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spk01: evening, and welcome to the Renaissance Corporation 2022 second quarter earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutchison with Renaissance Corporation. Please go ahead.
spk00: Good morning, and thank you for joining us for Renaissance Corporation's 2022 Second Quarter Webcast and Conference Call. Participating in this call today are members of Renaissance'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.renaissance.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.
spk05: 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 2022. 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.
spk06: Thanks, Mitch. Our second quarter earnings were $39.7 million or 71 cents per diluted share compared to $33.5 million or 60 cents 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 produce positive results for the quarter. Our mortgage division withstood 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 the lean quarter basis. I will now turn the call over to Jim.
spk04: Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. We continued 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 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 dollars 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 record a credit provision of two million dollars and net charge-offs of 2.3 million dollars 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, income recognized in triple P 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 equity 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.
spk05: 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 one team and one bank. I look forward to the second half of the year. I will now turn the call over to the operator for Q&A.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up the headset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Will Jones with KBW. Please go ahead.
spk10: Will Jones Great. Good morning, guys. Good morning, Will. Hey, so just wanted to start on deposit costs. You know, it was really impressive to see you guys reduce funding costs quarter over quarter just in light of this rate backdrop. Just wanted to gauge, you know, how you guys are thinking about deposit betas as we move into, you know, the next quarter and just the back half of 2022. You know, I know in the likely event we may get CP rate hikes this afternoon. Just curious if you have any leverage still on the deposit side to, you know, keep the betas more contained through this cycle?
spk04: Good morning. Well, this is Jim Mabry. And I guess what I'd start as a, where I'd start as a race deposits is a couple of things. You know, we, we've sort of made deposits a real focus here. And as you know, we've taken non-interest bearing deposits up about 10 percentage points over the last three or four years. And so we've really worked in the mix and attracting and building a good core funding base. And I think that was, that was evident in the quarter. The other thing I'd say about our deposit basis 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. You know, I think, you know, we went into this environment with probably a little longer duration than some on our deposit funding, and 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.
spk10: Got it. That makes sense. Switching over to loan growths, I know you guys are really strong together, two really nice quarters of double-digit growth. I know some of that is coming from, you know, portfolioing more of your resume book, you know, just as rates and yields get a little more attractive here. I hear you that, you know, you think growth may take 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?
spk05: Well, maybe a good place to start with that thought, and as I referenced in remarks, You know, 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 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 on a core basis if you adjust for southeast commercial that came in in the first quarter. And just thinking about going forward and, you know, 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 and our various business lines contributing And just back to your question, also the granularity, you mentioned real estate one to four. If I take that production, I did this last quarter, and I think this speaks to the strength or our ability to continue to produce. About 27% of production this quarter was in the, what I would call consumer non-real estate, HELOCs, one to four 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 consistency over time. Certainly, we've seen it in the last two 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.
spk10: All right, great. And just left for me, maybe more household. I noticed that a credible yield ticked up a little bit quarter over quarter, as well as some interest on problem loans. But was there anything one time going on in there that we should just be thinking about? And how should we think about a normalized run rate for a credible yield moving forward?
spk04: Yeah, what you mentioned, Will, this is Jim again, was the result of one large payoff. And I think You know, other than that, there was nothing that I would point out that was non-recurring or unusual in interest income for the quarter.
spk10: Okay, awesome. Thanks for the question, guys.
spk01: Thank you, Will. Our next question comes from Michael Rose with Raymond James. Please go ahead.
spk09: Hey, good morning, guys. Hope all is well. I got on the call a little bit late, but I just wanted to talk about the mortgage business. You know, not surprising that income down a little bit. You know, I think last quarter you talked about the efficiency ratio being in the, I think the high 80s to kind of low 90s. Obviously, again, on sale margin, you know, drop this quarter. Any color around, you know, kind of the efficiency and then, you know, what the outlook is for the business as we move in the back half of the year, just given the you know, what we're seeing with, with purchase apps and, you know, declining volumes, uh, you know, obviously at better markets than, you know, the rest of the, uh, rest of the country in a lot of places, but just wanted to get some color there. Thanks.
spk06: Hey, Michael, it's Kevin. Um, yeah. So on mortgage, everything you mentioned, uh, the backdrop you gave about, about the margins, the volume, uh, all of that was evident in Q2. And, um, to specifically answer the question on efficiency. Mortgage's efficiency ratio is about 85% in Q2, which is 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. As we mentioned, we are still profitable and expect to be profitable. 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 – 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.
spk09: 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 Some growth in the balance sheet earning asset mix shift, you know, pretty positive, but, you know, cash levels down a little bit. Can you just give us an update on your rate sensitivity, you know, from here? Thanks.
spk04: Good morning. This is Jim. I would say, you know, 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 cited. It's the mix. I mean, you know, of course, our deposit costs behave really well in Q2. And while I don't expect it'll 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, you know, picked up nicely in Q2. So I think all those things point to, you know, a meaningful improvement in the margin in Q3.
spk09: Great. Thanks for taking my questions.
spk05: Thank you, Michael.
spk01: Our next question comes from Kevin Fitzsimmons with DA Davidson. Please go ahead.
spk07: Hey, good morning, everyone.
spk05: Good morning, Kevin.
spk07: Just wanted to touch on credit. So, you know, the ACL ratio contracted, you know, pretty modestly to 1.57, and that's still a pretty healthy ratio relative to peers. But, you know, 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? Thanks.
spk03: Hi, Kevin. This is Dave. Good morning. I think what you said towards the latter part is kind of what we have forecasted over the past few quarters that we'll kind of hold that number steady. We'll see what potential impact may come out of economic changes. We haven't seen anything definitive 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.
spk07: Okay, great. Thank you. And then just following up on Michael's question on some of the net interest income issues, dynamics. You know, is it fair to say, you know, average earning assets were fairly flat link quarter. Is that pretty much what to expect going forward that, that, you know, it's, it's a little bit of a flip flop in recent years. We, we saw net interest income driven more by the balance sheet where the margin was hit. And now it's, it's kind of the opposite and because of deposits coming in and potential outflow there. and use of cash, maybe that average earning asset balance stays flat, but your margin keeps going up, and you, in turn, still have the ability to drive NII higher.
spk04: Kevin, this is Jim. I think that's 100% accurate. I mean, it feels like it's more rate-driven than volume-driven, and our expectation is that we don't see a 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, and that margin is going to benefit more from rate moves than the size of the balance sheet growing.
spk07: Hey, and Jim, you pointed to being positioned for pretty meaningful margin expansion in third quarter. Are you able to share with us what, if you have it handy, what your margin was in the month of June?
spk04: Yes, the margin in the month of June on a core basis was 312, Kevin, and that was up from 303 in May. So, you know, each – obviously each month in the second quarter showed nice, you know, improvement in the margin.
spk07: Okay. And one last one for me, thanks, Jim, is, you know, with some large mergers having occurred or – in process of occurring and in your footprint generally, um, you know, 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, um, not, not very active given the focus on keeping costs stable? Thanks.
spk05: Yeah, no, Kevin, good question. And, um, 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 four relationship managers in the markets of Memphis, Atlanta, Mobile, Huntsville. That brings us to 11. actually totaled this year. So we continue to see those opportunities and we'll continue to be opportunistic there.
spk06: Kevin, I may just add just on the efficiency. I'm glad you brought up this question because we 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 uh, talent and we're using the opportunities in the market, uh, to do that. But, but it's about resource allocation. We are always, um, as we evaluate hires, as we evaluate opportunities, we look for the returns that we get off of it. And, um, and, 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 accountability, we have less tolerance for unproductivity. And that's what's driving the improvement in the efficiency and the flattening of expenses.
spk05: 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 three 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 over the last number of quarters. Also, we're equally as important 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 three years to add something over 100, you can also see in that the accountability relative to the production that we're seeing from all of those in that segment. And, of course, here I'm referring to relationship managers relative to loan production.
spk07: Got it. Thanks for the clarification, guys.
spk05: Thank you.
spk01: Our next question comes from Dave Bishop with Havdi Group. Please go ahead.
spk08: Good morning, gentlemen. Staying on the topic of funding this year, obviously this quarter you took down some of the excess cash and liquidity sitting on maybe a billion or so. Where do you see that? Is there a floor, an eventual floor? Obviously there is, but just curious your comfort level of bringing that down even further to fund loan growth.
spk04: Good morning, Dave. This is Jim. So I'd say a couple of things. Yes, the billion dollars, we would be comfortable with that going down to somewhere near half a billion dollars. I'd say 450 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 percentage of or that total is 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 the deposit growth that we hope for. So, you know, both of those are levers that we feel like we can pull to fund incremental loan growth from here.
spk08: 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.
spk04: Yeah, so we've seen nice improvement in terms of new and renewed rates. And if we look at core loan yields for the months during 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 contrast, I mean, we're a good 30 or 40 basis points above where we were this time a quarter ago.
spk08: I appreciate the color.
spk05: Thank you, Dave.
spk01: Again, if you would like to ask a question, please press star then 1. Our next question comes from Matt Olney with Stevens Inc. Please go ahead.
spk02: Hi, good morning. 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?
spk05: Yeah. So, Matt, actually, payoffs ticked up slightly, but only slightly. I think they were very close to the quarter prior. We actually saw this past quarter total paydowns was 718. That compares to 704 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 borrowers 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 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's 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.
spk02: Perfect. Thank you.
spk05: Thank you.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Mitch Waycaster for closing remarks.
spk05: Well, thank you and thank you to those who joined the call today. We appreciate the interest and look forward to speaking again soon.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now
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