Renasant Corporation (NASDAQ:RNST) Q4 2022 Earnings Call Transcript

Renasant Corporation (NASDAQ:RNST) Q4 2022 Earnings Call Transcript January 25, 2023

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: 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.

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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.

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Q&A Session

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: 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.