Good morning, and welcome to the Renasant Corporation 2022 4th quarter earnings Conference Call. All participants will be in a listen-only mode. Should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw a question, please press Star then 2. 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.
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 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 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. Now I will turn the call over to our President and Chief Executive Officer, Mitch 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 Q4 , 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 creditworthy portfolio of assets. 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.
Thanks, Mitch. Our Q4 earnings were $46.3 million or $0.82 per diluted share compared to $46.6 million or $0.83 per diluted share in the Q3 . Excluding certain items which we will cover later in our remarks, our adjusted diluted EPS for the Q4 was $0.89. We recently announced that we completed our acquisition of Republic Business Credit (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.
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 a linked- quarter basis. Competitive pressures on deposit pricing impacted our deposit cost this quarter, driving an increase of $14.4 million in interest expense from the Q3 . We don't expect these pressures to abate in the near term and anticipate that our funding costs will continue to increase. We still boast a strong core deposit base and believe it positions us to manage our deposit costs in this volatile rate environment. Our capital markets, treasury solutions, wealth management, and insurance lines of businesses were solid contributors to our earnings this quarter.
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 linked- quarter basis. We incurred $1.1 million in merger expenses associated with our acquisition of RBC, and we recognized expense of $1.3 million related to the FDIC's recently issued guidance to banks regarding representment 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, continued to improve, coming in at 56.3% for the Q4 . Our improvement on a linked-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. 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.
Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. Total footings were up nearly $500 million, due in large part to another strong quarter of loan growth. The acquisition of RBC added $77 and a half million in loans, while legacy Renasant contributed $396 million in organic loan growth. Excluding the loans acquired from RBC, loan growth in the Q4 represents an annualized growth rate of 14.4%. Competition for deposits within our markets picked up significantly this quarter. We experienced a decline in non-interest- bearing deposits of $268 million from the Q3 . We borrowed $233 million in brokered time deposits in the month of November. The company's core deposit base and our overall liquidity position remain strong.
All regulatory capital ratios are in excess of required minimums to be considered well capitalized and show 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 experienced net charge- offs of $2.6 million. The ACL as a % 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 Q3 for a $3 million gain. There was no such sale in 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 Q3 . 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.
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.
We will now begin the question and answer session. To ask a question, you may press Star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press Star then 2. At this time, we will pause just momentarily to assemble our roster. 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.
Thanks. Good morning.
Good morning, Catherine.
Wanted to see if y'all could provide us an outlook on how you're thinking about the margin. A lot of other banks we've seen report so far are thinking about this quarter's margin as the peak, you know, and are forecasting a pretty significant decline as we move through next year. How are you thinking about it, both in terms of NII growth and also just the margin trajectory? Thanks.
Good morning, Catherine. This is Jim.
Good morning.
Good morning. You know, I don't, 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, you know, where it goes from here. Core NIM for November was 378. Core NIM for December was 376. And I think for the quarter it was 376. Our outlook for margin is that 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. I would say it's a similar story on NII, Catherine.
I would say flat to slightly down for 2023.
I know deposit costs have been higher for everybody. Have you changed your view on what you think the cumulative, you know, over the cycle beta will be for Renasant?
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.
Okay.
That's probably up from where we were six months ago, Catherine, but that's what we're using.
Okay, great. That's on the beta on interest-bearing, correct?
That's correct.
Okay, great. Then maybe moving over to expenses. I know you've mentioned in your prepared remarks that you expect growth from this level. You're also managing that 60% efficiency ratio goal. Is there a, a range of expense growth that you think is appropriate to think about this year? How much flexibility do you have in that outlook if revenue comes in lighter than expected?
Hey, Catherine, Kevin.
Morning, Kevin.
As we look at... Hey, good morning. As we look at expenses, you know, that continues to be one of our, one of our main initiatives. Again, not so much to just eliminate expenses, but to maximize the return on them. I think you've seen that over the last couple of quarters, as rates have helped us, helped bring margin back in through revenue back in through the margin. Our efficiency ratio now sits in the mid-50s%. As we look at our expense outlook, and again, we're gonna have inflationary pressures on our expenses. Just if you take our non-interest expenses of one hundred and one and a half 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 a $1.1 million in merger expenses. If you're just using that, the reported as your baseline, we think expenses are up, you know, close to 2%, 1.5% to 2.5%. If you back out those items, our core run rate of expenses are gonna be closer to 3.5% to 4% increase. All of that is before RBC. That's just the legacy Renasant expenses. 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 23. It continues to remain one of our main initiatives, and if revenues adjust, our expenses will adjust accordingly.
Great. All right. Thank you so much.
Thank you, Catherine.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, guys. guys, sorry about that. Good morning. Just wanted to.
Good morning, Michael.
To touch on mortgage. Good morning. Just wanted to touch on mortgage here. You know, it's down to about 3% of revenues, obviously, you know, a lot of headwinds, but, you know, it's a lot higher, you know, a couple of years ago. It seems like the headwind has been fully absorbed. You know, how should we be thinking about the mortgage business, you know, here, both on the expense side and then on 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 broad color and commentary on mortgage. Sorry if I missed it in the prepared remarks. Thanks.
You're good. Look, as we look at mortgage, and you're right, if you go back, you know, a couple of years ago, mortgage as a percentage of revenues was much higher than the 3%-4% that it is today. If you look at it on a more normalized basis, if we go back to pre-2020, mortgage revenues represented about 6%-8% of total revenues. 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. We are actually seeing opportunity that comes with that volatility. The disruption in the markets created opportunity for hiring. 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've reduced our headcount about 30%, and that includes some hiring, some strategic hiring that we've done on the production side. As we see that strategic 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, we have seen our pipeline grow about 30% since the beginning of the year. Our pipeline, mortgage pipeline is about $130 million right now. It was about $100 million at the beginning of the year. There are some signs that production is coming back. Again, it's variable on rate and it's variable on product and inventory.
All of those just feel a little bit volatile right now, but we feel good with where we're positioned for mortgage. I think back over, as we look over time, mortgage revenue is gonna again come back to about that 6% range of total revenues from its current position in that 3%-4% range.
Very helpful. Just wanted to dig in, again, sorry if I missed this, into the reserve build this quarter. You know, if I look at slide 17, it looks like the reserve was built in the commercial space, which, you know, I guess was, I was a little surprised about and actually down in construction. Can you just give some color on the reserve build? You know, you guys are pretty healthy. Was this more of a proactive conservative move, just given that credit metrics are still pretty benign? You know, is there something, you know, greater that you're seeing in your either in your pipeline or just more broadly in the economy? Thanks.
Hey, good morning, Michael. This is David. I can address page 17, but I'll direct you first to page 19, just to give you a high- level overview of the build quarter-over-quarter. You can see it breaks down into, from a legacy Renasant standpoint, charge-offs $2.6 million, provision legacy at $7.9 million. On a pre-RBC basis, if we were to exclude RBC, our provision went from $157 last quarter to $156 this quarter. Basically, it was flat quarter-over-quarter from a legacy Renasant standpoint. The difference being that the build in PCD and non-PCD loans related to RBC, and that's really what you're seeing, that increase in the commercial bucket is that provisioning and, that PCD and non-PCD provision for RBC quarter-over-quarter.
Sorry, I missed that. Thanks for clarifying that. I appreciate it. 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, you know, what does more moderate growth mean to me, and how much of it is, you know, you guys pulling back in either certain asset classes and versus, you know, what the market is maybe, you know, giving you in terms of opportunities? Thanks.
Yeah, Michael, 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. What we expected occurred. 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. Like I say, geographically, we're still pleased. While it continues to moderate with production, I think equally important as the geographic is the types. As I mentioned earlier, just the granularity of our ability to produce in our consumer, which is more 1 to 4 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%.
Larger commercial credits above $2.5 million, just core C&I owner-occupied type credits was another 35%. 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%. We continue to hit on many different cylinders relative to our ability to produce. The other thing I should mention here as we think about going forward, while production, while pipeline production had moderated, so have payoffs. We saw that again this past quarter. For the last two quarters, we've saw payoffs below what we saw on average in 2022, and well below what we saw in the year 2021.
We certainly remain disciplined in underwriting as well as pricing. We remain optimistic about our ability to produce, driven by markets, business lines, talent. I mentioned in opening comments, just the in-migration that continues in our markets. You know, previous economic development activity in manufacturing, distribution, medical, government, education. It's, you know, a good definition of where we do business. Certainly that's not looking past at all the economic uncertainties that exist today, but just a testament to where we do business and our talent.
appreciate the color. balancing the puts and takes is something like a high single digit from this quarter's 14% annualized growth, you know, somewhat in the ballpark?
Yeah. Michael, it's hard to, you know, be that specific given the, you know, 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 the change quarter-over-quarter, I mean, it would lead you to that type conclusion.
Great. Thanks for taking my questions.
Thank you.
Again, if you have a question, you may press Star then one to join the queue. Our next question will come from Thomas Wendler with Stephens. Please go ahead.
Hey, good morning, everyone.
Morning, Thomas.
We saw a bit of a tick up in past due loans in 4Q. Can you give us any color there?
Hey, Thomas Wendler, this is David. Good morning. It's a little bit of color. For the most part, that was, you know, that was made up for when we turned to the 1st of the year. When we look at the 1st of January, those, the amount of loans that paid current brought us consistent back with where we would have been in prior quarters. 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 a consumer. Again, we saw that number return to more of our normalized quarter in past dues after the turn of the month.
All right. Thank you. Just a bit of a modeling question here for me. With the RBC acquisition, I'm just kinda thinking about the purchase accounting accretion in 1Q. Can you give me any color there, what we should expect?
Thomas, 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 23.
All right. Thank you for that. That's all my questions. Thanks, guys.
Thank you, Thomas.
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.
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 Janney CEO Forum next week.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.