Renasant Corp Q2 FY2024 Earnings Call

Good morning, and welcome to the Renasant Corporation 2024 Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. 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.

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.

Thank you, Kelly. Results for the quarter showed solid progress. The balance sheet remains strong, led by growth in traditional deposits that funded an increase in loans. Asset quality metrics continue 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.

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 $0.05 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 continue 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 broker deposits to mature. Included in the 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 the 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 aforementioned gains on the sale of MSR assets and extinguishment of debt in the first quarter. Adjusted non-interest income increased $900,000 quarter-over-quarter. The income from our mortgage division, excluding the MSR gain in the first quarter increased $1.8 million on a linked-quarter basis, 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 9 basis points. Reported non-interest expense decreased $1 million from the first quarter. In the first quarter of 2024, we recorded an expense of $700,000 related to the FDIC special assessment, and we also made contributions totaling $1.1 million to certain charitable organizations, which qualifies for 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.

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 Slides 6 and 7, the company's core deposit base and overall liquidity position remains strong. The deposit base is diverse and granular and with the strong core deposit growth, our loan-to-deposit ratio remained steady at 88%. 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. 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 2 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 towards 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 1 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.

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.

We will now begin the question-and-answer session. The first question comes from Stephen Scouten with Piper Sandler. Please go ahead.

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

Good morning, Stephen, this is Jim. We anticipate booking about a $36 million gain from the sale of the insurance company in Q3. While this was an important part of the company, it isn’t as significant financially compared to other instances in the industry. This sale will have a very slight negative impact on EPS for the second half of the year; however, it will be modest. Additionally, you will see a slight increase in the tax rate for Q3 due to this gain, around 23% compared to our usual 22%. Regarding the use of the capital gain, our main priority remains on utilizing that capital or any incremental capital from such sales to drive organic growth. That is our first priority. As you mentioned, whether through lift outs or organic growth, that is our top focus. The second priority would be M&A. We are uncertain about the timing or occurrence of that, but if the opportunity arises, we would like to be involved, and that would be a suitable use of that capital as well. In the near term, we do not see a buyback as a likely route, although we aren’t ruling it out entirely.

Okay. Very helpful. And then maybe just thinking about the NIM trends from here. Still, obviously, don't know exactly what the Fed is going to do and what the curve is going to look like. But do you still kind of think if we get the first couple of 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?

Since the beginning of the year, we've operated under the assumption of a flat rate environment, and that remains our approach in managing the balance sheet. However, if we experience a 25 basis point cut in September, I don't anticipate it will affect EPS in Q3. There might be a very slight negative impact in Q4, but it would be minimal. Regarding margin, I expect it to remain roughly flat for the rest of the year, consistent with our outlook for a flat rate environment.

Okay. Great. Lastly, I wanted to mention that while credit metrics have increased slightly, they still appear strong, and your reserves are solid. When we spoke at Gulf South earlier this year, you indicated that there wasn't much concern regarding some of the commercial real estate exposure, but your internal team seemed more focused on residential exposure. Is there anything noteworthy regarding the residential side, or is this merely a relative assessment for you? Are there any concerns there?

Stephen, hi, good morning. This is David. In this quarter, our changes in asset quality mix weren't a result of anything in our residential portfolio. That remains a heightened area of concern for us 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 with 100% direct loans we have to our commercial customers that we've been working with those customers for a while and large just felt like it was time to go ahead and move on those assets when you start to see concerns about the valuation of some of the collateral underlying those loans would think best to go ahead and move on those assets and whether it be a note sale or foreclosure just go ahead and try to remedy those and get them out of the way, but it was not due to residential for this quarter.

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

Thank you, Stephen.

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

Hey, good morning guys. How are you?

Good morning, Michael.

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

Sure. I'll start with the pipeline and then discuss production, along with a comment on payoffs. We had another strong quarter, beginning with $130 million in the 30-day pipeline, which reflects the robust markets we operate in. This quarter generated a net growth of $104 million in loans, approximately 3.5%. Both Kevin and Jim highlighted the growth in loans and deposits. Additionally, our balance sheet looked good with strong deposit growth. Production this quarter was about $390 million, compared to $418 million in the previous quarter, leading to the $104 million net growth, down from $150 million in the prior quarter. Regarding payoffs, we observed a modest increase this quarter, which is generally a timing issue rather than anything unusual. Looking back at production and forward, all our markets and business lines continue to perform well, as evidenced by our pipeline and production. Specifically, the $390 million this quarter comprised 23% from Tennessee, 17% from Alabama, another 14% from Georgia and Central Florida, 22% from Mississippi, and 23% from our commercial corporate business line. This distribution showcases the granularity that Jim and Kevin referred to. Approximately 20% of this quarter’s production was in short-duration assets, with 31% in small business credits under $2.5 million, and 32% in commercial credits $2.5 million and above, representing traditional C&I and owner-occupied commercial real estate. The corporate commercial business lines accounted for 18% of this quarter's production. As we have demonstrated previously, we continue to perform effectively across various sectors. This reflects our capability to prudently manage production relative to pricing and credit underwriting. Looking ahead, we remain optimistic about our potential to sustain loan growth, anticipating mid-single-digit net growth going forward.

Mitch, very thorough answer as usual. Maybe just as a follow-up, it was good to see NIB deposits kind of stabilized. Can you just talk about some of the push-pull there? I know there's several other banks that have referenced 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 in deposit costs? Thanks.

Michael, this is Jim. As you mentioned, it continues to be a competitive environment, but it seems like the competition may not be as intense or irrational as it was in the past. The pressures are still present but have eased somewhat. While answering your question, I noted that our cost of deposits in the second quarter was $247 million, and in June it was 2.49%. This suggests that the rise in deposit costs is slowing down. For NIBs, we are internally managing our balance sheet with the expectation of some additional decline in NIBs. While we hope not to see it, we were pleased with the results in Q2 that Mitch mentioned. The competitive landscape has shifted, and although we are not experiencing the same level of aggressive pricing as a couple of quarters ago, it’s hard to say when we will reach a stabilization point, yet we’re seeing some positive trends.

Very helpful. And then maybe just finally for me, following up on Stephen's question on M&A. You guys are about $17.5 billion in assets. 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 size? Just any sort of color you can provide in terms of what you would be looking for? And maybe an asset size that we could think about both with organic and opportunistic M&A over the medium to long term.

Sure, Michael. One thing I would just start answering that question is just our discipline around evaluating opportunities. And certainly, we're focused on building scale and density within the markets that we operate in. We would certainly see that as an opportunity, and I would say a sweet spot relative to size, probably something $1 billion or above. Like I say, focused on scale and density within the footprint. And as we think about being opportunistic, as Jim mentioned earlier, certainly, we began 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, 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.

Great. Thanks for taking my questions.

Thank you.

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

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

Good morning, Catherine, this is Jim. I would say, yes, we've been really pleased with the new and renewed rates we've been getting over the last couple of quarters. It does feel like 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 or renewed deals.

Great.

And actually, I'll take it a step further, Catherine. If you look at it, it's one month, so one month doesn't indicate a trend, but our new and renewed for June were slightly lower than what we observed for the quarter. Again, it doesn't necessarily indicate a trend, but we are noticing some pressures there.

But you mentioned that some of that is the mix or just new, and the same category of loans still has a lower incremental yield?

I wouldn't say that what we're seeing or experiencing is due to mix. It's just overall. There is a lot of competition for loan growth, and it seems to be reflected in pricing pressures.

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 from the expense base?

Yes. 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 insurance coming out. So that will affect the run rate of bringing it down about $2 million. But still, if you back that out off of what our run rate was in Q2, 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, it drives more revenue, the repricing, the opportunity on repricing of assets and liabilities, as Jim discussed in the margin or also looking at greater accountability measures to reduce our expenses. And that's been our focus. It will continue to be our focus.

Great. All right, thank you.

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

Hey, good morning gentlemen. Jim or Kevin, I just want to make sure I follow up Catherine's question. I hear that the expense impact from the insurance sale was about $2 million per quarter. Did I hear that correct?

That's correct.

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

Sure. Good morning. This is David. The increase in non-performing assets quarter-over-quarter was entirely related to commercial activities. It wasn't widespread; it was primarily due to three credits. Approximately 80% to 85% of the two larger credits were related to commercial real estate. One involved a senior housing property, while the other included a mix of retail and office. Both of these credits have been classified as troubled assets for quite some time. We are actively working with the borrowers on these issues, but considering the valuations of these asset types—especially in the office and senior housing sectors where occupancy is low and the market conditions are challenging—we felt it was prudent to take proactive measures to resolve these loans, whether through a note sale or foreclosure. As you know, we typically prefer to identify problems early, which we did. Once we determine that a loan is unlikely to be resolved or has potential valuation issues, we proceed with remediation. In this instance, we moved those loans to nonaccrual and will expedite the resolution process as efficiently as we can.

Got it. Appreciate the color.

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

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? It's going to be stabilizing or continued to track lower? Thanks.

Jordan, good morning this is David. So, we've not changed our philosophy on our seasonal model. We feel strong about our seasonal model the way it's worked. We reserve them with what told us to reserve a few years ago, and it's this point has required us, but 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 pay down, but the model had built in where we need to reserve a little bit. So, the dollar amount came down. But that was really in part due to we reserve for new loan growth, but the portfolio derisked 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 related to that one asset. That derisked that senior housing asset type and caused a little bit of a reduction on the required reserve for that particular asset. But all in all, we continue to follow a model quarter-over-quarter. And I think we will continue to see that until we see some change in some of those factors that drive the model.

I would like to add to what David mentioned. Implicit in your question is that, as David suggested, we've discussed this for a few quarters. It seems that, while things can always change, the allowance will likely gradually decrease throughout the rest of the year. Conditions and circumstances will ultimately influence this. We established the allowance for a reason, and although we haven't experienced significant charge-offs, which remain very low, we anticipate that it will trend down towards the 150-ish range by year-end if the current circumstances persist.

Okay. Thank you.

Thank you.

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

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?

Good morning John. Yes, I think I think internally, we sort of think about it's not 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 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 manage that securities position.

Okay, makes sense. Thanks guys.

Thank you, John.

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.

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

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