 9% or 10% reduction in the percentage of refi versus purchase. Really, when you look at our overall production for 2017, we were $1.955 billion. We were $2.172 billion in '16, and 100% of that reduction can be attributed to a reduction in refinanced activity. We actually had a slight improvement in the purchase activity.

The next question comes from Matt Olney with Stephens.

I wanted to start on the efficiency ratio. You guys made some good progress there during 2017. You're now well below 60%, your stated goal. I'm curious where you think it can go from here. Any new goal you want to share with us? And what will be the primary driver of moving this down further?

As far as goals, I would just remind you of what we stated. When we targeted the 60%, that that number is fungible and that it would continue to improve. That our short-term goal is to get below 60%, but after we reached that, the goal would be to continue to see measured improvement in that. And ultimately, what our goal is, is I guess, ultimately, to get that down into the mid-50s. And if we just -- if we break down that efficiency ratio, about 3 to 4 percentage point of the efficiency ratio is tied up in our nonbanking lines of businesses of mortgage, insurance, wealth management. Each of those lines are less efficient than the bank. And so if we're in the -- corporately, if we're in the 55% range, that means the bank is operating in the low 50% range. And that's ultimately where we want to get to. And that's what our goal is, is just continue to see measured improvement in that efficiency ratio from here on out. Short-term goals, I guess, would be another -- we'd get it to 55%, but that's going to happen over a period of time. How we get there is going to -- is really, if you look at 2017 and how we saw the improvement, that's going to be the road map for how we get it lower, and it's really going to be driven off revenue lift. Our growth in revenues is really what drove the efficiency ratio. We really did -- we didn't see that in '16. Just with the flattened yield curve and just pressures we saw in the revenue, that prevented us from getting there in '16. '17 is where that really came through, particularly as we saw the revenue lift. As margin expanded, balance sheet grew plus margin expansion, tighter constraint on the expenses, all of those were what drove us below 60%. That's what's going to continue to drive it to lower levels from here. And we think we're in a position for that to occur as well.

Okay. That's helpful. And then on the margin front, as you noted in prepared remarks, it was a pretty heavy quarter on the accretion from purchase accounting. Can you give us what the remaining discount is on the -- those acquired loans?

Yes. So our remaining discount is in the $70 million range. The -- outside of our normal accretion or accretable yield as well as accretion that came from payoffs, paydowns of loans, that was relatively flat compared to previous periods. What we did see, we saw an uptick in some income we collected from a previously charged-off loan. But typically, that line item, over the course of the year, has averaged about $1.5 million per quarter. It was a little bit higher this quarter, primarily because we had a loan associated with one of our law share deals that we collected a substantial amount from the bar. It was -- it really wasn't a release of -- it was not release of the purchase accounting adjustment. It was cash collected from a previous loan that was charged off through the loss share acquisition. So that large uptick really didn't even impact our -- the remaining amount of our purchase accounting. So our accretable yield, non-accretable difference remaining still holds in the $70 million to $71 million range.

And within that, Kevin, to give us a better idea of duration, how much of that $70 million is from Metropolitan versus previous deals?

Just specific to Metropolitan, Metropolitan is in the $15 million range, with the remainder being from the previous acquisitions.

The next question comes from Brian Zabora with the Hovde Group.

Just a question on -- back to loans. The decline that you saw in purchase loans, was that a quicker pace this quarter? Was the Metropolitan deal fairly recently closed? Or can we see this kind of pace in the next couple of quarters?

Brian, this is Mitch. I think what we experienced this quarter was just the ordinary course of business of payoff and paydown. As I've mentioned, net growth on a linked quarter was just over 9%. So we did have good production, as I mentioned earlier. But as far as payoffs, paydowns, pretty much in line with what we would see on a normal run rate.

Okay. Did you have loans from the purchase bucket going to the non-purchase bucket? Or is that -- was that a factor at all as far as just that category growth?

No, not really.

Okay. All right. Just your thoughts on the loan deposit ratio in the 90s or so, do you -- is there a limit that you'd like to go, keep under, like 100%? Or just your thoughts about funding the strong loan growth that you're having.

Yes. Brian, Kevin. Good question. We target around a 90% loan-to-deposit ratio. It -- our loan-to-deposit ratio this quarter is a little bit elevated just because of the deleveraging. We did reduce several hundred million just as far as the deleveraging effort. Some of those deposits have frankly rolled back in already this quarter, so just being off the balance sheet short term. But at 12/31, that loan-to-deposit ratio was elevated a little bit. But as we look long term, we do target more in that 90% range. If we get up above 100% -- we're not targeting 100% loan deposit. We're really trying to keep it in that 90% range.

The next question comes from John Rodis with FIG Partners.

Just to clarify on the loan outlook of high single digit to low double digit, that includes the runoff of acquired loans, correct?

That is correct. John, it would.

And then -- and just sort of bigger picture, given the lower tax rates and so forth, have you guys seen any sort of meaningful change in sort of the outlook for your borrowers and stuff, just in recent conversations and so forth?

John, this is Mitch. We -- as we have throughout the year, the sentiment that we hear is good and we continue to hear that. I guess it's maybe yet to be seen. We'll let the current tax changes will yield. But like I say, what we hear is good, production -- what we see in production, what we're currently reflecting in the pipeline. Certainly, we've not seen a decrease there in any of those and remain optimistic as I believe the -- our customer base does as well.

Okay. Okay, that makes sense. And then, Kevin, just to follow up on the interest recoveries. You said the higher run rate this quarter was driven by one loan. I know that's going to be a volatile number going forward, but I assume you would expect it or we should expect it to sort of drop back down to that -- around that $1 million a quarter level, give or take.

Yes. On the average -- if we exclude the one large item, on the average, it's typically around $1.5 million per quarter.

And can you say how much that one loan was this quarter?

It was about $3 million. So if you back it out, we were riding in that $1.5 million range for Q4.

(Operator Instructions) The next question comes from Andy Stapp with Hilliard Lyons.

There's a lot of moving parts that will impact the margin, including the December Fed rate hike or average securities lengthening the holding period for the loans held for sale. Just want to make sure, were all those items reflected in your guidance for a stable margin?

They were. And you're right, a lot of moving parts, including the December Fed movement. But yes, all of those items were factored in. But just as we look at margin and it being flat, just as we look at what happens with competition with the most recent tax change increases and then just -- we are anticipating continued pressure on the liability side. But all of those items were factored in to the guidance of a flattish margin.

And does that flattish margin also reflect the impact of tax reform on the FTE margin?

It does. It does, yes.

Okay. And is that stable outlook for just Q1 or the entire year?

Right now, Q1, but we're somewhat anticipating the same for the remainder of '18. But primarily more of a short-term look. That outlook is more of a short-term outlook.

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, Rachel. We appreciate everybody joining us today, and we appreciate your time and interest in Renasant Corporation and look forward to speaking with you again soon. Thank you.

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