Good morning, and welcome to the Renasant Corporation 2023 1st 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star-1 on your touchtone phone. To withdraw from the question queue, please press Star then 2. Please note this event is being recorded. Now I'd like to turn the call over to Kelly Hutcheson, Chief Accounting Officer. Please go ahead.
Good morning, and thank you for joining us for Renasant Corporation's quarterly webcast and conference call. Participating in this call today are members of Renasant's executive management team. Before we begin, please note that many of our comments during this call will be forward-looking statements which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance, and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site www.renasant.com, at the Press Releases link under the News and Market Data tab.
We undertake no obligation, and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. 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 Renasant. Before Kevin and Jim discuss the results for the Q1, I would like to reflect on the environment and the outlook for the balance of the year. The baseline of all decision-making at Renasant Bank is the safe and sound operation of our institution. Only after that box is checked do we turn to 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 insulate the company and our shareholders from adversity. We are not immune from our industry pressures, but I believe Renasant is well situated to serve our customers and produce attractive results for shareholders.
While the economic outlook is unclear, Renasant has granular core funding, a diverse loan portfolio, and strong capital base. Our goal is to further build upon these balance sheet strengths and to continue pursuing profitability improvement. We have reduced costs in recent periods, but believe there is more to accomplish. There are also ways for us to enhance revenue growth in our efforts to increase operating leverage. Now I will turn the call over to Kevin.
Thanks, Mitch. Our Q1 earnings were $46.1 million or $0.82 per diluted share compared to $46.3 million or $0.82 per diluted share in the Q3. 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. 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 Q3 of last year. In response to the developments in the industry, we carried an excess level of liquidity, which negatively impacted our net interest margin by 2 basis points for the quarter.
Our long-term focus on building and maintaining 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, deposits 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 a more normal operating environment. As we previously announced, effective January 1st, we eliminated consumer non-sufficient funds fees and certain consumer overdraft charges. This impacted non-interest income $1.3 million during the Q1, in line with our expectations. Non-interest expense increased $6.1 million from the Q3. The acquisition of Republic Business Credit, which closed on December 30th of last year, added $2.7 million to our non-interest expense. We also experienced lower deferred loan origination fees and a seasonal increase in both payroll taxes and the company's match of 401(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. All levels of management are aligned in our goal of improving operating leverage. I will now turn the call over to Jim.
Thank you, Kevin. As we 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 accounted for about $300 million of the growth. We also experienced another solid quarter of loan growth. Loan growth in the Q1 was $188 million and represents an annualized growth rate of 6.6%. Referencing slide 8 and additional slides in the appendix, we have a very diverse loan portfolio with no significant concentrations in loan type or industry. Specific to our construction and non-owner occupied commercial real estate portfolios, our exposure to individual sectors is granular and the portfolios are performing well. Competition for deposits within our markets continued to pick up this quarter.
We experienced a decline in non-interest bearing deposits of $314 million from the Q3, 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 $29,000 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 credit losses on unfunded commitments of $1.5 million, which is recognized in non-interest expense. Net charge-offs were $4.7 million, and the ACL as a percentage of total loans remained flat at 1.66%. Credit quality metrics remain stable and are presented on page 17 through 20. The increase in non-performing 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 compression in our net interest margin and the increase in non-interest 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 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 costs will continue to increase in coming quarters. Kevin touched on the highlights within non-interest income and expense. We are encouraged by the results of our mortgage division. Although there was an uptick in our overall non-interest expenses this quarter, we remain committed to improving our operating leverage and managing our expense base remains a priority. I will now turn the call back over to Mitch.
Thank you, Jim. The focus at Renasant remains on basic banking principles and the pursuit 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. To ask a question, you may press star then one on your touchtone phone. If you're 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'll pause momentarily to assemble our roster. Our first question will come from Brad Milsaps 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. You know, you guys have had a very low kind of cumulative deposit beta to date. Just kind of curious how you see that picking up from here. You know, the broker 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 gonna maybe impact that deposit beta going forward?
Good morning, Brad. This is Jim. Yes. On, on beta, I think when we, when in Q4 we're using a cycle beta of about 40, and we revised that upward and we're using 45 in our modeling at this point in terms of interest bearing beta for the cycle. You asked about brokered. I think it, you know, we were roughly at, call it $900 million, just below $900 million in brokered at quarter end, and the weighted average maturity of that was about a half a year. I think the average cost of that was about 5%.
Okay. Jim, would the plan be to maybe just continue to use the broker channel versus, you know, maybe pushing, you know, the rest of your deposit base with, you know, in the interim, is that, is that sort of your plan to fund through the broker network, you know, versus your own deposit growth? Just kind of want to think about 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. Of course, in this environment it's really difficult, but that's the primary goal. Like, you know, I'm sure for all the other banks in the industry, that's the goal. Yes, I think we would probably lean towards brokered. We evaluate obviously the cost of brokered versus advances. As we went through particularly the latter part really of Q1, the cost of that brokered money was less than the cost of advances. Additionally, what we liked about brokered was it did not tie up collateral.
Not that we're short of collateral, but it was nice, particularly given the events of early March to be mindful of that aspect as well. I think you're right. We'll probably lean towards brokered, 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 otherwise.
Okay. Thank you. Maybe just final question for Jim or Kevin. The expenses I think, you know, maybe excluding the unfunded commitment reversal around $109 million, maybe a little bit higher than I was looking for. I know 1Q has a lot of seasonal impact. You also had the acquisition. Just kind of curious how you guys are thinking about, you know, expense trajectory from the 1Q run rate as you move through 2023.
Hey, Brad. As we look ahead, the run rate in that $107, $108 range we think is a good run rate. When we enter Q2, we're gonna have merit increases that aren't in Q1. We also, Q2 is when we expect the increase in the FDIC insurance assessments pre-March losses that the fund incurred. We were all anticipating a fairly large increase in our FDIC insurance assessments, That goes into effect in Q2. Factoring those two into the equation, we think the $107, $108 range is a good range for the near term on expenses.
Okay, great. Thank you, guys. I'll hop back in queue.
Thank you, Brad.
Our next question will come from Dave Bishop with Hovde Group. You may now go ahead.
Hey, good morning, gentlemen.
Good morning, Dave.
Hey, obviously, you know, rightfully so, a lot of attention on deposit betas within the sector. You know, you guys saw good growth and pick up in loan yields this quarter, 568. Just curious, do you have a sense of maybe, is there a sort of a loan beta baked into the projection? Maybe where do you see loans peaking, you know, in the quarters after maybe the Fed pauses if it's in the second or Q3? Do you continue to see, you know, loan yields lagging higher even after the Fed pauses?
Dave, this is Jim. In terms of loan beta for the cycle, we see that in the mid to upper 40s from here. I can tell you that, if it's helpful, if you look at new and renewed loan rates or yields for Q1, they were 7.16% for production in Q1. That's excluding RBC. RBC does have an impact on that. With RBC it was 7.44%. For March, those same two data points would be 7.47% ex RBC and 8.10% with RBC.
Got it. Is it your sense that, you know, the natural churn will continue to sort of, you know, lag upward even if the Fed pauses in, you know, say, second or Q3? You're continuing to see some of that repricing benefit into the latter half of the year into 2024. You think it's a pretty quick peak and maybe turnaround?
I think it will continue. I mean, the funding costs are gonna weigh on that. So that's, you know, the gains we have on loan yields are gonna be muted because of, you know, funding pressures that we're gonna face in terms of, you know, prices we're paying on whether it's brokered or advances or core deposits.
Got it. Sticking with the, you know, the liquidity position, I think you said there was maybe $300 million of excess liquidity at 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, we wanted to keep some excess liquidity on the balance sheet, quarter end. Depending upon the environment and how, you know, things behave in the bank industry, I would suspect that gradually trends down over the course of the year.
Got it. Then just one housekeeping item. I thought I saw a tick up in 90 days past due. Curious if that was, you know, administrative
You know, paperwork type, you know, end of year, end of quarter delays, in terms of financials or such. Looks like those ticked up to about $18.6 million from, like, $300,000. Just any color there.
Dave, hey, good morning. This is David. Jim mentioned in the opening comments there were two credits that rolled into that 90-day past due bucket. Those were credits we had identified, and they were in our previous past due numbers. We had them as criticized assets, so we had them noted. They were loans that on both of those, we feel very strongly that we're in a great collateral position and anticipate no loss on those. Those rolled into our NPLs. We expect to work out of those on normal course of business without any charge-offs.
Dave, as you'll note, you see the 30 to 89-day numbers, past due numbers actually bumped down a little bit from 51 to 43. We're relatively flat in our criticized assets. They went down a few basis points quarter-over-quarter. Absent those couple of loans, our asset quality held pretty strong in the Q1.
Got it. Thanks.
Thank you, Dave.
Our next question will come from Catherine Mealor with KBW. You may now go ahead.
Thanks. Good morning.
Good morning, Catherine.
Wanted to ask about outlook for loan growth, just given the current environment. Are you seeing a pullback in production and pipeline? Or do you still think we can kind of keep a, you know, low to mid-single digit kind of growth rate this year?
Yeah. Catherine, we, the moderation that we've seen the last actually 2 quarters it continued this quarter. We do feel very good about our ability to continue to produce. Just, I guess, to drill a little more there, the pipeline, going into the quarter was $163 million. That had moderated from $200 million the prior quarter. The good part is, like I say, we still feel good about production. We see that, spread across the regions, the business lines each continue to contribute in a meaningful way. 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, you know, it looks a lot like our deposit side of the balance sheet. We're very pleased with that. As I look at this quarter's production of $415 million, about 36% of that production was still in that consumer 1-4 residential. When you get into the small business and commercial, small business and business banking was about 13%. The commercial book, that would be loans $2.5 million and greater, owner occupied C&I, we're seeing good production in C&I. Very pleased with Southeast Business and Republic.
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 CRE business, even though that's pulled back some certainly. That represented another 24%. When you get into corporate banking, some larger C&I commercial real estate type credits rounded out to 27%. You see again, very granular and then distributed across a number of business lines. We continue to hit on many different cylinders and produce, like I say, granular, good core, relationship driven type loan growth. We expect that to continue. Relative to your question, kind of where we see that coming in, I would expect Q2 to be somewhat reflective of Q1 relative to net.
We are seeing, Catherine, I'll add, too, another contributor to that net is payoffs as we've seen production moderate. As well, we continue to see payoffs moderate as well, which contributes to the net result.
Great. Circling back, Jim, to the margin conversation. You gave your expectations for interest-bearing deposit costs. How are you thinking about the mix shift out of non-interest bearing and where that may land as a % of deposits at the end of the year?
Good morning, Catherine. Well, of course, we don't know the answer to that. I would say this, that migration is going to continue. I think we peaked at roughly 35% or 36% NIB and we're a quarter in 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 twenties.
Great. As we mix shift that, do you think more of the growth, it flows into CDs? Or how do you think about the mix shift within the categories within deposits?
We would hope that what we can do is hold total deposits flat. We're hoping that NIB migration turns into, we get that through money markets or CDs.
Great. Very helpful. All right. Thank you. Actually, you know what? Let me ask one more on the margin. Just big picture on the margin. I don't think you gave, Jim, yet your thoughts on just how I know the margins still have to forecast, but maybe just for the next quarter, how you're thinking about kind of what level of compression we could see again in the Q2.
I would say that I guess I should start with too, Catherine, that, I mean, we 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. On the margin side, I would expect something roughly similar to what we saw in Q1 in terms of impact to margin. I would point out that, you know, Q1, particularly the last month of Q1, that margin was weighed down by the excess liquidity we carried. As we look out for the balance of the year, Q2 definitely see some compression in the margin, close to maybe not to the extent in Q1, but maybe close to it.
The H2 of the year, better performance in terms of what kind of declines we would see in the margin. I do think that given our rate outlook, we think it's reasonable to see some margin declines through the balance of the year. Again, not as meaningful as they would be in the H1, but we still see some compression in the margin in the H2 of the year.
Great. Again, very helpful. Thank you.
Thank you, Catherine.
Our next question will come from Kevin Fitzsimmons with Hovde Group. You may now go ahead.
Hey, good morning, guys. This is actually Christian, on for Kevin.
Good morning, Christian.
Just a quick one from me. I noticed that you closed a few offices, particularly with loan production and 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 that led to those office closures, or you know, doing that more related to cost savings?
Hey, Christian, it's a couple of things. It's, it's a little bit of both. It was driven by a look at our real estate and how we could better manage the non-interest expense related to all of our operations. What we saw was the opportunity in many mortgage markets was to consolidate those mortgage personnel into the branch. We, we typically had a close a branch that was in close proximity, and so it was to maximize performance as well as minimize the expense and related to carrying occupancy and equipment, duplicate occupancy and equipment 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 for when rates more normalize or if there's a potential in the future that rates may fall. We feel very good about how we're positioned from the costs we've taken out, some of the fixed costs that maybe we built up in better times. Also we've hired. We've been very active and proactive in hiring mortgage personnel, mortgage producers that will help drive higher levels of production 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. That's all I have.
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'm sorry if I missed it, but what the tenor of those is and, you know, what the expectation, you know, would be just for broker deposits in general. I mean, would you still expect to have some, assuming the kind of the crisis that we've been in kind of begins to abate here in the next couple of months? Thanks.
Michael, this is Jim. They stand roughly today at about $850 million a quarter in, and the cost of those brokered monies is about 5%, and the average maturity is about a half a year. Going forward, I mean, a lot's gonna depend upon what we're able to do on the core funding side and obviously Mitch talked about loan growth. We continue to have no interest in purchasing investment securities, so we'll benefit from that roll-off of about $25 million a month. Where that takes us in terms of that broker deposit balance, I don't know.
Certainly we're gonna evaluate that, you know, versus our other opportunities to fund the balance sheet, be that advances or things that we can do in terms of specials on CDs and money markets. I don't know exactly where it ends up. Sort of hard to predict, we're certainly not adverse to accessing that source of funding.
Perfect. Thanks for, thanks for that. Maybe just switching back to margin. If you can just kind of walk us through kind of the dynamics that have, you know, led to the decline in the gain on sale margin Q on Q. I think from other banks that I've seen report, it's been mixed. I mean, some up, some down. There's obviously various reasons for that, but just wanted to get some color on you guys specifically. Obviously understanding that the backdrop is still fairly competitive, any expectations for that gain on sale, you know, margin as we move over the next couple quarters and when you think, you know, the mortgage company can get back to profitability. Thanks.
Michael, on that, would first start off and just let you know that our mortgage group was profitable in Q1. Their pre-tax income pushed close to $1 million for the quarter. They had a really strong quarter and what continues to be a very volatile time in mortgage. On the gain on sale, I think maybe where we're a little bit different in peers, I'm not sure exactly which peers or how they're calculating it. Our gain on sale margin may be a little bit influenced this quarter by our mix of retail versus wholesale. It was a little bit our production was about 60% retail, 40% wholesale.
That wholesale does come at a little bit thinner margin than maybe the retail production. I think that's what causes a little bit of weight or maybe some volatility in our margin compared to some of our peers.
Perfect. 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'd like to turn the conference back over to Mitch Waycaster for any closing remarks.
Thank you, Anthony. Thank you to all of you who joined the call this morning. We welcome your interest. We plan to participate in the Gulf South Bank Conference, May the eighth and ninth.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.