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Edited Transcript of RNST earnings conference call or presentation 18-Jul-18 2:00pm GMT

Q2 2018 Renasant Corp Earnings Call

TUPELO Jul 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Renasant Corp earnings conference call or presentation Wednesday, July 18, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. Mitchell Waycaster

Renasant Corporation - President, CEO & Director

* Edward Robinson McGraw

Renasant Corporation - Executive Chairman of the Board

* James W. Gray

Renasant Corporation - EVP

* John Sidney Oxford

Renasant Corporation - Senior VP & Director of Marketing

* Kevin D. Chapman

Renasant Corporation - Executive VP, COO & CFO

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Conference Call Participants

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* Brandon James Steverson

Stephens Inc., Research Division - Research Associate

* John Lawrence Rodis

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

* Peter Finley Ruiz

Sandler O'Neill + Partners, L.P., Research Division - Director

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Presentation

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Operator [1]

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

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John Sidney Oxford, Renasant Corporation - Senior VP & Director of Marketing [2]

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Thank you, Gary. Good morning, and thank you for joining us for Renasant Corporation's 2018 Second Quarter Webcast and Conference Call. Participating in this call today are members of Renasant's executive management team.

Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the 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. We incur expenses in connection with certain transactions with respect to which management may be unable to accurately predict the timing of when these expenses will be incurred, or when incurred, the amount of such expenses. These include merger convergence costs, prepayment penalties, among other items. 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 measures can be found in our earnings release, which has been posted to our corporate site, renasant.com, under the Investor Relations tab in the News & Market Data section.

Now I will turn the call over to Renasant Corporation Executive Chairman, Robin McGraw. Robin?

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Edward Robinson McGraw, Renasant Corporation - Executive Chairman of the Board [3]

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Thank you, John. Good morning, everyone. Thank you for joining us today. First of all, on behalf of our board, I would like to congratulate Mitch, Kevin and our team on a successful transition, which I believe is evident in our second quarter 2018 results as we once again achieved record earnings. Our profitability metrics continued to improve as our returns on average tangible assets and average tangible equity, excluding merger and conversion expenses, were 1.59% and 16.92%, respectively.

Now I'll turn our call over to our President and Chief Executive Officer, Mitch Waycaster, to discuss this quarter's financial results. Mitch?

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C. Mitchell Waycaster, Renasant Corporation - President, CEO & Director [4]

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Thank you, Robin. Looking at our results for the second quarter of '18, net income was $36.7 million as compared to $25.3 million for the second quarter of '17. Our basic and diluted EPS were $0.74 for the second quarter as compared to $0.57 for the second quarter of '17. Merger and conversion costs impacted our diluted EPS by $0.01 during the quarter.

Turning our focus to our balance sheet. Total assets at June 30, '18, were approximately $10.5 billion as compared to approximately $9.8 billion at December 31, '17. Total loans were approximately $7.8 billion at June 30, '18, as compared to $7.7 billion at March 31, '18, and $7.6 billion at December 31, '17. This represents annualized loan growth of approximately 4% on a linked quarter basis.

Loans not purchased were $6.1 billion at June 30, '18, up from $5.6 billion at December 31, '17, compared to $5.8 billion at March 31, '18. This represents approximately 16% annualized growth on a linked quarter basis.

Our growth in loans for the quarter was driven by strong new loan production of approximately $460 million. As we have seen over the last several quarters, this growth was geographically diverse as each of the bank's 4 regions accounted for more than 20% of this loan production. Although production was strong, we also experienced high levels of paydowns and payoffs in previous quarters. The majority of the paydowns during the quarter were due to either the sale of business or refinancing the underlying property to the permanent market.

For the second quarter of '18, the yield on total loans was 5.05% as compared to 4.95% for the first quarter of '18 and 5.03% for the second quarter of '17. The impact of purchase accounting adjustments on our loan yield was 35 basis points for the second quarter of '18 as compared to 34 basis points for the first quarter of '18 and 52 basis points for the second quarter of '17.

Total deposits increased to $8.4 billion at June 30, '18, from $7.9 billion at December 31, '17. Noninterest-bearing deposits averaged $1.8 billion or 22.31% of average deposits for the first 6 months of '18 compared to $1.6 billion or 22.17% of average deposits for the same period in '17.

For the second quarter of '18, the cost of total deposits were 52 basis points as compared to 40 basis points for the first quarter of '18 and 30 basis points for the second quarter of '17.

Our capital ratios remained strong, with the tangible common ratio was 9.35%, Tier 1 leverage ratio of 10.65% and the total risk-based capital ratio of 14.75% at June 30, '18.

Now I'll turn the call over to Renasant Chief Operating and Financial Officer, Kevin Chapman, to discuss our additional financial results. Kevin?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [5]

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Thank you, Mitch. Net interest income was $92.4 million for the second quarter of '18 as compared to $89.2 million for the first quarter of '18 and $79.6 million for the second quarter of '17.

Net interest margin was 4.16% for the second quarter of '18 compared to 4.20% for the first quarter of '18 and 4.27% for the second quarter of '17.

The impact of purchase accounting adjustments on our margin was 30 basis points for the second and first quarter of '18 and 43 basis points for the second quarter of '17. Excluding purchase accounting adjustments, core margin for the second quarter of '18 was 3.86%, down 4 basis points on a linked quarter basis.

During the second quarter, we completed our releveraging strategy by purchasing approximately $200 million of investment securities. The releveraging contributed to approximately 2 basis points of linked quarter margin compression.

Noninterest income for the second quarter of '18 was $35.6 million as compared to $34 million in the first quarter of '18 and $34.3 million for the second quarter of '17.

Mortgage banking income was strong for the second quarter of '18 at $12.8 million compared to $11 million for the first quarter of '18 and $12.4 million for the second quarter of '17.

Noninterest expenses were $79 million for the second quarter of '18 compared to $77.9 million for the first quarter of '18 and $74.8 million for the second quarter of '17. Salary and employee benefits accounted for the linked quarter increase in noninterest expenses, which was driven primarily by 2 items: first, higher levels of mortgage banking salaries and commissions tied to the increase in mortgage banking income; and annual merit increases, which took effect in mid-March of Q1.

Shifting to our asset quality. At June 30, 2018, our overall credit quality metrics continue to remain strong at, or near, historical lows in all credit quality metrics, including nonperforming loans, nonperforming assets and predictive indicators, such as loans 30 to 89 days past due or our internal watch list.

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

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Edward Robinson McGraw, Renasant Corporation - Executive Chairman of the Board [6]

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Thank you, Kevin. In closing, we believe the first 6 months of '18 have shown strong results. Our continued focus on profitability in this competitive interest rate environment were driving factors behind another quarter of record earnings. We believe the stage is set for another successful year for our company as we add Brand Bank to the Renasant family during the third quarter and continue to capitalize on strategic opportunities as they unveil themselves.

Now Gary, I'll turn the call back over to you for Q&A.

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Questions and Answers

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Operator [1]

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

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [2]

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This is actually Peter Ruiz on for Brad. So I guess just maybe first touching on growth. Obviously, net-net growth after accounting for the paydowns in the acquired book there, it was still a little bit sluggish here relative to maybe that previous high single, low double-digit loan growth. Do you guys still think that, that level is kind of attainable here in the second half? What are you kind of seeing at -- the press release kind of seemed a little optimistic here on maybe production ramping back up. Or is it more just paydown subsiding?

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C. Mitchell Waycaster, Renasant Corporation - President, CEO & Director [3]

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Yes, Peter, this is Mitch, and good question, good point. And we did feel good. Our current pipeline is at $175 million, that's an increase from $163 million. And as you just referred, as I mentioned earlier, production at $460 million was very strong last quarter. And geographically, across the 4 regions of the company as well as in our business lines, with our current pipeline, we do expect that to continue. This was an unusual quarter as we saw things like sale of business, sale of property, refinance to the secondary market. Some of those things are very hard to predict. But what we do feel good about is the current pipeline coming off of a strong quarter and, really, where we end up as far as net growth going forward. And large part is maybe dictated by some of the things that we saw this quarter that are hard to predict, but we don't expect many of those things going forward. And like I said, given the current pipeline, feel very, very good about the next quarter and production. One area, in particular, that we saw in those payoffs and paydowns, in particular, is in the 1-4 family. We had some credits priced with 3 handles that we actually saw competition move at lower rates. And one thing we will certainly do is remain disciplined when it comes to pricing and underwriting, and that also contributed to some of the payoffs and paydowns we saw this quarter.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [4]

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Okay, that's great. I appreciate that. Maybe just on the NIM. I guess your commentary there in your prepared remarks kind of implied that you're done with the balance sheet releveraging here with the securities book. Is that correct?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [5]

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That's correct.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [6]

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Okay. And then I guess just on deposit costs, obviously, deposit betas are increasing industry-wide. I think you kind of had a deposit beta closer to maybe 50% this quarter. Can you talk about the dynamics here? Are you going to ratchet deposit pricing a little bit more? And how does that -- could you lean maybe on your low-90s loan-to-deposit ratio? What are the dynamics there, and how do you think about that as you fund growth here in the second half?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [7]

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Yes, so our philosophy just on how we fund that growth really hasn't changed in the fact that we are targeting funding sources that support our interest rate position. So we continue to maintain a slightly asset-sensitive interest rate position, and that's largely going to be driven off of funding. So we will continue to fund with what -- with funding sources we think is appropriate based on what's going on, on the asset side of the balance sheet. As we look at just the -- our cost of deposits on a linked quarter basis, it did -- we did step up 12 basis points in total cost of deposits. A couple of things drove that. One, we felt that with the advertising and the competition around deposits that we needed to take steps, proactive steps to really solidify our core -- our base of our deposits. So the majority, if not all, of our deposits, we looked at the rates and, in most cases, changed some of those rates for almost all of our deposits, really, in an effort to -- in a defensive measure to just solidify the -- our core base so that we didn't have any decay or attrition of that base. And then on top of that, it's really just going back to our strategy of finding stable low-cost funding sources to fund future balance sheet growth. As we look out in the future quarters, we do think deposit betas are going to be higher than what they were last year. But we also view this quarter as a little bit of a stair-step and would anticipate that future quarters -- cost of deposits in future quarters to not be at levels that we had this quarter.

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Operator [8]

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The next question comes from John Rodis with FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [9]

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Kevin, you mentioned in your prepared remarks, I think, in operating expenses, you said salary expense, the increase -- so the increase linked quarter was about 3 -- a little over $3 million. And you said that was primarily driven by mortgage commissions and the -- and merit increases. Can you sort of break that out? How much of it was merit increases versus mortgage commissions, which, obviously, will fluctuate some?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [10]

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Sure. So the mortgage accounted for about 40% of that increase. Merit increases accounted for another 30% of it, with the residual just being a different day count, an additional day in second quarter compared to Q1.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [11]

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Okay. So sort of assuming the seasonality in mortgage, you could see operating expenses, overall, sort of pull back a little bit, ex the Brand merger and ex the $500,000 in merger expenses this quarter. So do you sort of see $77 million to $78 million being sort of a good run rate for operating expenses before the Brand acquisition?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [12]

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If you normalize the mortgage commissions, yes.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [13]

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Okay. And then, Kevin, just one other question on the tax rate. 20 -- little -- roughly 22% for the last 2 quarters, is that sort of a good run rate to use going forward? And then what's the impact from the Brand acquisition?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [14]

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Yes. So tax rate, 22.5% to 23%. Brand -- the impact of Brand, they run at a very similar tax rate. So net-net, we don't think it moves our effective tax rate significantly.

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Operator [15]

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(Operator Instructions) The next question comes from Matt Olson with Stephens.

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Brandon James Steverson, Stephens Inc., Research Division - Research Associate [16]

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This is Brandon Steverson on for Olney. On the Brand acquisition, I was wondering if you guys could provide any comments on maybe some preliminary 2Q results and any updates on the approval process, when you expect to close and maybe conversion -- timeline of conversion, I'm sorry.

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [17]

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Sure. So we'll talk about the last questions first. Just -- we've indicated that we anticipate closing on the Brand acquisition in Q3. We -- everything is in line for us to be able to do that. So we're still targeting a Q3 close. Conversion is still set for Q4. And we're still targeted in gearing up for a conversion in early to mid-Q4. As it relates to just how Brand did during the quarter, I'll give some general commentary. They have not released any of their numbers via the call report or internally to their shareholders. So I'll just give some general comments. Overall, their operating results, their pretax income is in line or better than what we projected. So generally, overall, they continue to operate as we expect, if not better, in that Atlanta market.

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Brandon James Steverson, Stephens Inc., Research Division - Research Associate [18]

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That's helpful. And then just moving over -- back to the NIM discussion. You mentioned that a couple of the core NIM, a couple of basis points were just due to the completion of the releveraging strategy. As far as going forward, when we take into account the deposit beta discussion that you just kind of laid out for us, what do you expect as we move into 3Q and 4Q this year in terms of core NIM?

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Kevin D. Chapman, Renasant Corporation - Executive VP, COO & CFO [19]

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We continue to expect core NIM to be flat.

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Brandon James Steverson, Stephens Inc., Research Division - Research Associate [20]

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Got it. And maybe I can sneak in one more on mortgage. Is there anything you can provide as far as volume and what the gain on sale margins did from 1Q to 2Q this year?

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James W. Gray, Renasant Corporation - EVP [21]

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Yes, this is Jim Gray. Our volume for the second quarter was $610 million, that is up from $438 million in the first quarter. 82% purchase and 18% refi in the second quarter. That mix changed. The first quarter, it was 73% purchase and 27% refi. And then the mix between wholesale and retail was 31% in the second quarter versus 39% in the first quarter; and retail, 69% versus 61% in the first quarter.

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Operator [22]

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

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Edward Robinson McGraw, Renasant Corporation - Executive Chairman of the Board [23]

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

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Operator [24]

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