Renasant Corp Q1 FY2024 Earnings Call

Good morning, and welcome to the Renasant Corporation 2024 First Quarter Earnings Conference Call. 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.

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 fluctuations, 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 at the Press Releases link under the News & Market Data tab. We undertake no obligation and 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.

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 I look forward to a bright future under his leadership. I will now turn the call over to Kevin.

Thank you, Mitch. I appreciate the trust and confidence our Board, shareholders and company has in me, and I 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 yields 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 remain focused on growing our core funding base and continue 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 brokered 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 noninterest 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 $56,000 on extinguishment of debt. Excluding these one-time items, adjusted noninterest income decreased $688,000 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. Noninterest expense increased $1 million from the fourth quarter. In the first quarter of 2024, we recorded an expense of $700,000 related to the FDIC 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 tax income expense. I will now turn the call over to Jim.

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 in the 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 noncore 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 were 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 noninterest 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.

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

Our first question will come from Catherine Mealor with KBW.

And congratulations to both of 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?

Catherine, this is David. So in Q1, we received year-end financials for year-end '23. We set out on a review of all of our loans, not just CRE, but also our C&I credits during the quarter. 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. To add a little color behind that, 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 their credit to get back to an improved status where it's not classified, or provide the opportunity to exit the bank before deteriorations worsen, which is what we did in Q1 to identify those loans. Just as a perfect example, already in Q2, we worked out of one of those loans that was $23 million, and we'll continue to work those assets out of the bank. Jim mentioned in his comments that they are all current. There's no concerns about losses. So 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.

That's great. And then maybe one question on the margin. What's your outlook on the margin over the next couple of quarters 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?

Catherine, this is Jim. 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 where it's at. As you point out, I mean, we've had nice increases in loan yields, but the relief on the deposit pricing side has just been stubborn. We've hoped for more progress there, and we'll see how that plays out in '24. I'm very encouraged with what we're seeing on our loan yields and what we're getting there. I think the key is really what happens on that funding cost. Our net incremental cost on new deposits is running at 4.5% to 4.75%. Hopefully, we get more stabilization in our net interest margin. We had outflows from Q3 to Q4 of about $160 million. In Q4 to Q1, it was closer to $65 million or $70 million. So the trends there are encouraging. Hopefully, we can continue to see that progress, which will help some of the margin. So I'd say, overall, a flat outlook. If we do get cuts, I'm not sure—generally, cuts are going to be modestly 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.

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% to 4.75%. Where are incremental loan yields coming at right now?

So if you exclude RBC, we're comfortable in the low 8s. For the quarter, it was about 8.25%, somewhere around there. For the month, I want to say, Catherine, it's right around 8.30%. So nice progress there. I think now we've seen new and renewed loans at 8% or better for two or three quarters. We're really encouraged by what we're seeing, and hopefully, we can keep that up. RBC certainly adds to that, so it's closer to around 8.30%, which turns into 8.50% or 8.60% for the month of March, if you include RBC.

Our next question will come from Michael Rose with Raymond James.

Congratulations to both you, Kevin and Mitch. Looking forward to seeing what the future brings for Renasant. I missed the first prepared remarks, so I apologize if you covered this, but I did want to touch on loan growth expectations for the year. We've seen some banks reduce their outlooks, or maybe reiterate off of lower first quarter expectations. I don't think you've given us a formal guide, but Mitch, you usually talk us through the pipelines and what they look like. I would be curious as to what the pull-through rate looks like relative to pipeline and if you think that will increase through the year. Is something in the mid-single-digit growth kind of in the cards for this year?

Very good. And thank you for your comments, Michael. Yes, so let's start with pipeline. We're going into this quarter with a pipeline of $142 million. That compares to $122 million at the start of the first quarter. So we see that up a modest bit as we start the quarter. And 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 where we see rates coming in. Also, the funding, both pricing and funding. Underwriting is something we are very prudent about. You just heard about administration. Demand continues to be evident. We operate in good, vibrant, resilient markets and we continue to serve and grow relationships, driving production and pipeline. This is evidenced by the growth we saw this past quarter of roughly $150 million or about 5%. We also saw very good funding and deposit growth, as Jim just mentioned. The production is coming from each of our markets, our regions, and our business lines, contributing in a meaningful way across our footprint. To give some percentages, this past quarter saw 13% in Tennessee; 10% in Alabama and the Florida Panhandle; 15% in Georgia and Central Florida; 26% in Mississippi, which had a very good quarter; and 36% from our commercial corporate business lines. It's equally critical to consider the size of credit. We have a granulated asset-based loan portfolio. This quarter's production of $418 million sees 7% from what I would call consumer loans, whether that be HELOCs or 1-4 family portfolio. We've seen that pull back a bit due to mortgage production inventory, but 32% was in small business loans under $2.5 million. These are deposit-rich, great relationship credits. Additionally, 31% was in commercial credits greater than $2.5 million, including owner-occupied commercial real estate. Lastly, another 30% in production came from our corporate banking group for larger C&I, commercial, real estate, asset-based lending, equipment finance, and senior housing. Our average credit remains around $260,000. Overall, we continue to hit on many cylinders, evidencing our ability to prudently and consistently produce a highly diverse portfolio. Looking forward, I would suggest that for this quarter and '24, we expect to align with our past quarters, reflecting mid-single-digit growth as a reasonable target, with payoffs that will ebb and flow as they always do.

Mitch, that's great color. I always appreciate your commentary; it's very insightful. Just wanted to switch gears to fee income and mortgage, which showed nice upside this quarter with a gain-on-sale margin jumping higher. I know it's hard to predict; there are lots of variations quarter-to-quarter with the timing of lock and realization of income. But maybe if you can walk us through expectations for mortgage revenue, specifically the profitability of that business, including the current efficiency ratio for the quarter and similar metrics. I know the MBA is forecasting an increase in volumes this year. Could we expect normal seasonal patterns and a little better mortgage income as we move through the year?

Michael, it's Kevin. To address your last question first, we are anticipating mortgage revenues to remain strong, potentially even pick up as we enter the summer months. We are all cautious, trying to understand the current mortgage environment. Coming out of 2021, with normalization in 2022 and 2023, it is challenging to assert that normal cyclicality exists currently. Inventory constraints remain a headwind in the industry, yet we still see significant demand—limited supply notwithstanding. In Q1, we saw our pipeline grow in comparison to Q4. The pipeline currently in Q2 is holding steady, if not slightly up, which puts us against the trend. The Mortgage Bankers Association is observing nationwide trends that show applications and sales are either flat or pulling back. However, we remain optimistic about our mortgage team. We have been proactive in making key hires for producers in select markets this past Q1, which instills confidence in us for higher levels of performance and outperformance in our mortgage space. Overall, the division continues to be profitable despite prevailing headwinds. Over the last 18 to 24 months, we've been redesigning our operations and implementing a new operating platform. We are nearing the completion of that transition, and more of our mortgage-related expenses are becoming variable. For instance, in Q1, mortgage salaries dropped by $300,000 due to cost-cutting efforts from Q4, while commissions rose by $400,000 to $500,000 against core revenue, which excluding the gain on mortgage servicing rights, was up over $1 million. Achieving the right structure in mortgage, balancing variable revenue against variable expenses has been a core effort of our team. We believe they've done commendable work, and we're optimistic about the future of mortgage profitability. While it is undeniably a tough environment, we are confident that the investments and improvements made over the past two years will position us well in this space.

This concludes our question-and-answer session. I would like to turn the conference back over to Mitch Waycaster.

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 29.

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