Renasant Corp
NYSE:RNST
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Renasant Corp
Earnings Call Analysis
Q3-2023 Analysis
Renasant Corp
Looking forward to the year ahead, the company expresses measured optimism, hinting at the potential for market stabilization in 2024. This cautious optimism stems from the significant amount of fixed-rate loans, approximately $600 million worth, set to reprice in 2024, which could prove advantageous for the company's margins. Currently, these loans are at rates around 5.25-5.30%, providing a clear repricing opportunity as newer loans exhibit higher rates of around 8.27-8.34%.
In response to the challenging interest rate environment, the company is modeling a terminal beta in the mid-50s for interest-bearing deposits, anticipating to reach this more stabilized position by mid-2024. This projection suggests a thoughtful approach to managing the impact of interest rate changes on the company's cost of funds.
The company is undergoing a shift away from brokered deposits as part of its funding structure, signaling a pivot back to a strictly core-funded bank. With $750 million in brokered deposits set to mature, the majority of which carries rates of 5.25-5.30%, the company expects to replace these with new deposits at lower costs around the low 4% range. This strategic move is aimed at strengthening the balance sheet and reaping income statement benefits in the upcoming quarters.
Credit quality remains a focus for the company, with recent attention on loans transitioning from 90-days past due to non-accrual status. The shift involved primarily two credits: an underperforming senior housing credit and a mortgaged property. However, the company believes it holds a strong loan-to-value position on these assets, providing some assurance amidst credit concerns.
Capital continues to build within the company, providing a strong foundation for future growth and shareholder value. A buyback program is already in place, and management signals an ongoing expectation to explore other opportunities, including potential M&A activities, while prioritizing organic growth as the leading growth strategy. The vigilant balance of organic expansion and the consideration of strategic M&A underscores the company's commitment to delivering long-term value.
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Good day, and welcome to Renasant Corporation 2023 Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. I'd like to turn the conference over to Kelly Hutcheson of Renasant Corporation. Please go ahead.
Thank you for joining us for Renasant Corporation's 2023 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 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. I am pleased with our quarterly results that show solid loan growth, good asset quality and increase in core deposits and expense control. The balance sheet has steadily strengthened in 2023. The markets in which we operate have remained generally resilient and are benefiting from net in-migration and economic expansion. We are well positioned in some of the best markets in the South and we'll continue our efforts to add to this presence. Renasant's solid financial footing should allow us to take advantage of opportunities that will emerge.
Finally, we are excited to now be a part of the New York Stock Exchange, which we believe provides greater visibility for our company and our shareholders. I will now turn the call over to Kevin.
Thanks, Mitch. Our third quarter earnings were $42.3 million or $0.75 per diluted share compared to $28.6 million or $0.51 per diluted share in the second quarter. Our second quarter results included an after-tax loss of $18.1 million or $0.32 from the sale of a portion of our securities portfolio.
Breaking down net interest income. Loan interest income increased over $9 million on a linked quarter basis, driven by another quarter of solid loan growth, coupled with a 15 basis point increase to our loan yields. However, while loan yields increased, continued competitive pressures on deposit pricing impacted both our deposit mix and deposit costs this quarter, leading to a $19.5 million increase in deposit interest expense on a linked quarter basis. These pricing pressures are market-driven and not unique to Renasant and they underscore the importance of core funding in this rate environment.
We have an outstanding team that has worked diligently to preserve and even grow our core deposit base. During the quarter, we grew core deposits $385 million on a linked quarter basis, which helped us reduce our reliance on wholesale funding and allowed us to pay down the FHLB advances by $150 million and broker deposits by $323 million, respectively, during the quarter. Our focus on growing core deposits and managing our funding cost is unchanged and will remain a top priority in the future.
Excluding the loss on the sale of securities in the second quarter, noninterest income decreased $1.5 million quarter-over-quarter. Our capital markets, treasury solutions, wealth management and insurance lines of businesses continued to deliver solid results.
Income from our mortgage division declined $2.2 million from the second quarter. Volumes were impacted not only by seasonality, but also by the increase in rates and lack of housing inventory. Interest rate lock volume declined $110 million quarter-over-quarter, and our gain on sale margin decreased 11 basis points. Noninterest expenses decreased $1.5 million from the second quarter. Mortgage played a role in the decline along with modest savings in other areas. Our efficiency ratio was 63.7% for the quarter. Margin compression continues to put pressure on our efficiency but managing this ratio down continues to be a goal of ours.
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. The balance sheet contracted modestly from June 30. We experienced strong growth in deposits, excluding broker deposits, which together with utilizing some excess cash allowed us to pay down about $470 million of wholesale funding.
Loan growth in the second quarter was $237 million and represents an annual growth rate of 7.9%. We continue to focus on our liquidity. As you can see on Slide 6 and 7, the company's core deposit base and overall liquidity position remained strong. The deposit base is diverse and granular. The average deposit account is $29,000, 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. We also experienced a modest build in the tangible common equity ratio and tangible book value per share.
Turning to asset quality. We recorded a credit loss provision of $5.3 million and a recovery of credit losses on unfunded commitments of $700,000, which is recognized in noninterest expense. Net charge-offs were $1.9 million, which represents an annualized rate of 6 basis points, and the ACL as a percentage of total loans held flat at 1.63%. Credit metrics are presented on Page 9.
Our criticized loans and nonperforming assets each improved quarter-over-quarter and past dues were relatively unchanged at 11 basis points of total loans. The improvement in nonperforming loans from the second quarter is driven by the resolution of 2 previously disclosed credits. Both were well collateralized and as anticipated, resulted in no loss.
While pleased with the underlying strength of our portfolio, we remain cautious about credit in the current environment. Our commitment to high underwriting standards remains, and we attempt to identify potential problems early in order to mitigate loss to the bank.
Moving on to profitability, beginning on Slide 10. Excluding the after-tax loss on the sale of securities in the second quarter, net income declined $4.4 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. However, as you can see on Slide 11, we successfully offset the pressures on our revenue with savings on the expense side such that the adjusted efficiency ratio remained flat on a linked-quarter basis.
Turning to Slide 12. Adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries was 3.37%, down 6 basis points from Q2. Although loan yields were up 15 basis points, deposit pricing pressures more than offset the increase in yield. The cost of total deposits increased 48 basis points to 1.98% for the quarter. Competitive pressures are expected to persist, and we believe funding costs will continue to increase in the short term. Kevin touched on the highlights within noninterest income and expense.
The diversification within our revenue streams and expense control were positives in the quarter. While the rate environment is a headwind, we remain committed to improving operating leverage and managing the expense base remains a priority.
I will now turn the call back over to Mitch.
Thank you, Jim. I am very proud of our team and the efforts made to produce the results so far in 2023. I will now turn the call over to the operator for questions.
[Operator Instructions] The first question will be from Michael Rose, Raymond James.
I just want to start on loans and the outlook. The growth has been, frankly, a little bit stronger than what we've seen from many of your peers and kind of across the industry. Can you just remind us again kind of where you stand in construction fund-ups? And why has the growth just generally been so strong in your eyes? And maybe as we think about next year, just given maybe a more cautious economic backdrop, what should we expect, both from what your customers are telling you? And then maybe just from your own views around credit, just being a little bit more cautious?
Let me start with the backdrop, I'll start with pipeline to production and then I'll ask David to talk a little specifically about construction which you mentioned. Just beginning with pipeline, kind of put in perspective where the moderation is continuing to occur both in pipeline and production now definitely touch on underwriting and pricing. But pipeline, we're beginning this quarter at $120 million in the 30-day pipeline. That compares to $135 million the prior quarter. So just as expected, what we've seen throughout this year, we continue to see some moderation quarter-to-quarter. That is driven by discipline in pricing relative to our ability to fund incrementally the next extension of credit. I would -- and of course, underwriting and then I would say demand.
With that said, we operate in some very good, vibrant, and as I mentioned in the opening comments, resilient markets. We continue to serve and grow relationships. And that's evidence from our growth in loans also in deposits this quarter. Just going back to production. Actually, production this quarter was $404 million. That's down slightly from $413 million in the prior quarter. That produced a net of $238 million or roughly 8% in annualized growth. And as I've mentioned on prior calls, really the [ governor ] on that net is payoffs. And what we saw this quarter, we saw payoffs pull back more like we saw in the first quarter of this year, we had $384 million, that compares to $370 million in Q1, but $455 million in Q2. So Q2 was a little elevated. That impacted our net performance in 2Q. We had about 6% versus the 8% this quarter.
Looking forward, and I would say expectations for this next quarter and is likely as we move into '24, one thing that we do know when we look at our production, we continue to see that from each of our markets, our regions, our business lines, they all continue to contribute in a meaningful way. To give you an example of that, that $400 million this prior quarter, 14% came from Tennessee and another 18% from Alabama and the Florida Panhandle; 19% from the Georgia, Central Florida; 16% from Mississippi; and the remaining 33% from the commercial and corporate business lines. And again, as I usually mentioned each quarter, equally important is the geographic distribution of those, is the loan types and the size of the credit and just the granularity that Jim referred to earlier in his remarks.
And again, we see that both on deposits and loans. But if you take the $404 million in production in Q3, 26% of that, talking about the granularity and types and product, 26% of that came from consumer, 1-4 family, short duration that we keep on our books. Another 28%, and we're very proud of this, and we've had a lot of success here in the past, is in small business and business banking, and that's credit less than $2.5 million. Another 13% in commercial credit is greater than $2.5 million, which will include C&I, owner-occupied, commercial real estate. And then that remaining 33% in our corporate banking group, larger C&I, commercial real estate, ABL, equipment finance, factoring operation, we've been very pleased with.
All to say, geographically and by type, very granular. Our average loan size of $250,000 for the total company. We just simply continue to hit on many different cylinders, and it's evidencing of our ability to prudently produce a diverse -- diversified portfolio, but certainly while remaining disciplined in our pricing and underwriting. But -- with that said, we remain optimistic about our ability going forward in this next quarter. David, do you want to comment specifically on construction?
Yes, sir. Thank you. Michael, this is David. Our construction and development bucket changed moderately over the quarter. It went from about 53% to 54%. That led to about $35 million change quarter-over-quarter, or about 15% of our loan growth. That kind of 54% is just not far off from where we would have seen. Historically, our construction and development bucket somewhere this time [indiscernible] we expect that number to be. So it's not out of line from an expectation standpoint.
I appreciate all the color. Great detail. Just as a separate follow-up. Expenses were down a little bit Q-on-Q and you guys have kind of talked about flattish. Any specific efforts or things that you're kind of working on? I assume some of it has to do with mortgage-related revenue being down a little bit, so incentive comp a little bit less. But anything that you guys are kind of working on the expense front? I know you've kind of talked about migrating the efficiency ratio back towards 60%. Just wanted to get an update there just given some of the revenue headwinds that are out there for the industry.
Michael, Kevin. So on the expenses, our focus really hasn't changed. If you just look at the expense categories where you saw the decrease, you can see occupancy and equipment, salaries and employee benefits, both of which comprise collectively, they're going to comprise 70%, 75% of our expenses. So that's where our focus is. In Q2, we did -- we do have the seasonality revenue -- mortgage revenue was down. So mortgage expenses, specifically mortgage commissions are down. So if you look at salaries and employee benefits line item, it's down $1.2 million, but that's not all mortgage. About $300,000 of that was expenses from the core bank. So roughly $900,000 of that is going to be attributable to mortgage, but there's also a day count differential there. If you add in the day count differential compared to Q2, our core salaries and employee -- our core bank or just non-mortgage salaries and employee benefit, it's going to be down another $500,000 just from a day differential. So there's real traction being made on our efforts to control and contain and reduce expenses.
As we look out, our focus is still going to be the same. We don't have an announced expense initiative. But we've announced multiple times that we're focusing on expenses, and I think you see that in our numbers. If you just look quarter-over-quarter, there's some seasonality to it. But our focus has been on reducing expenses. When it comes to the efficiency ratio, our attention is now focused on the revenue side of that. But we will continue to have an ongoing effort to reduce expenses. And again, we'll just -- we will just focus on salaries and employee benefits and occupancy and equipment. That is where our attention is going to be because that's where the majority of our expenses lie.
Next question will be from Catherine Mealor of KBW.
I wanted to ask on the margin and just see what you think -- what's your outlook for the margin into the next quarter and into next year. And really, maybe a big picture, just thought for the margin is how do you think about where and kind of potentially when the margins should bottom? And also how you're thinking about NII growth as we move into next year.
Catherine, this is Jim. So as you know, we think about margin or other profitability performance metric to really start with the balance sheet. I do want to see it the numbers, but I think we're very proud of how we've grown deposits here in the last couple of quarters. I think our growth in core deposits in Q3 was about 11% annualized. And so the balance sheet remains a focus. And certainly, everybody's focus was sharpened by the events in early March. And we, like others, leaned into wholesale funding. And since that time, we've tried to reduce our lines on those wholesale sources. And that remains a goal, and Federal Home Loan Bank were down to $100 million, and that will not only lower because we've got a very attractive rate on that $100 million or about 70 basis points.
And now the focus remains to lower that in some broker deposits. I think we reduced that a little over $300 million in the quarter, and our goal over the next few quarters to get that down to essentially 0. So I'd say that as a backdrop to margin because the balance sheet -- we will start with a focus there. And then as we think about margin and looking for a couple of comments, we do see continued pressures on the margin. I think as we look at Q4, my expectation is that the margin will continue to compress and probably a bit more than we saw Q2 to Q3, but less than the compression that we saw Q1 to Q2 in terms of margin. NII will sort of follow that trend, I guess. I mean, certainly, growth will help a bit, but I think NII directionally will follow what we were seeing the margin.
As it relates to looking forward to '24, we see some really encouraging signs, Catherine. It remains uncertain in an environment as you know. So sort of predicting where things might bottom is a tough thing. But one of the things that we were struck by in our quarter was the moderation in NIB decline. So we did see a decline in noninterest-bearing balances in the quarter, but it was meaningfully less than decline we saw from Q1 to Q2. So things like that give us hope that we'll see some stabilization in '24, but it remains too, I guess, uncertain to call when that might be.
Great. How about on loan repricing. I think the tailwind that we're all looking for, for '24 as we think about when it bottoms and when we start to -- how much of an increase we can see throughout '24. Is there any -- can you kind of talk about maybe the amount of loans -- fixed rate loans that you know are going to be repricing over the next year? And what kind of upside that might paint your margins?
So a couple of things. I think in terms of fixed rate loans and the repricing opportunity there, we've got about $200 million in Q4 that will reprice next. Those loans are roughly carrying out 5.40% or 5.45% rate. And then for the '24, I think it's a little over $600 million in loans and a slightly lower like 5.25% or 5.30%. So there is some repricing opportunity there. Another thing may be helpful, Catherine, I think in prior calls, we've talked about sort of giving you a monthly look, not just a quarter look but a monthly look. So I would tell you that if you look at loans repricing for the quarter. New and renew was 8.27, and for the month, it was 8.34. But the other side of that is what we just talked about in terms of the pressures, interest-bearing deposits for the quarter were 1.98%, for the month of September were 2.10%. So you can see those pressures still persist. But again, there are certainly some repricing opportunities in '24, and we look to capitalize on those.
Great. And maybe just one margin question and then I'll back out. You had -- I think in the past, you've talked about a 50% interest-bearing deposit beta over the cycle. Is that still about where you're targeting or you think you'll see?
We've tried to be conservative -- every time we're trying to be conservative that we still not hit the market exactly, Catherine. But right now, we're modeling a terminal beta in the mid-50s on interest-bearing deposits.
Okay. But that would be -- you would probably hit that more like mid '24 versus next quarter.
I think that's a reasonable guess, yes.
Next question will be from David Bishop of the Hovde Group.
I wanted to stick with that, the funding topic real quick. Specifically, just curious what your level -- absolute level of brokered deposits were. And maybe the cost of maturity deposits over the next couple of quarters?
Dave, this is Jim. So I think -- at quarter end, we were around $750 million, call it, in brokered deposits. And in Q4, I think we've got matured deposits of around $300 million in brokered. And I want to say that's carrying an average rate of like, call it, the 5.25%, 5.30%. And within the next 3 quarters, I would say roughly -- the vast majority of that $750 million will have the ability to pay off. So we're putting on new deposits at cost on low 4s. So we definitely benefit from that, plus the greater benefit as we see certainly -- we certainly want that income statement benefit, but what we really like is just having a balance sheet that here at some point in the next few quarters has virtually no reliance on alternative funding sources, and we're strictly -- we're back to being a strictly core funded bank.
Got it. And then from a funding perspective, I appreciate the slide in cash and securities to total assets down to about 17%. Do you think that's reaching a [ further ] a near-term target for that?
I think we're pretty close, David. Maybe there's another $100 million or so in there that will be used to fund -- help fund loan growth, but we're pretty close to where we want to be in terms of that cash level.
Got it. And then turning to credit quality. It looks like there was maybe some migration from the loans 90-days past due into the nonaccrual, maybe talk about maybe some of the sort of the "mix shift" that occurred from the credit quality front this quarter.
Sure. David, this is David. As a quarter for those, we didn't have loans that were 90 days past due last quarter that migrated and for just the identification of new loans. It was primarily comprised of just really 2 credits that made up that chain. One was a senior housing credit that continues to underperform. We believe, like that we're a very good loan to value position on that asset by virtue. They're taking an asset market for sale for a really good asset position. The other was mortgage property as we've seen with mortgage properties. Those values are still holding. So we believe we're in a good value position on those 2. So it is primarily related to those 2 properties.
[Operator Instructions] Next question is from Jordan Ghent of Stephens.
I just wanted to ask about capital and kind of what your guys' preference is. Capital continues to build and you have the buyback program in place. And just kind of what is your appetite for any share repurchases going forward?
Jordan, this is Jim. So as you noted, we did -- our program has just expired and the Board renewed the repurchase program. As you know, there was no activity in Q3. And I would say this that as our cap ratios do build, it gives us more flexibility with regards to how we might utilize that capital, and share repurchases are constant topic of conversation. But I would say that generally we're not leaning in that direction. We'll take it off the table. It's always something that you think about potential use. And our expectation is that we'll have other opportunities, at least we think that's very possible in the coming quarters that it feels like there's a lot going on in the industry, and we think that, that could present some opportunities for the company. And so maintaining and growing that capital in the near term is something that we like because we like the flexibility that, that gives us.
Perfect. And then maybe just kind of a follow-up to that. You said other opportunities. How do you weigh capital use between organic growth and M&A?
I think as we think about growth, organic growth is certainly preferred. And that's really how we've largely grown the company over the last few years. And as you saw in the numbers this quarter, we had really good growth, and it was very diverse and across all target base, so it was pretty much in line with what we've done in the last few quarters. So that's the preference and that's the priority. But as Mitch has said in the past, we remain open to looking at external growth, M&A growth. And of course, we've done some smaller nonbank acquisitions over the last 12 months or so. And we believe that as you look forward in the banking industry, we think that there's a growing likelihood in the year ahead or so that we could see more depository opportunities. And we're made open to those. And feel like that -- on the right terms that could be attractive for our shareholders.
This concludes question-and-answer session. Now I'd like to turn the conference back over to Mitch Waycaster for closing remarks.
Well, thank you, Nick, and thank each of you for joining the call today. In closing, our Renasant team wishes for [ Sarah Pope Davis ] the very best in her upcoming retirement. We next plan to participate in the Piper Sandler Conference on November 15 and 16.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.