Earnings Call Transcript - RNST Q3 2023

Operator, Operator

Good day and welcome to Renasant Corporation 2023 Third Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. 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 Hutchinson of Renasant Corporation. Please go ahead.

Kelly Hutcheson, Executive Vice Chairman and Chief Executive 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. And now I will turn the call over to our Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.

Mitchell Waycaster, 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 we'll 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.

Kevin Chapman, CFO

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 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 by $385 million on a linked quarter basis, which helped us reduce our reliance on wholesale funding and allowed us to pay down the FHLB advances by $150 million and brokered 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, noninterest 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. Noninterest 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.

James Mabry, COO

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 brokered 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 six and seven, 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 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. 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 noninterest expense. Net charge-offs were $1.9 million, which represents an annualized rate of six basis points and the ACL as a percentage of total loans held flat at 1.63%. Credit metrics are presented on page nine. 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 onto profitability, beginning on slide 10. Excluding the after-tax loss on 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 six 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 noninterest income and expense. The diversification within our revenue streams and expense control were positives in the quarter. While the right 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.

Mitchell Waycaster, 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, Operator

Thank you. We'll now begin the question-and-answer session. First question will be from Michael Rose, Raymond James. Please go ahead.

Michael Rose, Analyst

Hey, good morning, guys. Thanks for taking my questions. I just wanted to start on loans and the outlook. The growth has been, frankly, a little bit stronger than what we've seen from many of your peers and kind of across the industry. Can you just remind us again kind of where you stand in construction fund-ups and why has the growth just generally been so strong in your eyes and maybe as we think about next year just given maybe a more cautious economic backdrop, what should we expect both from what your customers are telling you and then maybe just from your own views around credit and just being a little bit more cautious? Thanks.

Mitchell Waycaster, CEO

Very good. Good morning, Michael. Let me start with the backdrop. I'll start with pipeline and production and then I'll ask David to talk a little specifically about construction which you mentioned. Just beginning with pipeline, we are beginning this quarter at $120 million in the 30-day pipeline. That compares to $135 million the prior quarter. So just as expected, we continue to see some moderation quarter-to-quarter. That is driven by discipline in pricing relative to our ability to fund incrementally that next extension of credit and of course underwriting. And then I would say demand. With that said, we operate in some very vibrant, 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. Production this quarter was $404 million. That's down slightly from $413 million the prior quarter. That produced a net of $238 million of roughly 8% annualized growth and as I've mentioned on prior calls, the governor on that net is payoffs; we saw payoffs pulled back more like we saw in the first quarter of this year. Looking forward and as we likely move into '24, 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, 18% from Alabama and the Florida Panhandle, 19% from Georgia, 16% from Mississippi, and the remaining 33% from the commercial and corporate business lines. Our average loan size is $250,000 for the total company. We just simply continue to hit on many different cylinders, and it is evidencing our ability to prudently produce a diversified portfolio. But certainly while remaining disciplined in our pricing and underwriting. 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, Construction Department Head

Yes, sir. Thank you. Good morning, Michael. This is David. 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, just about 15% of our loan growth; yet that kind of 54% is not far off from where we would have seen historically our construction and development bucket somewhere 55% to 60% where we expect that number to be. So it's not out of line from an expectation standpoint.

Michael Rose, Analyst

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 talked about flattish. Any specific efforts or things that you're kind of working on? I assume some of it has to do with mortgage-related revenue being down a little bit, so incentive comp a little bit less, but anything that you guys are working on the expense front? I know you've talked about migrating the efficiency ratio back towards 60%. Just wanted to get an update there, given some of the revenue headwinds that are out there for the industry. Thanks.

Kevin Chapman, CFO

Yeah. Hey, Michael. Kevin. So on the expenses, our focus really hasn't changed. If you just look at the expense categories, we saw the decrease. You can see occupancy and equipment, salaries, employee benefits, both of which comprise collectively 70% to 75% of our expenses. In Q2, you do have the seasonality revenues, mortgage revenue was down, so mortgage expenses, specifically mortgage commissions are down. If you look at salaries and 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 is also a day count differential there. If you add in the day count differential compared to Q2, our core salaries and employee benefits, our core bank or just non-mortgage salaries will be down roughly $500,000 just from the day differential. So there is real traction being made on our efforts to control and contain and reduce expenses. We will continue to focus on reducing expenses.

Michael Rose, Analyst

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

Mitchell Waycaster, CEO

Thank you, Mike.

Operator, Operator

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

Catherine Mealor, Analyst

Thanks, good morning.

Mitchell Waycaster, CEO

Morning, Catherine.

Catherine Mealor, Analyst

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

James Mabry, COO

Good morning, Catherine. This is Jim. So, as you know we, talking about margin and other profitability performance metrics, I think we're very proud of how we've grown deposits here in the last couple of quarters. Our growth in core deposits in Q3 was about 11% annualized. And so the balance sheet remains a focus. On Federal Home Loan Bank, we're down to $100 million, and that will not go any lower because we've got a very attractive rate on that $100 million of about 70 basis points. Our goal is over the next few quarters to get that down to essentially zero. As we think about margin, we do see continued pressures on the margin. My expectation is that the margin will continue to compress and probably a bit more than we saw in Q2 to Q3, but less than the compression that we saw Q1 to Q2. NII will follow that trend and it certainly grows, but I think NII directionally will follow what we foresee in the margin.

Catherine Mealor, Analyst

Great. And on loan repricing, that's I think the tailwind that we're all looking for in '24 as we think about when it then bottoms and then when we start to how much of an increase we can see throughout '24. Can you kind of talk about, you know, maybe the amount of fixed-rate loans that you know are going to be repricing over the next year and what kind of upside that can might bring to your margins?

James Mabry, COO

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 next. Those loans are roughly carrying like a 5.40% or 5.45% rate. And for '24, I think it's a little over $600 million in loans at a slightly lower rate. There are certainly some repricing opportunities in '24, and we look to capitalize on those.

Catherine Mealor, Analyst

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

James Mabry, COO

You know, we tried to be conservative. Right now, we're modeling a terminal beta in the mid-50s on interest-bearing deposits.

Catherine Mealor, Analyst

Okay, but that would likely occur more around mid-2024 rather than next quarter.

James Mabry, COO

I think that's a reasonable guess.

Catherine Mealor, Analyst

Okay. All right. Great. That's all I've got. Thank you.

James Mabry, COO

Thank you, Cath.

Operator, Operator

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

Dave Bishop, Analyst

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

James Mabry, COO

Good morning, Dave. This is Jim. At quarter end, we're around $759 million in brokered deposits. In Q4, we've got maturing deposits of around $300 million in brokered, carrying an average rate of like 5.25%, 5.30%. The vast majority of that $750 million will have the ability to pay off. So, we're putting on new deposits that call it for low 4s. We certainly want that income statement benefit, but we really like just having a balance sheet that, at some point in the next few quarters, has virtually no reliance on alternative funding sources.

Dave Bishop, Analyst

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

James Mabry, COO

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

Dave Bishop, Analyst

Got it. And then turning to credit quality, it looks like there was maybe some migration from the loans 90-day past due into non-accrual. Can you talk about the mix shift that occurred from a credit quality front this quarter?

David Meredith, Construction Department Head

Sure. Hi, good morning, Dave. This is David. As a quarter, we didn't have loans that were 90 days past due last quarter that migrated in. Those were just 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, and the other was mortgage property. So it was primarily related to those two properties.

Dave Bishop, Analyst

Got it. Appreciate the color. Thanks.

James Mabry, COO

Thank you, Dave.

Operator, Operator

Thank you. Next question is from Jordan Ghent of Stephens. Please go ahead.

Jordan Ghent, Analyst

Hey, good morning. Guys, how are you doing? I just wanted to ask about capital and kind of what you guys' preferences, 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?

James Mabry, COO

Morning, Jordan. This is Jim. As you noted, our program has just expired, and the Board renewed the repurchase program. As you know, there was no activity in Q3, and I would say our cap 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. Our expectation is that we'll have other opportunities in the coming quarters, and we think that could present some attractive opportunities for the company.

Jordan Ghent, Analyst

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?

James Mabry, COO

Organic growth is certainly preferred, and that's how we've largely grown the company over the last few years. That feels like there's a lot going on in the industry, and we think that could present some opportunities for the company.

Jordan Ghent, Analyst

Perfect. Okay, thank you for taking my questions.

James Mabry, COO

You're welcome.

Operator, Operator

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

Mitchell Waycaster, CEO

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

Operator, Operator

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