Q2 2020 Renasant Corp Earnings Call
[noise], Okay and welcome to the Renaissance Corporation, 2022nd quarter earnings Conference call and webcast.
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I'd now like to turn the call so over to Kelly Hutchison Apprenda. Some corporation. Please go ahead.
Thanks, Allison good morning, and thank you for joining us for Renaissance Corporation, 2022nd quarter webcast and conference call participating in this call today are members of Renaissance Executive management team.
Well we began please note that many of our comments during this call will be forward looking statement, which involve risks and uncertainty. There are many factors that could cause actual results could differ materially from the anticipated results were other expectations expressed in the forward looking statement.
Obviously, the continuing impacted because it 19 pandemic the federal state and local measures taken through or less the virus as well as all of the follow on effect from the pandemic situation or the most significant doctors that will impact our future financial condition and operating result.
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 on a recently filed earnings release, which has been posted to our corporate site Renaissance Dot com under the Investor Relations tab.
The news in market data section.
Furthermore, the Kevin 19 pandemic has magnified unlikely we'll continue to magnify the impact of these factors on that we undertake no obligation and we specifically disclaim any obligation to update or revise forwardlooking statements.
Like changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
In addition, some of the financial measures that we make discussed this morning, maybe non-GAAP financial measures a reconciliation of the non-GAAP measures to them as comparable GAAP measures can be found in our earnings release and now I'll turn the call over to Renaissance Corporation Executive Chairman Robin Mcgraw. Thanks, Good morning, everyone and thank you joining us today.
Sure quarter marked our first quarter operating during the.
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Endemic its effect.
But its important first of all lights unity of our team no response to meet the needs for our clients in our communities selfishly efforts by our entire team at every level referrals are footprint support not only our blog and also one another's bar spreads throughout our communities.
Who truly Moore our success. This quarter is directly attributable to the cameras are hard work dedication of our team and we commend their service in their loyalty to the company and our communities. There's no doubt Koby 19 outbreak you had a material impact <unk>.
Net income from quarter was $20.1 million, which represents basic and diluted earnings per share 36.
Our net income included $5 million net tax expense, specifically attributable to Ben maybe [noise].
These expenses reduced our diluted EPS.
By nine cents. Furthermore, because we cannot accurately predict definitely the economic impact, resulting from the pandemic and the government response, there do during the second quarter, we recorded an additional $26.9 million in provision for credit losses, and another $2.6 million to our reserve unfunny, but.
On a year to date basis, we recorded $53.3 million vision for any losses and $86 million through our reserve.
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In addition to the impacted by Cobot 19 related expenses and our enhanced provision.
Quarterly negative valuation adjustment to our mortgage servicing rights of $4 million on an after tax basis, which reduced our diluted dps by seven cents.
Excluding these items our diluted EPS for the quarter was 52 cents.
Listen to them back to the Cobiz 19 pandemic in these other items in our resort, we had a solid second quarter results not only highlighted the diversity of our revenue streams, but also reflect our commitment for our clients in our communities even through these turbulent times spider compressed timeframe, our team designed and executed abroad.
This has allowed us to originate over $1.3 billion loans and Paychex Dick's broke.
Through the end of last week, we are processed over 127000 economic impact type.
We believe rooms on played an instrumental Rome, providing the capital liquidity required by existing clients in a time grade need and we hope that we've gained the trust and respect of our new class as a result, our hard work diligence due to government stimulus rollout.
A regulatory capital ratios strength from quarter over quarter, and all exceeded the minimum requirements to be considered will capitalize I'll remind you that we suspended our stock repurchase program during the first quarter 2020.
Although there's five and a half million dollars repurchase available Brogan. We currently do not pursue situation where their program would be restarted for its exploration.
When you really.
We are committed to maintaining a strong capital liquidity position well also serving the needs of each of our stakeholders. During these uncertain times. We believe our continued efforts to affected demand growth and profitability of our core business in light of economic raise we face we'll continue to preserve shareholder value.
Now I'll turn the call overdraft, President and Chief Executive Officer, Mitch Waycaster to discuss in greater detail. This quarter's financial results and the impact to go with 19th Indeed, Mitch. Thank you Robyn.
Ill Echo Robbins 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 the excellence and go above and beyond.
On with ever 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.
Oh, we're 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 and loans to help provide relief to small business.
Mrs. Thus far and we continue to make triple payday loans to this day. Our approach has been high touch an 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 11000 loans and generated more than $45 million and gross fee.
Rent is on has remained open for business are out the pandemic.
Although we closed our branch lobbies to regular traffic on March 20, and all of which remain 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.
By the 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 we'll consider the advice of medical and regulatory experts prior to reopening our branch lobbies.
The health and wellbeing 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, a $14.9 billion as compared to 13.4 billion.
December 31 night teen type.
Total loans held for investment were $11 billion at the end of the quarter as compared to 9.7 billion at December 31 night team.
Included in our loan balance included in our loan balance it. They ended the quarter is $1.28 billion and PPP loans.
We have utilized owned balance sheet liquidity for our funding needs, which is a testament to our teams focused on growing a stable source of low cost deposits total deposits were up $1.7 billion from the previous year end with growth in noninterest bearing deposits accounting for one point.
$3 billion of the increase.
Although it is difficult to specifically to link deposit dollars to triple PD Lone proceeds we estimate that in excess of $600 million of our growth and noninterest bearing deposits is attributable to triple payloads with the remainder of the increase Jana generated from ERP deposits.
And core growth.
Regardless of the interest rate environment noninterest 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 first Jim maybe Terry will join Renaissance Corporation and bank as its CFO.
Jim brings a wealth of financial experience knowledge of our markets and familiarity with our company. We're fortunate to have him join our extent outstanding management team.
Kevin Chapman has served our company well as CFO over the past two years is 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 and customer facing experiences under Kevin strategic leadership now I'll turn the call over to Kevin for additional discussion of our financial results Kevin.
Thank you mentioned good morning, everyone.
Let me first start by echoing niches remarks about June.
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 mentor.
And talking about our numbers for the second quarter, we reported net interest income.
Of approximately $106 million, which was down 800000 quarter over quarter.
Net interest income attributable to Triple play loans was just under 6 million for the quarter Accretable yield recognized on purchase loans and interest income collected on problem loans was down 600000 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.
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 triple P. loans and excess liquidity, both of which weighed on margin during Q2.
Triple PD lones negatively impacted margin by five basis points during the quarter and excess on balance sheet liquidity impacted by 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 feds rent 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 turns maturing over the next day quarters at an average rate.
Of 1.4%, we're confident in our ability to continue to reduce our funding calls in order to mitigate the pressure on on the asset yields.
Noninterest income continues to be a great source of income for us our mortgage division, which had a record quarter effectively provided a heads to our traditional loan portfolio in today's interest rate environment. During the quarter are locked volume was $1.7 billion driving gross mortgage banking income.
Excluding at $5 million pretax mortgage servicing rights 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 Bayer stimulus plans and programs and then overall decrease in consumer spending a shelter in place and similar government restrictions were opposed across the country.
We anticipate this fee income will return as local economies begin to reopen and consumer spending resumes.
Our noninterest income continues to be impacted by the limitations on our interchange fees imposed by the Durbin amendment, which reduce fees and commissions on loans and deposits by approximately $3 million during the second quarter when compared to the same quarter last year.
Noninterest 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 cobot response.
$5.8 million of this expenses related to salaries and benefit expenses.
Such as overtime recognition awards.
And health and life and accruals for anticipated health and life expenses.
The remainder of expense is attributable to supplies signage and other preparedness type expenses.
I previously mentioned that our mortgage division had a record quarter. The continue the continued elevated production during the quarter drove an increase and related compensation calls for mortgage of $3.2 million as compared to the first quarter.
After these considerations noninterest 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 remained stable and actually improved 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 nonperforming loans.
In fact.
Our 30 to our loans 30 to 89 days past due 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 category categorization of high risk as these portfolios had benefited from recent economic activity and we expect the loan deferral percentages are both categories to decline significantly as initial deferrals expire and are not renewed.
In connection with our earnings release filing with the FCC. We have we have furnished supplementary information on each of these industries and provide a 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 Thirtyth around 22% of our loan portfolio was deferred under one of these programs.
Many of the deferral turns began to expire in July and as of July 24th around 14% of our loan portfolio was still under deferral.
All different programs remain available and we plan to utilize if the borrower meets our underwriting criteria.
To reiterate to reiterate our criteria deferral under these programs were made available to our borrowers who are in good standing prior to the pandemic, even though we focused on these specific portfolios because we cannot accurately predict the impact of the pandemic into 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 Thirtyth.
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 a 150 basis points, a total loans when you exclude triple play loans and our coverage ratio.
Of allowance to nonperforming 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.
First specific numbers are ratios.
Now I'll pass the call back to Robin for any closing comments. Thank you Kevin.
I'd also like to welcome Jim maybe GRC gyms, and O'brien, who worked closely with us in the past we're happy to have him as four rooms on the Im also pleased to see Kevin had this opportunity to expand his Roe.
Operating officer, he has been integral part of our success and deserves his expanded role.
In closing the uncertainty that exists heading into the second quarter steel remains as we begin the third.
We are unable to accurately predict the long term impact of the virus continue limitations on our economic activity.
With that will have on our shareholders, but our commitment to the safety and security of our employees to understanding in meeting the needs of our clients new being good citizens and communities will support our success in this cycle.
We provide value to our shareholders.
Now I'll turn the call back have you.
Thank you Sir.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
You are using his speakerphone. Please pick up your handset Stifel are pressing Mickey.
To withdraw your question. Please press Star then too.
Again, the Star then one 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 gender.
Okay.
Few questions first of all.
Just talk about what your loan growth outlook.
Couple of quarters, Mattson, what you've seen pipeline.
Sure I'll Love, Jennifer Al began 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 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 to 29 would been in the range of Oneninety.
If we would go back six weeks it would be in the 160 million.
Range. So as you can see we we've continued to see pipeline built particularly.
As we saw things reopened.
Earlier in the quarter.
Considering the pandemic.
We can see continued to see a good but what I would call cautious deal flow across each of the markets in business lines, and if I break that down.
Current pipeline of to 29, 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.
Salons, so if you take the to 29.
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 dollar range.
Which would indicate low to mid single digit nicks net growth, but I would follow that by saying.
Until we began to see sustain resolution of the pandemic it's.
It's very difficult.
To give that guidance, but with that being said, let's just focus submitted on the production. We did see in Q2 and this does not that pipeline that I. Just mentioned does not clear include any current triple T 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 and non acquired growth or about 6% annualized.
We did see an elevation in pay offs of over the last four quarter average of about 20 25 million also we saw some reduction in line utilization so both of those things Wade.
On what resulted in a net of flat to slightly down in net growth I will say to 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.
As joined the company and the last several quarters in Q2 that group produced right at 21% of that production.
That's helpful color. Thanks.
My other question move on.
Can you talk about the trends you saw in the second quarter.
Sure genera Hi, this is Dave and Meredith.
Second quarter, we didnt 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 pretty covered that were just slightly more impacted by covered one was a retail shopping center and one was a senior housing portfolio, but our classified assets about 1.4% of our lump all at this time up slightly from Q1.
On due primarily to those two loans, but we've not seen a tremendous.
Reflection and our asset quality. This Paul will also continue to be mindful of as we.
Do our enhanced monitoring on loans in deferral and increase our.
All monitoring but at this point, we're not seeing that light classified asset inquiries.
Okay. Thank you.
Thank you Jennifer.
Our next question today is from Brad Milsaps of Piper Sandler. Please go ahead.
Hey, good morning, guys.
Born and bred right Brett.
Hi, Thanks for thanks for taking my question.
Kevin wanted to see we can maybe start on the expense side of the equation.
You talked about the.
Point $3 million of.
The related costs in the quarter just curious if there was also any any benefit going the other way from Fas 91 deferred resignation costs I know those hurt you in the first quarter, just kind of curious with all the PPP.
Lending this quarter, if there's any benefit there just trying to get a sense of.
Kind of expense run rate, you're going to the back half of the year.
Yes, there was a little bit of a benefit and it was there was attributable to the triple B, but the difference in Fas 91 expense compared 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 with all the other moving parts that we had court the expense run rates trending down.
As we've mentioned if we kind of look through what's happening in mortgage our look through what's happening encoded this was true in Q1 to be true to salaries it'll be is true in Q2 and will be true in Q3 salaries employee benefit what we'll continue to decline Saar Expectational continue to decline we will be opportunistic in our hiring.
We're also using this as an opportunity to reconstitute or provide better levels of accountability.
So we're expecting that trend line to decline if you look at our other other items.
Data processing occupancy and equipment.
All of those items that were flat or declining during the quarter and again, we're looking at any property any contract anything.
Sure that it's hitting our internal profitability metrics that it is achieving any of our projections that we thought or that we modeled and making our decision and if it's not were challenging it and looking to.
Looking to either increased the performance of that decision or look at exiting that decision whether to contract our property or.
Or in some cases, the higher and so we'll continue to be mindful of expenses and look at that.
With urgency we recognize that we have.
That we could could continue to have revenue headwinds and we've got to we've got to look for the offsets on the expense on.
But as we look at Q3, we again, if we look through we expect mortgage to have a good quarter. In Q3, so continue to have excess elevated expenses related to mortgage and their production.
We'll probably have some more covered expenses in Q3, just looking at our states and that but we operate in the high concentration of positive test. We are expecting continued increases from co or continued expenses from cobot, 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 disclose you had gross fees of.
$44.7 million is kind of curious kind of what you recognized.
In this quarter as a portion of the the interest income that you disclosed and then how much you have less.
Remaining to recognize.
Kind of on that basis.
Yes so.
TEGNA 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 are they viewed as a.
A discount against that loan portfolios being amortized over the contractual maturity of alone and for the most part 99% of alone, but we originated were originated with a two year expected contractual life. So we're amortizing this over two years if.
We are expecting a significant amount of these loans to be forgiven when the forgiveness happens who knows that is a that's a target that continues to move and be extended.
But we are expect into these would be forgiven in once there for given all that.
Unrecognized fee will be collected back into income.
But we are amortizing it over.
We are we are amortizing it over the the contractual maturity, which will be two years.
Breaking down to $6 million of.
The benefit from the Triple B program in Q1 about three to 3.5 million were tied to the fees.
Right recognition of amortizing the feedback into income over the remainder would just be they stated interest income of 1%.
Okay, Great and then just final question just.
On the mortgage obviously tremendous performance this quarter can you give us a little more color positive I missed it just on on production.
In the second quarter versus the first and then maybe.
Gain on loan sale margin kind of what impact that had any on a linked quarter basis on on how that changed.
Sure I'll make a couple of comments and turn it over to Jim.
So continue to have strong levels of production are more of our mortgage group they locked about 1.7 billion.
I think that was actually slightly down from Q1, nothing Q1 was about 1.81 0.9, but the margin expanded and so there is significant increase in the fees.
Was really a margin play just heavy volume.
But also the margin expanded and Thats what caused the pop in the in the mortgage income.
Jim you any detailed report a detailed is kind of looking into the third quarter.
Our volumes through July a lot daily log volumes continue to be strong of very similar to what we experienced in the second quarter margins of state really strong.
We have had we keep have to monitor what our competition is doing and.
Take on the wholesale side, if I 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 today thing that we look at so.
Looking right now at the third quarter emotional you outperformance. So would you expect to see.
Similar results to the second quarter.
Okay, great. Thank you guys.
I will make one comment.
Looking at our purchase a repo volume of as noted in the in the release, though we were roughly.
58% Rifai in the first quarter, 50% rebar in the second quarter.
What we're seeing now in the third quarter were running more about 45%.
Brief us so purchase continues to increase.
And is consistently increase over 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 if I add back the MSR.
Impairment 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 looks like and then as that mix continues to evolve into next year, just use NAND base forecast that should come down I mean, what what areas on the expense side can you look to to offset.
Some of the impacts from the.
Declining what I would expect to be declining revenue come for mortgage next year. Thanks.
Sure. So just looking at the efficiency of mortgage with the volume that they had.
Well, maybe as a backdrop typically mortgage book, but before Q1 and Q2 efficiency ratio runs in the 75 to about 70, 75% range right now there little bit more efficient with all the volume that they've had so it's less than.
Let's move more in that 60% to 65% range.
As we look ahead and recognize that every year the we forecast.
We forecast declining revenues coming out of mortgage the gold is just cyclical and that's just the nature. We just anticipated 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 as I don't think it's only on the expense there levers to pull on the expense side and we've discussed some of those where there's the salaries employee benefits whether it is looking at property, but just looking at every contract, but there's also opportunity on the revenue side.
Mentioned, what's happening on the on the service charges service charges on linked quarter basis are down 2.2 million.
That annualizes to.
Annualized is close to $10 million 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 as a significant amount of upfront costs, but every dollar above that upfront costs is pretty efficient.
The other is going the other is going to come through.
Other small wins in what is preserving margin whether it is small incremental balance sheet growth was larger incremental balance sheet growth is going to come through singles and doubles as to how we mitigate and drive an improved profitability by pulling multiple levers on the expense side on the revenue side. Some cases on the growth side.
[music].
Thats whats going to be those are the levers that were on pole, if and when the tide of mortgage rolls out of the revenue stream Michael one other thing minutes. One other thing I will mention and as you know we've been very opportunistic.
Tying a relationship managers and really in the every cylinder of this company, whether its retail small business commercial commercial specialty corporate.
Last year, we had an intense focus layer that focus continues this year. We've we've had 18 additions, but at the same time, you've heard us and back to kevins point, our intentionality around and expectations around production that drives.
Mhm.
Drives revenue it drives production the focus on pricing underwriting so what we've seen this year, where as we continue to add talent and as I mentioned as we continue to drive loan production that are referred to earlier across all segments. We've also been intentional and actually have NAND.
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 from liquidity in the.
TPP loans.
It sounds like Theres, some ability to its actually improve the core margin here some of that excess liquidity runs out looks like you saw 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.
Yes, so a estimate maybe let's let's define the core margin as we talk about it and so what I'm going to mentioned the kind of excludes all the excess liquidity and triple B only because we're expecting in Q3, Q4, 2021 triple pay to drive more noise and.
In the margin just as we start to enter the forgiveness phase. So maybe if we kind of look through that 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 repriced these high cost.
Time deposits that I mentioned I mentioned that we've got 2.4 billion maturing over the next.
Eight quarters.
75% to 80% of that is maturing over the next four quarters. So and that's had an average rate of roughly a 130. So we have about 1.8 billion of 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 thats 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 combine.
We'll continue to look to properly invest excess cash in loan growth.
Again, it's gonna have to meet our credit metrics and.
And our underwriting but continue to ways to deploy that cash but in the short term. We do have some tailwinds on the funding side as we as we can 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 about the way to think about it that's the way to think about it.
Hi, 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.
I'm just curious on the deferrals. So it seemed like positive progress was made there I'm just curious if the is there any.
Initial data points on second deferral requests and what you've seen so far on that.
The areas 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 that there. The first phase deferral will be expiring and so we do anticipate that 14% to continue to to migrate downwards.
Again, I'll, let David Meredith, our Chief Credit Officer, just talk about what they're saying and second phase deferral and also what asking what the criteria are.
I have to qualify for second phase deferral sure an all sort of fit that criteria. So the.
And just real quickly I will first phase Kevin mentioned earlier, it was basically helping those customers who were in good standing with the back we all from the ability to defer peanut payment on the commercial side for 90 day second phase.
There is a little more robust through through the deferral process anybody.
Were saved at floral had to have monthly monitoring at their loan to make sure. We were in touch with forms of the customer loan migration and so forth second phase deferral is a more detailed look at best ways. There is there a neat.
Have a customer performed during the first phase deferral other headwinds that are going to impact into a subsequent deferral did a half the cash flow to meet debt service payments or are we properly aligned from a structural standpoint would that be the borrower. So also guarantor, we collaterally when the right place and so forth and so it's much more of a.
Modification tied than just drilling another 90 day deferral.
At the second phase so theres a lot more robust process in phase two in at this point, we have we have a fairly large percentage. If we look at our world is roughly 2.1 billion, but a big in eight of that is commercial.
In nature, and we will have a heavy deferral second phase first ice roles that mature in July bet a billion three that billion a mature in July as 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.
Yes. This fall we only have couple hundred thousand of extra rolled into a second phase deferral, but much more color vanda comes from the.
Those entities, where we're looking at who's going to potential request the second phase deferral.
That number this point will drop off.
Materially we expect based on preliminary numbers by the end of August somewhere around a timeframe that deferrals will drop to about it no more than 8% range based on those conversations veterans with continued to see that migrate down.
The end of Q3 in into Q4, but.
But we've got a fairly good deal by an industry standpoint.
Fatality will continue to be fairly heavy heavy level of deferrals that need to second round out probably best second option of that book of business. When the second round oral than it dropped off pretty materially Arps entertainment needed fit for so that book Montney, we'll need a second look.
Restaurants, best 16% healthcare, maybe about 25% of so much more of this as a forward looking than historical look based on heavy level phase one deferrals in the month of July but again, we expect positive trends in the month of August opening the at 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 buttons in second quarter. There was this uncertainty and that uncertainty continues going into third quarter how.
And I know this is a tough to pinpoint but how should we think about further reserve building over the back half of the year with the allowance ratio now one of the half some banks some larger banks.
Eclipse surpassed 2% should we think about this kind of.
Pace, if we continue with this kind of uncertainty as far as to the depth and the duration of of the uncertainty. Thanks. Yeah. Thanks, guys. Good question and answer the short answer based on what we know today would say no. We would do not anticipate this level of provisioning.
But we.
Part of our factoring in the of our assumptions for this quarter's provision was.
The reality that Theres five the five states. We operate in there is now what the level of positive testing is putting back into question, whether or not there is going to be some type of either pullback or maybe again. This is this is all our presumption, but there could be pressure to pull back economic activity as a result of the heightened levels of increase.
And positive test and so what that leaves who is a prolonged rather than and rather than more of a.
None of the where we've never seem to be we assume more of a U shape recovery, but its extending the length of that recovery specific to our five states that was the overriding factor that led to a higher 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 what the impacts would be isolate that impact to the higher risk loan categories and sure 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 in Q2, Q1, and Q2 for the back half of the year.
We do look at some of the Premier information and maybe it's worthwhile to 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 and so therefore, I don't 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 and we monitor it.
But we also recognize that we have oh, we have some differences and leased and lease where 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.
Your next question is from Matt Olney Stephens. Please go ahead.
Hi, Thanks, Good morning, guys.
Matt I wanted to circle back on loan growth and we got a great update from from Mitch on the pipeline.
Sounds like there seems to not build in recent weeks can you talk about the challenge of converting these pipelines in the loan fundings and as you talk to borrowers are there any specific data points there, they're waiting to see that would actually move those from pipeline into the loan funding.
Yes, Matt good Poland and as I ended that discussion and I made mention until we began to see some resolution.
So that when it'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 it's really a question of traction so that traction there 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 increase particularly over the last several weeks, but I I can tell you when you reflect on the sentiment.
Of clients that question does remain in back to Kevin's comments as he was just talking about provisioning.
There's some uncertainties out there so.
And on I've talked about our production of 521 million. The current pipelines indicate probably production in that 550 to 600 and what you mentioned is pulled 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.
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 were being very prudent as we underwrite.
Our our clients are being.
Using that same prudence as they.
And they are mine think about how they deploy capital.
They increased debt.
Hopefully that helps it is definitely an unknown at this point.
Yes, I know thats helpful. It's definitely not not easy question too to address this point. So appreciate the commentary and then I guess, taking a step back talking about the margin.
Interest bearing deposit costs are now down to about 70, Bips 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 rents on how to interest bearing deposit cost in the high 20 below 30 basis point range and if we assume that rates just hold here for.
For a while do we think we can eventually get down at those levels I'm just trying understand if there's any been any structural changes to the bank.
Recently that would that would prevent something like that from occurring if of course rates were to stay here for a few years.
Yes, I know you 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.
Tell about 16 17 started to increase in it was in that low 20 basis point range, maybe maybe close to 25 basis points.
Yes, we do anticipate getting back down to that level, if not slightly lower.
And.
And particularly if we stay in this prolonged environment and don't think that Theres anything that would prevent us from from doing that.
A lot 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 the absolutely we're going to get that write down but I think the challenge in front of us and again, we operated this environment for several years.
And the recent past, but but we believe that we can get back to those levels, if not slightly lower in the confidence on the slightly lower fees is right now we have more noninterest bearing VVA funding our balance sheet and we did in 2012 2013 that led us to those lower cost of deposits that you mentioned.
Right now our mix is more favorable and is should so the impact on the absolute cost should be slightly more favorable.
But we we anticipate in our prepared to go down to those levels, just given where we are in the in the rate environment.
Okay. That's helpful. Thank you guys.
Thank you Matt.
Again to ask a question Star then one.
Our next question is from Catherine Mealor of KBW. Please go ahead.
Thanks, Good morning.
Morning.
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I just wanted to circle back on extensive honesty follow up so first on the targeted related expenses then Kevin you mentioned that you think some of that will be.
We will still be in the run rate into next quarter and I know, it's hard to gas, but I guess my question. First question is how much of that do you think sticks around how much of it was really just kind of onetime investment that you had to do this past quarter that you won't fall down and then my second question just on that.
Expense topic is on brands clay hearing.
You mentioned, you're looking at all.
Well I'm just trying to figure out how you reduce expenses in this low revenue environment.
Talk or thought about branch closures and where your thoughts on potential saving bar.
All right so.
Let's talk covered expenses first.
I do think this quarter was a little bit elevated just on the corporate expenses.
Give you an example.
The amount of work in effort that was done in April and May to rollout of the the triple b or the at process economic stimulus programs led to a lot of over time and again Robin in Ms talked about the dedication of the team, but that just just kind of amplify how dedicated there where 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 has happened to.
But it was it was truly an opportunity where people stood up and rolled out these programs and worked hard to figure it out.
And and we think to assess successfully.
Help 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 a million five.
Most of that occurring in April and May.
So I don't I don't think we're going to replicate that in Q through 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 theres going to be a rushed to the door for the forgiveness phase like we saw in Q1 with the rush with phase one 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. The net takes a significant amount of burden off the system at the process and so therefore, we're not expecting having to work those 12 14 hour days for multiple weeks.
But thats just an example of some of the some of the variables are the factors that could affect that covered expense over time being one.
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On the branch closure and I would just go back we're looking at anything and everything part 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 in challenge our assumptions about that branch change our assumptions about any of our decisions in todays 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 don't know, which are how many are if any but all of those are on the table.
To to evaluate Theres also ways to do affect efficiency within the branch.
Without closing it through the adoption of technology to the rollout of.
Integrated teller machines.
That can help the efficiency of the branch without actually closing the physical facility that it operating and Catherine I was going to add to to Kevins point. The last when he just made in particular.
And I think is 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 we are.
Adoption of online account opening adoption of a.
Digital and own line means to deliver services, especially during the pandemic that even pre pandemic, we we solve customer.
Desires their interactions changing so I think as an industry as a company we continue to evaluate that in and really determine what customer expectations are going forward and how will that impact us as a company and how how we deliver our services, it's an opportunity and all.
So same time staying focused on meeting client needs.
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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 Allison, we appreciate everyone's time and interest in rooms on Corporation and look forward to speaking with you again said.
The conference has now concluded.
Thank you for attending today's presentation and you may now disconnect your lines.