Renasant Corp

NYSE:RNST

Earnings Call Transcript 2022-Q1

[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. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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, EVP and CAO]

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, www.renasant.com, 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 CEO]

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, Senior EVP and COO]

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 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 of 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, EVP and CFO]

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 record 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, increased interest income from our securities portfolio helped offset the full quarter of interest expense on our sub debt issuance from November of 2021.

Our core margin, which excludes purchase accounting accretion and interest recoveries was down two basis points from Q4. Although loan yields continue to come under pressure in Q1, we believe we are poised for margin improvement as more on balance sheet liquidity is put to work and as interest rates rise. We are focused on retaining our core funding base and maintaining a low cost of funds, which we believe provides us leverage in this rising rate environment.

As expected, income from our mortgage division declined from Q4 of 2021 from a combination of higher rates and the seasonality of the business. But new business in our wealth management and insurance divisions, provided growth and income in each of these lines of business from the previous quarter.

Non-interest expenses with exclusions were down approximately $700,000 for the quarter. We mentioned in our last earnings call that salaries and benefits in Q4 of 2021 benefited from onetime 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 CEO]

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]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

And the first question will be from Brad Milsaps with Piper Sandler. Please go ahead.

[Brad Milsaps, Piper Sandler]

Hey, good morning. Thanks for taking my questions.

[Mitch Waycaster, President and CEO]

Good morning, Brad.

[Brad Milsaps, Piper Sandler]

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, Senior EVP and COO]

Hey Brad, it's Kevin. So, yes, as we look at our expenses going forward and really 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 and eliminate some space that's no longer being used post-pandemic.

And just on the salaries and employee benefits, 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 -- on a quarterly run rate as we go throughout the rest of 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, Piper Sandler]

Thanks Kevin. That's helpful. And you've before laid out maybe some efficiency targets as you kind of get to the end of 2022 into 2023, can you -- just kind of update us on kind of your thinking around maybe an efficiency ratio towards the end of the year into 2023, I guess, against the backdrop of what should be better interest rate environment? And it looks like what's building better loan growth momentum for you guys?

[Kevin Chapman, Senior EVP and COO]

Yes. So, I think everything that you just mentioned is the culmination of what we laid out. As far as what's going to drive that efficiency ratio working its way down. We still have the target -- short-term target of getting to 60%. And it's going to be largely dependent on what interest rates do and how quickly we get there. But we're still on our -- we're still on our plan related to that.

I will mention, if you look at the efficiency ratio, for Q1, it's going to be heavily impacted by just the return to normal, the rapid return to normal of mortgage. Mortgage efficiency did increase significantly in Q1 upwards of 80%, 90%.

If you exclude mortgage from the total company efficiency ratio, our efficiency ratio saw another percentage or two improvement and is hovering around that 62%, 63%, 64% range if you exclude mortgage.

So, the things that we're doing on expenses, the momentum we see on loan growth, the prospects of future rate increases are all going to play to our advantage in driving and bringing revenue into the efficiency equation and complement all the work that we've done on expenses.

[Brad Milsaps, Piper Sandler]

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

[Mitch Waycaster, President and CEO]

Thank you, Brad.

[Operator]

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

[Catherine Mealor, KBW]

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, Senior EVP and COO]

I think as we look at just 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 -- just looking at the levels of production, the reduction in expenses we saw, I think, are an accurate reflection of what the run rate would be, but that doesn't take into consideration the effort that mortgage is doing to become more efficient in light of some of the revenue pressures.

[Catherine Mealor, KBW]

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, EVP and CFO]

Good morning Catherine, this is Jim.

[Catherine Mealor, KBW]

Good morning.

[Jim Mabry, EVP and CFO]

Good morning. 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, and that's without rate hikes.

And I want to -- so for example, if we look at new and renewed rates, they're almost equal with the core loan yields that we've got today. So, I think as we look into Q2, Q3, and Q4, we feel optimistic about the margin and NII rising again without any further rate cuts -- rate increases, excuse me.

[Catherine Mealor, KBW]

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 50 move in May?

[Jim Mabry, EVP and CFO]

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

[Catherine Mealor, KBW]

And does that -- and the impact of floors?

[Jim Mabry, EVP and CFO]

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, KBW]

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, EVP and CFO]

Let me get back to you on that, Catherine.

[Catherine Mealor, KBW]

Okay. No worries. Thank you so much.

[Operator]

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

[Kevin Fitzsimmons, D.A. Davidson]

Hey good morning guys.

[Mitch Waycaster, President and CEO]

Good morning Kevin.

[Kevin Fitzsimmons, D.A. Davidson]

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.

So, I'm just trying to looking ahead based on what you think about production, what you think about paydowns, payoffs, what -- how you feel about the pace of loan growth going forward because it improved this quarter. I'm just wondering if you guys feel that's sustainable going forward?

[Mitch Waycaster, President and CEO]

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 kind of 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, which kind of plays into what we're seeing in production because the pipeline does reflect what we have experienced.

And it's good to see in our pipeline that we continue to experience good deal flow across the markets and the various business lines, which I'll talk a bit about when I get into production.

So, if we go to production this quarter, we saw $892 million in production. If you adjust for Southeastern Commercial Finance, which came into the company in the quarter, that would bring that -- which you take out about $28 million, as we mentioned, 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 of $820 million.

And if I look back over the prior year, just looking at pipelines in production, I mentioned pipeline. Our production, Q2 of 2021 was up 7%. In Q3 of 2021, it was up 22% and Q4 were up 17%, which was a record for the company and like I said, this quarter, that increased another 5%.

What really is encouraging is that we're seeing this production from across all of our markets and our business lines. And I think equally important is the granularity. I've mentioned this on prior calls, but we continue to be encouraged because if I take that $863 million this prior Q1, about 29% of that was in the group of consumer non-real estate HELOC, 1-4 family residential type product, short duration that we hold on the books. So, about 29% there. Another 22% was in small business and business banking, loans less than $2.5 million and then another 21% in commercial loans greater than $2.5 million.

Just core C&I, owner-occupied commercial real estate type transactions. And then the remaining 28% in our corporate banking group, larger C&I, commercial real estate, ABL, equipment finance, senior housing all to say we continue from a production standpoint, not only geographically, but hitting on many different cylinders relative to our product types and product lines, which comes to -- part of your question was payoffs and we did see that moderate quite a bit in Q1.

Payoffs reduced by $245 million. I think a key point there, that was about $21 million under the 21 average. So, as we noted on the Q4 call, payoffs in Q4 were quite high. We felt like we had some pull forward to Q4. And when I look at the reasons for those payoffs, where we saw a lot of that moderation was in sale of the underlying asset, which you might remember last quarter, was around 60% of total payoffs. This quarter, that reduced to 34%.

So, we saw quite a bit of change there. We continue to expect at some point that would moderate. I would say to the permanent market, those remain fairly high as the permanent market are taking things sooner than expecting -- expected. I think we're basically seeing that across the industry.

So, you would assume that would pull back at some point, but that remained fairly high this quarter. But albeit payoffs moderated production, as I described, continued and continue to increase quite well, which resulted in our net growth of $293 million or about 12% annualized. Again, if you adjust for Southeastern Commercial, about $265 million or annualized at about 11%.

So, we feel good as we look forward relative to our ability to produce given our strong markets talent and various product lines. We entered this year with expectations that loan growth would be in that mid-single-digit and range net, and we continue to feel good about that.

And certainly, as evidenced by the last number of quarters in this quarter, our ability to produce well throughout our geography and our product lines. So, very optimistic on all of those fronts and it's good to see payoffs begin to normalize.

[Kevin Fitzsimmons, D.A. Davidson]

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? Can that get a lot larger and more expansive and/or are there other such opportunities out there that you could be looking at kind of asset-based type lending opportunities?

[Mitch Waycaster, President and CEO]

Yes. So, Kevin, that's a good question related to Southeastern Commercial, certainly, and it's very insightful as far as us continuing to be opportunistic about various business lines that align with our risk appetite and fit within our business model.

And that certainly is the case with Southeastern Commercial asset-based lending company based out of Birmingham, 26-year-old company and people that we've known for quite some time, it brought to the company very good leadership in that area of our company and was very additive to the talent relative to combining that with already very good ABL group, but what they bring to the table. And we have been very pleased with the results that we have seen in a short period of time.

So, certainly, I think it fits well within the company and fits well with our other business lines and fits well within the core and the corporate bank. And like I say, we're seeing that early on.

As far as your question, we certainly remain opportunistic in regards to looking at other business lines, whether in some cases, nonbank-type additions that fit quite well to the business model as well as continuing to add talent.

We were fortunate to add seven additional members as part of that is inclusive of Southeastern Commercial this quarter as well. So, certainly, we will continue to look for those opportunities that closely align with the business model.

[Kevin Fitzsimmons, D.A. Davidson]

Great. Thanks so much Mitch.

[Mitch Waycaster, President and CEO]

Thank you, Kevin.

[Operator]

[Operator Instructions] The next question will be from Jennifer Demba from Truist Securities. Please go ahead.

[Brandon King, Truist Securities]

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

[Mitch Waycaster, President and CEO]

Hey Brandon.

[Brandon King, Truist Securities]

Hey, 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. And if you're anticipating a sort of mix change in what deposits actually come in as interest rates continue to increase and if you're anticipating more of those money market savings accounts as opposed to those demand deposits?

[Jim Mabry, EVP and CFO]

Good morning, Brandon, this is Jim. So, we are hopeful that deposit growth will continue throughout the year. And to your question about that mix, I mean, 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 and when it occurs is hard to predict. But it seems like a reasonable assumption you will see some behavior changes in terms of customers and what that does to deposit mix.

[Brandon King, Truist Securities]

Okay. And as far as those deposits, what are the beta assumptions that you have currently? Has that kind of lowered based off of where you saw deposit betas in the beginning of the year based off of the higher magnitude in Fed rate increases?

[Jim Mabry, EVP and CFO]

So, where do we stand, we haven't changed our deposit beta input recently. It stands at about 43. And I think your question is a good one. I mean, 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, but expect these first couple of rate hikes to not have a lot of influence.

I mean if you look at our cost -- total cost of deposits is around 17 basis points, we see that generally behaving sort of flattish here in the near-term. We haven't seen a lot of exceptions to pricing in the field. So, again, it's an important asset, if you will, of the company. We value core deposit and we're going to protect that deposit base and seek to grow it.

[Brandon King, Truist Securities]

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 and if that's actually included in your plan to have expenses lower this year compared to last year?

[Kevin Chapman, Senior EVP and COO]

Yes. Hey, good morning, it's Kevin. And there is some further -- there will be further branch rationalization efforts that are done. And some of that is included in the comments about the lower expectation on occupancy and equipment. Some of them, we actually are in the process of closing some of them may yet to be identified.

But that's just going to be an ongoing effort as we look at our branches, look at what we need to -- what we've identified is the proper level of scale as well as how we manage and implement technology and other ways to deliver banking services in certain markets that may not require as much brick-and-mortar to be able to meet the needs of those markets. So, that will be an ongoing effort.

And specifically, yes, as we look forward, looking at the profitability of branches, will be one of those initiatives.

[Brandon King, Truist Securities]

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

[Mitch Waycaster, President and CEO]

Thank you, Brandon.

[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 CEO]

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]

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