Renasant - Q1 2024

Transcript

Operator (participant)

Good morning, and welcome to the Renasant Corporation 2024 first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press Star then one on your telephone keypad. To withdraw from the question queue, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson with Renasant Corporation. Please go ahead.

Kelly Hutcheson (Chief Accounting Officer)

Good morning, and thank you for joining us for Renasant Corporation's 2024 quarterly webcast and conference call. Participating in this call today are members of Renasant's executive management team. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance, and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, www.renasant.com, at the Press Releases link under the News and Market Data tab.

We undertake no obligation, and we specifically 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 may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now I will turn the call over to our Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, Kelly. Good morning. We appreciate you joining the call and your interest in Renasant. This quarter's results reflect loan and deposit growth, plus continued expense management. We continue to build the strength of the balance sheet and believe this will be beneficial as we progress through 2024. Our Southeastern markets remain economically vibrant and lead us to see continued growth in the near term. The combination of deposit-rich markets and the higher growth areas is one of the keys to our financial success. Yesterday, our board of directors implemented the next step of our company's management succession plan by designating Kevin Chapman to become our CEO in May 2025. I look forward to working closely with Kevin in this leadership transition, as I will continue as Executive Vice Chairman when he assumes his new role as CEO.

Having worked with Kevin for nearly 20 years, I know Renasant is in great hands with Kevin guiding our company and look forward to a bright future under his leadership. I will now turn the call over to Kevin.

Kevin Chapman (President and COO)

Thank you, Mitch. I appreciate the trust and confidence our board, shareholders, and company has in me and look forward to your wisdom and guidance as I prepare to take on this new role. Looking at our first quarter results, our earnings were $39.4 million, or $0.70 per diluted share. In the first quarter, we sold a portion of our mortgage servicing rights portfolio for a $3.5 million gain. The carrying value at the time of the sale was $19.5 million and represented $2 billion in unpaid principal amount. Excluding this gain and one smaller item, our adjusted EPS was $0.65 for the quarter.

We experienced another quarter of solid loan growth, which, when coupled with an increase in loan yield of 12 basis points, resulted in an increase of $3.9 million in loan interest income on a linked-quarter basis. On the deposit side, we remained focused on growing our core funding base and continued to see good momentum during the quarter, with core deposit growth of $280 million on a linked-quarter basis. With this continued growth, we were able to allow $119 million of broker deposits to mature. Pricing for deposits remains competitive throughout our footprint, and although deposit interest expense has continued to increase, the pace of increase continues to slow, as reflected during the quarter.

Included in non-interest income for the first quarter are two one-time items: the gain on the sale of the mortgage servicing rights of $3.5 million and a gain of $56 thousand on extinguishment of debt. Excluding these one-time items, adjusted non-interest income decreased $688 thousand quarter-over-quarter. Income from our mortgage division, excluding the MSR gain, increased $1.3 million from the fourth quarter. Interest rate lock volume increased $102 million quarter-over-quarter, and our gain-on-sale margin increased 64 basis points. Non-interest expense increased $1 million from the fourth quarter. In the first quarter of 2024, we recorded expense of $700 thousand related to the FDIC special assessment after the $2.7 million assessment in the fourth quarter of 2023.

We also made contributions totaling $1.1 million to certain charitable organizations, which qualify as tax credits and will provide a one-to-one offset in income tax expense. I will now turn the call over to Jim.

Jim Mabry (CFO)

Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. While the size of our balance sheet is essentially unchanged, we continue to see excess liquidity deployed into loans, and deposit growth has generally kept pace with loan growth. Loan growth in the first quarter was $149 million and represents an annualized growth rate of 5%. We experienced another quarter of strong core deposit growth, which allowed us to continue to shift our reliance away from non-core funding sources.

As you can see on slides 6 and 7, the company's core deposit base and overall liquidity position remains strong. The deposit base is diverse and granular. The average deposit account is $31,000, and there are no material concentrations. Referencing slide 8, all regulatory capital ratios are in excess of required minimums to be considered well capitalized, and each of these ratios improved from the prior quarter. Earnings for the quarter contributed to an increase in the tangible common equity ratio, which now exceeds 8% in tangible book value per share.

Turning to asset quality, we recorded a credit loss provision of $2.4 million. Net charge-offs were $164,000, which represents an annualized rate of 1 basis point, and the ACL as a percentage of total loans was flat at 1.61%. Asset quality metrics are presented on page 9. Our criticized loans increased quarter-over-quarter. The loans added in the quarter are current on payments, and we currently do not anticipate any loss on these loans. All other metrics are relatively stable, underscoring our emphasis on prudent underwriting. We continue to remain vigilant in monitoring credit, including early identification of potential problem loans in order to mitigate loss. Our profitability metrics are presented on slides 10 and 11. Excluding one-time items, adjusted pre-provision net revenue declined $4.4 million on a linked-quarter basis.

Pressure on our net interest income is the primary driver of the decrease. Turning to slide 12, adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries, was 3.28%, down 1 basis point from Q4. Adjusted loan yields increased 12 basis points, while the cost of total deposits increased 18 basis points. Deposit pricing pressures remain and will likely cause deposit costs to continue to increase in the near term. Kevin commented on the highlights within non-interest income and expense. While uncertainty in the rate environment continues to be a challenge, the focus remains on improving operating leverage. I will now turn the call back over to Mitch.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, Jim. We believe Renasant is well positioned to prosper and look forward to providing you updates on the progress. I will now turn the call over to the operator for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Catherine Mealor with KBW. You may now go ahead.

Catherine Mealor (Managing Director)

Thanks. Good morning.

Mitch Waycaster (Executive Vice Chairman and CEO)

Good morning, Catherine.

Catherine Mealor (Managing Director)

Congrats to both you, Mitch and Kevin, for the news last night. I know this will be a great transition for Renasant, so excited for both of you. My first question maybe is just starting on credit. Jim, you mentioned the increase in classified. Just wanted to see if you could just give us a flavor of what was in there, and what gives you confidence that you don't expect to see a loss on some of those credits.

David Bishop (Chief Credit Officer)

Catherine, good morning, this is David. Also-

Catherine Mealor (Managing Director)

Good morning, David.

David Bishop (Chief Credit Officer)

Hi, good morning. So we, you know, Q1, we—as we received a year-end financial, which is for year-end 2023, we set out to make sure we were reviewing all of our loans, not just CRE, but as well as our C&I credits during the quarter. And we saw some tightening in just a handful of C&I credits, which caused us to go ahead and downgrade those loans. It was primarily driven by C&I credit downgrades. And just to add a little color behind that, it was, you know, there was a net downgrade of around $77 million, but that's inclusive of some upgrades and some downgrades. We continue to cycle through those loans.

As you know, our history is to be very proactive in the management of our problem assets, which is what we did in Q1. We seek to identify where there's weakness, to provide the opportunity to restructure the credit, to get back to an improved status where it's not classified or provide the opportunity to get out of the bank before deterioration is worsened, which is what we did in Q1, to identify those loans. Just as a perfect example, already in Q2, we've worked out of one of those loans that was $23 million, and we'll continue to work those assets out of the bank. As Jim mentioned in his comments, they're all current. There's no concerns about losses. So there's. So again, we don't have a level of concern.

It was purely driven by what we feel is early identification of stress on a handful of loans, to identify those loans and work them out of the bank proactively.

Catherine Mealor (Managing Director)

That's great. And then maybe one question on the margin. What's your outlook for the margin over the next couple of quarters, you know, before, outside of any rate cuts? Do you feel like we're at or near the bottom? And maybe specifically on just deposit costs, I think that increased a little bit more than I was expecting this quarter. How close do you think we are to a peak there?

Jim Mabry (CFO)

Good morning, Catherine. This is Jim.

Catherine Mealor (Managing Director)

Morning, Jim.

Jim Mabry (CFO)

Good morning. So if we assume no cuts and go with that outlook for 2024, at least in the near term, we're hopeful that the margins are going to stabilize roughly at where it's at. As you point out, I mean, we've had nice increases in loan yields, but the, you know, relief on the deposit pricing side has just been, you know, it's been stubborn. I mean, it's, we've hoped for more progress there, and so we'll see how that plays out in 2024. But I think I'm very encouraged what we're seeing on loan yields and what we're getting there. And I think the key is really what happens on that funding cost. And, you know, we're, our net incremental cost on new deposits is running at 4.5%-4.75%, and hopefully we get, you know, more stabilization in NIB.

We had, I think, our outflows from Q3 to Q4 were, like, $169 million, and in Q4 to Q1, it was closer to $65 million-$70 million. So the trends there are encouraging, and hopefully we can continue to see that progress, which will help some at the margin. So I'd say overall, a flattish outlook. If we do get cuts, I'm not sure. I mean, generally, cuts are gonna be modestly, in the near term, hurtful to the margin, but given the current outlook, if those cuts occur later in the year, there's only a couple of them, I don't know that the impact would be that significant.

Catherine Mealor (Managing Director)

Okay, great. And maybe just one follow-up to your point on loan yields being better. New deposit costs, you said, were between 4.5% and 4.75%. Where are incremental loan yields coming on right now?

Jim Mabry (CFO)

So if you exclude RBC, we're comfortably in the low 8s. I think for the quarter, it was like 8.25%, somewhere around there. And for the month, I want to say, Catherine, it was like around 8.30%. So nice progress there. I think now we've got, it's been two or three quarters that new and renewed has been at 8% or better. So really encouraged what we're seeing there, and, you know, hopefully we can keep that, keep that up. RBC definitely adds to that, so it's closer to, I think, 8.30% turns into, like, 8.50% or 8.60%, for the month of March, if you add RBC.

Catherine Mealor (Managing Director)

Perfect. Great. Thank you.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, Catherine.

Operator (participant)

Again, if you have a question, please press Star then one. Our next question will come from Michael Rose with Raymond James. You may now go ahead.

Michael Rose (Managing Director)

Hey, good morning, guys. Thanks for taking my questions. And congratulations to both of you, Kevin and Mitch. Looking forward to see what the future brings for Renasant. I missed the first prepared remarks, so sorry if you missed this, but did want to just touch on, you know, loan growth expectations, you know, for the year. You know, we've seen some banks, you know, kind of reduce their outlooks or maybe reiterate off of lower first quarter expectations.

I don't think you've given us kind of a formal guide, but Mitch, you usually talk us through kind of the pipelines and what they look like, and would just be curious as to, you know, what the pull-through rate looks like relative to pipeline, and if you think that will increase through the year and if, you know, something in the mid-single digit growth is kind of in the cards for this year. Thanks.

Mitch Waycaster (Executive Vice Chairman and CEO)

Very good. Good morning, and thank you for your comments, Michael. Yeah, so let's start with pipeline. We're going into this quarter with a pipeline of $142 million. That compares to $122 million start of the first quarter. We see that up a modest bit as we start the quarter. I would first say that just coming back and I'll eventually get to your specific question, but governing both the pipeline and certainly the production is our discipline in pricing. You just heard Jim talk about the results for the quarter and what we see rates coming in, but also the funding both pricing and funding, and then underwriting. Certainly, that's something we're very prudent about.

You just heard, David, or in an earlier question, you may have not heard, he was talking about administration. And then I would come to demand, but that demand we continue to see, and we simply operate in good, vibrant, resilient markets, and we continue to serve and grow relationships, and that's driving what I'm referring to here in both production and pipeline. All of that's evidenced by the growth that we saw this past quarter, $150 million, roughly 5%. And also on the deposit side, we had, as Jim just mentioned, we had very good, funding and deposit growth. The other thing I would say about production, and it's continued this quarter, the last number of quarters, it's coming from each of our markets, our regions, our business lines.

They continue to contribute in a meaningful way, and it, and it's coming from across the footprint and business lines, as I mentioned. Just to give you some percentages, this past quarter, we had 13% in Tennessee, 10% in Alabama, Florida Panhandle, 15% Georgia, Central Florida, 26% in Mississippi. Mississippi had a very good quarter this quarter, and then 36% from our commercial corporate business lines. And I would say just as important as the geographic distribution and those loan types is the quality of credit. We have a very granular asset-based loan portfolio.

If you look at the production this quarter of $418 million, 7% of that was in what I would call consumer, whether that be HELOCs, 1-4 family portfolio, which we've seen that pull back a touch with mortgage production inventory. But 32% was in small business, business banking, loans under $2.5 million. They're also deposit rich, great relationship type credits, and another 31% in commercial credits greater than 2.5, C&I. David mentioned C&I earlier, but owner-occupied commercial real estate. And then another 30% to round out the production for this quarter came in our corporate banking group. Some larger C&I, commercial real estate, asset-based lending, equipment finance, senior housing. Also, we've mentioned a Republic Business Credit. Jim mentioned our factoring business.

All of that to say our average credit's still around 260,000 or so. So as you can see, we continue to hit on many different cylinders, evidencing our ability to both prudently and continue to produce a very diverse portfolio. But back to your question, relative to just looking forward. You know, I would say for this quarter and just looking out to 2024, I would say what the expectation would be to be in line with our past quarters and more in that mid-single digit type net. Another variable always is payoffs. We saw payoffs pull back a little this quarter. That's gonna ebb and flow, so that'll ultimately play out in the net result that we see quarter-to-quarter.

Mitch, it's a great call. I always appreciate your commentary. It's very insightful. Just wanted to switch gears to fee income and mortgage, which was a nice upside this quarter with a gain-on-sale margin, you know, jumping higher. I know it's hard to predict. There's lots of variations quarter to quarter with timing of lock and realization of income, but maybe if you can just walk us through, you know, expectations, you know, for mortgage revenue and maybe specifically, if you can just give us some dynamics on, you know, what the profitability of that business looks like, maybe current efficiency ratio in the quarter, you know, things like that. And I know the MBA is forecasting, you know, an increase in volumes this year.

Just wanted to see if you'd expect normal seasonal patterns and, you know, if we can expect, you know, a little bit better, you know, mortgage income as we move through the year. Thanks.

Mark Jeanfreau (EVP and General Counsel)

Hey, hey, Michael, Kevin. So to kind of answer your last question first, we are anticipating mortgage revenues to continue to hold strong, maybe even pick up, as we get into the summer months. I think we're all very cautious just trying to understand what's happening in mortgage. Coming out of 2020 and 2021 and maybe normalizing in 2022, 2023, and even now, it's hard to say that the normal cyclicality of mortgage is there. Inventory constraints continue to be a headwind in the industry. We actually still see a lot of demand, it's just limited supply. If you look at some of our trends, you saw the pipeline grow in Q1 compared to Q4.

The pipeline currently in Q2 is holding steady, if not up slightly, and we recognize that that's going against the trend that Mortgage Bankers Association is seeing nationwide, where maybe applications and sales are flat to kind of pulling back. So, we're optimistic about our mortgage team. We have been opportunistic in some key hiring in Q1 of producers in certain markets. That gives us optimism about, you know, higher levels of performance, outperformance in our mortgage space. And, look, the division continues to remain profitable. Despite all these headwinds, it does continue to remain profitable. We've gone through now 18, 24 months of relooking at the business, restructuring the business. We've implemented a new operating platform. We're on the back end of that now.

And, as well as more of our expense coming from mortgage is becoming more and more variable. If you just look at expenses, for example, in Q1 for mortgage, salaries are down $300,000, because of the cost-cutting efforts that were taken in Q4. Commissions are up $400,000-$500,000, but that's against revenue that was up, kind of, core revenue, if you exclude the gain on mortgage servicing rights, core revenue's up, you know, over $1 million. So getting the right structure there in mortgage, of having that right balance of variable revenue against variable expenses has been a key effort of our team, and we think they've done a really good job, and we're optimistic about mortgage. That, I say that to say it's a tough environment out there in mortgage.

We all know that, but I think the investments we've made, as well as the improvements we've been making over the last two years, we're positioned well for mortgage to continue to be profitable.

Michael Rose (Managing Director)

Thanks, guys. I appreciate the color, and congrats again.

Mark Jeanfreau (EVP and General Counsel)

Thank you, Mike.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Mitch Waycaster. Pardon me, there's actually another question from Stephen Scouten with Piper Sandler. You may now go ahead.

Stephen Scouten (Managing Director)

Hey, everyone. Thanks for taking my question there. I—we just wanted to follow up on the comment around new loan yields potentially moving up to that 8.50%-8.60% range. And do you think those incremental costs of deposits can kind of stay in that range you were speaking to, and thus we could see some widened spreads on incremental production? Thanks.

Jim Mabry (CFO)

Morning, Stephen, this is Jim. So yes, again, nice improvements in new and renewed yields, and the eight sixty did include RBC. Ex-RBC, it was around eight thirty for the month of March as a snapshot. I would like to be optimistic and think that, you know, those spreads, you know, could stay where they are or potentially widen, but I think the reality is we're still just a, you know, a tough deposit market. So I take what we're seeing on the loan yield side and feel good about that, and I really like those trends, but I'm cautious in baking in too much, I don't know, too much that'll go to the bottom line, Stephen.

That's why I think overall margin, you know, I think our best outlook here with a no rate cut environment is for a pretty stable margin, at least near term.

Stephen Scouten (Managing Director)

Okay. That's helpful, Jim. And then just maybe one other question for me, if I could. I mean, your loan loss reserve, I mean, 1.61 relative to peers is, is a fair bit higher, and credit quality looks stable. Only one basis point in the, in net charge-offs here in the quarter. I mean, how do you think about that reserve moving forward? I mean, is it really mathematical based on kind of economic scenarios and kind of how you weight those things? Or, you know, is, is there any kind of visibility you could give us into how that percentage might change moving forward?

David Bishop (Chief Credit Officer)

Hey, Stephen, good morning. This is David. And so to answer the second part of your question, it is mathematical, and it takes into account different economic factors. And this quarter, there was some movement in that number. Obviously, we had loan growth. We had to fund for loan growth as well, as we talked about earlier. We had some negative credit migration in a category that we had to allocate for. So that number is mathematical. You know, we have intentionally—well, we've kept that number up where it is based on the economic forecast, while we continue to believe there's an economic event that we're going through. And so some of those economic variables within our Q factors are a little bit on the more elevated side.

Just as we work through it, as we continue to see things settle out in the near future, you know, I think if we forecast the past, we would expect to see that number migrate down, but it would just be looking forward to changes in those economic factors to drive a change in our ratios.

Stephen Scouten (Managing Director)

Okay. Thanks for letting me sneak in here late. And, Kevin and Mitch, congrats on the transitions and all what's to come. Appreciate the time.

Jim Mabry (CFO)

Thank you, Stephen.

Mark Jeanfreau (EVP and General Counsel)

Thank you, Stephen.

Operator (participant)

Our next question will come from Jordan Ghent with Stephens Inc. You may now go ahead.

Jordan Ghent (Equity Research Associate)

Hey, good morning. I just kind of had a follow-up question to your comments on the variable expenses. Just wondering, where are you seeing expenses kind of go from here and kind of on a quarterly basis through 2024?

Mark Jeanfreau (EVP and General Counsel)

Yeah. Hey, hey, Jordan, it's Kevin. Thank you for the question. So as we look at expenses, and let's just take Q1 expenses at that $113 million range. You know, if you look at each of the individual components, all of the line items are trending downwards, excluding kind of one, but one or two of them. And that advertising, that's one of them, that increased. But again, that's where we had that $1 million-$1.1 million charitable contribution that's gonna flow through taxes. And the other line item, that's where you had the $700,000 increase related to the special assessment.

So if you back those out, our kind of our run rate is in the $111 million range. And just as we look out, kind of in the short term, Q2, you know, we're gonna be in that $111 million-$112 million range, $111 million-$113 million range. We've got merit increases that went into effect late in Q1. There'll be a full quarter impact. And then as we get into the latter half of the year, that's when we see that there could be some opportunity for relief on the expenses. Just with the initiatives that we're taking internally, we could see some relief there.

But just in the short run, as we get into Q2, as we again more normalize the run rate related for the merit increases, that could be flattish to what we see this quarter.

Jordan Ghent (Equity Research Associate)

Perfect. Thank you.

Mark Jeanfreau (EVP and General Counsel)

Thank you, Jordan.

Operator (participant)

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

Mitch Waycaster (Executive Vice Chairman and CEO)

Well, thank you, Anthony, and thank each of you for joining the call today. We next plan to meet with investors at the Gulf South Conference in New Orleans, beginning on April the 29th.

Operator (participant)

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