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spk07: Good day and welcome to Renaissance Corporation 2023 third quarter earnings conference call and webcast. All participants will be in listen-only mode. If 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. Please note that this event is being recorded. I'd like to turn the conference over to Kelly Hutchinson of 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.
spk02: 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 will continue our efforts to add to this presence. Renaissance 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.
spk01: 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 quarters. Our second quarter results included an after-tax loss of $18.1 million or 32 cents from the sale of a portion of our securities portfolio. Breaking down net interest income, loan interest income increased over $9 million on a late 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 $385 million on a linked quarter basis, which helped us reduce our reliance on wholesale funding and allowed us to pay down FHLB advances by $150 million and broker 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, non-interest 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. Non-interest 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 calls over to Jim.
spk06: 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 broker 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. As you can see on slides six and seven, the company's core deposit base and overall liquidity position remains strong. The deposit base is diverse and granular. The average deposit account is $29,000 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. We also experienced a modest build in the tangible common equity ratio and tangible book value per share. Turning to asset quality, we record a credit loss provision of $5.3 million and a recovery of credit losses on unfunded commitments of $700,000, which is recognized in non-interest 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 9. 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 on to profitability, beginning on slide 10, excluding the after-tax loss and 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 6 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 non-interest 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.
spk02: 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.
spk07: Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time we'll pause momentarily to assemble the roster. First question will be from Michael Rose. Raymond James, please go ahead.
spk03: Hey, good morning, guys. Thanks for taking my questions. I just want to start on loans and the outlook. The growth has been, frankly, a little bit stronger than what we've seen from 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.
spk02: Very good. Good morning, Michael. Let me start with the backdrop. I'll start with pipeline, go to production, and then I'll ask David to talk a little specifically about construction, which you mentioned. Just beginning with pipeline, kind of put 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 in 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 an add 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 pull back More like we saw in the first quarter of this year, we had 384 million. That compares to 370 Q1, but 455 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 loan types and the sizes of 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 in production in Q3, 26% of that, talking about the granularity in 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's 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 operations we've been very pleased with. All to say, geographically and by type, very granular, our average loan size is $250,000 for the total company. We just simply continue to hit on many different cylinders, and it's evidencing of our ability to prudently produce a diversified portfolio, but certainly while remaining disciplined in our pricing and underwriting. But with that said, we remain optimistic about our ability going forward in this next quarter. David, do you want to comment specifically on construction?
spk04: Yes, sir. Thank you. Good morning, Michael. This is David. Our construction and development bucket changed moderately over the quarter. It went from about 53% to 54%. It led to about $35 million in change quarter over quarter. That's only about 15% of our loan growth. that kind of fish 4% is not far off from where we would have seen historically our construction and development buckets somewhere fish 5-6% where we would expect that number to be. So it's not out of line from an expectation standpoint.
spk03: I appreciate all the color. Great detail. Just as a separate follow-up, expenses were down a little bit Q on Q and you guys have kind of talked about flattish. Any specific efforts or things that you're kind of working on? I assume some of it has to do with, you know, mortgage, you know, related revenue being down a little bit. So incentive comp a little bit less, but you know, anything that you guys are kind of working on in the expense front, I know you've kind of talked about migrating the efficiency ratio back towards 60%. Just wanted to get an update there, just given some of the revenue headwinds that are out there for the industry. Thanks.
spk01: Hey, Michael, Kevin. On the expenses, our focus really hasn't changed. If you just look at the expense categories where you saw the decrease, you can see occupancy, equipment, salaries, employee benefits, both of which comprise, collectively, they're going to comprise 70-75% of our our expenses, so that's where our focus is. In Q2, we do have the seasonality. Mortgage revenue was down, so mortgage expenses, specifically mortgage commissions, are down. So if you look at salaries and employee benefits line item, it's down 1.2 million, but that's not all mortgage. About $300,000 of that was expenses from the core bank, so roughly $900,000 of that is going to be attributable to mortgage. But there's also a day count differential there. If you add in the day count differential compared to Q2, our core bank, or just non-mortgage salaries and employee benefits, it's going to be down another $500,000 just from the day differential. So there's real traction being made on our efforts to control and contain and reduce expenses. As we look out, our focus is still going to be the same. We don't have an announced expense initiative, but we've announced multiple times that we're focusing on expenses, and I think you see that in our numbers. If you just look quarter to quarter, there's some seasonality to it. But our focus has been on reducing expenses. When it comes to the efficiency ratio, our attention is now focused on the revenue side of that. But we will continue to have an ongoing effort to reduce expenses. And, again, we'll just ask you to focus on salaries and employee benefits and occupancy and equipment. That is where our attention is going to be because that's where the majority of our expenses lie.
spk03: Appreciate the color. I'll step back. Thanks for taking my questions.
spk07: Thank you, Mike. Thank you. Next question will be from Catherine Mellor of KBW. Please go ahead.
spk09: Thanks. Good morning. Good morning.
spk06: Good morning, Catherine.
spk09: I wanted to ask on the margin and just see what you think, what's your outlook for the margin into the next quarter and into next year? And really, maybe a big picture just thought for the margin is how do you think about where and kind of potentially when the margin should bottom, and also how you're thinking about NII growth as we move into next year? Thanks.
spk06: Good morning, Catherine. This is Jim. Morning. morning. So as you know, when we think about margin or other profitability performance metrics, we really start with a balance sheet. I do want to see it in numbers, but I think we're very proud of how we've grown deposits here in the last couple of quarters. I think our growth in core deposits in Q3 was about 11% annualized, and So the balance sheet remains a focus. And certainly, everybody's focus was sharpened by the events in early March. And we, like others, leaned into wholesale funding. And since that time, we've tried to reduce our reliance on those wholesale sources. And that remains a goal. On federal home loan bank, we're down to $100 million, and that will not only lower because we've got a very attractive rate on that $100 million of about 70 basis points. And now the focus remains to lower that reliance on broker deposits. I think we reduced that a little over $300 million in the quarter, and our goal is over the next few quarters to get that down to essentially zero. I say that as a backdrop to margin because the balance sheet, we start with a focus there, and then as we think about margin and looking forward, a couple of comments. We do see continued pressures on the margin. I think as we look at Q4, my expectation is that the margin will continue to compress and probably a bit more than we saw Q2 to Q3, but less than the compression that we saw Q1 to Q2. in terms of margin. NII will sort of follow that, you know, trend, I guess. I mean, certainly growth will help a bit, but I think NII direction will follow what we foresee in the margin. As it relates to, you know, looking forward to 24, we see some really encouraging signs, Catherine. You know, it remains an uncertain and volatile environment, as you know. So sort of predicting where things might bottom is a tough thing, but one of the things that we were struck by in our quarter was the moderation in NIB decline. So we did see a decline in nitrous bearing balances in the quarter, but it was meaningfully less than the decline we saw from Q1 to Q2. So things like that give us hope that we'll see some stabilization in 24, but you know, remains too, I guess, uncertain to call one that might be.
spk09: Great. And how about on loan repricing? That's, I think, the tailwind that we're all looking for for 24 as we think about, you know, when and bottoms and when we start to see how much of an increase we can see throughout 24. Is there any, can you kind of talk about, you know, maybe the amount of loans, fixed rate loans that you know are going to be repricing over the next year and what kind of upside that might claim to your margin?
spk06: So a couple of things, I think in terms of fixed rate loans and the repricing opportunity that we've got about 200 million in Q4 that will repriced and that's, those loans are roughly carrying like a 540 or 545 rate. And then for the 24, I think it's a little over 600 million. in loans in a slightly lower way, like 525 or 530. So there's some repricing opportunity there. Another thing that may be helpful, Catherine, I think in prior calls we've talked about sort of giving you a monthly look, not just a quarterly look, but a monthly look. So I would tell you that if you look at loan repricing for the quarter, new and renewed was 827, and for the month it was 834. But the other side of that is what we just talked about in terms of the pressures. Interest-bearing deposits for the quarter were at 198, and for the month of September were 210. So you can see those pressures still persist. But again, there are certainly some repricing opportunities in 2014, and we look to capitalize on those.
spk09: Great. And maybe just one margin question, and then I'll back out as the... I think in the past you've talked about a 50% interest-bearing deposit beta over the cycle. Is that still about where you're targeting, or do you think you'll see?
spk06: You know, we try to be conservative, and every time we try to be conservative, I think we still not hit the mark exactly, Catherine. But right now we're modeling a terminal beta in the mid-50s on interest-bearing deposits.
spk09: But that would be, you would probably hit that more like mid-24 versus next quarter.
spk06: I think that's a reasonable guess, yes. Okay. All right.
spk09: Great. That's all I got. Thank you.
spk06: Thank you, Pat.
spk07: Thank you. Next question will be from Dave Bishop of the Hubby Group.
spk05: Please go ahead. Yeah, good morning. Wanted to just stick with that, the funding topic real quick. Specifically, just curious what your level, absolute level of broker deposits were and maybe the cost and maturity schedule over the next couple quarters.
spk06: Good morning, Dave. This is Jim. So I think at quarter end, we're around $750 million, call it, in broker deposits. And in Q4, I think we've got maturing deposits of around $300 million in brokerage. And I want to say that's carrying an average rate of like, call it 525, 530. And within the next three quarters, I would say roughly, you know, the vast majority of that 750 will have the ability to pay off. So you know, we're putting on new deposits that cost below four. So we definitely benefit from that. Plus the greater benefit as we see, we certainly want that income statement benefit. But what we really like is just, you know, having a balance sheet that here at some point in the next few quarters has virtually no reliance on alternative funding sources. And we're strictly, we're back to being a strictly core funded bank.
spk05: Got it. Then from a funding perspective, Appreciate the slide and cash and securities to sole assets down to about 17%. Do you think that's reaching a floor? Is there a near-term target for that?
spk06: I think we're pretty close, David. Maybe there's another $100 million or so in there that we would use to help fund loan growth, but we're pretty close to where we want to be in terms of that cash level.
spk05: Got it. Then turning to credit quality, it looks like there was maybe some migration from the loans 90 days past due into not accrual. Maybe talk about maybe some of the sort of the quote-unquote mix shift that occurred from a credit quality front this quarter.
spk04: Good morning, Dave. This is Dave. As a quarter, for those where we didn't have loans that were 90 days past due last quarter that migrated in, those were just identification of new loans. It was primarily comprised of just really One was a senior housing credit that continues to underperform. We believe that we're in a very good loan-to-value position on that asset by virtue of their taking that asset to market for sale. We're in a really good asset position. The other one was a mortgage property, as we've seen with mortgage properties. Those values are still holding, so we believe we're in a good value position on those two. So it was primarily related to those two properties.
spk03: Got it. Appreciate the color. Thanks.
spk07: Thank you, Dave. Thank you. Again, if you'd like to ask a question, please press star then 1. Next question is from Jordan Gent of Stevens. Please go ahead.
spk08: Hey, good morning, guys. How are you doing? I just wanted to ask about capital and kind of what your guys' preference is. You know, capital continues to build and you have the buyback program in place. And just kind of what is your appetite for any share repurchases going forward?
spk06: Martin Jordan, this is Jim. So, as you noted, we did, our program had just expired and the board renewed the repurchase program. As you know, there was no activity in Q3. And I would say this, that as our cap ratios do build, it gives us more flexibility with regard to how we might utilize that capital. And share repurchases are a constant topic of conversation. But I would say that generally we're not leaning in that direction. We don't take it off the table. It's always something that you think about potential use and Our expectation is that we'll have other opportunities. At least we think that's very possible in the coming quarters. It feels like there's a lot going on in the industry, and we think that that could present some opportunities for the company. And so maintaining and growing that capital in the near term is something that we like because we like the flexibility that that gives us.
spk08: Perfect. And then maybe just kind of a follow-up to that. You said other opportunities. How do you weigh the capital use between organic growth and M&A?
spk06: You know, I think as we, you know, think about growth, organic growth is certainly preferred. And that's really how we've largely grown the company over the last few years. And, you know, as you saw in the numbers this quarter, we had really good growth and it was very diverse and across all geographies. So it was pretty much in line with what we've done the last few quarters. So that's the preference and that's the priority. But as Mitch has said in the past, we remain open to looking at external growth, M&A growth. And of course, we've done some smaller non-bank acquisitions over the last 12 months or so. And we believe that as you look forward in the banking industry, we think that there's you know, a growing likelihood in the year ahead or so that we could see more depository opportunities. And we would remain open to those and, you know, feel like on the right terms those could be attractive for our shareholders.
spk08: Perfect. Okay. Thank you for taking my questions.
spk07: Thank you. This concludes the question and answer session. I'd like to turn the conference back over to Mitch Waycaster for closing remarks.
spk02: Well, thank you, Nick, and thank each of you for joining the call today. In closing, our Renaissance team wishes for Sally Pope Davis the very best in her upcoming retirement. We next plan to participate in the Piper Sandler Conference on November the 15th and 16th.
spk07: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
spk01: Great. Gregory? 3.77% of Utah?
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