Good day and welcome to the Renasant Corporation 2021 Second Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kelly Hutcheson, Renasant Corporation. Please go ahead.

Good morning and thank you for joining us for Renasant Corporation's 2021 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. Although the markets in which we operate reopened over the first half of 2021, in connection with the rollout of the COVID-19 vaccines, the spread of the Delta variant reminds us that the impact of the pandemic and the federal, state and local measures taken to arrest the virus may remain significant factors impacting our financial condition and operating results for the foreseeable future. Other factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission including our recently filed earnings release, which has been posted to our corporate site www.renasant.com at the Press Releases link under the News & Market Data tab. We undertake no obligation and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now I will turn the call over to our President and Chief Executive Officer, Mitch Waycaster.

Thank you, Kelly and good morning. We appreciate you joining the call today. Before Kevin and Jim discuss results for the second quarter, I want to offer comments to the 2021 results thus far and share our outlook for the second half of the year. Many of the trends present in the first quarter continued into these last three months. We experienced slightly improved credit metrics, saw more deposit inflows, and produced net loan growth. Earnings reflected a lower margin contribution, which was partially offset by gains elsewhere in the company. Looking forward, we are optimistic about loan growth continuing despite the headwinds of elevated payoffs. Our team is focused on efficiency gains from both revenue and expense initiatives that should be increasingly evident in future periods. We operate in a number of dynamic markets that will give us opportunities for new business. Renasant's emphasis on capital, asset quality, reserve levels and considerable core deposit base remain central to how we manage the company. I will now turn the call over to Kevin.

Thanks, Mitch. Our second quarter earnings were $41 or $0.72 per diluted share. Several factors contributing to our earnings this quarter are worth highlighting. First, our net interest income held steady quarter-over-quarter. Core loan yields remain under pressure, but our ongoing deposit repricing efforts and fee income recognized upon PPP's loan forgiveness offset the dollar impact to net interest income. Second, as Mitch mentioned, the contribution from mortgage declined in the second quarter as interest rates rose and housing inventory remained scarce. However, our previously announced efficiency initiatives compensated for some portion of that decline and we expect the benefits from those and other initiatives to grow somewhat in upcoming quarters. Know that our work on efficiency is ongoing and we continue to evaluate our operating model and the profitability of our branch network. I'll reiterate that our efforts concerning efficiency are deliberate and we consider the long-term impact of any decision before moving forward by focusing on balance sheet growth, managing net interest income, leveraging our other lines of business to generate additional fee income and reducing excess cost, we believe efficiency goals can be attained. Our mobile and digital metrics continue to trend in a positive direction indicating a strong willingness of our customers to adopt new technology in this rapidly changing environment. It is essential that we provide our customers with quicker and more convenient access to banking services and we seek investments that deliver the technology and security that they've come to expect. Wrapping up the PPP program, continues to be an important focus of our team. We are assisting our customers through the forgiveness phase of round one PPP loans with around $614 million having been forgiven during the second quarter. At quarter end, we have approximately $247 million of round one PPP loans remaining on our balance sheet. We mentioned last quarter that we entered into a referral relationship with another firm to utilize this technology platform to originate round two PPP loans for our customers. In the second quarter, we realized approximately $1.4 million in referral fees from our partner. I will now turn it over to Jim.

Thank you, Kevin. As we walk through the quarter's results, I will reference slides in the earnings deck. Starting with the balance sheet, footings grew about $400 million in the quarter. This was largely driven by an increase in deposits, as shown on Page 9. Since the beginning of the pandemic, deposits are up over 25% with much of that growth in non-interest bearing accounts. We invested some of the excess liquidity in our securities portfolio increasing the balance $600 million from the previous quarter. As of June 30, we had approximately $1.6 billion in cash. We expect some of this liquidity will go into the securities portfolio in future periods. We experienced another quarter of loan growth with loans ex-PPP, up $75 million from the first quarter, and represent an annualized loan growth of 3%. PPP loan forgiveness rapidly accelerated during the quarter with only $247 million in PPP loans outstanding at quarter end. During the quarter, capital ratios continued their build, as seen on Page 12, and provide the company with flexibility for loan growth, buybacks or M&A opportunities. We did not incur a credit provision expense and the ACL as a percentage of loans ex-PPP moved down slightly from 1.76% to 1.74%. Credit quality metrics are shown on Pages 14 through 16. Past dues, classified and non-performing asset measures all remained relatively steady and net charge-offs dropped to three basis points of loans ex-PPP. COVID-related deferrals are now below 25 basis points with nearly all deferrals in our 1-4 Family Mortgage portfolio. Net interest income held steady quarter-over-quarter. PPP revenue was $10 million. Of the PPP income, accelerated recognition of deferred fees represented $5.2 million and we have approximately $4.1 million in remaining deferred fees to be recognized. Our core margin, which excludes purchase accounting accretion and interest recoveries was down 13 basis points from the first quarter and after also excluding the impact from PPP was down approximately 20 basis points. Excess cash weighed on the margin about 32 basis points in the quarter. Excluding the recovery on our MSR asset recognized in the first quarter, mortgage banking income was down $16 million quarter-over-quarter, primarily resulting from lower margin on sales. Aside from mortgage, the company experienced gains in all other fee income categories. Non-interest expenses with exclusions were down approximately $6.5 million for the quarter. As Kevin mentioned, we continue to see the benefits of expense initiatives announced in the fourth quarter and expect continued realization throughout the balance of the year. We also received benefit from a one-time state tax credit investment. We fully amortized a $3.1 million investment in non-interest expense and recognized a $3.4 million credit in the tax provision. I will now turn the call back over to Mitch.

Thank you, Jim. In closing, while we have more to do I am pleased with revenue and expense trends through the first six months and the prospect for more loan growth in the second half of 2021. Our balance sheet is well-positioned and affords us optionality as we look forward. Now, I will turn the call over to the operator for Q&A.

We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Kevin Fitzsimmons with D. A. Davidson. Please go ahead.

Maybe we can start out with mortgage that -- I think we've talked about this coming at some point. It was definitely kind of normalizing trends from what we've seen and just curious if you can drill down into what your thoughts on when and at what level mortgage revenues might trough? I know there were -- this quarter production stayed relatively strong, but you said you had compression in gain on sale margins so maybe a little detail on that. And also how mortgage expenses are acting? I'm assuming most of the decline in salaries was due to that variable rate costs. So just drilling down a little more into your thoughts on mortgage. Thanks.

Sure Kevin. And as you mentioned, going through your question, mortgage remains a key part of our business. And while we saw many things that we expected this quarter there are certainly positives as we look forward, but I'll ask Jim to expand on mortgage. Jim?

Kevin, good morning. And as you said, I mean, we essentially returning to more normal times in mortgage. And I would say if you look in detail at Q2 and think about where we're going for the second half of the year, I would anticipate that Q3 will -- if we continue the trends that we saw in the latter part of Q2 you'll still see a little bit of decline in terms of mortgage contribution in Q3. A couple of things there I would comment on; efficiency, as we look at the efficiency ratio in mortgage. It's in the upper 70s and that's sort of back to where we were in pre-pandemic times and we were running in the 50s for much of last year. I think a couple of things that we're looking at. Inventory remains a big part of that and as you know, it's not just true for us, it's true, I think for the industry. Inventory is a real constraint in terms of growth. But all-in, I think we've pretty much gotten close to the trough in terms of mortgage and that would be our expectation absent meaningful changes in the marketplace.

Hey Kevin. It's Kevin. I'd add a couple of comments just on mortgage; the mortgage operations and what we saw was a significant reversion to the mean. As you mentioned, we've all been expecting that. If we break down their expenses, you had asked about that, we did see variability on the expense side related to mortgage. Just looking at salaries and employee benefits, if you look at about -- we had roughly an $8 million to $8.5 million decline in salaries and employee benefit. Mortgage only made up about half of that. It wasn't all of it. It was only about half of it. And we've seen this and we've been talking about some of the disintermediation that we've had over the last couple of quarters with fee income and net margin. Our originators are based off production. If you see, we actually had strong production in Q2. We had $1.5 billion in production, down slightly from $1.7 billion in the prior quarters, but really what's affecting that income line item is the margin compression. And as Jim mentioned, we think that we're at a point of approaching the point of stabilization. We are enacting measures on the mortgage side that will -- show that there is more variable costs that can come out of the mortgage operations. And also would add that although compared to the past couple of quarters, yes, mortgage is down but mortgage did contribute $5.6 million for the quarter in pre-tax income. And that's actually several million dollars more than Q2 of 2019. So we recognize that it has -- mortgage optically over the last couple of quarter's looks like it's underperforming, but if you look at more normalized periods, which again we think Q2 was a reversion back to normality. We're actually up in gross income and pre-tax income on the mortgage side.

Kevin, I would just -- this is Mitch. I would just add as well. And as we talk about being opportunistic and hiring talent as Jim and Kevin have described. Jim -- Kevin just mentioned relative to expense and variable expense. We will continue to address those. We also see opportunity to continue to recruit talent within the mortgage team and we've been successful in doing that over time. It does remain a core line of business for us. So as we look forward, we will certainly -- as we remove expense, we'll look forward to opportunities to continue to grow that line of business.

Okay, thank you. Appreciate all that detail. And just a quick follow-up, you mentioned loan growth ex-PPP was up about 3% linked annualized. And Mitch, you mentioned that you're optimistic going forward. Some other banks have had a little more pronounced core loan growth that they reported this quarter. So I'm assuming from your comments, it was much more -- you guys experienced heavier headwind from pay-downs and pay-offs. So if you could drill down beyond that 3% to give -- what you're seeing has given you those signals of optimism and how much of a headwind those paydowns were? Thanks.

Absolutely and your question is right on point. Let me begin with the optimism, and let me start with the pipeline. I'll reflect on production this quarter and the build in that pipeline in production as we ended 2Q and what we're kind of saying as we enter into 3Q that's continuing. So our current pipeline is $261 million, that's up from $240 million as we started the prior quarter and up from $229 million prior year. But we do see good growing deal flow pipeline across all of our markets and business lines. And it's reflective in production. It's reflective in the pipeline as you look across those markets. 13% in Tennessee, 10% in Alabama, Florida Panhandle, 28% in the Georgia Central Florida markets, 34% in Mississippi, 16% in our corporate and commercial business lines. So as I look at the pipeline of $261 million that should result in about $78 million growth in non-purchase outstanding in 30 days. This current pipeline would indicate production somewhere in that $575 million to $625 million range. And as I said, we continue to see that build. That compares to production of $572 million this past quarter. That is up from $534 million in Q1. So we continue, again, to see the pipeline build production and certainly pointing toward positive loan growth in 3Q. You made mentions of payoffs, which is a very good point. We did see in this prior quarter payoffs elevate little over a $100 million. And if you look at just the last four quarter average, it's a little over $50 million. If you were to adjust that to our net growth -- if payoffs had normalized just at the prior quarter the 3% net would have been 7% net or if it's simply been at the average,…

The next question comes from Jennifer Demba with Truist Securities. Please go ahead.

I have two questions, first for Jim. Jim, could you just talk a little -- give us a little bit more detail on the expense outlook for the next few quarters based on what Kevin said on your efficiency and branch network initiatives that were still coming?

Yes, hey, Jennifer, it's Kevin. I'll go ahead and take that. So as we look out -- if you look there was significant decline in expenses quarter-over-quarter. It's down about $7 million. What we talked about, where some of that is just variability in the mortgage operations. But as we look at the core bank we are still realizing some of the benefits of two programs -- two initiatives that we announced: early retirement program and branch consolidation. Since we've announced that we've identified another handful of branches that are in the process of being consolidated. It's less exiting the market and taking multiple locations and consolidating them into one. We have approximately another five locations that we're looking at doing that with. And then in addition, there is still additional cost saves on the accountability measures that will be reflected in salaries and employee benefits that that occurred in Q2 and we'll see more realization of that in Q3 and Q4. So as we lookout we expect non-interest expenses to continue to decline. But a real quick comment just on the efficiency ratio, if you look at our reported efficiency ratio, it's about 67%, 68%. If you normal -- if you back out mortgage and just kind of the reversion to the normal loan mortgage, the Bank's efficiency ratio is more in the 63%, 62% range. It has been holding flat there for the last several quarters. Although the reported numbers bounced all over the place with mortgage, the Bank's efficiency ratios is kind of holding in there in that 63% range. And again, with efforts that we have on the expense side and I do think we have momentum on our expenses as we're realizing -- just starting to realize the cost saves from the initiatives we've enacted, you'll continue to see that line item come down. But again it's not all about the expenses. We have identified and are working on ways to improve revenue. We talk a lot about pre-tax, pre-provision income. And there is a lot of noise in the numbers, but underlying what we're excited about is a solid trend line of continuing steady increase in that pre-tax, pre-provision line item. And that comes from expense saves, but it also comes from the revenue side, which again if you look at the earnings release, we saw nice improvement in service charges. And in fact on the service charges line item we are actually slightly ahead of where we were of Q1 of last year and in almost every line item, whether it's wealth management, insurance, fees and commissions to help offset what's happening with mortgage we're seeing small and steady improvements in each of those other line items that will help offset.

Okay, thanks. My second question is on merger interest. There seems to be almost a frenzy going on in the industry Mitch, so I'd love to hear your updated thoughts on Renasant's interest in partnerships?

Yes. Thank you, Jennifer. And we certainly continue to evaluate opportunities that drive shareholder value. We are remaining disciplined in -- as we look at those opportunities. As always we begin with culture and business model and risk appetite and just making sure a line that exists. But to always answer that question are we better together. So as we have been opportunistic in the past and course for us that's certainly new talent. I've referred to that. I mentioned seven this last quarter, is actually up to 13 for the year. And also, as you've seen in our past just new markets or new business lines as we have continued to build out some of our commercial and commercial specialty in corporate. But also, just back to your point is certainly strategic partnerships. And we continue to be -- continue to evaluate those opportunities and certainly we'll be doing that going forward.

The next question comes from Brad Milsaps with Piper Sandler. Please go ahead.

Maybe, I want to start with the balance sheet. It looked like the period end securities portfolio was closing in on $2.2 billion, up quite a bit of the average. You guys have quite a bit cash likely to get more back with -- as the PPP loans run off. Just kind of curious how you're thinking about sizing the bond portfolio going forward and the stuff that you are buying, kind of what average rates are there that's coming on the books at?

Yes, good morning, Brad. So, as you know we pronged about $600 million in the quarter in terms of growth in the securities portfolio and anticipate we'll continue to grow that portfolio, albeit maybe at a more moderate pace. And of that, so we've got $1.6 billion in cash and I think we would sort of consider anything above $300 million to $400 million to be excess. So -- of course the hope is that we've got loan growth that will continue to be present and will absorb some of that liquidity. But bottom line is I do think you'll see that securities portfolio increase. In terms of the yield that we're putting that to work, it's roughly just above 1% and that's got a three or four year duration on it. So I think that's what we see in terms of liquidity. I mean, when we look at our balance sheet compared to peers, I think our investment portfolio is about 12% of earning assets and that would imply that if we're at peer levels that we'd have another $700 million or so in the securities portfolio. Not that we won't get there, but we will certainly probably increase that percentage over the coming quarters.

Got it. That's helpful and then just back to the mortgage business, just kind of curious the amount of loans that you actually sold during the quarter, just kind of curious what the pull-through rate on the pipeline was. And can you refresh my memory, I know in terms of commissions, do you pay those based on the locked pipeline and then retract some of that depending upon what's sold or is that on actual loan sales? Just kind of curious if you've got maybe more to come there. Thanks.

Yes, hey Brad, let me answer the last question first. No, we pay on actual units closed and sold. Now, we will accrue -- just for accounting purposes, we'll accrue at the time of lock income and expense, but we don't actually pay until the loan is closed and sold. I'll need to follow-up quickly on the actual amount of what we sold. I don't have that right at my fingertips. Jim, I'm not sure if you have.

I don't.

But Brad, we can follow-up with you on the amount that's actually sold.

Okay, great. And then maybe just a follow-on for Mitch, I think you mentioned new hires about seven in the quarter, just kind of curious, I know you've had voluntary retirement, you're looking for cost saves. What was kind of the net number of maybe new hires in the quarter versus maybe people? I know you're always sort of calling the bottom 5%, 10% or whatever. Just kind of curious what that net number might be?

Yes. So for the quarter, Brad, it's net down four. So we had 11 exits and to your point, most of those exits are driven around expectation and our discipline around the production that we expect. So like I say, I think the positive thing there is certainly that discipline remains. That's been true. If you look back at 2019, 2020, 2021, we've been very opportunistic with talent, particularly as we've added business lines as we've grown other lines of business, but it's certainly true in our core bank as well. So definitely opportunistic in hiring but the discipline is in place and the expectation of production.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, guys. Most of my questions have been asked and answered, but wanted to just touch on capital if I missed it. I know you guys have the buyback in place. You haven't really used any of it. I think it expires at the end of October. Any near term thoughts to using? And then just separately, I did see that you have the two series of debt that are coming due. Would the plan be to redeem and replace or just pay it down? Thanks.

Yes, good morning, Michael. Jim?

Sure. So Michael, on the buybacks, certainly with bank equities having pulled back the relative merits of a buyback have become more attractive. And you're correct, we did not have any buybacks in Q2 and none thus far in Q3, so no buybacks yet. But I do underscore they've become more attractive relatively speaking. And then in terms of the debt, you're right. We've got, I think July 1st was a $15 million piece of debt that was callable and then we've got another piece. I think its $16 million in size at September 1 and both of those are at higher rates. And so I would anticipate that that's something that we will act on at some point.

Okay, that's helpful. And then maybe just on the reserve front, we've seen a lot of big reserve reversals this quarter, and negative provisions. Mitch, I know you've talked about growing into it being a little bit more cautious and conservative. I would assume that's still the plan. Can you just confirm that? And then can you just remind us again what day one post a -- post CECL day one reserve is and if you think you can get back to that level over time? Thanks.

Yes, Michael, I'll make a comment. I will turn it over to Jim and of course, I reflected earlier on loan growth and certainly the prospects there. And I think those are good but at the same time as we continue to evaluate the reserve as we walk through the model. Jim expand kind of what we're seeing today relative to the model and what we're looking forward?

Sure. So when you look at the model there was -- while there was no change in terms of expense or release in the quarter there was lots of activity within that model. I would say if you looked at the buckets there was considerable activity. And if things do not change materially one way or another -- loan growth, the economic environment, et cetera, it does -- the data does point to releases in coming quarters. So we were a little slow to taper off last year in terms of providing for allowance and it feels like our model is just working versus peers. It's going to be a little slower to release than peers. So I do anticipate that you could see releases in coming quarters. As it relates to day one, I think we were just a touch below 1% on the ACL day one. Philosophically, we're in no hurry to get back there and again our preference is I'm sure for most people, is to grow into this allowance with loan growth. But I would not anticipate we get back to day one reserves anytime soon.

The next question comes from Matt Olney with Stephens. Please go ahead.

Want to circle back on the outlook for operating expenses. I believe, Kevin, you mentioned that we could see a continued decline of operating expenses. Can you just clarify if that includes or excludes that tax credit, amortization? I guess the question is kind of what's the baseline that you're assuming when you say it should decline from these levels?

Yes. So thank you for clarifying that because if you just look line item non-interest expenses are down $7 million. But if you back out that tax benefit or that tax amortization and the benefits in the effective tax rate actual expenses are down $10 million. So again, I would say to answer your question is both. But we continue to expect non-interest expenses to come down -- core non-interest expenses to come down, which would also be the reported as well.

Got it ,okay. Thank you. And then also going to ask about the core loan yields, I think we were down around 7 basis points if I take out the discount accretion. Any color on the new loan yield production that we saw in 2Q?

Sure, Matt. In Q2 new loan yields were about 3.90 and just for comparative purposes they were about 3.70 in Q1. And then in terms of what they're replacing, if you look at loans maturing over the next 90 days those loans are -- the yield on those loans is about 4.20.

Okay. Thanks for that Jim. And then last question for me is around deposits, I think interest-bearing deposits are now around 36 bps. How much more room do you guys have to bring that down from here?

So, cost of deposits in the quarter I think was 27 bps -- it went from 27 bps to 24 bps and our goal there is to get that below 20 by year end. There's about a $1.6 in interest-bearing deposits that reprice in the next 12 months. And those funds are roughly at 90 basis points. So total cost of funds went from 38 to 34 and much like the cost of deposits we see some further opportunity there. We'd hope that would get below 30 by year-end.

[Operator Instructions]. The next question comes from Catherine Mealor with KBW. Please go ahead.

Just one last follow-up on mortgage. Can you give us any indication on if the lower mortgage revenue was from a decline in the fair value of the large pipeline or is it just -- it looks like from your commentary that the origination volume was down but not all that much. And so just curious on what else the pipeline did linked quarter and if that kind of factored into this? And if not, does that mean that we've got further downside as that pipeline starts to normalize even further in the back half of the year?

I would say, Catherine much as we said, I guess in answer to earlier question and certainly happy to get into more detail with you after the call, but I think generally we're pretty close to the trough in mortgage when you look at the results for Q2. And I think there is some downside. But it's -- we're pretty close to where a normal profitability outlook would be in Q3.

Yes. Catherine, I would just add, the drop in gross mortgage income was more the value of that -- the $1.5 billion at lower margins. So yes, as we get into future quarters, if there is variability in that production, if there is variability in the margins, if less production at lower margins. Yes, it will drive lower levels of growth income. But I think what we saw this quarter, is again a large swing back to the mean, which is where we've been operating kind of pre-pandemic. I think it does speak to how strong our mortgage operations are to adjust all of that accrual accounting in the pipeline and still have almost $6 million of profitability. But I do think, as we go forward, we're going to see more of the cyclicality of mortgage as we typically see and that is Q2 and Q3 being the stronger quarters; Q4, Q1 could be just weaker quarters because that's typically when home buying slows down. It just feels like we're returning more to normal there are external factors, interest rates have pulled back a little bit and so we are seeing a little bit more refi opportunity. As Jim mentioned, housing inventories are going to be a significant variable in this as far as new home sales. So we're not completely back to normal, but we view Q2 as one large step back to returning to normal mortgage operations and its usual cyclicality that comes with it.

Right. And then as I think to what normal is, I look back to 2018, 2019 and total mortgage revenue was I think $50 million in 2018, $57 million in 2019 but there was the acquisition of the First Bank kind correspondent piece, so how much should we think about kind of adding on to revenue, just from that acquisition if we're trying to compare a normalized year?

Yes, I think a good proxy is comparing it to 2Q of 2019 and if you look just over those two periods I think we had -- I'm going to be approximate because I don't have the exact numbers, but I think in gross revenue, we had about, call it $15 million in gross revenue compared to this quarter about $20 million to $21 million. Pre-tax income, I think is up almost double over that same time period. So I think 2019 will be a good proxy for what a more normalized operation looks like, but at the same time we're operating more efficiently. We've added new team members, whether it's wholesale or additional team members that will drive growth in that line item and growth in the profitability.

Great, okay, that's really helpful. Thank you, Kevin. My last question is just the question -- just can you remind us about how much you've got left in PPP fees and your current expectations for the consulting fee and other income as well.

So round one PPP Catherine there's about $4 million left and round two that program of course is terminated and we've recognized all the referral fees there in Q2.

Great, okay. So no more coming through the fee line from round two?

Yes, on round two, that's correct.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you, Tom and to each of you on today's call. We appreciate your time and your interest in Renasant Corporation. We look forward to speaking with you again soon. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.