Renasant Corp

NYSE:RNST

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and welcome to the Renasant Corporation 2023 First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note the event is being recorded.

I'd now like to turn the call over to Kelly Hutchinson, Chief Accounting Officer. Please go ahead.

[Kelly Hutcheson]

Good morning and thank you for joining us for Renasant Corporation's 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 release's 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 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 and your interest in Renasant.

Before Kevin and Jim discuss the results for the first quarter, I would like to reflect on the environment and the outlook for the balance of the year.

The baseline of all decision-making at Renasant Bank is the safe and sound operation of our institution. Only after that box is checked, do we turn to considerations of profitability and growth in that order. Recent events in the banking industry reinforced how essential it is that we continue to approach our operations in this manner.

Although sometimes this approach can weigh on near-term profitability, I believe it helps insulate the company and our shareholders from adversity. We are not immune from our industry pressures, but I believe Renasant is well situated to serve our customers and produce attractive results for shareholders. While the economic outlook is unclear, Renasant has granular core funding, a diverse loan portfolio and strong capital base.

Our goal is to further build upon these balance sheet strengths and to continue pursuing profitability improvement. We have reduced cost in recent periods, but I believe there is more to accomplish. There are also ways for us to enhance revenue growth and our efforts to increase operating leverage. We look forward to the rest of the year.

And now I will turn the call over to Kevin.

[Kevin Chapman]

Thanks, Mitch.

Our first quarter earnings were $46.1 million or $0.82 per diluted share compared to $46.3 million or $0.82 per diluted share in the fourth quarter. Breaking down net interest income, we experienced an increase in loan interest income of over $16 million on a linked quarter basis, driven by another quarter of strong loan growth coupled with nearly a 50-basis point increase to our loan yields. However, while loan yields increased, competitive pressures on deposit pricing impacted both our deposit mix and deposit costs this quarter, leading to a $15.6 million increase in deposit interest expense from the fourth quarter of last year.

Further, in response to the developments in the industry, we carried an excess level of liquidity, which negatively impacted our net interest margin by 2 basis points for the quarter. Our long-term focus on building and maintaining a strong core funding base during our 119-year history positions us well in times of volatility, and we did not experience significant deposit runoff.

In fact, deposits excluding broker deposits increased in February and in March. As we return to a more normal operating environment, we will adjust the level of operating cash accordingly while still focusing heavily on growing core deposits and managing our funding costs in this volatile environment. Our capital markets, treasury solutions, wealth management and insurance lines all continued to deliver solid results.

Our mortgage division had a strong quarter's income from the division increased $3.3 million on a linked-quarter basis. Interest rate lock volume increased $145 million from Q4. Our investment in new talent, coupled with an already strong production team positions us to grow market share when the industry returns to a more normal operating environment.

As we previously announced, effective January 1, we eliminated consumer nonsufficient fund fees and certain consumer overdraft charges. This impacted noninterest income of $1.3 million during the first quarter in line with our expectations. Noninterest expense increased $6.1 million from the fourth quarter. The acquisition of Republic Business Credit, which closed on December 30 of last year, added $2.7 million to our noninterest expense.

We also experienced lower deferred loan origination fees and a seasonal increase in both payroll taxes and company's match of 401(k) contributions. Our efficiency ratio was 61.3% for the quarter. The increase on a linked-quarter basis was driven by the compression in our margin coupled with the increase in our expenses, managing this ratio down continues to be a key focus of ours and all levels of management are aligned in our goal of improving operating leverage.

I will now turn the call over to Jim.

[Jim Mabry]

Thank you, Kevin.

As we walk through the quarter's results, I will reference slides from the earnings deck. Our balance sheet grew nearly $500 million from December 31, we carried excess liquidity at the end of the quarter, which accounted for about $300 million of the growth. And we also experienced another solid quarter of loan growth. Loan growth in the first quarter was $188 million and represents an annualized growth rate of 6.6%.

Referencing Slide 8 and additional slides in the appendix, we have a very diverse loan portfolio with no significant concentrations in loan type or industry and specific to our construction and non-owner occupied commercial real estate portfolios, our exposure to individual sectors is granular and the portfolios are performing well.

Competition for deposits within our markets continued to pick up this quarter. We experienced a decline in noninterest-bearing deposits of $314 million from the fourth quarter, most of which occurred during January, and increased our broker deposit position by $623 million during the quarter. The company's core deposit base and overall liquidity position remains strong. Similar to our loan portfolio, the deposit portfolio is diverse and granular. The average deposit account is $29,000, and we have no material concentrations.

Slide 13 shows the available sources of liquidity. And as you can see, our availability significantly exceeds the balance of uninsured and uncollateralized deposits. All regulatory capital ratios are in excess of required minimums to be considered well capitalized and reflect the strength of our capital position.

Turning our attention to asset quality. We recorded a credit loss provision of $8 million and a recovery of credit losses on unfunded commitments of $1.5 million, which is recognized in noninterest expense. Net charge-offs were $4.7 million in the ACL as a percentage of total loans remained flat at 1.66% and credit quality metrics remained stable and are presented on Page 17 through 20. The increase in nonperforming loans is attributable to 2 relationships, both of which are well collateralized and therefore, we expect no loss.

Net income remained flat at $46 million on a linked-quarter basis, while our pre-provision net revenue declined $8 million.

Profitability was impacted by the compression in our net interest margin and the increase in noninterest expense during the quarter. Core margin, which excludes purchase accounting accretion and interest recoveries, was 3.63%, down 13 basis points from Q4, although loan yields were up 49 basis points, deposit pricing pressures and excess liquidity impacted us more heavily this quarter.

Total cost of funding increased 57 basis points to 1.33% for the quarter. We expect competitive pressures to persist and believe funding costs will continue to increase in coming quarters. Kevin touched on the highlights within noninterest income and expense. We are encouraged by the results of our mortgage division. Although there was an uptick in our overall noninterest expenses this quarter, we remain committed to improving our operating leverage and managing our expense base remains a priority.

And I will now turn the call back over to Mitch.

[Mitch Waycaster, President and Chief Executive Officer]

Thank you, Jim.

The focus at Renasant remains on basic banking principles and the pursuit of efficiency gains. We also believe the company is positioned to consider opportunities that may develop in the quarters ahead.

I will now turn the call over to the operator for Q&A.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from Brad Milsaps with Piper Sandler. You may now go ahead.

[Brad Milsaps, Piper Sandler]

Mitch, thanks for taking my questions. Maybe, Jim, wanted to start with the margin. You guys have had a very low kind of cumulative deposit beta to date. Just kind of curious how you see that picking up from here. And then the brokered deposits that you did put on, can you give us a sense of kind of the rate and duration of those deposits and how that's going to maybe impact that deposit beta going forward?

[Jim Mabry]

Good morning, Brad. This is Jim. Yes. So on beta, I think in Q4, we're using a cycle beta of about $40 million. And we've revised that upward and we're using 45 in our modeling at this point in terms of interest-bearing beta for the cycle. You asked about brokered. I think we were roughly at, call it, $900 million, just below $900 million in brokered at quarter end, and the weighted average maturity of that was about 0.5 year. And I think the average cost of that was about 5%.

[Brad Milsaps, Piper Sandler]

Okay. And Jim, would the plan be to maybe just continue to use the broker channel versus maybe pushing the rest of your deposit base in the interim, is that toward your plan to fund through the broker network versus your own deposit growth? Just kind of want to think about how you plan to fund your growth going forward.

[Jim Mabry]

Yes. I mean, we want to as much as we can, try to grow core deposits. Of course, in this environment, it's really difficult but that's the primary goal. Like, I'm sure for all of all the other banks in the industry that's the goal. But yes, I think we would probably lean towards brokered, but we evaluate, obviously, the cost of broker versus advances. And as we went through particularly the latter half, latter part really of Q1, the cost of that brokered money was less than the cost of advances.

Additionally, what we like about brokered was it did not tie up collateral, not that we're short of collateral, but it was nice, particularly given the events of early March to be mindful of that aspect as well. So I think you're right, we'll probably lean towards brokered to the extent we've got a shortfall in core deposits to fund our loan growth that we're not funding from cash flows from the investment securities or otherwise.

[Brad Milsaps, Piper Sandler]

Okay. Thank you. And then maybe just a final question for Jim or Kevin. The expenses, I think, maybe excluding the unfunded commitment reversal around $109 million, maybe a little bit higher than I was looking for. I know 1Q has a lot of seasonal impact. You also had the acquisition. But just kind of curious how you guys are thinking about expense trajectory from the 1Q run rate as you move through 2023.

[Kevin Chapman]

Hey. Brad. As we look ahead, the run rate in that 107, 108 range, we think, is a good run rate. When we enter Q2, we're going to have [myriad] [ph] increases that aren't in Q1. And then, Q2 is when we expect the increase in the FDIC insurance assessments pre-March losses that the fund incurred, we were all anticipating a fairly large increase in our FDIC insurance assessments and that goes into effect in Q2. So factoring those two into the equation, we think that the 107, 108 range is a good range for the near term on expenses.

[Operator]

Our next question will come from Dave Bishop with D.A. Davidson. You may now go ahead.

[Dave Bishop, D.A. Davidson]

Obviously, rightfully, so a lot of attention on deposit betas within the sector. But you guys saw good growth and a pickup in loan yields this quarter, 568. Just curious, do you have a sense of maybe, is there a sort of a loan beta baked into the projection? And maybe where do you see loans peaking in the quarters after maybe the Fed pauses, if it's in the second or third quarter, you continue to see loan yields lagging higher even after the Fed pauses?

[Jim Mabry]

Dave, this is Jim. So in terms of loan beta for the cycle, we see that in the mid-to-upper 40s from here. So I can tell you that if it's helpful. If you look at new and renewed loan rates or yields for Q1, they were 716 for production in Q1 that's excluding RBC. RBC does have an impact on that with RBC, it was 744. And for March, that same 2 data points would be 747 ex RBC and 810 with RBC.

[Dave Bishop, D.A. Davidson]

Got it. Is your sense that the natural churn will continue to sort of lag upward even if the fed pauses in, say, second or third quarter, you'll continue to see some of that repricing benefit into the latter half of the year to '24. I think it's a pretty quick peek and maybe turn around.

[Jim Mabry]

I think it will continue. I mean the funding costs are going to weigh on that. And the gains we have on loan yields are going to be muted because of funding pressures that we're going to face in terms of prices we're paying on whether it's brokered or advances or core deposits.

[Dave Bishop, D.A. Davidson]

Got it. And then, sticking with the liquidity position. I think you said there was maybe $300 million of excess liquidity in the quarter, where do you see that trending over the near term?

[James Mabry]

I would say over the near and intermediate term, that will trend down. Clearly, we wanted to keep some excess liquidity on the balance sheet at quarter end. But depending upon the environment and how things behave in the banking industry. I would suspect that gradually trends down over the course of the year.

[Dave Bishop, D.A. Davidson]

Got it. And then just one housekeeping item. I thought I saw a tick up in 90 days past due. Curious if that was administrative paperwork type end of year, end of quarter delays in terms of financials or such. But looks like those ticked up to about $18.6 million from like $300,000, just any color there.

[David Meredith]

This is David. Jim mentioned in the opening comments, there were 2 credits that rolled into that 90-day past due bucket. Those are credits we had identified, and they were in our previous past due numbers. We had them as criticized assets. So we have noted there were loans on both of those, we feel very strongly that we're in a great collateral position and anticipate no loss on those. So those rolled into our NPLs. We expect to work out of those normal course of business without any charge-offs.

[Jim Mabry]

As you'll note, you can see the 30 to 89-day number, past due numbers actually bumped down a little bit from 51 to 43. We've seen were relatively flat in our criticized assets. They went down a few basis points quarter-over-quarter. So absent those couple of loans, our asset quality held pretty strong in the first quarter.

[Operator]

Our next question will come from Catherine Mealor with KBW. You may now go ahead.

[Catherine Mealor, KBW]

I wanted to ask about outlook for loan growth, just given the current environment. Are you seeing a pullback in production and pipeline? Or do you still think we can kind of keep a low to mid-single-digit kind of growth rate this year?

[Mitch Waycaster, President and Chief Executive Officer]

Yes. Catherine, the moderation that we've seen the last actually 2 quarters continued this quarter. We do feel very good about our ability to continue to produce. And just, I guess, to drill a little more there, the pipeline going into the quarter was $163 million that had moderated from $200 million in the prior quarter. But the good part is, like I say, we still feel good about production. We see that spread across the regions, the business lines, each continue to contribute in a meaningful way. And as I've mentioned in prior quarters, in addition to that geographic distribution is just our loan types and size of credits, the granularity in our loan book, Jim mentioned this in the opening comments, it looks a lot like our deposit side of the balance sheet. And we're very pleased with that.

As I look at this quarter's production of $415 million, about 36% of that production was still in that consumer 1 to 4 residential. And then, when you get into the small business and commercial, small business and business banking was about 13%, the commercial book, and that would be loans $2.5 million and greater owner-occupied C&I, and we're seeing good production in C&I, very pleased with the Southeast business in Republic. Both of those partnerships coming from last year have been very productive, along with some of our other C&I lines as well as some of the CRE business, even though that's pulled back some, certainly. But that represented another 24%.

And then when you get into corporate banking, some larger C&I, commercial real estate type credits rounded out to 27%. So you see, again, very granular and then distributed across a number of business lines.

So we continue to hit on many different cylinders and produce, like, say, granular good core relationship-driven type loan growth, and we expect that to continue and relative to your question kind of where we see that coming in, I would expect Q2 to be somewhat reflective of Q1 relative to net.

Catherine, and I'll add another contributor to that net is payoffs as we've seen production moderate. So as well, we continue to see payoffs moderate as well, which contributes to the net result.

[Catherine Mealor, KBW]

Great. And then circling back, Jim, to the margin conversation. You gave your expectations for interest-bearing deposit costs. How are you thinking about the mix shift out of noninterest-bearing and where that may land as a percentage of deposits at the end of the year?

[Jim Mabry]

Good morning, Catherine. Well, of course, we don't know the answer to that. But I would say this, that migration is going to continue. I think we peaked at roughly 35% or 36% NIB and we're a quarter in here. I think we're right around $31 million. I don't know where it ends up at the end of the year, but a reasonable expectation would probably be something in the upper 20s.

[Catherine Mealor, KBW]

Great. And as we mix shift that you think more of the growth it flows into CDs? Or how do you think about the mix shift within the categories within deposits?

[Jim Mabry]

We would hope that what we can do is hold total deposits flat. So we're hoping that NIB migration turns into, we get that to money markets or CDs.

[Catherine Mealor, KBW]

Great. Very helpful. All right. Thank you. Actually let me ask one more on the margin. So just big picture on the margin. I don't think you gave, Jim, get your thoughts on just, how you're [indiscernible] margins still have to forecast. But maybe just for the next quarter, how you're thinking about kind of what level of compression we could see again in the second quarter.

[Jim Mabry]

I would say that I guess I should start with, two, Catherine, that I mean at this point in our modeling, we're using a 25-basis point increase in May and then flat thereafter in terms of Fed moves. And on the margin side, I would expect something roughly similar to what we saw in Q1 in terms of impact to margin. I would point out that Q1, particularly the last month of Q1, that margin was weighed down by the excess liquidity that we carried. But as we look out for the balance of the year. So Q2 definitely see some compression in the margin close to maybe not to the extent in Q1, but maybe close to it. And then, the second half of the year, better performance in terms of what kind of declines we would see in the margin.

But I do think that given our rate outlook, we think it's reasonable to see some margin declines for the balance of the year. Again, not as meaningful as they would be in the first half, but we still see some compression in the margin in the second half of the year.

[Operator]

Our next question will come from Kevin Fitzsimmons with D.A. Davidson. You may now go ahead.

[Unidentified Analyst]

It's actually Christian on for Kevin. So just a quick one for me. I noticed that you closed a few offices, particularly with loan production and mortgage. Meanwhile, your mortgage income was up significantly compared to last quarter. Just wanted to know if there was something that you saw in those areas than of those office closures? Or are you doing that more related to cost savings?

[Kevin Chapman]

Hey, Christian, it's a couple of things. It's a little bit of both. It was driven by a look at our real estate and how we could better manage the noninterest expense related to all of our operations. But what we saw was the opportunity in many mortgage markets was to consolidate those mortgage personnel into the branch. We typically had a close -- branch that was in close proximity. And so it was to maximize performance as well as minimize the expense and related to carrying occupancy and equipment, maybe duplicate occupancy and equipment in the same markets.

As it relates to mortgage, not only on the expense side, the mortgage group has cut out a significant amount of expense preparing itself when rates more normalize or if there's a potential in the future that rates may fall, we feel very good about how we're positioned from the costs we've taken out, some of the fixed costs that maybe we built up in better times. But also, we've hired -- we've been very active and proactive in hiring mortgage personnel mortgage producers that will help drive higher level of production as rates maybe tick back down or moderate and stay at levels that we see right now, we see that pipeline holding and possibly growing a little bit.

[Operator]

[Operator Instructions] Our next question will come from Michael Rose with Raymond James. You may now go ahead.

[Michael Rose, Raymond James]

Just a few follow-ups here. I understand the addition of the broker deposits. Can you just remind us. I'm sorry if I missed it, but what the tenor of those is and what the expectation would be just for broker deposits in general. I mean, would you still expect to have some, assuming the kind of the crisis that we've been in kind of begins to abate here in the next couple of months. Thanks.

[Jim Mabry]

Michael, this is Jim. So they stand roughly today at about $850 million at quarter end. And the cost of those brokered monies is about 5%, and the average maturity is about half a year. Going forward, I mean a lot is going to depend upon what we're able to do on the core funding side. And obviously, Mitch talked about loan growth. We continue to have no interest in purchasing investment securities. So we'll benefit from that roll off of about $25 million a month. So where that takes us in terms of that broker deposit balance, I don't know. But certainly, we're going to evaluate that versus our other opportunities to fund the balance sheet, be that advances or things that we can do in terms of specials on CDs and money markets. I don't know exactly where it ends up sort of hard to predict, but we're certainly not adverse to accessing that source of funding.

[Michael Rose, Raymond James]

Perfect. Thanks for that. Maybe just switching back to the margin. If you can just kind of walk us through kind of the dynamics that have led to the decline in the gain on sale margin q-on-q. I think from other banks that have seen reported in mix, I mean some up, some down. There's obviously various reasons for that, but just wanted to get some color on you guys specifically. And then, obviously, understanding that the backdrop is still fairly competitive. Any expectations for that gain on sale margin as we move over the next couple of quarters and when you think the mortgage company can get back to profitability? Thanks.

[Kevin Chapman]

Yes. So Michael, on that, would first start off and just let you know that our mortgage group was profitable in Q1. Their pretax income pushed close to $1 million for the quarter. So they had a really strong quarter in what continues to be a very volatile time in mortgage.

On the gain on sale, I think maybe we're a little bit different in peers, I'm not sure exactly which peers or how they're calculating it. Our gain on sale margin may be a little bit influenced this quarter by our mix of retail versus wholesale. But it was a little bit, our production was about 60:40, 60% retail, 40% wholesale, and that wholesale does come at a little bit thinner margin than maybe the retail production. And I think that's what causes a little bit of weight or maybe some volatility in our margin compared to some of our peers.

[Operator]

It appears there are no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Mitch Waycaster for any closing remarks.

[Mitch Waycaster, President and Chief Executive Officer]

Thank you, Anthony, and thank you to all of you who joined the call this morning, and we welcome your interest, and we plan to participate in the Gulf South Conference, May 8 and 9th.

[Operator]

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