Renasant Corporation (NASDAQ:RNST) Q4 2024 Earnings Call Transcript

Renasant Corporation (NASDAQ:RNST) Q4 2024 Earnings Call Transcript January 29, 2025

Operator: Good morning, and welcome to the Renasant Corporation 2024 Fourth Quarter and Year-End Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson, Chief Accounting Officer for Renasant. Please go ahead.

Kelly Hutcheson: Good morning, and thank you for joining us for Renasant Corporation’s quarterly webcast and conference call. Participating in the 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 risks 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 & 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 Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.

Mitch Waycaster: Thank you, Kelly. Good morning. We appreciate you joining the call and your interest in Renasant. The fourth quarter results marked the end to a successful year for Renasant. After announcing a transformative merger in July and diligently working on the planning necessary for a successful combination, our team maintained a focus on generating loan growth, disciplined pricing on both sides of the balance sheet and steady credit performance. We still anticipate completing our merger with The First in the first half of 2025. I will now turn the call over to Kevin.

Kevin Chapman: Thank you, Mitch. To echo Mitch’s comments, 2024 was a successful year for Renasant and one of transformation as our team worked diligently to improve our financial performance and prepare for a successful merger with The First. This work has positioned Renasant for continued growth and success in 2025 and beyond. I will now turn our attention to our fourth quarter financial results. Our earnings were $44.7 million or $0.70 per diluted share. Net interest income was $135.5 million, an increase of $1.9 million on a linked quarter basis. This increase was driven by solid loan growth of $257 million on a linked quarter basis bolstered by a significant decrease to our cost of deposits. On the liability side of the balance sheet, we have continued to see strong deposit growth, especially in interest-bearing deposits, which increased by $189 million.

Total deposits increased by $63 million, which includes a $127 million reduction of brokered deposits. We did not hold any brokered deposits by year-end. This deposit growth happened even as our total deposit costs decreased 16 basis points during Q4 compared to 4 basis point increase during Q3. Non-interest income decreased $55.1 million for the third quarter. The third quarter included a one-time pre-tax gain of $53.3 million from the sale of our insurance agency. Excluding the aforementioned gain on the sale of the insurance agency, adjusted non-interest income decreased $1.7 million quarter-over-quarter due primarily to seasonal declines in mortgage volume and the corresponding decline in mortgage revenue. Non-interest expense was $114.7 million for the fourth quarter, a $7 million quarter-over-quarter decrease driven largely by $9.2 million decrease in merger and conversion expenses from Q3.

Excluding merger and conversion expenses, non-interest expense was $112.7 million for the quarter, representing an increase of $1.9 million on a linked quarter basis. We will work to continue to diligently manage our expenses as we work to efficiently integrate The First this year. Overall, we had a strong quarter as we continued to execute on our pricing, expense management, and continued deposit growth. I will now turn the call over to Jim.

Jim Mabry: Thank you, Kevin. As we walk through the quarter’s results, I will reference slides from the earnings deck. Total assets grew $76.1 million due in large part to our strong loan growth of $257.4 million, which was partially offset by a decrease in cash of $183.6 million as we deployed our liquidity to, among other things, paying off our remaining brokered deposits. On the liability side, we experienced another quarter of strong deposit growth, which allowed us to continue to shift away from non-core funding sources. Referencing Slide 8, all regulatory capital ratios are in excess of required minimums to be considered well capitalized. These ratios increased meaningfully in Q3 with our capital raise and a gain on the sale of the insurance agency.

The ratio showed moderate declines in the fourth quarter. Turning to asset quality, we recorded a credit loss provision on loans of $3.1 million. Net charge-offs were $1.7 million and the ACL as a percentage of total loans decreased 2 basis points quarter-over-quarter to 1.57%. Asset quality metrics, presented on Page 9, criticized loans and total non-performing assets decreased for the quarter with criticized loans as a percent of total loans decreasing by 13 basis points to 2.89% and non-performing assets as a percentage of total assets decreasing 3 basis points to 68 basis points. Our strategy is to proactively identify underperforming loans early and work quickly towards resolution in order to mitigate loss. Turning to Slide 12, adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries increased 2 basis points to 3.34% for the quarter.

Adjusted loan yields decreased 14 basis points to 6.27% and the total cost of deposits decreased by 16 basis points to 2.35%. Kevin commented on the highlights within non-interest income and expense. We are encouraged by the expense trends we saw in the quarter and believe it positions us to build on that momentum in 2025. As a reminder, we will have considerable merger and conversion expenses in ’25 related to the combination with The First. I will now turn the call back over to Mitch.

Mitch Waycaster: Thank you, Jim. We are excited about the company’s prospects for this upcoming year. The First merger application is proceeding and once completed, will meaningfully strengthen the balance sheet and earnings profile of Renasant. We look forward to our teams coming together to form a top performing regional bank in the Southeast. I will now turn the call over to the operator for questions.

Q&A Session

Operator: [Operator Instructions] And your first question today will come from Joe Yanchunis with Raymond James. Please go ahead.

Joe Yanchunis: Good morning.

Jim Mabry: Good morning, Joe.

Joe Yanchunis: So the reported 4Q NIM came in ahead of your prior outlook, which called for some modest compression. So given the current rate backdrop, how should we think about near-term trends for the NIM?

Jim Mabry: This is Jim. You’re right, our guidance was for some modest compression in the margin. And I would say just – let’s say, a couple of things. One, our funding base, the pricing on our deposits behaved better than we anticipated. So that was a real bright spot for us. We had a higher beta there than we anticipated and those costs came down more than we expected. So – and loan yields certainly came down, but held in pretty well. So I would say now our outlook for ’25, even with the two cuts is we’re going to sort of flip that on its head a little bit and as opposed to modest compression, we – our outlook is for some modest expansion in the margin.

Joe Yanchunis: I appreciate that. That was pretty helpful. And then kind of shifting over to loan growth here. So it was notably stronger in the quarter. And given the general increase in sentiment, how should we think about loan growth trends in the near-term? And then just to kind of follow back-up on your prior answer, what were new loan origination yields in the quarter?

Mitch Waycaster: Jim, you want to touch on yields and I’ll talk a little bit about…

Jim Mabry: Sure, Joe. If you look at new and renew in the quarter, it was around 7.35% for the quarter. And if it’s helpful, the spot new and renewed in December was about – was a little above 7%, about 7.05%.

Mitch Waycaster: And Joe, this is Mitch. Going to production, we’re quite pleased with our ability to price on both sides of the balance sheet. Jim just reflected on that on both. But coming back to production, maybe let’s start with the pipeline. We entered the fourth quarter with a pipeline of $176 million. We entered Q1 with $174 million. So we continue to see in the 30-day pipeline a very strong across each geography, each business line. That was reflected in production. To your point, in Q1, it was $572 million. That was up from $507 million in 3Q, which yielded a net loan growth of little over 8%, $257 million. One thing that I would note, which we’ve always pointed to is kind of a governor on the net. We did see pay-offs this quarter decrease to $471 million down from $551 million.

In relation to that $572 million, the – if you look at the average over the year, it’s going to be in the – currently in that – about $450 million range. So pay-offs were more in line, but as we’ve said before, the variability there does affect net. But just going back to production, we had strong production and even if pay-offs had remained as they were in the prior quarter, we would still had some 5.5% net growth. So just looking to the future, each of our markets, our regions, our business lines continue to contribute in a meaningful way to both production and if we look at that current pipeline. And just going back to production, about 14% of that was from Tennessee markets, another 10% in Alabama, the Florida Panhandle; 28% this past quarter was in Mississippi, 15% in Georgia and Central Florida and another 33% in our commercial corporate business lines.

And I would say, as we usually point to in this discussion, not only the geographic distribution, but really the loan types and besides credits. And it gets back to the granularity, the many cylinders that we continue to hit on when we look at production. And we saw that if you take that $572 million, we saw that again this quarter with roughly 12% in the consumer, HELOC, and one-to-four family, 23% in small business and business banking, which has always been strong for us across our markets. Another 34% of that came from commercial credit, C&I, we had a very good quarter there. We continue to build that book, owner-occupied was good this past quarter. And the rounding out the last 32% came from the corporate banking group, which was you’d find their larger C&I commercial real estate, ABL equipment finance factoring.

So again, geographically and by type, by business line, continuing to perform well in all of those, that’s reflected in the current pipeline. We’re optimistic about Q1.

Joe Yanchunis: That was a very thorough answer. Thank you very much for taking my questions.

Operator: Your next question today will come from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten: Yes, thanks. Good morning, everyone. I guess, curious about the pending merger and any color you can give around – we’re still expecting to close later in the first half, if you’ve had any specific updates from the approval process, anything that can – I don’t know, kind of give confidence around that timeline?

Mitch Waycaster: Sure. Stephen, I’ll just go back to our prepared remarks and maybe expand a touch there. We reflected on the fact that we announced in July since that time both companies, teams in both companies have worked and continued to work diligently on planning the integration conversion as well as completing the application and the approval process. I would say regulators throughout the process have been very engaged and responsive and we are pleased with how all of those things are progressing. And I would just point back relative to timing, as we originally announced, we – and planned, we anticipate completing the merger in the first half of this year.

Stephen Scouten: Got it. Appreciate the color there. And then maybe outside of regulators potentially getting more, I don’t know, favorable around M&A timelines, do you guys think about any specific potential regulatory changes or improvements that might help your bank in particular, things you look to that could maybe make life easier for Renasant if we get some additional regulatory relief?

Kevin Chapman: Yes. Hi, Stephen, it’s Kevin. So we are – but we’re paying close attention to appointees, nominations, their picks. But there are some – it appears that it’s – that there’s going to be changes in the regulatory environment in a lot of different ways. How that ultimately impacts, say, a bank of our size or a bank with our business model, a lot is to be learned there. But I don’t think – I think if you look at the last four years and the environment banks have been in, the next four years, arguably are going to be a lot different. And again, a lot of the – some of the changes coming, it may be good, it may be negative. But overall, I think we’re expecting that some of the regulatory changes being proposed will be net positive to the industry as well as positive to Renasant.

And so I think just a lot more to stay tuned there and way too early to tell with specificity how it will impact us. But overall, we’re trying to stay close and make sure we understand that as things evolve, we understand how it could impact our business model.

Stephen Scouten: Got it. Appreciate that, Kevin. And then just last for me. I know Jim, you said a little bit ahead of schedule and where you thought you’d be from a NIM perspective, largely related to better betas, lower deposit costs in the quarter. And we’ve seen that a lot industry-wide here this quarter, which is great. Do you think that’s more a kind of a pull forward and the lack of a maybe lag effects that we all thought we might see with deposits going back down with rate cuts or do you think the destination actually changed and we can get to a lower point as we get through this potential easing cycle here?

Jim Mabry: I think the direction changed. I mean, I think there – obviously, I want to guard against being overly optimistic about. I think there was just – there’s a change in direction and I almost would look at the and we’ll see how it plays out over time. But there are a couple of things that worked really well for us in the quarter and I would say notably just to get some slope in the yield curve was a nice thing to see. I mean, I think we were modestly inverted when we had our Q3 call and to see that change and of course, trying to predict that’s a difficult test. But I mean – I think we’re as – I mean, again, it’s not going to be – I would – I’m certainly not advertising a sea change in our margin, but I do think the outlook there is very encouraging and we’ll see how it plays out, but very hopeful there.

Stephen Scouten: Got it. Very helpful. Thank you guys for all the color and congrats on a great quarter.

Operator: Your next question today will come from Will Jones with KBW. Please go ahead.

Will Jones: Yes. Hi, thanks. Good morning, guys.

Mitch Waycaster: Good morning, Will.

Will Jones: I wanted to start with expenses this quarter, the narrative around expense this year really has been very positive. Now, so it’s maybe a bit surprised to see this core operating expense jump up in the fourth quarter here, especially when the comp line is hitting a low watermark for the year. Was there anything chunkier or kind of more one-time-ish in nature that happened this quarter? And do you feel like this is kind of a good jumping off run rate as we look into the first quarter of next year?

Kevin Chapman: Yes. Hi, good morning, Will. It’s Kevin. So yes, on expenses, and just specific in the quarter, we did have a couple of things that were a little bit – that were large and they’ve been somewhat persistent throughout the year and really in two categories. One is just operational losses, fraud losses, Reg E disputes, those have been elevated all year. I don’t think that’s specific to Renasant, I think that’s a bit of an industry issue. But it was abnormally high in Q4, it was up in the $1.5 million, $2 million range in Q4 compared to Q3. We don’t necessarily think that’s going to happen every quarter, but the trend line in that has been up in ’24 compared to ’23. The other item and it’s in salaries and employee benefits is health and life.

We’re a self-funded plan. And so as we incur health expenses, we pay for that. And we’ve had an unusually large expense there, which means our claims history is up. And it’s just been an outlier this year. Year-to-date, our accrued health and life is up $5 million compared to – roughly $5 million compared to ’23. In Q4, it was up $1 million to $1.3 million compared to Q3. So those are kind of the two outliers that are somewhat masking those improvements that we’ve been talking about in the expense run rate. If you look year-to-date, and you include those items, but you back out merger expenses, our expenses are up about 2%. So if you kind of smooth out the quarterly volatility, it’s up about 2%. If you back out accrued health and life, we’re roughly flat, year-to-date.

And so we are not taking our off the ball as it relates to expenses. Although we have had – we’ve had some unusual items pop-up in ’24 and we’ll work to get those down back to historical levels, but as we look out into 2025, we think that, you know that 2% to 3% increase in expenses is a good run rate as we look out into ’25. And Q1, we’ll have some volatility and it has less days, there’s merit increases that will come into play at the back-half – or the back-end of Q1. But we think overall, as we look for 2025, a 2% to 3% increase in expenses is kind of what we’re guiding. But again, we’ll work hard to keep that number lower, flat and again, continue to work on our expenses as we’ve done the last couple of years.

Will Jones: Yes, Kevin, that’s really helpful color. I appreciate the thoughtful response there. And then I don’t want to underscore, you guys have done a really nice job on the expense base this year. So thank you for all that helpful color. And maybe, Jim, one for you. Just any – I know it’s a bit of a slide and scale with some of the rate volatility, but any updated thoughts on where rate marks with The First stand today? Is there any material change there in your view?

Jim Mabry: I mean, it definitely has moved some Will, from when we announced the deal and it’s – you know the movements have been, I was going to say positive or negative, but actually they sort of net out to roughly de-minimis change to the earn back. But to your point, if you look at the marks and you look at the impact of capital and the EPS, that’s sort of been toggling back and forth within a range, I would say, because we look at this probably monthly. But at the end of the day, and of course, when we get some regulatory clarity, we’ll update these numbers. But at the end of the day, it has – it does not have a meaningful impact on earn back. They sort of offset one another. So we’ll keep you updated, but that’s the way I would describe the merger math.

Will Jones: Yes. Okay. That’s great. And then Mitch, maybe finally for you, just if you look at The First, they also had a really nice quarter of growth. And so it feels like the two combined companies are really carrying nice momentum into 2025, is there a way to think about what the right growth rate is for the combined company or what you would kind of earmark, you know an achievable level for growth as you think about the two companies’ combined?

Mitch Waycaster: Maybe I should have mentioned that earlier, just reflecting on our ability to grow organically, to your point, we’re seeing the same thing in The First. And I have no reason to believe that, that won’t continue just considering their markets and if you look at everything from culture, to our business models, how we complement each other, how we go to market, in very similar ways, but some of the things I think as a combined company that Renasant can bring to them that I think will be additive to customer bases. We don’t have a lot of overlapping customers. I just say, it’s really one of those better together stories when you put it together and you look at our ability to go to market. So we view that quite favorably and I think it would be in line with what I’ve described earlier.

I would say also in the planning of integration and conversion, naturally, a lot of those conversations continue and we’re quite encouraged. And I think you would hear the same thing from that team.

Will Jones: Yes, okay. Well, thanks for the questions, guys. I appreciate it.

Mitch Waycaster: Thank you, Will.

Operator: Your next question today will come from Matt Olney with Stephens. Please go ahead.

Matt Olney: Thanks. Good morning, guys.

Mitch Waycaster: Good morning, Matt.

Matt Olney: I think you already highlighted the new and renewed loan yields earlier. Just remind us of the volume of loans that will reprice this year on that variable fixed rate loans that we should expect over the next few quarters?

Mitch Waycaster: Variable rate book is about $6 billion and the vast majority of that, 90 plus percent of that reprices within a month of the rate change. I will say this about that variable book is – 75% of that is at a rate of 6.5% or less. So it will be interesting to see what the real impact is to yields as we – as we get that repricing, but that will give you a sense of the size of the variable rate book. And then – and actually, I can’t remember the second part of your question.

Matt Olney: The fixed rate book, kind of similar question as far as repricing dynamics of that fixed rate book.

Mitch Waycaster: Yes, sorry. So we’ve got, call it, $600 million of fixed rate loans that we price within the next 12 months. And I would say that’s probably at a blended rate of about 5.5%, and actually it’s closer to $700 million that reprice over the next 12 months. And then we’ve also got – bear in mind, we’ve got, call it, $200 million of securities that will reprice and that’s probably carrying a yield in the mid-2s.

Matt Olney: Okay. That is helpful. And also on the credit front, I think we did see classified loans tick a little bit higher in the quarter. Any color behind that the uptick in classified loans?

David Meredith: Hi, good morning, Matt. This is David. It was – those were…

Matt Olney: Good morning.

David Meredith: Loans that were transitioning within the criticized bucket, they went – there was about 27 million of loans that were criticized – that were OAM special mention that were reclassified to classified. So there were loans that we had already highlighted where there were stress on them, but we – just in our normal ongoing portfolio management, we migrated those down to sub-standards. So not anything materially new in that criticized classified bucket.

Matt Olney: Just following-up on that. I guess, I mean, it would imply, I guess there’s incremental stress on those borrowers compared to maybe last quarter? Was there incremental stress or are you just suggesting there maybe was a lag in terms of how those were graded internally versus what we discussed back in October?

David Meredith: It would be the more of the former. It would be as we continue to watch. When we look at a – without getting into detail, we look at a sub-special mention type asset, a criticized asset, we’ll watch performance. And if that performance – that negative performance extends longer, we’ll look at downgrading as a classification properly doing to move that from special mention to classified. So it’s not incremental deterioration in the portfolio, just probably loans that have stayed within that criticized bucket a little bit longer. And there’s a little bit of a transitory element to loans that are in special mention that there is some level of stress, but it – but there may be a shorter-term view where they may be upgradable as that stress continues, then we’ll look at what’s the proper classification is stay in OEM or does it need to move to sub-standard.

Matt Olney: Okay. Well, I appreciate the color and that’s all from me. Thank you.

Operator: [Operator Instructions] And your next question today will come from David Bishop with Hovde Group. Please go ahead.

David Bishop: Yes, good morning. Sort of staying on Matt’s last question with credit. I’m curious as the interest rate and the economy evolves here, from a credit perspective or loan segment perspective, are there any changes that are forcing you or driving your change in appetite to grow any certain loan segments? Just curious if there’s been any change in the appetite for growth? Thanks.

David Meredith: David, good morning. I was saying short, there is not. We continue to watch all segments of the economy, be it commercial real estate, C&I to determine what the impacts are going to be. And as at this point, we’re not making any change. We’re going to remain cognizant of impacts obviously on our markets due to the potential for changes due to administrative reasons, whether it be tariffs or whatever. I mean, we’ll continue to look at the impact. But as of today, we’re staying fairly consistent with our thoughts around appetite as we’ve had for, I’d say really pretty much the past four quarters. And we’re pretty positive on most elements of our markets in the Southeast. We continue to see strong performance in our marketplace in most aspects of CRE and most aspects of C&I. So we maintain a positive outlook and in our risk guidance to – through our lending teams, we have a positive outlook towards most asset classes.

David Bishop: Got it. And then turning back to the balance sheet side, looks like this quarter may be some seasonality or funding flows. You leaned into cash a little bit more. Looking out the first quarter, if we do see the continuing loan growth, is there any resumption of loan growth you’re assuming? Do you think you still lean into liquidity a little bit here in the first quarter into the merger?

David Meredith: I mean, we – as you know, we’ve sort of – we have leaned into liquidity, and I would say, this is – what’s interesting – what struck me about this quarter was it was the first quarter, I think in four or five day where we didn’t have core deposit growth exceed loan growth and yet, we still have really good core deposit growth quarter. I think we were roughly 5% on the core deposit side. And we’re down that we’ve got no, as you know, no wholesale borrowings except for a very small amount, the Federal Home Loan Bank, which we’re not going to pay-off because it’s got a sub 1% rate on it. But I would say this as we look to Q1 – as we look to the first half, I mean, we feel really good about our deposit engine. I mean, it’s just performed really well for us.

And we expect that to continue. And so we’ll see how loan demand plays out for the quarter, the first half. But I would say, you know, one side of that is we’re probably going to be a net purchaser of securities in the first quarter. And we haven’t done that in, I don’t know, probably a year or more. So I think those things sort of tell the story about the movements from the balance sheet and we’ve just the great work we’ve done on the deposit side to give us that flexibility of – if we don’t have the loan growth to put it into securities.

David Bishop: Great. I appreciate the color. My last question sort of staying on the deposit side. You talked about the loan maturities repricing. Just curious if there’s any an update in terms of deposit repricing maybe on the fixed CD side in the first half of the year? Thanks.

David Meredith: On the CD side, we’ve got probably in the first half, roughly, call it, $2 billion of CDs that mature and those will be the blended rate and that’s probably low-4s. And if you look at our – the pricing that we’re getting now, it’s – , call it 3.75% 4%. So that will give you a sense of how that might impact the income statement.

David Bishop: Appreciate the color.

Mitch Waycaster: Thank you, Dave.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mitch Waycaster for any closing remarks.

Mitch Waycaster: Well, thank you, Nick, and thank you to each of you for joining the call today. We appreciate your interest in Renasant.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.