Renasant Corporation (NASDAQ:RNST) Q1 2024 Earnings Call Transcript

Renasant Corporation (NASDAQ:RNST) Q1 2024 Earnings Call Transcript April 24, 2024

Renasant Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Renasant Corporation 2024 First Quarter Earnings Conference Call. All participants will be in listen-only mode. [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: Good morning and thank you for joining us for Renasant Corporation’s 2024 quarterly webcast and conference call. Participating in this call today are members of Renasant’s Executive Management Team. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance, and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, www.renasant.com at the press releases link under the News and Market Data tab.

We undertake no obligation, and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now, I will turn the call over to our Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.

Mitchell Waycaster: Thank you, Kelly. Good morning. We appreciate you joining the call and your interest in Renasant. This quarter’s results reflect loan and deposit growth plus continued expense management. We continue to build the strength of the balance sheet and believe this will be beneficial as we progress through 2024. Our southeastern markets remain economically vibrant and lead us to see continued growth in the near term. The combination of deposit-rich markets and the higher growth areas is one of the keys to our financial success. Yesterday, our Board of Directors implemented the next step of our company’s management succession plan by designating Kevin Chapman to become our CEO in May 2025. I look forward to working closely with Kevin in this leadership transition as I will continue as Executive Vice Chairman when he assumes his new role as CEO.

Having worked with Kevin for nearly 20 years, I know Renasant is in great hands with Kevin guiding our company and look forward to a bright future under his leadership. I will now turn the call over to Kevin.

Kevin Chapman: Thank you, Mitch. I appreciate the trust and confidence our Board, shareholders, and company has in me and look forward to your wisdom and guidance as I prepare to take on this new role. Looking at our first quarter results, our earnings were $39.4 million or $0.70 per diluted share. In the first quarter, we sold a portion of our mortgage servicing rights portfolio for a $3.5 million gain. The carrying value at the time of the sale was $19.5 million and represented $2 billion in unpaid principal amount. Excluding this gain and one smaller item, our adjusted EPS was $0.65 for the quarter. We experienced another quarter of solid loan growth, which — when coupled with an increase in loan yields of 12 basis points, resulted in an increase of $3.9 million in loan interest income on a linked quarter basis.

On the deposit side, we remained focused on growing our core funding base and continued to see good momentum during the quarter with core deposit growth of $280 million on a linked quarter basis. With this continued growth, we were able to allow $119 million of broker deposits to mature. Pricing for deposits remains competitive throughout our footprint and although deposit interest expense has continued to increase, the pace of increase continues to slow as reflected during the quarter. Included in non-interest income for the first quarter are two one-time items, the gain on the sale of the mortgage servicing rights of $3.5 million and a gain of $56,000 on extinguishment of debt. Excluding these one-time items, adjusted non-interest income decreased $688,000 quarter-over-quarter.

Income from our mortgage division, excluding the MSR gain, increased $1.3 million from the fourth quarter. Interest rate lock volume increased $102 million quarter-over-quarter and our gain on sale margin increased 64 basis points. Non-interest expense increased $1 million from the fourth quarter. In the first quarter of 2024, we recorded expense of $700,000 related to the FDIC special assessment after the $2.7 million assessment in the fourth quarter of 2023. We also made contributions totaling $1.1 million to certain charitable organizations, which qualify as tax credits and will provide a one-to-one offset in tax income expense. I will now turn the call over to Jim.

James Mabry: Thank you, Kevin. As we walk through the quarter’s results, I will reference slides from the earnings deck. While the size of our balance sheet is essentially unchanged, we continue to see excess liquidity deployed into loans and deposit growth has generally kept pace with loan growth. Loan growth in the first quarter was $149 million and represents an annualized growth rate of 5%. We experienced another quarter of strong core deposit growth, which allowed us to continue to shift our reliance away from non-core funding sources. As you can see on Slides 6 and 7, the company’s core deposit base and overall liquidity position remain strong. The deposit base is diverse and granular. The average deposit account is $31,000 and there are no material concentrations.

Referencing Slide 8, all regulatory capital ratios are in excess of required minimums to be considered well capitalized and each of these ratios improved from the prior quarter. Earnings for the quarter contributed to an increase in the tangible common equity ratio, which now exceeds 8% in tangible book value per share. Turning to asset quality, we recorded a credit loss provision of $2.4 million. Net charge-offs were $164,000, which represents an annualized rate of 1 basis point and the ACL as a percentage of total loans was flat at 1.61%. Asset quality metrics are presented on Page 9. Our criticized loans increased quarter-over-quarter. The loans added in the quarter are current on payments and we currently do not anticipate any loss on these loans.

All other metrics were relatively stable, underscoring our emphasis on prudent underwriting. We continue to remain vigilant in monitoring credit, including early identification of potential problem loans in order to mitigate loss. Our profitability metrics are presented on Slides 10 and 11. Excluding one-time items, adjusted pre-provisioned net revenue declined $4.4 million on a linked quarter basis. Pressure on our net interest income is the primary driver of the decrease. Turning to Slide 12, adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries was 3.28%, down one basis point from Q4. Adjusted loan yields increased 12 basis points, while the cost of total deposits increased 18 basis points. Deposit pricing pressures remain and will likely cause deposit costs to continue to increase in the near term.

Kevin commented on the highlights within non-interest income and expense. While uncertainty in the rate environment continues to be a challenge, the focus remains on improving operating leverage. I will now turn the call back over to Mitch.

Mitchell Waycaster: Thank you, Jim. We believe Renasant is well positioned to prosper and look forward to providing you updates on the progress. I will now turn the call over to the operator for questions.

See also 12 Best Growth Stocks to Buy and Hold in 2024 and 15 Fastest Growing Cities in Tennessee.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from Catherine Mealor with KBW. You may now go ahead.

Catherine Mealor: Thanks. Good morning.

Mitchell Waycaster: Good morning, Catherine.

Catherine Mealor: And congrats to both you Mitch and Kevin for the news last night. I know this will be a great transition for Renasant. So excited for both of you. My first question maybe is just starting on credit. Jim, you mentioned the increase in classifieds. Just wanted to see if you could just give us a flavor of what was in there and what gives you confidence that you don’t expect to see a loss on some of those credits?

David Meredith: Good morning. This is David.

Catherine Mealor: Good morning, David.

David Meredith: Hi, good morning. So, we — Q1, as we received a year in financial aid [ph] for yearend ’23, we set out to make sure we were reviewing all of our loans, not just CRE but as well as our C&I credits during the quarter and we saw some tightening in just a handful of C&I credits, which caused us to go ahead and downgrade those loans. It was primarily driven by C&I credit downgrades. And just a little color behind that, there was a net downgrade of around $77 million but that’s inclusive of some upgrades and some downgrades. We continue to cycle through those loans. As you know, our history is to be very proactive in the management of our problem assets, which is what we did in Q1. We seek to identify where there’s weakness to provide the opportunity to restructure the credit to get back to an improved status where it’s not classified or provide the opportunity to get out of the bank before deteriorations worsen, which is what we did in Q1 to identify those loans.

Just as a perfect example, already in Q2, we’ve worked out of one of those loans that was $23 million and we’ll continue to work those assets out of the bank. Jim mentioned in his comment, they’re all current. There’s no concerns about losses. So, there’s — and we don’t have a level of concern. It was purely driven by what we feel is early identification of stress and a handful of loans to identify those loans and work them out of the bank proactively.

Catherine Mealor: Great. And then maybe one question on the margin. What’s your outlook for the margin over the next couple quarters, you know, before – outside of any rate cuts? Do you feel like we’re at or near the bottom and maybe specifically on just deposit costs? I think that increased a little bit more than I was expecting this quarter. How close do you think we are to a peak there?

James Mabry: Good morning, Catherine. This is Jim.

Catherine Mealor: Good morning, Jim.

James Mabry: Good morning. So, if we assume no cuts and go with that outlook for 2024, at least in the near term, we’re hopeful that the margins are going to stabilize roughly where it’s at. As you point out, I mean, we’ve had nice increases in loan yields but the relief on the deposit pricing side has just been – it’s been stubborn. I mean, it’s – we’ve hoped for more progress there and so we’ll see how that plays out in 2024. But I think, I’m very encouraged what we’re seeing on loan yields and what we’re getting there and I think the key is really what happens on that funding cost. Our net incremental cost on new deposits is running at 4.5 to 4.75 and hopefully we get more stabilization in NIB. We had – I think our outflows from Q3 to Q4 were like $160 million, and in Q4 to Q1 it was closer to $65 million or $70 million.

So, the trends there are encouraging and hopefully we can continue to see that progress, which will help some at the margin. So, I’d say overall a flattish outlook. If we do get cuts, I’m not sure, I mean, generally cuts are going to be modestly in the near term hurtful to the margin but given the current outlook, if those cuts occur later in the year and there’s only a couple of them, I don’t know that the impact would be that significant.

Catherine Mealor: Okay, great. And maybe just one follow-up to your point on loan yields being better. New deposit costs, you said, were between 4.5 to 4.75. Where are incremental loan yields coming on right now?

James Mabry: So if you exclude RBC, we’re comfortably in the low eights. I think for the quarter it was like 8.25, somewhere around there for the month. I want to say, Catherine, it was like around 8.30. So nice progress there. I think now we’ve got – it’s been two or three quarters that new and renewed has been at 8 or better. So really encourage what we’re seeing there, and hopefully we can keep that up. RBC definitely adds to that, so it’s closer to – I think 8.30 turns into like 8.50 or 8.60 for the month of March if you add RBC.

Catherine Mealor: Perfect. Great. Thank you.

James Mabry: Thank you, Catherine.

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

Michael Rose: Hey, good morning, guys. Thanks for taking my questions. And congratulations to both you, Kevin and Mitch. Looking forward to see what the future brings for Renasant. I missed the first, the prepared remarks, so sorry if you missed this, but did want to just touch on loan growth expectations for the year. We’ve seen some banks kind of reduce their outlooks or maybe reiterate off of lower first quarter expectations. I don’t think you’ve given us kind of a formal guide, Mitch, you usually talk us through kind of the pipelines and what they look like. And we’d just be curious as to what the pull-through rate looks like relative to pipeline and if you think that will increase through the year and if something in the mid-single-digit growth is kind of in the cards for this year? Thanks.