The First Bancshares, Inc. (RNST) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Renasant Corporation investor call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Kelly Hutcheson, Chief Accounting Officer of Renasant. Ma'am, please go ahead.

Thank you for joining us for today's Renasant and The First's merger call. Presenting on today's call are Mitch Waycaster, Kevin Chapman, Jim Mabry and Hoppy Cole. Also joining us on the call are David Meredith and Dee Dee Lowery. 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 are discussed in our filings with the Securities and Exchange Commission including the preliminary prospectus supplement relating to our equity offering that we filed with the SEC on July 29, 2024. 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. I would now like to turn the presentation over to Mitch Waycaster.

Thank you, Kelly, and good morning. We appreciate you joining the call as we discuss our announced acquisition of The First Bancshares, Inc, and the follow-on equity offering. Before handing the call over to Hoppy, Kevin and Jim, I'd like to make a few comments. For a background on why this acquisition is a great fit for us, I've known Hoppy Cole for many years and have long admired what he and his team have accomplished. Growing a $500 million Harrisburg community banks into an $8 billion institution, with strong deposit bases in Florida, Georgia, Mississippi, Louisiana and Alabama is impressive. The First, our community bankers focused on developing trusted relationships in their markets in order to become their customers' financial services provider of choice. Geographically, they have established a strong presence in many of the Southeast, most dynamic growing markets. The First has a granular customer base with limited loan concentrations and a strong retail deposit foundation. They also have a strong credit culture that has performed well. All of these attributes are also true for Renasant. And we believe that these similarities will help the integration process go smoothly and enable us to achieve the financial results that we have modeled. As you know, it has been a few years since we have announced the bank merger. We have looked at a number of opportunities and this one checks all the boxes. For the reasons I have touched on, this is the deal that we have been looking for. I am as excited today as I've ever been about Renasant and the opportunity in front of us. I'll now turn the call over to Hoppy.

Thanks, Mitch. I appreciate the kind words and could not agree more about the similarities between our two organizations. When we started The First, almost 30 years ago, our goal was to develop long-term relationships in vibrant southeastern markets and grow as a result. I'm proud of our team for how we have executed on that vision. And now with Renasant, we could not ask for a better partner to continue down this path. I'm excited for our associates, our customers and our shareholders as we enter this next chapter and I am confident in the success of this combination. With each of our respective teams prior experiences with merger integration, I'm comfortable that this will be a smooth transition, particularly because culturally, I don't think this will feel like a change at all. Again, we're excited about this new chapter in the history of our company as we joined Renasant to create top Southeastern banking franchise. I'll now pass the call over to Kevin.

Thanks Hoppy. I want to start by echoing that I'm excited. This is a great opportunity for our company, and this is the right deal at the right time for several reasons. To start, we view this merger and integration as low risk -- as low risk as things can be while not ignoring the complexities associated with combining two large geographically diverse institutions, we believe The First is a strong cultural fit and our knowledge of and familiarity with their people and markets, provide for a great deal of comfort in this deal. This will reinforced during our extensive due diligence process. Additionally, we have had tons of proactive conversations with our regulators on this deal to keep them informed throughout the process. Second, this acquisition meaningfully improves our financial condition. Looking at Slide 4, The First has significant scale with a combined $25 billion in total assets and accelerates profitability improvement with about 30% EPS accretion. As you can see on Slide 5, we modeled ROA increasing for 1.3%, with a return on tangible common equity expected to be in the high teens and an efficiency ratio in the mid-50s. We believe that the combined company can accomplish these improved profitability metrics. We'd also deliver Renasant's existing balance sheet strength, adding further depth to our granular deposit base, enhancing our liquidity position, and improvement in our asset quality metrics. And finally, looking past the model, this acquisition makes us a better bank. As Slide 8 and 7 shows, this acquisition brings us strength in Florida and along the Gulf Coast, which will improve our prospects for continued growth. We also had density in Mississippi, Georgia and Alabama. And we enter Louisiana, which we believe will help with brand recognition and enable our branch network to operate more efficiently. Turning to Slide 9. In our view, The First has one of the best deposit bases in the Southeast. They are customer deposit funded with little to no wholesale funding and enhance our already strong deposit base. I'll now ask Jim to talk a bit about the diligence process and financial assumptions.

Thanks, Kevin. Before going into the modeling details, I want to build on Kevin's comments regarding the balance sheet. As you can see on Slide 14, deposit and liquidity positions are enhanced by this transaction. Our loan-to-deposit ratio is expected to decline to 86% at closing with a 19% cash and securities to assets ratio. Both of these metrics provide us with added flexibility. We project the CET1 ratio will be approximately 11% and total risk-based capital ratio around 15% at close. Given the profitability profile of the combined company, those capital ratios will build by approximately 70 to 80 basis points annually. Moving to diligence in modeling. We spent several months in the diligence process with contributions from all areas of the bank as well as third parties. And the numbers on Slide 13 were developed with a bottoms-up approach. This is a 100% stock acquisition with a 1:1 exchange ratio that we anticipate closing in the first half of 2025. We are using consensus estimates for each bank through 2025 and then growing those estimates by 5% thereafter. We are modeling 30% cost saves with 40% achieved in 2025 and 100% achieved thereafter. We've identified $75 million of after-tax deal charges and we are assuming a 1.5% allowance for credit losses is established in the first loan portfolio. The accretable double count here is net against The First existing purchase accounting marks is projected to be $48 million. We've assumed a $189 million interest rate mark on our loan portfolio or approximately 3.6%. We are assuming that we will sell the first securities and reinvest those proceeds into higher-yielding assets. I will now turn the call back over to Mitch.

Thanks, Jim. To close, we think this acquisition, paired with the capital raise, transforms our financial position. It is additive to our footprint and our demographic profile. It leaves us with strong capital and liquidity levels and we have a high level of comfort around integration and execution. I will now turn the call over to the operator.

[Operator Instructions] And our first question today comes from Michael Rose from Raymond James.

I noticed that along with the deal announcement that you guys are doing a community benefits plan. I was just wondering if you could spend maybe a minute or 2 just kind of outlining it, how it came about? And maybe just some details on what you're trying to accomplish?

Very good, Michael. And yes, two things about our company is our commitment and focused on community development, which always precedes economic development. So as The First, one of the largest CDFI banks and with Renasant for the last number of years through our community development and social responsibility arm of the company, we've had like The First, a very clear focus on community development, making sure we're very intentional, whether it's community reinvestment type activities, whether -- just focusing on the total community, and we believe our job is to understand the needs of all of our communities. So simply what we decided to do, no one asked us to do this, but what we decided to do is we were going through diligence and thinking about the future was to add an announcement, and we will also make this part of the application to develop a community benefits plan. And to your question, what we've simply done is looked at what both banks are doing currently. And we projected that forward with an increase. I think the cumulative increase over the 5-year period is around 13%. But again, we're looking at really what we're doing today, and we're projecting that forward. Just to be very intentional and clear about our expectations and our intentions to continue to reinvest in our communities. And as far as the aspects of it, there's -- it's really in four parts. One part being on residential mortgages, particularly focusing on LMI and majority minority census tracts. Also a part of that is a down payment assistance to [ VARs ] who might need that. As well there's a small business segment, where we're being very clear about focusing on small business and those that would benefit in majority minority census tracts. And then on the community development side, just being very focused with some funds that are focused on community development loans and investments. And then there is a portion that's focused more on philanthropic and outreach type activities. But again, a reflection of what we're doing today and the intentionality of continuing to do that in the future.

I appreciate that, Mitch. And maybe one more for you. Just I think at the outset, you mentioned the regulators comfort with the deal. And if you could just expand upon that. I mean there's a decent amount of branch overlap here. I just wanted to understand what gives you comfort that this won't be a kind of a protracted approval process?

Yes sir. Well, first, I would start with just a good relationship in both companies with our respective regulators. The other thing is just the intentionality all the way during -- the process to date is staying very close to the regulators reaching out, seeking input and they've been very helpful as far as guidance as we think about the application process and moving forward. As far as locations, there are -- there's a small amount of locations where they're within 1 to 3 miles where there would be some consideration of not exiting the market, but simply thinking about physical plan and the combination of some of those, but no exits of any markets.

Okay. Perfect. And then maybe just finally for me. Are there any areas that with this deal that you'll be able to either expand upon or look to grow a little bit more? Obviously, you can understand the pro formas in the slide deck. But just trying to have a better sense of with the larger balance sheet, will there be any changes in the business model at all?

Yes. Mike, it's Kevin. I don't think that there's going to be drastic changes in the business model. We'll relook at several things just given our -- the larger size of our balance sheet. But I don't think that material changes anything. I do think there is a couple of opportunities just embedded in both of our models for maybe some revenue synergies for some immediate pickup. One is mortgage. The First had a mortgage group, we have a mortgage group. I think on a combined basis, that there's greater opportunity to expand product services and maybe distribution channels for selling so I think that's an opportunity. And I recognize also that mortgage with the industry to be talking about now. But if you look at long term or even immediate, the markets that we and The First are in, there's inbound migration and there's home sales. So there's still positive activity from a mortgage perspective. I think there's -- look, opportunity for synergies on the [indiscernible] side, business lines that we have, like our recent expansions in ABL and factories. We have found significant opportunities in our footprint just by being able to offer those services to customers. And suspect and believe that in The First footprint there are going to be similar opportunities. We haven't modeled that into our balance sheet over the above-average yields that come along with those business lines. So just real quick, that's kind of three off the top. There's probably several more underneath that we think are just embedded in the two business models that complement each other.

Our next question comes from Matt Olney from Stephens.

Congrats on the deal. I want to start on interest rate sensitivity of the combined company. I think based on the disclosures from the 10-Q, Renasant looks to be asset sensitive based off the shop analysis and First Bank is more rate neutral. I know those are just models. So any color you can provide on the rate [ sensitivity ] especially kind of in the near term. If the Fed does cut the next few months more of a short-term impact. And then kind of a longer-term impact. I'm curious, with the two balance sheets combined, the accounting marks I'm curious kind of what the natural rate [ sensitivity ] at the bank that you want to manage longer term?

Matt, this is Jim. So a couple of thoughts that hopefully address that question. If you're waiting on the [indiscernible] that data is just [indiscernible]. The First is less -- a little less asset sensitive than we are. And I would say, if you did like a 100 basis point shock, if we look at the impact of earnings from that at Renasant versus on a combined basis, [indiscernible] I think the shock announces has it roughly down 3%, again, shock, assuming we take no action, that would go down about 1 point. So it's about 1% benefit, if you will, in terms of mitigating rate cuts. So that's definitely a plus. And then I think this addresses your sort of looking forward question. If you -- if we look at the model and look at the data that you're seeing in the deck, in terms of lower rates and their impact on that data is -- it's of course, there's a lot of moving pieces in that, Matt. When you do that and assume 2 or 3 or 4 rate cuts between now and close. It does have an impact on the numbers that you see, but it's frankly pretty small when you net all the ins and outs of that. So very slight sinuations to the returns that you see, but it's not material that we have cost between 50 and 100 basis points down between now and close.

Okay. Appreciate those details, Jim. And then also want to ask about -- on the due diligence process that you highlighted. I think in the slide deck, you mentioned a pretty material focus of the diligence was on that office portfolio. I think it's around the nonowner-occupied CRE, I think it's around 3%, the pro forma portfolio is going to be office. Any color on that office portfolio of the combined company? And what are the size of some of the larger office loans in the portfolio and some of those loan grades?

Matt, this is David. So we did a deep dive into -- the portfolio as a whole, 7% of the portfolio, emphasis on commercial as well as the non-occupied CRE. You point out the 84% coverage of office states, not -- that's all nonowner-occupied office loans, 100% of those loans over $0.5 million. So we felt like we got really good coverage out of the portfolio. One of the things that -- one, their underwriting process that First goes through is very similar to our underwriting process. There's a stress testing of the interest rates, stress testing of the vacancy, stress testing of the rental rates in the market, very good in-depth look at the submarket vacancy. So the underwriting matched up very well with the way we look at them and we got very comfortable with their underwriting as well as their portfolio management. The average loan size on a combined basis, to your point, is $700,000 to $800,000 and our office loans are very small. They pull our average loan size down. The average LTV across the book, the combined portfolio is like 56%. So a very good loan to value. And Matt, I think it's important to note, also exposure is different. They both Renasant as well as The First is different than what we see in the marketplace today. We're talking about single story, smaller office properties in Harrisburg, Mississippi, [indiscernible], Georgia, Decatur, Alabama. The [indiscernible] due diligence and their Chief and I after had the opportunity to talk and had a great quote, and I'm going to attribute to him, but he said, we don't finance an office building, well, I can't jump off a roof of it. So I thought that was in the -- so -- and I think that's just typical of the office opportunities that The First looks at. All options that we look at there. Smaller community bank deals, you don't have the drive to work issues to work from home. You don't have the 100,000 square foot floor place that you've got to backfill up if attorney's firm leads. So I think it's a good portfolio. There's obviously stress within that book just as part of a macroeconomic environment, but it's not anything outside from what we've seen in our historical legacy Renasant book.

Our next question comes from Catherine Mealor from KBW.

One follow-up to the margin question that Matt was just asking about. Do you have the duration of The First loan book and just trying to think the timing of how we should model the accretion of the loan book back into earnings through accretable yield?

Catherine, it's Jim. It's around 6 or 7 years, and that's going to match, sort of the behavior of that interest rate mark. I think it's -- we've got some years digits, over 6 years on what it's going to creep back in. So that's -- those would be the rough numbers.

Great. Okay. So accelerated in the first year with that. Okay, that's perfect. And then on cost savings, I appreciated you putting only 40% achieved in '25. So if so many deals kind of overestimate that. So it feels conservative. But just kind of curious on your timing of -- I know you're saying that you should close in the first half. So we'll hope for earlier rather than later. But maybe your thoughts on when you hope to have conversion and then -- and just kind of -- and maybe talk through some of your cost savings analysis. It feels like the 40% achieved next year is conservative, which is great. But then also just curious with the deal of this size, typically, you may see great cost savings, so you may have other investments kind of behind that as you become a bigger company. And so just curious if there was any of that factored into that number as well?

Yes. Catherine, we -- so a couple of things. So just on the last and then holding [indiscernible] the end. I think some of the calculus behind this conversation of what we announced is at $17 billion, we had -- we've invested a lot in infrastructure for scale. Being over $10 billion, 6 or 7 years, we were now trying to grow into the back office and the infrastructure we have. Whether it is for technology or whether it's to [ revect or rigor ], we have that infrastructure. What's exciting about this is we think this is an inflection point to lever some of that. So I'm sure there will be some incremental investments we need to make along the way. But as we look at our technology offering as we look at the systems of the first, we think there is some opportunity to take existing technology and leverage it a little bit more. Just on the cost saves in the realization, time will tell whether that's a conservative number. But we think it's a realistic number. We started from a bottom-up approach and tried to detail it out with its most precision -- with as much precision as we could. I would say, and hopefully, you'll appreciate this, this is the largest acquisition that we've done. It is extremely important that we execute this with good precision and be as seamless and smooth in the conversion and the group integration as possible with the most customers, the most employees [indiscernible] ranges. And so we're going to -- whether it's 40% in '25 or a little bit more over that, I just want to emphasize, we're going to be very intentional about making this a smooth transaction. Because what we believe is important is we bring over the good employees to give customers that balance sheet and the revenue -- and we -- and what's been great is the conversations we've had not only with Hoppy and Dee Dee and their executive team. They're committed to that as well. Their history of acquisitions. They understand. That integration is as important as that conversion. And by the way, we are targeting for August '25 conversion. But what's exciting about this is kind of the momentum and the interest to ensure that we integrate this smoothly, which may be maybe -- which well beyond post conversion. But I feel confident about the cost saves and also our goal is to make sure we bring over here good employee and good customer that brings that balance sheet or bring that revenue.

Helpful, Kevin. And one more, if I could. On, Jim, you mentioned that you're of accreting capital. I think you said it was 70 to 80 basis points annually now just your higher levels of profitability. Is it fair to assume maybe a higher organic growth rate as we move into '25 and '26, just given your higher levels of capital. How should we think about a use for that?

So I would say, Catherine, on the growth rates, I mean, we -- for modeling purposes, as you saw in this [indiscernible] in the mid-single-digit number. I don't know about near term, but certainly, longer term, as we get through integration and beyond, the footprint is a very compelling footprint, and it's got low above national averages, as you know, in terms of growth, economic growth. So we feel like we'll be in a position to outgrow our peers. And we'll see what that turns into. But I do think to your point, that will be a good use of the capital to capitalize that growth. So we'll see if that holds, but I think it's reasonable to assume that as we get beyond integration, that the growth trajectory of the company should look pretty good.

Our next question comes from David Bishop from Hovde Group.

Congrats on the deal. A quick question. I appreciate the guidance in terms of the CRE ratio post close. Just curious, the comfort level at that level, do you think you're going to look to trim that relatively quickly, stay close and any guidance in terms of where we should think that trends to?

David, this is David. The -- both The First and Renasant have been banks that leverage commercial real estate in our marketplace for loan growth in that number at closing at 82% and 278% it's probably not too far off from where we would continue to see our loan growth opportunities. Now that's subject to macro marketplace, how does CRE perform from a macro level. But from our willingness to loan into CRE, it's both a core competency of The First as well as Renasant. We understand it, we underwrite it well. We manage it well. So I don't think we'd see a material decrease in those dollars or probably a material increase, but we'll continue to probably operate within that range.

Got it. And then on a pro forma basis, the cash assets, I think, gives -- you showed 11%. Just curious where you see that trending ideally on a longer-term basis.

David, this is Jim. I think we've got -- I think our model shows a little higher than that in terms of a closing where our cash -- actually cash assets, that's correct. Securities to assets will be about 14% or 15%. We went about 10 or 11 today, and we'll probably end up somewhere between that. So that's some add liquidity that we can hopefully put to work in the loan book.

Got it. And then just a final question following up on Mike's earlier question. In terms of the low to mod LMI census tracts, just curious if you think you can satisfy the tone you've laid out in terms of census tracts, but you both already service or does that require expansion into some of the -- some new markets down there?

Yes, Dave, it's Mitch. I do. I think our past is a good reflection of what we can do going forward. And the confidence in that, as I referred earlier, the first work as a CDFI bank in both people, product and what they demonstrated in the past and the same for Renasant. As you know, all of these markets, all the needs of the markets, they change over time. And I think, again, what we're indicating here is our intentionality to continue to understand those needs and meet whatever those needs are. So yes, we are very confident in our ability to deliver in that space.

[Operator Instructions] Our next question comes from John Rodis from Janney.

Congratulations. Jim, maybe a question for you just back to the securities portfolio, the restructuring. Would you expect to do that all within the first quarter? Or do you think that would take a couple of quarters to sort of reinvest in the securities portfolio?

We'll evaluate that as we go along. And I mean the model assumes that we do it simultaneously closed. Obviously, that was made just for ease of modeling. But we'll -- as we get closer, we'll sort of examine the merits of timing and how much and when. But yes, for model purposes, we assume you did [indiscernible] the data close. But to your point, practically, that's probably not going to happen that way. But if we chose to do all of it at once, you could affect that pretty quickly within a couple of weeks. So we'll fight that fight here.

Okay. And then just for the combined institution, what would be a good tax rate to use?

I would say -- we have both dug into the tax record both companies portfolio and as you know, we won 21%, 23%. I don't know that it would be meaningfully different for the combined companies. So that probably gets priced over at this point.

Ladies and gentlemen, with that and showing no additional questions, I'd like to turn the floor back over to Mitch Waycaster for any closing comments.

Well, thank you, Jamie, and thank each of you for joining this morning's call, and thank you for your interest in Renasant.

Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.