Renasant Corp

NYSE:RNST

Earnings Call Transcript 2020-Q2

[Operator]

Good day and welcome to the Renasant Corporation 2020 Second Quarter Earnings Conference 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. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Kelly Hutcheson of Renasant Corporation. Please go ahead.

[Kelly Hutcheson, IR]

Thanks Allison. Good morning and thank you for joining us for Renasant Corporation's 2020 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 risks and uncertainties. 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.

Obviously, the continuing impact of the COVID-19 pandemic, the federal, state and local measures taken to arrest the virus, as well as all of the follow-on effects from this pandemic situation are the most significant factors that will 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, renasant.com under the Investor Relations tab in the News & Market Data section.

Furthermore, the COVID-19 pandemic has magnified and likely will continue to magnify the impacts 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 may be 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'll turn the call over to Renasant Corporation, Executive Chairman, Robin McGraw.

[Robin McGraw, Executive Chairman]

Thank you, Kelly. Good morning everyone and thank you for joining us today. The second quarter marked our first full quarter of operating during the pandemic. Later in our prepared remarks, we'll discuss in greater detail how the pandemic has affected our operations. But it is important to first highlight the unity of our team and our response to meet the needs of our clients and our communities. The selfless efforts by our entire team at every level and across our footprint to support not only our clients, but also one another as the virus spread throughout our communities, it has been truly remarkable.

Our success this quarter is directly attributable to the camps our hard work and dedication of our team and we commend their service and their loyalty to the company and our communities. There is no doubt the COVID-19 outbreak had a material impact on our second quarter results. Net income for the quarter was $20.1 million, which represents basic and diluted earnings per share of $0.36. Our net income included $5 million in after-tax expense specifically attributable to the pandemic. These expenses reduced our diluted EPS by $0.09.

Furthermore, because we cannot accurately predict the depth and length of the economic impact resulting from the pandemic and the government's response to it, during the second quarter, we recorded an additional $26.9 million in provision for credit losses and another $20.6 million to our reserve for unfunded commitments.

On a year-to-date basis, we have recorded $53.3 million of provision for credit losses and added $6 million to our reserve of unfunded commitments. In addition to the impact of our COVID-19 related expenses and our enhanced provision, we recorded a negative valuation adjustment to our mortgage servicing rights of $4 million on an after-tax basis, which reduced our diluted EPS by $0.07.

Excluding these items, our diluted EPS for the quarter was $0.52. Looking through the impact of the COVID-19 pandemic and these other items in our results, we had a solid second quarter and our results not only highlighted the diversity of our revenue streams, but also reflect our commitment to serve our clients and our communities even through these turbulent times.

Despite a compressed timeframe, our team designed and executed a process that allowed us to originate a $1.3 billion in loans and the paycheck protection program. And through the end of last week we have processed over 127,000 economic impact payments. We believe Renasant played an instrumental role in providing the capital and liquidity required by existing clients in a time of great need and we hope that we've gained the trust and respect of our new clients as a result of our hard work and diligence with the government stimulus rollout.

Our regulatory capital ratio strengthened quarter-over-quarter and exceeded the minimal requirements to be considered well capitalized. I'll remind you that we suspended our stock repurchase program during the first quarter of 2020. Although there is $5.5 million of repurchase availability under the program, we currently do not foresee a situation whether the program would be restarted before its expiration in October 2020.

We are committed to maintaining a strong capital liquidity position while also serving the needs of each of our shareholders during these uncertain times. We believe our continued efforts to effectively manage the growth and profitability of our core business in light of the economic problems [ph] we face will continue to preserve shareholder value.

Now, I'll turn the call over to our President and Chief Executive Officer, Mitch Waycaster to discuss in greater detail this quarter's financial results and the impact of COVID-19 pandemic. Mitch?

[Mitch Waycaster, President and CEO]

Thank you, Robin. I'll echo Robin's remarks on the efforts of our team in response to the pandemic. Our employees are advocates for our company. They take personal pride in the company and champion our products and services. Our employees are exceptional. They execute with excellence and go above and beyond with every interaction. These past several months have been no different. As one team, our employees across our entire footprint and in the back office have provided critical services to our clients, many of whom are experiencing the economic impact of the pandemic. Our employees' efforts over these past several months have been truly extraordinary and we applaud their service and commitment.

As Robin mentioned we have been an active participant in the paycheck protection program originating over $1.3 billion in loans to help provide relief to small businesses thus far and we continue to make PPP loans to this day. Our approach has been hot touch and intentional, which we believe is the driver behind our success. Our reputation quality service garnered positive media attention and we originated 30% of our loans [ph] by dollar value to new clients.

Through the date of this call we have originated over 11,000 loans and generated more than $45 million in gross fees. Renasant has remained open for business throughout the pandemic. Although we closed our branch lobbies to regular traffic on March 20, all of which remain closed, we believe our clients have not experienced any meaningful interruptions in service. All drive-throughs at our branches remain open and our mobile and online banking products provide alternative means for our clients to satisfy many of their banking needs.

We are a community bank when it comes to customer service, but we also have a robust fleet of digital and online products that in our view rivals any of our larger competitors. And we believe that this has set us apart and gives us a competitive advantage in this environment. We continue to monitor the spread of virus throughout our communities and will consider the advice of medical and regulatory experts prior to reopening our branch lobbies.

The health and well-being of our associates and our client is our highest priority and will drive our decision making with respect to the reopening of our branch lobbies. Although much of our time and effort in recent months have been focused on our response to the pandemic, we have not lost sight of our strategic plan and growth of our core operations. We closed the quarter with total assets of $14.9 billion as compared to $13.4 billion at December 31, 2019. Total loans held for investment were $11 billion at the end of the quarter as compared to $9.7 billion at December 31 2019.

Including our loan balance, included in our loan balance at the end of the quarter is $1.28 billion in PPP loans. We have utilized our own balance sheet liquidity for our funding needs, which is a testament to our team's focus on growing a stable source of low-cost deposits. Total deposits were up $1.7 billion from the previous year with growth in non-interest bearing deposits accounting for $1.3 billion of the increase.

Although it is difficult to specifically link deposit dollars to PPP loan proceeds, we estimate that in excess of $600 million of our growth in non-interest bearing deposits is attributable to PPP loans with the remainder of the increase generated from ERP deposits and core growth. Regardless of the interest rate environment, non-interest bearing deposits enhanced the core profitability of the company and they will continue to be the preferred source of funding for our growth.

While the long-term economic impacts from the pandemic are still very uncertain, we remain committed to meeting the needs of our clients and staying nimble in this rapidly changing environment. We remain focused on prudently managing our balance sheet as the pandemic and its economic effects evolve and we remain committed to profitable growth without sacrificing credit quality.

I mentioned earlier an exceptional team. We announced yesterday another exceptional leader will join our management team. Effective August 1, Jim Mabry will join Renasant Corporation and Bank as its CFO. Jim brings a wealth of financial experience, knowledge of our markets, and familiarity with our company. We are fortunate to have him join our outstanding management team.

Kevin Chapman has served our company well as CFO over the past two years as both CFO and COO. As Jim joins our company, this will allow Kevin to expand his role and strategic leadership devoting his full attention to Chief Operating Officer. The company has made great strides in refining and enhancing our internal and customer facing experiences under Kevin's strategic leadership.

Now I'll turn the call over to Kevin for additional discussion of our financial results. Kevin?

[Kevin Chapman, Chief Operating and Financial Officer]

Thank you, Mitch, and good morning everyone. Let me first start by echoing Mitch's remarks about Jim and as a growing financial institution we believe Jim is the right person to help us continue to execute on our strategic plan. We are excited to welcome Jim and happy he will head our talented finance team. He brings great leadership and extensive background and a passion for mentoring.

And talking about our numbers, for the second quarter we reported net interest income of approximately $106 million which was down $800,000 quarter-over-quarter. Net interest income attributable to PPP loans was just under $6 million for the quarter. Accretable yield recognized on purchased loans and interest income collected on problem loans was down $600,000 from the prior quarter.

Our reported net interest margin was 338% for the first quarter of 2020 as compared to 375 for the first quarter. Core margin as we have historically defined it, which explains our credible yield on purchase loans and income collected on problem loans decreased 33 basis points on a linked quarter basis. Include in this core margin decline is the effect of PPP loans and excess liquidity, both of which laid on margin during Q2. PPP loans negatively impacted margin by 5 basis points during the quarter and excess on balance sheet liquidity impacted margin by another 15 basis points. So combined both of the affected core margin 20 basis points.

In order to offset the effect of the Fed's rate cuts on our core loan yields, we took aggressive action to reduce interest bearing deposit rates during the first half of the year. Our cost of total deposits were 49 basis points for the second quarter a 23 basis point decline quarter-over-quarter. With over $2 billion of time deposits, public funds and money market commitment terms maturing over the next 8 quarters at an average rate of 1.4% we are confident in our ability to continue to reduce our funding cost in order to mitigate the pressure on the asset yields.

Non-interest income continued to be a great source of income for us. Our mortgage division which had a record quarter effectively provided a hedge to our traditional loan portfolio in today's interest rate environment. During the quarter, our locked volume was $1.7 billion driving great mortgage banking income excluding a $5 million pretax mortgage servicing valuation adjustment of $50 million. Refi volume accounted for 50% of production during the second quarter compared to 50% in Q1.

It is worth mentioning that we experienced a decline of about $2 million in overdrive fees during the quarter. We attribute this to increased customer liquidity generated by the bank stimulus plans and programs and an overall decrease in consumer spending as shelter in place and some more government restrictions were imposed across the country. We anticipate that fee income will return as local economies begin to reopen and consumer spending resumes.

Our non-interest income continues to be impacted by the limitations on our interchange fees imposed by the Durbin Amendment, which reduced fees and commissions on loans and deposits by approximately $3 million during the second quarter when compared to the same quarter last year. Non-interest expense was just over $118 million for the quarter and includes $2.6 million in provision related to our unfunded commitments.

During the quarter we recorded $6.3 million in pretax expense attributable to our COVID response. $5.8 million of this expense is related to salaries and benefit expenses such as overtime, recognition awards, and helping life in accruals for anticipated help in life expenses. The remainder of the expense is attributable to supply, signage and other preparedness type expenses.

I previously mentioned that our mortgage division had a record quarter. The continued elevated production during the quarter drove an increased in related compensation costs for mortgage of $3.2 million as compared to the first quarter. After these considerations, non-interest expense decreased on a linked quarter basis. We are continuously reviewing our expense base for cost savings and efficiency gains to help mitigate the impact to our net income from any revenue headwinds that we may have.

Shifting our attention to credit quality, at the end of the second quarter our asset quality metrics remained stabled and actually improved slightly from the first quarter. Our annualized net charge-offs were 6 basis points of average loans in Q2 and we have yet to see any unusual trends in our nonperforming loans. In fact our loan study date 90 days test did only 10 basis points of total loans in Q2 which was down from 47 basis points at the end of Q1.

Our approach to credit monitoring during the second quarter remains unchanged from our approach from previous quarters. Our early identification of portfolio concentration that may be more adversely affected by the pandemic has proven to be true. We continue to tightly monitor our clients in the hospitality, restaurant, entertainment and certain sectors of the retail trade industries. We have removed the convenience store and transportation industries from our categorization of high risk as these portfolios have benefited from recent economic activity and we expect the loan defer percentages of both categories to decline significantly as initial deferrals expire and are not renewed.

In connection with our earnings release filing with the SEC, we have furnished supplementary information on each of these industries and provided credit metrics and performance statistics as of July 24. Our exposure to each of these industries on an individual basis is less than 10% of our entire portfolio and our exposure to these industries collectively is just over 15%. We mentioned on our first quarter call that we offered relief programs to our qualified commercial and consumer customers and we are tracking these deferrals by industry and loan type.

As of June 30, around 22% of our loan portfolio was deferred under one of these programs. Many of the deferral terms began to expire in July and as of July 24, around 14% of our loan portfolio was still under deferral. Our deferral programs remain available and we plan to utilize if the borrower meets our underwriting criteria.

To reiterate our criteria, deferral under these programs were made available to our borrowers who were in good standing prior to the pandemic, even though we focused on these specific portfolios because we cannot accurately predict the impact of the pandemic and the related economic interruption we are continuing to monitor all asset categories for signs of deterioration.

Looking specifically at our high risk portfolios, we experienced decreases in the deferral percentages of each category as of July 24 compared to June 30. In his remarks, Robin mentioned our provisioning for the quarter. We continue to take the position that a credit event occurred in Q1 and there continues to be uncertainty of the actual cost or losses and magnitude of this event. As such we believe it to be prudent to continue to bolster our reserves in response to the uncertainty and therefore recorded a provision for loan losses of $26.9 million and increased our reserve for unfunded commitments to about $2.6 million.

Our loans at the end of the quarter represents 150 basis points of total loans when you exclude PPP loans and our coverage ratio of allowance to nonperforming loans was 330% at the end of the quarter. For more detailed information on our financials, I'll refer you to our press release, our SEC filing supplement for specific numbers or ratios.

Now, I'll pass the call back to Robin for any closing comments.

[Robin McGraw, Executive Chairman]

Thank you, Kevin. I'd also like to welcome Jim Mabry to our team. Jim is an old friend who has worked closely with us in the past. We are happy to have him as part of the Renasant team. I am also pleased to see Kevin have this opportunity to expand his role as our Chief Operating Officer. He has been an integral part of our success and deserves his expanded role.

In closing, the uncertainty that exists heading into the second quarter still remains as we begin the third we aren’t able to predict a long-term impact of the virus and the continued limitations on our economic activity that will have on our shareholders. But our commitment to the safety and security of our employees to understanding and then meeting the needs of our clients and then being good citizens in the communities will support our success through this cycle and ultimately provide value to our shareholders.

Now Allison, I'll turn the call back over to your for Q&A.

[Operator]

Thank you, sir. [Operator Instructions] And our first question today will come from Jennifer Demba of SunTrust. Please go ahead.

[Jennifer Demba, SunTrust]

Thank you. Good morning.

[Mitch Waycaster, President and CEO]

Good morning, Jennifer.

[Jennifer Demba, SunTrust]

Just a few questions. First of all, can you just talk about what your loan growth outlook is over the next couple of quarter’s Mitch and what you're seeing in your pipeline?

[Mitch Waycaster, President and CEO]

Sure, I'll – Jennifer, I'll begin with a discussion of the pipeline and how we have seen that build in the last several weeks and then come in on what we could expect given that pipeline and production in the quarter. And then I'll reflect some on the production that we saw in Q2, in addition to PPP, but beginning with the pipeline, the current pipeline is $229 million. That compares to $177 million the prior quarter.

If we were to go back about three weeks, that $229 million would have been in the range of $190 million. If we would go back six weeks, it would be in the $160 million range. So as you can see, we've continued to see pipeline build, particularly as we saw things reopen earlier in the quarter. Considering the pandemic, we can see, continue to see a good, but what I would call cautious deal flow across each of the markets and business lines. And if I break that down, that current pipeline of $229 million, 24% would be in Tennessee, 11% in Alabama, Florida Panhandle, 12% in Georgia, Central Florida, 13% in Mississippi, and about 40% in our corporate and commercial business lines.

So if you take the $229 million, you could expect about $68 million growth in non-purchase within 30 days. also taking the current pipeline, it would be indicating production this quarter more in the $550 million, $600 million range, which would indicate low to mid single digit net growth. But I would follow that by saying, until we begin to see sustained resolution of the pandemic, it's very difficult to give that guidance. But with that being said, let's just focus a minute on the production we did see in Q2, and this does - that pipeline that I just mentioned does not include any current PPP transactions, nor does the $521 million that we produced in Q2.

So we had $521 million in production outside of $1.3 billion, as Robin and I mentioned in our comments during the quarter. That $521 million compares to $516 million in the first quarter. It compares with $349 million, same period prior year. The $521 million lead to about $122 million in non-acquired growth or about 6% annualized. We did see an elevation in payoffs over the last four quarter average of about $20 million, $25 million, also we saw some reduction in line utilization. So both of those things weighed on what resulted in a net of flat to slightly down and net growth. I will say to the production of $521 million, we continue to see as we do in the pipeline, good production across our markets and across our business lines, also relative to the talent, that's joined the company in the last several quarters. In q2, that group produced right at 21% of that production.

[Jennifer Demba, SunTrust]

That's helpful color. Thank you. My other question is on criticized loans. Can you talk about the trends you saw in the second quarter?

[David Meredith, Chief Credit Officer]

Sure. Jennifer, this is David Meredith. So second quarter, we didn't see a material, the writing of our loan portfolio. We did have two larger downgrades in Q2, they were already assets that we had identified on the watch list pre-COVID that were just slightly more impacted by COVID-19, one was a retail shopping center and one was a senior housing portfolio. But our classified assets are about 1.4% of our loan portfolio at this time up slightly from Q1 due primarily those two loans but we've not seen a tremendous inflexion in our asset quality at this point. We will obviously continue to be mindful of it as we do our enhanced monitoring on loans and deferral and increase our portfolio monitoring, but at this point we have not seen that like the classified asset increase.

[Jennifer Demba, SunTrust]

Okay, thank you.

[Mitch Waycaster, President and CEO]

Thank you, Jennifer.

[Operator]

Our next question today is from Brad Milsaps of Piper Sandler. Please go ahead.

[Brad Milsaps, Piper Sandler]

Hi, good morning guys.

[Robin McGraw, Executive Chairman]

Good morning Brad.

[Mitch Waycaster, President and CEO]

Good morning Brad.

[Brad Milsaps, Piper Sandler]

Thanks for taking my questions. Kevin, I wanted to see if we can maybe start on the expense side of the equation. You talked about the $6.3 million of COVID related costs in the quarter. Just curious if there's also any benefit going the other way from FAS 91 deferred origination costs. I know those hurt you in the first quarter. Just kind of curious with all the PPP lending this quarter, if there was any benefit there, just trying to get a sense of, kind of expense run rate, as you get into the back half of the year.

[Kevin Chapman, Chief Operating and Financial Officer]

Yes, there was a little bit of a benefit and it was, it was attributable to the PPP, but that the difference in FAS 91 expense in Q2 compared to Q1 was a benefit of about $2 million. So there's a little bit of a pickup there, but even if you factor that in, with all the other moving parts that we had, the expense run rate is trending down. As we've mentioned, if we kind of look through what's happening in mortgage or look through what's happening in COVID, this was true in Q1 and will be true Q2 salaries. It is true in Q2 and it will be true in Q3. Salaries, employee benefits will continue to decline. So our expectation will continue to decline. We will be opportunistic in our hiring. But we're also using this as an opportunity to reconstitute or provide better levels of accountability. And so we're expecting that trend line to decline.

If you look at our other items, debt processing, occupancy and equipment, all of those items were flat or declining during the quarter. And again, we're looking at any property, any contract anything to ensure that it's hitting our internal profitability metrics, that it is achieving any of our projections that we thought or that we modeled in making our decision, and if it's not, we're challenging it and looking to either increase the performance of that decision or look at exiting that decision, whether it is a contract or a property or in some cases are higher.

And so we'll continue to be mindful of expenses and look at that with urgency. We recognize that we have, that we could continue to have revenue headwinds. And we've got to look for the offsets on the expense side. But as we look at Q3, we, again, if we look through, we expect mortgage to have a good quarter in Q3. So continue to have elevated expenses related to mortgage and their production. We will probably have some more COVID expenses in Q3 just looking at our states and that we operate in and the high concentration of positive tests. We are expecting continued increases from continued expenses from COVID, but if we look through that the core expenses should be trending down.

[Brad Milsaps, Piper Sandler]

Great, that's helpful. And then just on PPP, I think you disclose you had gross fees of $44.7 million. Just kind of curious, kind of what you recognized in this quarter as a portion of the interest income that you disclosed, and then, how much you have left, remain to recognize, kind of on a net basis.

[Kevin Chapman, Chief Operating and Financial Officer]

Yes, so it may take me a minute to get the amount that was - of the income that was interest income as opposed to, fee recognition. But I'll tell you just as we look at our, how we're recognizing these fees, they are capitalized, they are, they're viewed as a discount against their loan portfolios and it is being amortized over the contractual maturity of the loan. And for the most part, 99% of the loans that were originated were originated with a two-year expected contractual life. So we're amortizing this over two years.

We are expecting a significant amount of these loans to be forgiven. When the forgiveness happens, who knows and that's a target that continues to move and be extended. But we are expecting that these would be forgiven and once they're forgiven all that unrecognized fee will be collected back into income, but we are amortizing it over. We are amortizing it over the contractual maturity, which will be two years.

Breaking down the $6 million of benefit from the PPP program in Q1, about $3 million to $3.5 million were tagged to the fees, recognition of amortizing the fee back into income, the remainder would just be the stated interest income of 1%.

[Brad Milsaps, Piper Sandler]

Okay, great. And just final question, just on the mortgage, obviously, tremendous performance this quarter, can you give us a little more color? I apologize, I missed it, just on production, in the second quarter versus the first and then maybe, gain on loan sale margin, kind of, what impacts that had if any on a linked quarter basis on how that changed?

[Kevin Chapman, Chief Operating and Financial Officer]

Sure, I'll make a couple of comments and turn it over to Jim. So we’ll continue to have strong levels of production of mortgage groups, they locked about $1.7 billion. I think that was actually slightly down from Q1, I think Q1 was about $1.8 billion, $1.9 billion. But the margin expanded and so there's a significant increase in the fees was really a margin play, just heavy volume, but also the margin expanded and that's what caused the pop in the mortgage income. Jim any details, any further details?

[James Mabry, Incoming Chief Financial Officer]

Just kind of looking into the third quarter, our volumes through July a lot daily, large volumes have continued to be strong very similar to what we experienced in the second quarter. Margins have stayed really strong. We have had, we could have to monitor what our competition is doing and particularly on the wholesale side we've have had to pull back a little bit on margins, but then we've been able to put them back in and really that's a day-to-day thing that we look at. So looking right now at the third quarter based on July performance, we’d expect to see similar results to the second quarter.

[Brad Milsaps, Piper Sandler]

Okay, great. Thank you, guys.

[Mitch Waycaster, President and CEO]

I will make one comment looking at our purchase refi volume. As noted in the in the release, though, we were roughly 88% refi in the first quarter 50% refi in the second quarter. And what we're seeing now in the third quarter, we're running more about 45% refi. So purchase continues to increase and has consistently increased over the year and we anticipate that continuing.

[Operator]

Our next question today will come from Michael Rose of Raymond James. Please go ahead.

[Michael Rose, Raymond James]

Hey, guys, thanks for taking my questions. Just wanted to follow up on the mortgage, so if I add back the MSR impairment, looks like mortgage ramps are about 29%, roughly of total revenue this quarter. Can you give us a sense for what the efficiency of that business looks like and then as that mix continues to evolve in the next year and just using the base forecast that should come down? I mean, what areas on the expense side can you look to offset some of that impacts from the declining, what I would expect to be declining revenue come for mortgage next year? Thanks.

[Kevin Chapman, Chief Operating and Financial Officer]

Sure. So, just looking at the efficiency of mortgage with the volume that they had, oh mainly is a backdrop, typically mortgage before Q1 and Q2 efficiency ratio runs in the 75% to - about 70%, 75% range. Right now they're a little bit more efficient with all the volume that they've had. So it's less than, it is more in that 60% to 65% range. As we look ahead and recognize that every year that we forecast, we forecast declining revenues coming out of mortgage because it's just cyclical and that's just the nature we just anticipate it to be down. One day, we'll be right about that.

We've been more wrong about that over the past five years, but one day, we'll be right. And so what do we do? I think the question is, what do we do to reduce our dependence on mortgage? And I don't think it's only on the expense side, there are levers to pull on the expense side. And we've just got some of those whether it's the salaries, employee benefits, whether it is looking at property or it is looking at every contract, but there's also opportunity on the revenue side. I mentioned what's happening on the service charges, service charges on linked quarter basis are down $2.2 million.

That annualizes close to $10 million of revenue that's currently out of the run rate if you just annualize the current run rate. We expect that to come back to us and that's a pretty efficient revenue stream. It has a significant amount of upfront costs, but every dollar above that upfront cost is pretty efficient.

The other is going to come through other small wins in whether it's preserving margin, whether it is small incremental balance sheet growth, whether it is larger incremental balance sheet growth is going to come through singles and doubles as to how we mitigate and drive and improve profitability by pulling multiple levers on the expense side, on the revenue side, some cases on the growth side. That's what's going to be - those are the levers that we're going to pull if and when the tide of mortgage rolls out of the revenue stream.

[Mitch Waycaster, President and CEO]

Michael, one other thing, Mitch, one other thing I would mention, and as you know, we've been very opportunistic just hiring our relationship managers and really in every cylinder of this company, whether it's retail small business, commercial, commercial specialty, corporate. Last year, we had an intense focus layer that focus continues this year. We've had 18 additions. But at the same time, you've heard us and back to Kevin's point, our intentionality around and expectations around production that drives revenue, it drives production, the focus on pricing underwriting.

So what we've seen this year as we continue to add talent, and as I mentioned, as we continue to drive loan production that I referred to earlier across all segments, we've also been intentional and actually have a net decrease of about 7 this year in that group. But again, staying very focused on having the right talent in the right markets, focused on growth, but focused on profitability.

[Michael Rose, Raymond James]

That's very helpful. I appreciate the color. Maybe just a follow up if you can talk about the margin. You mentioned the impact from some of the liquidity and the PPP loans. It sounds like there is some ability to actually improve the core margin here some of that excess liquidity runs out and it looks like you still have some room on the deposit cost side that the question becomes on the loan yields. How should we think about that core margin in the near term? Thanks.

[Kevin Chapman, Chief Operating and Financial Officer]

Yes, so maybe let's define the core margin as we talked about it. And so what I'm going to mention kind of excludes all the excess liquidity in PPP only because we're expecting in Q3, Q4, 2021, PPP to drive more noise in the margin, just as we start to enter the forgiveness phase. So maybe if we kind of look through that. I do think there is real possibility for mortgage to – there is going to be downward pressure, but real possibility for mortgage - for margin to stabilize as we reprice these high cost time deposits that I mentioned. I mentioned that we got $2.4 billion maturing over the next eight quarters, 75% to 80% of that is maturing over the next four quarters.

So, and that's at an average rate of roughly a 130. So we have about $1.8 billion of time deposits or negotiated public funds, money markets, that will be maturing and it's a weighted average cost of 130. That we're going to have the opportunity to reprice down to current market rates. So that's going to provide a nice tailwind. We still have the headwinds of just being in a low rate environment. Security portfolio yields are hard to come by.

We'll continue to look to properly invest excess cash in loan growth. But again, it's going to have to meet our credit metrics and our underwriting, but continued ways to deploy that cash, but in the short -term, we do have some tailwinds on the funding side, as we continue to evaluate where the opportunities are on the assets side to deploy to excess cash.

[Michael Rose, Raymond James]

So after that 322 in the second quarter, maybe flat to slightly up is the way I'm reading it based on your comments. That's the way to think about it?

[Kevin Chapman, Chief Operating and Financial Officer]

That's the way to think about it.

[Michael Rose, Raymond James]

All right guys, thanks for taking my questions. Thank you.

[Kevin Chapman, Chief Operating and Financial Officer]

Thank you, Michael.

[Operator]

The next question will come from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.

[Kevin Fitzsimmons, D.A. Davidson]

Hi, good morning everyone.

[Mitch Waycaster, President and CEO]

Good morning, Kevin.

[Kevin Chapman, Chief Operating and Financial Officer]

Good morning, Kevin.

[Kevin Fitzsimmons, D.A. Davidson]

I'm just curious on the deferrals. So it seemed like positive progress was made there. I'm just curious, is there any initial data points on second deferral requests and what you've seen so far on that?

[Mitch Waycaster, President and CEO]

There is and I will mention just on where we stand as of Friday. We have more loans over the next 30 days that will be entering, that is the first phase deferral will be expiring, and so we do anticipate that 14% to continue to migrate downwards. But again, I'm going let David Meredith, our Chief Credit Officer just talk about what they're seeing in second phase deferral and also with asking what the criteria are to qualify for a second phase deferral?

[David Meredith, Chief Credit Officer]

Sure. And I'll start with that criteria. So the just real quickly on first phase, Kevin mentioned earlier, it was basically helping those customers who were in good standing with the bank. We offer them the ability to deferral the non-payments on the commercial side for 90 days.

Second phase, there is a little more robust through the deferral process, anybody who received referral had to have monthly monitoring of their loan to make sure we were in touch with the forms of the customer, loan migration and so forth.

Second phase deferral is a more detailed look and best way is, is there is a need. How the customer performed during the first phase deferral? Are there headwinds that are going to impact them to a subsequent deferral? Do they have the cash flow to meet debt service payments or are we properly aligned from a structural standpoint, whether that be the borrower also a guarantor we collaterally we are in the right place and so forth, and so it's much more of a modification type than just purely another 90-day deferral and the second phase.

So that's a lot more robust process in phase two. And at this point, we have a fairly lower percentage, if we look at our referrals roughly $2.1 billion, about $1.8 billion of that is commercial in nature. And we will have a heavy deferral second phase – first phase deferrals that mature in July about $1.3 billion of that $1.8 billion mature in July. And so, a lot of this is what we're talking about is in process from looking at our customers and what the expectation is, by having those monthly meetings between the customer and the lender.

At this point, we only have a couple hundred thousand I've actually rolled into a second phase deferral, but much more color that comes from the interviews where we're looking at who is going to potential requests a second phase deferrals, and that number just won't [ph] will drop off materially. We expect based on preliminary numbers by the end of August, somewhere around that timeframe that deferrals will drop to about no more than an 8% range based on those conversations with customers, we have continued to see that migrate down through the end of Q3 and in the Q4, but we've got a fairly good deal by an industry standpoint.

Hospitality will continue to be a fairly heavy level of deferrals that need a second round, about probably about 69% that book of business will need a second round deferrals. Then it dropped off pretty materially, arts and entertainment needed 54% of that book, [indiscernible] will need a second look. Restaurants about 16% healthcare, maybe about 25%. So much more of this is a forward looking than a historical look based on a heavier level of phase one deferrals in the month of July. But again, we expect positive trends into the month of August, hoping to get no more than 8% by the end of August.

[Kevin Fitzsimmons, D.A. Davidson]

Okay, great. That was very helpful. And just a quick follow on, you guys had mentioned earlier in your prepared remarks how the credit event occurred in the first quarter, but in second quarter there was this uncertainty, and that uncertainty continues going into third quarter. So how - and I know this is tough to pinpoint, but how should we think about further reserve building over the back half of the year with the allowance ratio now, one and a half? Some larger banks have a clip surpassed 2%. Should we think about this kind of pace if we continue with this kind of uncertainty as far as the depth and the duration of the uncertainty? Thanks.

[David Meredith, Chief Credit Officer]

Yes. Thanks, Kevin. Good question. And the short answer based on what we know today I would say no. We do not anticipate this level of provisioning. But we - part of our factoring of our assumptions for this quarters provision was the reality that there is five states we operate in. There is now what's the level of positive testing is putting back into question whether or not there is going to be some type of either pullback or maybe again, this is all our presumptions, but there could be pressure to pull back economic activity as a result of the heightened levels of increase in positive tests.

And so what that leads to is a prolonged rather than more of - we've never seen V. We assume more of a U-shaped recovery, but it's extending the length of that recovery specific to our five states. That was the overriding factor that led to a higher level of provision this quarter. We tried to be severe in our assumptions. Again, we tried to capture as much as we could in the uncertainty and try to quantify what the impacts would be. Isolate that impact to the higher risk loan categories and so those are adequately reserved. And again, we'll just have to look at it as to where we stand at the end of Q3, but it would not anticipate the level of provisioning we've had in Q1 and Q2 for the back half of the year.

We did look at some of the peer information, and maybe it's worthwhile at this time to just remind that compared to some of our peers, we do not have energy exposure. We do not have credit card portfolio. And so therefore, I don't see us necessarily needing to get to the upper end of the peer group as it relates to allowance to loans. We look at it and we monitor it, but we also recognize that we have some differences, at least what we view as some higher risk loan categories that others may have a little bit more exposure to.

[Kevin Fitzsimmons, D.A. Davidson]

That's a fair point. Thanks, Kevin. Thanks, everyone.

[Kevin Chapman, Chief Operating and Financial Officer]

Thank you.

[Mitch Waycaster, President and CEO]

Thank you, Kevin.

[Operator]

Our next question is from Matt Olney of Stephens. Please go ahead.

[Matt Olney, Stephens]

Hey, thanks good morning guys.

[Mitch Waycaster, President and CEO]

Good morning, Matt.

[Kevin Chapman, Chief Operating and Financial Officer]

Good morning, Matt.

[Matt Olney, Stephens]

I want to circle back on loan growth and we got a great update from Mitch on the pipelines. It sounds like they're seeing some nice build in recent weeks. Can you talk about the challenge of converting these pipelines into loan fundings? And as you talk to borrowers, are there any specific data points they're waiting to see that would actually move those from a pipeline into a loan funding? Thanks.

[Mitch Waycaster, President and CEO]

Yes Matt, good point and as I ended that discussion, and I made mentioned until we began to see some resolution that one is hard to predict. So, just thinking about the returns that we saw earlier in the quarter, and then as numbers across our footprint and much of the country now, we're seeing those numbers increase. It's really a question of traction. So that traction that really began earlier in the quarter with the elevation of cases of late how will that put a Governor on what I described earlier.

So we do talk about that quite a bit internally. And as we talk about pipeline and I made reference of how deal flow has increased, particularly over the last several weeks. But I can tell you when you reflect on the sentiment of clients, that question does remain and back to Kevin's comments as he was just talking about provisioning, there's some uncertainties out there.

So and I talked about our production of $521 million. The current pipelines indicate probably production in that $550 million to $600 million. And what you mentioned is pull-through, how many actually get across the finish line. It is very hard to determine. I can tell you overall sentiment remains good across each of our business lines, markets, but with a sense of caution. And like I said, I don't know how to predict that one. It is good to see the deal flow. It's good to see the conversation.

And I think as we're being very prudent as we underwrite our clients are being, using that same prudence as they – in their mind, think about how they deploy capital, they increase debt. Hopefully that helps. It's definitely an unknown at this point.

[Matt Olney, Stephens]

Yes, I know that's helpful and it's definitely not an easy question to address at this point. So I appreciate the commentary. And then I guess, taking a step back thinking about the margin. Interest bearing deposit costs are now down to about 70 bps and it sounds like there's some nice momentum to move that down from time deposit pricing? If I go back four or five years, I think Renasant had a interest bearing deposit cost in the high 20s, low 30 basis point range?

And if we assume that rates just hold here for a while, do we think we can eventually get down to those levels? Just trying to understand if there has any been – any structural changes to the bank recently that would prevent something like that from occurring? If of course rates would stay here for a few years?

[Kevin Chapman, Chief Operating and Financial Officer]

Yes, no you're exactly right. I think our deposit costs bottomed out, maybe 16. And while they bottomed out in about 13, 14, and they stayed at that bottom till about 16, 17 started to increase. And it was in that low 20 basis point range, maybe close to 25 basis points. We do anticipate getting back down to that level if not slightly lower and particularly if we stay in this prolonged environment.

And we don't think that there's anything that would prevent us from doing that. Now a lot going to change between now and where we bottom out. There's a lot of excess liquidity floating in the system. It makes it easy to say right now that absolutely we're going to get that right down, but I think the challenge in front of us. And again, we operated at this environment for several years in the recent past, but we believe that we can get back to those levels, if not slightly lower.

And the confidence in the slightly lower piece is right now we have more non-interest bearing DDA funding our balance sheet than we did in 2012-2013 that led us to those lower cost of deposits that you mentioned. Right now, our mix is more favorable and it should, so the impact on the absolute cost should be slightly more favorable. But we anticipate and are prepared to go down to those levels, just given where we are in the rate environment.

[Matt Olney, Stephens]

Okay, that's helpful. Thank you, guys.

[Mitch Waycaster, President and CEO]

Thank you, Matt.

[Operator]

[Operator Instructions] Our next question is from Catherine Mealor of KBW. Please go ahead.

[Catherine Mealor, KBW]

Thanks, good morning.

[Mitch Waycaster, President and CEO]

Good morning, Cath.

[Kevin Chapman, Chief Operating and Financial Officer]

Good morning, Cath.

[Catherine Mealor, KBW]

I just want to circle back on expenses on a few follow-ups. So first on the COVID-related expenses, I know Kevin, you mentioned that you think some of that will be – will still be in the run right into next quarter, and I know it's hard to guess? But I guess my question, first question is, how much of that do you think sticks around and how much of it was really just kind of one-time investment that you had to do this past quarter that you won't see again?

And then my second question, just on the expense topic is on branch closures? You mentioned, you're looking at – everything to try to figure out how you reduce expenses in this low revenue environment, have you talked or thought about branch closures and where are your thoughts on potential savings there?

[Kevin Chapman, Chief Operating and Financial Officer]

So let's talk COVID expenses first. I do think this quarter was a little bit elevated just on the COVID expenses. I'll give you an example. The amount of work and effort that was done in April and May to rollout either PPP or the process of economic stimulus programs led to a lot of overtime. And again Robin and Mitch talked about the dedication of the team, but to just kind of amplify how dedicated they were.

We had multiple teams working seven days a week, 12 to 14 hour a day to implement these programs, and we know we're not the only bank that this happened to. But it was truly an opportunity where people stood up and rolled out these programs and worked hard to figure it out. And we think successfully helped get this money out to where it was intended. But that came with a cost and that cost was overtime or it was reward recognition.

Overtime for example in Q2 compared to Q1, it was up over $1.5 million, most of that occurring in April and May. And so, I don't think we're going to replicate that in Q3 with the level of overtime, but that's just an example of what we saw. And again, the forgiveness phase, we don't think there's going to be a rush to the door for the forgiveness phase like we saw in Q1 with the rush with phase one of the application phase.

But there will be some time and effort and again with the new rules it gives us more time. If they simplify forgiveness, then that takes a significant amount of burden off the system and to process. And so therefore, we're not expecting having to work those 12 to 14 hour a days for multiple weeks. But that's just an example of some of the some of the variables or the factors that could affect that COVID expense, overtime being warned.

On the branch closure, and I would just go back, we're looking at anything and everything. Part of this is branch rationalization. I would say that we have been rationalizing branches for multiple years. In today's environment, we have to look even harder and challenge our assumptions about that branch, challenge our assumptions about any of our decisions in today's set of circumstances as opposed to what we thought was going to happen based on what was happening in the past.

So I would say anything and everything right now is on the table for challenge, including that branch rationalization, don't know which or how many or if any, but all of those are on the table, to evaluate. There's also ways to affect efficiency within the branch without closing it through the adoption of technology, through the rollout of integrated teller machines. That can help the efficiency of the branch without actually closing the physical facility that it operates in.

[Mitch Waycaster, President and CEO]

And Catherine, I was going to add to Kevin's point, the last one he just made in particular, and I think as an industry and certainly at Renasant, we have to start with listening to the client, and seeking to understand how they wish those services to be delivered and we're seeing changes, adoption of online account opening, adoption of digital and online means to deliver services, especially during the pandemic. But even pre-pandemic, we saw customer desires, their interactions changing.

So I think as an industry, as a company, we continue to evaluate that and really determine what customer expectations are going forward and how will that impact us as a company and how we deliver our services. It's an opportunity and also at the same time staying focused on meeting client needs.

[Operator]

Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Robin McGraw for any closing remarks.

[Robin McGraw, Executive Chairman]

Thank you, Allison. We appreciate everyone's time and interest in Renasant Corporation and look forward to speaking with you again soon.

[Operator]

The conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.