Renasant Corporation (RNST) Earnings Call Transcript & Summary

Good day, and welcome to the Renasant Corporation 2025 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, Chief Accounting Officer. Please go ahead.

Good morning, and thank you for joining us for Renasant Corporation's Quarterly Webcast and Conference Call. Participating in the 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. Such factors include, but are not limited to, changes in the mix and costs of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, www.renasant.com at the Press Releases link under the News & Market Data tab. We undertake no obligation and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now I will turn the call over to our Executive Vice Chairman and Chief Executive Officer, Mitch Waycaster.

Thank you, Kelly. Good morning. We appreciate you joining the call. The first quarter results reflect a good start to the year with solid profitability and growth in loans and deposits. As you know, on April 1, we completed the merger with First Bancshares, and we welcome their team to Renasant. Our focus remains steadfast on successfully bringing 2 strong companies together and achieving higher profitability with solid organic growth. While the economic outlook contains uncertainty, we are excited about the prospects for Renasant to perform well in the periods ahead. I will now turn the call over to Kevin.

Thank you, Mitch. Before we dive into the quarter's results, I too want to welcome the team from the First to Renasant. We successfully closed the merger less than a month ago, and the conversion and integration teams have been hard at work to orient our new team members, align our management teams and continue to meet the needs of our customers. I want to commend all employees of the combined company for their diligence, patience and flexibility throughout these past several weeks. With the early success we're experiencing, and I'm excited about the future opportunities for Renasant. I will now turn our attention to our first quarter financial results. Our earnings were $41.5 million or $0.65 per diluted share. Net interest income was $134.2 million, an increase of $1.3 million on a linked quarter basis. Similar to last quarter, solid loan growth of $170.6 million linked quarter, coupled with a sizable decline in our cost of deposits was the driver behind the increase in net interest income. The liability side of the balance sheet presents another positive growth story. Total deposits increased approximately $200 million linked quarter with growth in noninterest-bearing deposits accounting for $137 million of growth. The improvement in deposit mix along with disciplined pricing, as rates have fallen, resulted in a decrease in total cost of deposits of 13 basis points from the prior quarter. Noninterest income increased $2.2 million from the fourth quarter of last year. Seasonality in our mortgage division drove an increase in mortgage banking income of $1.3 million, accounting for the majority of the overall increase in noninterest income. Noninterest expense was $113.9 million for the first quarter. Excluding merger and conversion expenses, noninterest expense was $113.1 million for the quarter representing an increase of $415,000 linked quarter. We will continue to work diligently to manage our expenses as we work to efficiently integrate the First this year. Overall, we had a strong quarter marked by solid balance sheet growth, disciplined pricing and expense management. Before turning the call over to Jim to discuss financials, I would like to thank Mitch for his service and outstanding leadership as CEO of Renasant during the past 7 years. During Mitch's leadership, Renasant Bank grew to become a $26 billion financial services company with more than 300 locations and over 3,100 employees throughout the Southeast. Additionally, Mitch's steady hand and calming approach helped us navigate several significant events during his tenure, such as the pandemic and the bank failures of 2023. On behalf of our employees, customers, communities and shareholders, Mitch, we congratulate you on your success during your tenure as CEO, and are excited that you will remain a part of the team as Executive Vice Chair. I will now turn the call over to Jim.

Thank you, Kevin, and I echo your comments about Mitch and his leadership. I have really enjoyed and benefited from serving under Mitch these past 5 years. I'll begin with highlights on the balance sheet. Total footings grew $237 million on a linked-quarter basis. We experienced another quarter of strong loan growth, driving an increase to our loan portfolio of $171 million which represents a 5.4% annualized growth rate. We also purchased securities during the quarter, which contributed to an increase of $147 million quarter-over-quarter. This asset growth was primarily funded by growth in deposits, which increased $200 million on a linked-quarter basis. This growth came in the form of either noninterest-bearing or otherwise lower costing deposits as we reduced higher costing time deposits from year-end. From a capital standpoint, all regulatory capital ratios are in excess of required minimums to be considered well capitalized and our book value per share and tangible book value per share increased 1.6% and 2.7%, respectively, quarter-over-quarter. Turning to asset quality. We experienced improvement in all of our credit quality metrics. A cornerstone of our credit risk management strategy is to proactively identify underperforming loans early and work quickly towards resolution in order to mitigate loss and our team executed this strategy well during the quarter. We recorded a credit loss provision on loans of $4.8 million, comprised of $2.1 million attributable to funded loans and $2.7 million attributable to unfunded commitments. We experienced growth in our commitments to finance construction projects, which we expect to fund over the next 12 to 24 months driving the need for provision for unfunded commitments in the first quarter. Net recoveries were $125,000, and the ACL as a percentage of total loans decreased 1 basis point quarter-over-quarter to 1.56%. Turning to the income statement. Our adjusted pre-provision net revenue increased $3.3 million driven by growth in both net interest income and noninterest income and effective management of noninterest expense. Our adjusted net interest margin, which excludes purchase accounting accretion and interest recoveries increased 8 basis points to 3.42% for the quarter. Adjusted loan yields decreased 8 basis points to 6.19% and the total cost of deposits decreased by 13 basis points to 2.22%. Kevin commented on the highlights within noninterest income and expense. The improvement in net revenue, coupled with stable expenses resulted in an improvement in our adjusted efficiency ratio of 1.4 percentage points. We are encouraged by the results of the first quarter and the momentum building for the remainder of 2025. We look forward to bringing you results over our combination with the First at the end of the second quarter. I will now turn the call back over to Mitch.

Thank you, Jim. As Kevin noted, we have made good progress on merger integration. Renasant not only operates in some of the best banking markets in the country but is also positioned to accelerate profitability improvement in upcoming quarters. On a personal note, I appreciate the kind words from Kevin and Jim. It's been a blessing serving with this outstanding team for 46 years and I look forward to continuing my service as Executive Vice Chair in semi retirement. I will now turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from Stephen Scouten with Piper Sandler.

So I'm curious, one, first, in fees, it looked like another really strong quarter in wealth management. Have there been any larger-scale changes to that business or anything that's kind of changed the run rate or the potential of revenues overall? Or anything kind of notable there based on last couple of quarters?

Stephen, I think it's more a story of consistency in that space. We find ourselves today just over $6 billion in assets under management. And as you look across those various business lines, our ability to integrate that delivery, particularly in the small business commercial space has continued to produce well for us. We see a lot of upside going forward as we continue to grow that business.

Okay. Great. And then maybe as we think about the deal having closed, curious if it's probably still very early, but as you've gotten into it, anything you look at within the loan book of the combined company and you think maybe you want to work a part of the loan book down or deemphasize anything without throughout the footprint?

Stephen, this is David Meredith, we realized through our due diligence just a comfort level in their loan book. It's very similar to our loan book from a geographic standpoint, asset concentration standpoint, the type of transactions they chase, the metrics they use in underwriting performance, everything lined up very well with what we do. So we don't see any changes, hopefully, just as a springboard to continue to grow further.

Okay. Great. And then just last thing for me. Any updates on kind of were there any major changes to marks with the deal that you guys have disclosed and then timing of cost saves and integration? Have there been any changes? Or has any of that been able to be pulled forward with the closing of the deal?

Stephen, it's Jim Mabry. No, no changes in terms of timing. And as you know, we've got conversion slated for early August. And so we'll start to see efficiencies show up in the income statement after that. But I would say, generally, the purchase accounting assumptions that we laid out last July, are relatively unchanged, except for the rate mark, rates are a little different. And so that mark is not likely to be as large as it was in July but otherwise pretty much tracking to what we laid out last summer.

Okay. That's helpful. And so if it's a little lower and then a little less dilution, but maybe a little less forward accretion as well, but not a major change. Is that right, Jim?

That's correct.

Perfect. Congrats on a great quarter.

Thank you, Stephen.

And the next question comes from Michael Rose with Raymond James.

I'd be remiss if I didn't ask Mitch one more time to give an update on the loan pipelines as you normally do.

Well, thank you, Michael, and happy to do that this morning. I'll start with the pipeline and maybe reflect on production this past quarter and just some thoughts going forward. But we started this quarter with a 30-day pipeline of $189 million. That's a modest increase from $174 million the prior quarter. I would also add, Kevin reflected earlier in opening remarks about the integration and the success at the First early on. In legacy markets of the First, they're starting with a pipeline of $83 million. That's up from $53 million at the beginning of the year, the prior quarter. Of course, and as you see, we're starting the quarter with a strong pipeline, just reflecting on the first quarter on production. We saw a nice increase in production $645 million compared to $572 million the prior quarter. As we usually do, just looking forward, we always comment on payoffs and likely that being the kind of the governor on what net could be in any given quarter, we did see an increase in payoffs this quarter, not unexpected. That was up about $86 million. So it resulted in a net of $171 million, as Kevin mentioned earlier, about 5.5%. As we think about pipeline and production in the company, we continue to see a meaningful contribution from across our markets, our various business lines as well as the type and the size credits. We saw that again this past quarter with 1-4 family contributing about 18% small business, business banking about 24%. Commercial credits that in this category would be roughly $3.5 million or greater, about 33%, and then our corporate banking group, the larger C&I, commercial real estate, ABL, equipment finance another 25%. So again, we're certainly not looking -- just thinking about the pipeline and looking forward, we're not looking past the potential economic uncertainties in the coming days. Certainly, we're here to understand and meet the customer financial service needs. And as we've done in the past, we'll certainly remain disciplined in our underwriting, in our pricing. And I would mention again just looking forward with the economic uncertainty and the timing of payoffs and that was reflected in this quarter's net. And given those considerations, just expanding on your question, Q2 could be more in the net growth somewhere in that low single-digit range, most likely.

That's very helpful, Mitch. Maybe just another one on expenses, obviously, with the deal closed. Jim, can you give us any sense of a good starting point before cost saves as we think about kind of the Q2 base just with the 2 companies combined as a starting point? And then just given a pretty good expense control this quarter and whatever is going on at the First would just be helpful for a starting point.

Sure, Michael. I mean as you sort of mentioned, it's early, and we don't have the clarity that we're going to have in coming quarters. But if you look at their quarter and you look at our quarter, we were pleased with their quarter, both on the income statement and balance sheet side. So nothing about their quarter changed any of our thoughts about the model or how things will go from here. And as it relates to expenses, I mean, it's -- Q2, I suspect it won't be as straightforward as this, Michael, but I would suspect you could really take the 2 expense basis, the most recent quarterly expense basis for both companies probably layer in a little bit of a increase above that for merit increases. And that's pretty much what you would probably see. Again, it won't be perfect, but that's pretty much what you'd probably see in Q2. From that forward, you'll start to see the benefit of the efficiencies. And our goal is we've sort of had a -- our internal goal is to have a very clean Q1 of '26. And certainly, I would say, in Q4 of '25, we'll provide -- investors will get a really good look at the progress we've made in terms of efficiency. So each quarter, we'll give a little more clarity and transparency in terms of our progress. But not so much of that in Q2, I would expect.

Helpful. And what was their Q1 expenses, if you have them handy?

I don't have them handy. I don't know what the expense number was, but around $45 million, $46 million is what they've been running at.

Okay. Perfect. And maybe just 1 final one for me. I know you guys are tied up with the deal, but any thoughts on share repurchases as we kind of move through the year? I know you guys have the authorization, but just didn't know your willingness or ability to buy just in light of the deal.

Sure. You're correct, we do have the authorization. We did not have any activity under the authorization in Q1. And it's a topic like other uses of capital that we discuss regularly. In fact, yesterday in our Board meeting, we went through sort of a look at our capital. And I think as you appreciate, the thing that's different for us here in future periods as opposed to the -- our recent history is that we're going to have more capital flexibility. We're going to start off with some -- with good ratio, strong ratios, and we're going to accrete capital rather nicely in the coming periods, roughly 60 to 80 basis points a year. And that's going to provide -- it provides optionality for us. And buybacks would be one of those possible levers. What we do and what we'll be doing in the quarters ahead is evaluating the returns, the merits of a buyback versus other possible uses. So I don't know how that's going to play out. But I would say this, we clearly have the -- we'll have the capital wherewithal. We want to be good stewards of that capital and make sure it's providing returns for shareholders. So whether that's buybacks or other uses. And of course, #1 goal is to support the organic growth of the companies.

Perfect. I appreciate you taking all my questions, and Mitch, thank you for all you've done over the past many years. It's been a pleasure working with you, and congrats as you move forward.

Thank you, Michael.

And the next question comes from Catherine Mealor with KBW.

One question just on the margin. I was curious, Jim, if you could give us just an updated view on where the margin should come together pro forma. I know there's a little bit of change in rates, but not too much, but just kind of curious what you're thinking there especially given the greater margin performance that you had on a base this quarter. And then maybe as a kind of side note to that question on just the bond book that you're buying from the First. I know you've talked about kind of selling or remixing that by about, I think, 60% or so of their bonds. You've talked about selling and then reinvesting. I know the yield -- or the market has been all over the place. So just kind of curious if you already knocked some of that out earlier in the month and kind of how you're thinking about that with the volatility in rates?

Sure, Catherine. And as you know, we're early in this. But I would say again, there's -- we really don't see anything in their numbers or in our numbers or the environment. There've been -- obviously, there have been changes. But I think our guidance on margin from what we laid out last July is pretty close to what we feel today. So I'll give you some ranges and hopefully, that's helpful. I think on core NIM, if you take our core NIM for Q1 -- and this won't be exact, but this will give you the -- I guess, the -- a sense of the impact. I think core NIM could expand 10 to 15 basis points in Q2 from Q1. All-in NIM would benefit another roughly 10 to 15 basis points from what we saw in Q1. And as you appreciate, I mean there's -- in periods going forward, there's going to be some lumpiness in that number just because of prepayment behavior. But I think roughly 10 to 15 on core and another 10 to 15 all-in. So call it, 20 to 30 basis points altogether for all-in NIM. On the bond book, you're correct. We -- very soon after the close, we started to engage with their bond book. And we'll -- I think we're pretty much close to being finished with that, not 100%, but pretty close. And at the end of the day, we will have sold probably a little over 50% of their bond book and reinvested it. And the other 50%, we like those securities, and they met our policies. They had good yields. They had CRA benefits or otherwise. So that is pretty much completed. And I would say we're -- even though the equity markets were obviously very turbulent during this period. The bond markets had some change and some volatility, but the execution there went really well. We're pleased with how that went. So I think we're -- it was a good first step in terms of sort of remixing the balance sheet.

And the next question comes from Dave Bishop with Hovde Group.

Just curious, guys, as you sort of scrubbed up the loan book for exposure to any segments or any industries that have exposure to the tariffs or the other economic policies coming out of D.C. Just curious how far along you are that and maybe what you're seeing in terms of the deeper dives within your commercial portfolio?

Dave, this is David. What -- we've looked heavily at our book. And one of the things that benefits us is we do a lot of community banking, a lot of local type business. Obviously, everything has some level of impact from whether it be tariffs or reduction in government spending. We have very little exposure in the primary government markets, D.C., Northern parts of Virginia, I think we only have a couple of transactions in that marketplace. So we don't have a material direct impact there. But obviously, tariffs and immigration issues are much further reaching and impact everything. So we continue to have ongoing conversations with each of our opportunities, each of our customers to see what the impact of them individually is because each one is going to be a little bit different to determine is there elasticity within their income statement, they can absorb cost of goods sold. Or when we have new loan conversations, what's the breakeven, what's the reserves within construction projects. There's a very robust conversations to make sure we understand the risk within each individual transaction at this point. We're doing some things, more specifically, we're looking at -- we're calling our foreign wires and ACH is just to see which customers do more foreign -- have more foreign exposure and make a more pinpointed target at this point. Maybe as you know, I guess, at any point in time, this could change next week. And so we're just doing a very broad-brush look at all of our customers and the impact and obviously putting up -- putting plans in place if this continues, the volatility continues, economic uncertainly continues, we may have to do things more specific, and that may include things as modifications to underwriting, modifications to guarantee requirements and so forth. And so there are contingency plans we're putting in place just to determinate what the -- once we assess what the longer-term impact is of the economic changes.

Got it. And then maybe just saw the resilience in the mortgage banking group. Just curious, I think the early read into the second quarter, maybe in the summer, do you expect sort of a rebound? I know there's been a lot of more abundant terms of activity. Just curious what you're seeing in overall activity within your footprint?

Dave, it's Kevin. So yes, mortgage is right in the wave of just the volatility of the rates that you're seeing, the 10-year, 30-year volatility. We did see an uptick leading into quarter end. We saw the pipelines build, chalk that up to seasonality that we typically see. And we still continue to see, although there's rate volatility, we do continue to see activity in the mortgage business. particularly the end of first week of April, when rates kind of bottomed out, you saw an immediate pop in the pipeline that -- an increase in the pipeline. You've seen that pull back a little bit, but we still have some good activity in mortgage. So we'll continue to see how Q2 plays out, but we feel good about how we're positioned with mortgage, with the hiring we did last year, with the products we have, the delivery that we can provide we feel very good about mortgage, but just going to -- it's going to be very dependent on what happens with rates. And as we all know, we're expecting that to be volatile throughout Q2.

And the next question comes from Matt Olney with Stephens.

I just want to go back to the capital discussion and the potential for the loan mark to be a little bit less at closing. Just any color on what this could mean for capital at closing? I think we talked around the CET1 being just below 11% at closing. Is this still the thinking? Or could this be a little bit higher given those comments about the loan mark?

Matt, this is Jim. And you're correct, you're spot on. I mean, if we take a look at the variances between what we announced last July and what the balance sheet looks like now, and of course, we're still going through some of those entries. But generally, higher capital, and I would say that the Q2 CET1 would be probably a touch above 11%. And of course, we're closing quarter earlier than what we had modeled back last July. So capital will be a bit higher. The EPS accretion will be a touch lower and of course, lower -- slightly lower TBV dilution. And the earn back, just to give you that as well, is really unchanged. I think it's up 0.1 point in terms of earn-back, but hopefully, that gives you a sense of capital and the movement between announcement and when we closed.

Yes, that's helpful, Jim. And it sounds like you'll have more just capital optionality than maybe when we first forecasted the deal. So -- and you addressed the buyback appetite, you've also got some sub debt tranches that become callable, I think, later on this year and into next year. Curious just what the appetite is to call those or refinance those later on this year and into next year?

So you're correct. We do have those opportunities, and that's part of what we had in discussion yesterday with the Board, it was looking at the various opportunities we've got for deployment of capital. And so that's on the list as well. It's nice to be in a position where we've got capital flexibility and Renasant's got that today. The other thing I'd add to that, which helps considerably, particularly when you're talking about calling any debt is that we carry a considerable amount of cash at the parent. We've got about 3 years' worth of cash at the parent. And that just provides even more flexibility in terms of how we think about that debt and what pieces we want to keep and what pieces we want to go ahead and redeem. So all that's in the mix. And I think as we -- as Renasant goes forward in the coming quarters and year or so, particularly with the debt, you'll see some changes, and I think those things will be additive to the earnings of the company.

Okay. And then also I got on the call a few minutes late, so you may have already hit on this. Just any broader comments on deposit competition and loan pricing competition in your core markets just compared to when we talked back in January?

No, it's -- I think, like others, we -- it's certainly very competitive still. But our funding price -- funding pricing has behaved better than we anticipated and that continues. The real pressure is more on the asset side of the books. I will also add that the First had a really good deposit quarter. They had really strong growth in deposits. Some of it was public funds, but they had a really strong quarter in terms of their balance sheet and their deposit growth. So it's really nice that both companies had good quarters going into the closing of the deal. But yes, we're very pleased with what we're seeing on the funding side from both companies.

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, Dave, and thank each of you for joining today's call, and we appreciate your interest in Renasant.

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