Earnings Call Transcript - RNST Q1 2022

Operator, Operator

Good day and welcome to the Renasant Corporation 2022 First Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson with Renasant Corporation. Please go ahead.

Kelly Hutcheson, President and Chief Executive Officer

Good morning and thank you for joining us for Renasant Corporation's 2022 first quarter 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, 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 at the Press Releases link under the News & 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 President and Chief Executive Officer, Mitch Waycaster.

Mitch Waycaster, President and Chief Executive Officer

Thank you, Kelly. Good morning. We appreciate you joining the call today. Before Kevin and Jim discuss the results for the first quarter, I would like to offer observations on the start of the year and the outlook for the balance of 2022. Loan growth accelerated in the quarter as payoffs moderated and production remained very strong. We also showed continued progress in expense management. And while economic conditions are presenting headwinds, we remain hopeful that further improvement can be accomplished. We are fortunate to operate in a number of growth markets, where in-migration and business development activities are strong. Operating in dynamic markets with a team that I am very proud of leads us to be optimistic about our ability to grow, maintaining a strong balance sheet that emphasizes core deposits, capital, and credit quality are important operating principles at Renasant that we believe are important for shareholder value creation. I will now turn the call over to Kevin.

Kevin Chapman, Chief Financial Officer

Thanks, Mitch. Our first quarter earnings were $34 million or $0.60 per diluted share compared to $37 million or $0.66 per diluted share in the fourth quarter of 2021. Our core banking operations and our other lines of business strengthened this quarter and mitigated to some degree the volatile return to the normal operating environment of our mortgage division. On the banking side, strong loan production and moderating payoffs contributed to our solid loan growth for the quarter. We also successfully closed the acquisition of Southeastern Commercial Finance, an asset-based lending company headquartered in Birmingham, Alabama, which added $28 million in loans on the acquisition date. Excluding these acquired loans, we experienced 11% annualized loan growth for the quarter. Our insurance and wealth management divisions produced strong results for the quarter and our continued focus on expense discipline resulted in expenses falling for the fifth consecutive quarter. We aren't immune to the inflationary pressures present in the broader markets, but we are focusing on finding offsets for any expense increases resulting from these pressures. Although there may be some linked quarter increase in the second quarter due to our full quarter realization of merit increases and operations of Southeastern, we still anticipate total non-interest expense for the full year of 2022 to be less than 2021. In a separate release yesterday, we also announced our plans to eliminate consumer non-sufficient fund fees and certain other consumer deposit-related fees. These changes will take effect January 1st, 2023. These eliminated fees totaled $1.3 million in the first quarter of 2022. I will now turn the call over to Jim.

Jim Mabry, Chief Operating Officer

Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. Starting with the balance sheet, total footings grew modestly. We continue to invest some of our excess liquidity in our securities portfolio, increasing the portfolio just over $220 million from the previous quarter. Rising interest rates had a negative impact on the value of our portfolio, resulting in a fair market value adjustment of $135 million. Total loans increased $293 million from Q4 of 2021. The first quarter was another strong quarter in terms of production, with $863 million in new loan production and $588 million of advances driving net growth in nearly all categories. Our PPP portfolio declined $50 million during the quarter, with only $8 million outstanding as of March 31st. All of our regulatory capital ratios remain in excess of required minimums to be considered well capitalized and reflect the strength of our capital position. We recorded a credit provision of $1.5 million and net charge-offs of $851,000. Provision expense attributable to the acquisition of Southeastern Commercial Finance was $582,000, with the remainder attributable to loan growth. The ACL as a percentage of total loans declined from 1.64% to 1.61%. We recorded a release from our reserve for unfunded commitments of $550,000 which is reflected in other non-interest expense. Credit quality metrics are shown on pages 14 through 16. Past dues, criticized, and non-performing asset measures all remained relatively stable and net charge-offs were inconsequential. Net interest income declined $1.8 million quarter-over-quarter primarily due to two fewer days of interest income recognition. We believe we are poised for margin improvement as more on-balance sheet liquidity is put to work and as interest rates rise. We mentioned in our last earnings call that salaries and benefits in Q4 of 2021 benefited from one-time items. The decline in expenses in our mortgage division this quarter helped offset the return to normal of certain other expenses. We also contributed approximately $1 million to charitable organizations throughout Mississippi and Georgia, for which we received a dollar-for-dollar tax credit during the first quarter. I will now turn the call back over to Mitch.

Mitch Waycaster, President and Chief Executive Officer

Thank you, Jim. We are pleased with our results for the first quarter and look forward to the opportunities ahead of us for the remainder of the year. I will now turn the call over to the operator for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And the first question will be from Brad Milsaps with Piper Sandler. Please go ahead.

Brad Milsaps, Analyst

Hey, good morning. Thanks for taking my questions.

Mitch Waycaster, President and Chief Executive Officer

Good morning, Brad.

Brad Milsaps, Analyst

Just wanted to maybe start on expenses. I appreciate the guidance around expenses being lower in 2022 than 2021, which is consistent with what you said last quarter. Just maybe if you could give us a little more sense of the magnitude. I know at one point, Jim, you talked about expenses kind of reverting back to the third quarter run rate. It seems like as we sit today, with the last two quarters, you're a long way from there. So, just wanted to ask maybe trajectory-wise, kind of where you think maybe some of the increase would come from as you move through the year, if in fact, you do think expenses will get back to that 3Q level?

Kevin Chapman, Chief Financial Officer

Hey Brad, it's Kevin. So, yes, as we look at our expenses going forward and the progress we made in Q1, a couple of things as we look out for the rest of the year, just using Q1 as a baseline. So, I think total expense is around $94 million. But merit increases in a full quarter of Southeastern is going to cause salaries and employee benefits to tick up. Outside of that, we're expecting most of the other expenses to be somewhat in line, if not continue to see decreases. Some of the decreases are going to come on the occupancy and equipment side, just our ongoing efforts to look at our either branches or our facilities and look for ways to consolidate and be more mindful of the use of those facilities. I would expect that as far as the merit increases and some of the wage inflation that we're seeing, I would expect that to increase upwards of $2 million to $3 million as we go throughout the year. So, as we look, our expenses just using it as a baseline, we expect expenses to be up maybe in that $2 million to $3 million range on a quarterly basis based on the $94 million run rate in Q1.

Brad Milsaps, Analyst

Thanks, Kevin. That's helpful. You've previously outlined some efficiency targets as we approach the end of 2022 and move into 2023. Can you provide an update on your thoughts regarding an efficiency ratio for the end of the year and into 2023, especially considering the improved interest rate environment and the anticipated loan growth momentum?

Kevin Chapman, Chief Financial Officer

Yes. I believe everything you've mentioned is a result of what we previously outlined. In terms of what will lower the efficiency ratio, our short-term goal remains at 60%. This will largely depend on interest rate movements and the speed at which we achieve that goal. We are still adhering to our plan. I should also point out that the efficiency ratio for Q1 will be significantly influenced by the quick return to normal in the mortgage sector.

Brad Milsaps, Analyst

Great. Thank you guys. I'll hop back in queue. Thanks.

Mitch Waycaster, President and Chief Executive Officer

Thank you, Brad.

Operator, Operator

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

Catherine Mealor, Analyst

Thanks. One follow-up on the expense conversation. How much of a reduction in mortgage expenses did we see this quarter? And is the lower mortgage revenue environment, do you think fully reflected in the expense base? Or is there more savings that we could see there?

Kevin Chapman, Chief Financial Officer

I think as we look at volatility due to production, I think the expenses are fully baked. We are looking at what does the mortgage operations look like based on the prospects of lower volumes, maybe tighter margins. So, there could be further expense reductions there. But just looking at the normal levels of production, the reduction in expenses we saw, I think are an accurate reflection of what the run rate would be.

Catherine Mealor, Analyst

Okay, great. And then can you give us any outlook on the margin, maybe kind of thinking about how you think the margin could expand from here, just thinking about the forward curve and maybe some color around increasing the margin per rate hike or anything around some asset sensitivity give us some color there. Thanks.

Jim Mabry, Chief Operating Officer

Good morning Catherine, this is Jim. So, as you saw in Q1, our margin was down a couple of basis points from the fourth quarter. And as I said a few minutes ago, I think we're poised for both margin and NII growth from here without rate hikes. I want to emphasize that we feel optimistic about the margin and NII rising again without any further rate increases.

Catherine Mealor, Analyst

Okay, great. And then as a reminder, and then you've given us the forecast or just as an update for percentage of loans that are variable and how quickly we move to the floors if we get under a 50 basis point move in May?

Jim Mabry, Chief Operating Officer

Percentage of loans is variable, it's about 40%.

Catherine Mealor, Analyst

And does that include the impact of floors?

Jim Mabry, Chief Operating Officer

Yes, floors. So, currently, where we stand is that on that portfolio, 80% of the portfolio is no longer subject to floors and another 25 basis points takes that to about 90%.

Catherine Mealor, Analyst

Maybe one more thing on the variable piece, how much of that is floating, so it's actually floating immediately versus variable that may reprice over a longer period of time?

Jim Mabry, Chief Operating Officer

Let me get back to you on that, Catherine.

Catherine Mealor, Analyst

Okay. No worries. Thank you so much.

Operator, Operator

The next question will be from Kevin Fitzsimmons from D.A. Davidson. Please go ahead.

Kevin Fitzsimmons, Analyst

Hey good morning guys.

Mitch Waycaster, President and Chief Executive Officer

Good morning Kevin.

Kevin Fitzsimmons, Analyst

Just wanted to talk a little more broadly about expectations for loan growth. So, Mitch, in your earlier comments, I think you made the observation that the economic growth potential in the region is very healthy, but there's also been a pullback. I think one of the big headwinds for you guys in prior quarters have been payoffs and paydowns, and I'm guessing that softened a bit this quarter.

Mitch Waycaster, President and Chief Executive Officer

Sure. Thank you, Kevin. Let me begin with pipeline. I'll talk a bit about production this quarter and prior quarters and then go to pay off and reflect on how we see that going forward. So, to begin that discussion, we'll talk just a minute about our pipeline we entered this quarter at $290 million. That was up from $284 million in the prior quarter and $240 million in the prior year. So, if we go to production this quarter, we saw $892 million in production. If you adjust for Southeastern Commercial Finance, that would bring that down to $863 million for the quarter. That's about 5% ahead of what we produced in 4Q, which was a record production. What really is encouraging is that we're seeing this production from across all of our markets and business lines. We continue to expect at some point that would moderate, but that remained fairly high this quarter. So, we feel good about our ability to produce given our strong markets talent and various product lines.

Kevin Fitzsimmons, Analyst

Okay. Thanks Mitch. And just I guess a question on the purchase of Southeastern Commercial. So, it didn't seem like it added too much in terms of loans. So, it's just a relatively small unit. But how big can that get in terms of what bolting on to you in your balance sheet and capital?

Mitch Waycaster, President and Chief Executive Officer

Yes. So, Kevin, that's a good question related to Southeastern Commercial, certainly. We continue to be opportunistic about various business lines that align with our risk appetite and fit within our business model. We have been very pleased with the results that we have seen in a short period of time. As far as your question, we certainly remain opportunistic in regards to looking at other business lines. We were fortunate to add seven additional members as part of that acquisition and will continue to look for those opportunities that closely align with the business model.

Kevin Fitzsimmons, Analyst

Great. Thanks so much Mitch.

Mitch Waycaster, President and Chief Executive Officer

Thank you, Kevin.

Operator, Operator

The next question will be from Jennifer Demba from Truist Securities. Please go ahead.

Brandon King, Analyst

Hey, this is Brandon King on for Jenny. Good morning.

Mitch Waycaster, President and Chief Executive Officer

Hey Brandon.

Brandon King, Analyst

I wanted to touch on deposit growth. I saw there was some growth in the quarter, but I wanted to know what your expectations were for the rest of the year.

Jim Mabry, Chief Operating Officer

Good morning, Brandon, this is Jim. So, we are hopeful that deposit growth will continue throughout the year. It seems reasonable that as we have these rates moving up, that we'll see some shifts in that mix. Exactly what that looks like is hard to predict, but it seems like a reasonable assumption that we will see changes in terms of customers and what that does to deposit mix.

Brandon King, Analyst

Okay. And as far as those deposits, what are the beta assumptions that you have currently?

Jim Mabry, Chief Operating Officer

So, where do we stand, we haven't changed our deposit beta input recently. It stands at about 43. We feel like that's a conservative number and that for the first couple of rate hikes, it's probably going to be a little lower than that. So, again, we feel that's a conservative look at our sensitivity and we'll see how it plays out.

Brandon King, Analyst

Thanks. And then lastly, I saw that three branches were closed in the quarter. I was curious where do you see that branch rationalization efforts going for the rest of the year?

Kevin Chapman, Chief Financial Officer

Yes. Good morning, it's Kevin. There will be further branch rationalization efforts that are done. Some of that is included in the comments about the lower expectation on occupancy and equipment. That will be an ongoing effort as we look at our branches.

Brandon King, Analyst

That’s all I had. Thank you very much.

Mitch Waycaster, President and Chief Executive Officer

Thank you, Brandon.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mitch Waycaster for any closing remarks.

Mitch Waycaster, President and Chief Executive Officer

Thank you, and thank you to those who joined the call this morning. We appreciate the interest and look forward to speaking again soon. We next plan to participate in the Gulf South and the D.A. Davidson Conferences in early May.

Operator, Operator

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