Renasant Corp
NYSE:RNST
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Renasant Corp
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Good morning and welcome to the Renasant Corporation 2021 third quarter earnings conference call. All participants will be in a 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, Renasant Corporation. Please go ahead.
Good morning and thank you for joining us for Renasant Corporation's 2021 third 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 during much of the third quarter 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.
Thank you Kelly. Good morning. We appreciate you joining the call today. Before Kevin and Jim discuss the results for the third quarter, I will offer reflections on the quarter and the outlook for the fourth quarter.
As we entered 2021, there was still considerable uncertainty and although that remains today, we are seeing increasing signs of business activity in our markets. In the face of these conditions, I am very proud of our team for results through the first nine months. We see all areas of the bank contributing to performance. The company's financial condition is strong and marked by liquid, core funded and well capitalized balance sheet. Earnings were up year-over-year and we have initiatives under way that will further improve profitability in future periods. The markets in which Renasant operates continue to rebound in terms of economic activity. There is considerable net in-migration into many of the places we do business. These demographic trends accelerated during the pandemic and this bodes well for loan growth in the coming quarters.
I will now turn the call over to Kevin.
Thanks Mitch. Our second quarter earnings were $40 million or $0.71 per diluted share compared to $41 million or $0.72 per diluted share in the second quarter. Forgiveness of our PPP loan portfolio slowed this quarter and was the largest contributor factor to the decline in net interest income quarter-over-quarter. We were expecting the contribution from PPP to decline and have been focused on growth in other lines of business and expense efficiency initiatives to mitigate the impact.
Our insurance and wealth management lines of business put forward strong results and stabilizing pricing and volumes in our pipeline helped boost results in our mortgage division as well. Our previously announced efficiency initiatives continued to provide benefit on the expense side as evidenced by our expenses trending down to the lowest level in the last five quarters. Further, we expect the contributions from these and other initiatives to reduce expenses in upcoming quarters.
Operationally speaking, we continue to adapt to our customers' evolving needs and preferences for service delivery. The rise in virus cases during the third quarter brought back levels of uncertainty that we experienced early in the pandemic. Our branches remained open during this most recent wave and our mobile and digital metrics continue to increase. We must remain nimble in this rapidly changing environment and provide our customers with quick and convenient access to banking services whether through physical or digital channels. We are focused on innovation and continue to seek investments that deliver the technology and security that our customers have come to expect.
I will now 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 assets, grew about $130 million in the quarter. Deposits increased again this quarter, albeit at a slower pace with much of the growth in non interest bearing accounts. We invested some of the excess liquidity in our securities portfolio, increasing the balance $390 million from the previous quarter. At the end of the quarter, we had approximately $1.5 billion in cash. We anticipate the combination of additional growth in the securities portfolio and loans to reduce this cash position in the near term.
We experienced another quarter of loan growth with loans ex-PPP at $47 million from Q2, representing an annualized loan growth of about 2%. PPP loan forgiveness totaled $180 million for the quarter, with only $68 million in PPP loans outstanding at quarter-end. All of our regulatory capital ratios are in excess of required minimums to be considered well-capitalized and share the strength of our capital position.
During the quarter, the company repurchased $21 million of common stock at a weighted average price of just under $35 per share. Although our Board renewed our repurchase plan which now extends to October 2022, we currently have no plans for additional stock repurchases in the near term.
We had a credit provision release of $1.2 million and net charge-offs of $1.1 million. As a consequence, the ACL as a percentage of loans ex-PPP, moved down slightly from 1.74% to 1.71%. We also had a release from a reserve for unfunded commitments of $200,000 which is reflected in other non-interest expense.
Credit quality metrics are shown on pages 14 through 16. Past dues classified and nonperforming asset measures all remained relatively steady and net charge offs were low at four basis points of loans ex-PPP. COVID-related deferrals are now below five basis points with nearly all deferrals in our 1-4 family mortgage portfolio.
Net interest income declined $6.3 million quarter-over-quarter with substantially all of that decline attributable to PPP runoff. PPP revenue was $3.5 million for the quarter. Of the PPP income, accelerated recognition of deferred fees represented $2.6 million and we have approximately $1 million in remaining deferred fees to be recognized. Our core margin which excludes purchase accounting accretion and interest recoveries was down 24 basis points from Q2. Of the 24 basis points, the impact from PPP accounted for approximately eight basis points. The decline in margin is the result of loan pricing measures and the considerable on-balance sheet liquidity.
Our other lines of business each contributed strong results for the quarter. In our mortgage business, production volume and loan pricing in our pipeline began to stabilize in Q3, driving the increase in income quarter-over-quarter. Non-interest expenses with exclusions were down $4.5 million for the quarter. Part of that decline is attributable to the amortization of a tax credit investment recognized in Q2. But as Kevin mentioned, we continue to see the benefits of expense initiatives announced in late 2020 and expect continued realization in Q4 and into 2022.
I will now turn the call back over to Mitch.
Thank you Jim. We look forward to a successful finish to the year and increasingly have our sights on the opportunities ahead of us in 2022.
Now we will turn the call over to the operator for Q&A.
[Operator Instructions]. Our first question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Hi. Good morning guys.
Good morning Brad.
Mitch and Jim, just wanted to maybe start with the balance sheet and maybe if you could quantify how you are thinking about loan growth over the next few quarters and into 2022 and how that you plan to handle some of the $1.5 billion liquidity? It seems kind of based on the pace you are on right now, with the runoff of the acquired book and then growth in the legacy book, they are almost one-for-one, not quite but it seems to be tough to put a dent in it unless you see a big acceleration in loan growth or you start to build them up even more aggressively. So just kind of curious how you guys are thinking about that?
Sure. Brad, let me to approach your question, let me talk about our current pipeline. I am also going to talk about production in Q3 and then as we look forward how we really feel good about our ability and how we are positioned to continue to drive that production and also I will reflect on payoffs, which has been the headwind. But let's start with the current pipeline.
It's 280 million and that compares to $261 million as we started the third quarter. So as we experienced in Q3, we do continue to see good and I would say growing deal flow and pipeline across our markets and our business lines. As we have seen in the past and we saw in Q3 and we see that looking forward in this current pipeline, each of our regions, our business lines continue to contribute in a meaningful way to the pipeline and the production.
Just thinking back, as we started Q3 and we started with a pipeline of $261 million, as I said, this quarter, $280 million. We expected them to see production in the $575 million, $600 million range. We actually produced $700 million in production this past quarter. Actually, one of the highest we have seen in the company. And as the pipeline indicated then and as we do entering into Q4, we are seeing this come from across the footprint.
I think, equally important as the geographic distribution are the loan types and size of credit and our ability to produce. Let me reflect on that a bit. I will use Q3, but also we will reflect on that ability going forward. I will start with our 1-4 family residential loan products that would include consumer products. That accounted for about 19% of our production in Q3. And then when I go to small business and business banking type credits and that's credits that range from few thousand dollars up to $2.5 million, that was about 15% of that production. And then I will go to commercial credits. Loans, $2.5 million and greater which represent C&I, owner-occupied, commercial real estate type credits, that accounted for 39%. And then on to our corporate banking group where you find larger C&I, commercial real estate and then our specialty lines of business, that was about 27% of that production.
All to say and I will give you those examples, just to say that we are hitting on many different cylinders relative to our ability. We saw that in Q3. And I would say that's a representation of our ability going forward. So in Q3, we saw production increase about 20%, as I said, one of the highest levels in the company's history.
The other side of that you referred to it in your question is just payoffs. As we have seen in prior quarters, that was the governor, if you will, on net growth. For example, if payoffs had remained at the current levels that we saw in Q2, net growth this quarter would have been 7.5% versus 2%. And as I look at the reasons for those payoffs and we examine that closely, about 46% of those was where the borrower sold the underlying asset. Another 33% was lost to term or rate. And a good portion of that to the permanent market.
At some point, we will begin to see payoffs normalize. But I would say, despite those payoffs and just speaking to the liquidity that we have and the use of those bonds, I am optimistic about our future growth as we continue to see progress in economic activity and we are seeing quite a bit of progress across the markets in which we operate. And I think that's evidenced by this past quarter's production.
Jim, you want to comment a bit on just the securities portfolio and what we are doing there?
Sure. Good morning, Brad. So as you point out, we have got about $1.5 billion in cash at the end of the quarter. And we put to work a fair amount of that liquidity in securities in Q3. And I think it was just under $400 million. Our expectation in Q4 is that we would continue to grow that securities book, probably not quite at the same pace. And then looking into the new year, we will continue to reevaluate that position to see how our loan growth is panning out and make those determinations as we get into 2022.
Great. That's very helpful. I appreciate all the color. And then just maybe one follow-up on expenses. You guys, as Kevin pointed out, you continue to trend lower. I think you are down about $8 million or $9 million year-over-year. I know you were targeting $9 million or $10 million to start the year. Some of that's probably been helped by headwinds in mortgage banking. Can you guys just kind of quantify a little bit more kind of what you are thinking about in terms of kind of where the expense trajectory can head from here?
Yes. Hi. Brad, good morning. This is Kevin. We think it goes lower, right. So if you not only look at the income statement and compare to prior periods, there is a lot of noise in the prior periods, whether it's mortgage or whether it's pandemic, whether some restructuring of the balance sheet we did in the prior year. I think the best look is if you look at page 20 of our press release, that gives you the expenses that we use for the adjusted efficiency ratio. And as you can see, that line has been trending down appreciably.
And it's not all coming from mortgage. That trend line on the bank side is occurring as well. And as we have indicated, in the past our focus is driving that expense number down further. So we expect the trend line of expenses to continue to decline. We announced a couple of initiatives last year. Those initiatives are really almost fully baked into our run rate in Q3. We have had many other initiatives that we haven't announced publicly. And we will continue to focus on expenses. Some of the initiatives we may announce publicly. Some of them we may just let you see the results of that in the expense run rate as a decline.
I would also add that there's a lot of pressures on expenses right now, whether there is a pressure to reinvest in technology or just wage inflation pressures. Our guidance includes any of those pressures as well. We feel that we have got the opportunity and the capacity in our expenses to continue to see declines, despite the commentary around reallocating expenses of technology or the conversation about wage inflation. We feel that those are coming down. And I can tell you, our management team has a conviction around our efficiency ratio, bringing it down as well as the denominator of that calculation being expenses, that expenses are coming down as well.
And Brad, I will just follow Kevin's comments relative to expenses. And we are very optimistic. You can hear that in Kevin's comments. We are committed as well to continuing to reduce our expense base. And at the same time, we will continue, as Kevin mentioned, to intensify initiatives to enhance both revenue and to minimize expense.
Great. Thank you guys. I will hop back in queue.
Thank you Brad.
Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hi guys. Good morning.
Good morning Kevin.
Just switching to credit for a second. Looking at the ACL ratio ex-PPP now 1.71%, if I am correct. It seems like that leaves you still a fair amount of room for credit leverage going forward, despite the uncertainty, assuming the uncertainty you mentioned before doesn't get worse, but gets better, clears up. Can you remind us again what we should be, not a target, but what is your day one CECL ratio? And what are your thoughts on timing of how quickly you could bring that down? And whether we could still have a number of quarters of negative provisions in front of us? Thanks.
Hi Kevin. Good morning. This is David Meredith. I will take a stab at it and let Jim follow-up as well. So how we have chosen to look at our loan loss provision is kind of a longer term, as you mentioned. You talked about kind of some unknowns in the marketplace, a deal that we forecast before, we are going to use it to absorb loan growth on a go-forward basis. And so that's still our thought and hasn't changed much.
And we are going to look longer term before we start pulling that number down materially. We do still think we have got good asset quality in our book. But our choice is better use of dollars for continued loan growth and then just kind of see if something happens in the marketplace and we keep those dollars out there for. So I don't think you will see any material change in how we approach loan loss provisioning in the near future.
Jim?
I totally agree. And I think, Kevin, we would say that at least the expectation as we sit here today would be for similar results in terms of what you have seen recently out of us in terms of going forward. If we have stable credit metrics and sort of generally consistent economic indicators and nominal loan growth, I would expect that you would see minor or no releases. But of course, we will continue to analyze quarter-to-quarter, the model, what results we get out of our CECL model and making those determinations.
Okay. Great. Appreciate that. And then, Mitch, maybe we could just get your updated thoughts about M&A. I know you have said in the past that you look to be opportunistic and you have optionality? Are you more, would you say, in like a capital building mode right now before you look to that? Or are you optimistic there could be accretive deals for you guys? And you could carve that up anywhere you want in terms of bank versus non-bank? We have seen a lot of banks bolt-on asset generators given the excess liquidity. And then on bank opportunities whether you would be open to something transformational? There is one that closed just today in our own backyard. Or what do you think deals are maybe not necessarily likely given the opportunity, you might have for hiring in front of you? I know that's a lot, but just to get your updated thoughts. Thanks.
No. Kevin, good question. Happy to comment on each of those and it's more of your latter part of your comments. As we have consistently done in the past, we will remain, we are remaining opportunistic. I will just start with talent, one of the last things you mentioned. We had five additions this quarter. That brings us to 24 this year. Of course, we had 32 in 2020 and 52 in 2019. And we continue to see very good results from that talent, adding to our already strong talent in the company. So certainly we will remain active there and we continue to see those opportunities.
New markets, as we have done in the past, we will continue to evaluate those and certainly strategic partners. You use the term banks and non-banks. And I would include both of those. You mentioned relative to size. Certainly a more optimal size to us would be currently in that, say, one to five, not that we wouldn't go downstream, if that was meaningful in a market where we were operating today. We continue to evaluate all of those opportunities, both banks and non-banks.
And I would expand it to non-banks, whether that be fintech, other business lines. Things that complement our business model that either grow our business line or introduce a new business line and certainly all of those remaining in line with our risk appetite. We always start these conversations with culture, exploring business models, how either it could be new or additive to one of the lines or businesses that we have today. But just making sure alignment exists and certainly hitting financial metrics that we would be looking to hit. And I always use the term, that's all to answer, are you better together? So to answer your question about being opportunistic, the answer is yes. And I would say that is consistent, will be in our future as it's been in our past.
Hi Mitch, just given that openness to still remaining active on new hires, when and if they come up, can you help kind of marry that with just the past few minutes we have talked,, you guys talked about being committed and focused on taking expenses down. So it's probably a high bar to, in that environment, when you are still focused on taking expenses down to being open to new strategic hires. Or do you feel, if the right strategic hires come in, you are confident you can find places to cut elsewhere?
Yes. So excellent question. I would answer it this way. And I would say our results are a good reflection of our ability to bring in new talent and like I said, joining an already strong team. If you look at that 100-plus that I mentioned over the last three years, we are net up about a third of that number. So accountability is certainly there and it's very important. And I would say over that same term, I just talked about production in this past quarter being one of the highest production periods in the company. The loans generated by officers, we are seeing that increase. So I think we have demonstrated our ability to recruit and integrate and grow the company as we add new talent, but also managing expense.
Yes. Kevin, I might just add that, the question you asked about the use of capital, whether it's external in the form of acquisition or new hires, it's interesting that we benchmark all of our metrics basically against the same. All of our opportunities against the same metrics around earn back and dilution to capital, dilution to tangible book value and how quickly we earn that back. We are somewhat agnostic as to which way we go as long as it meets our metrics.
The conversation around hiring, it may conflict a little bit with our discussion around expenses. But it's in line with our discussion around efficiency. To drive our efficiency, lower, to do that part of the strategy is reducing expenses. But also part of the strategy is growing revenue, which will require balance sheet growth to do that. So as we look at efficiency and I know questions often times, the expenses and the efficiencies, the questions we are asked at the same time. But our strategies around efficiencies will require revenue growth and the opportunity to hire good talent is absolutely consistent with that. We recognize that as we hire, we have to have the returns that we expect and it may require us to be equally attentive on the expense side to overcome that short term cost of a new hire.
Kevin, fair point. Thanks very much for clarifying that. Great. Thank you.
Thank you Kevin.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Hi. Good morning everyone. Thanks for taking my questions. The cost of deposits continues to come down. So just trying to get a sense for how much remixing could happen? And are we getting close to a bottom in terms of deposit costs? Thanks.
Yes. Good morning Michael. Jim?
Good morning Michael. I think you are correct. I mean we are getting close. There is still some opportunity on deposit pricing. And we entered sort of this period with probably a longer duration on our funding side than some of our peers. And so, when I look at it versus peers, we have been gaining ground. And I would say the next couple of quarters, we have got that opportunity. We are currently, I think at 21 basis points in terms of cost of deposits. And our expectation is that that would by the end of Q2, that's probably something less than 20 basis points. So there is some room there./ But yes, those benefits really are going to start to wane.
Understood. And then maybe just on the buyback. Good to see the re-up there. Can you just talk about what you view as kind of intrinsic value and maybe a sense of a pace? I think you repurchased a little bit more than, maybe some of us were modeling this past quarter. In the near term, should we expect to see a fairly healthy level of activity, just given the stock's performance year-to-date? Thanks.
I would say, our expectations there are, we are going to continue to look at sort of as it's an analysis, we spent a lot of time on it and it's what gives us the best relative return on our capital. And I think near term, our modeling suggests that it's probably not in repurchases. You don't close the door there. But I think it's in other places. And whether that's M&A or in some balance sheet growth opportunities that we have. So our expectation is that near term, it would not be in the repurchase side. But in other, either organic or external growth opportunities.
Okay. Great. Thanks for taking my questions.
Thank you Michael.
[Operator Instructions]. Our next question comes from Catherine Mealor with KBW. Please go ahead.
H. Good morning. I just wanted to follow-up on the margin discussion. And Jim, is there a target size that you would be comfortable bringing the securities portfolio up to as you deploy some of this cash?
Good morning Catherine. I don't know that we have got a target per se. If I look at peers, for example, we still probably are little underweighted in securities and which is, all right, that's helpful. But I also look at uses of that liquidity. So I think as we said earlier, I expect in the near term, we will continue to put some money to work in that securities portfolio. But I think our optimism around balance sheet growth entering 2022 is good. And so the hope is that we sort of taper off those security purchases as we get into 2022 and we have got other places to deploy that capital. So there is no hard and fast number there. And I think we are optimistic that instead of putting that money to work at 1.25%, we can put that money to work at something closer to 3%.
Great. Okay. And then on that reference of 3%, can you talk about core loan yields and where you are seeing new production coming on, on average right now?
Sure. It's definitely been impacted and Mitch may want to speak to the competitive environment. But of course like everybody else, we faced a lot of competition on loan pricing. And that's not abated, that's continued. And I think it's probably more peers here recently than it was earlier in the year. So we continue to feel that. Our new and renewed loan rates are down 30 basis points or 40 basis points from Q2 and they are close to, call it, 3.5%. So obviously that's puts pressure on that margin and I don't know when that's going to stabilize or abate. But we certainly feel that pressure in terms of loan pricing and its impact on our margin.
Catherine, I would add to that. As I mentioned earlier, just relative to payoffs, 30% or so, we are in that term or rate. I would say, more of that is the term than rate. We are very focused on relationship. And in most cases from a relationship pricing standpoint, we can be successful. But it is very competitive.
The other thing I would point to just going forward, I went through the granularity and our ability to produce on many different cylinders. And when you are in that small business business banking and some of our commercial space, you are going to see a little better yield on some of those credits and possibly in some of the other more commercial business lines that we are in. So I think we have opportunity there as we go forward relative to pricing.
Great. Thank you very much.
Thank you.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mitch Waycaster for any closing remarks.
Well, thank you. And we appreciate each of you for your time, your interest in Renasant Corporation. We look forward to speaking with you again soon. We plan to participate in the Piper Sandler Conference in November. Thank you.
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.