Renasant - Q3 2023

Transcript

Operator (participant)

Good day, and welcome to Renasant Corporation 2023 third quarter earnings conference call and webcast. All participants will be in listen-only mode. If 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. Please note that this event is being recorded. I'd like to turn the conference over to Kelly Hutcheson of Renasant Corporation. Please go ahead.

Kelly Hutcheson (EVP and Chief Accounting Officer)

Thank you for joining us for Renasant Corporation's 2023 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. Good morning. We appreciate you joining the call and your interest in Renasant. I am pleased with our quarterly results that show solid loan growth, good asset quality, an increase in core deposits, and expense control. The balance sheet has steadily strengthened in 2023. The markets in which we operate have remained generally resilient and are benefiting from net in-migration and economic expansion. We are well positioned in some of the best markets in the South and will continue our efforts to add to this presence. Renasant's solid financial footing should allow us to take advantage of opportunities that will emerge. Finally, we are excited to now be a part of the New York Stock Exchange, which we believe provides greater visibility for our company and our shareholders. I will now turn the call over to Kevin.

Kevin Chapman (President and COO)

Thanks, Mitch. Our third quarter earnings were $42.3 million, or $0.75 per diluted share, compared to $28.6 million, or $0.51 per diluted share in the second quarter. Our second quarter results included an after-tax loss of $18.1 million, or $0.32 from the sale of a portion of our securities portfolio. Breaking down net interest income, loan interest income increased over $9 million on a linked-quarter basis, driven by another quarter of solid loan growth, coupled with a 15 basis point increase to our loan yields. However, while loan yields increased, continued competitive pressures on deposit pricing impacted both our deposit mix and deposit costs this quarter, leading to a $19.5 million dollar increase in deposit interest expense on a linked-quarter basis.

These pricing pressures are market-driven and not unique to Renasant, and they underscore the importance of core funding in this rate environment. We have an outstanding team that has worked diligently to preserve and even grow our core deposit base. During the quarter, we grew core deposits $385 million on a linked-quarter basis, which helped us reduce our reliance on wholesale funding and allowed us to pay down FHLB advances by $150 million and broker deposits by $323 million, respectively, during the quarter. Our focus on growing core deposits and managing our funding costs is unchanged and will remain a top priority in the future. Excluding the loss on the sale of securities in the second quarter, non-interest income decreased $1.5 million quarter-over-quarter.

Our capital markets, treasury solutions, wealth management, and insurance lines of businesses continued to deliver solid results. Income from our mortgage division declined $2.2 million from the second quarter. Volumes were impacted not only by seasonality, but also by the increase in rates and lack of housing inventory. Interest rate lock volume declined $110 million quarter-over-quarter, and our gain on sale margin decreased 11 basis points. Non-interest expenses decreased $1.5 million from the second quarter. Mortgage played a role in the decline, along with modest savings in other areas. Our efficiency ratio was 63.7% for the quarter. Margin compression continues to put pressure on our efficiency, but managing this ratio down continues to be a goal of ours. I will now turn the calls over to Jim.

Jim Mabry (EVP and CFO)

Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. The balance sheet contracted modestly from June 30. We experienced strong growth in deposits, excluding broker deposits, which, together with utilizing some excess cash, allowed us to pay down about $470 million of wholesale funding. Loan growth in the second quarter was $237 million and represents an annual growth rate of 7.9%. We continue to focus on our liquidity, and as you can see on slides 6 and 7, the company's core deposit base and overall liquidity position remain strong. The deposit base is diverse and granular. The average deposit account is $29,000, 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. We also experienced a modest build in the tangible common equity ratio and tangible book value per share. Turning to asset quality, we recorded a credit loss provision of $5.3 million and a recovery of credit losses on unfunded commitments of $700,000, which is recognized in non-interest expense. Net charge-offs were $1.9 million, which represents an annualized rate of 6 basis points, and the ACL, as a percentage of total loans, held flat at 1.63%. Credit metrics are presented on page 9. Our criticized loans and non-performing assets each improved quarter over quarter, and past dues were relatively unchanged at 11 basis points of total loans.

The improvement in non-performing loans from the second quarter is driven by the resolution of two previously disclosed credits. Both were well collateralized and, as anticipated, resulted in no loss. While pleased with the underlying strength of our portfolio, we remain cautious about credit in the current environment. Our commitment to high underwriting standards remains, and we attempt to identify potential problems early in order to mitigate loss to the bank. Moving on to profitability, beginning on slide 10. Excluding the after-tax loss and the sale of securities in the second quarter, net income declined $4.4 million on a linked-quarter basis. Pressure on our net interest income and declines in the mortgage division are the key drivers to the decrease.

However, as you can see on slide 11, we successfully offset the pressures on our revenue with savings on the expense side, such that the adjusted efficiency ratio remained flat on a linked-quarter basis. Turning to slide 12, adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries, was 3.37%, down 6 basis points from Q2. Although loan yields were up 15 basis points, deposit pricing pressures more than offset the increase in yield. The cost of total deposits increased 48 basis points to 1.98% for the quarter. Competitive pressures are expected to persist, and we believe funding costs will continue to increase in the short term. Kevin touched on the highlights within non-interest income and expense. The diversification within our revenue streams and expense control were positives in the quarter.

While the rate environment is a headwind, we remain committed to improving operating leverage, and managing the expense base remains a priority. I will now turn the call back over to Mitch.

Mitch Waycaster (Executive Vice Chairman and CEO)

Thank you, Jim. I am very proud of our team and the efforts made to produce the results so far in 2023. I will now turn the call over to the operator for questions.

Operator (participant)

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time, we'll pause momentarily to assemble the roster. First question will be from Michael Rose, Raymond James. Please go ahead.

Michael Rose (Managing Director of Equity Research)

Hey, good morning, guys. Thanks for taking my questions. I just wanted to start on loans and the outlook. The growth has been, you know, frankly, a little bit stronger than what we've seen from, you know, many of your peers and kind of across the industry.

Can you just remind us again, kind of where you stand in, in construction fund ups and, you know, why, you know, has, has the growth just generally been, you know, so strong in your eyes and, and, you know, maybe as we think about, you know, next year, just given maybe a more, you know, cautious economic backdrop, you know, what should we expect, both from what, your customers are telling you and then maybe just from your own, you know, views around, around credit and just being a little bit more cautious? Thanks.

Mitch Waycaster (Executive Vice Chairman and CEO)

Very good. Good morning, Michael. Let me start with the backdrop. I'll start with pipeline, go to production, and then, I'll ask David to talk a little specifically about construction, which you mentioned. Just beginning with pipeline, kind of put in perspective, where the moderation is continuing to occur, both in pipeline and production. I'll definitely touch on underwriting and pricing, but pipeline, we're beginning this quarter at $120 million in the 30-day pipeline. That compares to $135 million the prior quarter. So just as expected, what we've seen throughout this year, we continue to see some moderation quarter to quarter. That is driven by discipline and pricing, relative to our ability to fund incrementally that next extension of credit. I would and of course, underwriting, and then I would say demand.

With that said, we operate in some very good, vibrant, and as I mentioned in the opening comments, resilient markets. We continue to serve and grow relationships, and that's evidenced by our growth in loans, also in deposits this quarter. Just going back to production, actually, production this quarter was $404 million. That's down slightly from $413 the prior quarter. That produced an add of $238 million, or roughly 8% in annualized growth. And as I've mentioned on prior calls, really, the governor on that net is payoffs. And what we saw this quarter, we saw payoffs pull back, more like we saw in the first quarter of this year. We had $384 million. That compares to $370 Q1, but $455 in Q2.

Q2 was a little elevated. That impacted our net performance in Q2. We had about 6% versus the 8% this quarter. Looking forward, and I would say expectations for this next quarter, and as likely as we move into 2024, one thing that we do know, when we look at our production, we continue to see that from each of our markets, our regions, our business lines, they all continue to contribute in a meaningful way. To give you an example of that, that $400 million, this prior quarter, 14% came from Tennessee, another 18% from Alabama and the Florida Panhandle, 19% from Georgia, Central Florida, 16% from Mississippi, and the remaining 33% from the commercial and corporate business lines.

And again, as I usually mention each quarter, equally important as the geographic distribution of those is the loan types and the sizes of credit and just the granularity that Jim referred to earlier in his remarks. And again, we see that both on deposits and loans. But if you take the $404 million in production in Q3, 26% of that, talking about the granularity on types and product, 26% of that came from consumer, one-to-four family, short duration that we keep on our books. Another 28%, and we're very proud of this, and we've had a lot of success here in the past, is in small business and business banking, and that's credits less than $2.5 million.

Another 13% in commercial credit is greater than 2.5, which would include C&I, owner-occupied, commercial real estate, and then that remaining 33% in our corporate banking group, larger C&I, commercial real estate, ABL, equipment finance, factoring operations, we've been very pleased with. All to say, geographically and by type, very granular, our average loan size $250,000 for the total company. We just simply continue to hit on many different cylinders, and it's evidencing of our ability to prudently produce a diversified portfolio, but certainly while remaining disciplined in our pricing and underwriting. But with that said, we remain optimistic about our ability going forward in this next quarter. David, you want to comment specifically on construction?

David Meredith (Senior EVP and Chief Credit Officer)

Yes, sir. Thank you. Good morning, Michael, this is David. At all, our construction and development bucket changed moderately over the quarter. It went from about 53% to 54%. It led to about $35 million in change quarter-over-quarter, so it's about only about 15% of our loan growth. That kind of 54% is not far off from where we would have seen historically our construction and development bucket, somewhere 55%-60% where we expect that number to be. So it's not out of line from an expectation standpoint.

Michael Rose (Managing Director of Equity Research)

I appreciate all the color, great detail. Just as a separate follow-up, expenses were down a little bit Q-on-Q, and you guys have kind of talked about flattish. Any specific efforts or things that you're kind of working on? I assume some of it has to do with, you know, mortgage, you know, related revenue being down a little bit, so incentive comp, a little bit less. But, you know, anything that you guys are kind of working on in the expense front. I know you've kind of talked about migrating the efficiency ratio back towards 60%. You know, just wanted to get an update there, just given some of the revenue headwinds that are out there for the industry. Thanks.

Kevin Chapman (President and COO)

Yeah. Hey, hey, Michael, Kevin. So on the expenses and our focus really hasn't changed. If you just look at the expense categories where you saw the decrease, you can see occupancy and equipment, salaries, employee benefits, both of which comprise, you know, collectively, they're going to comprise 75% of our expenses. So that's where our focus is. In Q2, you do have the seasonality. Revenue, mortgage revenue was down, so mortgage expenses, specifically mortgage commissions, are down. So if you look at the salaries, employee benefits line item, it's down $1.2 million, but that's not all mortgage. About $300,000 of that was expenses from the core bank. So roughly $900,000 of that is going to be attributable to mortgage.

But there's also a day count differential there. If, if you add in the day count differential compared to Q2, our core bank or just non-mortgage salaries, employee benefits, it's gonna be down, it's gonna be down another $500,000 just from the day differential. So there's real, there's real traction being made on our efforts to control and contain and reduce expenses. As we look out, our focus is still gonna be the same. We, we don't have an announced expense initiative, but we've announced multiple times that we are we're focusing on expenses, and I think you see that in our numbers. If you just look quarter-over-quarter, there's some seasonality, seasonality to it.

But our focus has been on reducing or reducing expenses. When it comes to the efficiency ratio, our attention is now focused on the revenue side of that. But we will continue to have an ongoing effort to reduce expenses, and again, we're just asking you to focus on salaries and employee benefits and occupancy and equipment. That is where our attention is going to be, because that's where the majority of our expenses lie.

Michael Rose (Managing Director of Equity Research)

Appreciate the color. I'll step back. Thanks for taking my questions.

Kevin Chapman (President and COO)

Thank you, Mike.

Operator (participant)

Thank you. Next question will be from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor (Managing Director)

Thanks. Good morning.

Jim Mabry (EVP and CFO)

Morning, Catherine.

Catherine Mealor (Managing Director)

Wanted to ask on the margin and just see what you think, what's your outlook for the margin into the next quarter and into next year? And really, maybe a big picture, just thought for the margin is, how do you think about where and kind of potentially when the margin should bottom? And also how you're thinking about NII growth as we move into next year? Thanks.

Jim Mabry (EVP and CFO)

Good morning, Catherine. This is Jim. So-

Catherine Mealor (Managing Director)

Morning.

Jim Mabry (EVP and CFO)

Morning. So as you know, we, when we think about margin or other profitability performance metrics, we really start with the balance sheet. I do want to see at the numbers, but I think we're very proud of how we've grown deposits here in the last, you know, couple of quarters. I think our growth in core deposits in Q3 was about 11% annualized. So the balance sheet remains a focus, and certainly, everybody's focus was sharpened by the events in early March, and we, like others, leaned into wholesale funding. And since that time, we've tried to, you know, reduce our reliance on those wholesale sources, and that remains a goal.

Federal Home Loan Bank, we're down to $100 million, and that will not only lower because we've got a very attractive rate on that $100 million of about 70 basis points. Now the focus remains to lower that reliance on broker deposits. I think we reduced that a little over $300 million in the quarter, and our goal is, over the next few quarters, to get that down to essentially zero. So, I say that as a backdrop to margin because the balance sheet, we start with a focus there. And then as we think about margin and looking forward, a couple of comments. We do see continued pressures on the margin.

I think as we look at Q4, my expectation is that the margin will continue to compress and probably a bit more than we saw Q2 to Q3, but less than the compression that we saw Q1 to Q2 in terms of margin. NII will sort of follow that, you know, trend, I guess. I mean, certainly growth will help a bit, but I think NII directionally will follow what we foresee in the margin. As it relates to you know, looking forward to 2024, we see some, we see some really encouraging signs, Catherine. You know, it remains uncertain and you know, volatile environment, as you know, so sort of predicting where things might bottom is a tough thing.

But, you know, one of the things that we were struck by in our quarter was the moderation in NIB decline. So we did see a decline in non-interest bearing balances in the quarter, but it was, you know, meaningfully less than the decline we saw from Q1 to Q2. So things like that give us hope that we'll see some stabilization in 2024, but it remains too, I guess, uncertain to call when that might be.

Catherine Mealor (Managing Director)

Great. And how about on loan repricing? That's, I think, the tailwind that we're all looking for, for 2024 as we think about, you know, when then bottoms and then when we start to see how much of an increase we can see throughout 2024. Is there any—can you kind of talk about, you know, maybe the amount of loans that—fixed rate loans that you know are going to be repricing over the next year and, and what kind of upside that can, might play into your margin?

Jim Mabry (EVP and CFO)

So a couple of things. I think in terms of fixed rate loans and the repricing opportunity there, we've got about $200 million in Q4 that will reprice, and that's, those loans are roughly carrying, like, a 5.40% or 5.45% rate. And then for 2024, I think it's a little over $600 million in loans at a slightly lower rate, like 5.25% or 5.30%. So there is some repricing opportunity there. Another thing that may be helpful, Catherine, we—I think in prior calls, we've talked about, you know, sort of giving you a monthly look not just a quarter look, but a monthly look. So I would tell you that if you look at loan repricing for the quarter new and renewed was 8.27%, and for the month, it was 8.34%.

But, you know, the other side of that is what we just talked about in terms of the pressures. Interest-bearing deposits for the quarter were 1.98%, and for the month of September were 2.10%. So you can see those pressures still persist, but again, there are certainly some repricing opportunities in 2024, and we look to capitalize on those.

Catherine Mealor (Managing Director)

Great. And maybe just one margin question, and then I'll back out. Is the, you guys—I think in the past, you've talked about a 50% interest-bearing deposit beta over the cycle. Is that still about where you're targeting or, or you think you'll see?

Jim Mabry (EVP and CFO)

You know, we've tried to be conservative, and every time we try to be conservative, I think we've still not hit the mark exactly, Catherine. But right now, we're modeling a terminal beta in the mid-50s on interest-bearing deposits.

Catherine Mealor (Managing Director)

Okay, but that would be, you would probably hit that more like mid-2024 versus next quarter?

Jim Mabry (EVP and CFO)

I think that's a reasonable, that's a reasonable guess, yes.

Catherine Mealor (Managing Director)

Okay, great. Great, that's all I got. Thank you.

Jim Mabry (EVP and CFO)

Thank you, Catherine.

Operator (participant)

Thank you. Next question will be from Dave Bishop of Hovde Group. Please go ahead.

Dave Bishop (Director)

Yeah, good morning. Wanted to just stick with that, the funding topic real quick. Specifically, just curious, what's your level, absolute level of brokered deposits were, and maybe the cost and maturity schedule over the next couple quarters?

Jim Mabry (EVP and CFO)

Good morning, Dave, this is Jim. So I think at quarter end, we're around $750 million, call it, in brokered deposits. And in Q4, I think we've got maturing deposits of around $300 million in brokered. And I wanna say that's carrying an average rate of, like, call it, you know, 5.25%-5.30%. And within the next three quarters, I would say roughly, you know, the vast majority of that $750 million we'll have the ability to pay off. So, you know, we're putting on new deposits that call it low fours, so we definitely benefit from that.

Plus, the greater benefit as we see, we certainly want that income statement benefit, but what we really like is just, you know, having a balance sheet that, here at some point in the next few quarters, has virtually no reliance on alternative funding sources, and we're strictly—we're back to being a strictly core funded bank.

Dave Bishop (Director)

Got it. Then, from a funding perspective, appreciate the slide and cash and securities to total assets down to about 17%. Do you think that's reaching a floor? Is there a near-term target for that?

Jim Mabry (EVP and CFO)

I think we're pretty close, Dave. Maybe there's another $100 million or so in there that we would use to fund, help fund loan growth, but we're pretty close to where we wanna be in terms of that, cash level.

Dave Bishop (Director)

Got it. And then turning to credit quality, it looks like there was maybe some migration from the loans 90-day past due into nonaccrual. Maybe talk about maybe some of the, sort of the, quote-unquote, "mix shift" that occurred from a credit quality front this quarter.

David Meredith (Senior EVP and Chief Credit Officer)

Sure. Good morning, Dave. This is David. As a quarter, for those four, we didn't have loans that were 90 days past due last quarter that migrated in. Those were just the identification of new loans. It was primarily comprised of just really two credits that made up that change. One was a senior housing credit that continues to underperform. We believe, like, that we're in a very good loan-to-value position on that asset by virtue of their taking that asset to market for sale. We're in a really good asset position. The other one was a mortgage property, and as we've seen with mortgage properties, those values are still holding, so we believe we're in a good value position on those two. So it was primarily related to those two properties.

Dave Bishop (Director)

Got it. Appreciate the color. Thanks.

David Meredith (Senior EVP and Chief Credit Officer)

Thank you, Dave.

Operator (participant)

Thank you. Again, if you'd like to ask a question, please press star then one. Next question is from Jordan Ghent of Stephens. Please go ahead.

Jordan Ghent (Senior Research Associate)

Hey, good morning, guys. How are you doing? I just wanted to ask about capital, and kind of what your guys' preference is. You know, capital continues to build, and you have the buyback program in place. Just kind of what is your appetite for any share repurchases going forward?

Jim Mabry (EVP and CFO)

Good morning, Jordan, this is Jim. So as you noted, we did—our program had just expired, and the board renewed the repurchase program. So as you know, there was no activity in Q3. And I would say this, that as our capital ratios do build, it gives us more flexibility with regard to how we might utilize that capital. And share repurchases are a constant topic of conversation, but I would say that generally, we're not leaning in that direction. We don't take it off the table. It's always something that we think about its potential use, and our expectation is that we'll have other opportunities.

At least we, we think that's very possible in the coming quarters, that it feels like there's a lot going on in the industry, and we think that that could present some opportunities for the company. And so, you know, maintaining and growing that capital in the near term is something that we like because we like the flexibility that that gives us.

Jordan Ghent (Senior Research Associate)

Perfect. And then maybe just kind of a follow-up to that. You said other opportunities. How do you weigh the capital use between organic growth and M&A?

Jim Mabry (EVP and CFO)

You know, I think as we, you know, think about growth, organic growth is certainly preferred, and that's really how we've largely grown the company over the last few years. And, you know, as you saw in the numbers this quarter, we had really good growth, and it was very diverse and across all geographies. So it's, you know, pretty much in line with what we've done in the last few quarters. So that, that's the preference and that's the priority. But as Mitch has said in the past, we, you know, we remain open to looking at external growth, M&A growth. And of course, we, we've done some smaller non-bank acquisitions over the last, you know, 12 months or so.

You know, we believe that as you look forward in the banking industry, we think that there's, you know, a growing likelihood in the, you know, in the year ahead or so, that we could see more depository opportunities, and we remain open to those. You know, feel like that on the right terms, those could be attractive for our shareholders.

Jordan Ghent (Senior Research Associate)

Perfect. Okay. Thank you for taking my questions.

Jim Mabry (EVP and CFO)

Thank you, Jordan.

Operator (participant)

Thank you. This concludes the question and answer session. I'd like to turn the conference back over to Mitch Waycaster for closing remarks.

Mitch Waycaster (Executive Vice Chairman and CEO)

Well, thank you, Nick, and thank each of you for joining the call today. In closing, our Renasant team wishes for Sally Pope Davis the very best in her upcoming retirement. We next plan to participate in the Piper Sandler conference on November the 15th and 16th.

Operator (participant)

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