Q1 2023 Renasant Corporation Earnings Call
Good morning, and welcome to the <unk> Corporation 2023 first quarter earnings Conference call.
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I'll now like to turn the conference Kelly Hudson Chief Accounting Officer. Please go ahead.
Good morning, and thank you for joining us for rent is that corporations quarterly webcast and conference call participating on this call today are members of Renaissance Executive management team.
Four 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 such factors include but are not limited to changes in the Mexico.
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 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, our 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 President and Chief Executive Officer, Mitch Waycaster. Thank you Kelly. Good morning, We appreciate you joining the call today and your interest in <unk>.
Renaissance before Kevin and Jim discuss the results for the first quarter I would like to reflect on the environment and the outlook for the balance of the year. The baseline of all decision, making at Renaissance Bank is the safe and sound operation of our institution only after that box is checked.
Do we turned two considerations of profitability and growth in that order recent events in the banking industry reinforced how essential it is that we continue to approach our operations in this manner. Although sometimes this approach can weigh on near term profitability I believe it helps <unk>.
<unk> the company and our shareholders from adversity.
We are not immune from our industry pressures, but I believe Renaissance is well situated to serve our customers and produce attractive results for shareholders. While the economic outlook is unclear Renaissance has granular core funding a diverse loan portfolio and strong capital base.
Our goal is to further build upon these balance sheet strength and to continue pursuing profitability improvement.
We have reduced cost in recent periods, but believe there is more to accomplish there are also ways for us to enhance revenue growth and our efforts to increase operating leverage we look forward to the rest of the year and now I will turn the call over to Kevin Thanks, Mitch our first quarter earnings.
Were $46 $1 million or 82 cents per diluted share compared to $46 $3 million or 82 cents per diluted share in the fourth quarter breaking down net interest income we experienced an increase in loan interest income of over $16 million on a linked quarter basis, driven by another quarter of strong loan growth coupled with nearly.
A 50 basis point increase to our loan yields however, while loan yields increased competitive pressures on deposit pricing impacted both our deposit mix and deposit cost this quarter, leading to a $15.6 million increase in deposit interest expense from the fourth quarter of last year further in response to the developments in the industry we can.
Third in excess level of liquidity, which negatively impacted our net interest margin by two basis points for the quarter. Our long term focus on building and maintain a strong core funding base during our 119 year history positions us well in times of volatility and we did not experience significant deposit runoff in fact.
Posits excluding broker deposits increased in February and in March as we return to a more normal operating environment, we will adjust the level of operating cash accordingly, while still focusing heavily on growing core deposits and managing our funding costs in this volatile environment, our capital markets Treasury solutions wealth management and insurance lines all continue.
To deliver solid results, our mortgage division had a strong quarter as income from the division increased $3.3 million on a linked quarter basis interest rate lock volume increased $145 million from Q4, our investment in new talent, coupled with an already strong production team positions us to grow market share when the industry returns to them.
More normal operating environment as we previously announced effective January 1st we eliminated consumer non sufficient fund fees and certain consumer overdraft charges. This impacted noninterest income $1.3 million during the first quarter in line with our expectations.
Noninterest expense increased $6 $1 million from the fourth quarter, the acquisition of Republic business credit, which closed on December 30th of last year added $2.7 million to our noninterest expense. We also experienced lower deferred loan origination fees and a seasonal increase in both payroll taxes and the company's match.
A four one K contributions our efficiency ratio was 61, 3% for the quarter. The increase on a linked quarter basis was driven by the compression in our margin coupled with the increase in our expenses managing this ratio down continues to be a key focus of ours and all levels of management are aligned in our goal of improving operating lever.
I will now turn the call over to Jim. Thank you Kevin as you walk through the quarter's results I will reference slides from the earnings deck.
Our balance sheet grew nearly $500 million from December 31st we carried excess liquidity at the end of the quarter, which account for about $300 million of the growth and we also experienced another solid quarter of loan growth loan growth in the first quarter was $188 million and represents an annualized growth rate of 6.6%.
Referencing slide eight and additional slides in the appendix, we have a very diverse loan portfolio with no significant concentrations and loan type or industry and specific to our construction and non owner occupied commercial real estate portfolios our exposure to individuals' sectors is granular in their portfolios are performing well.
Well competition for deposits within our markets continue to pick up this quarter, we experienced a decline in non interest bearing deposits of $314 million from the fourth quarter, most of which occurred during January and increased our broker deposit position by $623 million during the quarter the company's core deposit base.
And overall liquidity position remains strong similar to our loan portfolio. The deposit portfolio is diverse and granular. The average deposit account is $29000 and we have no material concentrations slide 13 shows the available sources of liquidity and as you can see our availability.
Significantly exceeds the balance of uninsured and uncollateralized deposits all regulatory capital ratios are in excess of required minimums to be considered well capitalized and reflect the strength of our capital position turning our attention to asset quality, we recorded a credit loss provision of $8 million and a recovery of <unk>.
Losses on unfunded commitments of $1.5 million, which is recognized in non interest expense net charge offs were 4.7 $9 in the ACL as a percentage of total loans remained flat at 1.66% credit quality metrics remained stable and are presented on page 17 through too.
'twenty the increase in nonperforming loans is attributable to two relationships both of which are well collateralized and therefore, we expect no loss net income remained flat at $46 million on a linked quarter basis, while our pre provision net revenue declined $8 million profitability was impacted by the compressed.
<unk> and our net interest margin and the increase in noninterest expense during the quarter core margin, which excludes purchase accounting accretion and interest recoveries was 3.63% down 13 basis points from Q4, although loan yields were up 49 basis points deposit pricing pressures and excess liquidity.
<unk> impacted us more heavily this quarter total cost of funding increased 57 basis points to 1.33% for the quarter, we expect competitive pressures to persist and believe funding cost will continue to increase in coming quarters, Kevin touched on the highlights. We'll then noninterest income and expense we are encouraged by the results.
<unk> of our mortgage division, although there was an uptick in our overall noninterest expenses. This quarter, we remain committed to improving operating leverage and managing our expense base remains a priority and I will now turn the call back over to match. Thank you Jim the focus at Renaissance remains on basic banking principles and the <unk>.
For suite of efficiency gains. We also believe the company is positioned to consider opportunities that may develop in the quarters ahead, I will now turn the call over to the operator for Q&A.
We will now begin the question and answer session.
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Our first question will come from Brad Millsaps with Piper Sandler you May now go ahead.
Hey, good morning.
Good morning, Brad.
Mitch Thanks for taking my questions.
Maybe Jim wanted to start with the margin.
Guys have had a very low.
Cumulative deposit beta to date.
Just kind of curious how you see that picking up from here and then.
The brokered deposits that you did put on can you give us a sense of you know kind of the rate.
And duration of those deposits and how that's going to maybe impact that deposit beta going forward.
Okay.
Good morning, Brad This is Jim yes, so on beta Ah I think when we were.
In Q4, we're using a cycle beta of about 40.
And.
We've revised that upward and we are using 45 and our modeling at this point in terms of interest bearing beta for the cycle.
You asked about brokered and I think it you know we were roughly at a call at nine.
100 million just below 900 million in brokered at quarter end and the weighted average maturity of that was about a half a year and I think the the average cost of that was about 5%.
Okay, and Jim would the plan be to maybe just continue to use the broker channel versus you know maybe pushing you know you're the the rest of your deposit base with it in the interim is that is that towards your plan to the fund.
Through the broker network universes versus your own deposit growth just kind of want to think about how to how you plan to fund your growth going forward.
Yes, I mean, we want to as much as we can try to grow core deposits and of course in this environment, it's really difficult, but that that's the primary goal of like you know I'm sure for all of our.
All the other banks industry that that's that's the goal, but yes, I think we would probably lean towards brokered.
But we evaluate obviously the the costa brokered versus advances.
And as we went through the particularly the latter half latter part really of Q1, the cost of that brokered money was less.
Then the cost of advances.
Particularly given the events of early March to to be mindful of that aspect as well. So I think youre right, well, probably lean towards brokered a to the extent we've got a shortfall in core deposits to fund our loan growth.
That we're not funding from you know cash flow from the investment securities or or otherwise.
Okay. Thank you and then maybe just a final question for Jim or Kevin.
Okay.
Expenses I think you know maybe excluding the unfunded commitment reversal of around 109 million, maybe a little bit higher than I was looking for I know <unk> has a lot of seasonal impact you also had the acquisition, but just kind of curious how you guys are thinking about expense trajectory from the <unk> run rate as you can.
Move through 2023.
Yeah, Hey, Hey, Brad as we look ahead.
The run rate in that 1071 away range, we think is a good run rate when.
When we enter Q2, we're gonna have merit increases that arent in Q1 and then we also Q2 is when we expect the.
The increase in FDIC insurance assessments free pre March law says that the that the fund incurred we were all anticipating a fairly large increase in our FERC insurance assessments and that goes into effect in Q2. So factoring those two into the equation, we think that the one of seven one in weight range is a good.
Range for.
For the near term on expenses.
Okay, great. Thank you guys I'll hop back in queue.
Thank you Brian .
Our next question will come from Dave Bishop with D. A Davidson you May now go ahead.
Good morning, gentlemen.
Good morning des.
Hey, obviously rightfully so a lot of attention on deposit betas within the sector, but.
You guys talked you saw good growth and pick up in loan yields this quarter of $5 68.
Curious do you have a sense of maybe.
Is there a sort of a loan beta baked into the projections and maybe where do you see loans, peaking.
In the quarters after maybe the fed pauses if it said in the second or third quarter.
We continue to see loan yields lagging higher even after the fed pauses.
Dave This is Jim so in terms of the loan beta for the cycle, we see that in the mid to upper Forty's.
From here, so I can tell you that.
It's helpful. If you look at new and renewed loan rates.
Our yields are for Q1 are they were 716 for them for our production in Q1, that's excluding RBC RBC does have.
And impact on that with RBC was 744 and for March that those same two data points would be 747 X RBC and 810 with RBC.
Got it.
The natural churn will continue sort of.
Even if the fed pauses in USA second or third quarter, you'll continue to see some of that repricing benefit benefit into the latter half of the year at 24, I think it's a pretty.
Pretty quick peak and maybe turnarounds.
I think it will continue I mean, the the funding costs are going to weigh on that and and so that's you know the gains we have on on loan yields are going to be.
Muted because of no funding.
The pressures that we're going to face in terms of you know the prices, we're paying on whether it's brokered or advances our core deposits.
Got it and then.
Sticking with the.
The liquidity position I think you said, there was maybe $300 million of excess liquidity.
The quarter, where do you see that trending over the near term.
I would say over the near and intermediate term that will trend down clearly with Wanda.
Keep some excess liquidity on the balance sheet, our quarter end, but depending upon the environment and how you know things.
Behave in the banking industry I would suspect that that gradually trends down over the over the course of the year.
Got it and then just one housekeeping item I thought I thought.
Pick up in 90 days past due.
So that was administrative.
Paperwork type end of year end of quarter delays in terms of financials or such but it looks like those ticked up to about $18 6 million from like 300000, or just any color there.
Good morning, This is David and Jim mentioned in our opening comments there were two credits that rolled into that 90 day past due bucket.
Those are credits we had we've had we had identified and are at their run our previous past due numbers. They they were we had him as criticized assets its way out of matter. They were loans that we both on both of those we feel very strongly that we're in a great collateral position and anticipate no loss on those so those rolled into R. R. M. P. L. We expect to work out of those are normal course of business without any.
Any charge offs.
Okay.
You can see the the 30 30 to 89 day number past due numbers actually bumped down a little bit from 51 to 43 weeks.
We've seen a relatively flat our criticized assets. They went down a few basis points quarter over quarter. So absent those couple of loans, our asset quality held pretty strong in the first quarter.
Got it thanks.
Thank you David.
Hum.
Our next question will come from Catherine Mealor with <unk>.
You May now go ahead.
Thanks, Good morning.
Good morning Catherine.
I wanted to ask about outlook for loan growth just given the current environment are you seeing a pullback in production on pipeline.
Or do you still think we can kind of keep us in the low to mid single digit kind of growth rate this year.
Yeah, Catherine we are the moderation that we've seen the last actually two quarters. It continued this quarter, we do feel feel very good about our ability to continue to produce and just.
Yes.
To drill a little more there the pipeline.
Going into the quarter was 163 million that had moderated from 200 million the prior quarter.
But the good part is like.
Like I say, we still feel good about production, we see that.
Spread across the regions the business lines.
Each continued to contribute in a meaningful way.
And as I've mentioned in prior quarters. In addition to that geographic distribution is just our loan types and size of credits the granularity in our loan book Jim mentioned this in the opening comments, it's Oh, it looks a lot like our our deposit side of the balance sheet and we're very pleased.
With that.
As I look at this quarter's production of $415 million about 36% of that that our production was still in that consumer one to four residential and then when you get into the small business and commercial.
Small business and business banking was about 13% of the commercial book and that would be loans $2.5 million in greater owner.
Owner occupied C&I and we're seeing good production and see and are very pleased with the southeast business and Republic, both of them both of those partnerships coming from last year have been very productive.
Along with some of our other C&I lines as well as some of the core business, even though this pullback some certainly but that that represented another 24% and then when you get into corporate banking some larger C&I commercial real estate type credits rounded out the 27% so.
You see again very.
Granular and then distributed across a number of business lines. So we continue to hit on many different cylinders and produce like say granular good core relationship driven type loan growth than we do.
We expect that to continue in a relative to your question kind of where we see that coming in I would expect Q2 to be somewhat reflective of Q1.
Relative to NAV, we are see Katherine I'll add too.
Another contributor to that and add as pay offs as we've seen production moderates. So as well we continue to see payoffs moderate as well, which contributes to the net result.
And then secondly back Jim to the margin conversation.
And you gave your expectations for interest bearing deposit costs. How are you thinking about the mix shift out of noninterest bearing and where that ball.
And as a percentage of deposits at the end of the year.
Good morning, Catherine well of course, we don't know the answer to that but I would I would say this that that migration is going to continue I think we peaked at roughly 35 or 36% and I b and we're at quarter and here I think we're right around 31.
I don't know where it ends up at the end of the year, but a reasonable expectation would probably be something in the upper twenty's.
Great and it is a mix shift that you think more of the growth.
It flows into Cds or how do you think about the mix shifts within the category.
Deposits.
We would we would hope that what we can do is hold total deposits flat. So we're hoping that that that that and I be migration turns into we get that the money markets or C. DS.
Great very helpful. Thank you.
Let me ask one more on the margins. So just big picture on the margin I don't think you gave Jim.
You get your thoughts on just how you handle the margin.
Okay and then he gets to the next quarter, how youre thinking about what level of compression, we can see that in the second quarter.
I would say that is I guess I should start with two Catherine that mean weak at this point in our modeling we're using a 25 basis point increase in May and then flat thereafter in terms of fed moves and.
And on the margin side.
I would expect something roughly similar to what we saw.
And in Q1 in terms of impact to margin I would point out that you know Q1, particularly the last month of key months Q1 that margin was weighed down by the excess liquidity, we carried but as we look out for the balance of the year. So.
Q2, definitely see some compression in the margin.
Close to maybe not to the extent in Q1, but may be close to it and then the second half of the year better performance in terms of what kind of declines we would see in the margin, but I do think that given our rate outlook. We think it's reasonable to us to see some margin declines through the balance of the year again not us.
Not as.
As meaningful as they would be in the first half, but we still see some compression in the margin in the second half of the year.
Great very helpful. Thank you.
Thank you Catherine.
Our next question will come from Kevin Fitzsimmons with D. A Davidson.
I'll now go ahead.
Hey, good morning, guys, Congrats and Christian on for Kevin.
Good morning Christian.
So just a quick one for me I noticed in your <unk>.
Close a few offices, particularly with some production in mortgage.
Meanwhile, your mortgage income was up pretty significantly compared to last quarter. Just wanted to know if there was something that you saw in those areas chemicals office closures or new.
Doing that more related to.
Cost savings.
Hey, Christian it's a it's a couple of things, it's a little bit of both.
It was driven by a look at our real estate and how we could and then may be banned it better manage the.
The noninterest expense related to all of our operations, but what we saw was the opportunity in many more mortgage market was to consolidate those mortgage personnel into the branch. We typically had to close a branch there within close proximity and so it was to maximize performance as well as minimize.
The expanse and.
Related to carrying occupancy and equipment may be duplicate occupancy and equipment and in the same markets.
As it relates to mortgage.
Not only on the expense side the mortgage group has.
Cut out a significant amount of expense.
Preparing itself when rates more normalized or if theres a potential in the future that originally fall we feel very good about how we're positioned from the costs, we've taken out some of the fixed cost that.
That may be we built up.
And better times, but also we've hired.
Well, we've been very active and proactive in hiring mortgage personnel.
Mortgage producers that will help drive higher levels of production as rates.
As rates, maybe tick back down.
Or moderate and stay at levels that we see right now, we see that pipeline holding and possibly growing a little bit.
Great. Thank you.
Thank you Christian.
Again, if you have a question. Please press Star then one.
Our next question will come from Michael Rose with Raymond James You May now go ahead.
Hey, good morning, guys. Thanks for taking my questions just a few follow ups here.
Understand the addition of the broker deposits can you just remind us.
I am sorry, if I missed it but what's.
What's the tenor of those days in.
You know what the expectation would be.
Just for brokered deposits in general I mean would you still expect to have some.
Assuming the kind of the crisis that we have been in kind of begins to abate here in the next couple of months. Thanks.
Michael This is Jim so they stand roughly today at about 850 million at quarter end and the cost of those brokered money is about 5% and <unk>.
The average maturity is about a half a year.
Going forward I mean.
A lot's going to depend upon what we're able to do in the core funding side and obviously Mitch talked about loan growth. We continue to have no interest in purchasing our investment securities that will benefit from that roll off of about $25 million a month.
So where that takes us in terms of that broker deposit balance I don't know them, but.
Certainly we're going to evaluate that.
You know versus our other opportunities to fund the balance sheet, but that advances are things.
Things that we can do in terms of specials on Cds and money market. So I don't know exactly where it ends up.
Sort of hard to predict but we're certainly not adverse to accessing that that that a source of funding.
Perfect. Thanks for thanks for that maybe just switching back to the margin. If you. If you can just kind of walk us through kind of.
The dynamics that have led to the decline in the.
Gain on sale margin Q on Q I think from other banks that I've seen reports in mix I mean, some up some down there's obviously various reasons for that but just wanted to get some color on you guys, specifically and then.
Obviously understanding that the backdrop is still fairly competitive.
Any expectations for that gain on sale.
Margin as we move over the next couple of quarters and when you think.
Mortgage company can get back to profitability.
Yeah. So.
So Mike alone that would first start off and just let you know that our mortgage group.
As profitable.
In Q1, they're pre tax income.
Push close to a million dollars for the quarter. So.
They had a really strong quarter and.
And in what continues to be a very volatile time in mortgage.
On the gain on sale I think maybe where we were a little bit different than peers I'm not sure exactly.
Which peers or how they're calculating it our gain on sale margin, maybe a little bit influenced this quarter by our mix of retail versus wholesale.
It was a little bit our production was about 60 40, 60% retail 40%.
Wholesale.
And that wholesale does comment a little bit thinner margins than maybe the retail production and I think that's what causes a little bit of weight or may be some volatility in our margin compared to some of our peers.
Perfect I appreciate the color thanks for taking my questions.
Thank you thank you Michael.
It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Mitch Waycaster for any closing remarks.
Thank you Anthony and thank you to all of you who joined the call. This morning, and we welcome your interest and we plan to participate in the Gulf South Conference May the eighth and ninth.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.