Q3 2021 Renasant Corp Earnings Call
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Good morning, and welcome to the Renaissance Corporation 2021 third quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal 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 you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Kelly Hutcheson. Please go ahead.
Good morning, and thank you for joining us for Renaissance corporations, 2021 third quarter 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 risks.
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.
Although the markets in which we operate reopened over the first half of 2021 in connection with the rollout of the COVID-19 vaccines the spread of the Delta variant during much of the third quarter reminds us that the impact of the pandemic and the federal state and local measures taken to arrest the virus may remain significant factors.
Acting our financial condition and operating results for the foreseeable feature.
Other factors include but are not limited to 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 Dot Renaissance dotcom.
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.
Conciliation 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 President and Chief Executive Officer, Mitch Waycaster. Thank you Kelly. Good morning, We appreciate you joining the call today before Kevin and Jim discuss the results for the third quarter.
<unk> I will offer reflections on the quarter and the outlook for the fourth quarter. As we entered 2021, there was still considerable uncertainty and although that remains today, we are seeing increasing signs of business activity in our markets in the face of these conditions.
I am very proud of our team for our results through the first nine months, we see all areas of the bank contributing to performance. The company's financial condition is strong and marked by liquid core funded and well capitalized balance sheet earnings were up year over year and we have initiatives.
Underway that will further improve profitability in future periods the markets in which Renaissance operates continue to rebound in terms of economic activity. There is considerable net in migration into many of the places we do business. These demographic trends accelerated during.
The pandemic and this bodes well for loan growth in the coming quarters I will now turn the call over to Kevin. Thanks, Mitch Our second quarter earnings were $40 million or 71 cents per diluted share compared to $41 million or 72 cents per diluted share in the second quarter forgiveness of our triple P loan.
<unk> slowed this quarter and was the largest contributing factor to the decline in net interest income quarter over quarter, we were expecting the contribution from triple P to decline and have been focused on growth in other lines of business and expense efficiency initiatives to mitigate the impact our insurance and wealth management lines of business put for strong results and stabilizing pricing.
Volumes in our pipeline helped boost results in our mortgage division as well, our previously announced efficiency initiatives continue to provide benefit on the expense side as evidenced by our expenses trending down to the lowest level in the last five quarters. Further we expect the contributions from these and other initiatives to reduce expenses and upcoming key.
Orders operationally speaking, we continue to adapt to our customers' evolving needs and preferences for service delivery, the raws and virus cases during the third quarter brought back levels of uncertainty that we experienced early in the pandemic. Our branches remained open during this most recent wave and our mobile and digital metrics continue.
To increase we must remain nimble in this rapidly changing environment and provide our customers with quick and convenient access to banking services, whether through physical or digital channels. We are focused on innovation and continue to seek investments that deliver the technology and security that our customers have come to expect I'll now turn it over to Jim. Thank you Kevin as we walk.
Walk through the quarter's results I will reference slides from the earnings deck, starting with the balance sheet assets grew about $130 million in the quarter deposits increased again this quarter, albeit at a slower pace with much of the growth in non interest bearing accounts, we invested some of the excess liquidity in our securities portfolio.
Palio, increasing the balance $390 million from the previous quarter at the end of the quarter, we had approximately $1.5 billion in cash we anticipate the combination of additional growth in the securities portfolio and loans to reduce this cash position in the near term we experienced another quarter of loan growth with loans ex Triple P.
<unk> up $47 million from Q2, representing an annualized loan growth of about 2% Triple P loan forgiveness totaled $180 million for the quarter with only $68 million in Triple P loans outstanding at quarter end all of our regulatory capital ratios are in excess of required minimums to be considered well cap.
Laws and show the strength of our capital position during the quarter the company repurchased $21 million of common stock at a weighted average price of just under $35 per share, although our board renewed our repurchase plan, which now extends to October 'twenty 'twenty. Two we currently have no plans for it.
Additional stock repurchases in the near term, we had a credit provision release of $1.2 million and net charge offs of $1.1 million as a consequence, the ACL as a percentage of loans ex Triple P moved down slightly from 1.74% to 1.7.
1%.
We also had a release from our reserve for unfunded commitments of $200000, which is reflected in other non interest expense credit quality metrics are shown on pages 14 through 16 past dues classified and nonperforming asset measures all remain relatively steady and net charge offs were low.
So at four basis points of loans extra puppy Covid related deferrals are now below five basis points with nearly all deferrals in our one to four family mortgage portfolio net interest income declined $6.3 million quarter over quarter with substantially all of that decline attributable to triple P run off.
Triple P revenue was $3.5 million for the quarter of the Triple P income accelerated recognition of deferred fees represented $2.6 million and we have approximately $1 million in remaining deferred fees to be recognized our core margin, which excludes purchase accounting accretion and interest recoveries was <unk>.
<unk> 24 basis points from Q2 of the 24 basis points the impact from Triple P accounted for approximately eight basis points. The decline in margin is the result of loan pricing measures and the considerable on balance sheet liquidity or other lines of business. Each contributed strong results for the quarter in our mortgage business.
<unk> volume in loan pricing and our pipeline began to stabilize in Q3 driving the increase in income quarter over quarter noninterest expenses with exclusions were down $4.5 million for the quarter part of that decline is attributable to the amortization of a tax credit investment recognized in Q2, but as Kevin mentioned, we can.
To see the benefits of expense initiatives announced in late 'twenty 'twenty and expect continued realization in Q4 and into 'twenty 'twenty. Two I will now turn the call back over to Mitch. Thank you, Jim we look forward to a successful finish to the year and increasingly have our sights on the opportunities ahead.
US in 2022 now will turn the call over to the operator for Q&A.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Brad Millsaps with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Brad.
Mentioned, Jim just wanted to maybe start the balance sheet and maybe if you could kind.
Kind of quantify kind of how youre thinking about.
Loan growth over the next few quarters and into 2022.
And sort of you know how that you know if you plan to handle some of the 1 billion five liquidity. It seems you know kind of based on the pace you're on right now.
With the run off of the of the acquired book and then growth in debt and the legacy book yet.
Almost one for one not quite but it seems it would be tough to put a dent in it unless you see yep.
A big acceleration in loan growth or you you start to build the bond portfolio, even more aggressively so just kind of curious how you guys are thinking about that.
Sure Brad let me.
To approach your question, let me talk about our current pipeline and I'm also going to talk about production in Q3, and then as we look forward, how we really feel good about our.
Ability and how we're positioned to continue to drive that production and honestly. So we'll reflect on payoffs, which is has been the headwind, but let let's start let's start with the current pipeline, it's 280 million and that compares to $261 million as we started the.
Third quarter, so as we experienced in Q3.
We do continue to see good and I would say growing deal flow and pipeline across our markets and our business lines.
As we have seen in the past and we saw it in Q3 and we see that looking forward in this current pipeline each of our regions. Our business lines continued to contribute in a meaningful way to the pipeline and the production you know just thinking it back as we started Q3 and we should.
With a pipeline of $2 61, as I said this quarter to 80.
We expected them to see production in the 575 600 million.
Range, we actually produce 700 million.
In production this past quarter actually one of the one of the highest we've seen in the company.
And as the pipeline indicated them and as we do entering into Q4.
We're seeing this come from across the footprint.
Equally important as the geographic distribution or the loan types and size of credit and our ability to produce let me reflect on that a bit I'll I'll use Street Q3, but also will reflect on that ability going forward.
I'll start with our one to four family residential loan products that would include consumer products that accounted for about 19% of our production in Q3, and then when I go to small business and business banking type credits and that's credits that range from a few thousand dollars up to <unk>.
$2 $5 million that was about 15% of that production.
And then I'll go to commercial credits loans, $2 5 million in greater which represents C&I owner occupied commercial real estate type credits that accounted for 39% and then onto our corporate banking group.
Where do you find larger C&I commercial real estate and then our specialty lines of business that was about 27% of that production all to say and I'll give you. Those examples just to say that we're hitting on many different so cylinders relative to our ability.
We saw that in Q3, and I would say that's.
Oh, that's a representation of our ability going forward. So in Q3, we saw production increase about 22% as I said one of the highest levels.
And in the company's history.
The other side of that you referred to it in your question is just pay off says as we've seen in prior quarters.
That was the governor if you will on net growth of.
For example, if payoffs had remained at the current levels that we saw in Q2 net growth this quarter would have been 7.5% versus 2% and as I look at the reasons for those payoffs and we examine that closely about 46% of those was where the.
Boris sold the underlying asset another 33% was lost a term a rate and a good portion of that to the permanent market.
You know at some point, we will began to see payoffs normalized.
And but I would say despite those payoffs and just speaking to the liquidity that we have in the use of that those funds I'm optimistic about our future growth as we continue to see progress in economic activity and we're seeing quite a bit of progress across the markets, which we.
We operate and I think that's evidenced by this past quarter's production Jim do you want to comment a bit on just the securities portfolio.
What we're doing there sure good morning, Brad.
As you point out we've got about 1 billion and a half in cash at the end of the quarter and weed.
We've put to work a fair amount of that liquidity and securities in Q3, and I think it was just under $400 million.
Our expectation in Q4 is that we would continue to grow that securities book, probably not quite the same pace.
And then looking into the into the new year, we will continue to reevaluate that position to see how our loan growth is panning out and make those determinations as we get into 'twenty two.
Yeah.
Great. That's very helpful. I appreciate all the color and then just maybe one follow up on expenses.
You guys.
As Kevin pointed out it continue to trend lower I think you're down about eight or $9 million.
Year over year.
No you were targeting nine or $7 million to start the year some.
Some of that's probably been helped by headwinds at more in mortgage banking can you can you guys just kind of quantify a little bit more kind of what you're thinking about in terms of kind of where the expense trajectory you know can't head from here.
Yeah, Hey, Brad good morning, Kevin.
We think it goes lower right. So if you if you not only look at the income statement and compare it to prior periods. There's a lot of noise in the prior periods, whether it's mortgage or whether its pandemic whether some.
Restructuring of the balance sheet, we did in the prior year I think the best look as if you look at page 20 of our press release that gives you the expenses that we used for the adjusted efficiency ratio and as you can see that line has been trending down appreciably and it's not all coming from mortgage.
That trend line on the bank side.
Is occurring as well.
And as we've indicated.
In the past our focus is driving that expense number down further so we expect the trend line of expenses to continue to decline we.
We announced a couple of initiatives last year. Those are those initiatives are really almost fully baked into our run rate in Q3.
We've had many other initiatives that we haven't announced publicly and we will continue to focus on expenses.
Some of the initiatives, we admit we may announce publicly some of them. We may just let you see the results of that in the expense run rate as it declines I would also add that there's a lot of pressures on expenses right now whether there's a pressure to reinvest in technology are just wage inflation pressures our guidance includes any of those price.
As well, we feel that we've got the opportunity and the capacity in our expenses.
To continue to see declines despite the commentary around reallocating expenses in technology or or the conversation about wage inflation, we feel that those are coming down and I can tell you. Our management team has a conviction around our efficiency ratio, bringing it down as well as.
The denominator of that of that calculation being expenses that expenses are coming down as well.
And Brad I'll, just follow Kevin's comments relative to expenses and.
We're very optimistic you can hear that in kevins comments, we're committed as well to continuing to reduce our expense base and at the same time, we will continue as Kevin mentioned to intensify initiatives to enhance both revenue and to minimize X.
Fence.
Great. Thank you guys I'll hop back in queue.
Thank you Maria.
Our next question comes from Kevin Fitzsimmons with D. A Davidson. Please go ahead.
Hey, guys good morning.
Good morning, Kevin.
Just.
Looking to switching to credit for a second looking at the ACL ratio X P. J T now, 171% if I'm correct.
It seems like that leaves us still a fair amount of room.
Credit leverage going forward. Despite the uncertainty you know assuming the uncertainty you mentioned before it doesn't get worse, but gets better clears up can you remind us again, what we should be you know not a target, but what you what what is your date.
Jay one Cecil ratio and what what are your thoughts on timing of.
How quickly you could bring that down and whether we could still have a number of quarters of negative provisions in front of us.
Hey, Kevin Good morning, This is David Meredith.
I'll take a stab at what Jim follow up as well. So you know how we we've chosen to look at our loan loss provision is kind of a longer term.
As you mentioned you talked about kind of some unknowns in the market place ideal and we forecast before we're going to use it to absorb loan growth on a go forward basis, and so that's still our thought that it hasn't changed much we're gonna look.
Longer term before we start pulling that number down materially we do still think we've got a.
Good asset quality in our book, but our choice would be to use those dollars for continued loan growth and then just kind of see if something happens in the marketplace. When they keep those dollars out there for us I don't think you'll see a material change in how we approach our loan loss provisioning in the near future.
I totally agree and.
I think Kevin we would we would say that at least the expectation as we sit here today would be similar results in terms of what you've seen recently out of us in terms of going forward. If we have stable credit metrics and you know sort of generally consistent economic indicators in nominal nominal longer.
I would expect that you'd see them you know.
Miner or no releases, but of course, we will continue to analyze quarter to quarter. The model what the what results, we get out of our seasonal model and making those determinations.
Okay, great appreciate that.
And then.
Mitch you know me.
We could just get your updated thoughts about M&A I know you you have said in the past that you you know.
You look to be opportunistic and you'll have optionality.
Or are you more.
Would you say in like a capital building mode right now before you look to that or do you or are you optimistic there could be.
Accretive deals for you guys and you could carve that up any way you want in terms of bank versus nonbank, we've seen a lot of.
Bolt on asset generators, given the excess liquidity and then and then on bank opportunities whether you.
You know you'd be open to something transformational. There you know is one that closed just today in their own backyard or.
Do you think you know.
Deals or maybe not necessarily likely given the opportunity you might have for hiring in front of you I know, there's a lot, but just to get your updated thoughts. Thanks.
No Kevin Good question happy to comment on each of those and it's more of your latter part of your comments, we as we have consistently done in the past. We we will remain we are remaining opportunistic.
I'll just start with talent one of the last things you.
You mentioned.
We had five additions this quarter that brings us to 24. This year of course, we had 32 and 20 and 52 in 19, and we continue to see very good results from that talent.
Adding to our already strong talent in the company. So certainly we'll remain active there and we continue to see those opportunities new markets are as we've done in the past we will continue to evaluate those and certainly strategic partners.
You use the term banks and Nonbanks and I would include both of those.
You know you mentioned relative to size.
Certainly a more optimal size to us would be <unk>.
And that say one to five are not that we wouldn't go downstream if it was meaningful.
In a market, where we were operating today.
We continue to evaluate all of those opportunities, both banks and Nonbanks and I I would expand it to non banks, whether that the fintech other business lines things that complement our business model that are either grow our business line or introduce a new business Salon and certainly all of those remain.
In line with our risk appetite, we always start these conversations with culture exploring business models, how either it could be new or additive to one of the lines of businesses that we have today, but just making sure alignment.
Exist and certainly hitting financial metrics.
That we would be looking to hit and I always use the term yeah. That's all to answer are you better together so to the to answer your question about.
Being opportunistic the answer is yes, and I would say that is consistent will be in our future as it's been in our past.
Hey, Mitch just given given that <unk>.
Openness to still remaining active on new hires.
When and if they come up.
Can you help kind of marry that with just the past few minutes. We've talked you guys had talked about being.
Committed and focused on taking expenses down so it's probably it's probably a high bar to too in that environment. When you're so focused on taking expenses down to being open to new strategic hires or do you feel it's the right strategic hires come in you're confident you can you can find places to cut elsewhere.
Sure.
Yes. So excellent question I would answer this way and I would say our results are a good reflection of our ability to.
To bring in new talent and like I say, joining an already strong team. If you look at that 100, plus that I mentioned over the last three years.
Our net up about a third of that number so accountability.
Is certainly there and it is very important and I would say over that same charm I just talked about production in this past quarter being one of the highest production periods in the company the loans generated by officer, we're seeing that increase so I.
I think we've demonstrated our ability to recruit.
And they integrate and grow the company as we add new talent, but also managing expense.
Kevin I might just add that.
Well. The question you asked about the use of capital whether it's external in the form of acquisition or new hires.
It's there, but it's interesting that we benchmark all of our metrics basically against the same.
All of our opportunities against the same metrics around earn back and dilution to capital dilution to tangible book value and how quickly we earn that back we're somewhat agnostic as to which way we go as long as it meets our our metrics.
The conversation around hiring.
Conflict, a little bit with our with our discussion around expenses, but it's but it's in line with our discussion around efficiency to drive our efficiency lower.
Do that part of the strategy is reducing expenses, but also part of the strategy is growing revenue, which will require balance sheet growth to do that so as we look at efficiency and there are no questions oftentimes the expenses and the efficiencies. The questions were asked at the same time.
But but but our strategies around efficiencies rural require revenue growth and the opportunity to hire good talent is absolutely consistent with that we recognize that as we hire we have to have the returns that we expect and it may it may.
Require us to be equally as a tune of on the expense side to overcome that short term cost of a new hire.
No fair point, thanks, very much for clarifying that great. Thank you.
Thank you Kevin.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone and thanks for taking my questions.
The the cost of deposits continues to come down so just trying to get a sense for how much remixing is.
Could happen and are we getting close to a bottom in terms of deposit costs.
Good morning, Michael Jim.
Good morning, Michael I think you're you're correct I mean, we're getting close theres still some opportunity on on deposit pricing and we entered this period with probably a longer duration on our funding side than some of our peers and so we've been.
When I look at it versus peers have been gaining ground and I'd say the next couple of quarters. We've got that opportunity were currently I think at 21 basis points in terms of cost of deposits.
And our expectation is that that would by the end of Q2, that's probably something less than 20 basis points. So theres some room, there, but but yeah.
Those benefits are going to start to I'm going to start to wane.
Understood.
And then maybe just on the on the buyback.
Good to see the.
The re up there.
Can you just talk about.
What you view as kind of intrinsic value and maybe a sense of a pace you know I think you've repurchased a little bit more than maybe some of US were modeling this past quarter wood in the near term should we expect to see.
Fairly healthy level of activity just given.
You know the stock's performance year to date.
I would say.
Our expectations. There are we're going to continue to look at it as sort of a.
It's an analysis, we spent a lot of time on it and it's what gives us the best relative return on our capital and I think near term a or.
Our modeling suggests it's probably not in repurchases you know you don't close the door there, but I think it's in other places and whether that's M&A or in December the some balance sheet growth opportunities that we have.
So our expectation is that near term it would not be on the repurchase side, but and other.
Either organic or external growth opportunities.
Okay, great. Thanks for taking my questions.
Thank you Michael.
Again, if you'd like to ask a question. It is star then one star then one to ask a question.
Our next question comes from Catherine Mealor with K VW. Please go ahead.
Hey, good morning, I just wanted to follow up on the margin discussion Jim is there a target size that you would be comfortable brand name in securities portfolio up to as you deploy some of this cash.
Good morning, Catherine I don't know that we've got a chart yeah, Yeah, I don't know that we've got a target per se if you.
If we if we look at if I look at peers. For example, we still probably a little underweight in securities and which is alright. That's helpful. But I also look at it uses of that liquidity.
So I think as we said earlier I expect in the near term, we will continue to put some money to work in that securities portfolio, but I.
I think our optimism around balance sheet growth entering 'twenty two is good and so the hope is that we.
We sort of taper off those security purchases as we get into 'twenty, two and we've got other places to deploy that capital. So there's no there's no hard and fast number there and.
And I think we're up or optimistic that.
Instead of putting that money to work at 1.25%, we can put that money to work at something closer to three.
Great. Okay, and then and then on that referenced a three can you talk about core loan yield and where you're seeing new production coming on on average right now.
Sure well, it's definitely been impacted and Mitch may want to speak to the competitive environment, but of course like everybody else are theirs.
We faced a lot of competition on loan pricing and that has not abated. That's continued and if anything it's probably more affairs here.
Here recently then.
And then it was earlier in the year. So we continue to feel that our new and renewed loan rates are down 30, or 40 basis points from Q2, and they're close to call. It three 5%. So obviously that's that puts pressure on that margin.
I don't know when that's going to when that's going to stabilize or abate, but we certainly feel that pressure.
In terms of loan pricing and its impact on our margin.
Catherine I would add to that as I mentioned earlier, just relative to pay offs.
30% or so were in that term rate I would say more of that as to term them right. We are very focused on relationship.
In most cases from a relationship pricing standpoint, we can be successful, but it is very competitive the other thing I would point to just going forward I went through the granularity and our ability to produce on many different cylinders and when you you know when you're in that small.
Business business banking and some of our commercial space Youre going to see a little better yield on some of those credits and possibly in some of the other more commercial business lines that we're in so.
We have opportunity there is as we go forward relative to pricing.
Yeah.
Great. Thank you very much.
Thank you.
Ladies and gentlemen, 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 and we appreciate each of you for your time your interest in Renaissance Corporation. We look forward to speaking with you again soon we plan to participate in the Piper Sandler Conference in November. Thank you.
Yeah.
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