Renasant Corp
NYSE:RNST
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Renasant Corp
Earnings Call Analysis
Q4-2023 Analysis
Renasant Corp
The company reported fourth quarter earnings of $28.1 million, or $0.50 per diluted share. This includes an after-tax impairment charge of $15.7 million from selling part of their security portfolio, which generated $177 million in proceeds. Adjusting for this and other smaller one-time items, the earnings per share (EPS) would have been $0.76.
The company experienced solid loan growth and an increase in loan yields, resulting in a $7.4 million rise in loan interest income from the previous quarter. Core deposit growth was robust at $215 million, affirming the company's focus on managing funding costs amidst competitive pricing pressures.
Fourth quarter noninterest income encompassed one-time items, including a $19.4 million pretax impairment charge and gains from various financial activities. Adjusted for these items, noninterest income rose by $341,000 quarter-over-quarter, although the mortgage division faced declines in income, rate lock volume, and gain-on-sale margin.
The company's adjusted efficiency ratio, a measure of cost management, was 66.18% for the quarter. Despite some challenges with revenue headwinds and competitive pressures, they remain focused on improving operating leverage. Deposit costs are expected to rise in the near term, which could impact future earnings.
There's been a quarter-over-quarter improvement in criticized loans, offset by an uptick in past dues. Revenue pressures led to a $4.6 million drop in pre-provision net revenue after adjusting for one-time items. However, the net interest margin was slightly down due to these pressures and adjusted net interest margin stood at 3.29%, a decline of 6 basis points from the third quarter.
The company anticipates its interest-bearing beta to peak in the upper 50s during the year, suggesting some resistance to margin growth. Nonetheless, there is potential for modest margin expansion, especially if the rate environment remains stable. For tax purposes, investors should not use Q4's effective tax rate as a '24 proxy; instead, an expected range of 21% to 22% is more indicative of what's to come.
Approximately $700 million in fixed-rate loans will reprice in the current year, and the expected yield is predicted to be in the upper 7s to 8%, up from just under 6%. Credit quality has been notably strong and stable, and while the company doesn't intend to release reserves, they may use their provision for pursuing loan growth opportunities. The allowance for credit losses (ACL) is envisioned to decrease slightly as the year progresses.
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Good day, everybody, and welcome to the Renasant Corporation 2023 Fourth Quarter Earnings Conference Call and Webcast.
[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 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. 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 $0.50 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 to smaller onetime 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 we 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 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 onetime items, including the $19.4 million pretax 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 onetime 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 and a loan recovery agreement, which we assumed as part of the 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 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 alliance 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 2 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 onetime 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 noninterest 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.
[Operator Instructions]
And our first question today comes from Catherine Mealor with KBW.
[Operator Instructions]
Our next question comes from John Rodis with Janney.
Nice quarter.
John, thank you.
I hope you guys are doing well. Maybe, Jim, just to start out on the margin, down 3 basis points this quarter. Maybe your thoughts on -- do you think it's bottomed out? Or do you think maybe there's still a little bit more downside?
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, 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 '24, I think there is a case that the margin probably is close to bottom and could show some moderate upside in '24 if we have no cuts.
Okay. And then with cuts?
I mean cuts are going to weigh on that, John. So if we -- if you have -- let's say you've got -- you have 3 cuts and it's 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 along that time line, that you'd see some slight improvement in the margin would be something we would hope for.
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?
Yes, that's correct. There was a recovery. It was part of a relationship and acquired bank of ours had. And I really view that as likely onetime in nature. I mean there could be future recoveries, but I sort of view that as a onetime item.
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?
It's a good base to work off of as we talked about last quarter. We felt that Q4 and Q1 are going to be relatively flat. And 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.
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?
Yes. 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 impairment. I would say for '24, John, something in that 21% to 22% effective tax rate range would work.
Our next question comes from Catherine Mealor with KBW.
A follow-up to the margin question for you, Jim. Can you talk to us about the fixed rate pricing opportunity, and do you happen to know the amount of loans 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 a 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 on the liability side, there's a fair amount that would be priced here in the near term.
Great. Okay. And generally...
Catherine, just -- I'm sorry. I was just going to say, I was looking at my notes, it's $500 million in '25, Catherine, on the fixed rate loan side.
Okay. Great. And generally, that $700 million is going 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 [ at 8% in '21 ], 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 '24, 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 upper 7s, 8% would be a reasonable yield to look at for '24.
Okay. And 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, kind of cut the way on your margin, 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 the extent that we have a number of cuts in '24, that at least near term, I would think that's going to be a little bit of a headwind on margin.
Where we end up for the year? I don't know. But because there are 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 -- if we get cuts, when they happen, what the velocity and frequency of those are, but it's a little hard to predict.
That makes sense. And then maybe one on credit. Your credit has just been really strong and very stable charge-offs kind of stable, NPAs, stable classifieds. 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 relief for you, which would kind of be a tailwind to EPS estimates? Or you kind of fight as hard as you can just to kind of keep that more stable just in case? Just kind of curious, your thoughts on kind of provisioning year-over-year and outlook for credit.
Catherine, this is David. I don't think 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 forecast that way. So I would hesitate to think that there's going to be a release at some point in the near future. And we also know the '24 -- there's still probably going to 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, we'll probably see us stay fairly consistent with our methodology and just determine the impact of our provisioning based on the -- our loan portfolio holds up and how our loan growth is.
And Catherine, I'll 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, 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 '24 to assume that percentage would moderate downward.
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, it came down 2 basis points, of course, in Q4, but I think that's a reasonable outlook that we sit here a year from now that, that ACL percentage will be a little bit lower than it is now.
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.
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 15.
The conference has now concluded. Thank you, everybody, very much for attending today's presentation. You may now disconnect.