Renasant Corporation

Good morning and welcome to the Renaissance Corporation 2024 First Quarter Earnings Conference Call. 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, press star, then one your telephone keypad. To withdraw from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutchinson with Renaissance Corporation. Please go ahead.

Good morning, and thank you for joining us for Renasant Corporation's 2024 quarterly webcast and conference call. Participating in this call today are members of Renasant's executive management team. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance, and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, www.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.

Thank you, Kelly. Good morning. We appreciate you joining the call and your interest in Renaissance. This quarter's results reflect loan and deposit growth plus continued expense management. We continue to build the strength of the balance sheet and believe this will be beneficial as we progress through 2024. Our Southeastern markets remain economically vibrant and lead us to see continued growth in the near term. The combination of deposit-rich markets and the higher growth areas is one of the keys to our financial success. Yesterday, our board of directors implemented the next step of our company's management succession plan by designating Kevin Chapman to become our CEO in May 2025. I look forward to working closely with Kevin in this leadership transition. as I will continue as Executive Vice Chairman when he assumes his new role as CEO. Having worked with Kevin for nearly 20 years, I know Renasant is in great hands with Kevin guiding our company and look forward to a bright future under his leadership. I will now turn the call over to Kevin.

Thank you, Mitch. I appreciate the trust and confidence our board, shareholders, and company has in me and look forward To your wisdom and guidance as I prepare to take on this new role. Looking at our first quarter results, our earnings were $39.4 million or 70 cents per diluted share. In the first quarter, we sold a portion of our mortgage servicing rights portfolio for a $3.5 million gain. The carrying value at the time of the sale was $19.5 million and represented $2 billion in unpaid principal amount. Excluding this gain and one smaller item, our adjusted EPS was $0.65 for the quarter. We experienced another quarter of solid loan growth, which, when coupled with an increase in loan yields of 12 basis points, resulted in an increase of $3.9 million in loan interest income on a linked quarter basis. On the deposit side, we remain focused on growing our core funding base and continue to see good momentum during the quarter with core deposit growth of $280 million on a linked quarter basis. With this continued growth, we were able to allow $119 million of broker deposits to mature. Pricing for deposits remains competitive throughout our footprint, and although deposit interest expense has continued to increase, the pace of increase continues to slow as reflected during the quarter. Included in non-interest income for the first quarter are two one-time items, the gain on the sale of the mortgage servicing rights of $3.5 million and a gain of $56,000 on extinguishment of debt. Excluding these one-time items, adjusted non-interest income decreased $688,000 quarter over quarter. Income from our mortgage division, excluding the MSR gain, increased $1.3 million from the fourth quarter. Interest rate lock volume increased $102 million quarter over quarter, and our gain on sale margin increased 64 basis points. Non-interest expense increased $1 million from the fourth quarter. In the first quarter of 2024, we recorded expense of $700,000 related to the FDIC special assessment after the $2.7 million assessment in the fourth quarter of 2023. We also made contributions totaling $1.1 million to certain charitable organizations which qualify as tax credits and will provide a one-to-one offset in tax income expense. I will now turn the call over to Jim.

Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. While the size of our balance sheet is essentially unchanged, we continue to see excess liquidity deployed into loans, and deposit growth has generally kept pace with loan growth. Loan growth in the first quarter was $149 million and represents an annualized growth rate of 5%. We experienced another quarter of strong core deposit growth, which allowed us to continue to shift our reliance away from non-core funding sources. As you can see on slides 6 and 7, the company's core deposit base and overall liquidity position remains strong. The deposit base is diverse and granular. The average deposit account is $31,000 and there are no material concentrations. Referencing slide 8, all regulatory capital ratios are in excess of required minimums to be considered well capitalized. And each of these ratios improved from the prior quarter. Earnings for the quarter contributed to an increase in the tangible common equity ratio, which now exceeds 8%, and tangible book value per share. Turning to asset quality, we recorded a credit loss provision of $2.4 million. Net charge-offs were $164,000, which represents an annualized rate of one basis point, and the ACL as a percentage of total loans was flat at 1.61%. Asset quality metrics are presented on page 9. Our criticized loans increased quarter over quarter. The loans added in the quarter are current on payments and we currently do not anticipate any loss on these loans. All other metrics were relatively stable underscoring our emphasis on prudent underwriting. We continue to remain vigilant in monitoring credit including early identification of potential problem loans in order to mitigate loss. Our profitability metrics are presented on slides 10 and 11. Excluding one-time items, adjusted pre-provision net revenue declined $4.4 million on a linked quarter basis. Pressure on our net interest income is the primary driver of the decrease. Turning to slide 12, adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries, was 3.28%, down one basis point from Q4. Adjusted loan yields increased 12 basis points. while the cost of total deposits increased 18 basis points. Deposit pricing pressures remain and will likely cause deposit costs to continue to increase in the near term. Kevin commented on the highlights within non-interest income and expense. While uncertainty in the rate environment continues to be a challenge, the focus remains on improving operating leverage. I will now turn the call back over to Mitch.

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

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 your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Catherine Miller with KBW. You may now go ahead.

Thanks. Good morning.

Good morning, Catherine.

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

Good morning. This is David. Oh, good morning, David. Hi, good morning. So we, you know, Q1, as we received year-end financial statements for 2020, for a year and 23. We set out to make sure we were reviewing all of our loans, not just CRE, but as well as our CNI credits during the quarter. And we saw some tightening in just a handful of CNI credits, which caused us to go ahead and downgrade those loans. It was primarily driven by CNI credit downgrades. And just to add a little color behind that, there was a net downgrade of around $77 million, but that's inclusive of some upgrades and some downgrades. We continue to cycle through those loans. As you know, our history is to be very proactive in the management of our problem assets, which is what we did in Q1. We seek to identify where there's weakness to provide the opportunity to restructure the credit to get back to an improved status where it's not classified or provide the opportunity to get out of the bank before deterioration worsens, which is what we did in Q1 to identify those loans just as a perfect example already in Q2, we've worked out of one of those loans that was $23 million and we'll continue to work those assets out of the bank. As Jim mentioned in his comments, they're all current. There's no concerns about losses. So we don't have a level of concern. It was purely driven by what we feel is early identification of stress on a handful of loans to identify those loans and work them out of the bank proactively.

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

Good morning, Catherine. This is Jim. Good morning, Jim. Good morning. So if if we assume no cuts and go with that outlook for 2024, at least in the near term, we're hopeful that the margins are going to stabilize roughly where it's at. As you point out, we've had nice increases in loan yields, but the relief on the deposit pricing side has just been You know, it's been stubborn. I mean, we've hoped for more progress there. And so we'll see how that plays out in 24. But I think I'm very encouraged what we're seeing on loan yields and what we're getting there. And I think the key is really what happens on that funding cost. And, you know, our net incremental cost on new deposits is running at four and a half to four and three quarters. And hopefully we get, you know, more stabilization in NIB. We had, I think, our outflows from Q3 to Q4 were like $160 million. And in Q4 to Q1, it was closer to $65 or $70 million. So the trends there are encouraging. And hopefully, we can continue to see that progress, which will help some at the margin. So I'd say overall, a flattish outlook. If we do get cuts, I'm not sure. I mean, generally cuts are going to be modestly in the near term hurtful to the margin, but given the current outlook, if those cuts occur later in the year and there's only a couple of them, I don't know that the impact would be that significant.

Okay, great. And maybe just want to follow up to your point on loan yields being better. New deposit costs, you said, were between four and a half and four and three quarters. Where are incremental loan yields coming on right now?

So if you exclude RBC, we're comfortable in the low eights. I think for the quarter, it was like eight and a quarter, somewhere around there. And for the month, I want to say, Catherine, it was like around 830. So nice progress there. I think now we've got, it's been two or three quarters that new and renewed has been at eight or better. So really encourage what we're seeing there. And hopefully we can keep that up. RBC definitely adds to that. So it's closer to, I think 830 turns into like 850 or 860 for the month of March if you add RBC. Perfect.

Great. Thank you.

Thank you, Kathleen.

Again, if you have a question, please press star then 1. Our next question will come from Michael Rose with Raymond James. You may now go ahead.

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

Very good. And good morning, and thank you for your comments, Michael. Yeah, so let's start with pipelines. So we're going into this quarter with a pipeline of 142 million. That compares to 122 million at the start of the first quarter. So we see that up a modest bit as we start the quarter. And I would first say that, just coming back and I'll eventually get to your specific question, but governing both the pipeline and certainly the production is our discipline in pricing. You just heard Jim talk about the results for the quarter and what, what we, where we see rates coming in, but also the funding, uh, both pricing and funding and then underwriting. Um, certainly that's something we're very prudent about. And you just heard, uh, David or in an earlier question, you may have not heard, he was talking about administration. And then I would, I would come to demand, but, uh, That demand we continue to see, and we simply operate in good, vibrant, resilient markets, and we continue to serve and grow relationships, and that's driving what I'm referring to here in both production and pipeline. All of that's evidenced by the growth that we saw this past quarter, 150 million, roughly 5%. and also on the deposit side. We had, as Jim just mentioned, we had very good funding and deposit growth. The other thing I would say about production, and it's continued this quarter, the last number of quarters, it's coming from each of our markets, our regions, our business lines. They continue to contribute in a meaningful way, and it And it's coming from across the footprint in business lines, as I mentioned. Just to give you some percentages, this past quarter we had 13% in Tennessee, 10% in Alabama, Florida, Panhandle, 15% Georgia, Central Florida, 26% in Mississippi. Mississippi had a very good quarter this quarter. And then 36% from our commercial corporate business lines. And I would say just as important as the geographic distribution and those loan types is the size of credit. We have a very granular asset-based loan portfolio. If you look at the production this quarter of 418 million, 7% of that was in what I would call consumer, whether that be HELOC's one to four family portfolio. which we've seen that pull back a touch with mortgage production inventory. But 32% was in small business, business banking. Loans under $2.5 million. They're also deposit-rich, great relationship-type credits. And another 31% in commercial credits greater than 2.5. CNI, David mentioned CNI earlier, but owner-occupied commercial real estate. And then another 30% to round out the production for this quarter came in our corporate banking group, some larger C&I, commercial real estate, asset-based lending, equipment finance, senior housing. Also, we've mentioned a Republic business credit. Jim mentioned our factoring business. All of that to say our average credit is still around $260,000 or so, so As you can see, we continue to hit on many different cylinders, evidencing our ability to prudently and continue to produce a very diverse portfolio. But back to your question relative to just looking forward, you know, I would say for this quarter and just looking out to 24, I would say what the expectation would be to be in line with our past quarters. and more in that mid-single-digit type net. Another variable always is payoffs. We saw payoffs pull back a little this quarter. That's going to ebb and flow. So that'll ultimately play out in the net result that we see quarter to quarter.

Mitch, that's great, Collier. I always appreciate your commentary. It's very insightful. I just wanted to switch gears to fee income and mortgage, which was a nice upside this quarter with the gain on sale margin jumping higher. I know it's hard to predict. There's lots of variations quarter to quarter with timing of lock and realization of income, but maybe if you can just walk us through expectations for mortgage revenue and maybe specifically If you can just give us some dynamics on, you know, what the profitability of that business looks like, maybe current efficiency ratio in the quarter, you know, things like that. And I know the NBA is forecasting, you know, an increase in volumes this year. Just wanted to see if you'd expect normal seasonal patterns and, you know, if we can expect, you know, a little bit better, you know, mortgage income as we move through the year. Thanks.

Hey, Michael, Kevin, so to kind of answer to your last question first, we are anticipating mortgage revenues to continue to hold strong, maybe even pick up as we get into the summer months. I think we're all very cautious just trying to understand what's happening in mortgage coming out of 2021 and maybe normalizing. in 22, 23, and even now, it's hard to say that the normal cyclicality of mortgage is there. Inventory constraints continue to be a headwind in the industry. We actually still see a lot of demand. It's just limited supply. If you look at some of our trends, You saw the pipeline grow in Q1 compared to Q4. The pipeline currently in Q2 is holding steady, if not up slightly. And we recognize that that's going against the trend that Mortgage Bankers Association is seeing nationwide, where maybe applications and sales are flat to kind of pulling back. So we're optimistic about our mortgage team. We have been opportunistic in some key hiring in Q1 of producers. in certain markets. That gives us optimism about higher levels of performance, outperformance in our mortgage space. And the division continues to remain profitable. Despite all these headwinds, it does continue to remain profitable. We've gone through now 18, 24 months of re-looking at the business, restructuring the business. We've implemented a new operating platform. We're on the back end of that now. And as well as more of our expense coming from mortgage is becoming more and more variable. If you just look at expenses, for example, in Q1 for mortgage, salaries are down $300,000 because of the cost-cutting efforts that were taken in Q4. Commissions are up $400,000 to $500,000 But that's against revenue that was up, kind of core revenue, if you exclude the gain on mortgage servicing rights. Core revenue is up over a million. So getting the right structure there in mortgage, of having that right balance of variable revenue against variable expenses has been a key effort of our team. And we think they've done a really good job, and we're optimistic about mortgage. I say that to say it's a tough environment out there in mortgage. We all know that. But I think the investments we've made, as well as the improvements we've been making over the last two years, we're positioned well for mortgages to continue to be profitable.

Thanks, guys. I appreciate the call, and congrats again.

Thank you, Mark. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mitch Waycaster. Pardon me, there's actually another question from Stephen Skouten with Piper Sandler. You may now go ahead.

Hey, everyone. Thanks for taking my question there. I just wanted to follow up on a comment around new loan yields potentially moving up to that 850, 860 range. Do you think those incremental costs of deposits can kind of stay in that range you were speaking to and thus we could see some widened spreads on incremental production? Thanks.

Good morning, Steve. This is Jim. Again, nice improvements in new and renewed yields. The 860 did include RBC. XRBC was around 830 for the month of March as a snapshot. I would like to be optimistic and think that those spreads could stay where they are or potentially widen, but I think the reality is we're still just a tough deposit market. I take what we're seeing on the loan yield side and feel good about that and really like those trends, but I'm cautious in baking in too much that'll go to the bottom line, Stephen. That's why I think overall margin, I think our best outlook here with a no rate cut environment is for a pretty stable margin, at least near term.

Okay, that's helpful, Jim. And then just maybe one other question for me, if I could. I mean, your loan loss reserve, I mean, 161 relative to peers is a fair bit higher and credit quality looks stable, only one basis point in net charge-offs here in the quarter. I mean, how do you think about that reserve moving forward? I mean, is it really mathematical based on kind of economic scenarios and kind of how you weight those things? Or, you know, is there any kind of visibility you could give us into how that percentage might change moving forward.

Hi, Steven. Good morning. This is David. And so to answer the second part of your question, it is mathematical and it takes into account different economic factors. In this quarter, there was some movement in that number. Obviously, we had loan growth. We had to fund for loan growth as well as we talked about earlier. We had some negative credit migration in a category that we had to allocate for. So that number is mathematical. We have intentionally We've kept that number up where it is based on the economic forecast while we continue to believe there's an economic event that we're going through. Some of those economic variables within our Q factors are a little bit on the more elevated side. Just as we work through it, as we continue to see things settle out in the near future, I think if we forecast the past, we would expect to see that number migrate down, but we'll just be looking for the changes in those economic factors. to drive a change in our ratios.

Okay.

Thanks for letting me sneak in here late. And Kevin and Mitch, congrats on the transitions and all that's to come. Appreciate the time.

Thank you, Steven. Thank you, Steven.

Our next question will come from Jordan Gent with Stevens Inc. You may now go ahead.

Hey, good morning. I just kind of had a follow-up question to your comments on the variable expenses. And just wondering where you see expenses kind of go from here and kind of on a quarterly basis through 24? Yeah.

Hey, Jordan. It's Kevin. Thank you for the question. So if we look at expenses, let's kind of take Q1 expenses at that 113 range. If you look at each of the individual components, all of the line items are trending downwards at excluding kind of one, but one or two of them. And that advertising, that's one of them that increased. But again, that's where we had that million to $1.1 million charitable contribution that's going to flow through taxes. In the other line item, that's where you had the $700,000 increase related to the special assessment. So if you back those out, kind of our run rate is in the is in the $111 million range. And just as we look out, kind of in the short term, Q2, we're going to be in that 111, 112 range, 111 to 113 range. We've got merit increases that went into effect late in Q1. There'll be a full quarter impact. And then as we get into the latter half of the year, that's when we see that there could be some opportunity for relief on the expenses Just with the initiatives that were taken internally, we could see some relief there. But just in the short run, as we get into Q2, as we, again, we more normalize the run rate related for the merit increases, that could be flattish to what we see this quarter.

Perfect. Thank you. Thank you, Jordan.

This concludes our question and answer session. I would like to turn the conference back over to Mitch Waycaster for any closing remarks.

Well, thank you, Anthony, and thank each of you for joining the call today. We next plan to meet with investors at the Gulf South Conference in New Orleans beginning on April the 29th.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.