Q2 2023 Renasant Corporation Earnings Call
Good morning, and welcome to the Renaissance Corporation Torchy twenty-three second quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your toes.
Phone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two 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.
Thank you for joining us for Renaissance Corporation's 2023 quarterly 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 changes in the mix and cost of our funding sources interest rate fluctuation regulatory changes portfolio performance and other.
As 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 tap, we undertake no obligation and we specifically disclaim any obligation to update.
Our revised forward looking statements to reflect changed assumptions the occurrence of unanticipated events or changes to future operating results over time. In addition, some other financial measures that we may discuss this morning are non-GAAP financial measures.
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. Thank you Kelly. Good morning, We appreciate you joining the call today and your interest in Renaissance.
Although the current operating environment continues to be volatile and uncertain at times, our focus on basic banking principles and the safety and soundness of our institution has not wavered.
Our second quarter results are highlighted by solid core earnings strong asset quality metrics, and a well diversified and granular core funding base.
In the second quarter, we took steps to delever the balance sheet. These actions enhance the strength and optionality of our financial condition and will aid earnings in future quarters.
Loan growth was solid and reflects the vibrancy of markets in which we operate.
Our financial outlook, we will continue to benefit from the economic growth throughout our footprint I will now turn the call over to Kevin. Thanks, Smith, our second quarter earnings were $28 $6 million or 51 cents per diluted share included in our results is an after tax loss of $18 $1 million.
Or 32 cents from the sale of a portion of our securities portfolio.
Clothing. This loss our core EPS was <unk> 83 suits, which represents a one cent increase from the first quarter. The securities had an amortized cost of just over $500 million and the proceeds from the sale were used to shrink the balance sheet by paying down wholesale borrowings as.
As Mitch mentioned in his comments the actions we took during the quarter improve our capital and liquidity position and enhance future earnings and Optionality.
Breaking down net interest income we experienced an increase in loan interest income of over $11 million on a linked quarter basis, driven by another quarter of solid loan growth.
Coupled with a 25 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 an 18.5 million dollar increase in deposit interest expense on a linked quarter basis the.
The balance sheet repositioning transaction was executed late in the quarter and had a nominal impact on net interest income during the second quarter.
The earnings benefit will be realized beginning in the third quarter, considering the operating environment, our deposit portfolio performed well during the quarter and our overall liquidity remained strong.
Total deposits increased slightly during the quarter and our loan to deposit ratio held constant at 85%.
Our team was successful in defending our core funding base as deposits excluding broker deposits were up slightly late in the quarter. After a seasonal decline in April .
We are still operating in a volatile environment following the developments in the industry during the first quarter, but we continue to focus heavily on growing core deposits and managing our funding costs. Excluding the loss on the sale of securities noninterest income increased modestly quarter over quarter, our capital markets Treasury solutions wealth management and insurance lines of businesses continued to.
Deliver solid results our mortgage division had a strong quarter as income fronted division increased $1.3 million on a linked quarter basis interest rate lock volume was flat quarter over quarter, while our gain on sale margin increased 51 basis points noninterest expense increased $1.5 million from the fourth quarter, driven primarily by the impact from our annual Merit increases.
Greece's, which was offset slightly by savings in other areas our efficiency ratio excluding the loss on the sale of securities was 63% for the quarter margin compression continues to put pressure on our efficiency, but managing this ratio down continues to be a goal of ours, improving operating leverage across all lines of businesses will help us meet this goal.
I will now turn the call over to Jim.
Thank you Kevin as.
As we walk through the quarter's results I will reference slides from the earnings deck, our balance sheet contracted $250 million from March 31st.
The sale of Securities was offset by another quarter of solid loan growth.
Loan growth in the second quarter was $165 million and represents an annualized growth rate of 5.6%.
We continue to carry excess liquidity and our cash balances grew about $100 million on a linked quarter basis.
Slide eight and additional slides in the appendix illustrate that we have a diverse loan portfolio with no significant concentrations in loan type or industry and specific to our construction in non owner occupied commercial real estate portfolio is our exposure to individual sectors is granular and the portfolios are performing well turning.
To slide nine competition for deposits accelerated further this quarter and impacted both the mix and cost of deposits.
Noninterest bearing deposits represent 27% of total deposits compared to 31% at March 31st.
And our cost of deposits increased to 1.5%, which represents a cumulative beta of 27 as you can see on slides 10 through 12, the company's core deposit base and overall liquidity position remains strong similar to the loan portfolio. The deposit base is diverse and granular. The average deposit account is 29000 dollar.
And there are no material concentrations slide 13 touches on the available sources of liquidity and as you can see our availability significantly exceeds the balance of uninsured and uncollateralized deposits referencing slide 15, all regulatory capital ratios are in excess of required minimums.
To be considered well capitalized and each of these ratios improved from the prior quarter turning to asset quality, we recorded a credit loss provision of $3 million and a recovery of credit losses on unfunded commitments of $1 million, which is recognized in noninterest expenses.
Net charge offs were $3.9 million, which represents an annualized rate of 13 basis points in the ACL as a percentage of total loans declined three basis points to 1.63% credit metrics are presented on pages 17 through 19, our past dues and criticized loans each improved quarter over quarter.
The increase in nonperforming loans is attributable to a single relationship which is well collateralized and therefore, we expect 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 losses to the bank moving on to profitability beginning on slide 23 net income declined seven.
Teen point $5 million on a linked quarter basis, driven by the after tax loss of $18 million from the sale of securities. Excluding the loss on the shelf securities our profitability metrics remained relatively stable.
Core margin, which excludes purchase accounting accretion and interest recoveries was 3.43% down 20 basis points from Q1.
Although loan yields were up 25 basis points deposit pricing pressures more than offset the increase in yield total cost of funding increased 47 basis points to 1.8% for the quarter. Although we anticipate some relief in the short term from the balance sheet repositioning transaction competitive pressures are likely to persist.
And we believe funding costs will continue to increase in coming quarters.
Kevin touched on the highlights within noninterest income and expense. We are encouraged by the results 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.
I will now turn the call back over to Mitch. Thank you Jim we continued to emphasize time-tested banking principles as we operate the bank. These fundamentals not only protect our customers and shareholders, but also position us to generate attractive shareholder returns I will now turn.
The call over to the operator for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like 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 Thomas Wendler with Stephens.
Please go ahead.
Hey, good morning, everyone.
Good morning Carlos.
I just wanted to go back to the security sale you said it happened late in the quarter can you give us an idea of the impacts on <unk> from this and then maybe like an earn back for the trade.
Eric Good morning, Thomas This is Dan.
You are correct the Lee.
The series of trade.
And quite large in the FERC order James that impact.
Q2 was de Minimis.
Looking forward.
I will say that.
Our rationale and interest in that trade was really driven.
Secondary priorities, but mainly by the impact.
Trade would have in our balance sheet and what we like about.
Yes.
It was that we would delever our balance sheet, what do synthetic mesh and give us more flexibility in the balance sheet side first and foremost and so that was that was the primary.
Considering the strike it did have the benefit as you point out.
Benefiting future earnings.
Essentially sold securities about 2.9%.
We took those moneys in Dayton on advances that were costing us roughly.
So the breakeven calculation roughly two years plus.
Washington.
Very good questions.
The execution that we got and the impact it had on balance sheet.
That's great color. Thank you and then just one more for me.
You guys had an annual merit increase this quarter is going to be any impact in our three Q from that merit increase.
Hey, Tom it's Kevin.
There won't be and there may be there may be some additional hires.
And if I can add anything.
Merit increase impact March 1st.
Some of that was recognized in Q1.
Back in Q2, if you if you look at salaries employee benefits.
<unk> thousand dollars.
Six 600000 of that that would be related to mortgage.
If you look the mortgage income.
$2 million.
And there's going to be a corresponding increase.
On there.
Added to that.
So as you back out mortgage the increase in salaries, but just a couple of hundred thousand dollars.
Okay.
Alright, that's great. Thanks for answering my questions guys and a great quarter.
Thank you Thomas.
The next question comes from will Jones with K B W. Please go ahead.
Hey, great good morning, guys.
Good morning will.
So I just wanted to go back to the to the bond sale for a minute I mean obvious.
The math is very financially compelling, especially if you just look at other exchange and yield that you're getting there.
Is there any way to frame you know what what kind of margin benefit will be living for obviously, the third quarter, we'll see a nice benefit there and it'll run rates at the end of the year, but.
Jim is there just any way you're at any kind of context, you can give us on.
What were you know or maybe a range of where you think the margin could fill out oh in the back half of the year here.
Good morning, well, it's a good question and certainly the trade benefit the earnings power of the company estimated about bad weather.
I would say this as we look forward and think about the margin impact.
Hi.
Uh huh.
I will take that trade at least from an earnings perspective is helping to moderate.
The declines in depression.
Margin yeah.
Certainly.
I see.
And better off having executed the trade in terms of the performance of Beijing and margins in the second half.
But we still feel.
The pressures on the margin and we're likely to see.
Hum.
Those pressures in the second half so it was up again.
Yeah.
And the margin and NII.
But I will say those declines will be.
Much more moderate than what we saw from Q1 as you can see that's the real benefit.
The pressures remain.
But I would I would.
Directionally.
The margins in Pi.
Well well beyond the progression of secondhand.
Damn moderate way from what we saw in Q2.
Yeah.
Understood. That's very helpful. And then just separately on the margin we saw a little bit of a catch up beta this quarter. This just curious on the outlook, where you see that trending for the year. If you guys have any updated expectations on.
I know you brought on a little bit more broker deposits. This quarter, maybe just give us a sense of the tenor of those deposits and maybe the right rate or duration and that'd be helpful. Thanks.
Sure so.
Start with the broker deposits.
As you point out we did see an increase in broker deposits and Anna.
I'll get back to that bond trading for a second because again, what we like first and.
Almost about that right. The delevering that allowed us to do is that federal home loan bank and bad medicine.
As we think about alternative sources of funding we pay.
<unk> got a lot of.
Our federal home loan Bank Outstandings.
And plan to pay down more of that debt.
Quarter and likewise it broke we started.
And we are in a period of time.
Yeah.
Traditional core deposits throughout the body gathered.
It is.
But over the next few quarters.
Good man.
Accomplish it to pay down broker deposits mainly.
One of the core funded bank.
These alternative sources that benefited us.
Certainly.
Use them, but but that's our goal as it relates to that.
Funding as it relates to debate is what I would say.
Last couple of quarters.
That is.
Those assumptions on deposit betas and currently for interest bearing deposit beta we are already using about 50%.
Deposit.
Yeah.
Okay. That's very helpful. And then maybe if I missed this just bigger picture on this bond.
It feels like the rationale was clearly you know.
No.
What we saw liquidity to build March weather, the storm and kind of wait for the dust to settle in and you know three months down the road, we've kind of removed ourselves from from the deposit crisis.
And then it's time to right size, the balance sheet and get get it too.
Funding in a more efficient place I guess first of all you mentioned that is that just kind of how you'd frame you know there's this trade you guys made here.
And then just in terms of timing you know what gives you confidence that that right now and right here. It was kind of like the time Doug.
Repositioning the balance sheet, and you kind of put yourself behind this deposit liquidity crisis.
Yeah. So I think you know.
As I mentioned in the opening comments, just enhancing the strength and the optionality for us going forward.
Something we gave a lot of thought to and we thought it timely and we were in a position to execute this straight and we thought like I say, giving us optionality and and as we look forward and just position us for strength.
Certainly there is earning benefits from it but as Jim mentioned, we're more focused on just a strengthened balance sheet.
And just maintaining that optionality.
I would add this well to Vince assignments.
Yes.
We obviously think a lot about the balance sheet.
Protecting the strength of the balance sheet and enhancing the strength of the balance sheet.
From a capital and liquidity.
And average funds and so forth.
So there are a number.
But things that we think about.
It proves the strength of it in this particular topic, we start at two.
Think about late last year.
And I think to your question some of it was just yes. It's.
Finding the right time.
Financial pieces of this the law of the magnetic sensors.
We're starting to have a gaming.
The industry.
Issues and Oh March selling it had been at our mine and we were just waiting for the right window, but.
Net debt came to us.
That's a long ways.
Yeah.
Understood. Thanks for the questions guys.
Thank you will.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, guys.
Hope all is well.
Just wanted to get a sense or.
Loan production.
Mitch and what the what the outlook could be.
Here in the nearer term just the competitive dynamics.
You know what you guys are kind of seeing across your footprint. Thanks.
Sure. Thank you Michael.
Well another another solid quarter.
<unk> as we've seen in the last two to three quarters of course, we we say pipelines continued to moderate.
And I would say again, that's driven by our discipline in pricing funding underwriting and demand.
One of your question, but.
As I mentioned, we operate in vibrant markets and we continue to service and grow relationships.
Yeah. Our production this past quarter was 413 million that compares to 450 in the prior quarter. So again solid production.
Good net result, this quarter 169 million or roughly 6% and that compares to 198 million or just over 6% between six and 7% the prior quarter.
As I've mentioned before kind of the governor on that net result is what we see in payoffs payoffs were up modestly this quarter, but.
Overall compared to the prior year of course, they have moderated as well so.
You know as far as looking forward the <unk>.
Good thing about our portfolio as Jim and Kevin mentioned in opening remarks were granular on both sides of the balance sheet.
And that's reflected in this quarter's production geographically.
We continue to see all of our regions, our business lines contribute well to our results as well as the granularity of our loan types.
That we continue to have pointed to in the past, but again its reflective of our book with about 30% of that production coming from the consumer kind of one to four family another 30% from small business credits less than $2 5 million and then another 24% or so from.
<unk> credits that was above two point.
Representing C&I owner occupied commercial real estate credits and then our corporate commercial business lines continue to contribute oil that makes out the balance of this quarter's production. So we continue to hit on many different cylinder cylinders relative to our ability to.
To produce and.
All of that along with our markets gives us optimism about.
Our ability going forward and as to our markets.
<expletive> again to end migration economic development and sectors like manufacturing distribution medical government education, all of those contribute to a very vibrant strong marketplace that we do business.
And with all that I would expect.
This quarter to be generally reflective of what we've seen in Q1 and Q2 relative to our our net.
All of that depending somewhat on the level of payoffs.
And just the continued economic activity that I referred to.
That's great color and that actually touches on my follow up which as you know.
If the fed raises today and signaled that that's kind of a bit I mean, you guys have an expectation for what pay offs.
Could look like here over the next few quarters and then how does the acquisition of of Republic earlier, this year and the ABL business contribute to this quarter's growth and expectations in the back half. Thanks.
Yeah. Thank you yeah. So.
I don't know that an additional move in the fed would have a significant change in the pay offs.
Likely at this point, but.
Relative to public we have been very pleased the integration with that company into ours.
Strong both business development and the underwriting discipline and that company. We've been very pleased with what we've seen so far and just merging them into our company it's been rich.
<unk> received very well.
Referral of business out there.
Business I would say both ways within both companies.
We have been very pleased and was a meaningful meaningful contributor in Q1, and Q2 and looking at the pipeline, we certainly expect that to continue.
Okay.
Great and maybe just one more for me switching to two expenses and maybe how that ties in.
So the mortgage this quarter, a little bit stronger I assume that was some of the expenses coming in a little bit higher than that in the guidance range. You had given can you just give us some thoughts on where the.
The efficiency ratio was for the mortgage company and what the profitability looks like and.
What the expense range could look like for the third quarter.
Sure.
Michael Kevin again, so again, if we look at if we look at mortgage mortgage again continues continues to be a very volatile environment.
Environment, particularly compared to two to three years ago.
The great thing about our mortgage company has under their leadership.
We continue to be bought.
And we know that that's an anomaly.
Compared to what's happening in the industry, but also with <unk>.
Dan.
Less efficient.
I think the efficiency ratio for the quarter then.
In the mid nineties.
If you back them out they weigh on our efficiency ratio.
Two percentage points.
And as we look at the expense increase at the top of the house the.
The majority of that going to be attributable to mortgage we talked about earlier in the call.
<unk> benefits.
Given the growth that was up 800006.
600000 of that is mortgage.
If you look at some of the other other expenses.
In the category, particularly in all the mortgage is going to be contributing that just assuming a pulse to the portfolio.
As we look at expense guidance.
Probably it's probably going to be a little bit volatile for the next couple of quarters.
As far as the headwinds that we have versus some of our internal expense initiatives.
We do think.
But as we look out that expenses, but maybe the next couple of quarters, a little bit flattish.
Some of Thats going to be driven by mortgage.
We do expect mortgage to have another good good Q3.
So expenses could be remain elevated compared to what we've guided to in the past David mortgage.
But again continue to focus on initiatives to bring expenses down.
Revenue.
And ultimately get our business today.
Back down towards that 50% range.
The current environment of margin compression is while we've been paid.
A few more orders than we anticipated.
Great. Thanks for all the color guys I appreciate it I'll step back.
Thank you Mike.
Again, if you have a question. Please press Star then one.
The next question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning.
I guess I wanted to just follow ups briefly on deposit.
You talked about I think Jim maybe you said you wanted to look to replace a lot of those broker deposits over the coming quarters, where do you think that would come from would that likely be customer Cds at this point in time, and then kind of how do you think about noninterest bearing deposits and where those balances might might trend from here potentially bottomed.
Good morning, Steven.
So yes, I mean, our focus remains core deposit growth and we have a number of initiatives.
So we are not unusual.
And in that category, what other what other banks, but we've got a real focus there at our at our aspirations are to try to go out of core deposits.
We appreciate the significant headwinds.
And the industry, but.
That's our target.
And of course, well it plays a role.
We're funding it but our goal is to over the next few quarters.
Against that.
Both our endeavor.
In terms of an IV I think roughly about 27 or 28%.
Don't know for sure where that goes but a reasonable expectation.
The next two or three quarters as you can see that getting to mid twenties.
Of course.
Yeah.
A robust given where rates are higher.
Hello mate.
Higher than more difficult that that challenge becomes.
It'd be balances so a lot of that geopolitical big big specials and promotions.
On the deposit side, but our goal is to.
Yes returned to levels.
Close to 100% core funded bank soon as we can.
Got it helpful color Jim Thank you.
And I'm curious just kind of at a high level.
Obviously, we have all this turmoil in March in May and now the market is telling us everything okay all right.
So I'm wondering how your business model might have changed if in any way you can kind of as you think out longer term, how you want to focus to take advantage of any dislocation or opportunities that may exist for the bank to continue to succeed.
Yes, Steven.
You know certainly more focused today on the economic uncertainties.
Those might be.
I guess, there is varying opinions relative to maybe where we would be in that cycle, but certainly what we will do is remain very disciplined in evaluating opportunities, but certainly as we have consistently done in the past we will remain opportunistic and.
Whether that be new talent, new markets, our strategic partners, either banks or Nonbanks, we've talked a minute ago about our success with Republic I would also add.
Relative to the southeast commercial which we added earlier.
Last year as well, we continue to evaluate opportunities that drive shareholder value that align with our culture and our business model and risk appetite. So as we go forward, we will continue to do that and being opportunistic.
It makes sense and did you or do you think today your.
Loan to deposit ratio, giving you a little bit more room than maybe some of your peers.
Could allow you to bring on talent and would you want to do that today or are we still in a period of maybe we wait and see how this shakes out and get more aggressive.
As we get down the line a little bit.
Yeah well.
For the right talent.
You always take the opportunity when those opportunities come along we actually had two additions this past quarter, one in Nashville, and one in Atlanta, So we're always mindful of that and try to stay positioned.
That's always something that we would take that opportunity.
Kevin follow up comment there, yes, I think it is.
Great question and it would just simply add as we look at how we positioned our balance sheet from a liquidity from a capital standpoint.
We're still open for business and we recognize that there was a shock to the system in March and look there may be some shots in the future. We don't know, but we manage I'm not sure we're really managing any different today than we were.
Over the last couple of years.
There's capacity on our balance sheet to grow but it's got to be we got to have relationships. Neither told you that three years ago five years ago, we want to develop relationship theres very little capacity on our balance sheet for liquidity or capital transactions.
Transaction, we're going to get really well compensated.
So that tends to lead not test in new transactions.
Just say that our focus is the same.
We focus on deposits.
But there was also a heightened focus on heightened focus on deposits in 2021 and everybody was awarded the bid.
So.
We think with how we're positioned not only from our balance sheet.
Liquidity capital.
But also from an openness to hire talent.
<unk> quality talent is available.
We will hire them, if it's D&C down.
Hey, Pat the recent downward typically is always available.
Theres a caliber talent.
We will hire them because they don't become available.
Yes, that's great color.
Good to hear and I appreciate all the all the time this morning.
Thank you David.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Mitch Waycaster Renaissance CEO for any closing remarks.
Very good. Thank you drew and thank you to each of you for joining the call today, we plan to participate in the Raymond James Conference on September six and the Stephens Conference on September the 19.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.