Renasant's (RNST) CEO E. Robinson McGraw on Q4 2015 Results - Earnings Call Transcript

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Renasant Corp (NASDAQ:RNST)

Q4 2015 Earnings Conference Call

January 20, 2016, 10:00 ET

Executives

John Oxford - VP, Director, Corporate Communications

E. Robinson McGraw - Chairman, President & CEO

Mike Ross - Central Region President and Chief Commercial Officer

Mitch Waycaster - SEVP & Bank Chief Administrative Officer

Kevin Chapman - EVP & CFO

Analysts

Michael Rose - Raymond James & Associates

Emlen Harmon - Jefferies

Brad Milsaps - Sandler O'Neill & Partners

Catherine Mealor - KBW

Matt Olney - Stephens

Kevin Fitzsimmons - Hovde Group

Andy Stapp - Hilliard Lyons

John Rodis - FIG Partners

Operator

Welcome to the Renasant Corporation 2015 Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to John Oxford. Please go ahead.

John Oxford

Thanks, Kate. Good morning. Thank you for joining us for Renasant Corporation's 2015 fourth quarter and year-end 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 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 we will turn the call over to E. Robinson MacGraw, Chairman and CEO of Renasant Corporation. Robin?

E. Robinson McGraw

Thank you, John. Good morning, everyone. Thank you again for joining us today. Our financial results for the fourth quarter of 2015 represent a strong finish to a great year. The results include our completion of the Heritage acquisition and approximately 25% annualized linked quarter legacy loan growth. Excluding merger expenses, on an after-tax basis our diluted EPS of $0.55 per share represents some of our highest reported quarterly earnings which was driven by the strong performance of our legacy Company, coupled with the successful conversion of Heritage's operations.

Furthermore, our continued profitability is reflected in our return on average assets which, excluding merger expenses on an after-tax basis, was 1.12% for the quarter, marking the seventh consecutive quarter we've achieved greater than 1% return on average assets. As we look to 2016, we believe we're well-positioned to continue to improve on profitability and our earnings growth which in turn will generate shareholder value.

Looking at our performance during the fourth quarter of 2015, net income was up approximately 35.7% to $21.2 million as compared to $15.6 million for the fourth quarter of 2014. Basic and diluted EPS were $0.53 and $0.52, respectively, as compared to $0.49 for the fourth quarter of 2014. Excluding the impact of after-tax merger expenses incurred during the quarter of approximately $1.1 million, basic and diluted EPS were $0.55 for the fourth quarter of 2015.

Our return on average assets and return on average equity for the fourth quarter of 2015 were 1.06% and 8.06%, respectively. Our 2015 fourth quarter return on average tangible assets and return on average tangible equity were 1.19% and 15.84%, respectively. Focusing on our balance sheet, total assets at year end were approximately $7.94 billion as compared to approximately $5.81 billion at December 31st of 2014. The increase in total assets is primarily attributable to the acquisition of Heritage which was completed on July 1 of 2015.

Total loans including loans acquired in either the Heritage acquisition, First MNF Corporation, First MNF acquisition or an FDIC-assisted transaction which we will collectively refer to as acquired loans, increased 35.75% to approximately $5.41 billion at December 31st of 2015 as compared to $3.99 billion on December 31st of 2014. Excluding acquired loans, loans grew 17.23% to $3.83 billion at December 31st of 2015 as compared to $3.27 billion at December 31st of 2014. Breaking down year-over-year non-acquired loan growth by markets, our Alabama markets grew loans by 9.24% and have now grown loans 17 of the last 18 quarters.

Our Mississippi markets increased loans by 17.47% year-over-year and our Tennessee markets which have grown loans for 10 consecutive quarters, grew year-over-year loans by 12.31%. In Georgia we grew non-acquired loans by $70.1 million which offset a $52 million decrease in acquired loans which includes acquired and covered loans from Heritage and our Georgia FDIC acquisitions.

Before we move away from our loan discussion, let me address a topic which we've discussed in previous calls which is our lack of exposure to the energy sector. After review, we have virtually no exposure, direct or indirect, within our loan portfolio or our investment portfolio to which the fluctuations in the price of oil would negatively impact us.

Total year-end deposits were $6.22 billion as compared to $4.84 billion at December 31st of 2014. Our year-over-year increase in deposits is primarily attributable to the acquisition of Heritage. Our non-interest-bearing deposits averaged $1.32 billion or 21.36% of average deposits for the fourth quarter of 2015 as compared to $937 billion or 19.5% of average deposits for the fourth quarter of 2014. Our cost of funds was 31 basis points for the fourth quarter of 2015 as compared to 45 basis points for the same quarter in 2014.

Looking at our capital ratios at year end, our tangible common equity ratio was 7.56%. Our tier 1 leverage to capital ratio was 9.18%. Our common equity tier 1 risk-based capital ratio was 9.98%. Our tier 1 risk-based capital ratio was 11.5%. And our total risk-based capital ratio was 12.30%. Our regulatory capital ratios are all in excess of regulatory minimums as required to be well-capitalized.

Net interest income was $72.4 million for the fourth quarter of 2015 as compared to $50 million for the fourth quarter of 2014. Net interest margin was 4.33% for the fourth quarter of 2015 as compared to 4.09% for the fourth quarter of 2014. Additional interest income recognized in connection with the acceleration of paydowns and payoffs from acquired loans increased net interest margin 21 basis points in the fourth quarter of 2015 as compared to 11 basis points in the same period of 2014.

Our non-interest income is derived from diverse lines of business which primarily consist of mortgage, wealth management and insurance revenue sources along with income from deposit and loan products. For the fourth quarter of 2015, non-interest income increased to $31.5 million as compared to $20 million for the fourth quarter of 2014. Our growth in non-interest income for the fourth quarter of 2015 as compared to the fourth quarter of 2014 is primarily attributable to the Heritage acquisition and growth in our mortgage lending. Non-interest expense was $70.9 million for the fourth quarter of 2015 as compared to $46 million for the fourth quarter of 2014.

The increase in non-interest expense when compared to the same period in 2014 was primarily due to the acquired Heritage operations as well as merger expenses incurred during the quarter in connection with this acquisition. We recorded merger expenses during the fourth quarter of 2015 of approximately $1.92 million as compared to $500,000 during the fourth quarter of 2014, related to the Heritage acquisition.

Looking at our credit quality metrics and trends as of December 31 of 2015, we recorded a provision for loan losses of $1.8 million for the fourth quarter of 2015 as compared to $1.1 million for the fourth quarter of 2014. Annualized net charge-offs as a percentage of average loans were 10 basis points for the fourth quarter of 2015 as compared to 33 basis points in the same quarter of 2014. The allowance for loan losses as a percentage of total loans was 78 basis points at December 31 of 2015 as compared to 106 basis points at December 31st of 2014.

The allowance for loan losses as a percentage of non-acquired loans was 1.11% at December 31st of 2015 as compared to 1.29% on December 31st of 2014. Total nonperforming loans which are loans 90 or more days past due and nonaccrual loans, were $45.4 million and total OREO was $35.4 million. Our nonperforming loans and OREO that were acquired either through the Heritage acquisition, the First MNF acquisition or in connection with the FDIC-assisted transactions which we collectively refer to as acquired nonperforming loans and assets, were $30 million and $22.4 million, respectively, at December 31st of 2015.

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

Nonperforming assets decreased 23.85% to $28.4 million at December 31st of 2015 as compared to $37.3 million at December 31st of 2014. Nonperforming loans were $15.4 million or 0.4% of total non-acquired loans at December 31st of 2015 as compared to $20.2 million or 0.62% of total non-acquired loans at December 31st of 2014. Early-stage delinquencies or loans 30 to 89 days past due as a percentage of total loans were 20 basis points at December 31st of 2015 as compared to 32 basis points on December 31st of 2014. OREO was $13 million on December 31st of 2015 as compared to $17.1 million at December 31st of 2014, a 23.99% decrease.

We continue to proactively market the properties held in OREO, as evidenced by the sale of approximately $5.87 million of OREO during 2015, with $1.10 million in sales occurring during the fourth quarter of 2015.

Now, this concludes my prepared remarks and I will turn it back over to Kate for any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Michael Rose of Raymond James. Please go ahead.

Michael Rose

Just wanted to dig into this quarter's loan growth, non-acquired loan growth -- really strong again this quarter. Want to see where it's coming from, if any of it is a pull forward on the expectation that rates were going to rise, where the 30-day pipeline stands at now. And then maybe if you have an initial outlook for 2016 for noncovered, non-acquired loan growth, that would be great. Thanks.

E. Robinson McGraw

I'm going to let Mike Ross answer that one, Michael.

Mike Ross

To get specifically to your question on loan growth and where it came from, of our 1.35 in net loan growth of the quarter, approximately $27 million of that came from our new partners at [indiscernible] and our new franchise there. Approximately $20 million came from our specialty businesses and then the balance came from what we today is the legacy Renasant system.

And it's spread fairly evenly. I guess most -- in the quarter most of that probably coming out of Tennessee as far as the legacy growth but spread fairly equally throughout the franchise. And then, Mitch, you were going to talk about pipeline?

Mitch Waycaster

Michael, the 30-day loan pipeline is at $145 million. This compares to $111 million at last quarter end and to $80 million prior year. If you break the $145 million down by state, 25% is in Tennessee, 14% in Alabama, 41% in Georgia, 18% in Mississippi with the balance being in Florida. This pipeline should result in approximately $50 million in growth in non-acquired loans within 30 days. So at $145 million, we've continued to experience a strong pipeline as we enter the first quarter.

Michael Rose

And then any stab at non-acquired loan growth outlook for this year?

Kevin Chapman

Just as we look at this year, in the past we've indicated that non-acquired loan growth would be low double digits. We see, with the investments we've made in the specialty lines, with activity we've seen throughout our markets, that the non-acquired growth could be in the middle teens, 15%-16%. And we think the total net loan growth including runoff from the acquired portfolios could be in the high single digits, upwards of 8%-9%.

Michael Rose

Okay. And that's excluding the addition of KeyWorth?

Kevin Chapman

All those numbers are excluding KeyWorth.

Michael Rose

Okay. Is KeyWorth still expected to close at the end of the quarter or sometime in the first quarter?

Kevin Chapman

Go ahead. No, we feel like it will close by April 1. The end of the quarter, maybe the first day of the second quarter.

Michael Rose

And then just one final question from me just on the margin -- it looks like the core margin was up about 7 basis points. What drove that? And assuming we don't get any future rate increases, what would your outlook be for the core margin as we move through 2016?

E. Robinson McGraw

Yes, core margin -- we would continue to experience headwinds just on margin and fighting margin compression. We did see an uptick; if we exclude the additional income from the accelerated payoff, we did see an uptick in the margin. Really, that has more to do with just recasting some of our accretable yield as we finalize the purchase accounting adjustments out of Heritage. That additional accretable yield will stay with us for several years to come. But we saw rates move, the Fed move rates 25 basis points in December. Something that gives us concern is that we're not seeing competition respond to that in their loan pricing.

We're still seeing very aggressive loan pricing, not only leading up to the rate increase in December but post-rate increase after December. And so we still are concerned that margin and compression could still be a concern as we get into 2016.

Michael Rose

All right. So the way to think about it is that 413 core is a good way to -- a good place to start to build off of?

E. Robinson McGraw

That's correct.

Operator

The next question is from Emlen Harmon of Jefferies. Please go ahead.

Emlen Harmon

I was hoping you could just walk -- on the mortgage line -- was hoping you could walk us through the components of the fees there, just what the originations were in the quarter, what you saw in terms of the gain on sale and the pipeline.

Mitch Waycaster

Total production for Q4, both divisions, was $562 million. That compares to $659 million in Q3. About 67% of that was purchase, about 33% refi. So we saw a good quarter in production, a little pullback which is expected on a seasonal basis.

If you break that down by division, the Renasant division Q4 was $247 million, Q3 was $275 million. The Heritage mortgage division, Q4 was $315 million compared to $384 million in Q3. Looking at Q1, we project volume to be flat, particularly during January and February but picking up in March, just due to seasonal pickup in real estate activity.

The production as well -- if you look at our recent new hires, we will benefit from new hires in Jackson, Mississippi; additional hires in Alabama, in Auburn and Huntsville; as well as new hires in Nashville, also picking up on the wholesale side, some new third-party relationships.

So from a margin standpoint, good quarter, in line with the first two quarters of the year, that compares to, let's see, margin for the quarter was around a 2.30, compares to around 2 in Q3. Prior quarter is at 2.27 and 2.22 for Q2 and Q1.

Emlen Harmon

And then if I look at the loan growth this quarter, resi mortgage was a meaningful component of that. Are you guys planning to put more resi on the balance sheet going forward? And could you give us just the characteristics of what it is you are adding to the balance sheet?

Kevin Chapman

Just a couple of comments on that wonderful resi. We have seen an uptick in our HELOC portfolio. That product, we feel, is prudently underwritten, where some value -- where we're seeing LTVs. I think we've got max LTVs on that product of about 80%. We also like the fact that it's a variable rate loan and it's priced pretty close to prime or slightly above prime. So, that has been a large component of the growth.

We have also seen some opportunity to put some ARMs, adjustable-rate mortgages. Those ARMs are primarily in the five-to-seven-year range. That's more on our private client customers that are taking advantage of those ARMs. We don't necessarily anticipate those loans staying on the books for five to seven years; they typically have a shorter life than that. So we've seen an opportunity to pick up some growth in the ARM portfolio in our private client banking group.

Operator

The next question is from Brad Milsaps of Sandler O'Neill. Please go ahead.

Brad Milsaps

Kevin or Robin, I was curious if you guys could maybe talk a little bit about where you are with expense savings from Heritage and your outlook for efficiency as you push into 2016.

Kevin Chapman

Yes. Really, as we look at Heritage, we have a little bit more expense saves to go as we get into Q1, about another $200,000 to $250,000 that we expect to incur. If you look at our expenses in Q4 compared to Q3 and we can exclude the merger expenses, we did see a slight uptick in our non-interest expenses.

A couple things that drove that -- we did need to make a one-time adjustment in our incentive-based accruals that accounted for about accounted for about $700,000 of the increase. But as I discussed on last quarter's call, we anticipated about $1 million of expense saves coming into Q4. We realized those. What we've done is we've replaced those expenses with productive expenses. Mitch went through some of the new hires that we had on the mortgage side.

We've since added several individuals to our team in the SBA lending group, our C&I group in Atlanta, our new head of C&I, who is based out of Atlanta. What we've done is we've taken those expenses from Heritage which were primarily back-office nonproductive expenses and reallocated them into producers. So our expenses are flat, but if you look at the amount of expenses we now have geared toward generating higher levels of revenue, it is more concentrated in the producing category.

If you look at our efficiency ratio, we came down about a full percentage point compared to Q3. Mortgage continues to be a headwind as far as getting that number, seeing meaningful improvement in that number. If we exclude mortgage we're slightly below 60% on our efficiency.

So we're moving in the right direction. The object of our efficiency and our goals of getting it below 60 -- mortgage continues to be a headwind on that. But we're making progress on reallocating our expenses to drive higher levels of revenue.

E. Robinson McGraw

Brad, while we're talking about mortgage I'm going to let Mitch Waycaster give an update as to where we're on the integration of the Heritage Bank mortgage into the Renasant Bank mortgage group.

Mitch Waycaster

Brad, we're, I would say, on schedule and going well. Our intent has been, all along, to do this at a pace to not negatively impact the client or the originator. During the first quarter we will be converting to a common loan origination system which will be a very positive step. And that's on track. So overall, the integration is going quite well and on schedule.

Brad Milsaps

Kevin, I guess aside from the volatility of mortgage, I mean, directionally you feel you can continue to push that efficiency ratio lower?

Kevin Chapman

Yes, yes, I think we can. And it's really going to come from our ability to drive higher levels of revenue off of this expense base. We will still see opportunities to carve out expenses, but our focus has been not only to reduce the expenses that primarily reduce the amount of nonproductive or less productive expenses and reallocate that money into higher-return type of investments, whether it's a different type of lender, a different type of business line. Our focus has been reallocating those expenses to get higher returns off of them.

Operator

The next question is from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor

I just wanted to circle back on the margin real fast. Kevin, you mentioned that part of the increase in the core margin was a recasting of the accretable yield. Can you break down --? I know you gave part of the higher reported margin was at 21 bps in the accretable yield. Can you give how much was also from the non-accelerated lease of the accretable yield on a basis point perspective and then how long of a tale we have on that piece of the accretable yield, in your mind?

Kevin Chapman

Sure. So just looking at total all-in margin, if we exclude all fair values, our reported margin is at 3.80. And that number has been fairly flat throughout 2015. It has bounced somewhere between 3.80 and 3.83. So to get to our reported margin this quarter of the 4.34, if you add back the 21 basis points just due to the accelerated paydown, then we have another -- call it 29 to 30 basis points that are all of our fair value adjustments. And those fair value adjustments will be on loans, they will be on the interest-bearing liabilities, the FHLB debt, the trust-preferred securities, the time deposits and some of the other deposit accounts. That equates for, like I said, about 30 basis points.

The timeframe on those adjustments on the loan adjustment is going to continue for another four to five years. We will see some modest declines in that as we get out another two to three years. We will start seeing some modest declines in it, but it will last another four to five years.

On the liability side we have about 6 basis points of margin enhancement just to the liability -- the fair value adjustments on the liabilities. That is and as long of a life. It will last another -- call it 18 months to two years, that 6 basis point improvement on the liability side.

Catherine Mealor

So that as we think about that 3.80, it feels like the accelerated accretion is going to bump around, depending on how you work through the portfolio. The 30 bps of fair value creation is going to probably be released the next two years and then start to drift off.

And so then, as we think about that 3.80 core margin, looking into this year you think you will see modest compression in that number as we move through the year, absent whatever you want to -- however you want to model the rate impact?

Kevin Chapman

Correct. And also with those fair value adjustments of interest rate margin, we should see our 3.80, hopefully, over time -- I'm not sure what will happen in 2016. But over time, as we reprice deposits we're repricing them at our current market rates which is what our assumption was to determine that fair value mark.

So, some of those interest rate marks should blend together in the margin. But that was based on assumptions that we made either six or, in the case of MNF, two years ago. As the market changes, it may change the evenness as to how they blend together. But all of our assumptions on the interest rate marks were really based on what our expectations are for new loan pricing or new deposit pricing. And there should be some blending of those, that accretable yield and the -- but with our core margin.

Catherine Mealor

And then maybe on the reserve, how comfortable are you bringing this reserve-to-one ratio down as you -- thinking the credit is really strong, you don't really have any energy exposure but you've got Cecil. Does that play into how you think about the reserve-to-one ratio at all?

Kevin Chapman

Yes. When we look at our allowance, we look at a variety of factors. And the reserves -- the allowance to loans is a component of it. But it's a combination and the culmination of several different factors. We look at our coverage ratio. We look at the trend of our internal watch list. We get feedback on what loan review is seeing. We look at our early warning signs, indicators, our 30 to 89 days past due. So it's a combination of a lot of different factors, not just any one metric. To answer your question about where we comfortable taking it, as we have mentioned before not only on earnings calls but just in anybody that will listen to us, we have been very concerned about being able to maintain allowance as we saw credit quality improve coming out of the cycle.

I think we've mentioned several times we remember 2008 all too well. Our memories of that and just the uncertainty that surrounded the industry with pressure to release reserves might have put the industry in a precarious position as we entered 2008.

So we've tried to take proactive and pragmatic approaches to our allowance to make sure that we were identifying all the risks, not only risks that we knew of and were in front of us as a result of delinquencies but other risk that may be embedded in our portfolio that just aren't showing up in our metrics yet. So we also look at environmental factors. We look at economic factors, just to make sure that we're capturing some inherent risk in our portfolio, not just the evident risk.

Our allowance to non-acquired loans is 111. If we look at all of the loans, it's 80 basis points, maybe 78 basis points. I think that 78 basis points optically is a little bit misleading. We have about $2 million in loans that that allowance isn't covering. We have fair value marks of, in total, $90 million against that $2 million of acquired loans. If I am able to count that as allowance for loan loss and just run the calculation, then our allowance to total loans would be at 246. But optically I can't count that $90 million as allowance for loan loss although technically it serves the same purpose.

So I think just looking at our allowance and saying 78 or 80 basis points, how lower can we take it or what are we comfortable with, I think we've got to look at several other factors. That includes our acquired portfolio as well as what we're seeing in our early warning signs, early indicators of credit deterioration.

Operator

The next question is from Matt Olney of Stephens. Please go ahead.

Matt Olney

Earlier in the call, I believe it was either Kevin or Robin addressed the impact of the competition. And it hasn't been much of a change since the December Fed movement on the loan side. I'm curious what the competition has done since then on the deposit side, if anything, in your markets.

Mike Ross

We're seeing that money market rates are trending a little higher. And then we've seen in isolated cases that CD rates have started trending a little higher. So there's no question that the competition for deposits in terms of the rate environment out there is enhanced and more than what we've seen in some prior periods, no question about it.

Matt Olney

Any markets in particular where that is more of an issue than others?

Mike Ross

In Georgia and Tennessee, we're probably seeing the most of that. Our Mississippi market is fairly stable. We're seeing a little in Alabama, but not to the extent that we're seeing in Tennessee and Georgia.

Kevin Chapman

Leading up to December, we did see several of the larger regional banks, maybe some of the national banks coming out with a little bit more aggressive pricing on retail deposits. And so, there's a little bit of response as a result of that. As Mike mentioned, the areas where we have seen some pressure and some special rates have been in the money market in time deposits. If you remember, as we entered 2008 or as we exited 2008 and had a plan to build a balance sheet, part of that plan was funding it with the right types of deposits. And if you remember, we deemphasized money market out of concern that they would be a more volatile type of funding in a rising rate environment. So that's not unexpected.

We do still think there's opportunity for us to gather deposits and the right types of deposits. And we have sufficient availability in our borrowing lines to be able to bridge any gaps until that time. Or if there's any timing difference between funding it with core deposits, balancing against our projected loan growth.

Matt Olney

And then shifting over or back, I guess, to the mortgage discussion from before, it sounds like you guys are really creating a nice mortgage platform from what you had before, what you've added with Heritage and then added since then a number of offices around your footprint.

Strategically, though, how do you think about mortgage in terms of the percent of the overall bank's revenue? Would you still allow it to continue to increase? I think it's around 10% right now as far as gain-on-sale income. Is this where you are comfortable with it?

E. Robinson McGraw

To some degree I think you will see mortgage probably growing at a lesser rate than the commercial bank, from that standpoint, Matt. With the acquisition of Heritage we had a big doubling effect immediately. But I think as you continue to see, as with the KeyWorth, the acquisition and otherwise, future acquisitions and organic growth will be more in the banking lines as opposed to the mortgage loans. And so it will become less of an impact. Also you will start -- continue to see wealth management continuing to be a larger part than what it was.

So, to your point, I think size-wise or as a percentage of total revenue right now, we've seen it peak at this stage.

Kevin Chapman

Yes, but the one caveat I would throw in there is that as we get into the summer months, we're anticipating mortgage to increase their volumes. Gains will go up. So in the summer months it may be a little bit more weighted towards -- there may be another basis point or percentage point or 2 of additional revenue to the total revenue of the Company. But to Robin's point, I think, given our annual income of that 10% range, that is probably where our appetite is for mortgage. We like mortgage. It's a good line of business.

I think we understand the risk of not only the compliance of it but the risk of just the volatility and the earnings stream. We understand the risk and the pressure that it puts on the efficiency but we also enjoy the benefit of the returns we get off of it.

It's not capital-intensive. We don't have to allocate a significant amount of capital to this line of business. So for us -- we do like the business. But at the same time we understand the risk of it and understand the volatility that it can embed into your earnings stream.

Operator

The next question is from Kevin Fitzsimmons of Hovde Group. Please go ahead.

Kevin Fitzsimmons

Just a quick follow-up on the margin -- I know you mentioned that the different build-in from accretion income and looking at the core margin. But what are you thinking and forecasting in terms of rate increases and how you expect that core margin to be impacted this year?

Kevin Chapman

Right now, just as we budgeted, we actually budgeted a flat rate environment. But we did see the rate moving in December. It's going to be -- we're still a little bit uncertain as to how often, how frequently and how much the Fed moves from here on out. So we're still taking the stance of being very pragmatic about future rate increases and are continuing to position our balance sheet in a neutral position with an urgency to get more asset-sensitive, that hasn't changed.

And so we feel that future rate increases will enhance net interest income, will enhance earnings, but still are a little bit cautious as to the timing of any future rate increases or trying to predict the exactness of future rate increases, I should say.

Kevin Fitzsimmons

Just one on M&A, Robin, given your current size and the timing of KeyWorth and that coming in, how would you describe your all appetite at this point in terms of timing, in terms of market, in terms of size of deals. You really have to think about if deals are larger, incremental deals are larger from here, you start to think about that $10 billion threshold and your appetite for approaching that or jumping over it, just your thoughts there.

E. Robinson McGraw

Kevin, we have been thinking about the $10 billion threshold ever since the MNF acquisition. We started the process at that time, preparing ourselves to cross over the $10 billion, building the infrastructure, doing those things that we needed to do in order to put ourselves into position to cross it. So with that in mind, we have had it on our mind for a good while.

In fact, the latest checkmark that we have is we've finished our technology center expansion and re-do, to the extent that we're now in a position from a technological standpoint, I think, to cross the line we've been working toward repairing ourselves for stress testing.

I think we have, we have somewhere in excess of $1 million a quarter now in our run rate for the $10 billion expansion that we've already included from compliance personnel, BSA personnel, technology centers, things of that nature. With that in mind, we're cautious as to the size of an acquisition at this point. And we're obviously still looking. With KeyWorth coming on board, we will be about $8.3 billion.

So we're looking for the smaller acquisitions and/or large opportunity if, in fact, it comes into play that would in fact put us over by a measurable amount over the $10 billion as opposed to stepping across the line. We feel $12 billion to $13 billion, somewhere in there, would be the magic number at this point in time.

Operator

[Operator Instructions]. The next question is from Andy Stapp of Hilliard Lyons. Please go ahead.

Andy Stapp

Wondering if you could provide some thoughts on the possible impact of slowing economy on asset quality in 2016.

E. Robinson McGraw

That's going back to comments we made earlier Andy. And I'm going to let Mitch talk about it a little bit more so. We've been very cautious from a credit quality standpoint. We've been -- as we've been on the road, we've been talking with sell-side guys and investors for a while, that we've been observing some of our competition maybe doing some of the same things that the regulators have come out with recently in their guidance and concerns over what's going on in the economy. I think one of the reasons we saw our credit metrics improving this quarter is that we have been very aggressive in looking at loans as they have come across the desk as far as being certain that we weren't giving up anything from a credit quality standpoint.

Again, going back to a couple years back, we started seeing first give on rate, next give on term. And now we're starting to see some give on terms and that's something that we're avoiding here at Renasant. Mitch, do you want to talk a little bit about credit metrics and, again, what is happening with our credit guys?

Mitch Waycaster

Sure. Andy, just to follow up on Robin's comments, we have remained diligent over time. And we continue to look at our portfolio, the composition of that portfolio, really focusing on monitoring covenants. And as we see competition and we've seen it in markets where competition is maybe going outside of policy on structure and term -- and if we, in those very best credits, if we make a decision to do that to match competition, we do so with mitigants.

We have things in place where, if somebody maybe is going longer on term, we will get more money up front. We get more equity in the deal. So we have just been very diligent to remain consistent in underwriting, portfolio monitoring and, just relative to our various size credits and our lines of business, remain very disciplined and hold our position as we monitor and we underwrite.

Kevin Chapman

I'll add that, just as we look at our economy throughout the markets we operate in, they are still performing very well. So we're not feeling larger pullbacks or forces from maybe macro or global forces. And I'll just say yet. That doesn't mean that we won't in the future.

At the same time, we have expressed concern not just in the recent quarter but in previous years, as Robin was mentioning, about some of the same concerns the regulators came out with some reminder of CRE guidance in December. We had been expressing those same concerns not since December but from probably December of 2011.

So we've seen some of those loosening of terms. We've seen it in specific asset classes. And what we have done in response to that is shied away -- either shied away from those asset classes or, to Mitch's point, we put mitigants in place to make sure that we're properly and prudently underwriting to our standards.

I don't think that changes. If we start seeing the global macro forces affect our markets, I think we react to that. And we've had long conversations with our credit officers, making sure that we're aware and that they are plugged in and in tune to where they see risk. With the most recent concern over energy, as Robin mentioned in his prepared remarks, we looked at not only at our loan portfolio but we did a dive into our security portfolio.

We tried to challenge and identify areas that not only do we have direct exposure but what indirect exposure do we have to energy that we're just not thinking of or looking at right now. That caused us to look at loans secured by stock and making sure that we were not exposed to an energy stock. And so we've tried to really focus on not only what we know but, more importantly, what we don't know but need to.

And I don't think that changes if the macro forces in our markets -- if the macro forces catch up with our markets and we see a pullback, I don't think that changes at all. We will still continue to challenge and be pragmatic about how we view the world and how that impacts our credit risk.

Andy Stapp

And could you provide any insight you might have regarding the impact of payoff activity on acquired loans or on the margin going forward?

Kevin Chapman

Yes. So if you just look historically, on the average about 10 basis points per quarter in additional margin is resulting -- as a result of earlier payoffs or accelerated paydowns. That may be 4 basis points one quarter and 18 basis points the next quarter, but over the year it has been about 10 basis points per quarter and I think that's a good estimate to assume at least for the next year or two.

Operator

The next question comes from John Rodis of FIG Partners. Please go ahead.

John Rodis

Kevin, just two quick questions for you. First, on total loan growth you said you thought it could be high single digits. Was that with or without KeyWorth?

Kevin Chapman

That's without KeyWorth.

John Rodis

Without? Okay. And just back to operating expenses, if you look at the quarter on an absolute basis, if you back out the merger charges you are right around $69 million. And then I think you said additional cost saves of about $250,000 and then you said there was an incentive adjustment of about $700,000. So if you back those two out, about $1 million, you go from $69 million to $68 million. Is that the right way to look at expenses going forward, starting at $68 million?

Kevin Chapman

Yes. I would bump it up to maybe to about $68.5 million, only because we continue to see opportunities to pick up teams of lenders or producers. And as we see that, we're going to be opportunistic and hire them. As we see opportunity to bring in additional producers, we will move on that.

Operator

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

E. Robinson McGraw

Thank you, Kate. I want to thank everybody for your time today and your interest in Renasant Corporation. And we're certainly looking forward to speaking with you again in the near future. So have a good day.

Operator

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

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