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Renasant Corp
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Good morning and welcome to Renasant Corp. First Quarter 2021 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. Please note that this event is being recorded.
Now, I'd like to turn the call over to Kelly Hutcheson, Renasant Corp. Please go ahead.
Good morning and thank you for joining us for Renasant Corporation's 2021 first 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.
Even while conditions in our footprint and across the country appear to be improving as COVID-19 vaccines are administered to more people, the impact of the pandemic and the federal state and local measures taken to arrest the virus, as well as all of the follow-on effects from this pandemic remain significant factors likely to impact our future financial condition and operating results.
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 and market data tab.
Furthermore, the COVID-19 pandemic has magnified and likely will continue to magnify the impact of these factors on us. 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.
Thank you, Kelly and good morning. We appreciate you joining the call today. Before Kevin and Jim discuss results for the first quarter, I will offer observations on the quarter and our outlook for the balance of the year. First quarter results represent a good start to the year. The quarter was marked by stable credit metrics, a significant increase in deposits, slight net loan growth, and strong reported net income.
Performance in the quarter reflects contributions across all of our business lines and markets. We continue to see signs of improving economic activity throughout our region. Our hope is that this activity begins to spur additional loan demand in the second half of the year. At Renasant, we talk often about one team going to market as one bank. Throughout the pandemic, we have remained true to that approach in serving our customers.
I believe our company has grown its reputation as a financial service provider of choice in these challenging times. We also remain committed to core principles, which emphasize core funding, asset quality, and capital strength.
I will now turn the call over to Kevin.
Thanks Mitch. Our first quarter earnings were $58 million or $1.02 per diluted share. Several factors contributed to the first quarter’s EPS. First, our mortgage division experienced another strong quarter in production. We fully recovered all impairment charges that we had recognized in previous quarters. Second, net interest income improved as a result of our ongoing deposit repricing efforts and PPP fee income recognized upon loan forgiveness. Last, our strong and stable asset quality metrics coupled with an improved economic forecast resulted in additional credit provision expense this quarter being unnecessary.
Efficiency continues to be top of mind, and in the first quarter of 2021, we began to see the positive effects of two initiatives we introduced in the previous quarter aimed toward cost containment. Savings from our voluntary early retirement program are tracking according to our plan, and we completed the closure of six branches in early April. We still anticipate that these efforts will result in annual cost savings of approximately $9 million with around 75% of those savings realized during 2021.
Our work on efficiency is not complete and we continue to evaluate our operating model and the profitability of our branch network, and while short-term gains are often attractive, our efforts in this area are deliberate. And we consider the long-term impact of any decision before moving forward by focusing on balance sheet growth, stabilizing margin, leveraging our other lines of business to generate additional fee income and reducing excess costs, we believe our efficiency goals can be attained.
With vaccines becoming more broadly available and virus cases declining from the winter peak, we are seeing more economic activity in many markets throughout our footprint. Still our digital and mobile metrics are trending in a positive direction. This affirms our belief that customer behavior continues to evolve and expectations for quicker and more convenient access to banking services will continue to grow stronger rather than fade with the pandemic.
We are focused on innovation and seek investments that provide our customers with the technology and security that they've come to expect in this day and age. The Paycheck Protection Program continues to be an important focus of our team. We are assisting our customers to the forgiveness phase of round PPP loans with around $268 million having been forgiven during the first quarter. We have approximately $861 million of round one PPP loans remaining on our balance sheet.
We entered into a referral relationship with another firm to utilize its technology platform to originate round two PPP loans for our customers. This arrangement allows our relationship managers to focus on traditional loan growth and serving our customers through round one PPP forgiveness, while ensuring we continue to meet the needs of our customers, as they operate through the lasting effects of the pandemic. In the first quarter, we realized approximately $2.3 million in referral fees from our partners.
And now, I'll turn it over to Jim.
Thank you, Kevin. As we walk through the quarter’s results, I will reference slides from the earnings deck. Starting with the balance sheet, [footings] grew about 700 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 were up about 20%, and much of that growth has been a non-interest bearing accounts.
Loans, excluding PPP were essentially flat for the quarter, which together with a deposit growth brought our average loan to deposit ratio to 88%. There were $861 million in PPP loans outstanding at quarter-end. And while the pace of forgiveness has been slower than we anticipated, we expect the process to accelerate over the next few quarters.
During the quarter, capital ratios continued their build as seen on Page 12 and provide the company with flexibility for possible loan growth, buybacks, or M&A opportunities. In the quarter, we did not incur a credit provision expense and the ACL as a percentage of loans ex-PPP moved down from 1.80% to 1.76%. Credit quality metrics are shown on Pages 14 through 17. Past dues, classified, and non-performing asset measures all remained relatively steady.
Net charge-offs for the quarter were approximately $3 million. COVID-related deferrals are now below 1%. Net interest income was up slightly and was aided by the recognition of a $2 million recovery of a previously charged-off purchased loan. PPP revenue was just under $11 million. Of the PPP income, accelerated recognition of deferred fees represented $4.6 million and we have approximately $11 million in remaining deferred fees to be recognized.
Our core margin, which excludes purchase accounting accretion in interest recoveries was down 1 basis point from Q4 and after also excluding the impact from PPP was down approximately 10 basis points. Excess cash weighed on the margin about 20 basis points in the quarter. Non-interest income benefited from another strong mortgage quarter that included the write-up of our MSR asset by $13 million.
We also recognized $1.4 million of securities gains and fee income categories generally exhibited increases as well. Non-interest expenses with exclusions were approximately $3 million for the quarter. Most of the increase was driven by an increase in mortgage compensation expense as a result of higher Q1 production.
As Kevin mentioned, we also began to see the benefits of expense initiatives announced in Q4 and expect continued realization throughout the balance of the year.
I will now turn the call back over to Mitch.
Thank you, Jim. In closing, we experienced a strong start to 2021 and we commend the drive and determination of all of our team members, without which we wouldn't have earned this success. We remain committed to the safety and security of our employees to meeting the needs of our clients and to being a good citizen in our communities knowing that staying true to our core values will be long-term value for our shareholders.
Now, we'll turn the call over to the operator for Q&A.
[Operator Instructions] First question comes from Brad Milsaps of Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Brad.
Hey, Mitch, thanks for taking the questions. I was curious if you maybe, just kind of talk a little bit about the, you know, kind of loan growth environment, you know, kind of, you know, what you're seeing, kind of what your expectations are, you know, for the balance of the year, and importantly, you know, kind of where are new loans coming on the books, kind of relative to the current book yield?
Absolutely. Happy to do that Brad. Let me start with our 30-day pipeline. And then I'll reflect on the production for the quarter just ended and kind of how things look going forward. So, we began this quarter with the pipeline of 240 million. That compares to 238 for the prior quarter. So, we continue to see and I would say considering being early in 2Q a good, but I would continue to describe a cautiously optimistic deal flow and pipeline. The good thing, we continue to see that across all of our markets and business lines. If I break that down, by market, 12% would be in Tennessee, 13% in Alabama, the Florida Panhandle, 22% in Georgia, in Central Florida, 19% in Mississippi, and 34% in our corporate commercial business line.
So, just looking at the you know looking forward at this point based on that pipeline, that should result in approximately 72 million growth and non-purchase outstanding within 30 days. To your question, the current pipeline indicates, excuse me, production of about, I would say, 575 million to 625 range in the coming quarter. So, we continue to expect positive loan growth in 2Q. You know, looking forward until the resolution of the pandemic is more defined it remains difficult to give guidance.
I will say that, you know, hopefully with the stabilization of cases, the continued development in vaccines, Kevin referred to that in opening remarks. Hopefully, we'll continue the positive momentum and the economic activity that we see. One thing that we certainly feel good about is our markets and our talent. And, like I say, we continue to see whether, you know, you reflect on the production.
We have 534 million production past quarter, and if I look at that by region, it’s reflective of our pipeline. We continue to see that across the various markets in the business line, as well, both from existing talent, and the new talent that we've invested in, in the past number of quarters. Again, that was close to 20% of our production.
So again, feel good about talent market, and just the optimistic tone that we continue to hear from client base.
Thanks, Mitch and just in terms of rates on new loans, and then just maybe, as my follow up, I think, I heard Kevin mentioned you guys still feel good about the cost savings that you outlined last quarter. I'm just curious if there's any update on, you know any future, you know, expense savings is maybe you fight a little bit, you know, tougher mortgage comps, as you get through 2021? Or is the, kind of the 9 million the number we need to kind of speak about, you know over the near term? Thank you.
Sure. I'll ask Jim to comment on the pricing and maybe mortgage and then Kevin can circle back from the expense base question. Jim?
Sure. Brad in terms of production and current yield, saw current core yield ex-accretable yield and ex-PPPs right about 4%. I think it's 401 or 402. And if you look at the last few quarters, and I'll start with Q1 2020, this will give you a sense of what production is looking like in terms of which yield. Go back to Q1 2020; we were 436, 384 in Q2, 376, 385 in Q4 and 370 in Q1. Kevin, if you want to pick up on his second part there?
Sure. Be glad to. Good morning, Brad. Just on the expenses, I think Jim laid out in his comments where we are, as far as achieving the expense size we announced and the two initiatives we announced in Q4. As we look at [further call says], there's still several options on the table for us as we move forward. Just on the branch network, we continue to evaluate the branch network.
We have a couple of items, a couple of action items that will occur in Q2 and Q3 where we're looking at taking a couple of closely located branches and consolidating them into one. We have the potential for three instances of that where we take two to three branches and consolidate them into one.
Long-term, we'll continue to evaluate not only the branch network, but just our staffing models. And look for ways to be cognizant of expense save. On the revenue side, would highlight a couple of things just in the numbers they may not have stuck out, but just on the non interest income. A couple of things that we think are notable. One is, we saw an uptick in service charges. And that's an uptick when we got another round of liquidity from stimulus checks, and so that went counterintuitive that we actually saw the uptake.
So, we're starting to see some of our other fee income come back to us. That really declined significantly in 2020. The other thing I'd highlight is our fees and commissions. They're up $300,000 on a linked-quarter basis. And so, as we look at our efficiency, and as we look at, you know, the potential headwinds in mortgage in later years, some of other non-interest income lines we expect to kick in as well as the expense saving initiatives to help with the efficiency.
Thank you. Next question comes from Jennifer Demba of Truist Securities. Please go ahead.
Thank you. Can you hear me?
Yes. Good morning, Jennifer.
Good morning. Question on Jim mentioned acquisition interest in his monologue, just curious, how are you thinking about that right now. There has been an uptick in activity over the past few months, and how you think about it, when you look at buyer’s price reactions over the short-term? How do you think about that when you evaluate pricing on a deal or whether you're going to do a deal at all? Thanks.
Thank you, Jennifer. And let me start by saying as we have consistently done in our past, we remain opportunistic. So, I mentioned talent when I was talking about loan production, we added – and I'm going to circle back particularly the M&A to your question, but we added six additional producers in Q1. In some cases, certainly that's new markets, but it’s certainly strategic partners to your question, and we continue to evaluate opportunities that drive shareholder value.
And relative to how we get there, we always begin with culture and business model and risk appetite. And just making sure alignment exists as you're considering price, and you know all of the things that are considerations that would go into that transaction, but really all to answer the question, are we better together, and, you know, we see those opportunities, we continue to evaluate those opportunities.
Okay. Thank you very much.
Thank you.
Thank you. The next question is from Kevin Fitzsimmons with D. A. Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, Kevin.
Hey, on that topic on M&A. There's a number of large bank acquisitions that are either pending or recently closed that are going on in or around your footprint, and I'm just curious, if you view those as potential opportunities for gaining talent, gaining business, or whether, you know, it's not necessarily going to be a big tailwind for you.
Yeah. So, Kevin, good question. Of course, we've had this discussion in the past and as we have seen in the past, maybe not specific to those that were recently announced, but I think as the industry in the industry certainly disruption, in many cases proves our opportunities. But typically, that comes from just relationships with people maybe already in the company conversations that have been continuing for some length of time. And then in some cases, that change causes people possibly to make, you know, make a choice relative to their employment.
So, the main thing we do here is, you know we certainly have good talent, and we continue to have those conversations. As I just mentioned, we had six new producers join in the first quarter. So, as we do consistently, we look for the opportunity to have those and to your point sometimes those changes in the industry, you know, result in those conversations may be picking up or somebody making a decision. So, we do see it as a potential opportunity.
Okay, thanks, Mitch. Just maybe, you know, obviously, from the whole group, we're seeing this quarter the drag of excess liquidity and what that means to the margin, and perhaps even getting larger, right with stimulus checks, but I'm just curious how philosophically how you're looking at that excess liquidity? It looks like you have stepped up securities, purchases and your asset base, but I'm not sure where that is right now, relative to your comfort level? And at the same time, if you think loan demand and growth is going to pick up, then maybe you feel you can put some of that cash that sticks around to work that way, but just curious, like, is it, you know, are there still levers you can pull to offset the drag of that on dollars of NII or is it just a matter of waiting out this period? Thanks.
Thank you, Kevin. And I'll let Jim respond to the liquidity and putting it to work.
Good morning, Kevin. And, you know, I think you sort of alluded to the answer at the end to your question, but a couple of observations. So that, you know, the deposits have been stickier, I think, then maybe all of us thought going into this. And the deposit growth numbers we saw in Q1, we continue to see, you know, growth early in Q2. So, at this point, it doesn't seem to be abating in terms of that liquidity challenge. Our thoughts on deploying [net liquidities], we want to take up, sort of a thoughtful and balanced approach.
We're not going to put all that liquidity to work, you know in one quarter. And we also don't know the behavior of those deposits and how they're going to behave in future quarters. So, you know, the hope is that as we get to the second half of the year, we'll start to see increases and loans and that'll absorb that liquidity. You know, we clearly don't know. I’d say the other thing is that while as you point out, it does weigh on the margin.
We're also focused on net interest income and the goal there to try to keep that as steady as possible and so it's, yeah margin is definitely a focus, but we're also thinking about the dollars. So, we don't have a silver bullet as it relates to this, but I think what you're going to see from us is probably some continued build in the securities book, but not dramatic.
Alright, Jim, great, thanks. Thanks very much.
Thank you, Kevin.
Next question comes from Catherine Mealor of KBW. Please go ahead.
Thank you. Good morning.
Good morning, Catherine.
Just a question on mortgage and your outlook for mortgage revenue in the back half of this here, and maybe also an update on how you think about algorithm mortgage efficiency [can turn to]?
Yeah, sure. Good morning. In terms of mortgage, I guess a couple of thoughts. I mean, we had a good quarter there. But we're mindful of what's going on in that business and our expectations are that it certainly is not going to be what it was in 2020. And that in the, you know, upcoming quarters of 2021, it's going to continue to fall off and not be the tailwind that it was in 2020. And I think along those lines, this is something obviously, that we and others anticipate as we went into the year.
So, we're not, if things do turn around, they're great, but we're not counting on that. And we're thinking about other ways to try to replace that income, and the drag on efficiency. So, whether it's other revenue things, or, as Kevin talked about other expense initiatives, but you know, with that mortgage, you know, the profitability is, you know, not going to be probably what it was in 2020. So, we'll see that gain on [sale margin] decline, and the efficiency ratio go up, which will be a drag on overall efficiency.
So, we'll see, inventory is the biggest, I think the biggest issue there. And as you know, there's just not a lot of inventory out there. And I think, when you talk to our mortgage bankers, that's the thing they're looking for as to see some improvement there, because that would certainly drive volume, and we're really a purchase shop. And that's, you know, what we're hoping for as we get into the second half of the year.
That makes sense. Okay. And then maybe just on the reserve, there's a lot of talk about reserve levels heading back to, kind of the day one CECL number, how do you think about that path where you think Renasant ACL ratio eventually bottoms?
Thank you, Catherine. Jim, you want to comment?
Sure. So, as you saw, we didn't have an expense in Q1. And we'll see what the data shows for the ensuing quarters, but mentally, again, I think like we've been in prior quarters and probably like others, we hope that we can absorb some of that cushion, if you will through long growth. And I think the other thing that weighs on us is, we're still in a pandemic. We're still in uncertain times. And we're not going to be – we don't want to be in a hurry to see that allowance go down. And we, I think we started when we adopted CECL, we were a touch below 1% day one. And I don't think that's – I don't see us getting back to that level anytime soon. Just, we'll see what the model yields, but just mentally, I don't think that's something we're going to be comfortable with. So, we're – I don't know what that number is. And we'll see what that data yields, but I think as we go [through the year], we're really hoping for that long growth, to absorb that allowance. And so, again, I don't think we're going to be – we're probably not – we're not anxious to release reserves, I guess the best way to say it.
Got it. Kind of makes sense. All right. Well, thank you.
Thank you, Catherine.
[Operator Instructions] Next question comes from Matt Olney of Stephens. Please go ahead.
Hey, thanks. Good morning guys.
Good morning, Matt.
I want to circle back on the mortgage discussion, and you guys give some good disclosures on Slide 23 of your presentation. I was surprised that locked volume increased from 4Q 2020 to 1Q 2021, looks like it was around 20% or so, any different strategy with respect to your more channels in the first quarter? Just trying to appreciate why that increased. Thanks.
Hey Matt, I don't know that there was anything that was different about the way we did business from Q4 to Q1. We did see that volume grow as you point out. It came at, you know a smaller margin, but there was, you know, nothing that we did dramatically different in pursuing the business that we got in Q1. Kevin, I don't know if there are any thoughts you want to add to that?
No. Again, I don't think there's anything that we did differently. We do continue to look at opportunities for new hires. We do have multiple channels. As you can see, wholesale picked up a little bit. So, I don't – I'm not sure there's anything in particular other than just continuing to be in markets where we see a significant amount of in-bound migration. If you look at the states that we operate in, within our mortgage group, there is above average in-bound migration in those states. And so, it may just be the fact that the markets we're in are just providing more opportunity. And we expect that trend to continue.
We expect in-bound migration in those states to continue. So that will be a tailwind for us as we look out in the future on mortgage. As Jim mentioned, the constraints supply its inventory. Outside of that, we still remain optimistic about our outlook on mortgage.
Thanks for that. And I hopped on the call a few minutes late, so you may have disclosed this, but do you have what the – within mortgage what the originations and sales volumes were in the first quarter?
We've got the – the locked volume, of course is on Page 23. The other data, I have to get back to you on.
Okay, that's fine. And then just, largely just gain on sale margins in the first quarter, I think some of your peers talked about additional pressure on those margins later in the quarter. Did you see any of this pressure, just any thoughts on margins from here? Thanks.
We did see that. And if you were to look at that, if you're looking at the Q1 by month, you would see exactly what you talked about, in terms of declines in the margins from January to February, February to March. So, you know, we'll see what the year holds, but yes, we're – I think we're seeing the same thing as others are, and our expectation is that's going to continue, absent some change in the right environment.
Okay. And then outside of mortgage, but sticking with fees, I think other fees were still a little elevated this quarter, I'm showing around $10 million. I think it was running in that $3 million to $4 million per quarter range. I see you guys disclosed around $2 million of fees from referrals around PPP, anything else in the first quarter, we should think about with respect to fees within other?
I don't know that anything sticks out. I mean, as Kevin mentioned in his comments earlier, there was – it was broad based. I don't know that there's any one category that sticks out. PPP, you mentioned, you pointed the 2.3 million in PPP.
Matt, would highlight one other thing, and it's a normal occurrence in Q1, and that is in our insurance company. We have some contingency income. It's a one-time item – not a one-time item, it occurs once a year, typically in March in April. So, if you look at year-over-year, Q1 to Q1, the impact isn't as drastic. But if you look at Q4 to Q1, there's a pretty significant swing. And that's upwards of $750,000 that we recognize in Q1 in contingency income. And that's, again, normal recurring, coming out of our insurance company, but it typically happens and the majority of it happens in Q1 of each year.
Okay. And then on the PPP fees, a $2.3 million and other, could we see additional referral fees like that in the future or is it just a one-time benefit from the originations that you got in 1Q?
The way we're tracking, I would expect that Q2 would look similar to Q1. And in terms of round two, we'll see how it plays out from there. But as we look at Q2, I would think you'd see a similar impact on earnings in Q2.
And to clarify, I'm talking about fee income with respect to the 2.3 million, not the PPP fees that are within net interest income, is that same thing you're talking about Jim?
Yes, that's correct. I'm referring to, sort of round two of PPP in the fee income, we're getting off of that. Correct.
Okay. And is there a tail on that that could go beyond 2Q or once the program is shutdown, presumably here in a few weeks and then there wouldn't be a tail beyond that?
I think likely after Q2, you would not see meaningful contribution from round two PPP in our fee income.
Okay. That's all from me. Thank you, guys.
Thank you, Matt.
This concludes our question-and-answer session. Now, I would like to turn the conference back over to Mitch Waycaster for closing remarks. Please go ahead.
Thank you, [Nick]. And we appreciate each of your time, your interest in Renasant Corporation. We look forward to speaking with you again soon and look forward to participating in the Gulf South Bank Conference on May 3, and the D.A. Davidson Annual Financial Institutions Conference on the 6th. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.