Renasant Corporation. (NASDAQ:RNST) Q4 2022 Earnings Conference Call January 25, 2023 10:00 AM ET
Company Participants
Kelly Hutcheson – EVP & CAO
Mitchell Waycaster – President, CEO & Director
Kevin Chapman – Senior EVP & COO
James Mabry – Senior EVP & CFO
David Meredith – Senior EVP & Chief Credit Officer
Conference Call Participants
Catherine Mealor – KBW
Michael Rose – Raymond James
Thomas Wendler – Stephens
Operator
Good morning, and welcome to the Renasant Corporation 2022 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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
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
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 credit worthy 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
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 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 right 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 link quarter basis. We incurred $1.1 million in merger expenses associated with our acquisition of RBC, and we recognize 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 continue to improve coming in at 56.3% for the fourth quarter.
Our improvement on the link 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
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 has not 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 and 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 and Q4. Additionally, volumes declined in the quarter and 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
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.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] 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
Thanks. Good morning.
James Mabry
Good morning, Catherine.
Catherine Mealor
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 so far. I’m thinking about this, this quarter’s margin as the peak and our 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
Good morning, Catherine. This is Jim. So good morning. So 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 as we think about where it goes from here. So, 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 is that for the for 2023 is that I would characterize it as flat to slightly down, probably behaving no surprise to you but probably behaving better in the first half of 2023 than the second half. And I would say to similar story on NII Catherine. I would say flat to slightly down for 2023.
Catherine Mealor
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
So we’re using deposit beta of about in the 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
Okay, great. And that’s the beta on interest bearing, correct?
James Mabry
That’s correct.
Catherine Mealor
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 that 60% efficiency ratio goal? Is there a kind of 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
Hey, Catherine, Kevin. So as we look at — hey, good morning. So as we look at expenses, that that continues to be one of our 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 — help bring margin back in through — 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, if you’re using that as a baseline, again, there’s 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 just using that the reported as your baseline, we think expenses are up close to 2%, 1.5%, 2.5%.
If you back out those items, kind of our core run rate of expenses are going to be closer to 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 our 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 that subsides in 2023. It continues to remain one of our main initiatives, and if revenues adjust, our expenses will adjust accordingly.
Catherine Mealor
Great. All right. Thank you so much.
Kevin Chapman
Thank you, Catherine.
Operator
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Michael Rose
Hey, guys. Sorry about that. Morning. Just wanted to kind of 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, 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
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 reckon we recognize that 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 about 30%. And that includes some hiring some strategic hiring that we’ve done on the production side. And as we see that strategic opportunity or the hiring of strategic opportunities we’ll 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 pipeline – 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 with where we’re positioned for mortgage. And I think back over as we look 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
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 guess was a 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 kind 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
Hey, good morning, Michael, this is David. And I can address page 17. But I’ll direct you first to page 19 just kind of give you a high level overview of the build quarter-over-quarter and you can see it kind of breaks down into from a from a legacy Renasant standpoint, charge-offs $2.6 billion — $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, it was 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 that increase in the commercial bucket, is that that provisioning and that PCD, non-PCD provision for RBC quarter-over-quarter.
Michael Rose
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, what is more moderate growth mean to me? And how much of it is, you guys pulling back in either certain asset classes and, versus what the market is maybe, giving you in terms of opportunities? Thanks.
Mitchell Waycaster
Yes, Michael. And maybe the best way to have that discussion as we look forward is maybe look at 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 4Q was $700 million. And 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. I think the important thing here 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 like say geographically, we’re still pleased while it continues to moderate with production. I think equally important, as the geographic is the types. And as I mentioned earlier, just 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 continues to be a strength in our markets, and that’s loans that 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%.
And then 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%. So we continue to hit on many different cylinders, relative to our ability to produce. The other thing I should mention here is we think about going forward, while production while pipeline production has moderated, so at payoffs. And we saw that again, this past quarter for the last two quarters. We saw payoffs below what we’ve saw on average in 2022. And well below what we saw in the year 2021.
So we certainly remain disciplined in underwriting as well as pricing. And we remain optimistic about our ability to produce driven the markets, business lines, talent. I mentioned in opening comments, just the in-migration that continues in our markets. I think, also previous economic development activity and manufacturing distribution, medical government, education, it’s a good definition of where we do business. And certainly that’s not looking past at all the economic uncertainties that that exists today. But just a testament to where we do business and our talent.
Michael Rose
I appreciate the color. So balancing the puts and takes is something like a high single digit from this quarters, 14% annualized growth somewhat in the ballpark?
Mitchell Waycaster
Yes. So Michael, it’s hard to be that specific given the — the variability that we’re seeing in pipeline and production. But I think, and the component of payoffs. But I think if you just look at the current pipeline, and, and the change quarter-over-quarter, I mean, it would lead you to that type conclusion.
Michael Rose
Great. Thanks for taking my questions.
Mitchell Waycaster
Thank you.
Operator
[Operator Instructions] Our next question will come from Thomas Wendler with Stephens. Please go ahead.
Thomas Wendler
Hey, good morning, everyone.
David Meredith
Morning, Thomas.
Thomas Wendler
We saw a bit of a tick up in past two loans in 4Q. Can you give us any color there?
David Meredith
Hey Tom, this is David, good morning. A little bit of color. For the most part that was that was made up for and when we turn to the first of the year, when we get we look at the first of January. The amount of loans that paid current kind of brought us consistent back with where we would have been in prior quarters. So we don’t think it’s a — at this point, a long term trend. It was largely in the consumer space. Our commercial book continues to hold relatively flat quarter-over-quarter. So it’s largely driven to consumer. Again, we saw that number return to more of our normalized quarter, quarter in past dues after the turn on.
Thomas Wendler
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 1Q. Can you give me any color there, what we should expect?
James Mabry
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
All right. Thank you for that. And that’s all my questions. Thanks, guys.
James Mabry
Thank you, Thomas.
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
Thank you all to — that 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
The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.
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