Renasant Corp (RNST) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Renasant Corporation 2018 First 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 John Oxford. Please go ahead.

Thank you, Debbie. Good morning, and thank you for joining us for Renasant Corporation's 2018 First Quarter Webcast and Conference Call. Participating in this call today are members of the 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 disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

In addition, some of the financial measures that we discuss this morning may be non-GAAP financial measures. A reconciliation of any such non-GAAP measures to the most comparable GAAP measure can be found in our earnings release, which has been posted to our corporate site, renasant.com under Investor Relations tab in the News & Market Data section. And now I will turn the call over to E. Robinson McGraw, Chairman and CEO of Renasant Corporation. Robin?

Thank you, John. Good morning, everyone. Thank you for joining us today. Before moving into the discussion of our performance and financial results for the quarter, I'd like to take this opportunity to recognize a few key events taking place within our company.

First, on March 28, the company and Brand Group Holdings, Inc., the parent company of The Brand Banking Company, jointly announced the signing of a definitive merger agreement pursuant to which the company will acquire Brand for a combination of cash and Renasant common stock. Brand operates 13 locations throughout the greater Atlanta market.

As of December 31, 2017, Brand had approximately $2.4 billion in total assets, which included approximately $1.9 billion in total loans, excluding mortgage loans for held -- sale, and approximately $1.9 billion in total deposits.

We're excited to partner with a 113 year old company with strong talent in one of the most attractive markets in the country. We believe this merger will significantly enhance our Atlanta presence, as our pro forma market share will rank #10 in deposits in the Atlanta MSA. It's also worth noting that Atlanta is the largest MSA by GDP and the second largest MSA by population in the Southeast. We anticipate completing this merger during the third quarter of this year.

Secondly, yesterday, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid June 30, 2018, to shareholders of record as of June 16 of '18. The per share dividend represents a $0.01 increase from the dividend paid in the previous quarter and is the third increase to our quarterly dividend since March 31, '16.

Finally, it's my honor and privilege to announce that our President, Mitch Waycaster, will be moving into the role of Chief Executive Officer for our company on May 1, as previously announced in our board's succession plan. Mitch has an impressive banking career that spans almost 40 years and has been integral part of our company's achievements.

In addition to Mitch becoming CEO, Kevin Chapman was formally -- will formally assume the role of Chief Operating Officer, while maintaining his duties as Chief Financial Officer. Kevin, who has already taken on many of the responsibilities of the COO, has been essential in helping us meet or exceed our strategic goals and is well suited to oversee the daily operations of our company.

Let me add that, although I'll be relinquishing the duties of CEO, as Executive Chairman, I will remain active in our company's strategic planning, Investor Relations, M&A process and board level oversight. I look forward to working with Mitch, Kevin and the rest of our senior executive management team in continuing to move our company forward. Now I will turn the call over to Mitch Waycaster to discuss this quarter's financial results. Mitch?

Thank you, Robin. Looking at our balance sheet, total assets at March 31, '18 were approximately $10.2 billion as compared to approximately $9.8 billion at December 31, '17. Total loans were approximately $7.7 billion at March 31, '18, as compared to $7.6 billion at December 31, '17, which represents an annual linked quarter growth rate of 4.14%. Nonpurchased loans increased to $5.8 billion at March 31, '18, from $5.6 billion at December 31, '17, or an 18% increase on an annualized basis.

If we look at the first quarter of '18, we had total new loan production of about $397 million as compared to $314 million in the first quarter of '17. Looking at the markets that contributed to that production, 21% was from Alabama and Florida; 27% from Georgia; 29% in Mississippi; and 23% in Tennessee. As we've seen in the last number of quarters, we see each region and state continuing to produce 20% plus of our production.

Looking forward, our 30-day pipeline at March 31, '18 is $163 million. That compares to $157 million at the same period last year, and $160 million at December 31, '17. If we break down our pipeline by state or region: 28% is in Tennessee; 17% in Alabama and Florida; 28% in Georgia; 17% in Mississippi; and 10% in commercial specialty lines. This pipeline should produce approximately $57 million in growth and nonacquired outstandings in the next 30 days. We continue to again see a strong pipeline, and we expect high single to low double-digit loan growth throughout 2018.

For the first quarter of '18, the yield on total loans was 4.95% as compared to 5.07% for the fourth quarter of '17 and 4.82% for the first quarter of '17. Excluding purchase accounting adjustments and interest income collected on previously charged-off loans, our core loan yield was 4.61% for the first quarter of '18, up from 4.52% for the fourth quarter of '17 and 4.42% for the first quarter of '17.

Total deposits increased to $8.4 billion at March 31, '18, from $7.9 billion at December 31, '17. Noninterest-bearing deposits averaged $1.8 billion or 22.4% of average deposits for the first quarter of '18 compared to $1.6 billion or 21.8% for average deposits for the same period in '17.

For the first quarter of '18, the cost of total deposits were 40 basis points as compared to 36 basis points for the fourth quarter of '17, and 29 basis points for the first quarter of '17.

Looking at our capital ratios. Our tangible common equity ratio was 9.4%. Leverage ratio was 10.6% and our total risk-based capital ratio was 14.4% at March 31, '18. Our regulatory capital ratios are all in excess of regulatory minimums required to be classified as well-capitalized. Now I'll turn the call over to Kevin for a few -- for further discussion of our first quarter results. Kevin?

Thank you, Mitch. Looking at our results for the first quarter of '18, net income was approximately $34 million as compared to $24 million for the first quarter of '17. Our diluted EPS was $0.68 for the first quarter of '18 as compared to $0.54 for the first quarter of '17.

During the first quarter, we incurred merger costs related to the Brand merger, which impacted our diluted EPS for the first quarter of '18 by $0.02. Net interest income was $89 million for the first quarter of '18 compared to $93 million for the fourth quarter of '17, and $17 million for the first quarter of '17.

Excluding purchase accounting adjustments and any interest income we collected from previously charged-off loans, our net interest margin increased 12 basis points to 390 -- 3.9% for the first quarter of '18 compared to 3.78% for the fourth quarter of '17. Noninterest income for the first quarter of '18 was $34 million as compared to $32.4 million for the fourth quarter of '17, and $32 million for the first quarter of '17.

The addition of Metropolitan, coupled with growth in fee income on legacy Renasant loan and deposit products contributed to the growth in service charges on deposits and fees and commissions on loans and deposits for the first quarter of '18 compared to the same period in '17.

Our mortgage division started the year strong as mortgage banking income for the first quarter of '18 was $11 million compared to $9.9 million for the fourth quarter of '17 and $10.5 million for the first quarter of '17. Noninterest expense was $77.9 million for the first quarter of '18 compared to $76.8 million for the fourth quarter of '17, and $69.3 million for the first quarter of '17.

Shifting to our asset quality, at March 31, '18, our overall credit quality metrics continue to remain strong, being at or near historical lows in all credit metrics including nonperforming loans and nonperforming assets as well as early warning indicators, such as loans 30 to 89 days past due and our internal watch list.

For additional details on our financials, I'll refer you to our press release for specific numbers or ratios. Now, Mitch, I'll pass the call back to you.

Thank you, Kevin. Before moving the call into Q&A, on behalf of our company, our shareholders and Board of Directors, we thank Robin for his service and outstanding leadership as CEO of Renasant over the past 18 years. During this time, Robin led our company from $1.2 billion in assets to $10.2 billion, from 41 locations in Mississippi to 180 locations throughout the Southeast, and from less than 600 associates to more than 2,200.

Our market capitalization grew from $120 million in November of 2000 to $2.3 billion today. With these accomplishments, it's easy to see Robin's tenure as CEO has been one of great success. Robin, we congratulate you on your success during your tenure as CEO, and we are excited that you will remain as part of our team as Executive Chairman. Now I'll pass the call back to Robin for closing remarks and the Q&A portion of our call.

Thank you, Mitch, for the kind remarks. I'm grateful for the opportunity to -- our board gave me nearly 18 years ago and I'm proud of what we have accomplished together. I believe the future is bright for Renasant to maintain our strategic direction with Mitch at the reins and leading our current management team.

In closing, we opened the year with very strong results. Our continued focus on profitability in this competitive interest rate environment, coupled with our strategies around expense containment, were driving factors behind our record earnings for the quarter.

We believe the stage is set for another success year for our company as we add Brand to our Renasant family, continue to capitalize on strategic opportunities and maintain continuity in our leadership structure. Now Debbie, I'll turn the call back over to you for questions and answers.

(Operator Instructions) The first question comes from Michael Rose with Raymond James.

Maybe for you Kevin. Obviously good improvement in the core margin. Given the expectations for at least one more rate hike this year, you guys said -- previously talked about the core NIM being flat to slightly up this year. Looks like that's changed with this rate hike and potential for one in June. Can you give us some updated thoughts on the margin? And then, what are your expectations as we move through the year for at least the scheduled portion of it, purchase accounting accretion?

Sure. So yes, as it relates to margins, Michael, just -- if we look at what happened in Q1, we definitely benefited from the rate hikes that occurred in Q4. Also, the deleverage strategy did positively impact margin, although a minimal amount. Only about 2 basis points. So core margin did expand 10 basis points. As we do relever the balance sheet, that will bring margin down a little bit and just on our releveraging strategy, our average earning assets are a little bit lower than what we anticipated in Q1, primarily due to the security portfolio.

We've only repurchased about 60% of our releveraged strategy. We purchased a little over $300 million in Q1, and still have another $200 million to $250 million to repurchase. And the reason we extended that time frame is because we have found ourselves in a much steeper yield curve, particularly on the 5- and the 10-year [point] in the curve. And so we've somewhat extended our time horizon on releveraging and just to put into perspective why we're doing that, we sold securities that were yielding 2.40%, 2.50% back in Q4, and what we purchased in Q1 came in at an average rate of around a 2.90%. In today's terms, we got the 10-year above 3% and so we just -- we didn't -- we felt it prudent to maintain a smaller balance sheet, at least in Q1 just to take advantage and receive benefit from the steeper yield curve.

As we look at -- as we look out in what margin as we -- as what we expect margin to do in subsequent quarters, heavily -- is going to be heavily dependent on rate movements. We do anticipate more rate movements during the year. We do anticipate that, that will positively impact net interest income and as well as, we maintain our position that we are slightly asset-sensitive.

The thing that we are seeing in the market is cost of funds. We're seeing pressure on cost of funds. We -- I think we did a very good job of containing and controlling our cost of deposits and cost of funds in Q1, and that's going to be our goal and mindset Q2, Q3 and beyond. But as we look ahead, could probably see a little bit of margin compression just as we relever, and then the variables will be rate movements and then how we see the movement in funding costs going into Q2, Q3 and Q4.

Okay, that's helpful. And Mitch, maybe just a follow up. I appreciate the color on the loan pipeline. Looks like it's relatively flattish quarter-to-quarter. You reiterated the guidance or the outlook for high single to low double-digit growth. And I assume obviously, that excludes the Brand Bank deal. What would -- excluding that deal, what would cause you to be kind of at the lower end and what would cause you to be at the upper end? And are there any signs from your customers that give you increased confidence that you could maybe get to the upper end of the range?

Sure, Michael. You are correct, that would not include Brand. And at $163 million, I mentioned it was at $157 million prior year, $160 million prior year quarter. Customer sentiment, what we're hearing from all of our producers across the footprint, including our commercial specialty lines, continues to be very good. So we're very optimistic that, going forward, we will be in the high single, low double-digit. Of course, I guess, customers continuing to make a move on that optimistic outlook. Hopefully, that will continue. Certainly, we believe that's the case again from what we're seeing from all the markets.

And again, as I mentioned, if you look for the last several quarters, we continue to see consistent production throughout the total footprint and throughout the business lines. So we feel good going forward. We had -- I think if you look at production in 1Q, where typically you would see a decrease in the first quarter, it compares well to prior Q1s, and as we enter Q2, again, we feel good when you look at the 30-day pipeline, the 60, 90, you look out further you're listening to clients. We feel comfortable where we are and feel like we'll continue to experience growth in that, again, high single, low double-digit range.

Michael, one thing to add to that. If you just look at, as Mitch mentioned, our production, that did generate nonpurchased growth of -- annualized growth upwards of 18%. Now we did see a little bit of an uptick in our acquired portfolio runoff, which we did have some unexpected payoffs there. One thing that was prevalent in both the acquired and the nonacquired was line utilization was down compared to previous quarters.

That is some seasonality we have in our portfolio, typically Q1, we do see some seasonality, related to line utilization, and that rebounds as we get into Q2, Q3.

So the production was good, just some of the seasonality that we have in our portfolio did mute total loans. An example I'll give you just on HELOCs for example. HELOCs -- typically our HELOCs are growing about $8 million to $10 million per quarter. We actually saw HELOCs decline. They were flat to slightly declining, which is about a $25 million -- which is about a $15 million to $20 million swing just in one category. And it just really comes back to line utilization.

And Michael, one other thing I'll mention as well, during the first quarter, as in the past, we continue to recruit and have new talent join the company. We had 11 new producers or market leaders join the company during the first quarter, 2 in Tennessee, 4 in Georgia, 3 in Mississippi markets, 2 in our specialty line units. And that in itself as well will continue to drive new production as we go forward.

Okay, that's helpful. Maybe if I can just follow up on the line utilization comment. What gives you confidence that, that's actually going to come back? We've heard that from a lot of banks this quarter. But clearly, with the Tax Cut, it seems like at least in the near term, there could be some deleveraging on the commercial side. And then on the consumer side, as it relates to HELOCs specifically, the interest deductibility of that phases out over the next 5 years. So what gives you confidence that you could actually see line utilization increase from here?

Michael, I'll start with some comments on that. I think one thing that brings comfort is just what we're hearing from our clients. And line utilization, we have typically seen that pull back in 1Q. So that's not that unusual, as Kevin mentioned, a little more pronounced Q1. So the availability of cash maybe from the tax change certainly could've impacted that. I think from the HELOC standpoint, there may have been some question early on about the treatment of HELOCs and, again, we are, at this point, expecting that to return in future quarters as well. Just listening and seeing our pipelines and listening to client sentiment.

Michael, it's Robin. I'm going back just to his -- gone back and looked the first quarter, that line utilization issue has always been prevalent. The last year or 2 were anomalies in that we did see more line utilization in the first quarter than in the past. But if you go back and look historically, we have seen a very light utilization on lines of the first quarter of the year, then it picks up for the balance of the year.

The next question comes from Matt Olney with Stephens.

This is Brandon Steverson on for Olney. I wanted to ask you guys a question on mortgage. I'm sorry, if I missed this in the opening remarks, but did you all give the number of purchase versus refi this quarter?

No. This is Jim Gray. And as far as our closed volume, we were 73% purchased, 27% refi during the first quarter. But I'll give you our logged volume percentages, because as you know, closed volume is a little bit of a lagging indicator. Our logged volume for the first quarter was $671 million, and our purchase volume was 76%, refi was 24%. So we are seeing, as anticipated, a little bit more of a shift from refi to purchase. And we anticipate that, that will continue.

Got it. Okay. And then I also wanted to jump back over to securities. Kevin, I think this is a question for you. You mentioned that you still have $200 million to $250 million left to repurchase on securities. So is it fair to say that we'll see that go back up over $1 billion?

Yes.

And it will go back to -- the $1 billion it was before is not the level that you're targeting.

We're looking at getting it close to the levels where we were in Q3.

(Operator Instructions) The next question comes from Brad Milsaps with Sandler O'Neill.

Kevin, just to follow up on the volume question. Most of those purchases coming in the taxable book, or would you see given the tax change, did you see the muni book coming back up to where it was as well?

Yes. That's a good question. No, we have not been purchasing in the muni book. This has primarily been coming in the securities that are taxable. Really because we haven't seen -- we anticipated a little bit of a change in yields, and we haven't seen that in the muni book. So we haven't -- we've really been focusing -- we haven't been building our concentration back in the muni book as we did prior to the tax change. And unless we see a change in yields, probably won't change that position. We'll keep that position and look more at the taxable securities as opposed to the muni book.

Great. That's helpful. And would we expect the borrowed funds also to kind of move back to the third quarter level? It didn't look like -- it actually looked like period-end was down, even though the period-end security book was up. Just kind of curious how you plan kind of to fund the remainder of those purchases?

Well, that's another reason why we've also somewhat extended the time horizon is just to continue to focus on our goal of funding deposit growth and not funding a long-term asset, long term being 4 to 5 years with short-term FHLB borrowings. So we're also focused on core deposit growth, core fundings, driving balance sheet growth, whether that's in security book or the loan growth -- loan book. Admittedly, that's not going to be dollar for dollar. You will see our FHLB advances come up.

But long term, the goal is to have less reliance on the wholesale funds and more growth on the deposit side. And that -- by the way, I'll say that's everybody's goal, not just Renasant's but that's every bank's goal. We saw good growth in our deposits in Q1. Even if you exclude -- we did repatriate some of the deposits that were off balance sheet at year-end. In fact, 99% of them have come back with the other 1% coming back in April. But even if you exclude that, deposit growth was still good in Q1, and we have to continue that momentum in future quarters.

This concludes our question-and-answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.

Thank you, Debbie. We appreciate everyone's time and interest in Renasant Corporation, and look forward to speaking with you again soon. Thanks.

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