Renasant Corporation (NASDAQ:RNST) Q3 2023 Earnings Call Transcript

Renasant Corporation (NASDAQ:RNST) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good day and welcome to Renasant Corporation 2023 Third Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I’d like to turn the conference over to Kelly Hutchinson of Renasant Corporation. Please go ahead.

Kelly Hutcheson: Thank you for joining us for Renasant Corporation’s 2023 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. I am pleased with our quarterly results that show solid loan growth, good asset quality, an increase in core deposits, and expense control. The balance sheet has steadily strengthened in 2023. The markets in which we operate have remained generally resilient and are benefiting from net in migration and economic expansion. We are well positioned in some of the best markets in the South and we’ll continue our efforts to add to this presence. Renasant’s solid financial footing should allow us to take advantage of opportunities that will emerge. Finally, we are excited to now be a part of the New York Stock Exchange, which we believe provides greater visibility for our company and our shareholders. I will now turn the call over to Kevin.

Kevin Chapman: Thanks, Mitch. Our third quarter earnings were $42.3 million or $0.75 per diluted share compared to $28.6 million or $0.51 per diluted share in the second quarter. Our second quarter results included an after-tax loss of $18.1 million or $0.32 from the sale of a portion of our securities portfolio. Breaking down, net interest income, loan interest income increased over $9 million on a linked quarter basis driven by another quarter of solid loan growth coupled with a 15 basis point increase to our loan yields. However, while loan yields increased, continued competitive pressures on deposit pricing impacted both our deposit mix and deposit costs this quarter, leading to a $19.5 million increase in deposit interest expense on a linked quarter basis.

These pricing pressures are market-driven and not unique to Renasant and they underscore the importance of core funding in this rate environment. We have an outstanding team that has worked diligently to preserve and even grow our core deposit base. During the quarter, we grew core deposits by $385 million on a linked quarter basis, which helped us reduce our reliance on wholesale funding and allowed us to pay down the FHLB advances by $150 million and brokered deposits by $323 million respectively during the quarter. Our focus on growing core deposits and managing our funding costs is unchanged and will remain a top priority in the future. Excluding the loss on the sale of securities in the second quarter, noninterest income decreased $1.5 million quarter-over-quarter.

Our capital markets, treasury solutions, wealth management, and insurance lines of businesses continued to deliver solid results. Income from our mortgage division declined $2.2 million from the second quarter. Volumes were impacted not only by seasonality but also by the increase in rates and lack of housing inventory. Interest rate lock volume declined $110 million quarter-over-quarter and our gain on sale margin decreased 11 basis points. Noninterest expenses decreased $1.5 million from the second quarter, mortgage played a role in the decline along with modest savings in other areas. Our efficiency ratio was 63.7% for the quarter. Margin compression continues to put pressure on our efficiency, but managing this ratio down continues to be a goal of ours.

I will now turn the call over to Jim.

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James Mabry: Thank you, Kevin. As we walk through the quarter’s results, I will reference slides from the earnings deck. The balance sheet contracted modestly from June 30. We experienced strong growth in deposits excluding brokered deposits, which together with utilizing some excess cash, allowed us to pay down about $470 million of wholesale funding. Loan growth in the second quarter was $237 million and represents an annual growth rate of 7.9%. We continue to focus on our liquidity. And as you can see on slides six and seven, the company’s core deposit base and overall liquidity position remain strong. The deposit base is diverse and granular. The average deposit account is $29,000 and there are no material concentrations.

Referencing slide eight. 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. We also experienced a modest build in the tangible common equity ratio and tangible book value per share. Turning to asset quality. We recorded a credit loss provision of $5.3 million and a recovery of credit losses on unfunded commitments of $700,000 which is recognized in noninterest expense. Net charge-offs were $1.9 million, which represents an annualized rate of six basis points and the ACL as a percentage of total loans held flat at 1.63%. Credit metrics are presented on page nine. Our criticized loans and non-performing assets each improved quarter-over-quarter and past dues were relatively unchanged at 11 basis points of total loans.

The improvement in non-performing loans from the second quarter is driven by the resolution of two previously disclosed credits. Both were well collateralized and as anticipated resulted in no loss. While pleased with the underlying strength of our portfolio, we remain cautious about credit in the current environment. Our commitment to high underwriting standards remains and we attempt to identify potential problems early in order to mitigate loss to the bank. Moving onto profitability, beginning on slide 10. Excluding the after tax loss on the sale of securities in the second quarter, net income declined $4.4 million on a linked quarter basis. Pressure on our net interest income and declines in the mortgage division are the key drivers to the decrease.

However, as you can see on slide 11, we successfully offset the pressures on our revenue with savings on the expense side such that the adjusted efficiency ratio remained flat on a linked quarter basis. Turning to slide 12. Adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries was 3.37%, down six basis points from Q2. Although loan yields were up 15 basis points, deposit pricing pressures more than offset the increase in yield. The cost of total deposits increased 48 basis points to 1.98% for the quarter. Competitive pressures are expected to persist and we believe funding costs will continue to increase in the short-term. Kevin touched on the highlights within noninterest income and expense. The diversification within our revenue streams and expense control were positives in the quarter.

While the right environment is a headwind, we remain committed to improving operating leverage and managing the expense base remains a priority. I will now turn the call back over to Mitch.

Mitchell Waycaster: Thank you, Jim. I am very proud of our team and the efforts made to produce the results so far in 2023. I will now turn the call over to the operator for questions.

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Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] First question will be from Michael Rose, Raymond James. Please go ahead.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions. I just wanted to start on loans and the outlook. The growth has been, you know, frankly a little bit stronger than what we’ve seen from, you know, many of your peers and kind of across the industry. Can you just remind us again kind of where you stand in construction fund-ups and, you know, why, you know, has the growth just generally been, you know, so strong in your eyes and, you know, maybe as we think about, you know, next year just given maybe a more, you know, cautious economic backdrop, you know, what should we expect both from what your customers are telling you and then maybe just from your own, you know, views around credit and just being a little bit more cautious. Thanks.

Mitchell Waycaster: Very good. Good morning, Michael. Let me start with the backdrop. I’ll start with pipeline and production and then I’ll ask David to talk a little specifically about construction which you mentioned. Just beginning with pipeline, kind of put it in perspective, where the moderation is continuing to occur, both in pipeline and production. I’ll definitely touch on underwriting and pricing, but pipeline, we’re beginning this quarter at $120 million and the 30 day pipeline. That compares to $135 million the prior quarter. So just as expected, what we’ve seen throughout this year, we continue to see some moderation quarter-to-quarter. That is driven by discipline in pricing relative to our ability to fund incrementally that next extension of credit — I would — and of course underwriting.

And then I would say demand. With that said, we operate in some very good vibrant, and as I mentioned in the opening comments, resilient markets. We continue to serve and grow relationships and that’s evidenced by our growth in loans also in deposits this quarter. Just going back to production. Actually production this quarter was $404 million. That’s down slightly from $413 million the prior quarter. That produced a net of $238 million of roughly 8% in annualized growth and as I’ve mentioned on prior calls, really the governor on that net is payoffs and what we saw this quarter, we saw payoffs pulled back more like we saw in the first quarter of this year. We had $384 million and that compares to $370 million Q1, but $455 million in Q2. So Q2 was a little elevated.

That impacted our net performance in 2Q. We had about 6% versus the 8% this quarter. Looking forward and I would say expectations for this next quarter and as — likely as we move into ’24, one thing that we do know when we look at our production, we continue to see that from each of our markets, our regions, our business lines, they all continue to contribute in a meaningful way. To give you an example of that, that $400 million this prior quarter, 14% came from Tennessee, another 18% from Alabama and the Florida Panhandle, 19% from Georgia, Central Florida, 16% from Mississippi, and the remaining 33% from the commercial and corporate business lines. And again, as I usually mention each quarter, equally important is the geographic distribution of the — is the loan types and the size of the credit and just the granularity that Jim referred to earlier in his remarks.

And again, we see that both on deposits and loans, but if you take the 404 and production in Q3, 26% of that, talking about the granularity on types and product, 26% of that came from consumer, one-to-four family, short duration that we keep on our books. Another 28% and we’re very proud of this, and we’ve had a lot of success here in the past, is in small business and business banking, and that credits less than $2.5 million. Another 13% in commercial credits greater than 2.5, which would include C&I, owner-occupied, commercial real estate, and then that remaining 33% in our corporate banking group, larger C&I, commercial real estate, ABL, equipment finance, factoring operation, we’ve been very pleased with. All to say geographically and by type very granular, our average loans size, $250,000 for the total company.