Q3 2022 Renasant Corp Earnings Call
Good morning, and welcome to the Renaissance Corporation, Pulte 22 third quarter earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Kelly Hutcheson, Chief Accounting Officer with Renaissance Corporation. Please go ahead.
Good morning, and thank you for joining us for Renaissance Corporation's 2022 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 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 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 Dot Com at 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.
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, everyone. We appreciate you joining the call today.
Before Kevin and Jim discuss the results for the third quarter I will comment on the results and the outlook for the balance of the year.
Deposits continued good asset quality and strong capital levels I will now turn the call over to Kevin.
Thanks, Mitch our third quarter earnings were $46 $6 million.83 per diluted share compared to $39.7 million or 71 cents per diluted share for the second quarter of 22 on a year to date basis are diluted earnings per share were $2.13 compared to $2.47 in 2021.
The banking sad another quarter of strong loan growth coupled with the fed rate increases drove an increase in interest income of over $90 million on the link quarter basis.
Interest expense was up quarter over quarter, but the increase was isolated to certain public fund deposits.
And our trust preferred securities was pay a variable rate of interest we.
We are not immune to the competitive pressures on deposit pricey, but our strong funding base positions us to manage our deposit calls as we expect funding pressures to escalate in future Coders are capital markets Treasury solutions and insurance lines of businesses produce positive results for the quarter, we are still experiencing volatility in our mortgage division as production levels have.
Quickly return to more normal levels, we have prudently managed our expense in this division Nonetheless, while overall head count is down for the year, we are still investing as strong production talent and expect our mortgage team to continue to be an important part of our business model noninterest expense increased modestly quarter over quarter.
In light of the broader inflationary pressures on expenses operational efficiency remains of focus with the revenue lift from margin expansion, coupled with our expense discipline or just a deficiency ratio, which excludes non-recurring income and expense items in.
Improved nearly four percentage points from the second quarter and was 58.8% which is below our stated goal of achieving an efficiency ratio below 60%. We still anticipate total noninterest expense for the full year 2022 to be less than 2021. Despite these inflationary pressures I will now turn the call over to.
Jim Thank you Kevin as a walk through the corners results I'll reference slides from the earnings deck, we continued to invest excess liquidity into higher earning assets, which benefited net income and profitability metrics loan growth was strong again in the third quarter with total loans, increasing over $500 million on the.
Second quarter.
As Mitch mentioned production was down corner of a quarter, but still strong.
This coupled with a slowdown in payoffs resulted in net lung growth and nearly all categories.
We slowed down purchases and our investment portfolio and reinvesting cash flows into loans.
The continued increase in interest rates had a negative impact on the value of our portfolio, resulting in a fair market value adjustment of $85.3 million, although we experienced an overall decline in deposits. We grew non interest bearing deposits $86 million and that is deposits now represent 36%.
Of our Tuttle deposits core deposits and overall liquidity position remains strong.
And our loan to deposit ratio of 79% provides is flexibility all regulatory capital ratios are in excess of required menem's to be considered well capitalized and share the strength of our capital position.
During the quarter, we transferred $883 million in securities to the Hell the maturity category as we have no intent to sell these securities.
A benefit of this transfer helped preserve book value and are tangible common equity ratio declined only eight basis points from the second quarter.
We record a credit provision of $9.8 million and net charge offs of $1.6 million.
The a C L. As a percentage of total loans was flat quarter over quarter at 1.57%.
Our model did not produce a need for additional provision for unfunded commitments.
Credit quality metrics are shown on pages 14 through 16.
Past dues criticized in non-performing asset measures all remained relatively steady.
In net charge offs or nominal net interest income increased $12.8 million quarter over quarter.
Our core margin, which excludes purchase accounting accretion income recognized on triple P loans and interest recoveries was 3.5% up 50 basis points from Q2.
The change or a mix of earning assets position does that take advantage of the fed's rate increases. Furthermore, we remain disciplined in our deposit pricing efforts experiencing only a nominal increase to our cost of deposits, which helped drive the meaningful expansion of margin quarter over quarter.
We expect to experience competitive pressures around deposit pricing and believed funding cost will increase in the coming quarters.
We sold a portion of our mortgage servicing rights portfolio for a 3 million dollar gain.
The carrying value at the time of the sale was $15.4 million and represented $1.7 billion in unpaid principal amount.
Excluding the gain on sale of mortgage banking division was still profitable further solid results in our wealth management and insurance divisions as well as growth in our capital markets and Treasury solutions lines of business helped drive the increase in non interest income from the second quarter.
Non interest expense with exclusions, we're up approximately $5.1 million for the quarter.
We realize a full quarters impact from the increase in minimum wage adjustments and we invested an additional revenue production talent we.
We believe that additional operating efficiency gains are possible in the near term, although expenses may increase modestly in the fourth quarter given inflationary pressures.
We'll now turn the call back over to Mitch <unk>.
Thank you Jan we look forward to the balance of the year and our position for a successful fourth quarter. Our team remains focused on providing exceptional customer service and growing relationship says one team going to market as one bank before we began Q&A. This morning, I would like to take them.
Moment to convey on behalf of the Renaissance family that we are deeply saddened by the passing of Lisa Ferris vice-president of voluminous sales.
Lisa was a valued professional a friend to many on this call an outstanding mother and spouse, we will miss her greatly.
Our thoughts and prayers are with her family.
I will now turn the call over to the operator for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Kevin Fitzsimmons of da Davidson. Please go ahead.
Hey, good morning, everyone hope you're all well.
Good morning, Kevin.
I appreciate the the.
Comments on funding costs likely going up and I think that's that's pretty common with what we've been hearing.
But it was it was much stronger uhm.
Stronger margin expansion, we spent than I was expecting this quarter. So.
With the with the comment about funding costs going fire, Nick and I would assume that deposit beta accelerating maybe you can help us how to think of the margin.
Your directory from here you know.
To put words in your mouth, but I would assume.
Not gonna see this kind of expansion link quarter going forward, but maybe diminishing and.
Anything you can give us in terms of the next few quarters, and maybe where the margin and yield and.
Cost you deposit started for the month of September or any any any of that would be helpful. Thanks.
Good morning, Kevin This is Jim So a couple of things that hopefully will be helpful to you as you think about margin and its trajectory.
[noise] I'd start with I think I think you're right.
About Q4, and and beyond I mean, we saw obviously really nice margin expansion in Q3, we think we're poised to have additional margin expansion in queue for though not to the same extent.
And.
It's exactly what you reference it just our deposit said behaved really well we were really pleased with the way our.
Deposit base has performed I think our beta in third quarter was around 7% and we think again that will that will go up.
Talked before about how I'm modeling roughly a mid thirties beta an interest bearing deposits for the cycle.
I guess, a couple of data points. It at all so are Kevin that might be helpful.
So if we look at.
They were new new and renewed alone yields for the quarter. It was roughly 5.25% for September it was 582.
On the margin front core margin as you know as you reference was 350 for the quarter for September only it was 367.
So hopefully that helps as you as you think about it but I I think again, we're poised for some nice growth and that margin in queue for and.
I would I think it's a reasonable assumption as we sit here today, given what we know today that that margin for us will plateau sometime in the called the early part of twenty-three and then you know plateau from there. So we'll see how it plays out but again feel.
Police for some nice growth or expansion and that margin in Q4.
Hey, Jim just just wanted to clarify that mid thirties deposit paid up a cycle is that a total deposit beta is that just interest bearing and how does that compare with where you guys were last cycle.
It's interest bearing and it's very comparable to where we were last cycle.
Okay, and maybe just a follow on on.
Friday.
On one hand.
Kept the ACL ratio stable you had strong loan growth so.
I think you might've mentioned, the economic forecasts, but.
At the same time, you have a very.
Strong reserve ratio involved with peers. So I'm, just kind of wondering and your mindset like or did you just determine it was.
You know the prudent more conservative move to keep that ratio stable versus letting it bleed down just just.
Just trying to get some color on that banks.
Good morning, Kevin This is David.
So our reserves for this quarter were to your point were driven by Lone Grove and loan growth and we're just cover net charge off so that it remains stable <unk>.
Those factors, we think we forecast for the better part of the past year or intent to largely keep that stable, where we believe in economic event happened with Covid and we hadn't seen the.
Probably the final outcome to that event and at this point probably may not save them for another period of time that are reelected the key <unk> ICL at the current levels just until we can see what the final outcome or whether that be.
Distribution of access to put it in the marketplace government program flavor or whatever it might be and we see some rich.
Returned abnormal so you have a lot of the ratios that we use for more economic that.
Or attempt to this point Joseph continue to keep keep that number relatively stable cover loan growth cover charge often.
If there's any changes in the economy.
Got it okay. Thank you very much.
Yep.
The next question comes from Brad Millsaps with Piper Sandler. Please go ahead.
Hey, good morning.
Born and bred.
Thanks for taking my question and Mitch appreciate your sentiments on these fares.
You guys had a great quarter loan growth, maybe one of the best maybe you've ever had I joined a couple of minutes late so I apologize if you address this but uhm, which can you just talk a little bit about kind of what you know what you're seeing in terms of you know future Lone Grove kind of how you're thinking about 2023, most banks sang a.
A bit of a slowdown coming off the record quarter, just just kind of curious out how you're thinking about it.
Sure So brand all I will start with production and pipeline.
Talk a bit about both geographically and products are business lines, where we're seeing that that production and growth and then maybe make a comment about payoffs, which.
All both production and payoffs moderated this border when.
When we went into the quarter and I'm Gonna last quarter's call. We we talked about the expectation that production would moderate and we we in fact solve that this quarter. We we have production of 753 million.
Down from 877, so that's about up 14% moderation, but still strong strong historically, if you go back a year ago. It was 700. So we continue to see good deal flow good production the current pipe line.
Starting the quarter was 270 million that compares to 297 previous quarter. So the pipeline is reflecting the moderation in production, but still good sales strong and what's encouraging is and as I look back over the lives number of.
Quarters.
Where we see that production coming from and it really comes back to Talon and markets are business lawn, where we do business.
Breaking that 753 down 15% of that was Tennessee, another 15% was in Alabama, The Florida Panhandle.
24% in Georgia in Central Florida, 17% in Mississippi, and 29% in our commercial corporate business lines. So geographically, we see strong production and participation in the production of the company as well.
I would say if you break that down by product type in business Salon, 28% of it would would be in the consumer non roller stay one to four family residential that we retain on the books.
Another 12% in small business type credits, which has always been very good for our company across our footprints in that footprint, that's loans less than $2.5 million.
Then your more general is type commercial loans CNI owner occupied some commercial real estate loans generally over $2.5 million 31 per cent and.
And then an hour corporate banking group, our our commercial business lines.
Things like ABL equipment equipment financing your housing was 29%.
And we've been very consistent in both geographic and product tie production.
We continue to hit on many different settle wonders in the company and our ability to produce but like I say with some moderation this quarter, which was expected.
One thing that was a little more pronounced maybe not as expected, but expected payoffs they moderated about 36% this quarter.
But as I examined those and look at what made up those pay offs and where that pullback. Some it was in the sale of underlying assets that secured loans, which had been elevated of course in the past.
False to term right naturally pull back and then those credits going to the permanent market pullback. So it's very logical that we would have seen that but.
This quarter contributed to the strong net growth in addition to their production.
While we remain very disciplined and underlining and underwriting, which we have and we will going forward. We we remain very optimistic about our ability to produce and grow grow net loans really driven by.
Markets are business line and the talent and the company I I would add to that too and I've mentioned this before just where we do business in the southeast relative to economic activity, even in the head winds of what we face today the expansion that we see in manufacturing distribution medical government.
Military education, and if you look at the announcements of recent time.
Things I'll mention are represented and really.
<unk> for a strong economy, where we operate.
Even in light of like say, the the times that we're walking through.
Thanks, Thanks for all that color and maybe a question for Jim.
If growth does you know.
Stay strong even at a slightly lower pace, how should we think about you guys' funding that growth will you lead into the F. H O b a little bit more can you remind us how much you're getting out of the bond portfolio record or do you think you know how far would that go to kind of fun blend your needs.
Good morning, Brad So I mean, we we focus as you know on core deposits and we really want our loan loans outstanding and loan growth funded by that by deposits.
And as you say, what we'll see how long growth behaves over the coming quarters, I think we're roughly where someone the low eighties 80 283 per cent loan a deposit.
Preference would be to keep that you know.
No more than the low nineties or 90%.
So as we go through this sort of choppy period with the behavior of deposits and the competitiveness that we're seeing out there. We would we are open to alternative funding sources, including the federal home loan Bank.
Okay, and then may be final question Jim.
You mentioned expenses might be up some in the fourth quarter. It looked like other expense and the third was up maybe quite a bit from where it had been running.
Any any comments there I mean, it doesn't sound like it's going to reverse out but based on your comments, but just wanted to follow up on that to see if there's any additional kind of moving parts.
Hey, Hey, Brad It's Kevin I will take that question from G. [laughter] I think like that question.
Do you need to leave you out.
If you look at our expenses.
How are we detail them out all of them were were flat and down except for two line on salaries and employee benefits and other.
As your breakdown other there's a lot of little in there that we just saw some some increases in for example, some reinvestments we've made in technology.
In Q3 compared to cue to increase that run rate about battle by over half a million dollars. We also had some changes in our regulatory assessments in.
What appears to be a one time blip in some other losses. So it's just a lot of little but as we look ahead, we still think our expenses from this point are still relatively flattish.
We we continue to combat the inflationary pressures and I think where we are assigned.
Assigned that we're doing a good job of that if you look at salaries and employee benefits sits up 800000.
Compared to Q too, but embedded in that is almost $2 million of increased due to salary adjustments that we made in queue to to adjust our minimum wage and so we've significantly offset that with other accountability measures that that's I think that's a that's a model for our mindset as to how we're addressing.
The inflation pressures are everywhere the war were counted as.
Deep as it's ever been.
But we continue to believe and I think you saw it in this quarter the operating leverage that we have been talking about on our expense space.
As the margin has come back to us and we recognise mortgage has been volatile over the last two years, but I think you've seen what we've been talking about and that's at operating leverage our expenses are up there up one to two 3%, but net interest income is up 15% to 17%, we still think there's room of <unk>.
Writing leverage in future quarters, as Jim mentioned that our margin doesn't peak until sometime next year.
Great. Thank you guys.
Thank you Brian .
Again, if you have a question. Please press Star then one.
The next question comes from Catherine Mealor with K B W.
Please go ahead.
Thanks, Good morning, when follow up on what you were just talking about Kevin on the operating leverage Piecyk.
Hit your 60%.
Efficiency target this quarter given what you found any extent died and then.
Beyond the better revenue from the margin and just curious updated thoughts on if you think that that ratio can get further down from here.
Or if this is kind of a good level before anything cackling efficiency ratio for the next few quarters.
Just giving me a question.
Good question and the short answer is no. We we feel that that 60% in our our goal around efficiency no different than some of our goals around our profitability measures are fungible, we set short term goals.
Try to achieve those goals, but our longer term goal is to ultimately improve <unk>.
And at the same time at efficiency to that we think there's always room to continuously improve on that efficiency ratio. So our short term goal of 60%.
As you have mentioned, we've surpassed that and now and now it's on us to continue to improve that ratio.
Because at the end of a Fender.
The end of the day, what you're seeing in the numbers is that leverage that operating levers that comes from maintaining expenses with the opportunity to build revenues.
And that's all point, what's going to drive our profitability going forward and so there there continues to be a conviction around driving that efficiency ratio lower.
We're now back to the levels of efficiency, where we were pre pandemic.
And so we're in a real opportunity to continue to improve that.
Which not only.
That's such a new water.
New watermark for the company.
But it also it also allows us to close the gap and some of our peers. When it comes to profitability measures would continue to be a metric that we look at and continuously strive to improve on.
Okay.
Part through expenses and par three revenue.
Yeah, Yeah for sure Okay, Great. That's that's helpful and then.
Back on the margins that's on the size of the bond portfolio and.
You expect to see continued contraction and maybe.
As a percentage of advertising assets way, you're targeting you're bound to be after the horse for next year.
Good morning Catherine.
Oh, yes it.
Think I failed to answer this product Kevin's question earlier, but.
That portfolio stomach off about $30 million to $35 million a month so that helps.
<unk>.
Both going forward.
In my mind, I remember <unk> and.
Versus versus total asses, Katherine I think we're close to 19% or 18 or 19.
Which is the size of that portfolio relative to total assets.
We don't have any any hard and fast line, but.
As a rule of thumb I think we'd be willing to take that down around 15%.
Great. So really just depending on how deposit flags come in perhaps you could pull Samantha.
Finding appointment coming from your Bonduc, maybe that strange, it's a little bit in the next year.
Correct I mean.
You know.
Yeah. This period is courses are really fascinating one the deposits that our goal remains in our intention remains to grow core deposits.
It would be really challenging here in the next quarter to but but ultimately that's that's been a focus of the companies you know for a long long time and it remains a core part of the way, we think about building our business and sending our people so.
You will realize that we may see a slightly higher loan to deposit ratio is here in the near term.
Goal is to grow that core deposit base over the longest.
Okay.
Great. Thank you. Thank you I appreciate your sentiment on leaf this year.
<unk> she'll be next.
Right.
Okay. Thank you for making that comment about her uhm, okay quite a thanks, so much back.
Thank you Kathryn.
The next question comes from Jordan, Kent with Stephens, Inc.
Please go ahead.
Hey, good morning, Thanks for taking my call I got a quick question on your kind of the fee income guidance, you guys had a good quarter and yet.
Gain on sale of the mortgage servicing what are you guys seeing I guess in the near term or what are you expecting I guess from here.
So join just to be clear on mortgage or just all of fee income sorry, just just fee income.
Yeah. So so as we look a fee income.
It continues to be an.
And evolving story, whether whether we're talking about.
Our our service charges on deposits and some of the.
Call it regulatory pressures that it puts on that I think we've mentioned that beginning at the beginning of the year. There's gonna be some changes made that will that will bring server charges on deposits down a little bit, but overall as we look at noninterest income.
We think that there is there.
While there's headwinds may be a mortgage and some of the consumer fees. We also have tailwind and some of other business lines, whether it is stability in wealth management growth and insurance.
We've.
Two years ago, we invested in the capital markets group in bear impact and noninterest income is starting to become a.
A meaningful unreal number.
Or I'll I'll give you.
Kind of a mixed answer to say that we view noninterest income and our outlook is being stable right now with a lot of moving parts as to how historical noninterest income was generated versus what future noninterest income in the mix of it will be just as mortgage normalizes is regulatory.
Uncertainty and opinions affect income statement, we do have offsets and some of the other investments that we've made to keep noninterest income stable.
Perfect. Thank you and then maybe just one more question.
It looks like there wasn't any buyback activity in the third quarter, what's your appetite for share repurchases I guess in the near term and kind of looking into 2003.
During this is Jim and you are correct, we did not have any repurchase activity per quarter.
Remains a lever that we know that we can.
Deploy and we are constantly sort of evaluating.
Various uses of capital and buyback is always on that list.
And one thing I will note is that the.
Our program, which was due to expire this month was renewed and increased in size from $50 million to $100 million.
But I think to your to your question [noise].
Are are thinking on buybacks.
<unk> there are tool.
And we'll just sort of you know.
Take the coming months and quarters and see what alternative uses may present themselves and evaluate those against the returns on a buyback.
Perfect. Thank you for that.
The question.
Thank you Jordan.
This concludes our question.
Oh excuse me.
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No I'll just talk to him afterwards.
Okay, Alright, just wanted to make sure.
Not at all sure.
Sure.
Okay and in that case. This would conclude the question and answer session I would like to turn the conference back over to Mitch Waycaster, We're gonna start president and CEO for any closing remarks.
Thank you. Thank you everyone for joining this morning, we appreciate your interest in Renaissance, we look forward to meeting with investors at the hub D financial and the Piper Sandler financial services conferences in November .
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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