Earnings Call Transcript - RNST Q2 2021

Operator, Operator

Good day and welcome to the Renasant Corporation 2021 Second Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson, Renasant Corporation. Please go ahead.

Kelly Hutcheson, Executive Management

Good morning and thank you for joining us for Renasant Corporation's 2021 second quarter 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. Although the markets in which we operate reopened over the first half of 2021 in connection with the rollout of the COVID-19 vaccines, the spread of the Delta variant reminds us that the impact of the pandemic and the federal, state, and local measures taken to arrest the virus may remain significant factors impacting our financial condition and operating results for the foreseeable future. Other 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. And now I will turn the call over to our President and Chief Executive Officer, Mitch Waycaster.

Mitch Waycaster, CEO

Thank you, Kelly, and good morning. We appreciate you joining the call today. Before Kevin and Jim discuss results for the second quarter, I want to offer comments on the 2021 results thus far and share our outlook for the second half of the year. Many of the trends present in the first quarter continued into these last three months. We experienced slightly improved credit metrics, saw more deposit inflows, and produced net loan growth. Earnings reflected a lower margin contribution, which was partially offset by gains elsewhere in the company. Looking forward, we are optimistic about loan growth continuing despite the headwinds of elevated payoffs. Our team is focused on efficiency gains from both revenue and expense initiatives that should be increasingly evident in future periods. We operate in a number of dynamic markets that will give us opportunities for new business. Renasant's emphasis on capital, asset quality, reserve levels, and considerable core deposit base remain central to how we manage the company. I will now turn the call over to Kevin.

Kevin Chapman, CFO

Thanks, Mitch. Our second quarter earnings were $41 million or $0.72 per diluted share. Several factors contributing to our earnings this quarter are worth highlighting. First, our net interest income held steady quarter-over-quarter. Core loan yields remain under pressure, but our ongoing deposit repricing efforts and fee income recognized upon PPP's loan forgiveness offset the dollar impact to net interest income. Second, as Mitch mentioned, the contribution from mortgage declined in the second quarter as interest rates rose and housing inventory remained scarce. However, our previously announced efficiency initiatives compensated for some portion of that decline and we expect the benefits from those and other initiatives to grow somewhat in upcoming quarters. We continue to see the benefits of expense initiatives announced in the fourth quarter and expect continued realization throughout the balance of the year. Our mobile and digital metrics continue to trend in a positive direction indicating a strong willingness of our customers to adopt new technology in this rapidly changing environment. Wrapping up the PPP program continues to be an important focus of our team. We are assisting our customers through the forgiveness phase of round one PPP loans with around $614 million having been forgiven during the second quarter. At quarter end, we have approximately $247 million of round one PPP loans remaining on our balance sheet. In the second quarter, we realized approximately $1.4 million in referral fees from our partner. I will now turn it over to Jim.

Jim Mabry, CFO

Thank you, Kevin. As we walk through the quarter's results, I will reference slides in the earnings deck. Starting with the balance sheet, footings grew about $400 million in the quarter. This was largely driven by an increase in deposits, as shown on Page 9. Since the beginning of the pandemic, deposits are up over 25% with much of that growth in non-interest bearing accounts. We invested some of the excess liquidity in our securities portfolio increasing the balance by $600 million from the previous quarter. As of June 30, we had approximately $1.6 billion in cash. We expect some of this liquidity will go into the securities portfolio in future periods. We experienced another quarter of loan growth with loans excluding PPP, up $75 million from the first quarter and representing an annualized loan growth of 3%. The capital ratios continued their build and provide the company with flexibility for loan growth, buybacks, or M&A opportunities. Credit quality metrics are shown on Pages 14 through 16. Past dues, classified and non-performing asset measures all remained relatively steady and net charge-offs dropped to three basis points of loans excluding PPP. COVID-related deferrals are now below 25 basis points with nearly all deferrals in our 1-4 Family Mortgage portfolio. Non-interest expenses with exclusions were down approximately $6.5 million for the quarter. We also received benefit from a one-time state tax credit investment. I will now turn the call back over to Mitch.

Mitch Waycaster, CEO

Thank you, Jim. In closing, while we have more to do, I am pleased with revenue and expense trends through the first six months and the prospect for more loan growth in the second half of 2021. Our balance sheet is well-positioned and affords us optionality as we look forward. Now, I will turn the call over to the operator for Q&A.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Kevin Fitzsimmons with D. A. Davidson. Please go ahead.

Kevin Fitzsimmons, Analyst

Maybe we can start with the mortgage segment. I believe we've discussed the potential for this in the past, noting the normalization trends we've observed. I'm curious if you could elaborate on your thoughts regarding when and at what level mortgage revenues might reach their lowest point. I understand that production remained relatively strong this quarter, but you've mentioned margin compression in the gain on sale, so any details on that would be helpful. Additionally, how are mortgage expenses performing? I'm assuming that most of the drop in salaries was linked to variable rate costs. I would appreciate a deeper insight into your views on the mortgage sector. Thank you.

Mitch Waycaster, CEO

Sure, Kevin. And as you mentioned, going through your question, mortgage remains a key part of our business. And while we saw many things that we expected this quarter, there are certainly positives as we look forward, but I'll ask Jim to expand on mortgage. Jim?

Jim Mabry, CFO

Kevin, good morning. As you mentioned, we are essentially returning to more normal conditions in the mortgage market. If you examine Q2 closely and consider our outlook for the second half of the year, I would expect that Q3 will show a slight decline in mortgage contributions if we continue the trends observed in the latter part of Q2. There are a few points I’d like to highlight regarding efficiency in the mortgage sector. Our efficiency ratio is in the upper 70s, which brings us back to pre-pandemic levels, while we were operating in the 50s for much of last year. One major factor to consider is inventory, which remains a significant constraint for growth, not just for us but for the industry as a whole. Overall, I believe we are close to reaching the lowest point for mortgages, barring any significant changes in the market.

Kevin Chapman, CFO

Hey Kevin. It's Kevin. I'd like to add a few comments regarding mortgage operations. We observed a significant return to normal. As you pointed out, this was anticipated. In terms of expenses, we noticed some variability related to mortgage operations. When we look at salaries and employee benefits, there was a decline of about $8 million to $8.5 million, with mortgage accounting for roughly half of that. We had strong production in Q2, reporting $1.5 billion, slightly down from $1.7 billion in previous quarters. However, the income line is impacted by margin compression. As Jim mentioned, we believe we are nearing stabilization. We are implementing measures in mortgage operations to reduce variable costs. Although mortgage performance may seem lower in recent quarters, it contributed $5.6 million in pre-tax income for the quarter, which is actually several million dollars more than Q2 of 2019. We acknowledge that mortgage may appear to be underperforming, but when looking at more typical periods, we see increases in both gross income and pre-tax income from the mortgage side.

Mitch Waycaster, CEO

Mitch here. I want to emphasize that as we discuss being opportunistic in hiring talent, as Jim and Kevin have mentioned, we will keep addressing expenses, including variable ones. We also see opportunities to continue recruiting talent for the mortgage team, where we have had success over time. Mortgage remains a core line of business for us. Looking ahead, as we reduce expenses, we will seek opportunities to grow that line of business.

Kevin Fitzsimmons, Analyst

Thank you for the detailed information. I have a quick follow-up regarding the loan growth excluding PPP, which was about 3% linked annualized. Mitch, you expressed optimism about future growth, but I noticed other banks reported more significant core loan growth this quarter. Based on your comments, it seems you faced more substantial challenges from pay-downs and pay-offs. Could you elaborate on the factors behind your optimism and the extent to which these pay-downs impacted your growth? Thank you.

Mitch Waycaster, CEO

Absolutely, your question is very relevant. I'll start by expressing optimism regarding our pipeline. As we conclude the second quarter and transition into the third quarter, our current pipeline stands at $261 million, an increase from $240 million at the start of the previous quarter and up from $229 million a year ago. We are observing a strong deal flow across all markets and business lines, which is evident in our production numbers. Specifically, we see increases of 13% in Tennessee, 10% in Alabama and the Florida Panhandle, 28% in the Georgia and Central Florida markets, 34% in Mississippi, and 16% in our corporate and commercial business lines. This $261 million pipeline is expected to generate about $78 million in non-purchase outstanding within the next 30 days, suggesting production will likely be in the range of $575 million to $625 million. In comparison, our production for the last quarter was $572 million, an increase from $534 million in the first quarter. We did experience elevated payoffs of just over $100 million in the previous quarter, while the average over the last four quarters has been just over $50 million. If payoffs had simply returned to the averages from the previous quarter, our net growth would have been significantly higher—7% instead of 3%, or 5% if adjusted to the average. The attractive pricing of our assets and strong market demand has led to some deals being executed earlier in the market, but we are not losing those clients. The increase in payoffs is notable, but it's important to return to our pipeline and production growth, as these factors contribute to our optimism. Our ability to recruit talent has also been strong, with seven new producers joining us this quarter. Therefore, our outlook remains positive regarding net loan growth.

Operator, Operator

The next question comes from Jennifer Demba with Truist Securities. Please go ahead.

Jennifer Demba, Analyst

I have two questions, first for Jim. Jim, could you provide more detail on the expense outlook for the next few quarters based on what Kevin mentioned regarding your efficiency and branch network initiatives that are still in progress?

Kevin Chapman, CFO

Yes, it's Kevin. I'll address that. Looking at the results, we saw a significant decline in expenses from last quarter, down about $7 million. Some of this is due to variability in the mortgage operations. However, within our core bank, we're still benefiting from two initiatives we announced: the early retirement program and branch consolidation. Since that announcement, we've identified additional branches that are in the process of consolidation, approximately five locations. Additionally, there are more cost savings expected from accountability measures that impacted salaries and employee benefits in Q2, with further realization anticipated in Q3 and Q4. Moving forward, we expect non-interest expenses to continue to decrease. Regarding the efficiency ratio, our reported rate is around 67% to 68%. If we normalize it by excluding mortgage figures, the Bank’s efficiency ratio is closer to 62% to 63%, which has remained stable over the past several quarters. Therefore, while the reported numbers may fluctuate due to mortgage activities, the Bank's efficiency ratios are consistent. With our expense management efforts and the momentum from our savings initiatives, we expect to see continued improvement in this area. It’s important to note that our focus isn't solely on expenses; we are also exploring avenues to enhance revenue.

Jennifer Demba, Analyst

Okay, thanks. My second question is on merger interest. There seems to be almost a frenzy going on in the industry Mitch, so I'd love to hear your updated thoughts on Renasant's interest in partnerships?

Mitch Waycaster, CEO

Yes, thank you, Jennifer. And we certainly continue to evaluate opportunities that drive shareholder value. We are remaining disciplined as we look at those opportunities. As always we begin with culture and business model and risk appetite and just making sure a line that exists. But to always answer that question are we better together. So as we have been opportunistic in the past and course for us that's certainly new talent. I've referred to that. I mentioned seven this last quarter, is actually up to 13 for the year. We continue to evaluate those opportunities and certainly we'll be doing that going forward.

Operator, Operator

The next question comes from Brad Milsaps with Piper Sandler. Please go ahead.

Brad Milsaps, Analyst

I want to start with the balance sheet. It appears that the period-end securities portfolio is approaching $2.2 billion, which is significantly above the average. You have a substantial amount of cash, which will likely increase as the PPP loans phase out. I'm curious about your approach to sizing the bond portfolio moving forward and the average rates of the new purchases being added to the books.

Jim Mabry, CFO

Yes, good morning, Brad. So, as you know we pronged about $600 million in the quarter in terms of growth in the securities portfolio and anticipate we'll continue to grow that portfolio, albeit maybe at a more moderate pace. And of that, we've got $1.6 billion in cash and I think we would sort of consider anything above $300 million to $400 million to be excess. The hope is that we've got loan growth that will continue to be present and will absorb some of that liquidity. In terms of the yield that we're putting that to work, it's roughly just above 1% and that's got a three or four year duration on it. So I think that's what we see in terms of liquidity. I mean, when we look at our balance sheet compared to peers, I think our investment portfolio is about 12% of earning assets and that would imply that if we're at peer levels that we'd have another $700 million or so in the securities portfolio.

Brad Milsaps, Analyst

Got it. That's helpful and then just back to the mortgage business, just kind of curious the amount of loans that you actually sold during the quarter, just kind of curious what the pull-through rate on the pipeline was. And can you refresh my memory, I know in terms of commissions, do you pay those based on the locked pipeline and then retract some of that depending upon what's sold or is that on actual loan sales?

Kevin Chapman, CFO

Yes, hey Brad, let me answer the last question first. No, we pay on actual units closed and sold. Now, we will accrue at the time of lock income and expense, but we don't actually pay until the loan is closed and sold. I'll need to follow-up quickly on the actual amount of what we sold. I don't have that right at my fingertips. Jim, I'm not sure if you have.

Jim Mabry, CFO

I don't.

Kevin Chapman, CFO

But Brad, we can follow-up with you on the amount that's actually sold.

Brad Milsaps, Analyst

Okay, great. And then maybe just a follow-on for Mitch, I think you mentioned new hires about seven in the quarter, just kind of curious, I know you've had voluntary retirement, you're looking for cost saves. What was kind of the net number of maybe new hires in the quarter versus maybe people? I know you're always sort of calling the bottom 5%, 10% or whatever. Just kind of curious what that net number might be?

Mitch Waycaster, CEO

Yes. So for the quarter, Brad, it's net down four. So we had 11 exits and to your point, most of those exits are driven around expectation and our discipline around the production that we expect. So the positive thing there is certainly that discipline remains. That's been true. If you look back at 2019, 2020, 2021, we've been very opportunistic with talent, particularly as we've added business lines as we've grown other lines of business, but it's certainly true in our core bank as well. So definitely opportunistic in hiring but the discipline is in place and the expectation of production.

Operator, Operator

The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose, Analyst

Hey, guys. Most of my questions have been asked and answered, but wanted to just touch on capital if I missed it. I know you guys have the buyback in place. You haven't really used any of it. I think it expires at the end of October. Any near term thoughts to using? And then just separately, I did see that you have the two series of debt that are coming due. Would the plan be to redeem and replace or just pay it down? Thanks.

Mitch Waycaster, CEO

Yes, good morning, Michael. Jim?

Jim Mabry, CFO

Sure. So, Michael, on the buybacks, certainly with bank equities having pulled back, the relative merits of a buyback have become more attractive. And you're correct, we did not have any buybacks in Q2 and none thus far in Q3, so no buybacks yet. But I do underscore they've become more attractive relatively speaking. And then in terms of the debt, you're right. We've got, I think July 1st was a $15 million piece of debt that was callable and then we've got another piece. I think it's $16 million in size at September 1 and both of those are at higher rates. And so I would anticipate that that's something that we will act on at some point.

Michael Rose, Analyst

That's helpful. Regarding the reserve situation, there have been significant reserve reversals this quarter along with negative provisions. Mitch, you've mentioned taking a more cautious and conservative approach. I assume that remains the strategy. Can you confirm that? Also, could you remind us what the day one post CECL reserve is and whether you believe you can return to that level over time? Thank you.

Mitch Waycaster, CEO

Yes, Michael, I'll make a comment. I will turn it over to Jim and of course, I reflected earlier on loan growth and certainly the prospects there. And I think those are good but at the same time as we continue to evaluate the reserve as we walk through the model.

Jim Mabry, CFO

Certainly. When examining the model, although there was no change in expenses or releases during the quarter, there was significant activity within it. Looking at the different components, you could see considerable movement. If there are no major changes in areas like loan growth or the economic landscape, the data suggests that we might see releases in the upcoming quarters. It appears that our model is functioning more effectively compared to our competitors, though the pace of releases may be somewhat slower. Therefore, I expect releases to occur in the next few quarters. As for day one, we were slightly under 1% on the ACL. We are not in a rush to return to that level, and ideally, like most, we prefer to grow into this allowance alongside loan growth. However, I do not expect us to return to day one reserves in the near future.

Operator, Operator

The next question comes from Matt Olney with Stephens. Please go ahead.

Matt Olney, Analyst

Want to circle back on the outlook for operating expenses. I believe, Kevin, you mentioned that we could see a continued decline of operating expenses. Can you just clarify if that includes or excludes that tax credit, amortization? I guess the question is kind of what's the baseline that you're assuming when you say it should decline from these levels?

Kevin Chapman, CFO

Thank you for your clarification. The line item for non-interest expenses has decreased by $7 million. However, if we exclude the tax benefit or tax amortization and consider the improvements in the effective tax rate, the actual expenses have decreased by $10 million. To address your question, I would say it's both. We still expect core non-interest expenses to decline, and this will also be reflected in the reported figures.

Matt Olney, Analyst

Got it, okay. Thank you. And then also going to ask about the core loan yields, I think we were down around 7 basis points if I take out the discount accretion. Any color on the new loan yield production that we saw in 2Q?

Jim Mabry, CFO

Sure, Matt. In the second quarter, new loan yields were approximately 3.90, compared to about 3.70 in the first quarter. Additionally, for loans maturing in the next 90 days, the yield on those loans is around 4.20.

Matt Olney, Analyst

Okay. Thanks for that Jim. And then last question for me is around deposits, I think interest-bearing deposits are now around 36 bps. How much more room do you guys have to bring that down from here?

Kevin Chapman, CFO

So, the cost of deposits in the quarter was 27 basis points, and it decreased to 24 basis points. Our goal is to bring that below 20 by the end of the year. There is approximately $1.6 billion in interest-bearing deposits that will reprice in the next 12 months, and those funds are currently at 90 basis points. The total cost of funds decreased from 38 to 34 basis points, and similar to the cost of deposits, we see further opportunities for improvement. We hope to reduce that to below 30 by year-end.

Operator, Operator

The next question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor, Analyst

Can you provide any insight into whether the decrease in mortgage revenue was due to a decline in the fair value of the large pipeline, or if it was primarily because, based on your comments, the origination volume was down but not significantly? I'm also interested in the performance of the pipeline in the linked quarter and whether that played a role in this situation. If it didn’t, does this suggest we could see further declines as the pipeline continues to normalize in the latter half of the year?

Kevin Chapman, CFO

I would say, Catherine, much as we said, I guess in answer to earlier question and certainly happy to get into more detail with you after the call, but I think generally we're pretty close to the trough in mortgage when you look at the results for Q2. And I think there is some downside. But we're pretty close to where a normal profitability outlook would be in Q3.

Mitch Waycaster, CEO

Yes, Catherine, I would add that the decline in gross mortgage income was primarily due to the lower margins on the $1.5 billion. As we move into future quarters, fluctuations in production and margins, particularly if there’s less production at lower margins, will lead to lower growth income. This quarter, however, represents a significant return to average performance that we experienced before the pandemic. It demonstrates the strength of our mortgage operations in managing accrual accounting while still achieving almost $6 million in profitability. Looking ahead, we expect to see more typical cyclicality in the mortgage sector, with Q2 and Q3 generally being stronger, while Q4 and Q1 may experience a downturn, which aligns with the seasonal slowdown in home buying. It seems we are gradually returning to normalcy, supported by some external factors like a slight decrease in interest rates and a growing number of refinancing opportunities. Additionally, housing inventories will play a crucial role in new home sales. While we aren’t completely back to normal, we consider Q2 to be a significant step toward resuming normal mortgage operations along with its customary cyclical patterns.

Catherine Mealor, Analyst

Right. And then as I think to what normal is, I look back to 2018, 2019 and total mortgage revenue was I think $50 million in 2018, $57 million in 2019 but there was the acquisition of the First Bank kind correspondent piece, so how much should we think about kind of adding on to revenue, just from that acquisition if we're trying to compare a normalized year?

Kevin Chapman, CFO

Yes, I believe that a good comparison is to look at the second quarter of 2019. In that period, we had approximately $15 million in gross revenue, whereas this quarter, it is around $20 million to $21 million. Our pre-tax income has nearly doubled during the same time frame. Therefore, 2019 serves as a solid reference for a more normalized operation, yet we are also operating more efficiently now. We have brought on new team members in both wholesale and other areas, which will contribute to growth in those sectors and enhance profitability.

Catherine Mealor, Analyst

Great, okay, that's really helpful. Thank you, Kevin. My last question is just can you remind us about how much you've got left in PPP fees and your current expectations for the consulting fee and other income as well.

Jim Mabry, CFO

So round one PPP there's about $4 million left and round two that program of course is terminated and we've recognized all the referral fees there in Q2.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Mitch Waycaster, CEO

Thank you, Tom and to each of you on today's call. We appreciate your time and your interest in Renasant Corporation. We look forward to speaking with you again soon. Thank you.

Operator, Operator

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