Renasant Corporation (NASDAQ:RNST) Q3 2023 Earnings Call Transcript

Renasant Corporation (NASDAQ:RNST) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good day and welcome to Renasant Corporation 2023 Third Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] 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 Renasant Corporation. Please go ahead.

Kelly Hutcheson: Thank you for joining us for Renasant Corporation's 2023 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.

Mitchell Waycaster: 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 we'll continue our efforts to add to this presence. Renasant's 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.

Kevin Chapman: 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 quarter. Our second quarter results included an after-tax loss of $18.1 million or $0.32 from the sale of a portion of our securities portfolio. Breaking down, net interest income, loan interest income increased over $9 million on a linked 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 by $385 million on a linked quarter basis, which helped us reduce our reliance on wholesale funding and allowed us to pay down the FHLB advances by $150 million and brokered 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, noninterest 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. Noninterest 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 call over to Jim.

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James Mabry: 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 brokered 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. And as you can see on slides six and seven, the company's core deposit base and overall liquidity position remain strong. The deposit base is diverse and granular. The average deposit account is $29,000 and there are no material concentrations.

Referencing slide eight. 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 recorded a credit loss provision of $5.3 million and a recovery of credit losses on unfunded commitments of $700,000 which is recognized in noninterest 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 nine. 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 onto profitability, beginning on slide 10. Excluding the after tax loss on 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 six 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 noninterest 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.

Mitchell Waycaster: 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.

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