Good morning, and thank you for joining us for Renasant Corporation's 2021 Third 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. 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 during much of the third quarter 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 and 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. 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 the results for the third quarter, I will offer reflections on the quarter and the outlook for the fourth quarter. As we entered 2021, there was still considerable uncertainty, and although that remains today, we are seeing increasing signs of business activity in our markets. In the face of these conditions, I am very proud of our team for results through the first nine months. We see all areas of the bank contributing to performance. The company's financial condition is strong and marked by a liquid, core-funded, and well-capitalized balance sheet. Earnings were up year-over-year, and we have initiatives underway that will further improve profitability in future periods. The markets in which Renasant operates continue to rebound in terms of economic activity.
There is considerable net in-migration into many of the places we do business. These demographic trends accelerated during the pandemic, and this bodes well for loan growth in the coming quarters. I will now turn the call over to Kevin.
Thanks, Mitch. Our second quarter earnings were $40 million, or $0.71 per diluted share, compared to $41 million, or $0.72 per diluted share in the second quarter. Forgiveness of our PPP loan portfolio slowed this quarter and was the largest contributing factor to the decline in net interest income quarter-over-quarter. We were expecting the contribution from PPP to decline and have been focused on growth in other lines of business and expense efficiency initiatives to mitigate the impact. Our insurance and wealth management lines of business put forth strong results, and stabilizing pricing and volumes in our pipeline helped boost results in our mortgage division as well. Our previously announced efficiency initiatives continue to provide benefit on the expense side, as evidenced by our expenses trending down to the lowest level in the last five quarters.
Further, we expect the contributions from these and other initiatives to reduce expenses in upcoming quarters. Operationally speaking, we continue to adapt to our customers' evolving needs and preferences for service delivery. The rise in virus cases during the third quarter brought back levels of uncertainty that we experienced early in the pandemic. Our branches remained open during this most recent wave, and our mobile and digital metrics continue to increase. We must remain nimble in this rapidly changing environment and provide our customers with quick and convenient access to banking services, whether through physical or digital channels. We are focused on innovation and continue to seek investments that deliver the technology and security that our customers have come to expect. I will now turn it over to Jim.
Thank you, Kevin. As we walk through the quarter's results, I will reference slides from the earnings deck. Starting with the balance sheet, assets grew about $130 million in the quarter. Deposits increased again this quarter, albeit at a slower pace, with much of the growth in non-interest-bearing accounts. We invested some of the excess liquidity in our securities portfolio, increasing the balance $380 million from the previous quarter. At the end of the quarter, we had approximately $1.5 billion in cash. We anticipate the combination of additional growth in the securities portfolio and loans to reduce this cash position in the near term. We experienced another quarter of loan growth, with loans ex PPP up $47 million from Q2, representing an annualized loan growth of about 2%.
PPP loan forgiveness totaled $180 million for the quarter, with only $68 million in PPP loans outstanding at quarter end. All of our regulatory capital ratios are in excess of required minimums to be considered well capitalized and show the strength of our capital position. During the quarter, the company repurchased $21 million of common stock at a weighted average price of just under $35 per share. Although our board renewed our repurchase plan, which now extends to October 2022. We currently have no plans for additional stock repurchases in the near term. We had a credit provision release of $1.2 million and net charge-offs of $1.1 million. As a consequence, the ACL, as a percentage of loans, ex PPP, moved down slightly from 1.74% to 1.71%.
We also had a release from our reserve for unfunded commitments of $200,000, which is reflected in other non-interest expense. Credit quality metrics are shown on pages 14 through 16. Past dues, classified, and non-performing asset measures all remain relatively steady, and net charge-offs were low at 4 basis points of loans ex PPP. COVID-related deferrals are now below 5 basis points, with nearly all deferrals in our 1-4 family mortgage portfolio. Net interest income declined $6.3 million quarter-over-quarter, with substantially all of that decline attributable to PPP runoff. PPP revenue was $3.5 million for the quarter. Of the PPP income, accelerated recognition of deferred fees represented $2.6 million, and we have approximately $1 million in remaining deferred fees to be recognized.
Our core margin, which excludes purchase accounting accretion and interest recoveries, was down 24 basis points from Q2. Of the 24 basis points, the impact from PPP accounted for approximately 8 basis points. The decline in margin is the result of loan pricing measures and the considerable on-balance sheet liquidity. Our other lines of business each contributed strong results for the quarter. In our mortgage business, production volume and loan pricing in our pipeline began to stabilize in Q3, driving the increase in income quarter-over-quarter. Non-interest expenses with exclusions were down $4.5 million for the quarter. Part of that decline is attributable to the amortization of a tax credit investment recognized in Q2. As Kevin mentioned, we continue to see the benefits of expense initiatives announced in late 2020 and expect continued realization in Q4 and into 2022.
I will now turn the call back over to Mitch.
Thank you, Jim. We look forward to a successful finish to the year and increasingly have our sights on the opportunities ahead of us in 2022. Now we'll turn the call over to the operator for Q&A.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Brad.
Mitch and Jim, just wanted to maybe start with the balance sheet and maybe if you could kind of quantify kind of how you're thinking about you know, loan growth, you know, over the next few quarters and into 2022 and sort of, you know, how that, you know, if you plan to handle, you know, some of the $1.5 billion liquidity. It seems, you know, kind of based on the pace you're on right now, with the runoff of the acquired book and then growth in the legacy book, it you know, they're almost one-for-one, not quite, but it seems it'd be tough to put a dent in it unless you see a big acceleration in loan growth or you start to build the bond portfolio even more aggressively.
Just kind of curious how you guys are thinking about that.
Sure, Brad. To approach your question, let me talk about our current pipeline. I'm also gonna talk about production in Q3, and then as we look forward, how we really feel good about our ability and how we're positioned to continue to drive that production. We'll reflect on payoffs, which has been the headwind. Let's start with the current pipeline. It's $280 million, and that compares to $261 million as we started the third quarter. As we experienced in Q3, we do continue to see good, and I would say growing deal flow and pipeline across our markets and our business lines.
As we have seen in the past, and we saw in Q3, and we see that looking forward in this current pipeline, each of our regions, our business lines continue to contribute in a meaningful way to the pipeline and the production. You know, just thinking back as we started Q3, and we started with a pipeline of $261 million, as I said this quarter, $280 million, we expected then to see production in the $575-$600 million range. We actually produced $700 million in production this past quarter. Actually one of the highest we've seen in the company. As the pipeline indicated then, and as we do entering into Q4, we're seeing this come from across the footprint.
I think equally important as the geographic distribution are the loan types and size of credit and our ability to produce. Let me reflect on that a bit. I'll use Q3, but also will reflect on that ability going forward. I'll start with our 1-4 family residential loan products. That would include consumer products. That accounted for about 19% of our production in Q3. Then when I go to small business and business banking-type credits, and that's credits that range from a few thousand dollars up to $2.5 million. That was about 15% of that production. Then I'll go to commercial credits, loans $2.5 million and greater, which represents C&I owner-occupied, commercial real estate-type credits. That accounted for 39%.
Then on to our corporate banking group, where you find larger C&I commercial real estate, and then our specialty lines of business, that was about 27% of that production. All to say, and I give you those examples just to say that we're hitting on many different cylinders relative to our ability. We saw that in Q3, and I would say that's, you know, a representation of our ability going forward. In Q3, we saw production increase about 22%. As I said, one of the highest levels in the company's history. The other side of that, you referred to it in your question, is just payoffs. As we've seen in prior quarters, that was the governor, if you will, on net growth.
For example, if payoffs had remained at the current levels that we saw in Q2, net growth this quarter would have been 7.5% versus 2%. As I look at the reasons for those payoffs, and we examine that closely, about 46% of those was where the borrower sold the underlying asset. Another 33% was lost to term or rate, and a good portion of that to the permanent market. You know, at some point, we will begin to see payoffs normalize. I would say despite those payoffs and just speaking to the liquidity that we have and the use of that, those funds, I'm optimistic about our future growth as we continue to see progress in economic activity, and we're seeing quite a bit of progress across the markets in which we operate.
I think that's evidenced by this past quarter's production. Jim, you wanna comment a bit on just the securities portfolio and what we're doing there?
Sure. Good morning, Brad. As you pointed out, we've got about $1.5 billion in cash at the end of the quarter. We put to work a fair amount of that liquidity in securities in Q3, and I think it was just under $400 million. Our expectation in Q4 is that we would continue to grow that securities book, probably not quite the same pace. Looking into the new year, we'll continue to reevaluate that position, see how our loan growth is panning out, and make those determinations as we get into 2022.
Great. That's very helpful. I appreciate all the color. And then just maybe one follow-up on expenses. You guys, you know, as Kevin pointed out, they continue to trend lower. I think you're down about $8 million or $9 million year-over-year. I know you were targeting $9 million or so to start the year. Some of that's probably been helped by, you know, headwinds in mortgage banking. Can you guys just kind of quantify a little bit more kind of what you're thinking about in terms of kind of where the expense trajectory, you know, can head from here?
Yeah. Hey, Brad. Good morning. It's Kevin. We think it goes lower, right? If you not only look at the income statement and compare it to prior periods, there's a lot of noise in the prior periods, whether it's mortgage or whether it's pandemic, whether it's some you know, restructuring of the balance sheet we did in the prior year. I think the best look is if you look at page 20 of our press release. That gives you the expenses that we used for the adjusted efficiency ratio. As you can see, that line has been trending down appreciably. It's not all coming from mortgage. That trend line on the bank side is occurring as well.
As we've indicated in the past, our focus is driving that expense number down further. We expect the trend line of expenses to continue to decline. We announced a couple of initiatives last year. Those initiatives are really almost fully baked into our run rate in Q3. We've had many other initiatives that we haven't announced publicly, and we will continue to focus on expenses. Some of the initiatives we may announce publicly, some of them we may just let you see the results of that in the expense run rate, as it declines. Would also add that there's a lot of pressures on expenses right now, whether there's a pressure to reinvest in technology or just wage inflation pressures. Our guidance includes any of those pressures as well.
We feel that we've got the opportunity and the capacity in our expenses to continue to see declines despite the commentary around reallocating expenses and technology or the conversation about wage inflation. We feel that those are coming down. I can tell you, our management team has a conviction around our efficiency ratio, bringing it down, as well as the denominator of that calculation being expenses, that expenses are coming down as well.
Brad, I'll just follow Kevin's comments relative to expenses and, you know, we're very optimistic. You can hear that in Kevin's comments. We're committed as well to continuing to reduce our expense base. At the same time, we will continue, as Kevin mentioned, to intensify initiatives to enhance both revenue and to minimize expense.
Great. Thank you, guys. I'll hop back in queue.
Thank you, Brad.
Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hey, guys. Good morning.
Good morning, Kevin.
Just switching to credit for a second, looking at the ACL ratio ex PPP now 1.71%, if I'm correct. Seems like that leaves you still a fair amount of room for credit leverage going forward, despite the uncertainty, you know, assuming the uncertainty you mentioned before, it doesn't get worse, but gets better, clears up. Can you remind us again what we should be, you know, not a target, but what is your day one CECL ratio and what are your thoughts on timing of how quickly you could bring that down and whether we could still have a number of quarters of negative provisions in front of us? Thanks.
Hey, Kevin, good morning. This is David Meredith. I'll take a stab at it and let Jim follow up as well. You know, how we've chosen to look at our loan loss provision is kind of a longer term, as you mentioned, you talked about, you know, kind of some unknowns in the marketplace. Ideally, we've forecast before we're going to use it to absorb loan growth on a go-forward basis. That's still our thought. That hasn't changed much. We're going to look longer term before we start pulling that number down materially.
We do still think we've got good asset quality in our book, but our choice would be to use those dollars for continued loan growth, and then just kind of see if there's something happening in the marketplace we need to keep those dollars out there for. I don't think you'll see any material change in how we approach loan loss provisioning in the near future. Jim?
No, I totally agree. I think, Kevin, we would say that at least the expectation as we see here today would be for similar results in terms of what you've seen recently out of us in terms of going forward. If we have stable credit metrics and you know sort of generally consistent economic indicators and nominal loan growth, I would expect that you'd see you know minor or no releases. But of course, we'll continue to analyze quarter to quarter the model, what results we get out of our CECL model and making those determinations.
Okay, great. Appreciate that. Mitch, you know, maybe we could just get your updated thoughts about M&A. I know you have said in the past that you know you look to be opportunistic and you have optionality. You know, are you more, would you say, in like a capital building mode right now before you look to that? Or are you optimistic there could be accretive deals for you guys? You could, you know, carve that up any way you want in terms of bank versus non-bank. We've seen a lot of banks bolt on asset generators given the excess liquidity. On bank opportunities, whether you know you'd be open to something transformational. There, you know, is one that closed just today in your own backyard.
Do you think, you know, deals are maybe not necessarily likely given the opportunity you might have for hiring in front of you? I know that's a lot, but just to get your updated thoughts. Thanks.
No, Kevin, good question. Happy to comment on each of those. It's more of your latter part of your comments. As we have consistently done in the past, we will remain, we are remaining opportunistic. I'll just start with talent, one of the last things you mentioned. We had five additions this quarter. That brings us to 24 this year. Of course, we had 32 in 2020 and 52 in 2019. We continue to see very good results from that talent, adding to our already strong talent in the company. Certainly we'll remain active there and we continue to see those opportunities. New markets, as we've done in the past, we will continue to evaluate those. Certainly strategic partners. You used the term banks and non-banks, and I would include both of those.
You know, you mentioned relative to size. Certainly a more optimal size to us would be kind of in that, say, 1-5. Not that we wouldn't go downstream if it was meaningful, in a market where we were operating today. We continue to evaluate all of those opportunities, both banks and non-banks. I would expand it to non-banks, whether that be fintech, other business lines, things that complement our business model that either grow a business line or introduce a new business line. Certainly all of those remaining in line with our risk appetite. We always start these conversations with culture, exploring business models, how either it could be new or additive to one of the lines or businesses that we have today.
Just making sure alignment exists and certainly hitting financial metrics that we would be looking to hit. I always use the term, you know, that's all to answer, are you better together? To answer your question about being opportunistic, the answer is yes. I would say that is consistent, will be in our future as it's been in our past.
Hey, Mitch, given that openness to still remaining active on new hires, can you help kind of marry that with just the past few minutes we've talked, you guys have talked about being committed and focused on taking expenses down. It's probably a high bar in that environment when you're so focused on taking expenses down to being open to new strategic hires. Do you feel if the right strategic hires come in, you're confident you can find places to cut elsewhere?
Yeah. Excellent question. I would answer this way, and I would say our results are a good reflection of our ability to bring in new talent, and like I say, joining an already strong team. If you look at that 100-plus that I mentioned over the last three years, we're net up about a third of that number. Accountability is certainly there, and it's very important. I would say over that same term, I just talked about production in this past quarter being one of the highest production periods in the company. The loans generated by officer, we're seeing that increase. I think we've demonstrated our ability to recruit and integrate and grow the company as we add new talent, but also manage expense.
Yeah. Kevin, I may just add that, when the question you asked about the use of capital, whether it's, you know, external in the form of acquisition or new hires, it's interesting that we benchmark all of our metrics basically against the same, all of our opportunities against the same metrics around earn back and dilution to capital, dilution to tangible book value and how quickly we earn that back. We're somewhat agnostic as to which way we go as long as it meets our metrics. The conversation around hiring, it may conflict a little bit with our discussion around expenses, but it's in line with our discussion around efficiency.
To drive our efficiency lower, to do that part of the strategy is reducing expenses, but also part of the strategy is growing revenue, which will require balance sheet growth to do that. As we look at efficiency and I know questions, oftentimes the expenses and the efficiencies, the questions are asked at the same time. Our strategies around efficiencies will require revenue growth and the opportunity to hire good talent is absolutely consistent with that. We recognize that as we hire, we have to have the returns that we expect, and it may require us to be equally as attentive on the expense side to overcome that short-term cost of a new hire.
Yeah. Kev, fair point. Thanks very much for clarifying that. Great. Thank you.
Thank you, Kevin.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions. The cost of deposits continues to come down. Just trying to get a sense for, you know, how much remixing is, you know, can happen and, you know, are we getting close to a bottom in terms of deposit costs? Thanks.
Yeah. Good morning, Michael. Jim?
Good morning, Michael. I think you're correct. I mean, we're getting close. There's still some opportunity on deposit pricing. We entered sort of this period with probably a longer duration on our funding side than some of our peers. We've been, you know, when I look at it versus peers, we've been gaining ground. I'd say the next couple of quarters, we've got that opportunity. We're currently, I think, at 21 basis points in terms of cost of deposits. Our expectation is that would, by the end of Q2, that's probably something less than 20 basis points. There's some room there. You know, those benefits are gonna start to wane.
Understood. Maybe just on the buyback, you know, good to see the re-up there. You know, can you just talk about you know, what you view as kind of intrinsic value and maybe a sense of pace? You know, I think you repurchased a little bit more than maybe some of us were modeling this past quarter. In the nearer term, should we expect to see a fairly healthy level of activity just given you know, the stock's performance year to date? Thanks.
I would say our expectations there are we're gonna continue to look at, you know, it's an analysis we spend a lot of time on it, and it's what gives us the best relative return on our capital. I think near term, our modeling suggests that it's probably not in repurchases. You know, you don't close the door there, but I think it's in other places, whether that's M&A or in some balance sheet growth opportunities that we have. Our expectation is that near term, it would not be in the repurchase side, but in other either organic or external growth opportunities.
Okay, great. Thanks for taking my questions.
Thank you, Michael.
Our next question comes from Catherine Mealor with KBW. Please go ahead.
Hey, good morning. I just wanted to follow up on the margin discussion. Jim, is there a target size that you would be comfortable bringing the securities portfolio up to as you deploy some of this cash?
Good morning, Katherine. I don't know that we've
Morning.
Yeah, I don't know that we've got a target per se. If you know, if I look at peers, for example, we still probably are a little underweight in securities, and which is all right, that's helpful, but I also look at uses of that liquidity. I think as we said earlier, I expect in the near term, we'll continue to put some money to work in that securities portfolio. I think our optimism around balance sheet growth entering 2022 is good. The hope is that we sort of taper off those security purchases as we get into 2022, and we've got other places to deploy that capital. There's no hard and fast number there.
I think we're optimistic that instead of putting that money to work at 1.25%, we can put that money to work at something closer to 3%.
Great. Okay. On that reference of three, can you talk about core loan yields and where you're seeing new production coming on average right now?
Sure. Well, it's definitely been impacted, and Mitch may wanna speak to the competitive environment, but of course, like everybody else, we face a lot of competition on loan pricing, and that's not abated. That's continued, and if anything, it's probably more fierce here recently than it was earlier in the year. We continue to feel that. Our new and renewed loan rates are down 30 or 40 basis points from Q2, and they're close to call it 3.5%. Obviously, that puts pressure on that margin. I don't know when that's gonna, you know, stabilize or abate, but we certainly feel that pressure in terms of loan pricing and its impact on our margin.
Catherine, I would add to that, as I mentioned earlier, just relative to payoffs, you know, 30% or so were in that term rate. I would say more of that is to term than rate. We are very focused on relationship. In most cases, from a relationship pricing standpoint, we can be successful, but it is very competitive. The other thing I would point to just going forward, I went through the granularity and our ability to produce on many different cylinders. When you know, when you're in that small business banking, in some of our commercial space, you're gonna see a little better yield on some of those credits and possibly in some of the other more commercial business lines that we're in. I think we have opportunity there as we go forward relative to pricing.
Great. Thank you very much.
Thank you.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mitch Waycaster for any closing remarks.
Well, thank you, and we appreciate each of you for your time, your interest in Renasant Corporation. We look forward to speaking with you again soon. We plan to participate in the Piper Sandler Conference in November. Thank you.
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.