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spk05: Good morning and welcome to the Renaissance Corporation 2023 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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, Chief Accounting Officer with Renaissance Corporation. Please go ahead.
spk00: Thank you for joining us for Renaissance Corporation's 2023 Quarterly Webcast and Conference Call. Participating in this call today are members of Renaissance 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.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 Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.
spk03: Thank you, Kelly. Good morning. We appreciate you joining the call today and your interest in Renasant. Although the current operating environment continues to be volatile and uncertain at times, our focus on basic banking principles and the safety and soundness of our institution has not wavered. Our second quarter results are highlighted by solid core earnings, strong asset quality metrics, and a well diversified and granular core funding base. In the second quarter, we took steps to delever the balance sheet. These actions enhance the strength and optionality of our financial condition and will aid earnings in future quarters. Loan growth was solid and reflects the vibrancy of markets in which we operate. Our financial outlook will continue to benefit from the economic growth throughout our footprint. I will now turn the call over to Kevin.
spk08: Thanks, Mitch. Our second quarter earnings were $28.6 million or $0.51 per diluted share. Included in our results is an after-tax loss of $18.1 million or $0.32 from the sale of a portion of our securities portfolio. Excluding this loss, our core EPS was $0.83, which represents a $0.01 increase from the first quarter. The securities had an amortized cost of just over $500 million, and the proceeds from the sale were used to shrink the balance sheet by paying down wholesale borrowings. As Mitch mentioned in his comments, the actions we took during the quarter improved our capital and liquidity position and enhanced future earnings and optionality. Breaking down net interest income, we experienced an increase in loan interest income of over $11 million on a linked quarter basis, driven by another quarter of solid loan growth, coupled with a 25 basis point increase to our loan yields. However, while loan yields increased, competitive pressures on deposit pricing impacted both our deposit mix and deposit costs this quarter, leading to an $18.5 million increase in deposit interest expense on a linked quarter basis. The balance sheet repositioning transaction was executed late in the quarter and had a nominal impact on net interest income during the second quarter. The earnings benefit will be realized beginning in the third quarter. Considering the operating environment, our deposit portfolio performed well during the quarter and our overall liquidity remained strong. Total deposits increased slightly during the quarter and our loan-to-deposit ratio held constant at 85%. Our team was successful in defending our core funding base as deposits, excluding broker deposits, were up slightly late in the quarter after a seasonal decline in April. We are still operating in a volatile environment following the developments in the industry during the first quarter, but we continue to focus heavily on growing core deposits and managing our funding costs. Excluding the loss on the sale of securities, non-interest income increased modestly quarter over quarter. Our capital markets, treasury solutions, wealth management, and insurance lines of businesses continue to deliver solid results. Our mortgage division had a strong quarter as income from the division increased $1.3 million on a linked quarter basis. Interest rate lock volume was flat quarter over quarter, while our gain on sale margin increased 51 basis points. Non-interest expense increased $1.5 million from the fourth quarter, driven primarily by the impact from our annual merit increases, which was offset slightly by savings in other areas. Our efficiency ratio, excluding the loss on the sale of securities, was 63% for the quarter. Margin compression continues to put pressure on our efficiency, but managing this ratio down continues to be a goal of ours. Improving operating leverage across all lines of businesses will help us meet this goal. 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. Our balance sheet contracted $250 million from March 31st. The sale of securities was offset by another quarter of solid loan growth. Loan growth in the second quarter was $165 million and represents an annualized growth rate of 5.6%. We continue to carry excess liquidity, and our cash balances grew about $100 million on a linked quarter basis. Slide 8 and additional slides in the appendix illustrate that we have a diverse loan portfolio with no significant concentrations in loan type or industry. And specific to our construction and non-owner-occupied commercial real estate portfolios Our exposure to individual sectors is granular, and the portfolios are performing well. Turning to slide 9, competition for deposits accelerated further this quarter and impacted both the mix and cost of deposits. Non-interest-bearing deposits represent 27% of total deposits compared to 31% on March 31st. And our cost of deposits increased to 1.5%, which represents a cumulative beta of 27%. As you can see on slides 10 through 12, the company's core deposit base and overall liquidity position remains strong. Similar to the loan portfolio, the deposit base is diverse and granular. The average deposit account is $29,000, and there are no material concentrations. Slide 13 touches on the available sources of liquidity. And as you can see, our availability significantly exceeds the balance of uninsured and uncollateralized deposits. Referencing slide 15, 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. Turning to asset quality, we recorded a credit loss provision of $3 million and a recovery of credit losses on unfunded commitments of $1 million, which is recognized in non-interest expenses. Net charge-offs were $3.9 million, which represents an annualized rate of 13 basis points. And the ACL, as a percentage of total loans, declined three basis points to 1.63%. Credit metrics are presented on pages 17 through 19. Our past dues and criticized loans each improved quarter over quarter. The increase in non-performing loans is attributable to a single relationship, which is well collateralized, and therefore we expect 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 losses to the bank. Moving on to profitability, beginning on slide 23, net income declined $17.5 million on a linked quarter basis, driven by the after-tax loss of $18 million from the sale of securities. Excluding the loss on the sale of securities, our profitability metrics remain relatively stable. Core margin, which excludes purchase accounting accretion and interest recoveries, was 3.43%, down 20 basis points from Q1. Although loan yields were up 25 basis points, deposit pricing pressures more than offset the increase in yield. Total cost of funding increased 47 basis points to 1.8% for the quarter. Although we anticipate some relief In the short term from the balance sheet repositioning transaction, competitive pressures are likely to persist, and we believe funding costs will continue to increase in coming quarters. Kevin touched on the highlights within non-interest income and expense. We are encouraged by the results of our mortgage division. Although there was an uptick in our overall non-interest expenses this quarter, we remain committed to improving operating leverage and managing our expense base remains a priority. I will now turn the call back over to Mitch.
spk03: Thank you, Jim. We continue to emphasize time-tested banking principles as we operate the bank. These fundamentals not only protect our customers and shareholders, but also position us to generate attractive shareholder returns. I will now turn the call over to the operator for questions.
spk05: 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 are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Thomas Windler with Stevens. Please go ahead.
spk01: Hey, good morning, everyone.
spk03: Good morning, Thomas.
spk01: I just wanted to go back to the security sale. You said it happened late in the quarter. Can you just give us an idea of the impacts on 3Q from this and then maybe like an earn back for the trade?
spk04: Sure. Good morning, Thomas. This is Jim speaking. So you're correct. There's a series of trades. and they took place largely in the first part of June. So the impact on Q2 was de minimis. Looking forward, I would say that our rationale and interest in that trade was really driven secondarily by earnings, but mainly by the impact the trade would have on our balance sheet. And what we liked about this trade was that we would de-lever the balance sheet, reduce indebtedness, and give us more flexibility in the balance sheet side first and foremost. And so that was the primary impetus for considering this trade. It did have the benefit, as you point out, of benefiting future earnings. We essentially sold securities at about 2.9%, and we took those monies and paid down advances that were costing us roughly 5.5%. The break-even calculation, roughly two years, plus or minus, but very pleased with the execution that we got and the impact that it had on our balance sheet.
spk01: That's great, Keller. Thank you. And then just one more for me. You guys had an annual merit increase this quarter. Is there going to be any impact in 3Q from that merit increase?
spk08: Hey, Thomas, Kevin. It won't be. I mean, there may be some additional hires or out-of-cycle merit increases, but the merit increase went to March 1st. Some of that was recognized in Q1, but the full-quarter impact was in Q2. If you look at salaries and employee benefits, it's up about $800,000. Six $100,000 of that is going to be related to mortgage commission increase. If you look, the mortgage income is up about $1.2 million, and there's going to be a corresponding increase on the expense type related to that. So as you back out mortgage, the increase in salaries was just a couple hundred thousand dollars for the rest of the company.
spk01: All right. That's great. Thanks for answering my questions, guys, and great quarter.
spk03: Thank you, Thomas.
spk05: The next question comes from Will Jones with KBW. Please go ahead. Hey, great. Good morning, guys.
spk03: Good morning, Will.
spk02: I just wanted to go back to the bond sale for a minute. I mean, obviously, the math is very financially compelling, especially if you just look at that exchange and yield that you get in there. Is there any way to frame, you know, what kind of margin benefit will be, you know, moving forward? Obviously, the third quarter will see a nice benefit there, and it will run right to the end of the year. But, Jim, is there just any way or any kind of context you can give us on where, you know, or maybe a range of where you think the margin could, you know, pale out, you know, in the back half of the year here?
spk04: Good morning, Will. It's a good question. And certainly the trade benefits the earnings. power of the company. There's no two ways about that. But I would say this, as we look forward and think about the margin and impact of NII, I look at that trade, at least from an earnings perspective, as helping to moderate the declines and pressures we're feeling on the margin, you know, industry-wide and certainly at Renaissance. So I see it, we're certainly better off having executed the trade in terms of what our performance will be in margin in the second half. But we still feel, though, that, you know, there are pressures on the margin, and we're likely to see some of those pressures in the second half, so resulting in, you know, declines in the margin and in NII. But I will say those declines will be much more moderate than what we saw from Q1 to Q2, and that's the real benefit. So the pressures remain. But I would directionally say to you that margin and NII will be under pressure in the second half and down moderately from what we saw in Q2.
spk02: Understood. That's very helpful. And then just separately on the margin, you know, we saw, you know, a little bit of a catch-up beta this quarter. Just curious on the outlook where you see that trending for the year, if you guys have any form of, you know, updated odds beta expectations and I know you brought on a little bit more broker deposits this quarter. Maybe just give us a sense of the tenor of those deposits and maybe a rate or duration. That would be helpful. Thanks.
spk04: Sure. So I'll start with the broker deposits. And as you pointed out, we did see an increase in broker deposits. And I will go back to that bond trade for a second because, again, what we like, First and foremost about that trade was the de-levering that that allowed us to do and reduce the Federal Home Loan Bank indebtedness. And as we think about alternative sources of funding, we pay down a lot of the Federal Home Loan Bank outstanding and plan to pay down more of that debt in the quarter. And likewise, in brokerage, we sort of view it as a bridge. And here we are in a period of time where, you know, traditional core deposits are tough to find and gather. So we view that as a bridge, and it is. But over the next few quarters, our goal, if we can accomplish it, is to pay down those broker deposits. I mean, we want to be a core-funded bank, and these alternative sources have benefited us, and certainly we're open and have used them. But that's our goal as it relates to that thinking about the fundings. As it relates to betas, what I would say is this, that, you know, the last couple of quarters, we have upped those assumptions on deposit betas, and currently, for interest-bearing deposit beta, we are using about 50% of deposit beta 50.
spk02: Okay, very helpful. And then maybe for Mitch, just a bigger picture on this bond sale, you know, it feels like the rationale was clearly, you know, you know, what we saw liquidity bill in March, you know, the weather storm and kind of wait for the dust to settle. And, and, you know, three months down the road, we've kind of removed ourselves from, from the deposit crisis and, you know, and then it's time to right size the balance sheet and get, get it to, you know, get, get funding in a more efficient place. I guess firstly, Mitch, is that, is that just kind of how you frame, you know, this trade you guys made here and, and then just in terms of timing, you know, what, what gives you confidence that, that right now and right here was, was kind of like the time to, you know, reposition the balance sheet and you kind of put yourself, you know, behind this deposit liquidity crisis?
spk03: Yeah, so I think, you know, as I mentioned in the opening comments, just enhancing the strength and the optionality for us going forward, something we give a lot of thought to, and we thought it timely, and we were in a position to execute this trade, and we thought, like I say, giving us optionality and the And as we look forward and just position us for strength, and certainly there's earning benefits from it, but as Jim mentioned, we're more focused on just the strength of the balance sheet and just maintaining that optionality.
spk04: I would add this, Will, to Mitch's comments. You know, we obviously think a lot about the balance sheet and protecting the strength of the balance sheet and enhancing the strength of the balance sheet thinking about from a capital and liquidity point of view and how we fund it and so forth. And so there are a number of things that we think about that could improve the strength of it. And in this particular topic, we started to think about late last year. And I think to your question, some of it was just finding the right time for the financial pieces of this to line up and make really good sense. And some of it was sort of navigating through the the industry issues in early March. So it had been on our mind, and we were just waiting for the light window, but that, you know, came to us here in early June, and so that's when we put it in place.
spk02: Understood. Thanks for the questions, guys.
spk05: Thank you, Will. The next question comes from Michael Rose with Raymond James. Please go ahead.
spk06: Hey, good morning, guys. Hope all is well. Just wanted to get a sense for loan production here, Mitch, and what the outlook could be here in the near term, just the competitive dynamics and what you guys are kind of seeing across your footprint. Thanks.
spk03: Sure. Thank you, Michael. Well, another question. another solid quarter of production. As we've seen in the last two or three quarters, of course, we see pipelines continue to moderate some. And I would say, again, that's driven by our discipline and pricing, funding, underwriting, and demand to the point of your question. But as I mentioned, we operate in vibrant markets, and we continue to service and grow relationships. Our production this past quarter was $413 million. That compares to $415 million the prior quarter. So again, solid production, good net result. This quarter, $169 million, or roughly 6%. And that compares to $188 million, or just over 6%, between 6% and 7%, the prior quarter. As I mentioned before, kind of the governor on that net result is what we see in payoffs. Payoffs were up modestly this quarter, but overall, compared to the prior year, of course, they have moderated as well. So, you know, as far as looking forward, the good thing about our portfolio, as Jim and Kevin mentioned in opening remarks, we're granular on both sides of the balance sheet, and that's reflected In this quarter's production, geographically, we continue to see all of our regions, our business lines, contribute well to our results, as well as the granularity of our loan types that we continue to have pointed to in the past, but again, it's reflective of our book, with about 30% of that production coming from the consumer, got a wonderful family, another 30% from small business credits less than $2.5 million, and then another 24% or so from commercial credits, those above $2.5 representing C&I owner-occupied commercial real estate type credits. And then our corporate commercial business lines continue to contribute well. That makes out the balance of this quarter's production. So we continue to hit on many different cylinders relative to our ability to reduce All of that, along with our markets, gives us optimism about our ability going forward. As to our markets, I would point again to immigration, economic development in sectors like manufacturing, distribution, medical, government, education. All of those contribute to a very vibrant, strong marketplace that we do business in. And with all that, I would expect this quarter to be generally reflective of what we've seen in Q1 and Q2 relative to our net. All of that depending somewhat on the level of payoffs and just the continued economic activity that I referred to.
spk06: Mitch, that's great, Collin. And that actually kind of touches on my follow-up, which is, you know, if the fed raises today and signal that that's kind of it, I mean, you guys have an expectation for, you know, what payoffs could, could look like here over the next few quarters. And then how does the acquisition of, uh, of Republic earlier this year in the ABL business, um, contribute to this quarter's growth and expectations in the back half. Thanks.
spk03: Yeah. Thank you. Yeah. So, um, I don't know that an additional move in the Fed would have a significant change in the payoffs likely at this point, but relative to Republic, we have been very pleased. The integration with that company into ours, the strong both business development and the underwriting discipline in that company, we have been very pleased with what we've seen so far and just merging them into our company. It's been received very well the referral of business, I would say, both ways within both companies. We have been very pleased and was a meaningful contributor in Q1 and Q2, and looking at the pipeline, we certainly expect that to continue.
spk06: Great. Maybe just one more for me, switching to expenses and maybe how it ties into mortgage this quarter a little bit stronger. I assume that was some of the expenses coming in a little bit higher than the guidance range you'd given. Can you just give us some thoughts on where the efficiency ratio was for the mortgage company and what the profitability looks like and what the expense range could look like for the third quarter? Thanks.
spk08: Thanks. Michael, Kevin again. So, yeah, as we look at mortgage, mortgage, again, continues to be a very volatile and rough environment, particularly compared to two to three years ago. The great thing about our mortgage company is under their leadership, we continue to be profitable. And we know that that's an anomaly compared to what's happening in the industry, but also it's not an accident. They are less efficient. I think their efficiency ratio for the quarter is going to be in the mid-90s. If you back them out, they weigh on our efficiency ratio by two percentage points. And as we look at the expense increase at the top of the house, the majority of that is going to be attributable to mortgage. We talked about earlier in the call just the salaries and employee benefits. It was up gross. It was up $800,000. $600,000 of that was mortgage. If you look at some of the other expenses in the categories, particularly in the other, mortgage is going to be contributing to that just for some of the costs to close the loans. As we look at expense guidance, probably going to be a little bit volatile for the next couple of quarters. As far as headwinds that we have versus some of our internal expense initiatives, we do think But as we look out, the expenses for maybe the next couple of quarters are a little bit flattish. Some of that's going to be driven by mortgage. We do expect mortgage to have another good Q3. So expenses could be, remain elevated compared to what we've gotten to in the past just because of mortgage. But again, continue to focus on initiatives to bring expenses down, bring revenue up, and ultimately get our efficiency ratio back down towards that 60% range, which is, in the current environment of margin compression, is probably going to take a few more quarters than we anticipated.
spk06: Great. Thanks for all the color, guys. Appreciate it. I'll step back.
spk03: Thank you, Michael.
spk05: Again, if you have a question, please press star, then 1. The next question comes from Steven Skouten with Piper Sandler. Please go ahead.
spk07: Hey, good morning everyone. I am, I guess I want to do his followups briefly on deposits. Um, you talked about, I think Jim, maybe you said you wanted to look to replace a lot of those broken deposits over the coming quarters. Where do you think that would come from? Would that likely be customer CDs at this point in time? And then kind of, how do you think about non-interest bearing deposits and where those balances might, might trend from here, potentially bottom.
spk04: Our focus remains core deposit growth and we have a number of initiatives so we're not unusual in that category with other banks but we've got a real focus there and our aspirations are to try to grow core deposits and we appreciate the significant headwinds in the industry but But that's our target. And, of course, one of the things that plays a role in this is funding it. But our goal is to, over the next few quarters, try to reduce that brokered number. In terms of NIV, I think we're roughly around 27% or 28%. Don't know for sure where that goes, but a reasonable expectation, maybe over the next two or three quarters, is you see that get in the mid-20s. Of course, it's, you know, a real battle given where rates are. And the higher or the longer they remain higher, the more difficult that challenge becomes on NIV balances. So a lot of it, to your point, will be through specials and promotions on the POT side. But our goal is to, you know, return to a close to 100% core funded bank as soon as we can.
spk07: Got it. Helpful color, Jim. Thank you. And I'm curious, just kind of at a high level, how, you know, obviously we had all this turmoil in March and May, and now the market's telling us everything's okay, I guess, right? So I'm wondering how your business model might have changed, if in any ways, and kind of as you think out longer term, how you want to focus to take advantage of any dislocation or opportunities that may exist for the bank to continue to succeed.
spk03: Yeah, Steven, you know, certainly we're focused today on the economic uncertainties, whatever those might be. I guess there's varying opinions relative to maybe where we would be in that cycle. But certainly what we will do is remain very disciplined in evaluating opportunities. But certainly, as we have consistently done in the past, we will remain opportunistic. whether that be new talent, new markets, strategic partners, either banks or non-banks. We talked a minute ago about our success with Republic. I would also add relative to Southeast Commercial, which we added earlier last year as well. We continue to evaluate opportunities that drive shareholder value that align with our culture and our business model and risk appetite. As we go forward, we will continue to do that and be opportunistic.
spk07: Makes sense. And do you think today your loan-to-deposit ratio, giving you a little bit more room than maybe some of your peers, could allow you to bring on talent? And would you want to do that today, or are we still in a period of maybe we wait and see how this shakes out and get more aggressive as we get down the line a little bit?
spk03: Yeah, well, I think, you know, for the right talent, that's something you always take the opportunity when those opportunities come along. We actually had two additions this past quarter, one in Nashville, one in Atlanta. So we're always mindful of that and try to stay positioned, you know, where that's always something that we would take that opportunity. Kevin, follow-up comments there?
spk08: Yeah, Steve, I think it's a great question. And to just simply add, as we look at how we've positioned our balance sheet, either from a liquidity, from a capital standpoint, we're still open for business. And we recognize that there was a shock to the system in March, and there may be some shocks in the future. We don't know. But we manage. I'm not sure we're really managing any different today than we were over the last couple of years. There's capacity on our balance sheet to grow, but we've got to have relationships. We would have told you that three years ago or five years ago. We want to develop relationships. There's very little capacity on our balance sheet, either for liquidity or capital, for transactions. That transaction we're going to get really well compensated for. So that tends to lead not to us doing any transactions. So we just say that our focus is the same. There's a heightened focus on deposits. But there was also a heightened focus on deposits in 2021 when everybody was a loss of liquidity. So we think with how we're positioned, not only from a balance sheet, from a liquidity capital, but also from an openness to higher talent, if a quality talent is available, we're going to hire them. We will hire them. If it's B and Z talent, we may pass. The NC talent typically is always available, but if there's a caliber talent, we will hire them because they don't become available very often.
spk07: Yeah, that's great, Keller. Good to hear it and appreciate all the time this morning.
spk01: Thank you, Stephen.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Mitch Waycaster, Renaissance CEO, for any closing remarks.
spk03: Very good. Thank you, Drew, and thank you to each of you for joining the call today. We plan to participate in the Raymond James Conference on September the 6th and the Stevens Conference on September the 19th.
spk05: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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