Renasant Corp
NYSE:RNST
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Renasant Corp
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Good morning, and welcome to the Renasant Corporation 2022 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded.
I would now like to turn the conference over to Kelly Hutcheson, Chief Accounting Officer of Renasant Corporation. Please go ahead.
Good morning and thank you for joining us for Renasant Corporation's 2022 Third 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 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.
Thank you, Kelly. Good morning everyone. We appreciate you joining the call today. Before Kevin and Jim discuss the results for the third quarter, I will comment on the results and the outlook for the balance of the year. The first nine months have seen higher levels of loan growth and improved profitability.
While loan production activity has slowed, so have payoffs. This has resulted in a continuation of solid loan growth through the quarter. The benefits of loan growth, margin expansion and expense control all contributed to the stronger financial results.
Renasant's balance sheet remains sound with a solid base of core deposits, continued good asset quality and strong capital levels.
I will now turn the call over to Kevin.
Thanks, Mitch. Our third-quarter earnings were $46.6 million or $0.83 per diluted share compared to $39.7 million or $0.71 per diluted share for the second quarter of 2022.
On a year-to-date basis, our diluted earnings per share were $2.13 compared to $2.47 in 2021. On the banking side, another quarter of strong loan growth, coupled with the Fed rate increases drove an increase in interest income of over $19 million on a linked-quarter basis.
Interest expense was up quarter-over-quarter but the increase was isolated to certain public fund deposits and our trust-preferred securities would pay a variable rate of interest.
We are not immune to the competitive pressures on deposit pricing but our strong funding base positions us to manage our deposit costs as we expect funding pressures to escalate in future quarters.
Our capital markets, treasury solutions and insurance lines of businesses produced positive results for the quarter. We are still experiencing volatility in our mortgage division as production levels have quickly returned to more normal levels, we have prudently managed our expenses in this division.
Nonetheless, while overall headcount is down for the year, we are still investing in strong production talent and expect our mortgage team to continue to be an important part of our business model.
Non-interest expense increased modestly quarter-over-quarter in light of the broader inflationary pressures on expenses operational efficiency remains a focus. With the revenue lift from margin expansion, coupled with our expense discipline, our adjusted efficiency ratio, which excludes non-recurring income and expense items, improved nearly four percentage points from the second quarter and was 58.8%, which is below our stated goal of achieving an efficiency ratio below 60%. We still anticipate total non-interest expense for the full year 2022 to be less than 2021, despite these inflationary pressures.
I will now turn the call over to Jim.
Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. We continue to invest excess liquidity into higher earning assets, which benefited net income and profitability metrics. Loan growth was strong again in the third quarter, with total loans increasing over $500 million from the second quarter.
As Mitch mentioned, production was down quarter-over-quarter, but still strong. This, coupled with a slowdown in payoffs resulted in net loan growth in nearly all categories.
We slowed down purchases in our investment portfolio and reinvested cash flows into loans. The continued increase in interest rates had a negative impact on the value of our portfolio, resulting in a fair market value adjustment of $85.3 million.
Although we experienced an overall decline in deposits, we grew non-interest-bearing deposits $86 million, and those deposits now represent 36% of our total deposits. Core deposits and overall liquidity position remains strong.
Our loan-to-deposit ratio of 79% provides us flexibility. All regulatory capital ratios are in excess of required minimums to be considered well-capitalized and share the strength of our capital position.
During the quarter, we transferred $883 million in securities to the held-to-maturity category as we have no intent to sell these securities. A benefit of this transfer helped preserve book value and our tangible common equity ratio declined only eight basis points from the second quarter.
We recorded a credit provision of $9.8 million and net charge-offs of $1.6 million. The ACL as a percentage of total loans was flat quarter-over-quarter at 1.57%. Our model did not produce a need for additional provision for unfunded commitments.
Credit quality metrics are shown on pages 14 through 16, past dues, criticized and nonperforming asset measures all remained relatively steady and net charge-offs were nominal.
Net interest income increased $12.8 million quarter-over-quarter. Our core margin, which excludes purchase accounting accretion, income recognized on PPP loans, and interest recoveries was 3.5%, up 50 basis points from Q2. The change in our mix of earning assets positioned us to take advantage of the Fed's rate increases.
Furthermore, we remain disciplined in our deposit pricing efforts, experiencing only a nominal increase to our cost of deposits, which helped drive the meaningful expansion of margin quarter-over-quarter. We expect to experience competitive pressures around deposit pricing and believe funding cost will increase in the coming quarters.
We sold a portion of our mortgage servicing rights portfolio for a $3 million gain. The carrying value at the time of the sale was $15.4 million and represented $1.7 billion in unpaid principal amount. Excluding the gain on sale, our mortgage banking division was still profitable.
Further, solid results in our wealth management and insurance divisions as well as growth in our Capital Markets and Treasury Solutions lines of business helped to drive the increase in non-interest income from the second quarter.
Non-interest expense with exclusions were up approximately $5.1 million for the quarter. We realized a full quarter's impact from the increase in minimum wage adjustments, and we invested in additional revenue production talent. We believe that additional operating efficiency gains are possible in the near-term, although expenses may increase modestly in the fourth quarter given inflationary pressures.
I will now turn the call back over to Mitch.
Thank you, Jim. We look forward to the balance of the year and are positioned for a successful fourth quarter. Our team remains focused on providing exceptional customer service and growing relationships as one team going to market as one bank.
Before we begin Q&A this morning, I would like to take a moment to convey on behalf of the Renasant family that we are deeply saddened by the passing of Lisa Ferris, Vice President of Loomis Sayles. Lisa was a valued professional, a friend to many on this call, an outstanding mother and spouse. We will miss her greatly. Our thoughts and prayers are with her family.
I will now turn the call over to the operator for Q&A.
We will now begin the question-and-answer session. [Operator Instructions]
The first question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.
Hey good morning everyone. Hope you are all well.
Good morning Kevin.
I appreciate the comments on funding costs likely going up, and I think that's pretty common with what we've been hearing. But it was much stronger -- much stronger margin expansion, at least than I was expecting this quarter. So, with the comment about funding costs going higher and I would assume a deposit beta accelerating, maybe you can help us how to think of the margin trajectory from here.
I would -- not to put words in your mouth, but I would assume we're not going to see this kind of expansion linked quarter going forward, but maybe diminishing and anything you can give us in terms of next few quarters and maybe where the margin and yield and cost of deposits stood for the month of September, any of that would be helpful. Thanks.
Good morning Kevin, this is Jim. So, a couple of things that hopefully will be helpful to you as you think about margin and its trajectory. I'd start with, I think you're right about Q4 and beyond. I mean we saw obviously a really nice margin expansion in Q3. We think we're poised to have additional margin expansion in Q4, although not to the same extent. And it's exactly what you referenced. It's just -- our deposits have behaved really well.
We're really pleased with the way our deposit base has performed. I think our beta in the third quarter was around 7%. And we think, again, that will go up. We've talked before about how we're modeling roughly a mid-30s beta on interest-bearing deposits for the cycle. I guess a couple of data points that I'll throw out, Kevin, that might be helpful.
So, if we look at new and renewed loan yields for the quarter, it was roughly 5.25% for September, it was $582 million. On the margin front, core margin, as you know, as you referenced, was $350 million for the quarter. For September only, it was $367 million. So, hopefully, that helps as you think about it. But I think, again, we're poised for some nice growth in that margin in Q4.
And I would -- I think it's a reasonable assumption as we sit here today, given what we know today, that margin for us will plateau sometime in the, call it, the early part of 2023 and then plateau from there. So, we'll see how it plays out. But again, I feel like we're poised for some nice growth or expansion in that margin in Q4.
Hey Jim, just wanted to clarify that mid-30s deposit beta for the cycle, is that a total deposit beta? Is that just interest-bearing? And how does that compare with where you guys were at last cycle?
It's interest-bearing, and it's very comparable to where we were last cycle.
Okay. And maybe just a follow-on on credit. On one hand, you kept the ACL ratio stable. You had strong loan growth. So -- and I think you might have mentioned the economic forecast. But at the same time, you have a very strong reserve ratio relative to peers.
So, I'm just kind of wondering, in your mindset, like did you just determine it was the prudent, more conservative move to keep that ratio stable versus letting it bleed down? Just trying to get some color on that. Thanks.
Good morning Kevin, this is David. So, our reserves for this quarter were to your point were driven by loan growth, and we just covered net charge-offs. So it remains stable. Both factors, I think we forecast for the better part of the past year, our intent to largely keep that stable where we believe an economic event happened with COVID.
And we hadn't seen the probably the final outcomes of that event and at this point, probably may not see them for another period of time that are -- we elected to keep our ACL at the current levels just until we can see what the final outcomes are, whether that be distribution of excess, the marketplace, government program, believe whatever it might be. And we see some return to normalcy of a lot of the ratios that we use from our economic factors. Our intent at this point just to continue to keep that number relatively stable, cover loan growth, cover charge-offs and if there's any changes in the economy.
Got it. Okay. Thank you very much.
The next question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Hey good morning.
Good morning Brad.
Thanks for taking my question. Mitch, appreciate your sentiments on lease affairs. You guys had a great quarter of loan growth, maybe one of the best maybe you've ever had. I joined a couple of minutes late, so I apologize if you addressed this.
But Mitch, can you just talk a little bit about kind of what you're seeing in terms of future loan growth, kind of how you're thinking about 2023, most banks saying, a bit of a slowdown coming off the record quarter? Just kind of curious how you're thinking about it.
So, Brad, I will start with production and pipeline and talk a bit about both geographically and products, our business lines where we're seeing that production and growth and then maybe make a comment about payoffs, which all -- both production and payoffs moderated this quarter.
When we went into the quarter and on the last quarter's call, we talked about the expectation that production would moderate. And we in fact, saw that this quarter. We have production of $753 million. That's down from $877 million. So that's about moderation, but still strong, strong historically.
If you go back a year ago, it was $700 million. So, we continue to see good deal flow, good production. The current pipeline starting the quarter was $270 million. That compares to $297 million previous quarter. So, the pipeline is reflecting the moderation in production but still good, still strong.
And what's encouraging is -- and as I look back over the last number of quarters, is just where we see that production coming from, and it really comes back to talent and markets, our business line, where we do business, breaking that $753 million, down 15% of that was Tennessee. Another 15% was in Alabama, the Florida Panhandle. 24% in Georgia and Central Florida, 17% in Mississippi and 29% in our commercial corporate business lines.
So, geographically, we see strong production and participation in the production of the company. As well, I would say if you break that down by product type and business line, 28% of it would be in the consumer, non-real estate, one to 4-family residential that we retain on the books. Another 12% in small business type credits, which has always been very good for our company across our footprints and that footprint.
That's loans less than $2.5 million, then your more generalist-type commercial loans, C&I, owner occupied, some commercial real estate loans generally over $2.5 million, 31% and then in our corporate banking group, our commercial business lines, things like ABL, equipment finance, senior housing was 29%.
And we've been very consistent in both geographic and product-type production. We continue to hit on many different cylinders in the company and our ability to produce. But like I say, with some moderation this quarter, which was expected.
One thing that was a little more pronounced, maybe not as expected, but expected for payoffs. They moderated about 36% this quarter. But as I examine those and look at what made up those payoffs and where that pull back some, it was in the sale of underlying assets that secured loans, which have been elevated, of course, in the past, loss to term rate naturally pull back and then those credits going to the permanent market pullback. So, it's very logical that we would have seen that. But that this quarter contributed to the strong net growth in addition to the production.
While we remain very disciplined in underwriting, which we have and we will, going forward. We remain very optimistic about our ability to produce and grow net loans, really driven by our markets, our business line and the talent in the company.
I would add to that, too, and I've mentioned this before, just where we do business in the Southeast relative to economic activity, even in the headwinds of what we face today, the expansion that we see in manufacturing, distribution, medical, government, military, education.
And if you look at the announcements of recent time, those things I mentioned are represented and really make for a strong economy where we operate, even in light of like I say, the times that we're walking through.
Thanks for all that color and maybe a question for Jim. If growth does stay strong, even at a slightly lower pace, how should we think about you guys funding that growth, were you lean into the FHLB a little bit more? Can you remind us how much you're getting out of the bond portfolio every quarter? Do you think -- how far will that go to kind of fund your needs?
Good morning Brad. So, I mean, we focus, as you know, on core deposits, and we really want our loans outstanding and loan growth funded by deposits. And as you say, we'll see how loan growth behaves over the coming quarters. I think we're roughly -- we're somewhere in the low 80s, 82%, 83% loan deposit.
Our preference would be to keep that no more than the low 90s or 90%. So, as we go through the sort of choppy period with the behavior of deposits and the competitiveness that we're seeing out there, we would -- we are open to alternative funding sources, including the Federal Home Loan Bank.
Okay. And then maybe final question, Jim. You mentioned expenses might be up some in the fourth quarter. It looked like other expense in the third was up maybe quite a bit from where it had been running -- any comments there? I mean, does it sound like it's going to reverse out based on your comments, but just wanted to follow-up on that to see if there's any additional kind of moving parts?
Hey Brad, it's Kevin. I'll take that question from Jim. I think I better answer that question. Yes, if you look at our expenses and how we detail them out. All of them were flat and down except for two line items, salaries and employee benefits and others.
As you break down other, there's a lot of little in there that we just saw some increases. And for example, some reinvestments we made in technology in Q3 compared to Q2 increased that run rate by over $0.5 million. We also had some changes in our regulatory assessments and what appears to be a onetime blip and some other losses.
So, it's just a lot of little but as we look ahead, we still think our expenses from this point are still relatively flattish. We continue to combat the inflationary pressures. And I think where we assigned that we're doing a good job with that.
If you look at salaries and employee benefits, it's up $800,000 compared to Q2, but embedded in that is almost $2 million of increase due to salary adjustments that we made in Q2 to adjust our minimum wage. And so we've significantly offset that with other accountability measures that's going to -- I think that's a model for our mindset as to how we're addressing this.
The inflation pressures are everywhere. The war over talent is as deep as it's ever been. But we continue to believe, and I think you saw it in this quarter, the operating leverage that we have been talking about on our expense base, as the margin has come back to us and we recognize mortgage has been volatile over the last two years.
But I think you've seen what we've been talking about, and that's that operating leverage, where expenses are up, they're up 1% to 2%, 3%, but net interest income is up 15% to 17%. We still think there's room of operating leverage in future quarters, as Jim mentioned, that our margin doesn't peak until sometime next year.
Great. Thank you guys.
Thank you, Brad.
[Operator Instructions] The next question comes from Catherine Mealor with KBW. Please go ahead.
Thanks. Good morning. Just one follow-up on what you were just talking about, Kevin, on the operating leverage piece. It's you've hit your 60% efficiency target this quarter, just given what you've done on the expense side and then the better revenue from the margin. I'm just curious updated thoughts on if you think that ratio can go further down from here? Or if this is kind of a good level before you've been targeting the efficiency ratio to stay for the next few quarters, just given inflationary pressures.
Good question. And the short answer is, no, we feel that, that 60% and our goal around efficiency no different than some of our goals around our profitability measures are a bit fungible. We set short-term goals and try to achieve those goals, but our longer-term goal is to ultimately improve ROA, ROE and, at the same time, add efficiency to that. We think there's always room to continuously improve on that efficiency ratio.
So, our short-term goal of 60%. As you've mentioned, we've surpassed that. And now it's on us to continue to improve that ratio because at the end of the day, what you're seeing in the numbers is that leverage that operating leverage that comes from maintaining expenses with the opportunity to build revenues. And that's ultimately what's going to drive our profitability going forward. And so there continues to be a conviction around driving that efficiency ratio lower.
We're now back to the levels of efficiency where we were pre-pandemic. And so we're in a real opportunity to continue to improve that, which not only sets a new watermark for the company, but it also allows us to close the gap in some of our peers when it comes to profitability measures. We continue to be a metric that we look at and continuously strive to improve on. That's going to come part through expenses and part through revenue.
Yes, yes, for sure. Okay. Great, that's helpful. And then back on -- back on the margin, just tops on the size of the bond portfolio and if you expect to see continued contraction and maybe as a percentage of average earnings assets where you're targeting your bond book to be over the course of the next year?
Catherine. Yes, I think I failed to answer this part of Kevin's question earlier, but that portfolio is filling of about $30 million to $35 million a month. So that helps in funding growth going forward.
And I think in my mind, I remember -- versus total assets, Catherine, I think we're close to 19% or 18.5% or 19% in terms of the size of that portfolio relative to total assets. We don't have any hard and fast line. But as a rule of thumb, I think we'd be willing to take that down to around 15%.
Great. So, really, just depending on how deposit flows come in, perhaps you could see some of the funding of loan growth coming from your bond book, maybe that shrink just a little bit into next year.
Correct. I mean we -- this period, of course, is really fascinating one on the deposit side. Our goal remains and our intention remains to grow core deposits. May be really challenging here in the next quarter or two, but ultimately, that's been a focus of the company, as you know, for a long, long time, and it remains a core part of the way we think about building our business and sending our people.
So, you will realize that we may see slightly higher loan-to-deposit ratios here in the near-term. But the goal is to grow that core deposit base over the longer--
Great. Thank you. And also, Mitch, I appreciate your sentiment on Lisa. She certainly a big fan of Renasant, she'll be missed greatly in this industry. So, thank you for making that comment about her. Great quarter. Thanks so much guys.
Thank you, Cath.
The next question comes from Jordan Ghent with Stephens, Inc. Please go ahead.
Hey, good morning. Thanks for taking my call. I got a quick question on your kind of the fee income guidance. You guys had a good quarter and you had the gain on sale of the mortgage servicing. What are you guys seeing, I guess, in the near-term? Or what are you expecting, I guess, from here?
So, Jordan, just to be clear, on mortgage or just all of fee income.
Sorry, just fee income?
Yes. So, as we look at fee income, -- it continues to be an evolving story, whether we're talking about our service charges on deposits and some of the -- call it, regulatory pressures that it puts on that. I think we've mentioned that at the beginning of the year, there's going to be some changes made that will bring service charges on deposits down a little bit.
But overall, as we look at non-interest income, we think that there's -- while there's headwinds maybe in mortgage and some of the consumer fees, we also have tailwinds in some of our other business lines. Whether it is stability in wealth management, growth in insurance. We've -- two years ago, we invested in the capital markets group and their impact in non-interest income is starting to become a meaningful and real number.
So, overall, I'll give you kind of a mixed answer to say that we view non-interest income and our outlook as being stable. Right now with a lot of moving parts as to how historical non-interest income was generated versus what future non-interest income and the mix of it will be just as mortgage normalizes as regulatory, uncertainty and opinions affect income statement. We do have offsets and some of the other investments that we've made to keep non-interest income stable.
Perfect. Thank you. And then maybe just one more question. Looked like there wasn't any buyback activity in the third quarter. What's your appetite for share repurchases, I guess, in the near-term and kind of looking into 2023?
Jordan, this is Jim. And you're correct. We did not have any repurchase activity in the third quarter. It remains a lever that we know that we can deploy, and we are constantly sort of evaluating various uses of capital and buyback is always on that list. And one thing I will note is that our program, which was due to expire this month, was renewed and increased in size from $50 million to $100 million.
But I think to your question, our thinking on buybacks remains their tool. We're open to using stock repurchases as a use of capital. And we'll just sort of take the coming months and quarters and see what alternative uses may present themselves and evaluate those against the returns on a buyback.
Perfect. Thank you for the question.
Thank you, Jordan.
This concludes our question -- [Operator Instructions] This is the operator. Mr. Rose, I have opened up your line. Did you have a question?
No, I'll just talk to them afterwards. No problem.
Okay. All right. Just wanted to make sure -- not at all. Sure. Okay. And in that case, this would conclude the question-and-answer session. I would like to turn the conference back over to Mitch Waycaster, Renasant's President and CEO, for any closing remarks.
Thank you. Thank you, everyone, for joining this morning. We appreciate your interest in Renasant. We look forward to meeting with investors at the Hovde [ph] Financial and the Piper Sandler Financial Services Conferences in November.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.