Q4 2023 Renasant Corp Earnings Call

Presentation

Operator

Good day, everybody, and welcome to the Renasant Corporation 2023 Fourth Quarter Earnings Conference Call and Webcast participants will be in a listen only mode. (Operator Instructions) 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.

Thank you for joining us for Renasant Corporation's quarterly webcast and conference call. Participating in this call today are members of Renaissance 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 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 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.

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.

Thanks, Mitch. Our fourth quarter earnings were $28.1 million or $0.5 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 of $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 result of the core deposit growth of $250 million on a linked quarter basis.
Additionally, we were able to allow $295 million in broker 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 noninterest 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 sub debt and a $547,000 gain related to a holdback on previously sold mortgage servicing right assets.
Excluding these one-time items, adjusted noninterest 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.
Noninterest 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. Noninterest 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.

Thank you, Kevin. As you walk through the quarter's results, I will reference slides from the earnings deck. Total floating 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 6 and 7, 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 8, 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 two basis points to 1.61%.
Our reserve for unfunded commitments remain unchanged during the quarter. Asset quality metrics are presented on page 9, 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 six 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 and now I'll turn the call back over to Mitch.

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.

Question and Answer Session

Operator

(Operator Instructions) Catherine Mealor from KBW.
Our next question comes from John Rodis with Janney. Please proceed with your question.

Hey, good morning, guys. Nice quarter.

Good morning.

John, thank you for what you guys are doing. Well, maybe Jim, just out start out on the margin down three basis points this quarter. Maybe your thoughts on do you think bottomed out or do you think maybe there's still a little bit more downside?

Good morning, John. It was it was encouraging to see the trends that we saw in Q4, a nice change after living through what we did in '23. I would say this the way we're thinking about margin, 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 '24, I think there is a case that the margin probably is close to bottomed and could show some moderate upside in '24 if we have no cuts.

Okay. and then cuts?
Cuts are done away on that, John, so if we if you if you have, let's say you've got you have three cuts and had seen no sort of June, September, December, of course, December wouldn't really matter too much in that. With that backdrop, then the 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 around that time line that you'd see some slight improvement in the margin would be something we would we would hope for.
Okay, okay.
And then, Jim, did I hear you correctly or maybe it was Kevin, in your prepared remarks. I think in other noninterest income, the $6.9 million you said there was a recovery in there of roughly 2.3 million. Did I hear that correctly?

Yeah, that's correct. There was a recovery that was it was part of its relationship and 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 interest.

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

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

Okay. Thanks, Kevin. And then finally, guys, just one other question probably for you, Jim, to 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?

Yeah. So you're right using Q4 effective tax rate would not be a good proxy for 24. And that was really largely influenced by the by the impairment, I would say, for 24, John, something in that 21% to 22% effective tax rate range would work.

Okay. Sounds good. Thank you, guys.

Thank you, John.

Operator

(Operator Instructions) Catherine Mealor from KBW.

Thank you. Good morning.

Good morning, Catherine.

Per referral to the margin question for you, can you talk to us about on the fixed rate pricing opportunity and you happen to know the amount of loans on that are fixed rate that will reprice this year and maybe the next if you got it?

So this year, Catherine, it's just under $700 million that will reprice in 24. I don't have the number for 25, 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 in the liability side, there's a fair amount that would reprice here in the near term.

Great cash.

And generally that have not just the group.
I'm sorry, I just as I was looking at my notes, it's [$500 million], Catherine, on the fixed rate earning on the team.

Great in generally that $700 million is go in from 5.8 to about what?

So I mean, if I look at if we look at new and renewed in December, we were running 821. And that and there was a question earlier about our outlook for or for rates I mean, what we're using right now is there are no cuts in the way we're looking at it at 24 fully mindful that there could be cuts. So that wouldn't weigh on.
I guess the way I'd answer that question, Catherine, but and I would think in our upper sevens, 8% would be a reasonable yield to look at for 24.

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

We are I mean, I think currently we've got our interest bearing beta peaking somewhere in the upper 50s in 24. So I just I think as we think about them and at the extent that we have a number of cuts in 2014 at least near term, I would think that that's going to be a little bit of a headwind on margin and where we have that for the year, I don't know, but because there's so many 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 in the rest of the year, we'll see how the Lenovo get cards when they happen, what the velocity and frequency of those are. But it's okay, it's a little hard to predict the extent that makes sense.

And then maybe one on credit at your own credit has just been really strong and very stable charge-offs, kind of stable NPAs stable classifieds on 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 the soft landing that we could start to see reserve release for you, which would kind of be a tailwind to EPS estimates or you cannot kind of fight as hard you can't just to kind of keep that more stable. Just on just in case, just kind of curious your thoughts on kind of provisioning year over year and outlook credit.

Yeah good morning, Jeff. And this is I mean, I don't think I don't think I'll I don't think we'll you'll see us release we've kind of forecasted in the past that asset quality staying consistent that our preference would be to use our provision for loan growth opportunities. And I think at this point, we will continue to have and continue to forecast that way.
So I would I would hesitate to think that there's going to be a release at some point in the near future. And we also know that 24 are still probably going to be some volatility in asset quality just as we continue to work through loan repricing 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 the how our loan portfolio holds up and how our loan growth is.

And Kevin I would just add to that. I do think given what David just said, if you look at that percentage on ACL, of course, that model is a dynamic model that the CECL model. So there's a lot that goes into it. But I think it's reasonable as we sit here, the tough start to 24 to assume that that percentage would moderate downward from.
As David said, I don't anticipate any releases, but I think that percentage, just given loan growth and whatever charge-offs we're going to have in 24, it wouldn't surprise us to see that moderate down a little bit as we go through the year. I mean, we it came down two basis points, of course in Q4. And but I think that's a reasonable outlook that as we sit here a year from now that that ACL percentage will be a little bit lower than it is now.

Great. That makes sense. Three Thank you.

Thank you, Catherine.

Operator

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.

but 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 15.

Operator

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