Renasant Corporation (NYSE:RNST) Q2 2024 Earnings Conference Call July 24, 2024 10:00 AM ET
Company Participants
Kelly Hutcheson - Chief Accounting Officer
Mitch Waycaster - Executive Vice Chairman & Chief Executive Officer
Jim Mabry - Chief Financial Officer
Kevin Chapman - President & Chief Operating Officer
David Meredith - Senior Executive Vice President & Chief Credit Officer
Conference Call Participants
Stephen Scouten - Piper Sandler
Michael Rose - Raymond James
Catherine Mealor - KBW
Dave Bishop - Hovde Group
Jordan Ghent - Stephens
John Rodis - FIG Partners
Operator
Good morning, and welcome to the Renasant Corporation 2024 Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Kelly Hutcheson, Chief Accounting Officer 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'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.renasant.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.
Mitch Waycaster
Thank you, Kelly. Results for the quarter showed solid progress. The balance sheet remains strong, led by growth in traditional deposits that funded an increase in loans. Asset quality metrics continue to reflect our strong credit culture and credit reserves remain at historically high levels.
The income statement reflects ongoing work on expense control and margin stabilization. After the quarter, we announced the sale of Renasant Insurance. Renasant Insurance has been a valued part of the company for a long time.
While we felt market conditions made this an attractive move for our shareholders, we look forward to maintaining a relationship with our former colleagues going forward. The financial impact of the sale will be reflected in third quarter results.
I will now turn the call over to Kevin.
Kevin Chapman
Thank you, Mitch. Looking at our second quarter results, our earnings were $38.9 million or $0.69 per diluted share. Recall in the first quarter, we sold a portion of our mortgage servicing rights asset for a gain of $3.5 million and we recognized a $56,000 gain on the extinguishment of debt. Excluding these items, our earnings per share in the second quarter increased $0.05 on a linked-quarter basis.
Loan yields increased 11 basis points quarter-over-quarter, which when coupled with solid loan growth, drove an increase of $6 million in loan interest income during the second quarter from the first quarter.
Deposits continue to perform well. Traditional retail deposits increased just over $200 million from the first quarter, which afforded us the opportunity to allow $184 million in broker deposits to mature. Included in the retail deposit growth was $23 million in growth in non-interest-bearing deposits.
Our business model is built on relationship banking, and our team has done a tremendous job executing on this strategy with a goal of funding loan growth with core deposit growth. Pricing for deposits remains competitive throughout our footprint. And although deposit interest expense has continued to increase, the pace of increase slowed this quarter with total deposit cost increasing 12 basis points during the quarter. The continued hard work in managing deposit base was especially rewarded in the second quarter as non-interest income increased on a linked quarter basis for the first time since Q1 of 2023.
Reported non-interest income declined $2.6 million from the first quarter, excluding aforementioned gains on the sale of MSR assets and extinguishment of debt in the first quarter. Adjusted non-interest income increased $900,000 quarter-over-quarter. The income from our mortgage division, excluding the MSR gain in the first quarter increased $1.8 million on a linked-quarter basis, which was driven by an increase in interest rate lock volume of $116 million, offset to some degree by a decline in gain on sale margin of 9 basis points.
Reported non-interest expense decreased $1 million from the first quarter. In the first quarter of 2024, we recorded expense of $700,000 related to the FDIC special assessment, and we also made contributions totaling $1.1 million to certain charitable organizations, which qualifies tax credits. After adjusting for these items, non-interest expense increased approximately $800,000 from the first quarter. The increase in mortgage volumes resulted in higher levels of expense in that division, which were somewhat offset by savings in other areas.
I will now turn the call over to Jim.
Jim Mabry
Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. Total footings grew $164 million. Loan growth in the second quarter was $104 million and represents an annual growth rate of 3.5%. We experienced another quarter of strong core deposit growth, which allowed us to continue to shift 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 and with the strong core deposit growth, our loan-to-deposit ratio remained steady at 88%. 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.
Turning to asset quality. We recorded a credit loss provision of $3.3 million. Net charge-offs were $5.5 million, which was primarily comprised of a single credit and the ACL as a percentage of total loans declined 2 basis points to 1.59%. Asset quality metrics are presented on Page 9. Our criticized loans declined quarter-over-quarter while non-performing assets ticked up. We remain vigilant in monitoring credit risk. Our strategy is to identify potential losses early and work quickly towards resolution in order to mitigate loss.
Our profitability metrics are presented on Slides 10 and 11. Excluding one-time items, adjusted pre-provision net revenue increased $3.6 million on a linked-quarter basis, driving an increase in all other profitability metrics as well.
Turning to Slide 12. Adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries, was 3.29%, which represents an increase of 1 basis point from the first quarter. Core deposit growth, coupled with diligent loan pricing drove the increase in both net interest income and net interest margin quarter-over-quarter.
We continue to focus on growing our core deposit funding base and being diligent in pricing on both the asset and liability sides of the balance sheet.
Kevin commented on the highlights within non-interest income and expense. While the sale of the insurance agency will impact these categories beginning in the third quarter, we don't expect a material impact to the bottom line.
I will now turn the call back over to Mitch.
Mitch Waycaster
Thank you, Jim. Results through the first six months form a good foundation to build upon. We are excited about the future and believe opportunities to add relationships, market share and scale in Southeastern markets will enable us to grow shareholder value in the years ahead.
I will now turn the call over to operator.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Stephen Scouten
Yeah. Good morning. Thanks, everyone. I guess maybe I'm curious, first, from a capital perspective, kind of if there's any specific plans with the incremental capital the insurance sale. And what your overall capital priorities might be today, whether that's organic growth, new hires, things of that nature or maybe even potentially M&A?
Jim Mabry
Good morning, Stephen, this is Jim. So yes, we're going to book in Q3 about a $36 million gain from the sale of the insurance company. A couple of points I want to make about that before I go to your question. I would say, of course, it's not a -- it was an important part of the company. But in terms of dollars, it's obviously not as big as what we've seen elsewhere in the industry. The impact of that sale will be very slightly negative to EPS for the second half of the year, again, very slightly, but modestly negative EPS.
The other thing I'd want to point out is the tax rate in Q3 that you'll see because of that gain will be slightly elevated from what it historically is. So something around 23% versus, say, our normal rate of 22%. So not much difference, but you'll see a slight difference there.
As it relates to the use of those -- to that capital gain, I think our priorities remain the same. First and foremost, we want to target that capital or any incremental capital to retain earnings or sell like this to capitalize organic growth. And that's priority number one. And as you've said, whether that's lift outs or organic growth, that's priority number one.
I'd say priority number two would be M&A. We don't know when or if that's going to return. But if it does, we'd certainly like to participate and that would be a good use of that capital as well. We don't envision near-term going the route of buybacks. We don't take that off the table, but don't envision that the near-term.
Stephen Scouten
Okay. Very helpful. And then maybe just thinking about the NIM trends from here. Still, obviously, don't know exactly what the Fed is going to do and what the curve is going to look like. But do you still kind of think if we get the first couple of rate cuts that the margin can kind of remain stable, especially based on the relative stability you're seeing on the deposit cost side of things this quarter.
Jim Mabry
I think, I mean we -- I guess since the start of the year, we've assumed a flat rate environment, and that's still how we're managing and thinking about the balance sheet. But if we get that -- let's say, we get a 25 basis point cut in September, I don't -- in terms of EPS, I don't see it impact in Q3. And again, maybe very modestly impacting Q4, but it would be slightly negative, Stephen.
In terms of the margin, I would say that our outlook would be, again, a flat rate environment, our outlook for the margin is roughly flat for the balance of the year.
Stephen Scouten
Okay. Great. And maybe just lastly for me, I mean, credit metrics ticked up a little bit, but still remain strong and your reserve is obviously strong. I think when we spoke at Gulf South earlier this year, you guys noted that you really weren't all that concerned about maybe some of the CRE exposure, but your internal team was maybe a little more focused on resin exposure. Is there anything to note there around resi or anything -- is that just on a relative basis for you? Or is there anything there that gives you any concern?
David Meredith
Stephen, hi, good morning. This is David. In this quarter, our changes in asset quality mix wasn't a result of anything in our residential portfolio. That remains a heightened area of concern for us as far as watching it, just like all assets of the bank. But the change in asset quality was not residential. It was what we saw as far as an increase in NPAs with 100% direct loans we have to our commercial customers that are out there that we've been working with those customers for a while and large just felt like it was time to go ahead and move on those assets when you start to see concerns about valuation of some of the collateral underlying those loans would think best to go ahead and move on those assets and whether it be a note sale or foreclosure just go ahead and try to remedy those and get them out of the way, but it was not due to residential for this quarter.
Stephen Scouten
Got it. very helpful. Thank you all for the time and the color this morning. Appreciate it.
David Meredith
Thank you, Stephen.
Operator
The next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose
Hey, good morning guys. How are you?
Mitch Waycaster
Good morning, Michael.
Michael Rose
Good morning. Hey, Mitch, maybe we can just start, as you normally do, just kind of an update on the pipeline? And sorry if I missed it, but what you guys are kind of contemplating for loan growth as we move here, both from a production standpoint and also if you would expect a decrease in pay downs as we move forward, particularly if rates don't come down. Thanks.
Mitch Waycaster
Sure. I'll begin with pipeline and then go to production, maybe a comment on payoffs. We experienced another good quarter, and we started the quarter with $130 million in the 30-day pipeline, which continues to reflect the good vibrant resilient markets that we're operating in, that did yield this quarter $104 million growth, net growth in loans, roughly 3.5%.
Both Kevin and Jim commented on the growth of both loans and deposits. So while I'm there, I want to point out as well, we had a very good might relative to the balance sheet on both sides of it with our deposit growth as well. The production this quarter was roughly $390 million. That does compare to $418 million in the prior quarter. So it was that $390 million that resulted in the $104 million net. That net compared to $150 million in the prior quarter, you mentioned payoffs, we did see, and as we've said in the past, payoffs many times is the governor on kind of where the net ends up, we saw payoffs bump up modestly this quarter.
I wouldn't say anything unusual there out of the ordinary, just timing of payoffs. But just going back to production and looking forward, I mentioned our markets -- all of our markets, our regions, our business lines continue to contribute well. They're reflected in our pipeline, in our production. And I'll break that down for you to that $390 million this past quarter, 23% was in Tennessee, another 17% in Alabama, Florida Panhandle; another 14% in Georgia and Central Florida, 22% in Mississippi and 23% in our commercial corporate business line.
So you can see both geographically and just how it distributes to throughout the business lines and the loan types. I'll touch on that. And I think, again, it speaks to the granularity that Jim and Kevin mentioned. This past quarter, if you take that production, about 20% was in one to four short duration type assets. And another area we usually do very well in and really saw it this past quarter, 31% in small business-type credits less than $2.5 million and then an additional 32% in commercial credits $2.5 million and above, and that would be your traditional C&I owner-occupied type commercial real estate. And then the corporate commercial business lines rounded out that production at 18% this quarter.
So -- as we've seen in the past, and we consistently continue to hit on so many different cylinders. And that, I think, is the evidence of our ability to, I would say, prudently produce relative to pricing and underwriting credit. And I guess going to ultimately, to your question, just to looking forward, we remain optimistic about our ability to continue to produce and fund loan growth. And I would continue as been reflected throughout this year, somewhere in the mid-single-digit type net growth going forward.
Michael Rose
Mitch very thorough answer as usual. Maybe just as a follow-up, it was good to see NIB deposits kind of stabilized. Can you just talk about some of the push-pull there? I know there's several other banks that have referenced outsized competition from a few players in some of your markets. Just wanted to get some color there. And then when do you think we could actually begin to see a peak in deposit costs? Thanks.
Jim Mabry
Michael, this is Jim. So as you point out, I mean, it remains a very competitive environment. It does feel like the competition maybe isn't as fierce or, if you will, irrational as it was. I don't know if the irrational is the right word, but it felt that way at times going back a couple of quarters.
So the pressures are still there. They've just moderated some. And as you were asking the question, I was just looking at -- this might be -- this doesn't speak just to NIB, but the deposits as a whole.
Our cost of deposits in the second quarter was $247 million. If you look at June, it's just a data point, it was 2.49%. So I think that's just further evidence of that -- of the increases in deposit costs moderating.
I will also say that as we look at NIBs, I mean, internally, we're assuming or managing the balance sheet such that we anticipate we budgeted for mentally prepared for some additional run-off on NIBs. I don't know that we'll see it. We were really pleased with what we saw in Q2 as Mitch referenced. But it is a competitive environment and whether it's deposits across the board, but we're not seeing the same I guess, level of competitive pricing that we saw a couple of quarters ago. And when that sort of stabilize or the bottoms out, I don't know, but we're certainly seeing some encouraging trends there.
Michael Rose
Very helpful. And then maybe just finally for me, following up on Stephen's question on M&A. You guys are about $17.5 billion in assets. Just describe kind of what in theory you would be looking for in a deal. Would you potentially do something larger? Would it be in market? I know those are not necessarily in favor right now. Would you look to expand the footprint size.
Just any sort of color you can provide in terms of what you would be looking for? And maybe an asset size that we could think about both with organic and opportunistic M&A over the medium to long term.
Mitch Waycaster
Sure, Michael. One thing I would just start answering that question is just our discipline around evaluating opportunities. And certainly, we're focused on building scale and density within the markets that we operate in. We would certainly see that as an opportunity and I would say a sweet spot relative to size, probably something $1 billion or above, like I say, focused on scale and density within the footprint.
And as we think about being opportunistic, as Jim mentioned earlier, certainly, we began with that thought with organic growth talent, and we had five additions this quarter actually on the talent front, just staying focused on organic type opportunities. Also, I would say new markets relative to talent lift outs. But just coming back to strategic partners, whether that be banks or nonbanks. we continue to evaluate those opportunities. We always begin with culture and business model and risk appetite. I will say we do believe we're well positioned with a strong balance sheet. We have a capable team to take advantage of all of those opportunities.
Michael Rose
Great. Thanks for taking my questions.
Mitch Waycaster
Thank you.
Operator
The next question comes from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor
Thanks. Good morning. I just had one follow-up on the margin conversation. Your loan yields increased more this quarter than we've seen. Just wanted to see if you have updated thoughts on kind of the pace of loan yield increases that we should see for the back half of the year?
James Mabry
Good morning, Catherine, this is Jim.
Catherine Mealor
Good morning, Jim.
James Mabry
Good morning, Catherine. I would say, yes, we've been really pleased with the new and renewed rates we've been getting over the last couple of quarters. It does feel like at least in the near term, the increases in that new and renewed could plateau. So we're definitely seeing some pressures there. And so as I think about new and renewed for the balance of the year, I think you could see some pressures in new or renewed deals.
Catherine Mealor
Great.
James Mabry
And actually, I'll take it a step further, Catherine. If you look at -- it's one month, so one month doesn't make a trend, but our new and renewed for June were off a little bit from what we saw for the quarter. And again, it doesn't necessarily make a trend, but we're seeing some pressures there.
Catherine Mealor
But you say some of that's mix or just new -- same kind of category of loans still have a lower incremental yield?
Jim Mabry
I don't -- it's not really -- I wouldn't say that what we're seeing or experiences due to mix. It's just overall. I think there's a lot of competition for loan growth and it feels like it's just showing up in pricing pressures.
Catherine Mealor
Okay. That makes sense. Okay. And then maybe 1 on expenses, your expenses have been flat for the past couple of quarters. Any update on your outlook for the back half of the year from the expense base?
Kevin Chapman
Yes. Catherine, good morning, it's Kevin. So there's really not a whole lot of change there. I think we do have to adjust for insurance coming out. So that will affect the run rate of bring it down about $2 million. But still, if you back that out off of what our run rate was in Q2, that's what we're thinking, and that's what we're modeling for the back half of the year. Continue to be mindful of expenses, work to reduce them where we can and continue to find ways to improve profitability, whether that is more scale on the balance sheet. It drives more revenue, the repricing, the opportunity on repricing of assets and liabilities, as Jim discussed in the margin or also looking at greater accountability measures to reduce our expenses. And that's been our focus. It will continue to be our focus.
Catherine Mealor
Great. All right, thank you.
Operator
The next question comes from Dave Bishop with Hovde Group. Please go ahead.
Dave Bishop
Hey good morning gentlemen. Jim or Kevin, I just want to make sure I follow up Catherine's question. I hear that the expense impact from the Insurance sale was about $2 million per quarter. Did I hear that correct?
Kevin Chapman
That's correct.
Dave Bishop
Got it. And then turning back on the credit side, I know you discussed the -- some of the impact in terms of the increase in NPAs. But any granularity you can give us there in terms of segments with that C&I, commercial real estate, maybe any sort of granularity if it was CRE, what sort of segments was driving that and some of the issues? Thanks.
David Meredith
Sure. Good morning. This is David. It was all commercial-related increase in NPAs quarter-over-quarter. And it wasn't a -- broadly, it was really 3 credits that were impacted, and they were -- 80%, 85% of those 2 larger credits were CRE in nature. One was a senior housing property and another 1 was relationship as kind of an assortment of a little bit of retail, a little bit of office -- both of them are credits that we've had identified as classified assets for a long period of time. Assets we continue to work with the borrowers on and we just felt like due to valuations on some of these asset types, particularly the office space and the senior housing space were for those assets where we have occupancy issues and the market is not necessarily a favorable on those assets where we see some valuation concerns. We thought it was just better off and our normal philosophy to be proactive, go ahead and seek to resolve those loans, whether it'd be through a note sale or whether it'd be through foreclosure.
I think, Dave, as you know, we'd typically like to identify the problem on which we did a while ago when we kind of get to the point where we think there's -- it's a long-term problem loan that we won't be able to work out of or some potential valuation concerns. We're going to go ahead and seek to remedy that. In this case, we went ahead and put those loans on nonaccrual, and we'll work to expedite, the resolution of those loans as quickly as possible.
Dave Bishop
Got it. Appreciate the color.
Operator
The next question comes from Jordan Ghent with Stephens. Please go ahead.
Jordan Ghent
Hey good morning. I just had a quick question on the allowance. It looks like it's kind of been ticking down for the last few quarters and just kind of wondering if you guys could give a little info around where you kind of see that going? It's going to be stabilizing or continued to track lower? Thanks.
David Meredith
Jordan, good morning this is David. So, we've not changed our philosophy on our seasonal model. We feel strong about our seasonal model the way it's worked. We reserve them with what told us to reserve a few years ago, and it's this point has required us, but we've held steady based on where the model comes out.
We set it based on a number of factors at the asset level and we kind of let our model guide us where we are. So, in Q2 that number reduced a little bit, largely driven by the one pay down, but the model had built in where we need to reserve a little bit.
So, the dollar amount came down. But that was really in part due to we reserve for new loan growth, but the portfolio derisked a little bit, especially in the senior housing space as we talked about that one senior housing loan that we put on NPA, and we had to charge down related to that one asset.
That derisk that senior housing asset type and cause a little bit of a reduction on the required reserve for that particular asset. But all in all, we continue to follow a model quarter-over-quarter. And I think we will continue to see that until we see some change in some of those factors that drive the model.
Jim Mabry
And I would just add to -- I'm sorry, Jordan, just going to add to what David said, I think implicit in your question too, as -- and David suggested that, I mean, we've talked for a couple of quarters. I mean, it feels like, again, things could always change, but it feels like that allowance will slowly drift down during the balance of the year. Conditions and circumstances will ultimately dictate that.
But I think we've built it for a reason. We hadn't seen the charge-offs and they remain very low, but we sort of built it for a reason and anticipate that that will gravitate down towards the 150-ish range by year-end if circumstances and conditions hold where they are.
Jordan Ghent
Okay. Thank you.
Mitch Waycaster
Thank you.
Operator
[Operator Instructions] The next question comes from John Rodis with FIG Partners. Please go ahead.
John Rodis
Hey good morning guys. Jim, maybe just a quick question on the securities portfolio. It was down a little bit again this quarter, it's 11% of assets. How should we think about that going forward?
Jim Mabry
Good morning John. Yes, I think I think internally, we sort of think about it's not a bright line or a hard line, but we think about a level of around 10%. And we've got, obviously, plenty of external sources of liquidity available to us.
So, it's something that we're comfortable where it is but I generally wouldn't see it drifting much below, if at all, below 10%. So, we'll sort of watch that between now and year-end, but that's our philosophy on sort of how we manage that securities position.
John Rodis
Okay, makes sense. Thanks guys.
Mitch Waycaster
Thank you, John.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mitch Waycaster, Renasant CEO, for any closing remarks.
Mitch Waycaster
Well, thank you, Drew. Thank you to each of you who joined this morning's call and your interest in Renasant.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.