Renasant - Q4 2023

Transcript

Operator (participant)

Good day, everybody, and welcome to the Renasant Corporation 2023 fourth quarter earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson with Renasant Corporation. Please go ahead.

Kelly Hutcheson (EVP and CAO)

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 fluctuations, 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. And now I will turn the call over to our Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.

Mitchell Waycaster (EVC)

Thank you, Kelly. Good morning. We appreciate you joining the call and your interest in Renasant. This quarter's results reflects loan growth across the company, steady asset quality, and good expense control. Capital strength continues to build and affords us added optionality heading into 2024. I'm especially proud of our team for the results this quarter and for the year. The industry faced a number of challenges, and our employees responded by remaining focused on serving our customers and supporting each other throughout the year. I will now turn the call over to Kevin.

Kevin Chapman (President and CEO)

Thanks, Mitch. Our fourth quarter earnings were $28.1 million, or $0.50 per diluted share. Included in our results is an after-tax impairment charge of $15.7 million, or $0.28, as we elected to sell a portion of our security portfolio shortly after year-end. The sale generated $177 million in proceeds, excluding this charge and two smaller one-time income items. Our adjusted EPS was $0.76, which represents a $0.02 increase from the previous quarter. We experienced another quarter of solid loan growth, and when coupled with an increase in loan yields of 12 basis points, resulted in an increase of $7.4 million in loan interest income on a linked quarter basis. On the deposit side, competitive pressures on pricing persisted.

Growing core deposits and managing our funding costs through this rate cycle continues to remain a top priority. The efforts of our team and their commitment to protect and grow our core funding base resulted in core deposit growth of $215 million on a linked quarter basis. Additionally, we were able to allow $295 million in brokered deposits to mature this quarter. This mitigated the rise in deposit interest expense this quarter, which only increased $6.3 million from the previous quarter.

Included in non-interest income for the fourth quarter are several one-time items, including the $19.4 million pre-tax impairment charge on our securities, a $620,000 benefit from the extinguishment of a portion of our subdebt, and a $547,000 gain related to a holdback on previously sold mortgage servicing right assets. Excluding these one-time items, adjusted non-interest income increased $341,000 quarter-over-quarter. Income from our mortgage division, excluding the MSR gain, declined $1.5 million from the third quarter. Interest rate lock volume declined $152 million quarter-over-quarter, and our gain on sale margin decreased 41 basis points.

Non-interest income for the fourth quarter also included a $2.3 million payment related to our participation in a loan recovery agreement, which we assumed as part of a previous acquisition. Non-interest expense increased $3.5 million from the third quarter. The accrual of the $2.7 million FDIC insurance special assessment and higher salaries and benefits contributed to the increase. Our adjusted efficiency ratio was 66.18% for the quarter. I will now turn the call over to Jim.

James Mabry (CFO and SEVP)

Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. Total footings increased just under $180 million for the quarter. Loan growth in the fourth quarter was $183 million and represents an annualized growth rate of 6%. We experienced another strong quarter of core deposit growth, which allowed us to continue to shift our reliance away from non-core funding sources. As you can see on slides six and seven, the company's core deposit base and overall liquidity position remains strong. The deposit base is diverse and granular. The average deposit account is $28,000, and there are no material concentrations. Referencing slide eight, all regulatory capital ratios are in excess of required minimums to be considered well capitalized, and each of these ratios improved from the prior quarter.

Earnings for the quarter, coupled with an improvement in the unrealized loss position of our securities portfolio, contributed to an increase in the tangible common equity ratio and tangible book value per share. Turning to asset quality, we recorded a credit loss provision of $2.5 million. Net charge-offs were $1.7 million, which represents an annualized rate of 6 basis points, and the ACL, as a percentage of total loans, decreased 2 basis points to 1.61%. Our reserve for unfunded commitments remained unchanged during the quarter. Asset quality metrics are presented on page nine. Our criticized loans improved quarter over quarter, and past dues were up from the previous quarter and were 44 basis points of total loans. All other metrics were relatively stable, underscoring our emphasis on asset quality.

We continue to remain vigilant in monitoring credit, including early identification of potential problem loans in order to mitigate loss. Our profitability metrics are presented on slides 10 and 11. Excluding one-time items, adjusted pre-provision net revenue declined $4.6 million on a linked quarter basis. Pressure on our net interest income and declines in the mortgage division are the key drivers to the decrease. Turning to slide 12, adjusted net interest margin, which excludes purchase accounting accretion, and interest recoveries, was 3.29%, down 6 basis points from Q3. Adjusted loan yields increased 10 basis points, while the cost of deposits increased 19 basis points. Deposit pricing pressures remain and will likely cause deposit costs to increase in the near term. Kevin commented on the highlights within non-interest income and expense.

While the revenue headwinds are a challenge, the focus remains on improving operating leverage. Now I'll turn the call back over to Mitch.

Mitchell Waycaster (EVC)

Thank you, Jim. We are positioned for a successful 2024 and look forward to keeping you updated on the progress. I will now turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Catherine Mealor with KBW. Please proceed with your question. Catherine, your line is live into the call. If you would like to proceed with your question, please go ahead. Could you check if your line is on mute, please? Once again, if you would like to ask a question, please press star, then one on your telephone keypad. Our next question comes from John Rodis with Janney. Please proceed with your question.

John Rodis (Director and Senior Equity Research Analyst)

Hey, good morning, guys. Nice quarter.

Mitchell Waycaster (EVC)

Good morning, John. Thank you.

John Rodis (Director and Senior Equity Research Analyst)

Hope you guys are doing well. Maybe, Jim, just start out on the margin, you know, down 3 basis points this quarter. Maybe your thoughts on, you know, do you think it's bottomed out, or do you think maybe there's still a little bit more downside?

James Mabry (CFO and SEVP)

Good morning, John. It was encouraging to see the trends that we saw in Q4. A nice change after living through what we did in 2023. I would say this, that the way we're thinking about margin, and I should say at the top, we're assuming no cuts, and I can comment on certainly if there are cuts, but just to sort of set that as a base, assuming no cuts in 2024, I think there is a case that the margin probably is close to bottomed and could show some moderate upside in 2024 if we have no cuts.

John Rodis (Director and Senior Equity Research Analyst)

Okay, and then with cuts or?

James Mabry (CFO and SEVP)

I mean, cuts, cuts are going to weigh on that, John. So if you have... Let's say you have three cuts and it's, you know, sort of June, September, December. Of course, December wouldn't really matter too much in that, with that backdrop. Then whatever expansion that we would experience in the near term would be somewhat muted by those cuts. But I still think that if cuts happen roughly along that timeline, that there you'd see some, you know, slight improvement in the margin would be something we would hope for.

John Rodis (Director and Senior Equity Research Analyst)

Okay. Okay. And then, Jim, did I hear you correctly, or maybe it was Kevin, in your prepared remarks? I think in other non-interest income, the $6.9 million, you said there was a recovery in there of roughly $2.3 million. Did I hear that correctly?

James Mabry (CFO and SEVP)

Yes, that's correct. There was a recovery. It was part of a relationship an acquired bank of ours had, and I really view that as likely one-time in nature. I mean, there could be future recoveries, but I sort of view that as a one-time item.

John Rodis (Director and Senior Equity Research Analyst)

Okay. And then switching to expenses, you highlighted the FDIC special assessment of $2.7 million. So if we back that out, expenses were approximately $109 million. Is that sort of a good base to work off of with some modest growth for this year?

Kevin Chapman (President and CEO)

It's a good base to work off of, as we talked about last quarter. We felt that Q4 and Q1 are gonna be relatively flat. Then as we get into Q2, we'll see how expenses look for the remainder of the year. So yes, as we look at the baseline for this year, we think that's a good run rate if you back out that special FDIC assessment.

John Rodis (Director and Senior Equity Research Analyst)

Okay. Thanks, Kevin. And then finally, guys, just one other question, and probably for you, Jim. The tax rate was lower this quarter. How should we think about the—I guess I'm assuming there was some sort of true up or something this quarter, but how should we think of the tax rate going forward?

James Mabry (CFO and SEVP)

Yes, so you're right. Using Q4 effective tax rate would not be a good proxy for 2024, and that was really largely influenced by the impairment. I would say for 2024, John, something in that 21% to 22% effective Tax rate range would work.

John Rodis (Director and Senior Equity Research Analyst)

Okay. Sounds good. Thank you, guys.

Kevin Chapman (President and CEO)

Thank you, John.

Operator (participant)

Our next question comes from Catherine Mealor with KBW. Please proceed with your question.

Catherine Mealor (Managing Director and Equity Research Analyst)

Thanks. Good morning.

Kevin Chapman (President and CEO)

Good morning, Catherine.

Catherine Mealor (Managing Director and Equity Research Analyst)

A follow-up to the margin question for you, Jim. Can you talk to us about the fixed rate pricing opportunity? And, and do you happen to know the amount of loans that are fixed rate that will reprice this year and maybe even next, if you got it?

Mitchell Waycaster (EVC)

So this year, Catherine, it's just under $700 million that'll reprice in 2024. I don't have the number for 2025, but I think the yield on that book is just under 6%. I want to say it's 5.8% or something thereabouts. And you didn't ask, but I would just add, on the liability side, there's, you know, a fair amount that would reprice here in the near term.

Catherine Mealor (Managing Director and Equity Research Analyst)

Great, okay. And generally, that-

James Mabry (CFO and SEVP)

Catherine, I just-

Catherine Mealor (Managing Director and Equity Research Analyst)

Go.

James Mabry (CFO and SEVP)

I'm sorry. I was just gonna say, I was looking at my notes. It's $500 million in 2025, Catherine, on the fixed rate loan side.

Catherine Mealor (Managing Director and Equity Research Analyst)

Okay, great. And generally, that $700 million is going from 5.8 to about what?

James Mabry (CFO and SEVP)

So, I mean, if we look at new and renewed in December, we were running 8.21. You know, that and there was a question earlier about our outlook for rates. I mean, what we're using right now are no cuts in the way we're looking at 2024. Fully mindful that there could be cuts, so that would weigh on, I guess, the way I would answer that question, Catherine. But, I would think, you know, upper sevens, 8% would be a reasonable, you know, yield to look at for 2024.

Catherine Mealor (Managing Director and Equity Research Analyst)

Okay. And you mentioned that you thought cuts would weigh on your margin outlook for this year. As you think about that, what kind of deposit beta are you thinking about on the way down, as you say, kind of cuts will weigh on your margin? I'm assuming with that, you're being fairly conservative with your ability to lower deposit costs.

James Mabry (CFO and SEVP)

We are. I mean, I think currently we've got our interest-bearing beta peaking somewhere in the upper 50s in 2024. So I just... I think as we think about, you know, to the extent that we have a number of cuts in 2024, that at least near term, I would think that's gonna be a little bit of a headwind on margin. You know, where we end up for the year, I don't know, but because there's so many, you know, variables that go into that, Catherine. But I do think right now we're poised. If we've got a stable rate outlook in the near term, I think we're poised for some modest margin expansion here in the near term.

And then the rest of the year, we'll see how the, you know, if we get cuts, when they happen, what the velocity and frequency of those are, but, it's a, it's a little hard to predict.

Catherine Mealor (Managing Director and Equity Research Analyst)

Yep, that makes sense. And then maybe one on credit. Your credit has just been really strong and very stable with charge-offs, kind of stable NPAs, stable classifieds. You know, but you've got a really big reserve. So as we think about this next year, is there a potential, if we really kind of move through the year and we hit this soft landing, that we could start to see reserve release for you, which would, you know, kind of be a tailwind to EPS estimates? Or, you know, you kind of fight as hard as you can just to kind of keep that more stable, just, you know, just in case. Just kind of curious your thoughts on kind of provisioning year over year and outlook for credit. Thanks.

David Bishop (Director)

Yeah. Good morning, Catherine, this is Dave.

Catherine Mealor (Managing Director and Equity Research Analyst)

Morning!

David Bishop (Director)

And I don't think we'll—you'll see us release. You know, we've kind of forecasted in the past that asset quality staying consistent, that our preference would be to use our provision for loan, loan growth opportunities. And, you know, I think at this point, we will continue to forecast that way. So I would hesitate to think that there's gonna be a release at some point in the near future. And we also know that 2024, there's still probably gonna be some volatility in asset quality, just as we continue to work through loan repricing and cycle and so forth.

So I think near term, you'll probably see us stay fairly consistent with our methodology and just determine the impact of our provisioning based on how our loan portfolio holds up and how our loan growth is.

James Mabry (CFO and SEVP)

Catherine, I'll just add to that. I do think, given, you know, what David just said, if you look at that percentage on ACL, and of course, that model is a dynamic model, the CECL model, so there's a lot that goes into it. But I think it's reasonable, as we sit here at the start of 2024, to assume that that percentage would moderate downward. As David said, I, you know, don't anticipate any releases, but I think that percentage, just given loan growth and whatever charge-offs we're gonna have in 2024, it wouldn't surprise us to see that moderate down a little bit as we go through the year. I mean, it came down two basis points, of course, in Q4.

But I think that's a reasonable outlook, that we sit here a year from now, that ACL percentage will be a little bit lower than it is now.

Catherine Mealor (Managing Director and Equity Research Analyst)

Great, that makes sense. All right, thank you.

David Bishop (Director)

Thank you, Catherine.

Operator (participant)

Thank you very much. This concludes our question and answer session. I would now like to turn the conference back over to Mitch Waycaster for any closing remarks.

Mitchell Waycaster (EVC)

Well, thank you, Eric, and thank each of you for joining the call today. We next plan to participate in the KBW Conference, beginning on February 15th.

Operator (participant)

The conference is now concluded. Thank you everybody very much for attending today's presentation. You may now disconnect.