Q1 2024 Renasant Corp Earnings Call

Participants

Kelly Hutcheson; Chief Accounting Officer; Renasant Corp

C. Mitchell Waycaster; Chief Executive Officer, Executive Vice Chairman of the Board; Renasant Corp

Kevin Chapman; President, Chief Operating Officer; Renasant Corp

James Mabry; Chief Financial Officer, Senior Executive Vice President; Renasant Corp

David Meredith; Executive Vice President, Chief Credit Officer; Renasant Corp

Catherine Mealor; Analyst; Keefe, Bruyette, & Woods, Inc.

Michael Rose; Analyst; Raymond James & Associates, Inc.

Stephen Scouten; Analyst; Piper Sandler & Co.

Jordan Ghent; Analyst; Stephens Inc.

Presentation

Operator

Good morning and welcome to the Renasant Corporation 2024 first quarter earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson with Renasant Corporation, please go ahead.

Kelly Hutcheson

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 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.

C. Mitchell 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 continued 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 on no RENAISSANCE 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.

Kevin Chapman

Thank you, Mitch, and 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 $0.70 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 noninterest 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 and 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.

James Mabry

Thank you, Kevin. As I walk through the quarter's results, I will reference slides in 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 noncore 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 improve 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, record, 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 are 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 cost to continue to increase in the near term.
Kevin comment on the highlights within noninterest 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.

C. Mitchell Waycaster

Thank you, Jim. We believe RENAISSANCE 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.

Question and Answer Session

Operator

(Operator Instructions) Catherine Mealor, KBW.

Catherine Mealor

Good morning.

C. Mitchell Waycaster

Good morning, Catherine.

Catherine Mealor

And congrats to both you, Mitch and Kevin for on the news last, I know this will be a great transition for Renaissance, so excited for both of you from my first question maybe is just starting it's starting on credit. Jim, you mentioned the increase in classified. 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 lot I'm assuming that's correct?

David Meredith

Yeah good morning this is David.

Catherine Mealor

Good morning David.

David Meredith

Good morning. So we come to one week because we received a year-end FY24 year and '23, we set out on a to make sure we were reviewing all of our loans, not just theory, but as well as our C&I credits during the quarter. And we saw some tightening and just a handful of C&I credits, which caused us to go ahead and downgrade downgrade. Those loans was primarily driven by C&I credit downgrades.
And just a little color behind that, it was there was a net downgrade of around $77 million, but that's a that's inclusive of some upgrades and some downgrades. We continue to cycle through those loans or 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 to restructure the credit to get back to a group status where some might classify or provide the option to get out of the bank before deteriorations worsen, which is what we did in Q1 to identify those loans.
Just as a perfect example already in Q2, we work out of one of those loans that was $23 million, and we'll continue to work those those assets out of the bank.
Jim mentioned in his comments. They're all current. There's no there's no concerns about losses. So there's some talk and 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.

Catherine Mealor

Great. And then one question on the margin, what's your outlook is the margin over the next couple of quarters, even before that outside of any rate cuts on, do you feel like we're at or near the bottom? And maybe specifically on just deposit costs and you can increase a little bit more than I was expecting this quarter. How close do you think we are to repeat?

James Mabry

Good morning, Catherine.
This is Jim. So far and again, good morning. So if we assume no cut and go with that outlook for for 2024, at least in the near term, we were hopeful that the margins are going to stabilize roughly at where it's at. And as you point out, I mean, we've had nice increases in loan yields, but the relief on the deposit pricing side has just been it's been stubborn mean it's 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 what happens on that funding costs. And we were our net incremental cost on new deposits is running at [4.5] to four and three quarters, and hopefully we get some more stabilization. And then I'd IB, we had I think our outflows from Q3 to Q4 were like [$169 million].
And then in Q4 to Q1, it was closer to $65 million or $70 million. So the trends there and encouraging and hopefully we can we can continue to see that progress, which are which will help somewhat the margin. So I'd say overall flattish outlook if we do get cut and 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 occurred later in the year, there's only a couple of them. I don't know that the impact would be that significant.

Catherine Mealor

Okay, great. And maybe just one follow-up to your point on loan yields being better on your deposit costs you said were between [4.5] and four and three quarters where incremental loan yields coming on right now?

James Mabry

If you exclude RBC, we're comfortable in the low eights I think that I think for the quarter was like eight and a quarter somewhere around there for the month. That was a catalyst like around [830] and so nice progress there. When I think now we've got it's been two or three quarters that new and renewed has been at eight or better. So we're really encouraged what we're seeing there. And hopefully keep that keep that up, RBC definitely adds to that. So it's closer to, I think, 830 turns into like 858, 860 on and for the month of March if you had RBC.

Catherine Mealor

Okay. Great. Thank you.

C. Mitchell Waycaster

Thank you.

Operator

(Operator Instructions) Michael Rosem, Raymond James.

Michael Rose

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

C. Mitchell Waycaster

Very good and good morning and thank you for your comments, Michael of.
Yes.
So let's start with pipeline. So we're going into this quarter with a pipeline of $142 million. That compares to $122 million of started the first quarter. So we see that up a modest bit as we start the quarter. And I would first say that I'm just coming back and I'll eventually get to your specific question, but governing both of the pipeline and certainly the production is our discipline in pricing. You just heard Jim talk about the results for the quarter and what we where we see grades coming in, but also the funding both pricing and funding and then underwriting. Certainly, that's something we're very prudent about.
You just heard, David or heard in an earlier question, you may have not heard he was talking about administration and then we would come to demand. But that 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 that's driving what I'm referring to here in both production and pipeline and all of that's evidenced by the growth that we saw this past quarter, $150 million or roughly 5%. And also on the deposit side, we had as Jim just mentioned, we had very good funding and deposit growth. And the other thing I would say about production, and it's continued this quarter over 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 is coming from across the footprint and business lines.
As I mentioned, just to give you some percentages of this past quarter, we had 13% in Tennessee, 10% in Alabama, Florida Panhandle, 15%, Georgia, Central Florida, 26% in Mississippi had a very good quarter this quarter and then [36%] from our commercial corporate business lines. And I would say just important as important as the geographic distribution and those loan types is the size of credit. We have a very granular asset base loan portfolio.
If you look at the production this quarter of $418 million, 7% of that was in what I would call consumer would that may he locks one to four-family portfolio for us? 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 credit and another 31% in commercial credits greater than [2.5] C&I and David mentioned C&I earlier, but owner-occupied commercial real estate and then another 30% to round out their 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. Tim mentioned that our factoring business, all of that say our average credit still around $260,000 or so. So as you can see, we continue to hit on many different cylinders, evidencing our ability to book prudently and continue to produce a very diverse portfolio. But back to your question relative to just looking forward.
Yes, I would say for this quarter and just looking out to '24, I would say 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 will ultimately play out. And the net result that we see quarter to quarter.

Michael Rose

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

Kevin Chapman

Hey, Michael. Kevin, kind of the answer to your last question first, we we are anticipating mortgage revenues to continue to hold strong, maybe even pick up as we get into the as we get into the summer months, I think we're all very cautious.
Just trying to understand what's happening in mortgage on debt coming out of 2021 and maybe normalizing in '22, '23. And even now, it's hard to say that the normal cyclicality of mortgage on is there some inventory constraints continue to be a headwind in the industry?
We actually still see a lot of demand. It's just limited supply. Now if you look at some of our trends on 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 is that's going against the trend that the Mortgage Bankers Association is seeing nationwide or 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 the producers in certain markets that gives us optimism about on higher levels of performance outperformance in our mortgage space. And on the look, the division continues to remain profitable on despite all these headwinds, it does continue to remain profitable. We've gone through now 18, 24 months of relooking at the business restructuring the business, we've implemented a new, our operating platform. We're on the back end of that now on and on as well as more of our expense coming from mortgage, it's becoming more and more variable.
If you just look at expenses, for example, in Q1, for mortgage, our salaries are down $300,000 because of the cost cutting efforts that were taken in Q4. Commissions are up on the $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 revenues up over $1 million. So getting the right structure there and mortgage of having that right balance of variable revenue against variable expense and been a key effort of our team, and we think they've done a really good job, and we're optimistic about mortgage that 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 on as well as the improvements we've been making over the last two years, we're positioned well for mortgage to continue to be profitable.

Michael Rose

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

C. Mitchell Waycaster

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mitch. We Custer.
Pardon me.
There's actually another question from Stephen Scouten, Piper Sandler.

Stephen Scouten

Hey, everyone. Thanks for taking my question there. I just wanted to follow up on the comments around new loan yields potentially moving up to that 850, 860 range? And 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 some widening spreads on incremental production.

James Mabry

Yes, morning, Stephen . This is Jim. So yes, again, nice improvements in new and renewed yields in the 860 did include RBC ex RBC was around a 830 for the for the month of March as a snapshot at I would like to be optimistic and and I think that those spreads could stay where they are potentially one. But I think the reality is we're still just in a tough deposit market. So I take what was what we're seeing on the loan yield side and feel good about that. And I really like those trends from a cautious and in baking in too much have not too much that will go to the bottom line, Stephen, and that's why I think overall margin.
Yes, I think our best outlook here with a no rate cut environment is for a pretty stable margin at least near term.

Stephen Scouten

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 stable only 1 basis point in net charge-offs during 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 is there any kind of visibility you could give us into how that percentage might change moving forward?

David Meredith

Hey, Stephen, good morning.
This is David in. So to answer the second part of your question, it is mathematical and it takes into account different economic factors. And this quarter there was some movement in that number after we had loan growth, we had to fund the loan growth as well as we talked earlier, that we had some some negative credit migration and a category that we had to allocate for.
So that number is mathematical. We have we have materially where 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. And so some of those economic variables within our key factors are a little bit on the on the more elevated south side, just as we work through it as we continue to see things settle out in the near future.
I think we forecast the past, we would expect to see that number migrate down, but it will just be looking for the changes in those economic factors to drive a change at all our ratios.

Stephen Scouten

Okay. Thanks for letting me sneak in here late and Kevin and Mitch, congrats on the transitions and all what's to come for.

C. Mitchell Waycaster

Thank you, Steve.

Operator

(Operator Instructions) Jordan Ghent, Stephens Inc.

Jordan Ghent

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

Kevin Chapman

Hey, John, it's Kevin. Thank you for the questions. As we look at expenses, let's just let's kind of take Q1 expenses at that [1.13] range on if you break. If you look at each of the individual components on all of the line items are trending downwards ex excluding kind of one on one or two of them. And that advertising, that's one of them that increase. 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 on a dollar increase related to the special assessment.
So on. So if you back those out, our kind of 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 we're going to be in that $111 million, $112 million range, $111 million to $113 million range. We've got merit increases that went into effect late in Q1. That be a full quarter impact. And then as we get as we get into the latter half of the year on that one. That's when we see that there could be some opportunity for relief on the expenses on just what the initiatives that were taken internally, we could see some at some relief there. But just in the short run, as we get into Q2, as we again, we more normalized run rate related for the merit increases that could be flattish to what we've seen this quarter.

Jordan Ghent

Perfect. Thank you.

C. Mitchell Waycaster

Thank you, Jordan.

Operator

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

C. Mitchell Waycaster

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 29.

Operator

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