Renasant Corp (RNST) 2020 Q1 法說會逐字稿

Good day, and welcome to the Renasant Corporation 2020 First Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Kelly Hutcheson. Please go ahead.

Hey, good morning, and thank you for joining us for Renasant Corporation's 2020 First Quarter Webcast and Conference Call. Participating in this call today are members of Renasant's executive management team.

Before we begin, many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Obviously, the impact of the COVID-19 pandemic; the federal, state and local measures taken to arrest the virus; as well as all of the follow-on effects from this pandemic situation are the most significant factors that will impact our future financial condition and operating results.

Other factors include but are not limited to interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, renasant.com, under the Investor Relations tab, in the News & Market Data section. Furthermore, the COVID-19 pandemic could magnify the impact of these factors on us. We undertake no obligation and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

In addition, some of the financial measures we may discuss this morning may be non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.

And now I will turn the call over to Renasant Corporation's Executive Chairman, Robin McGraw.

Thank you, Kelly. Good morning, everyone, and thank you for joining us today.

We ordinarily begin our earnings conference call with a robust discussion of our financial highlights for the quarter, but we would be remiss not to remark on the pandemic that has quickly spread across the globe and comment on its effect on each of our stakeholders. We will discuss our preparedness and specific response in greater detail later in the prepared remarks, but it's worth highlighting that our highest priority at this time is to support the health and well-being of our employees, our clients and our communities while continuing to implement our growth strategy in this new operating reality. Selfless efforts by our entire team at every level and across our footprint to provide essential banking services and meet the needs of our clients during these challenging times have been truly remarkable, and we commend their service and loyalty to the company and to our communities.

There is no doubt the COVID-19 outbreak had a material impact on our first quarter results. Our net income for the quarter was $2 million, which represents basic and diluted earnings per share of $0.04. Our net income included $2.2 million in after-tax expense specifically attributable to the pandemic. These expenses reduced our diluted EPS by $0.04.

Furthermore, because of the continued uncertainty remaining and because we cannot accurately predict the depth and the length of the economic impact resulting from the pandemic and the government's response to it, during the first quarter, we recorded an additional $26.4 million in provision for credit losses and added $3.4 million to our reserve for unfunded commitments.

In addition to the impact of COVID-19, which includes our enhanced provision, we recorded a negative valuation adjustment to our mortgage servicing rights of $6.9 million on an after-tax basis, which reduced our diluted EPS by $0.12.

Looking through the impact of COVID-19 -- of the pandemic and these other items on our results, we had a solid first quarter. And our results reflect our team's commitment to the core operations of the bank. Our team has continued to execute on our growth strategy while, at the same time, remained prepared and focused on growing our low-cost deposits.

During the first quarter, we suspended our stock repurchase plan in response to the pandemic. Prior to the suspension, we've repurchased $24.5 million of our common stock at a weighted average price of $30. There is a $5.5 million of repurchase availability left under the program, which will remain in effect until the earlier of October of 2020 or the repurchase of higher amount of common stock authorized to be repurchased by the Board.

We are committed to maintaining a strong capital and liquidity position while also serving the needs of each of our stakeholders during this uncertain time. We believe our continued efforts to effectively manage the growth and profitability of our core business in light of the economic pressures we face will continue to preserve shareholder value.

Now I will turn the call over to our President and Chief Executive Officer, Mitch Waycaster, to discuss in greater detail this quarter's financial results and the impact from the COVID-19 pandemic. Mitch?

Thank you, Robin. I'll echo Robin's remarks on the efforts of our team in response to the pandemic.

One of our core value states we are dependent on and responsible to each other and will, at all times, work together as one team. As one team, our employees across our entire footprint and throughout our bank's back-office functions have provided critical services to our clients who are experiencing the economic impact of the pandemic. We are and have remained throughout open for business. Our employees' efforts in recent weeks are the reason for this. They have been truly extraordinary, and we applaud their service and commitment.

Our team has been incredibly innovative and flexible in this rapidly changing environment, but we were also prepared. In late February, in light of reports from abroad about the spread of COVID-19, our senior management team began meeting to formulate and implement plans on how we would navigate a pandemic in our markets. And shortly thereafter, in early March, our pandemic planning committee was activated. These senior management and pandemic committee meetings focused on the steps necessary to provide essential banking services in a pandemic environment while, at the same time, ensuring the health and well-being of our employees and our clients and also promoting community efforts to limit the transmission of the disease.

First and foremost, our employees are our primary asset. We took immediate steps to support the health and well-being of our team members by implementing alternative staffing models, such as splitting and relocating staff within our markets or enabling a large portion of our employees to work remotely. For those team members who cannot perform their duties from home, we have been creative and proactive in procuring and distributing facial coverings and self-sanitizing products across our footprint and have maintained nightly enhanced cleanings in each of our facilities. We've taken seriously the guidelines set forth by the CDC with respect to social distancing and prevention of workplace exposure and have continuously implemented the recommended strategies and procedures to help slow the transmission of the disease.

Beginning March 20, we closed our branch lobbies to regular traffic. All drive-thrus at our branches remained open, and our mobile and online banking products provide alternative means for our clients to satisfy many of their banking needs. Any transactions requiring access to branch lobby are by appointment only. Our decision to reopen our lobbies and fully return to pre-pandemic operating procedures will take into account the best interest of all of our stakeholders.

We have provided special benefit assistance to ease any concerns of our employees who have been impacted by the pandemic, whether due to personal exposure, family illness, school closures or other disruption in child care. Also if an employees' hours are reduced due to a rotating schedule or limiting branch access, the employee is compensated based on his or her normal work schedule. This has provided mutual security and assistance as all available workers remain on call to facilitate operations.

In addition to the steps we have taken to assist our employees, we have been proactive in participating in the Paycheck Protection Program to help provide relief to small businesses, both those that were existing clients as well as new relationships. During the first phase of the program, we approved over $1 billion in loans to our small business clients and proceeds of which will be used to keep their workers employed in the short term. We also expect to participate in the Federal Reserve's Main Street Lending Program, although we anticipate our lending under this program will be more limited and targeted to existing commercial clients.

To provide necessary and direct relief to our consumer and commercial borrowers, we established loan deferral programs that allow qualifying clients to defer principal and interest payments for up to 90 days. To qualify, a borrower must have suffered economic hardship as a result of the pandemic but not have been more than 30 days past due and were also current on insurance and tax payments prior to requesting relief. As of the date of this release, total deferred balances approximate 15% of our outstanding loan balance at March 31, with much of the deferrals in heavily impacted industries such as hospitality, restaurants and entertainment.

We'll discuss our credit monitoring processes and asset quality metrics in greater detail later in our remarks, but our intent with these relief programs is to provide capital and liquidity preservation for our borrowers over a longer-term period. Therefore, we were proactive in reaching out to our borrowers that could benefit the most from these programs.

Our response to the pandemic is not limited to our commitment to our employees and our customers. Part of our mission is to be a good citizen in our communities, and we've made targeted and intentional efforts to support the needs of our communities across our footprint. We've provided meals to underserved students at local schools. We purchased gift cards from local restaurants and gifted them to health care and other frontline workers. Our commitment to our communities extends far beyond providing essential banking and financial services.

Although much of our time and effort in recent weeks have been focused on the immediate needs of our clients and our employees, we have not lost sight of our strategic plan and growth of our core operations. We closed the quarter with total assets of $13.9 billion as compared to $13.4 billion at December 31, '19. Total loans held for investment were $9.8 billion at the end of the quarter as compared to $9.7 billion at December 31, '19, representing annualized net loan growth on a linked-quarter basis of just over 3%.

Our team's focus on growing low-cost deposits to fund our growth has remained steadfast. Total deposits were up $200 million from the previous year-end with growth in noninterest-bearing deposits accounting for $90 million of that growth. Regardless of the interest rate environment, noninterest-bearing deposits will enhance the core profitability of the company and will continue to be the preferred source of funding for our growth.

We should note that as volatility emerged during the quarter, we increased our own balance sheet liquidity by approximately $400 million through short-term advances from the Federal Home Loan Bank. This excess liquidity is reflected in cash and short-term investments on our balance sheet at March 31. In addition to the excess on balance sheet liquidity at the end of the quarter, we have $2.8 billion in availability at the Federal Home Loan Bank, over $100 million of Fed fund lines with other banks and $500 million of unpledged securities. These sources provide an additional $3.4 billion in additional liquidity.

While the long-term economic impacts from the pandemic are still very much uncertain, we remain committed to meeting the needs of our clients and staying nimble in this rapidly changing environment. We are optimistic about growth on both sides of our balance sheet, and we reinforce our commitment to profitable growth without sacrificing credit quality.

Now I'll turn the call over to Chief Operating and Financial Officer, Kevin Chapman, for additional discussion of our financial results and the impact from our adoption of CECL. Kevin?

Thank you, Mitch, and good morning, everyone. For the first quarter, we reported net interest income of $106.6 million, which was down $2 million quarter-over-quarter. Accretable yield recognized on purchased loans and interest income collected on problem loans was down $1 million from the prior quarter, accounting for over half of the decrease in net interest income.

Reported net interest margin was 3.75% for the first quarter of 2020 as compared to 3.90% for the fourth quarter of '19. Our core margin decreased 10 basis points over the same period. The decrease in core margin was primarily driven by the decline in asset yields as long-term and short-term rates fell during the quarter.

During the first quarter, we began to take aggressive action to continue to reduce our interest-bearing deposit rates. While we did see the cost of deposits decrease by 4 basis points during the first quarter, we continue to expect to see a decrease throughout 2020. With over $2 billion of time deposits and money market deposits maturing over the next 4 quarters, we are confident in our ability to reduce these rates in order to mitigate the pressure on our asset yields.

Noninterest income continues to be a great source of income for us, representing over 25% of our total revenues. Noninterest income was fairly consistent on a linked-quarter basis. As we've discussed in previous quarters, I'll remind everyone that our year-over-year comparison of noninterest income continues to be impacted by limitations on our interchange fees imposed by the Durbin Amendment, which reduced our fees and commissions line item $3 million during the first quarter of this year and the same amount for the third and fourth quarter of last year.

In the first quarter of 2020, we recognized the valuation adjustment on our mortgage servicing rights of approximately $9.6 million on a pretax basis. Related to mortgage, although we recognized the valuation adjustment, the first quarter was another strong quarter for our mortgage operations as interest rates remained low and our mortgage production increased. During the quarter, our locked volume was $1.9 billion, driving gross mortgage banking income excluding the MSR valuation adjustment of $25.1 million. Breaking our volume down, refinanced volume accounted for approximately 58% of production during the first quarter compared to 41% for the previous quarter ending December.

Noninterest expense increased quarter-over-quarter by $19 million. The increase is attributable to a combination of several factors. First, salaries and employee benefits expense increased $5.5 million on a linked-quarter basis. The increase was largely driven by an increase in mortgage commissions and incentives of $5.5 million related to the increased mortgage production and income during the quarter and also accruals for employee benefits of $2.5 million provided in response to the COVID-19 pandemic.

The increase in other noninterest expense was driven by a couple of factors. First, we increased the provision for our unfunded commitments of $3.4 million due to the provisioning build during the first quarter. We also experienced an increase in FDIC assessments of $1.2 million due to the exhaustion of certain credits that we had received last year. Additionally, other noninterest expense increased due to volatility in deferred loan origination costs as a result of decreased loan production during the quarter when compared to the fourth quarter of '19.

At March 31, 2020, our asset quality metrics remained stable. And our average net charge-offs -- our annualized net charge-offs were 3 basis points of average loans for the quarter, and we have yet to see any unusual trends in our nonperforming loans.

As the pandemic began to spread across the globe and its arrival in the United States became imminent, we evaluated our portfolio for concentrations and industry exposures that we thought were most likely to be adversely affected, and we proactively reached out to our clients in these sectors to understand how their business activities might be impacted. While we are monitoring all loan categories with a heightened level of attention and could argue that every category should be, at some level, high risk and concern, we identified 4 loan categories, specifically hospitality, restaurant, entertainment and certain sectors of the retail trade industries, as having higher concern.

In connection with our earnings release filed with the Securities and Exchange Commission, we have furnished supplementary information on each of these industries and provided credit metrics and performance statistics as of April 23. It is worth mentioning that 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 previously 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 April 23, 60% of our hospitality portfolio was deferred under the program, along with 42% of our restaurant portfolio, 46% of our entertainment portfolio and 30% of our retail trade portfolio. To reiterate the criteria, these programs were made available to borrowers who were in good standing prior to the pandemic. Even though we focused in on these specific portfolios because we cannot actually predict the impact of the pandemic and the related economic interruption may have on our borrowers in any sector, we are continuing to monitor all asset categories for signs of deterioration.

As of January 1, we adopted CECL. On the date of adoption, we increased our allowance for loan losses by $42.5 million and our reserve for unfunded commitments by $10.4 million. Our resulting allowance as of day 1 approximated 98 basis points.

With the economic uncertainty still remaining as a result of the virus' impact and even after considering the offsets due to the government stimulus packages and the internal relief efforts we're providing to our customers, we believe it to be prudent to bolster our reserves in response to the uncertainty, and therefore, we recorded a provision for credit losses of $2.6 million for the quarter and increased our reserve for unfunded commitments by $3.4 million. At the end of the quarter, our allowance to total loans represented 1.23% of total loans and 240 basis points of nonperforming loans.

From a capital standpoint, our adoption of CECL reduced retained earnings by $35.1 million. We have elected to take advantage of transitional relief offered by the regulatory agencies, and therefore, our regulatory capital ratios during the fourth -- first quarter are not impacted by the adoption of CECL. As of March 31, 2020, all of our company's regulatory capital ratios exceed the minimums required to be well capitalized. And for any further information on our financials, I'll refer you to our press release or specific -- for additional specific numbers or ratios.

Now Robin, I'll pass the call back to you.

Thank you, Kevin. In closing, we began the second quarter with a great deal of uncertainty. We are unable to accurately predict the long-term impact of the virus and other broad economic shutdown issues will have on our stakeholders, but our commitment to the safety and security of our employees and to the understanding and then meeting the needs of our clients and being a good citizen in our communities will support our success through this cycle and ultimately provide value to our shareholders.

Now Jason, I'll turn the call back over to you for Q&A.

(Operator Instructions) The first question comes from Jennifer Demba from SunTrust.

Could you talk about what you're seeing in terms of reopening efforts in your primary markets?

Yes. Jennifer, this is Mitch. And I commented earlier we're open for business. I think -- and that being with those things that I described that we put in place as we went through the month of March. And relative to banking, we see people consistent in that regard, and of course, it varies across our footprint, the degree at which others are returning. I think ultimately, that is really defined by the consumer and those that are using those services.

And as we are in our company, we see that people are continuing to be cautious and following the CDC guidelines. And certainly, that's what we will do as a company as we continue to focus on our employees and our clients. But as you know, across our 5 states, it somewhat varies, but we see people continuing to be very cautious as we work our way through the pandemic that's not fully defined at this point.

Jennifer, this is Kevin. I'll add a comment. We limited the activities in our lobbies. We did that on March 20, and that was before any governor or any mayor issued an executive order to do so. To Mitch's point, we didn't close. We just changed the access to the branch lobby.

Throughout this period, we've seen digital and technology adoption increase exponentially. Mobile deposits are up 2 or 3x the rate of Zelle enrollment, our P2P solution. Our treasury management teams continue to do a phenomenal job, as they did last year, of having high success rates in our commercial clients of treasury management products, electronic banking. So all of that is -- business is still going on, and it's just not being done in the lobby. We enhanced the capabilities of the drive-thru so that basically anything other than checking your safe deposit box could be done through the drive-thru or be done digitally.

And I made the comment about closing the branches before any executive order because we know there's a lot of conversations out there at least in the Southeast of states or municipalities considering dates to reopen. We're going to reopen much like we did when we elected to close the lobbies. We're going to reopen the lobbies based on when we feel comfortable that it's safe for our customers and employees to do so. And -- but I also would say we never closed the banking capabilities of any of our clients. And in fact, throughout this period, we may have enhanced them by empowering them to do their own banking outside of the branch.

And Jennifer to Kevin's point, it's very clear, our investments over the years in technology and the enhancement of our digital capabilities, we're certainly recognizing those during this time. And I believe -- I mean we're hearing the same from our clients. We're simply doing business, but we're delivering that product and service, to Kevin's point, differently.

Could you talk about the economic assumptions you made with your provision for the first quarter? And also just talk about what kind of expense control you might be looking at over the next few quarters.

We will. Thank you. So just looking at the assumptions we used and -- the great thing about assumptions is that at the time we make them -- over the last 45 days, the market changed so quickly that we were humbled how quickly we could be wrong in our assumptions. But ultimately, what we ended with on our forecast was a high level of unemployment, that unemployment would peak middle of the year at about 30% and then start to improve thereafter.

We're not assuming a V-shaped recovery. We're assuming more of a U shape. We are assuming, just from an economic forecast, GDP growth to be negative over the next 12 months and, again, a weak Q2 with the opportunity to start rebounding some as we get into the latter half of the year.

On the expense controls, everything is in place as it relates to expense control. I want to mention a couple of things. On salaries and employee benefits, although -- we did a lot of hiring last year. So I think that masked the effort that we were doing on salaries and employee benefits to reduce that cost. You saw that somewhat in Q1, where if you back out just the increase in mortgage -- the increase in salaries and employee benefits directly attributable to mortgage, salaries were flat. And then if you back out the overtime or the accruals that we made for the accommodations that Mitch mentioned on COVID, salaries and employee benefits are actually down. We will continue to have a heightened focus on reducing expenses.

The noise came in other noninterest expense. With the -- we report our reserve for unfunded commitments in other liabilities. We don't include it in the allowance for loan loss. And as a result, the provisioning -- that $3.4 million we view as a credit cost, not necessarily an operating cost. That contributed to it.

The biggest swing was in the FAS 91. Last quarter, we had net growth of, I think, 13%, 14%, maybe higher. This quarter, it was 3%. So the swing in that was directly correlated to the growth. We think that looking forward, that levels out. And noninterest expense has actually come down a couple of million dollar -- other noninterest expenses comes down a couple of million dollars as the growth rate normalizes in the current environment.

Aside from that, every expense within the company is up for review. And also I think we've learned that we can operate in a different business model, different banking model. And so I think not that this is -- not that we want to go through this, but this, I think, has opened our eyes to the level of change that we as a company can absorb and react to quickly. And I think that's a mindset we're going to carry out of this pandemic if we ever return to a normal operating environment. We are going to resist the urge to return to normal.

Jennifer, I want to add this as well in relation to expense. And as you know, we were very opportunistic in adding some very strong talent to an already strong team in the past several quarters. That continued this quarter. We had 12 additions, but also we have been saying that we are very disciplined in managing expenses and making sure that people are accountable and producing.

So during the quarter, with those 12 additions, we also had 14 just in that relationship manager area that exited the company, either from retirement, but certainly from accountability, where we hold people to certain expectations. So we actually -- to Kevin's point, just in managing expenses actually in the quarter just in relation to relationship managers, we saw a pretty good decrease in salary expense. So while we remain opportunistic, we also remain very -- make sure we're accountable in managing those expenses as we operate in a new environment.

The next question comes from Michael Rose from Raymond James.

Wanted to start on -- I know it's a tough topic, but on the loan growth. You guys had obviously brought on a bunch of new hires and built the pipelines. You guys previously were targeting some pretty robust growth numbers in part because of those new hires and the pipelines that they were building. I know it's hard to kind of look out at this point, but any nearer-term expectations for what we could expect for loan trends?

Sure, Michael. And you're correct, it's hard to predict. But let me start with what we're seeing currently in the pipeline, reflect on our production and talk about the results that we're seeing out of the additions. In course with Jennifer's question, I just commented on the accountability around expenses and expectations. Our current pipeline currently is $177 million. If -- comparing that to where we began the prior quarter, it was $240 million. If I look at the pipeline mid-March, it was more in the $250 million range, probably $200 million in early April. So considering the pandemic, we've still got good but cautious deal flow in that pipeline, and that's across the markets and our business lines.

I will probably talk about PPP in a moment. There's no PPP dollars in that pipeline. As I referred, we originated over $1 billion in PPP in 13 days. That's 6 months' worth of production in 13 days. So during this time period that I'm reflecting on pipeline, that business occurred.

So at $177 million, like I say, we continue to see good deal flow. If you break that by region, about 13% in Tennessee; 14%, Alabama/Florida Panhandle; 16% in Georgia and Central Florida; 11% in Mississippi; and 46% in our corporate and commercial business lines.

Looking at production, and then we'll kind of reflect going forward to the extent that it's prudent to do that today. But looking at the prior quarter, we had production of $516 million. That compares to over $800 million in the prior quarter. You will remember, in that quarter, we had some pull-through late in December. So at $516 million, considering the time of year, that was good production. That compares to $374 million the prior year same period. So the $516 million produced about 11% loan growth in nonacquired, and which -- about $214 million, which resulted in about 3.3% net growth or $80 million for the quarter.

If you look at that production, it sounds much like our pipeline. We saw, again, across all geographies, particularly in the corporate/commercial areas, almost 15% of that production came from the new hires. So we continue to see good production, good investment and, again, good geographic production. I keep referring to an already strong team who just simply continue to hit on many different cylinders.

If you take the pipeline of $177 million, that would -- should result in nonpurchased outstanding in 30 days increase of about $48 million. Again, if you look at that type pipeline across the quarter, that would indicate production in the $500 million to $550 million range, which would -- or should equate to low to mid-single annualized growth. However, as you began the conversation, until we begin to see sustained resolution of the pandemic, it's very difficult to give that guidance. Certainly, that could be less, it could be more depending on the duration of what we continue to see develop.

I certainly appreciate it's challenging, but that's fantastic color. Maybe just one follow-up as it relates to the PPP program. Maybe mechanically, Kevin, if you can let us know what the expected fees are that you'd expect to generate from at least around $1 billion. And then if that's going to flow through either NII and the NIM or fee income. And then finally, if you can give some thoughts on the margin.

Sure. So before I talk about PPP and accounting and margin, I want to make a comment that somewhat related to PPP that Mitch mentioned, that goes back to the hiring. And one thing that we found in the PPP program is that we were able to provide service to customers that weren't our customer at the beginning of PPP program that we think we won that customer over because their access -- the company they were using to access PPP program couldn't meet their capabilities or at that time, may not have even been participating in PPP program.

And I use that as an example because we're seeing signs where some of our customers are being -- or not our customers, but customers are being left in a lurch because of their financial institution reacting to the current economic environment, and that provides us an opportunity to win clients. It also provides us the opportunity to win additional talent.

And so as we see the opportunity for good talent, we're probably going to move on that talent as they get displaced because, again, what's happening is where they are, they're not able to meet the needs of their customers. And that's the common theme that led to our hiring strategy 10 years ago as well as what led to our strategy over the last 9 months. It seems like that might continue to play out. And so I would just add to Mitch's comment. We may still be opportunistic in the hiring if good talent gets displaced

On the PPP, a little bit early to tell what the gross fees are. I'll just tell you we've been average -- we've been averaging or estimating what the range could be, and let's just call it somewhere between -- let's just call it 3% on a gross fee. We don't have a number yet on what the agent fee would be related to that, but we're just -- from day 1, we just assumed an average fee of 3%, and that's been our guide. And as that firms up, we'll provide additional clarity around that going forwards.

The accounting of it is -- again, my favorite topic this quarter is FAS 91. It's a fee that's going to be deferred. And so it will be recognized over the life of the loan, and -- but we expect these loans to be pretty short-lived. And so that -- I don't think all that income comes in, in a single quarter. It's going to be spread out over multiple quarters, some probably being recognized in Q2 with another bulk of it being recognized in Q3 and Q4, but it's income that's going to be earned over a couple of quarters.

I don't have an estimate as to how much is not going to be forgiven and they roll into a loan. We built our program off of the assumption that this is a program that our customers need. We want to provide this to them. We want to be their conduit to access this capital in this program. And we're going to build it for it to be a bridge for the next 2.5 months with the goal of them qualifying for forgiveness and not rolling this into a lower-rate loan. That's how we built the program.

I suspect the majority of the program -- vast majority of the program is going to adhere to that. There will be some residual pool of loan portfolio that turns into a 1% loan. That wasn't our ultimate concern. It's not the best yielding asset, we recognize that, but the access to the program is really our primary concern.

The fees are going to be recognized over the next 2 to 3 quarters, and it will flow through margin. So it will provide some noise to margin. As we look through the noise that causes, we still have 150 -- we have a full quarter impact of 150 basis point cut that occurred in late March, and that's going to negatively impact core margin and reported margin. We're estimating that to be about 8 to 10 basis points for next quarter. And then after that, who knows what the rate environment is as to what the volatility and margin is on a go-forward basis, but we are anticipating some more margin compression next quarter.

(Operator Instructions) The next question comes from Stuart Lotz from KBW.

Kevin, maybe we could start on your -- the decision to account for the reserve for unfunded commitments through noninterest expense. And I think a lot of other banks that we've seen report so far have kind of lumped that into the provision. So I would just look to kind of what went into that process and how much volatility you guys expect around that under CECL and as the pipeline changes in the next couple of quarters.

Sure. So let's just -- let's start off with just the geography as to where that flows through. And really, we've had a reserve for unfunded commitments for -- well, this is not -- CECL didn't create that. It's always had some small impact on noninterest expenses, and that reserve has always been in other liabilities. That's just historically how we accounted for it. And I believe that's consistent with what the accounting literature requires.

I'm not aware of a change under CECL that requires it -- that requires the unfunded commitment to be in " the allowance for loan loss." But we can go back and reevaluate that if we need to adjust the geography of it. We challenged and researched how the -- how that -- the unfunded commitment should be reported. We came to that conclusion on our own, but then we also saw there was inconsistencies in some of the reporting of companies. And so maybe -- that's why we elected just to keep it where we had been, which was historically in other liabilities with the expense flowing through other noninterest expense.

As it relates to going forward, it will create -- as long as it stays in other noninterest expenses, it will create volatility in that line item. And I do think though, if you look at the correlation between the provisioning that we had during the quarter, that gives you a good guideline as to the impact on potential noninterest expense as it relates to the unfunded commitments. I don't know exactly what that ratio is, but that gives you a good correlation of the relationship between the provisioning and how that affects unfunded commitments, at least in a credit environment. Now if we have a period where we have a significant increase in commitments, then that -- without a significant increase in loan balances -- funded loan balances, that may cause some dis-correlation. But the noninterest expense will be affected by any reserve build unless, of course, we change the reporting of that and show it as a true provisioning expense.

Maybe one follow-up. I know you guys gave some color on some of the other items that were buried in the other noninterest expense. As we think about a core -- obviously, there's going to be a lot of volatility in that on a quarterly basis. But just trying to kind of hammer out a core operating expense run rate to drive forward from here. If we back out that $3.5 million related to the reserve for unfunded commitments as well as some of the deferred origination costs, how are you guys thinking about the expense, the core run rate going into 2Q?

Yes. So we -- if you take the current quarter's other noninterest expenses, which I think was roughly, call it, $20 million, back out $3.5 million for the credit costs associated for unfunded commitments, what we believe is that that number comes down a couple of million on a quarterly basis as FAS 91 normalizes this quarter as well as we implement cost-cutting measures.

That really -- that line item has a lot of discretionary expenses in it, and that's where our focus and effort is going to be on that. And so take Q1 as a baseline, back out the credit costs for unfunded commitments and then our expectation is that number comes down $1 million or $2 million with normalization of FAS 91 and cost-cutting measures.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.

Thank you, Jason. We appreciate everyone's time and interest in Renasant Corporation and look forward to speaking with you again next quarter. Thank you.

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