Renasant Corp

NYSE:RNST

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, afternoon, evening, and welcome to the Renasant Corporation 2022 Second Quarter Earnings Conference Call and Webcast. [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 & CAO]

Good morning, and thank you for joining us for Renasant Corporation's 2022 Second 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 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.

[Mitchell Waycaster, President, CEO & Director]

Thank you, Kelly. Good morning, everyone. We appreciate you joining the call today. Before Kevin and Jim discuss the results for the second quarter, I will offer observations on the first half and the remainder of 2022. Starting with loan growth. The first half has brought solid increases throughout the bank.

We anticipate additional growth but likely at a more moderate pace for the balance of the year. The focus on expense control, plus the benefit of higher rates has benefited profitability, and we anticipate further improvement in the second half of '22.

Importantly, the balance sheet continues to reflect good liquidity, asset quality and capital levels. we remain focused on core deposits as our primary funding source, and this has contributed to our first half success. I will now turn the call over to Kevin.

[Kevin Chapman, Senior EVP & COO]

Thanks, Mitch. Our second quarter earnings were $39.7 million or $0.71 per diluted share compared to $33.5 million or $0.60 per diluted share in the first quarter. On a year-to-date basis, our diluted earnings per share were $1.30 compared to $1.75 in 2021.

On the banking side, another quarter of strong loan production, coupled with the Fed rate increases drove an increase in interest income of over $13 million. We remain diligent in our deposit pricing, allowing that additional income to flow to the bottom line. Our capital markets, treasury solutions and other specialty lending lines of business produced positive results for the quarter.

Our mortgage division was stood another quarter of volatility as the industry abruptly returns to a more normal operating environment. Despite the headwinds affecting volumes and margins in the industry, our mortgage team remained profitable for the quarter. Our continued focus on expense discipline resulted in a slight increase in expenses with exclusions.

We are subject to the same inflationary pressures on expenses, particularly in wages. Despite these pressures, we remain committed to continued expense discipline in future quarters. Although there may be an increase in the third quarter due to the full realization of our minimum wage increase, we still anticipate total non-interest expense for the full year of '22 to be less than 21%.

With the revenue lift and expense discipline, we are seeing real operating leverage in our efficiency ratio. Our adjusted efficiency ratio, which reflects our run rate, excluding non-recurring items, declined to 62%, a decrease of approximately 5 percentage points on a linked-quarter basis. I will now turn the call over to Jim.

[James Mabry, Senior EVP & CFO]

Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. We continue to invest some of our excess liquidity into higher earning assets. Loan growth was strong again in the second quarter, with total loans increasing $290 million from Q1 both production and advances on existing lines increased quarter-over-quarter, driving net loan growth in nearly all categories.

We also invested excess cash in our securities portfolio, increasing the portfolio just over $200 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 $76 million. All of our regulatory capital ratios are in excess of required minimums to be considered well capitalized and show the strength of our capital position.

We recorded a credit provision of $2 million and net charge-offs of $2.3 million. The ACL as a percentage of total loans declined from 1.61% to 1.57%. We recorded a provision for unfunded commitments of $450,000, 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 steady and net charge-offs were nominal. Net interest income increased $13.9 million quarter-over-quarter. Our core margin, which excludes purchase accounting accretion and income recognized in PPP loans and interest recoveries was up 29 basis points from Q1.

We mentioned last quarter that our balance sheet was well positioned to take advantage of the rising rate environment. We deployed some of our excess liquidity into higher earning assets, and we remain disciplined in our deposit pricing efforts, which, together with the Fed's rate increases drove the meaningful expansion of the margin quarter-over-quarter.

As expected, income from our mortgage division declined from Q1 from a combination of higher rates and lower volumes, but solid results in our wealth management and insurance divisions as well as growth in our SBA capital markets and treasury solution lines of business helped offset the impact for mortgage.

Non-interest expenses with exclusions were up approximately $2.2 million for the quarter. Salaries and benefits increased $3.3 million, resulting from our annual merit increases going into effect in April as well as raising our minimum wage for non-exempt employees. Our discipline is evidenced in a decrease in all other non-interest expense line items. I will now turn the call back over to Mitch.

[Mitchell Waycaster, President, CEO & Director]

Thank you, Jim. I am proud of our employees and the contributions they make every day. We seek to provide exceptional customer service and go to market as 1 team and 1 bank. I look forward to the second half of the year. I will now turn the call over to the operator for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from Will Jones with KBW.

[William Jones, KBW]

I just wanted to start on deposit costs. It was really impressive to see you guys reduce funding costs quarter-over-quarter just in line with the rate backdrop. Just wanted to gauge how you guys are thinking about deposit betas as we move into the next quarter and just the back half of 2022? I know in the likelihood that we may get [indiscernible] rate hike this afternoon. Just curious if you have any levers still on the deposit side to keep the betas more contained through this cycle?

[James Mabry, Senior EVP & CFO]

This is Jim Mabry. And I guess what I'd start is as it relates to deposits is a couple of things. We've sort of made deposits a real focus here. And as you know, we've taken noninterest-bearing deposits up about 10 percentage points over the last 3 or 4 years.

And so we've really worked on the mix and attracting and building a good core funding base. And I think that was evident in the quarter. The other thing I'd say about our deposit base is very granular. On the consumer side, the average deposit account is less than $20,000. And so I think the mix as well as the granularity of our deposits is going to help us. And again, we saw that in Q2.

I don't think that's repeatable in Q3. I think we went into this environment with probably a little longer duration than some in our deposit funding. And so we had some more room to come down, and that's why you saw it come down a touch in Q2. But I think as we look at Q3 and 4, I don't think we're going to repeat that trend, and I would expect those costs to go up.

[William Jones, KBW]

Got it. That makes sense. So switching over to loan growth. I know you guys are very strong together 2 really nice quarters of double-digit growth. I know some of that is coming from portfolio in more of your resi book, just rates and yields get a little more attractive here.

I hear you that you think growth may tick back down in the second half of the year. But how much more runway do you feel like you have to grow that mortgage portfolio?

[Mitchell Waycaster, President, CEO & Director]

Well, maybe a good place to start with that thought. And as I referenced in remarks, we could see that moderation. But I would begin here, just looking at our pipeline, we're starting this quarter with $297 million.

That compares to $290 million the quarter before. So actually, we've seen a little increase in our pipeline. And of course, last quarter, that resulted in production of $877 million, which was above the prior quarter at $863 million on a core basis, if you adjust for Southeast Commercial that came in, in the first quarter.

And just thinking about going forward and thinking about the current pipeline, our current pipeline is also reflective of the geographic kind of distribution of where we saw that production in the prior quarter. And we see all of our regions in our various business lines contributing.

And just back to your question, also the granularity, you mentioned real estate 1 to 4. If I take that production, I did this last quarter, and I think this speaks to the strength of our ability to continue to produce. About 27% of production this quarter was in the what I would call consumer non-real estate HELOCs, 1- to 4-type portfolio credits that historically we've offered.

We think it's a core product, but that was about 27% of that production. Another 20% was in small business and business banking, loans under $2.5 million. And then another 27% in Commercial loans, 2.5 and greater that really are made up with C&I, owner-occupied commercial real estate type credits.

And then the other 26% from our corporate banking activities and our specialty lending groups, larger C&I, commercial real estate, ABL, equipment finance, senior housing, SBA. So you can see we're hitting on a lot of different cylinders. And we've seen that consistently -- consistency over time. Certainly, we've sent it in the last 2 quarters. we've had moderation of payoffs, and we expect that to continue.

So we feel good about our ability to continue to produce net growth in the coming quarter. It's hard to predict that moderation in the face, maybe of some of the economic headwinds. But certainly, I think our ability speaks to the markets that we do business in, the resiliency that we're seeing and to the talent in the company.

[William Jones, KBW]

All right. Great. And just last for me, maybe more household. I noticed that the accretable yield ticked up a little bit quarter-over-quarter as well as some interest on problem loans. Was there anything onetime going on in there that we should just be thinking about? And how should we think about a normalized run rate for accretable yield moving forward?

[James Mabry, Senior EVP & CFO]

Yes. The -- what you mentioned, Will, this is Jim again, was the result of one large payoff. And I think other than that, there was nothing that I would point out that was non-recurring or unusual in interest income for the quarter.

[Operator]

Our next question comes from Michael Rose with Raymond James.

[Michael Rose, Raymond James & Associates]

I got on the call a little bit late, but I just wanted to talk about the mortgage business. Not surprising that income down a little bit. I think last quarter, you talked about the efficiency ratio being in the -- I think the high 80s to kind of low 90s, obviously, gain on sale margin dropped this quarter.

Any color around kind of the efficiency and then what the outlook is for the business as we move into the back half of the year, just given what we're seeing with purchased apps and declining volumes. Obviously, you have better markets than the rest of the country in a lot of places, but just wanted to get some color there.

[Kevin Chapman, Senior EVP & COO]

Michael, it's Kevin. Yes. So on mortgage, everything you mentioned, the backdrop you gave about the margins, the volume. All of that was evident in Q2 and to specifically answer the question on efficiency, mortgages efficiency ratio was about 85% in Q2, which has held kind of steady compared to Q1.

And honestly, we think it's at that level or it ticks up a little bit as we get into Q3. We -- as we mentioned, we are still profitable and expect to be profitable. What we -- our mortgage team takes pride in the fact that in the 19, 20 years that they've been involved with our company, knowing that we've been in mortgage much longer than that. I'm just talking about the current team. They take pride in the fact that they remain profitable.

They understand the ebbs and flows. And it's just a tough environment right now. We are expecting and projecting to be profitable for Q3. And that includes cost-cutting efforts within mortgage. You mentioned everything on the revenue side. But we have positioned our mortgage company to have a large percentage, a vast, large percentage of their expenses to be variable, and they float with revenue.

And so that allows us to project and have confidence about the ability to remain profitable. But as we look at Q3, we expect volumes to continue to be tight. We expect margins to be tight, and we'll then kind of see how Q3 plays out to make a forecast about Q4 just given all the volatility that's happening.

[Michael Rose, Raymond James & Associates]

Great. Thanks for the color. Maybe just as a separate question. Can you just talk about some of the margin dynamics as we think about moving forward. Obviously, some growth in the balance sheet earning asset mix shift pretty positive, but cash level is down a little bit. Can you just give us an update on your rate sensitivity from here?

[James Mabry, Senior EVP & CFO]

This is Jim. I would say the outlook is positive. If we assume -- which obviously is not likely to be the case, but if we assume no further rate hikes, I think we're positioned to have a nice -- a meaningful expansion in the margin in Q3.

And it's some of the things you said. It's the mix. I mean -- of course, our deposit costs behaved really well in Q2. And while I don't expect, it will be quite the same in Q3. I do think because of the strength of our core funding that those costs will behave well, relatively well in Q3 and loan yields picked up nicely in Q2. So I think all those things point to a meaningful improvement in the margin in Q3.

[Operator]

Our next question comes from Kevin Fitzsimmons with D.A. Davidson.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

Just wanted to touch on credit. So the ACL ratio contracted pretty modestly to 1.57% and that's still a pretty healthy ratio relative to peers, but you guys have alluded to, it's a pretty uncertain outlook out there. Do you think -- when you think about provisioning and that being tied to loan growth, do you -- would it be reasonable to expect that ratio to moderate or to migrate down modestly? Or do you expect to kind of hold it here until you get a little more certainty?

[David Meredith, Senior EVP & Chief Credit Officer]

Kevin, this is Dave Meredith. I think what you said towards the latter part is kind of what we had forecasted over the past few quarters that will kind of pull that number steady. We'll see what potential impact may come out of economic changes.

We haven't seen anything dependent to this point, let loan growth continue to use the existing provision for loan growth. And so I think your point is we'll kind of hold it flat and see if something changes in the economy.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

Okay. Great. And then just following up on Michael's question on some of the net interest income dynamics. Is it fair to say average earning assets were fairly flat linked quarter. Is that pretty much what to expect going forward that it's a little bit of a flip flop? In recent years, we saw net interest income driven more by the balance sheet where the margin hit, and now it's kind of the opposite and because of deposits coming in and potential outflow there and the use of cash, maybe that average earning asset balance stays flat, but your margin keeps going up, and in turn, still have the ability to drive NII higher?

[James Mabry, Senior EVP & CFO]

Kevin, this is Jim. I think that's 100% accurate. I mean it feels like it's more rate-driven and volume-driven. And our expectation is that we don't see a meaningful increase in the size of the balance sheet at this point in the near-term.

So I think that's right. It's going to be -- we're going to -- and that margin is going to benefit more from rate moves than the size of the balance sheet growing.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

And Jim, you pointed to being positioned for a pretty meaningful margin expansion in the third quarter. Are you able to share with us what -- if you have it handy what your margin was in the month of June?

[James Mabry, Senior EVP & CFO]

Yes. The margin in the month of June on a core basis was 3.12%, Kevin, and that was up from 3.03% in May. So each -- obviously, each month in the second quarter showed nice improvement in the margin.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

Okay. And one last one for me is, with some large mergers having occurred or in process of occurring in your footprint generally? I know there's a real focus on efficiency, but you guys have also had a strategy in recent years of looking for new hires. Is that something that is active? Or is that something more kind of not very active given the focus on keeping costs stable?

[James Mabry, Senior EVP & CFO]

Yes. Kevin, good question. And that's something we consistently focus on just continuing to -- as we continue to see opportunities to add talent to an already strong team. And we actually had that opportunity this past quarter as we added 4 relationship managers in the markets of Memphis, Atlanta, Mobile, Huntsville that brings us to 11 actually total this year. So we continue to see those opportunities, and we'll continue to be opportunistic there.

[Kevin Chapman, Senior EVP & COO]

Kevin, I may just add just on the efficiency. I'm glad you brought up this question because we -- what we're not just simply cutting expenses to drive efficiency. What we're doing is reallocating resources to maximize revenue. And so absolutely, we are always open to hiring talent, and we're using the opportunities in the market to do that.

But it's about resource allocation. We are always -- as we evaluate hires, as we evaluate opportunities, we look for the returns that we get off of it. And so if there is -- if there's a compelling reason and economically, it makes sense, absolutely, we will be hiring.

At the same time on efficiency, accountability is a big theme of efficiency. So said another way, we have little tolerance for unproductivity of existing ventures operations, staffing. So that works on both sides. We are always open to hiring talent. At the same time, through accountabilities, we have less tolerance for unproductivity. And that's what's driving the improvement in the efficiency and the flattening of expenses.

[Mitchell Waycaster, President, CEO & Director]

And Kevin, I would just add to Kevin's comments, if you just think about the $877 million in production we saw this quarter, about 35% of that was driven by relationship managers that has joined the company in the last 3 years. Of course, flip side of that, we're seeing good production out of our current team, but it's really -- as we grow the company, as we are very focused on expense and our expense base, which you can see evident of what's been taken out of the company to Kevin's point, of the last number of quarters.

Also, we're equally as pointed on driving revenue and growing our markets. And of course, that's led with talent. So while we've had the opportunity actually over the last 3 years to add something over 100, you can also see in that the accountability relative to the production that we're seeing from all those in that segment. And of course, here, I'm referring to relationship managers relative to loan production.

[Operator]

Our next question comes from Dave Bishop with Hovde Group.

[David Bishop, Hovde Group]

Staying on the topic of funding this year. Obviously, this quarter, you took down some of the excess cash and liquidity, I think sitting on maybe $1 billion or so. Where do you see that -- is there a floor -- an eventual floor, obviously, there is, but just curious your comfort level bringing that down even further to fund loan growth.

[James Mabry, Senior EVP & CFO]

Dave, this is Jim. So I'd say a couple of things. Yes, we -- the $1 billion, we would be comfortable with that going down to somewhere near $0.5 billion. I'd say, $450 million to $500 million would be sort of where our floor would be.

And then additionally, we've got $3 billion in securities, as you know, and that percent as -- or that total as a percent of total assets or however you want to look at would be high for us historically like for a lot of people. And I think there's room there to fund that loan growth if we don't get to the deposit growth that we hoped for. So both of those are levers that we feel like we can pull to fund incremental loan growth from here.

[David Bishop, Hovde Group]

Got it. And then turning back to the loan growth discussion. Just curious if you have those numbers handy, maybe what the weighted average yield on new production was this quarter and just what you're seeing just in terms of the ability to get compensated for rising rates within the market.

[James Mabry, Senior EVP & CFO]

Yes. So we've seen a nice improvement in terms of new and renewed rates. And if we look at core loan yields for the month in the quarter. Of course, they improved in every month. And in June, they were right around 4.07% core loan yield. And so the trends there are good and that contrasts mean we're a good 30 or 40 basis points above where we were this time a quarter ago.

[Operator]

[Operator Instructions]. Our next question comes from Matt Olney with Stephens Inc.

[Jordan Ghent, Stephens Inc.]

This is actually Jordan on for Matt. I had a quick question on the loan growth. How much of that loan growth in 2Q was more a function of slower paydowns versus higher originations?

[Kevin Chapman, Senior EVP & COO]

Yes. So Matt, actually payoffs ticked up slightly, but only slightly. I think the -- they were very close to the quarter prior. We actually saw -- this past quarter, total paydowns was $7.18. That compares to $7.04 the prior quarter. I think the important thing here, and I was alluding to it earlier, if you look at the average, when we get into bars selling the underlying asset, which weighed on net last year, that's down from last year average, somewhere around 56%. That's down closer to 40% this year.

Another thing that we saw are those that are lost to term and rate we saw that reduce from -- it was roughly 24% in the first quarter. That's down to closer to 10%. So we're -- really, it's driven by continued and consistent improvement in production, commitments continue to grow.

Earlier, I went through the various both geography and the loan types throughout the company. Everything from our consumer small business commercial and our commercial specialty. We just continue to see continued strong production that is generated from some very good markets and good talent within the company.

So it's more driven by our ability to produce and to do that throughout the company.

[Operator]

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

[Mitchell Waycaster, President, CEO & Director]

Well, thank you, and thank you to those who joined the call today. We appreciate the interest and look forward to speaking again soon.

[Operator]

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