Earnings Call Transcript - RNST Q4 2022

Operator, Operator

Good morning, and welcome to the Renasant Corporation 2022 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. Please note that this event is being recorded today. I would now like to turn the conference over to Kelly Hutcheson, Chief Accounting Officer. Please go ahead.

Kelly Hutcheson, Chief Accounting Officer

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, 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 release's 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. And now I will turn the call over to our President and Chief Executive Officer, Mitch Waycaster.

Mitchell Waycaster, President and CEO

Thank you Kelly. Good morning. We appreciate you joining the call today and your interest in Renasant. Before Kevin and Jim discuss results for the fourth quarter, I want to reflect on the past year and the opportunities ahead. 2022 was a successful year for our company. We produced solid core earnings attributable to margin expansion, expense management, loan growth and the benefits of a good core deposit base. I am very proud of our team that successfully adapted to changes in this operating environment and continued to put each other and our customers first. We are also excited to welcome the team from Republic Business Credit to the Renasant family. The management and sales teams have a history of managing a profitable and creditworthy portfolio of assets and we look forward to their contributions in the years ahead. We end the year with a liquid and strong balance sheet that positions us well for 2023. While economic uncertainties are present, we operate in attractive markets that continue to show growth and meaningful net in-migration. We are optimistic about the year and look forward to sharing the results with you. I will now turn the call over to Kevin.

Kevin Chapman, CFO

Thanks Mitch. Our fourth quarter earnings were $46.3 million, or $0.82 per diluted share compared to $46.6 million or $0.83 per diluted share in the third quarter, excluding certain items which we will cover later in our remarks. Our adjusted diluted EPS for the fourth quarter was $0.89. We recently announced that we completed our acquisition of Republic Business Credit or RBC on December 30, 2022, which added $77.5 million in loans on the date of acquisition consistent with our acquisition of southeastern commercial finance earlier in 2022. This transaction advances our strategies of building more scale and reach in some of our specialty lines of businesses. Earnings from RBC will be included in our results beginning in 2023. However, provision and merger expenses associated with the acquisition reduced our results this quarter by $0.04 and $0.02 respectively. In our legacy business, another quarter of strong loan growth coupled with the Fed rate increases drove an increase in interest income of nearly $22 million on a linked quarter basis. Competitive pressures on deposit pricing impacted our deposit costs this quarter, driving an increase of $14.4 million in interest expense from the third quarter. We don't expect these pressures to abate in the near term and anticipate that our funding costs will continue to increase. But we still boast a strong core deposit base and believe it positions us to manage our deposit costs in this volatile rate environment. Our Capital Markets, Treasury Solutions, Wealth Management and Insurance lines of businesses were solid contributors to our earnings this quarter. And consistent with recent quarters, our mortgage division continues to experience volatility. Although we see some indications that volumes are beginning to normalize, margins remain unpredictable. In response to the rapid decrease in volumes during the year, we have prudently managed our expenses in this division. Nevertheless, while overall headcount is down for the year, we are still investing in strong production talent and expect our mortgage team to continue to be an important part of our business model. Non-interest expense was essentially flat on a linked quarter basis. We incurred $1.1 million in merger expenses associated with our acquisition of RBC, and we recognized an expense of $1.3 million related to the FDIC’s recently issued guidance to banks regarding representing NSF fees. We expect to make a voluntary reimbursement of such fees previously charged to customers in 2023. With the revenue lift from margin expansion coupled with our expense discipline, our adjusted efficiency ratio, which excludes non-recurring income and expense items, continues to improve coming in at 56.3% for the fourth quarter. Our improvement on a linked quarter and year-over-year basis provides evidence of our commitment to improving operational efficiency. We are not immune to inflationary pressures and expect non-interest expense to increase somewhat in 2023 before consideration of RBC. However, with continued expense discipline and appropriate attention to loan and deposit pricing, we maintain our goal of operating with an efficiency ratio below 60%. I will now turn the call over to Jim.

James Mabry, COO

Thank you, Kevin. As we walked through the quarter’s results, I will reference slides from the earnings deck. Total footings are up nearly $500 million, due in large part to another strong quarter of loan growth. The acquisition of RBC added $77.5 million in loans while legacy Renasant contributed $396 million in organic loan growth. Excluding the loans acquired from RBC, loan growth in the fourth quarter represents an annualized growth rate of 14.4%. Competition for deposits within our markets picked up significantly this quarter. We experienced a decline in non-interest bearing deposits of $268 million from the third quarter and we borrowed $233 million in brokered time deposits in the month of November. The company's core deposit base and our overall liquidity position remains strong. All regulatory capital ratios are in excess of required minimums to be considered well capitalized and share the strength of our capital position. The decline quarter-over-quarter is directly attributable to the acquisition of RBC. We've recorded a credit provision of $10.5 million, which includes $2.6 million for loans acquired from RBC, and experience net charge-offs of $2.6 million. The ACL as a percentage of total loans increased quarter-over-quarter to 1.66%, driven in large part by the acquisition of RBC. Credit quality metrics are shown on pages 14 through 16. Although past dues moved up, criticized and non-performing asset measures remained relatively steady. Net charge-offs were nominal. Net interest income increased $7.5 million quarter-over-quarter. Our core margin, which excludes purchase accounting accretion, income recognized on PPP loans and interest recoveries, was 3.75%, up 25 basis points from Q3, and 104 basis points from the low in Q1. The deposit pricing pressures impacted us more heavily this quarter. The cost of deposits increased 31 basis points from Q3 to 52 basis points this quarter. We expect these competitive pressures to persist in 2023 and believe funding costs will continue to increase in the coming quarters. Non-interest income is down $7.8 million quarter-over-quarter. The decline is largely linked to our mortgage division. You may recall that we sold a portion of our mortgage servicing rights portfolio in the third quarter for a $3 million gain. There was no such sale in Q4. Additionally, volumes declined in the quarter, which accounted for the remainder of the decrease in mortgage banking income. Non-interest expenses with exclusions declined $2.5 million from the third quarter. We are proud of our team's efforts to manage expenses in this environment and remain committed to improving operational efficiency. However, we do expect expenses to increase modestly from these levels given persistent inflationary pressures in the market. I will now turn the call back over to Mitch.

Mitchell Waycaster, President and CEO

Thank you, Jim. Our focus remains on the basic tenets of sound banking: retaining attractive core funding, maintaining a diverse and granular loan portfolio from high-quality borrowers, and having a capital position that provides optionality and affords us protection against potential industry headwinds. I will now turn the call over to the operator for Q&A.

Operator, Operator

We will now begin the question-and-answer session. And our first question here will come from Michael Rose with Raymond James. Please go ahead. Mr. Rose, is your line muted? All right, our next question will come from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor, Analyst

Thanks. Good morning. I wanted to see if you could provide us an outlook on how you're thinking about the margin. A lot of other banks we've seen reports from so far are thinking about this quarter’s margin as the peak and forecasting a pretty significant decline as we move through next year. How are you thinking about it in terms of NII growth and also just the margin trajectory? Thanks.

James Mabry, COO

Good morning, Catherine. This is Jim. So good morning. I don't know if it was the peak. But if it wasn't, it was certainly close to it. A couple of data points that may be helpful to you, as you think about margin: our core NIM for November was 3.78%. Core NIM for December was 3.76%. And I think for the quarter it was 3.76%. Our outlook for margin for 2023 is that I would characterize it as flat to slightly down, probably behaving better in the first half of 2023 than the second half. I would say a similar story on NII, Catherine. I would say flat to slightly down for 2023.

Catherine Mealor, Analyst

And other deposit costs have been higher for everybody. Have you changed your view on what you think the cumulative over-the-cycle beta will be for Renasant?

James Mabry, COO

So we're using deposit beta of about low 40s for the cycle for Renasant, and loan betas are a touch higher than that. So that's probably up from where we were six months ago, Catherine, but that's what we're using.

Catherine Mealor, Analyst

Okay, great. And that's the beta on interest-bearing, correct?

James Mabry, COO

That's correct.

Catherine Mealor, Analyst

Okay, great. And then maybe moving over to expenses. I know you've mentioned in your prepared remarks that you expect growth from this level. What is there that you're also managing your 60% efficiency ratio goal? Is there a range of expense growth that you think is appropriate to think about this year? And how much flexibility do you have in that outlook if revenue comes in lighter than expected?

Kevin Chapman, CFO

Hey, Catherine, Kevin. So as we look at expenses, that continues to be one of our main initiatives. And again, not so much to just eliminate expenses, but to maximize the return on them. And I think you've seen that over the last couple of quarters, as well as rates have helped us bring revenue back into the margin. Our efficiency ratio now sits in the mid-50s. As we look at our expense outlook, and again, we're going to have inflationary pressures on our expenses. So just if you take our non-interest expenses of $101.5 for the quarter as a baseline, there are some non-recurring items in there. There’s a $1.3 million that we called out on refunding some NSF fees, there’s $1.5 million in merger expenses. But if you're using that reported as your baseline, we think expenses are up close to 2%, 1.5%, 2.5%. If you back out those items, our core run rate of expenses is going to be closer to a 3.5% to 4% increase. And all of that is before RBC. That’s just the legacy Renasant expenses. So we will have some pressure on expenses as we look at headwinds on revenue. It doesn't detract us from our goal of efficiency ratio. We've made a lot of progress. There's a lot of momentum in the company. There's a lot of energy around maximizing returns. And we don't think that subsides in 2023. It continues to remain one of our main initiatives, and if revenues adjust, our expenses will adjust accordingly.

Catherine Mealor, Analyst

Great. All right. Thank you so much.

Kevin Chapman, CFO

Thank you, Catherine.

Operator, Operator

Our next question will come from Michael Rose with Raymond James. Please go ahead.

Michael Rose, Analyst

Hey, guys. Sorry about that. Morning. Just wanted to touch on mortgage. Good morning. Just wanted to touch on mortgage here. It's down to about 3% of revenues, obviously, a lot of headwinds, but it’s a lot higher, a couple of years ago. It seems like the headwind has been fully absorbed. But how should we be thinking about the mortgage business, here, both on the expense side, and then on the origination side, just given expectations for gain on sale margins? Hopefully, we'll see some rebound in the back half of the year. But just wanted to get some broader color and commentary on mortgage. Sorry, if I missed it in the prepared remarks. Thanks.

Kevin Chapman, CFO

You're good. Look, as we look at mortgage. And you're right, if you go back a couple of years ago, mortgage as a percentage of revenues was much higher than the 3% to 4% that it is today. If you look at it on a more normalized basis, so if we go back to pre-20, mortgage revenues represented about 6% to 8% of total revenues, and we expect mortgage to revert back to that average revert back to that mean. It's still a volatile time. I don't think that's a surprise or a secret that mortgage is still volatile. But we are actually seeing opportunity that comes with that volatility. The disruption in the markets created opportunity for hiring. And I recognize that’s a little bit counter to maybe what the trend should be. We have reduced our headcount in mortgage since the end of 2021. We reduced our headcount by about 30%. And that includes some strategic hiring on the production side. As we see that strategic opportunity, we will continue to look at that. We're seeing some positive trends just in the beginning of the year. Margins continue to be tight. But we have seen our pipeline grow about 30% since the beginning of the year. Our mortgage pipeline is about $130 right now. It’s about $100 at the beginning of the year. So there are some signs that production is coming back. But again, it's variable on rate, and it's variable on product, and product and inventory. And all of those just feel a little bit volatile right now. But we feel good about where we're positioned for mortgage. And I think back over time, mortgage revenue is going to, again, come back to about that 6% range of total revenues from its current position in that 3% to 4% range.

Michael Rose, Analyst

Very helpful. And then I just wanted to dig in, and again, sorry, if I missed this into the reserve build this quarter. If I look at slide 17, it looks like the reserve was built in the commercial space, which I was a little surprised about and actually down in construction. Can you just give some color on the reserve build? You guys are pretty healthy. Was this more of a proactive conservative move, just given the credit metrics are still pretty benign? Or is there something greater that you're seeing in your either in your pipeline or just more broadly in the economy? Thanks.

David Meredith, Analyst

Hey, good morning, Michael, this is David. And I can address page 17. But I'll direct you first to page 19 just to give you a high-level overview of the build quarter-over-quarter and you can see it breaks down from a legacy Renasant standpoint: charge-offs $2.6 million provision legacy at $7.9 million. So on a pre-RBC basis, if we exclude RBC, our provision went from 1.57% last quarter to 1.56% this quarter, so basically flat quarter-over-quarter from a legacy Renasant standpoint. The difference being that the build in PCD, non-PCD loans related to RBC, and that’s really what you're seeing in that increase in the commercial bucket is that provisioning and that PCD, non-PCD provision for RBC quarter-over-quarter.

Michael Rose, Analyst

Sorry, I missed that. Thanks for clarifying that. I appreciate it. And then maybe just finally, for me. I know you guys have talked about more moderate loan growth. Mitch, I'm sorry, I missed the update on the pipelines in the prepared remarks. But what does more moderate growth mean to me? And how much of it is you guys pulling back in certain asset classes versus what the market is maybe giving you in terms of opportunities? Thanks.

Mitchell Waycaster, President and CEO

Yes, Michael. And maybe the best way to have that discussion as we look forward is to consider the prior quarter. We did indicate there would be moderation, and we have seen that. We started the quarter with a 30-day pipeline of $200 million, that’s down from $270 million at the beginning of the prior quarter. The production for Q4 was $700 million. That moderated down from $753 million. So what we expected occurred. And, of course, that $700 million in production yielded, as Jim mentioned earlier, $396 million in net growth. The important thing here is just thinking about our ability to produce the granularity both from a geographic as well as our various business lines. I'll give you some percentages of that $700 million in production. 17% came from Tennessee markets, 18% from Alabama, Florida Panhandle 20%, Georgia, Central Florida 19% in Mississippi, and 28% came from our corporate commercial business lines. So while it continues to moderate with production, I think it’s equally important, as the geography is the types. And as I mentioned earlier, the granularity of our ability to produce and our consumer, which is more one to four family, that represented about 26% of that $700 million, small business credits, which continue to be a strength in our markets, and those loans would be less than $2.5 million in size represented another 10%. And then larger commercial credits, about $2.5 million just core C&I owner-occupied type credits was another 35%. As we've continued to build out and grow our corporate and our specialty lines, which we, of course had an addition there this past quarter, that represented 29%. We're still pleased while production has moderated with pipeline. The other thing I should mention here is that while production and pipeline production has moderated, so have payoffs. We saw that again, this past quarter for the last two quarters. We saw payoffs below what we've seen on average in 2022 and well below what we saw in the year 2021. We certainly remain disciplined in underwriting as well as pricing. We remain optimistic about our ability to produce driven by the markets, business lines, and talent. I mentioned in opening comments just the in-migration that continues in our markets. Previous economic development activity and sectors like manufacturing, distribution, medical, government, and education, define where we do business. Certainly, that’s not looking past the economic uncertainties that exist today, but just a testament to where we do business and our talent.

Michael Rose, Analyst

I appreciate the color. So balancing the puts and takes, is something like a high single digit from this quarter's 14% annualized growth somewhat in the ballpark?

Mitchell Waycaster, President and CEO

Yes. So Michael, it's hard to be that specific given the variability that we're seeing in pipeline and production, but I think, and the component of payoffs. If you just look at the current pipeline and the change quarter-over-quarter, it would lead you to that type of conclusion.

Michael Rose, Analyst

Great. Thanks for taking my questions.

Mitchell Waycaster, President and CEO

Thank you.

Operator, Operator

Our next question will come from Thomas Wendler with Stephens. Please go ahead.

Thomas Wendler, Analyst

Hey, good morning, everyone.

David Meredith, Analyst

Morning, Thomas.

Thomas Wendler, Analyst

We saw a bit of a tick up in past due loans in Q4. Can you give us any color there?

David Meredith, Analyst

Hey Tom, this is David. Good morning. To add some context, when we look at the beginning of January, the number of loans that were paid on time brought us back in line with where we would have been in previous quarters. We don't see this as a long-term trend at this point. The increase was mainly in the consumer sector, while our commercial loans have remained relatively stable from one quarter to the next. We observed that the past due numbers have returned to more typical levels for us after the transition.

Thomas Wendler, Analyst

All right, thank you. And then just a bit of a modeling question here for me. With the RBC acquisition, I'm just kind of thinking about the purchase accounting accretion in Q1. Can you give me any color there on what we should expect?

James Mabry, COO

Tom, this is Jim. There likely will be some in terms of the amount of that. I would say it would not be material, but there will be some as we go through 2023.

Thomas Wendler, Analyst

All right. Thank you for that. And that's all my questions. Thanks, guys.

James Mabry, COO

Thank you, Thomas.

Operator, Operator

And with no remaining questions, this will conclude our question-and-answer session. I'd like to turn the conference back over to Mitch Waycaster for any closing remarks.

Mitchell Waycaster, President and CEO

Thank you all who have joined the call today. We welcome your interest and look forward to talking again soon. We next plan to participate in the Janne CEO Forum next week.

Operator, Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.