Renasant Corporation

Good day and welcome to the Rent-A-Thon Corp 2020 Fourth 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 or an opportunity to ask questions, to ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Note, this event is being recorded. I'd now like to turn the conference over to Ms. Kelly Hudson, 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 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 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.renaissance.com, at the press releases link under the news and market data tab. Furthermore, the COVID-19 pandemic has magnified and likely will continue to magnify the impact of these factors on us. We undertake no obligation and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now I will turn the call over to our President and Chief Executive Officer, Mitch Waycaster.

Thank you, Kelly. 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 the 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. 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 dollars or 56 cents per diluted share. Our earnings for the full year are 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 Triple P 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 costs 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 two 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 two 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 a 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 Triple P activity, we are focused on assisting our customers through the forgiveness phase of the first round of Triple P loans. With around $185 million having 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 continue to see growth in the quarter and were up $126 million or 4.2% annualized. For the year, total deposits were up $1.8 billion and most of that growth has been in non-interest bearing accounts. 96% of deposits are core and the company has virtually no wholesale funding. Total loans were 10.9 billion in December 31st. During the quarter, loans excluding Triple P grew $28 million, which represents an annualized growth rate of about 1%. Triple P loans declined $179 million from the previous quarter, and we accelerated 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 two quarters likely to see material declines in Triple P loans which will result in the associated deferred income to be recognized on an accelerated basis. Asset quality measures are reflected on slides 13 through 15. Non-performing assets represented 44 basis points of total assets, excluding Triple P, and were up modestly from the previous quarter. Loans 30 to 89 days past due represented 27 basis points of loans, again excluding Triple P, and we're also up slightly compared to the previous quarter. All of our credit metrics remain near historically low levels, and loan deferrals continue to decline. As of December 31st, deferrals represent 1.5% of total loans outstanding, excluding Triple P. 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 1.2%. 8% of loans, excluding Triple P. The allowance for credit losses is meaningfully influenced by qualitative factors attributable to the pandemic's 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 Triple P fee income. Core margin was down by one 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 continue to be stable sources of non-interest income, and service charges continue 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.

I'll begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question is from Jennifer Dembo of Truist Securities. Please go ahead.

Thank you. Good morning.

Good morning, Jennifer.

Thanks for the information on the efficiency initiative. Is there any thought to giving, to doing any more on that front as you progress through 2021, depending on how the revenue growth environment looks? and also just wanted to see what your interest is in acquisitions at this point. Thanks.

Sure. Thank you, Jennifer. And I'll 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. 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's some 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 that what we started to see in Q3 about margin stabilizing, that continues to be a reality. So growth coupled with a stabilized margin will help lift revenue. When we look at non-interest 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. So 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 in-market consolidations. So we're trying to take the average size of our branches and our footprint and increase them and really take in 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 initiative is our focus is really in our two line items that are the largest in the non-interest expensive 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, 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 described, while we walk through the pandemic, As we have done in the past, consistently, we're opportunistic, whether that be talent, we had the opportunity to add eight new relationship managers during 4Q, whether that 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 are we better together and i've stated before i believe the pandemic offers opportunity to have those discussions and we we have we will will continue to evaluate these opportunities as the opportunities present themselves thanks so much it's all helpful 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. I wanted to go back to mortgage. One of your larger in-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'll lay out. Do you have sort of a gross number that you could kind of throw out there that might offset some of that decline in revenue? Thanks.

Sure. Thank you, Michael. And we do continue to feel good about our mortgage business that's been built over a number of years, and we consider that a key financial service of our company. But Jim, if 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, you know, going into the fourth quarter, you know, we knew there'd 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 were off a touch. So with that as sort of a starting point for 21, 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 certainly not expecting it to have the year that it did in 20. But I think our hopes are up that it can have nonetheless a good year. I think some of the dynamics in the business, I mean, you're likely to see refinance volume come off from what it was in 20, 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... Don't know where it will end up, but we're hopeful as we look at 21 and what mortgage could represent.

Okay. So would the expectation be that you guys could potentially do better than the NBA 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 Lone Grove, you guys have had a pretty good history being able to recruit talent. You've spent the better part of the last two years recruiting talent. Obviously, the environment's challenged, But any sense for kind of what loan growth could, you know, look like this year? I assume there's going to be some more paydowns, things like that. But any sort of stab at initial 2021 outlook? Thanks.

Sure. Thank you, Michael. And 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 the fourth quarter and as we start the first quarter, The pipeline is reflective of a 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 Alabama, Florida, Panhandle, 23% in Georgia, Central Florida, 14% in Mississippi, and 32% in our corporate and commercial business lines. You mentioned us being opportunistic, and I mentioned that earlier when I answered Jennifer, and new hires. 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. 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, the pipeline of 238 million should result in about 71 million growth and non-purchase outstanding in 30 days. That pipeline would be indicating a production for the quarter in the 575, 625 range. We did see an increase in production as we went through 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 some 140 million over kind of the last four quarter average. I don't know that that repeats itself, but certainly when you look at the nature of pay downs today, bars selling the underlying asset, some cases we lose it to term and rate. And one thing we will not step away from is our fundamental effect of underwriting. That will be prudent. And then the permanent market, of 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 or excluding triple P, we do expect to see continued net growth.

I appreciate all the comments. Thanks for taking my questions.

Thank you, Michael. Thank you. Next question is from Kevin Fitzsimmons of DA Davidson. Please go ahead.

Good morning, everyone. Good morning, Kevin.

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 one bit, so 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 Triple P. Jim?

Sure. Yes, Kevin. So I think you hit it on them. So as we look at margin and think about that core margin going forward, the two variables in 21 are the biggest variables, if you will, will 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 21, I don't know. But as we think about it now, and again, X accretable yield, X triple P, I would think we see that core margin, you know, flat-ish to down slightly. Again, the biggest thing is how that liquidity plays out. I will say in a couple of other points about the margin, We do still have some opportunities. You mentioned deposit costs. We've got about a billion dollars of deposit repricing over the next six months or so. The average rate on that is roughly 1%. So that represents an opportunity. So we still see some room in deposit costs coming down. I think total deposit costs for us were just above 30 basis points in Q4. 25 basis points is probably, you know, 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 variable is 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 21.

All right. Thanks, Jim. And then just one 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 space. the digital focus earlier in the call, or whether some or any of this will fall at 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 want to follow up on expenses? Jim, you may want to follow on there as well.

I'd 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 you know us long enough and well enough that we recognize that our efficiency had been one of the spots in our story that garners a lot of attention. 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 saving 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 saves, flow through to pre-tax income, flow through to the bottom line.

Thanks, Kevin. When you guys talk about efficiency, I realize 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, uh, realistic target that you guys are pegging, um, a year or so out on efficiency on where to take it?

Yeah. So it's similar to the story that we had, you know, four or five years ago where this is going to stair step down. Um, and it's going to be, it's going to be a continual effort of improvement. Um, so, you know, three, four 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 the interest rate environment started to change. So, mortgage has been a significant tailwind. We recognize that we have to overcome that dynamic in our efficiency. But again, with some balance sheet growth, some of this is going to be timing. 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.

Again, if you have a question, please press star, then one. Next question is from Catherine Meller, 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 base is tied to mortgage and trying to think about what maybe 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 and maybe the variable expense in 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 on the corporate efficiency. With the growth that we had, we 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, two to three percentage points. And so historically, that mortgage company had been running ahead of companies, 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 have been made within the mortgage company, we expect them to come out being a more efficient operation. So that drag that historically is 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 is there a way to think about what the mortgage efficiency ratio is on a standalone basis? 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 about that topic.

Sure. Good morning, Catherine. Morning. I think, you know, 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 allowance is, I think, in a good position. So as I think about those capital levers and buybacks being one, As you know, we've got a $50 million authorization in place. It's something that we continue to think about, not just buybacks, of course, but M&A as well as another logical source or another logical use of capital. So I would say, too, that as we go through the year and we continue to build capital, that thinking is going to become more prominent or that focus is going to become more prominent. on buybacks, and we will continue to evaluate the merits and the returns of that. Obviously, we're charged with putting that capital to good use, and I would not be surprised if that analysis yields or results in favorable metrics as it relates to buybacks. So we'll see how the year unfolds, but we certainly will not hesitate to if we see an attractive opportunity in utilizing that capital on buybacks.

Got it. Thank you so much. 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. It 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 relief as we move into this year. Thanks.

Yeah, thank you, Katherine. 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. Good morning, Katherine. 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 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 our motto is we're just going to continue to be conservative and With an unknown outlook at this point as things progress throughout the year, there's the potential for much lower provisioning levels at this point. But, again, we'll just watch it and see what the quantitative and qualitative metrics are in 21, and hopefully loan growth will continue. will continue to be a factor that we have to continue to reserve for and look for opportunities to utilize our current level of reserve. 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. I'd like to turn the conference back over 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 Renaissance 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 the 11th and the D.A. Davidson Southeast Bank Tour on February the 18th. Thank you

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