Renasant Corp
NYSE:RNST
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Renasant Corp
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Good day and welcome to Renasant Corp. 2020 Fourth 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] Note, this event is being recorded.
Now, I'd like to turn the conference over to Ms. Kelly Hutcheson, Chief Accounting Officer. Please go ahead.
Good morning and thank you for joining us for Renasant Corporation's 2020 fourth 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 pace of the distribution and administration of the COVID vaccine; the federal, state and local measures taken to arrest the virus; as well as all of the follow-on effects from this pandemic are the most 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, investors.renasant.com at the Press Releases link under the News & 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. Good morning. We appreciate you joining the call today. Before Kevin and Jim discuss results for the fourth quarter and our near-term outlook, I want to offer reflections on the past year and opportunities ahead of us.
At Renasant, we emphasize being one team going to market as one bank. We live that every day, working together as we serve our customers. 2020 was a great example of how we came together as one team to respond to the crisis.
As difficult as the year was, I will forever be proud of the way our employees responded to the challenges. I believe 2021 holds considerable promise for the company. We start with a great team. Renasant employees are actively engaged in our communities and continually strive to provide distinguished levels of service to customers.
Additionally, we operate in a number of high growth markets that we believe are positioned for accelerated economic activity in the future. Finally, our baseline principles, the importance of core funding, asset quality and strong levels of capital are unchanged. We have a diverse product line and expect to make meaningful strides in our efficiency.
All of this causes me to be optimistic about the year ahead. Now, I'll turn it over to Kevin.
Thank you, Mitch. We are pleased to report fourth quarter earnings of $31.5 million or $0.56 per diluted share. Our earnings for the full year were $83.7 million or $1.48 per diluted share. Our mortgage division outperformed once again this quarter. And our margin improved as a result of our ongoing deposit repricing efforts and PPP fee income recognized on loan forgiveness.
We continue to focus on building a sound and stable balance sheet, which saw improved capital strength and a meaningful build and allowance for credit losses, while significantly reducing overall credit cost and maintaining stable credit metrics. We've been focused on efficiency. Recognizing our plan will be driven by both revenue enhancement and expense containment.
Expanding on expense containment, I'd like to highlight 2 initiatives we undertook during the fourth quarter. First, we offered a voluntary early retirement incentive to a select group of employees. Second, we initiated a system-wide branch evaluation effort to better align our workforce and our branch network with a more efficient operating model.
During the fourth quarter of 2020, we recognized a $7 million restructuring charge in connection with both of these initiatives. These initiatives will result in an annual cost savings of approximately $9 million, with around 75% of that amount realized in 2021. We also incurred a $2 million charge in connection with the termination of 2 swaps that will reduce interest expense over the remaining terms, which were originally scheduled to mature in June of 2022 and 2023. More work remains and we continue to implement initiatives that will result in further reductions to the expense run rate.
At the same time, we won't shy away from additional investments in talent or technology, if these investments improve our operating leverage in the long run. We believe continued focus on revenue growth, whether through balance sheet growth, stabilizing net interest margin or enhancements to fee income, coupled with continued reductions in expenses provide guidance on how we plan to improve operating leverage in the future quarters.
We are focused on finding ways to deliver our services more conveniently and efficiently. We made significant technological investments before the pandemic and our clients and employees are benefiting from those investments today, for example, the dollar volume of digital payments through the Zelle platform have more than doubled from a year ago. Likewise, our interactive teller machines have seen the dollar volume increase 80% in the last year.
Like the rest of the country, we saw rise in confirmed cases throughout our footprint during the fourth quarter. But our retail and operations teams are working diligently through COVID fatigue; their rapid and flexible responses continue to mitigate the adverse impact of higher case numbers that we see throughout the region. With our suite of digital and online products and services that we believe rival any of our larger competitors, we feel our clients have experienced little to no disruption in their banking experience even during these worst weeks of the pandemic.
Touching a little on our PPP activity, we are focused on assisting our customers through the forgiveness phase of the first round of PPP loans with around $185 million haven't been forgiven through the end of the year. And we are ready to serve our customers again during this recently announced second round.
I will now turn it over to Jim for further comments.
Thank you, Kevin, and good morning. I will refer to the earnings deck while commenting on key themes for the quarter. I will start with a review of the balance sheet, deposits contained to see growth in the quarter and were up $126 million or 4.2% annualized. For the year, total deposits are up $1.8 billion, and most of that growth has been a non-interest-bearing accounts. 96% of deposits are core, and the company has virtually no wholesale funding. Total loans were $10.9 billion at December 31.
During the quarter, loans excluding PPP grew $28 million, which represents an annualized growth rate of about 1%. PPP loans declined $179 million from the previous quarter and we accelerate the recognition of $3.1 million in deferred fees associated with the early payoff of these loans. This trend is expected to continue with the next 2 quarters likely to see material declines in PPP loans, which will result in the associated deferred income to be recognized on an accelerated basis.
Asset quality measures are reflected at Slides 13 through 15. Nonperforming assets represented 44 basis points of total assets, excluding PPP and we're up modestly from the previous quarter, loans 30 to 89 days past due represented 27 basis points of loans, again, excluding PPP and we're also up slightly compared to the previous quarter. All of our credit metrics remain near historically low levels and loan deferrals continued to decline. As of December 31, deferrals represent 1.5% of total loans outstanding, excluding PPP. Credit costs are considerably lower this quarter. The provision for credit losses was $10.5 million for the quarter, which resulted in the allowance for credit losses increasing modestly to 1.8% of loans, excluding PPP.
The allowance for credit losses is meaningfully influenced by qualitative factors attributable to the pandemics impact on the general economy. Although economic projections continue to trend in a positive direction, there remains considerable uncertainty. For the quarter return on average assets and return on tangible equity were 0.84% and 11.2% respectively.
Net interest income for the quarter was $108 million and was up marginally from the third quarter. Reported margin in the fourth quarter was 3.35% as compared to 3.29% for the third quarter. The improvement was driven by our deposit repricing efforts and the accelerated recognition of PPP fee income. Core margin was down by 1 basis point compared to the third quarter.
As seen on Slide 22, non-interest income declined $8 million from the previous quarter with the decrease largely coming from mortgage. Wealth and insurance continued to be stable sources of non-interest income and service charges continued to improve, but are still below pre-pandemic levels. Non-interest expenses were up $5.6 million to $122.2 million.
As Kevin mentioned earlier, we recognized a $7 million restructuring charge and a $2 million swap termination fee. The core efficiency ratio for the quarter was 64% and was up marginally from the third quarter. I will now turn the call back over to Mitch.
Thank you, Jim. In closing, we start 2021 with a heightened sense of optimism. Our commitment to the safety and security of our employees to meeting the needs of our clients and to being good citizens in our communities will help us build shareholder value.
Now, we'll turn the call over to the operator for Q&A.
Now, we'll begin the question-and-answer session. [Operator Instructions] First question is from Jennifer Demba of Truist Securities. Please go ahead.
Thank you. Good morning.
Good morning, Jennifer.
Thanks for the information on the efficiency initiative. Is there any thoughts giving - to doing any [core] [ph] on that front as you progress through 2021, depending on how the revenue growth environment looks? And also, just want to see what your interest is in acquisitions at this point. Thanks.
Sure. Thank you, Jennifer. And I will ask Kevin to begin with the expense efficiency focus. And I'll circle back on acquisitions. Kevin?
Yeah, thank you, Mitch, and good morning, Jennifer. Yeah, so when we look at our efficiency efforts that we rolled out in Q4, this is the first phase of many phases. We are not done. We continue to look at ways to be more efficient. And we like looking at the efficiency ratio, because it encompasses both revenue growth and expenses.
And so, to your point, we still think that there is some - there are sort of some headwinds on revenue. We think we can overcome them. As we look at the opportunity for revenue growth, that's going to be built off how we're positioned to grow the balance sheet.
We're optimistic of what we started to see in Q3 about margin stabilizing that that continues to be a reality. So growth coupled with a stabilized margin will help lift revenue. When we look at noninterest income, mortgage continues to have some strength in it.
Again, we all know that mortgage can be volatile. But right now, it still has a lot of tailwinds pushing mortgage production. Aside from mortgage though, we feel that we've got some opportunities in the fee income collection side, whether it is loan fees or some of our more commercial-oriented deposit fees. That's on the revenue front. We feel that there's going to be an opportunity for some growth there.
On the expense side, you should continue to expect us to look at ways to reduce expenses, whether that comes through evaluating the branches. But when we look at branches, the locations that we are looking to close coming out of Q4 are more end-market consolidations. That's why we're trying to take the average size of our branches and our footprint and increase them, we're really taking multiple markets where we have multiple locations and see is there an opportunity to consolidate them and not disrupt customer service.
A couple of things that we have in 2021 that we think will help on the expense initiatives is our focus is really in our 2 - our line items that are the largest in the noninterest expenses: salaries, employee benefits, and occupancy and equipment. The third largest line item is data processing. And we do have an opportunity this year to do some renegotiation with our core provider. We are expecting some level of concessions in that expense.
We can't quantify that right now. We're in the early phases of it. So, when we look at what we've done in Q4, you should expect more of those types of initiatives around salaries and employee benefits, occupancy and equipment, as well as an opportunity on data processing. So I would just say there's still more to come and more work to do on our efficiency ratio.
Mitch, do you want to - any questions or, Mitch, you want to address the question about just appetite for acquisition?
Sure, sure, and thank you, Kevin. And as Kevin just explained, while we're clearly focused today on the challenges, the headwinds, the opportunities as Kevin just described, while we walk through the pandemic, as we have done in the past consistently, we're opportunistic, whether that'd be talent, we had the opportunity to add a new relationship manager steering 4Q, whether that'd be new markets or, Jennifer, to your question M&A partners.
We continue to evaluate opportunities that drive shareholder value. And as always, beginning with culture and business model and making sure alignment exists, always to answer that question, are we better together? And I've stated before, I believe the pandemic offers opportunity to have those discussions. And we have - we will continue to evaluate these opportunities as the opportunities present themselves.
Thanks so much. That's very helpful.
Thank you.
Thank you. Next question is from Michael Rose of Raymond James. Please go ahead.
Hey, good morning. I hope you all are well.
Good morning.
I wanted to go back to mortgage. One of your larger end market banks yesterday guided mortgage revenue down 40% to 50% this year. It's a smaller piece of their business. It's a much bigger piece of your business. And I'm just trying to kind of reconcile, why you think you could do better and then some of the initiatives that you've laid out? Do you have sort of a gross number that you can kind of throw out there that might offset some of that declines in revenue? Thanks.
Sure. Thank you, Michael. And we do continue to feel good about our mortgage business, it's been built over a number of years, and we consider that a key financial service of our company. But Jim, do you want to expand on the mortgage business?
Sure. Yes, Michael. So as we look at mortgage, I guess, a couple of things that might be instructive as we think about mortgage. So going into the fourth quarter, we knew there would be some seasonality and we thought we'd see that, we didn't see it as much as we thought. So we were pleased with Q4 margins were generally steady, although volumes are off a touch. So with that as sort of a starting point for 2021, clearly, we don't know what it holds. But I will say very early on that we're pleased with mortgage, it's off to a good start. We're not expecting it to have the year-to-date in 2020.
But I think our hopes are up that it can have, nonetheless a good year. I think some of the some of the dynamics in the business. I mean, you're likely to see refinance volume come off from what it was in 2020, but purchase activity should be solid. And a lot of that's going to depend upon inventory. And that's really tied to the pace of the vaccine distribution and how that unfolds.
But I would say that we're hopeful it's an important business to us. We do a nice job in that area. We continue to recruit. So I don't know where it will end up. But we're hopeful as we look at 2021 and what mortgage could represent.
Okay. So it would the expectation be that you guys could potentially do better than the MBA forecast?
I mean, we would like to think we could, Michael, we don't clearly know what we're going to do relative to that forecast. But we've got a really good unit, we continue to recruit there. And so, I don't know how it will play out versus that forecast, I've seen those forecasts. But we like the business and we feel like we're poised to have a good year. And we'll see what the environment gives us.
Okay, thanks. And then maybe just on loan growth, you guys have had a pretty good history being able to recruit talent, you've spent the better part of the last 2 years recruiting talent, obviously, the environments challenged. But any sense for kind of what loan growth could look like this year? I assume there's going to be some more pay downs things like that, but any sort of stab at initial 2021 outlook? Thanks.
Sure. Thank you, Michael. Let me start with a little backdrop to your question and then maybe some thoughts on go forward. And I'll start with pipeline and make a few comments about production and what we saw in 4Q, and maybe just reflecting on how we're starting the year in that regard. So we're beginning the quarter with a pipeline of $238 million. That's up from where we started 4Q at $219 million. We did see in 4Q, we saw our pipeline continue to build, which was encouraging, again, as we saw in fourth quarter, and as we start first quarter, the pipeline is reflective of core bank that's hitting on multiple cylinders.
So, as I look across the markets in the business line, for example, 17% is in Tennessee, 14% in the Alabama, Florida Panhandle, 23% in Georgia, Central Florida, 14% in Mississippi, and 32% in our corporate and commercial business lines. You mentioned the - us being opportunistic, and I mentioned that early when I answered Jennifer, and new hires, and again in the fourth quarter, the individuals that have joined the company. Over the last, we'll say 18 to 24 months produced 20% of that production. So we are continuing to benefit from that as well as a strong legacy team.
But going back to your question, just looking over the dashboard, if you will, a pipeline of $238 million should result in about $71 million growth in non-purchase outstanding in 30 days that pipeline would be indicating a production for the quarter in the 5.75-6.25 range. We did see an increase in production with the 4Q actually had production of over $700 million in 4Q.
But to your point, one of the headwinds was payoffs. And we, for instance, this past quarter, they were up $740 million over calendar last full quarter average. I don't know that that repeats itself, but certainly when you look at the nature of pay-downs today, bar selling the underlying assets and some cases we lose it to term and rate. And one thing, we will not step away from is our fundamental of underwriting that that will be prudent.
And then the permanent market course is quite active, so all of those things were somewhat of a headwind. But with all of those things, we saw net loan growth for the quarter. So back to your question, we feel very good about our markets. We feel very good about our team. And we expect positive loan growth going forward. That's hard to predict. At this point, walking through the pandemic as it's been in the past, but as we've seen over the last quarter to net of or excluding PPP, we do expect to see continued net growth.
I appreciate all the color, Mitch. Thanks for taking my questions.
Thank you, Michael.
Thank you. Next question is from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.
Good morning, everyone.
Good morning, Kevin.
I was - I know there are a lot of different variables in the margin. I was hoping maybe we could just focus on the core margin, so taking purchase accounting and PPP fees out of it. And I think you said it was down 1 bps of fairly stable and wondering if you can talk about some of the headwinds and tailwinds there. I would assume, continuing to take funding costs down, but excess liquidity remains a drag are some of the ones I can think of, and then maybe translate that into how you're looking at that core margin going forward? Thanks.
Sure. Absolutely. Jim, do you want to start with margin? Kevin, you may have some follow-ups relative to PPP? Jim?
Sure. Yes, Kevin. So I think you hit it on them. So we - as we look at margin and think about that core margin going forward, the 2 variables in 2021 are the biggest variables, if you will, it would be loan growth and liquidity, and how much of that liquidity is absorbed by that loan growth. And so what that liquidity tax ends up being in 2021? I don't know. But as we think about it now, and again ex-accretable yield, ex-PPP, I would think we see that core margin flattish to down slightly. Again, the biggest thing is how that liquidity plays out. I will say a couple of other points about the margin, we do still have some opportunities, you mentioned deposit costs, we've got about $1 billion of deposit repricing over the next 6 months or so.
The average rate on that is roughly 1%, so that that represents an opportunity, so we still see some room and deposit costs coming down. I think total deposit costs for us were just above 30 basis points in Q4, 25 basis points is probably, roughly the area where we're going to sort of bottom out would be my guess, just based upon what we've done historically there. So again, I think the biggest variables, what can we do with that liquidity? And hopefully, there's that as Mitch referred to, we're optimistic about the ability to grow loans, how much we'll see. But I think that's the biggest variable going into 2021.
All right. Thanks, Jim. And then just 1 follow-up with the focus being on the expenses and cost containment. And these initiatives that are just really starting, I was wondering, if you'd characterize this as really offsetting spending that's going on like I know you talked about the digital focused earlier on the call, or whether some or any of this will fall to the bottom line. So in other words, just in terms of looking at that the expense run rate we have today, whether your outlook is for that to be stable or whether it can actually decline over the course of the year? Thanks.
Sure. Kevin, do you our follow-up on expenses? Jim, you might want to follow on there as well?
Yeah, be glad to. Good morning, Kevin. So we - so yeah, our goal in light of compressing revenues has been to see the expense initiatives fall to the bottom line to offset revenue compression. I think, long enough and well enough that we recognize that our efficiency had been one of the spots in our story that that garners a lot of attention. We've been working to - we've been working for years to get that number down with the rate cuts and the revenue compression that we saw towards the end of 2019 and throughout 2020. It just highlighted the need to accelerate the momentum in the expense savings side of the efficiency equation.
So we recognize that we're going to be taking some of these savings and reinvesting them in either digital or technology solutions. We're going to reinvest some of the savings in new talent. But there is an expectation that the expense saves a portion, if not a significant portion of the expense save flow through to pre-tax income, flow through to the bottom line.
Thanks, Kevin. When you guys talk about efficiency, I realized it's such a focus and we're coming off a year where mortgage was so impactful in a positive way. Do you have any kind of soft realistic targets that you guys are pegging a year or so out on efficiency on where to take it?
Yeah, so it's similar to the story that we had 4, 5 years ago where this is going to stair step down. And it's going to be a continual effort of improvement. So 3, 4 years ago, we set a target of getting below 60% efficiency, and we had gotten down into the 57%, 58% range, right, as we crossed over 10. Unfortunately, we crossed over 10, lost debit card income, about the same time that that the interest rate environment started to change. So mortgage has been a significant tailwind, we've recognized that we have to overcome that that dynamic and our efficiency. But again, with some balance sheet growth to some of this is going to be timing, where I'm not saying that we can replicate every dollar of mortgage revenue that's lost, if we do start to see compression in mortgage revenue. But over time, we feel very confident that through expense savings, balance sheet growth, other types of fee income collection, can help mitigate that perceived headwind that's embedded in our mortgage operations right now.
Great, thanks, Kevin.
Thank you, Kevin.
[Operator Instructions] Next question is from Catherine Mealor of KBW. Please go ahead.
Thanks. Good morning.
Good morning, Catherine.
Just one follow-up on the expense conversation, is there a way that you could remind us what the current mortgage efficiency ratio is or how much of the expense basis is tied to mortgage, and trying to think about what may be the core bank run rate is and where that could go next year? And then we can kind of model mortgage volatility outside of that.
Kevin, you want to expand on mortgage, maybe the variable expense and mortgage as well?
Sure. So, yeah, so mortgage this year, with the growth that we had, we had an inflection point, where mortgage had typically been a drain or, yeah, what was a drain on the corporate efficiency, with the growth that we had, where actually crossed over to where it benefited the company efficiency ratio. So right now, I would say that it's benefiting the company ratio by a couple of percentage points, 2 to 3 percentage points.
And so, historically, that mortgage company had been running ahead of company. So it weighed. But I will say the improvements that the mortgage company has made during the pandemic, we have an expectation that they will come out of the cycle, this round of high production, high growth.
The efficiencies that had been made within the mortgage company, we expect them to come out being more efficient operation. So that drag that historically there will either be less of a drag or will be more in line with the company efficiency ratio.
So, right now, Catherine, to answer your question, mortgage is probably contributing a couple of points to the efficiency ratio.
Okay, so then, also could you - is there a way to think about what the mortgage efficiency ratio is on a standalone basis? I think I remember historically, I think you were saying that it was kind of in the 80% range. I'm assuming now it's significantly lower, just given the higher gain on sale margin.
Yeah, so typically through the course of the year, the mortgage company has been in the high 60% range. Right now, this past quarter, it was about 57%.
Okay, that's really helpful. And then, how about on buybacks? Do you view the buyback as a way to be opportunistic, if your stock price pulls back? Or would you have the intention of being aggressive in the buyback even at these current valuations?
Jim, as we - and good question, Catherine - as we prudently manage capital - Jim, you want to expand on just the buyback topic?
Sure. Good morning, Catherine.
Morning.
I think we - obviously, our capitals continue to build. And we've got a - I think we're in a good position from a capital point of view. And as I also think about capital, our allowances are I think in a good position. So as I think about those capital levers and buybacks being one, as you know, we got a $15 million authorization in place. It's something that we continue to think about. Not just buybacks, of course, but M&A as well. It's another logical source - or another logical use of capital.
So I would say to you that, as we go through the year and we continue to build capital, that thinking is going to become more - or that focus is going to become more prominent on buybacks. And we will continue to evaluate the merits and the returns of that, because obviously we're charged with - we're putting that capital to good use. And I would not be surprised if that analysis yields results in favorable metrics as it relates to buybacks.
So we'll see how the year unfolds. But we certainly will not hesitate if we see an attractive opportunity in utilizing that capital on buybacks.
Got it. Thank you so much. And I might slip in one more if I'm able to. Just on your credit outlook, your ACL increased this quarter. We've seen a lot of your peers keep it flat to a decline. Looks like a lot of your reserve build was in the commercial real estate and the construction book. So just curious what drove the increase and what your thoughts are for reserve release as we move into this year? Thanks.
Yeah, thank you, Catherine. And it certainly reflects our prudent approach. David, do you want to expand on credit and our thoughts there?
Sure. I'd be happy to. Hey, good morning, Catherine. So our thoughts were, in Q4 was just with the continued level of uncertainty in the marketplace and the continued direction while we saw some - many positive trends in Q4. As we got later in the quarter and saw some slowdown in unemployment numbers, we thought it'd be probably prudent to kind of just to make sure and stick on the conservative path from a continual reserve standpoint.
And so, that's kind of, I think, our motto is we're just going to continue to be conservative with an unknown outlook at this point as things progressed throughout the year. There's the potential for much lower provisioning levels at this point. But we'll just - we'll watch it and see what the quantitative and qualitative metrics are in 2021.
And hopefully, loan growth will continue to be a factor that we have to continue to reserve for and look for opportunities to utilize our current level of reserves. So that was kind of our thought behind continual reserve in the fourth quarter.
Got it. Makes sense. Thanks for the clarity.
Thank you, Catherine.
This concludes our question-and-answer session. And I'd like to turn the conference back over to Mr. Mitch Waycaster, President and Chief Executive Officer. Please go ahead.
Thank you, Nick. And to each of you on the call, we appreciate your time, your interest in Renasant Corporation. We look forward to speaking with you again soon and look forward to participating in the KBW Virtual Winter Financial Services Conference on February 11 and the D.A. Davidson Southeast Bank Tour on February 18. Thank you.
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.