Renasant - Q2 2024

Transcript

Operator (participant)

Good morning, and welcome to the Renasant Corporation 2024 Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson, Chief Accounting Officer 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. 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. Results for the quarter showed solid progress. The balance sheet remained strong, led by growth in traditional deposits that funded an increase in loans. Asset quality metrics continued to reflect our strong credit culture, and credit reserves remain at historically high levels. The income statement reflects ongoing work on expense control and margin stabilization. After the quarter, we announced the sale of Renasant Insurance. Renasant Insurance has been a valued part of the company for a long time. While we felt market conditions made this an attractive move for our shareholders, we look forward to maintaining a relationship with our former colleagues going forward. The financial impact of the sale will be reflected in third quarter results. I will now turn the call over to Kevin.

Kevin Chapman (COO)

Thank you, Mitch. Looking at our second quarter results, our earnings were $38.9 million, or $0.69 per diluted share. Recall in the first quarter, we sold a portion of our mortgage servicing rights asset for a gain of $3.5 million, and we recognized a $56,000 gain on the extinguishment of debt. Excluding these items, our earnings per share in the second quarter increased 5 cents on a linked-quarter basis. Loan yields increased 11 basis points quarter-over-quarter, which, when coupled with solid loan growth, drove an increase of $6 million in loan interest income during the second quarter from the first quarter. Deposits continued to perform well. Traditional Retail Deposits increased just over $200 million from the first quarter, which afforded us the opportunity to allow 184 million in Brokered Deposits to mature.

Included in that retail deposit growth was $23 million in growth in non-interest-bearing deposits. Our business model is built on relationship banking, and our team has done a tremendous job executing on this strategy with a goal of funding loan growth with core deposit growth. Pricing for deposits remains competitive throughout our footprint, and although deposit interest expense has continued to increase, the pace of increase slowed this quarter, with total deposit cost increasing 12 basis points during the quarter. The continued hard work in managing our deposit base was especially rewarded in the second quarter as non-interest income increased on a linked quarter basis for the first time since Q1 of 2023. Reported non-interest income declined $2.6 million from the first quarter.

Excluding the aforementioned gains on the sale of MSR assets and the extinguishment of debt in the first quarter, adjusted non-interest income increased $900,000 quarter-over-quarter. Income from our mortgage division, excluding the MSR gain in the first quarter, increased $1.8 million on a linked-quarter basis, which was driven by an increase in interest rate lock volume of $116 million, offset to some degree by a decline in gain on sale margin of nine basis points. Reported non-interest expense decreased $1 million from the first quarter. In the first quarter of 2024, we recorded expense of $700,000 related to the FDIC special assessment, and we also made contributions totaling $1.1 million to certain charitable organizations, which qualify as tax credits.

After adjusting for these items, non-interest expense increased approximately $800,000 from the first quarter. The increase in mortgage volumes resulted in higher levels of expense in that division, which were somewhat offset by savings in other areas. 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. Total footings grew $164 million. Loan growth in the second quarter was $104 million and represents an annual growth rate of 3.5%.

...We experienced another quarter of strong core deposit growth, which allowed us to continue to shift away from non-core funding sources. As you can see on slide six and seven, the company's core deposit base and overall liquidity position remain strong. The deposit base is diverse and granular, and with the strong core deposit growth, our loan-to-deposit ratio remains steady at 88%. Referencing slide eight, 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. Turning to asset quality, we recorded a credit loss provision of $3.3 million. Net charge-offs were $5.5 million, which was primarily comprised of a single credit, and the ACL, as a percentage of total loans, declined two basis points to 1.59%.

Asset quality metrics are presented on page 9. Our criticized loans declined quarter-over-quarter, while non-performing assets ticked up. We remain vigilant in monitoring credit risk. Our strategy is to identify potential losses early and work quickly toward resolution in order to mitigate loss. Our profitability metrics are presented on slides 10 and 11. Excluding one-time items, adjusted pre-provision net revenue increased $3.6 million on a linked quarter basis, driving an increase in all other profitability metrics as well. Turning to slide 12, adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries, was 3.29%, which represents an increase of one basis point from the first quarter. Core deposit growth, coupled with diligent loan pricing, drove the increase in both net interest income and net interest margin quarter-over-quarter.

We continue to focus on growing our core deposit funding base and being diligent in pricing on both the asset and liability sides of the balance sheet. Kevin commented on the highlights within non-interest income and expense. While the sale of the insurance agency will impact these categories beginning in the third quarter, we don't expect a material impact to the bottom line. I will now turn the call back over to Mitch.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, Jim. Results through the first six months form a good foundation to build upon. We are excited about the future and believe opportunities to add relationships, market share, and scale in Southeastern markets will enable us to grow shareholder value in the years ahead. I will now turn the call over to the operator.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star and one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star and two. At this time, we will pause momentarily to assemble our roster. The first question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten (Managing Director)

Yeah, good morning. Thanks, everyone. I guess maybe I'm curious first from a capital perspective, kind of if there's any specific plans with the incremental capital from the insurance sale, and kind of what your overall capital priorities might be today, whether that's organic growth, you know, new hires, things of that nature, maybe even potentially M&A.

Jim Mabry (CFO)

Good morning, Stephen. This is Jim. So yes, we're going to book in Q3 about a $36 million gain from the sale of the insurance company. A couple of points I'd want to make about that before I go to your question. I would say, of course, it's not a—it was an important part of the company, but in terms of dollars, it's obviously not as big as what we've seen elsewhere in the industry. The impact of that sale will be very slightly negative to EPS for the second half of the year. Again, very slightly, but modestly negative to EPS. The other thing I'd want to point out is the tax rate in Q3 that you'll see because of that gain, will be slightly elevated from what it historically is.

So something around 23% versus, say, our normal rate of 22%. So not much difference, but you'll see a slight difference there. As it relates to the use of those to the capital gain, I think our priorities remain the same. First and foremost, we want to target that capital or any incremental capital through retained earnings or a sale like this, to capitalize organic growth, and that's priority number one. And as you've said, whether that's lift-outs or organic growth, that's priority number one. I'd say priority number two would be M&A. You know, we don't know when or if that's going to return, but if it does, we'd certainly like to participate, and that would be a good use of that capital as well.

We don't envision near term, you know, going the route of buybacks. We don't take that off the table, but don't envision that in the near term.

Stephen Scouten (Managing Director)

Okay, very helpful. And then maybe just thinking about the NIM trends from here. Still, obviously don't know exactly what the Fed's going to do and what the curve's going to look like. But, do you still kind of think when we, if we get the first couple rate cuts, that the margin can kind of remain stable, especially based on the relative stability you're seeing on the deposit cost side of things this quarter?

Jim Mabry (CFO)

I think, I mean, you know, I guess since the start of the year, we've assumed sort of a flat rate environment, and that's still how we're, you know, managing and thinking about the balance sheet. But if we get that, let's say we get a 25 basis point cut in September, in terms of EPS, I don't see it impacting Q3, and again, maybe very modestly impacting Q4, but it would be slightly negative, Stephen. In terms of the margin, I would say that our outlook would be, again, in a flat rate environment. Our outlook for the margin is roughly flat for the balance of the year.

Stephen Scouten (Managing Director)

... Okay, great! And maybe just lastly for me, I mean, credit metrics ticked up a little bit, but still remain strong, and your reserve is obviously strong. I think when we spoke at Gulf South earlier this year, you guys noted that you really weren't all that concerned about maybe some of the CRE exposure, but your internal team was maybe a little more focused on resi exposure. Is there anything to note there around resi or anything? Is that just on a relative basis for you, or is there anything to note there that gives you any concern?

David Meredith (Chief Credit Officer)

Stephen, good morning, this is David. There's, in this quarter, our changes in asset quality mix wasn't a result of anything in our residential portfolio. That remains a heightened area of concern for us, just in, as far as watching it, just like all assets of the bank. But the change in asset quality was not residential, it was what we saw as far as an increase in NPAs, was 100% direct loans we had to our commercial customers that are out there, that we've, you know, we've been working with those customers for a while, and largely, we just felt like it was time to go ahead and move on those assets.

When you start to see concerns about valuation of some of the collateral underlying those loans, we figure it's best to go ahead and move on those assets, and whether it be a note sale or foreclosure, just to go ahead and try to remedy those and get them out of the way. But it was not due to residential for this quarter.

Stephen Scouten (Managing Director)

Got it. Very helpful. Thank you all for the time and the color this morning. Appreciate it.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, Stephen.

Operator (participant)

The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose (Managing Director)

Hey, good morning, guys. How are you?

Mitch Waycaster (Executive Vice Chairman and CEO)

Good morning, Michael.

Michael Rose (Managing Director)

Good morning. Hey, Mitch, maybe we can just start as you normally do, just kind of an update on the pipeline and, you know, sorry if I missed it, but you know, what you guys are kinda contemplating for loan growth as we move here, both from a production standpoint and also if you would expect a decrease in paydowns as we move forward, particularly if, you know, rates don't come down. Thanks.

Mitch Waycaster (Executive Vice Chairman and CEO)

Sure. I'll begin with pipeline and then go to production. Maybe I'll comment on payoffs. We experienced another good quarter, and we started the quarter with $130 million in the 30-day pipeline, which continues to reflect the good, vibrant, resilient markets that we're operating in. That did yield this quarter a $104 million growth, net growth in loans, roughly 3.5%. Both Kevin and Jim commented on the growth of both loans and deposits. So while I'm there, I wanna point out as well, we had a very good month relative to the balance sheet on both sides of it with our deposit growth as well. The production this quarter was roughly $390 million. That does compare to $418 million the prior quarter.

So it was that $390 million that resulted in the $104 million net. That net compared to $150 million the prior quarter, you mentioned payoffs. We did see, and as we've said in the past, payoffs many times is the governor on kind of where the net ends up. We saw payoffs bump up modestly this quarter. I wouldn't say anything unusual there, out of the ordinary, just timing of payoffs. But just going back to production and looking forward, I mentioned our markets. All of our markets, our regions, our business lines continue to contribute well. They're reflective in our pipeline, in our production, and, I'll break that down for you for that $390 million.

This past quarter, 23% was in Tennessee, another 17% in Alabama, Florida Panhandle, another 14% in Georgia and Central Florida, 22% in Mississippi, and 23% in our commercial corporate business line. So you can see both geographically and just how it distributes, too, throughout the business lines and the loan types. I'll touch on that. And I think, again, it speaks to the granularity that Jim and Kevin mentioned. This past quarter, if you take that production, about 20% was in one to four short duration type assets.

Another area we usually do very well in, and really saw it this past quarter, 31% in small business type credits, less than $2.5 million, and then an additional 32% in commercial credits, $2.5 million and above, and that would be your traditional C&I owner-occupied type commercial real estate. And then the corporate commercial business lines rounded out that production at 18% this quarter. So as we've seen in the past, and we consistently continue to hit on so many different cylinders, and that, I think, is the evidence of our ability to, I would say, prudently produce relative to pricing and underwriting credit. And I guess going to ultimately to your question, just relative to looking forward, we remain optimistic about our ability to continue to produce and fund loan growth.

And I, I would continue, as been reflected throughout this year, somewhere in the mid-single digit type net growth going forward.

Michael Rose (Managing Director)

Mitch, very thorough answer, as usual. Maybe just as a follow-up, it was good to see NIB deposits kind of stabilized. You know, can you just talk about some of the push-pull there? I know there's several other banks that have referenced you know, outsized competition from a few players in some of your markets. Just wanted to get some color there. And then when do you think we could actually begin to see a peak you know, in deposit costs? Thanks.

Jim Mabry (CFO)

Michael, this is Jim. So as you point out, it remains a very competitive environment. It does feel like the competition maybe isn't as fierce or, if you will, irrational as it was. I don't know if irrational is the right word, but it felt that way at times, going back a couple of quarters. So the pressures are still there. They've just moderated some. And as you were asking the question, I was just looking at you. This might be, this doesn't speak just to NIB, but to deposits as a whole. Our cost of deposits in the second quarter was 247. If you look at June, as just a data point, it was 249.

So, I think that's just further evidence of that, of the increases in deposit costs moderating. I will also say that as we look at NIBs, I mean, internally, we're assuming or managing the balance sheet such that we budgeted for or mentally are prepared for some additional runoff on NIBs. I don't know that we'll see it. We were really pleased with what we saw in Q2 as Mitch referenced. But it is a competitive environment and whether it's on deposits across the board, but we're not seeing the same, I guess, level of you know competitive pricing that we saw a couple of quarters ago.

When that, you know, sort of, you know, stabilizes or bottoms out, I don't know, but we're certainly seeing some encouraging trends there.

Michael Rose (Managing Director)

Very helpful. And then maybe just finally for me, following up on, on Stephen's question on, on M&A. You guys are about $17.5 billion in assets. You know, just describe kind of what, in theory, you would be looking for in a deal. Would you potentially do something larger? Would it be in market? I know those are not necessarily in favor right now. Would you look to expand the footprint, you know, size? Just any sort of color you can provide in terms of what you would be looking for and maybe an asset size that, you know, we could think about, both with organic and, and opportunistic M&A over the medium to long term. Thanks.

Mitch Waycaster (Executive Vice Chairman and CEO)

Sure, Michael. One thing I would just start by answering that question is just our discipline around valuing opportunities. And certainly, we're focused on building scale and density within the markets that we operate in. We would certainly see that an opportunity. And you know, I would say a sweet spot relative to size, probably something $1 billion or above, like, say, focused on scale and density within the footprint. And you know, as we think about being opportunistic, as Jim mentioned earlier, certainly we begin with that thought with organic growth, talent, and we had five additions this quarter, actually, on the talent front, just staying focused on organic type opportunities. Also, I would say new markets relative to talent lift-outs.

But just coming back to strategic partners, whether that be banks or non-banks, we continue to evaluate those opportunities. We always begin with culture and business model and risk appetite. I will say, we do believe we're well positioned, with a strong balance sheet. We have a capable team, to take advantage of, all of those opportunities.

Michael Rose (Managing Director)

Great. Thanks for taking my questions.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you.

Operator (participant)

The next question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor (Managing Director)

Thanks. Good morning. I just had one follow-up on the on the margin conversation. Your loan yields increased more this quarter than we've seen. Just wanted to see if you had updated thoughts on kind of the pace of loan yield increases that we should see for the back half of the year.

Jim Mabry (CFO)

Good morning, Catherine. This is Jim.

Catherine Mealor (Managing Director)

Morning, Jim.

Jim Mabry (CFO)

Good morning, Catherine. I would say, yes, we've been really pleased with, you know, the new and renewed rates we've been getting over the last couple of quarters. It does feel like that at least in the near term, the increases in that new and renewed could plateau. So we're definitely seeing some pressures there. And so as I think about new and renewed for the balance of the year, I think you could see some pressures in new and renewed yields.

Catherine Mealor (Managing Director)

Great. Okay.

Jim Mabry (CFO)

Actually, I'll take it a step further, Catherine. If you look at it, it's one month, so a month doesn't make a trend, but our new and renewed for June were off a little bit from what we saw for the quarter. And again, that doesn't necessarily make a trend, but we're seeing some pressures there.

Catherine Mealor (Managing Director)

Well, do you think some of that's mix or just new, same kind of, same kind of category of loans still have a lower incremental yield?

Jim Mabry (CFO)

It's not really. I wouldn't say that what we're seeing or experiencing is due to mix. It's just, it's just overall. There, I think there's a lot of competition for loan growth, and it feels like it's just showing up in pricing pressures.

Catherine Mealor (Managing Director)

... Okay, that makes sense. Okay, and then maybe one on expenses. Your expenses have been flat for the past couple of quarters. Any update on your outlook for the back half of the year for the expense base?

Kevin Chapman (COO)

Yeah. Hey, Catherine, good morning. It's Kevin. So there's really not a whole lot of change there. I think we do have to adjust for, for insurance coming out, so that will affect the run rate. It'll bring it down about $2 million. But still, if you back that out of what our run rate was in Q2, that, that's what we're thinking, and that's what we're modeling for the back half of the year. Continue to be mindful of expenses, work to reduce them where we can, and continue to find ways to improve profitability, whether that is more scale on the balance sheet that drives more revenue, the repricing, the opportunity of repricing of assets and liabilities, as Jim discussed in the margin, or also looking at greater accountability measures to reduce our expenses.

And that, that's been our focus. It will continue to be our focus.

Catherine Mealor (Managing Director)

Great. All right, thank you.

Jim Mabry (CFO)

Thank you, Cat.

Operator (participant)

The next question comes from Dave Bishop with Hovde Group. Please go ahead.

Dave Bishop (Director)

Hey, good morning, gentlemen.

Jim Mabry (CFO)

Morning, Dave.

Dave Bishop (Director)

Hey, Jim or Kevin, just wanna make sure to follow up, Catherine's questions. I hear that the expense impact from the insurance sale is about $2 million per quarter. Did I hear that correct?

Kevin Chapman (COO)

That's correct.

Dave Bishop (Director)

Got it. And then turning back on the credit side, I know you discussed the some of the impact in terms of the increase in NPAs, but any granularity you can give us there in terms of, you know, segments? Was that, you know, C&I, commercial real estate, maybe any, any sort of granularity, if it was CRE, what sort of segments was driving that and some of the issues? Thanks.

David Meredith (Chief Credit Officer)

Sure, Dave. Hey, good morning. This is David. It was all commercial-related increase in NPAs quarter-over-quarter, and it wasn't broadly. It was really three credits that are impacted, and they were about 85% of those three, two larger credits were CRE in nature. One was a senior housing property, and another one, the relationship was kind of an assortment of a little bit of retail, a little bit of office. Yeah, both of them are credits that we've had identified as classified assets for a long period of time.

assets we continue to work with the borrowers on, and we just felt like, due to valuations in some of these asset types, particularly the office space and the senior housing space, where those assets where we have occupancy issues and the market's not necessarily as favorable on those assets, where we see some valuation concerns. We thought it was just better off in our normal philosophy to be proactive, go ahead and seek to resolve those loans, whether it be through a note sale or whether it be through foreclosure.

I think, Dave, as you know, we typically like to identify the problem loan, which we did a while ago, when we kind of get to the point where we think there's—it's a long-term problem loan that we won't be able to work out of, or some potential valuation concerns, we're gonna go ahead and seek to remedy that. In this case, we went ahead and put those loans on non-accrual, and we'll work to expedite the resolution of those loans as quickly as possible.

Dave Bishop (Director)

Got it. Appreciate the color.

David Meredith (Chief Credit Officer)

Sure.

Operator (participant)

The next question comes from Jordan Ghent with Stephens. Please go ahead.

Jordan Ghent (Equity Research Associate)

Hey, good morning. I just had a quick question on the allowance. It looks like it's kind of been ticking down for the last few quarters, and just kind of wondering if you guys could give a little info around where you kind of see that going or, if it's gonna be stabilizing or continued to track lower? Thanks.

David Meredith (Chief Credit Officer)

Jordan, good morning. This is David. You know, so, you know, we've not changed our philosophy on our CECL model. We feel strong about our CECL model, the way it's worked. You know, it, you know, we reserved when they told us to reserve a few years ago, and it's – at this point, it's required us to, you know, we've held steady based on where the model comes out. We set it based on a number of factors at the asset level, and we kind of let our model guide us where we are. So in Q2, that number reduced a little bit, largely driven by the one paydown, but the model had built in where we need to reserve a little bit.

So the dollar amount came down, but that was really, you know, in part due to we reserved for new loan growth, but the portfolio de-risked a little bit, especially in the senior housing space, as we talked about that one senior housing loan that we put on NPA, and we had to charge down the loans of that one asset. That de-risk of that senior housing asset type caused a little bit of a reduction in the required reserve for that particular asset. But all in all, we continued to follow the model quarter-over-quarter. And, you know, I think we would continue to see that until we see some change in some of those factors that drive the model.

Jim Mabry (CFO)

I would just add, too. I'm sorry, Jordan. I was just gonna add to what David said. I think implicit in your question, too, and I think, and David suggested this, I mean, we've talked for a couple of quarters. I mean, it feels like, again, things could always change, but it feels like that allowance will slowly drift down during the balance of the year. You know, conditions and circumstances will ultimately dictate that, but I think, you know, we built it for a reason. We hadn't seen the charge-offs and they remained very low, but we sort of built it for a reason and anticipate that, you know, that'll gravitate down towards the 150-ish range by year-end if circumstances and conditions hold where they are.

Jordan Ghent (Equity Research Associate)

Okay. Thank you.

Jim Mabry (CFO)

Thank you, Jordan.

Operator (participant)

Again, again, if you have a question, please press star then one. The next question comes from John Rodis with FIG Partners. Please go ahead.

John Rodis (SVP and Research Analyst)

Hey, good morning, guys. Jim, maybe just a quick question on the securities portfolio. It was down a little bit again this quarter. It's 11% of assets. How should we think about that going forward?

Jim Mabry (CFO)

Good morning, John. Yeah, I think, you know, I think internally we sort of think about it's not a you know a bright line or a hard line, but we think about a level of around 10%. And we've got obviously plenty of external sources of liquidity available to us. So it's something that we're comfortable where it is, and but I generally wouldn't see it drifting much below, if at all, below 10%. So we'll sort of watch that between now and year-end, but that's our philosophy on sort of how we how we manage that securities position.

John Rodis (SVP and Research Analyst)

Okay, makes sense. Thanks, guys.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, John.

Operator (participant)

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

Mitch Waycaster (Executive Vice Chairman and CEO)

Well, thank you, Drew. Thank you to each of you who joined this morning's call and your interest in Renasant.

Operator (participant)

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