Renasant Corporation

and welcome to the Renaissance Corporation 2020 Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Kelly Hutchison of Renasant Corporation. Please go ahead.

Thanks, Alison. 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 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. 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 relief, which has been posted to our corporate site, renaissance.com, under the Investor Relations tab in the News and Market Data section. 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 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 relief. And now I'll turn the call over to Renaissance Corporation Executive Chairman Robin McGraw.

Thank you, Kelly. Good morning, everyone, and thank you for joining us today. The second quarter marked our first full quarter operating during the pandemic. Later in our prepared remarks, we'll discuss in greater detail how the pandemic has affected our operations. but it's 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 of 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 has been truly remarkable. Our success this quarter is directly attributable to the countless hours of hard work and dedication of our team, and we commend their service and their loyalty to the company and our communities. There's no doubt the COVID-19 outbreak had a material impact on our second quarter results. Our net income for the quarter was $20.1 million, which represents basic and diluted earnings per share of 36 cents. Our net income included $5 million in after-tax expense, specifically attributable to the pandemic. These expenses reduced our diluted EPS by 9 cents. Furthermore, because we cannot accurately predict the depth and length of the economic impact resulting from the pandemic and the government's response thereto, during the second quarter, we recorded an additional $26.9 million in provision for credit losses and another $2.6 million to our reserve unfunded commitments. On a year-to-date basis, we have recorded $53.3 million in provision for credit losses and added $6 million to our reserve unfunded commitments. In addition to the impact of our COVID-19 related expenses and our enhanced provisions, 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 7 cents. Excluding these items, our diluted EPS for the quarter was 52 cents. 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 support 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 over $1.3 billion in loans under 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 our 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 during the government stimulus rollouts. Our regulatory capital ratios strengthened quarter over quarter, and all exceeded the minimum 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's $5.5 million of repurchase availability under the program, we currently do not foresee a situation where the program would be restarted before its expiration in October of 2020. We're committed to maintaining a strong capital and liquidity position while also serving the needs of each of our stakeholders 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 pressures 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 last quarter's financial results and the impact of COVID-19 pandemic. Mitch?

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 Triple P loans to this day. Our approach has been high-touch and intentional. which we believe is the driver behind our success. Our reputation for quality service garnered positive media attention, and we originated 30% of our loans 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, and 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 suite 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 the 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 clients 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 31-19. Total loans held for investment were $11 billion at the end of the quarter as compared to $9.7 billion at December 31-19. Included in our loan balance at the end of the quarter is $1.28 billion in PPP loans. We have utilized on-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 in, 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 Triple P 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 EIP deposits and core growth. Regardless of the interest rate environment, non-interest-bearing deposits enhance 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 the 1st, 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 operations 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?

Thank you, Mitch, and good morning, everyone. Let me first start by echoing Mitch's remarks about Jim. As a growing financial institution, we believe Jim is the right person to help us continue to execute on our strategic plan. We're excited to welcome Jim and have him head our talented finance team. He brings great leadership and extensive background and a passion for mentoring. In 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 Triple P loans was just under $6 million for the quarter. Accreditable yield recognized on purchase 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 second quarter of 2020 as compared to 375 for the first quarter. Core margin, as we have historically defined it, which excludes accretable yield on purchase loans and income collected on problem loans, decreased 33 basis points on a linked quarter basis. Included in this core margin decline is the effect of PPP loans and excess liquidity, both of which rate on margin during Q2. Triple P loans negatively impacted margin by five basis points during the quarter, and excess on-balance sheet liquidity impacted margin by another 15 basis points. So combined, both of them 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 was 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 eight quarters at an average rate of 1.4%, we are confident in our ability to continue to reduce our funding costs in order to mitigate the pressure on the asset yields. Non-interest income continues 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 gross mortgage banking income, excluding a $5 million pre-tax mortgage servicing rate valuation adjustment of $50 million. Refile 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 overdraft fees during the quarter. We attribute this to increased customer liquidity generated by the various stimulus plans and programs and an overall decrease in consumer spending as shelter in place and similar government restrictions were imposed across the country. We anticipate this 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 pre-tax 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 accruals for anticipated health and life expenses. The remainder of the expense is attributable to supplies, 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 increase in related compensation costs for mortgages 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 remain stable and actually improve slightly from the first quarter. Our annualized net charge-offs were six basis points of average loans in Q2, and we have yet to see any unusual trends in our non-performing loans. In fact, Our loans 30 to 89 days past due were 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 concentrations 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 deferral 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 24th. 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 in 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 30th, 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 24th, 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 actually 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 24th compared to June 30th. 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 by $2.6 million. Our allowance 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 non-performing 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.

Thank you, Kevin. I'd also like to welcome Jim Maybridge to our team. Jim is an old friend who has worked closely with us in the past. We're happy to have him as part of the Renaissance team. I'm also pleased to see Kevin have this opportunity to expand his role as our chief operating officer. He's been an integral part of our success and deserves this expanded role. In closing, the uncertainty that existed heading into the second quarter still remains as we begin the third quarter. We are unable to accurately predict the long-term impact of the virus and the continuing limitations on our economic activity, what they 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 you for Q&A.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star and then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. Once again, it is star and then 1 to ask a question. And our first question today will come from Jennifer Demba of SunTrust. Please go ahead.

Thank you. Good morning.

Good morning, Jennifer.

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

Sure. Jennifer, I'll begin with a discussion of the pipeline and how we have seen that build in the last several weeks, and then comment on what we could expect given that pipeline in production in the quarter, and then I'll reflect some on the production that we saw in Q2 in addition to Triple P. 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 would have been in the range of 190. 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 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, 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, you could expect about 68 million growth and non-purchase within 30 days. Also, taking the current pipeline, it would be indicating production this quarter more in the $550, $600 million range. which would indicate low to mid single digit net growth. But I would follow that by saying, until we began 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 that pipeline that I just mentioned does not include any current Triple P 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 compares to 516 million in the first quarter, it compares to $349 million same period prior year. The 521 led 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 $20-25 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 in net growth. I will say, too, the production of 521, 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.

My other question is on criticized loans. Can you talk about the trends you saw in the second quarter?

Sure. Jennifer, hi. This is David Meredith. So second quarter, we didn't see a material degrading 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. 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 to those two loans, but we have not seen a tremendous reflection in our asset quality at this point. We'll 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've not seen that relate to classified asset increase.

Okay, thank you.

Thank you, Jennifer.

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

Hey, good morning, guys.

Morning, Brad.

Thanks for taking my questions. Kevin, wanted to see if we can maybe start on the expense side of the equation. You know, 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.

Yeah, Brad, there was a little bit of a benefit, and it was attributable to the PPP, but 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-19, This was true in Q1. It will be true in Q2. It's true in Q2, and it will be true in Q3. Salaries and 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, data 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 or look at exiting that decision, whether it's a contract or a property or, in some cases, a hire. And so we'll continue to be mindful of expenses and look at that with urgency. We recognize 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, 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'll probably have some more COVID expenses in Q3, just looking at our states that we operate in and the high concentration of positive tests. We are expecting continued expenses from COVID. But if we look through that, the core expenses should be trending down.

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

Yeah, 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're viewed as a discount against that loan portfolio. It's being amortized over the contractual maturity of the loan. And for the most part, 99% of the loans that we 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? 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 the contractual maturity, which will be two years. Breaking down the $6 million of the benefit from the PPP program in Q1, About $3 to $3.5 million were tied to the fees, recognition of amortizing the fee back into income. The remainder would just be the stated interest income of 1%.

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

Sure. I'll make a couple comments and turn it over to Jim. So we continue to have strong levels of production. Our mortgage group, they locked about $1.7 billion. I think that was actually slightly down from Q1. I think Q1 was about $1.8, $1.9. But the margin expanded. And so the 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?

Just kind of looking into the third quarter, our volumes through July, daily lock volumes have continued to be strong, very similar to what we experienced in the second quarter. Margins have stayed really strong. We have had You know, we have to monitor what our competition is doing, and particularly on the wholesale side, we've 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.

Okay, great. Thank you, guys.

I will make one comment. Looking at our purchase refi volume, as noted in the release, we were roughly 58% 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. We anticipate that continuing.

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

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

Sure. So just looking at the efficiency of mortgage with the volume that they had, or maybe as a backdrop, typically mortgage before Q1 and Q2, their 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's 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 discussed some of those, whether it's the salaries and employee benefits, whether it is looking at property, whether it's 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 a link 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. There's 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's larger incremental balance sheet growth. It's 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. Those are the levers that we're going to pull if and when the tide of mortgage rolls out of the revenue stream.

Michael, one other thing, Mitch, one other thing I will mention, and as you know, we've been very opportunistic just hiring on 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 there. 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 seven 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.

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 the liquidity and the PPP loans. It sounds like there's some ability to actually improve the core margin here. Some of that excess liquidity runs out. It looks like you still have some room on the deposit cost side, the question becomes, on the loan yields. How should we think about that core margin in the near term? Thanks.

Yeah, so maybe let's define the core margin as we talk 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's real possibility for mortgage to – there's 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've got $2.4 billion maturing over the next eight quarters. Seventy-five to 80 percent of that is maturing over the next four quarters, 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 a 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 requirements 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 asset side to deploy excess cash.

So off of that $322 in the second quarter, maybe flat to slightly up is the way I'm reading it based on your comments. Is that the way to think about it? That's the way to think about it. All right, guys, thanks for taking my questions. Thank you.

Thank you, Michael.

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

Hey, good morning, everyone. Good morning, Kevin. 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?

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. The first phase deferral will be expiring, and so we do anticipate that 14% to continue to migrate downwards. But, again, I'm going to let David Meredith, our chief credit officer, just talk about what they're seeing in second phase deferral and also what the criteria are to qualify for a second phase deferral.

Sure, and I'll start with that criteria. So just real quickly on first phase, Kevin mentioned earlier, it was basically helping those customers who were in good standing with the bank. We offered them the ability to defer P&I payments on the commercial side for 90 days. Second phase is a little more robust. Through the deferral process, anybody who received a deferral had to have monthly monitoring of their loan to make sure we were in touch with the performance of the customer, loan migration, and so forth. Second phase deferral is a more detailed look at, basically, is there a need? How did the customer perform during the first phase deferral? Are there headwinds that are going to impact them through a subsequent deferral? Do they have the cash flow to meet debt service payments? Or are we properly aligned from a structural standpoint? Would that be the borrower also a guarantor? Are we collaterally in the right place and so forth? And so it's much more of a modification type than just purely another 90-day deferral. at the second phase. So it's a lot more robust process in phase two. And at this point, we have a fairly large percentage. If we look at our referrals, it's roughly $2.1 billion. About $1.8 billion of that is commercial in nature. And we will have a heavy deferral, 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 that have actually rolled into a second-phase deferral, but much more color-bound it comes from those interviews where we're looking at who's going to potentially request a second-phase deferral. And that number at this point will drop off materially. We expect based on preliminary numbers, by the end of August, somewhere around that time frame, that deferrals will drop to about no more than an 8% range based on those conversations with customers. We'll continue to see that migrate down through the end of Q3 and into Q4. But we've got a fairly good feel by an industry standpoint. Hospitality will continue to be a fairly heavy level of deferrals that need a second round. About 69% of that book of business will need a second round deferral. Then it drops off pretty materially. Arts and entertainment need 54% of that look. We'll 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 heavy level of Phase I 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.

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 at one and a half? Some banks, some larger banks have eclipsed, you know, 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.

Yeah, 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 in of our assumptions for this quarter's provision was the reality that there's five, the five states we operate in, there's now with the level of positive testing is putting back into question whether or not there's going to be some type of either pullback or maybe, again, this is all our presumption, 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 a, we've never assumed a 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 provisioning 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 it to what the impacts would be. isolate that impact to the higher risk loan categories, ensure 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 do 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 information. 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.

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

Thank you, Kevin.

Our next question is for Matt Olney of Stevens. Please go ahead.

Hey, thanks. Morning, guys. Morning, Matt. 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 builds 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. Yeah, Matt, good point. And as I ended that discussion and I made mention until we began to see some resolution, that one's hard to predict. So just thinking about the return 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, will 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. And I talked about our production of 521 million The current pipelines indicate probably production in that 550 to 600. 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 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.

Yeah, no, that's helpful, and it's definitely not an easy question to address at this point. So appreciate the commentary. And then I guess taking a step back, thinking about the margin, I think 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 repricing. If I go back four or five years, I think Renaissance had an interest-bearing deposit cost in the high 20, 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? I'm just trying to understand if there's been any structural changes to the bank recently that would prevent something like that from occurring if, of course, rates were to stay here for a few years.

Yeah, no, you're exactly right. I think our deposit costs bottomed out maybe 16 and – well, they bottomed out in about 13, 14, and they stayed at that bottom until about 16, 17 and 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 don't think that there's anything that would prevent us from doing that. Now, a lot's 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 rate down, but I think the challenge in front of us, and again, we operated in this environment for several years in the recent past, but we believe that we can get back to those levels soon. if not slightly lower. And the confidence on 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, 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.

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

Again, to ask a question, it is star and then one. Our next question is from Catherine Mueller of KBW. Please go ahead.

Thanks.

Good morning. Good morning.

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 rate into next quarter. And I know it's hard to guess, but I guess my first question is how much of that do you think sticks around and how much of it was really just kind of a 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 what are your thoughts on potential savings there?

All right, 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 roll out either Triple P or the process economic stimulus programs led to a lot of overtime. And, again, Robin and Mitch talked about the dedication of the team and But to just kind of amplify how dedicated they were, we had multiple teams working seven days a week, 12- to 14-hour days, 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 1. 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 to have to process. And so therefore, we're not expecting having to work those 12- to 14-hour days for multiple weeks. But that's just an example of some of the variables or the factors that could affect that COVID expense, overtime being one. 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.

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 Renaissance, 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 openings. 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.

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.

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

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