Renasant Corporation (RNST) Q2 2025 Earnings Report, Transcript and Summary

Good morning, and welcome to the Renasant Corporation 2025 Second 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 for Renasant Corp. 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 cost 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 President and Chief Executive Officer, Kevin Chapman.

Thank you, Kelly, and good morning. We appreciate you joining the call and look forward to sharing results that reflect our merger with The First Bancshares and the successes we've enjoyed since the 2 companies came together. We closed the transaction on April 1, and our second quarter numbers reflect a full quarter of operations from both companies. I am proud of the results and believe they are a great reflection on the hard work of our employees in bringing the companies together. While we still have systems conversion in early August, the cultural integration of our employees and customers have gone well. The teamwork and collaboration from employees in all areas of both companies has put us right where we need to be from an overall perspective of the merger. We are very encouraged by these early results, and we will continue to remain focused on the work of meeting the needs of our customers by successfully integrating teams from both the companies. I will now highlight a few of our second quarter financial results. Our reported earnings were $1 million or $0.01 per diluted share. Adjusted earnings were approximately $66 million or $0.69 per diluted share. Importantly, both sides of the balance sheet demonstrated positive growth for the company and reveal the work done to solidify employee and customer relationships. Loans were up $312 million or 7% from what the combined companies reported on March 31. Likewise, deposits were up $361 million or 7%. We also saw a meaningful expansion in the core net interest margin from 3.42% to 3.58%. Reported margin, which reflects purchase accounting adjustments rose from 3.45% to 3.85% for the quarter. Our adjusted total cost of deposits decreased 18 basis points to 2.04%, while our adjusted loan yields decreased only 1 basis point to 6.18%. As you can see, our earnings trajectory and balance sheet strength are evident in the second quarter results. We are well positioned for the second half of the year and are on track to realize the benefits of the combination. I will now turn the call over to Jim.

Thank you, Kevin. The merger creates an exciting but noisy quarter. I'll begin with highlights from the merger. The fair value of assets acquired totaled $7.9 billion and included total loans of $5.2 billion. The fair value of liabilities assumed totaled $6.9 billion, and included total deposits of $6.4 billion. Core deposit intangibles totaled $159.6 million and preliminary goodwill arising from the transaction totaled $428.7 million. From a capital standpoint, all regulatory capital ratios remain in excess of required minimums to be considered well capitalized. Turning to asset quality. We experienced improvement in our past due loan percentage and nonperforming loans were flat. There was an uptick in classified loans that was largely driven by layering in the portfolio from The First and not due to deterioration. Excluding day 1 provisions, we recorded a credit loss provision on loans of $14.7 million, comprised of $13.2 million for funded loans and $1.5 million for unfunded commitments. Net charge-offs were $12.1 million, largely comprised of 2 credits. And the ACL as a percentage of total loans increased 1 basis point quarter-over-quarter to 1.57%. Turning to the income statement. Our adjusted pre-provision net revenue was $103 million. Net interest income growth was driven by improvement in the net interest margin and balance sheet growth. Noninterest income was $48.3 million in the second quarter, a linked quarter increase of $11.9 million, $9.7 million of this increase was attributable to The First, while our mortgage division drove much of the remaining increase. Mortgage experienced a solid quarter in terms of volume, resulting in an increase in income of $1.6 million from the first quarter after excluding a gain on sale of MSR assets. Noninterest expense was $183.2 million for the second quarter. Excluding merger and conversion expenses of $20.5 million, noninterest expense was $162.7 million for the quarter. With systems conversion a couple of weeks away, we expect to see additional conversion-related expenses in the third quarter. We remain on track to achieve modeled synergies by year-end. The improvement in net revenue coupled with cost containment from the combined companies resulted in an improvement in our adjusted efficiency ratio of about 7 percentage points. We are encouraged by the results of the second quarter and the momentum for the remainder of 2025. I will now turn the call back over to Kevin.

Thank you, Jim. We began the process of this merger over a year ago. There has been a tremendous effort by employees from both companies to create the new, higher-performing Renasant. We're excited about capitalizing on the opportunities ahead of us and delivering strong financial performance to our shareholders. I'll now turn the call back over to the operator for questions.

[Operator Instructions] Our first question will come from Michael Rose with Raymond James.

Just have a couple for you. Just, Jim, maybe if you can just kind of kind of walk through the margin. I think the total amount of accretion is higher. The core margin was obviously up. Can you just give us some color on kind of expect -- I know there's a lot of moving parts still, including a full -- another quarter of the combination. But how -- what are the puts and takes for the kind of the core margin as we kind of think about the combination as we move forward? And then what should we think about in terms of scheduled accretion for the next couple of quarters?

Michael, thanks for the question. So a couple of things. We focus on core. And I'll certainly touch on the purchase accounting influence on overall margin. But I would say in core, our outlook includes 2 rate cuts later this year, I think September and December. And so we've got that in there, but I would say they have a de minimis impact on our guidance or expectations for margin, core margin. I would say in terms of the core looking forward and certainly in Q3 and maybe to a lesser extent in Q4, we do see room for some modest expansion in that core margin. So we were at 3.58% as you know for Q2. I'm cautious to use a spot margin number, but I would say I would offer this. Our spot margin in June was 3.60%. So that will give you a sense of some upside there, although, again, cautionary note there, monthly margins are -- can be a little misleading. So I'd say that in the core, some modest expansion expected here in the near term. In terms of the accretion, and think about in 2 buckets, interest and credit. And of course, interest, we view that over time as that accretion coming into core. So that will transition from purchase accounting in the core NIM over time. And I think that for the quarter, the credit -- or excuse me, the interest accretion was about just a little shy of $10 million. And I would say for both interest and credit, in terms of trying to predict how that will come in the income statement in future quarters. And the normal part of that, I would say, you can use Q2 as a pretty good proxy for what Q3 and Q4 will look like. As it relates to the accelerated pieces of that accretion, that's just a really tough thing to project. So I'll stop there and happy to elaborate if it's helpful.

Yes. So obviously, you had some purchase time deposit amortization and long-term borrowing amortization this quarter. But if I just take the kind of the $17.8 million, is that what you're talking about should be kind of in the ballpark for the next couple of quarters?

Yes, I would say, so we had -- yes, we had roughly $16 million of purchase accounting accretion in the quarter roughly, and maybe it's $17 million if you include some other things. And that -- the normal part of that was about $13 million plus or minus. And I would think that's a pretty good indicator of what you're likely to see in the next quarter or 2. The accelerated piece, which is, again, a little less than maybe $5 million, it's just a tougher thing to project, Michael. So trying to predict that is a tough thing to do.

Totally got it. Just wanted to understand some of the pieces. Okay, perfect. And then maybe just as a follow-up, just as we think about the loan growth of the combined company, obviously, pretty solid again this quarter. Can you just touch on pipelines, hiring efforts and some of the benefits as we think about the combined company, larger balance sheet, et cetera, from a growth perspective as we move forward.

Michael, it's Kevin. So if you look at what both companies did in Q4, you saw balance sheet growth, both loans and deposits in that 6% to 7% range. And I know we all know this, but it was on the backdrop of probably one of the most disruptive times in the company. So commend the efforts of everybody throughout the company to integrate, plan for conversion and also continue to grow in our markets. So we're extremely excited for -- extremely excited of the work that was done to just grow the balance sheet in a very disruptive time. As we look at the pipeline, the pipeline is holding flat. If we look at our historical pipeline, if we look at our pipeline in Q2 compared to where it would have been in Q1, the Renasant legacy pipeline is flat as well as The First. So when you put both of them together, we still have a very strong pipeline. And I would caveat that with the past 2 quarters, both companies' pipeline was up compared to prior quarters. So as far as opportunities, we still see it. We still see -- we firmly believe we're in some of the best markets in the country, some of the best markets in the Southeast. And I think that's reflected in the pipeline. As we look out for the rest of the year, we're still guiding towards mid-single-digit loan and deposit growth. A couple of things could weigh on that or could factor into that, the payoffs. I think we've communicated in the past that we anticipate -- we've anticipated payoffs to pick up throughout the course of the year. That hasn't really materialized yet. But at any point in time, depending on the shape of the yield curve or volatility in the yield curve, that could accelerate. So we're still guiding in that mid-single digit and we've intentionally tried to get ahead of that at the beginning of this year towards the end of last year, having production that would keep us in that mid-single digit. But I would just say, pipelines are good, and our team is focused on capturing market share opportunities throughout all of our markets. I think it's reflected in Q2.

The second question comes from Matt Olney with Stephens.

I want to ask more about expense levels. And I think the core expenses that you mentioned look really good in the second quarter. And it sounds like we should anticipate more noncore expenses in the next few quarters as you get the -- as you integrate. But as far as the core levels and as you layer in the cost savings, I'm curious about the expectations for the core expense levels in the next few quarters. I think before, we said that the first full quarter of fully loaded cost savings wouldn't be until first quarter of next year. Just looking for additional color if that's still the case.

So yes, as it relates to the expense outlook for the next couple of quarters, I'd say this. There's really no -- as you would expect, there's virtually no efficiencies really reflected in Q2 from the merger. And that will start to show up in Q3. As you know, we've got our conversion -- systems conversion slated for early August. And so sometime after that, we'll start to see those efficiencies show up. So the way I would think about it is Q3, you'll see some efficiencies show up in the expense line. And then you'll see a little bit more show up in Q4. And then we still believe that when we get to Q1, it will -- our goal is to have a clean income statement that reflects all the efficiencies that we sought in the deal. The other thing I would add is you saw, we had -- I think it's roughly $20 million in merger expenses in Q2. Pardon me, I think you'll see about $25 million in the second half of the year in terms of merger expenses, and most of that will come in Q3.

Okay. That's helpful, Jim. I appreciate that. And then just as a follow-up, maybe a bigger picture question. I think a year ago, we talked about getting the efficiencies from the transaction and strategic goals, ROA of 1.25%, 1.30%, and efficiency ratio down to 56%. So as you just look at the overall landscape now and kind of the first full quarter with the transaction, any updates as far as your longer-term strategic goals with respect to profitability, ROA and efficiency?

Matt, it's Kevin. No real update other than to say we're tracking right in line with what we laid out a year ago. If you look at the efficiency ratio for Q2, we are right on track. We've busted through the 60% hurdle that we've talked about a long time. We're comfortably below that. And that doesn't include any of the cost saves yet to be realized in Q3 or Q4. The balance sheet growth that we expected, that will drive revenue, that's occurring. And so what we laid out was the combination would unlock potential on both sides of the company. And we think that's occurring. So no real update other than we are right on target with where we plan to be. If you look at the balance sheet that we projected in July of last year, we came in really on both sides, both Renasant and The First came in right on top of where we expected to be. So everything is lining up the way that we wanted to, and it will be our focus and our goal to continue to work and extract incremental improvements on the goals we laid out. But right now, we feel very comfortable about the guidance that we laid out over a year ago about ROA, ROE and efficiency, those profitability metrics that we key in on.

The third question comes from Catherine Mealor with KBW.

Just one follow-up on the margin. Jim, can you tell us the duration of the amortization that we'll see on the time deposits accretion, assuming that runs off pretty quickly.

It's about 5 months, Catherine.

Okay. Perfect. And then this quarter, we saw a little bit of elevated charge-offs of problem loans that was up $2 million or so. Just -- can you give us a little color around what that was and then -- and kind of what a fair run rate for that is moving forward?

Catherine, this is David. So on those 2 credits, those were both credits that we have had identified as problem loans, carried them as rated assets for a period of time. Both of them were on the C&I side of the house. They were not necessarily systemic. There were individual scenarios that drove each one of those. And happy to provide color if needed on the individual situations. But they were one-off credit opportunity or credits that we needed to go ahead and remove from the balance sheet. One of them, we had -- the charge-off was almost fully impaired. The other one was a little bit more of a change from a company standpoint, and we went ahead and charge that one off again. So those weren't deemed to be systemic of our C&I portfolio, of our loan book. And if you look historically, we've historically had a couple of bumpy quarters here and there as we've removed problem assets from our balance sheet. But again, normally, those numbers kind of revert back to. If you look at the last 12 months, I think we were 8 to 10 basis points on average the last 12 months. And that number somewhere around 10 basis points is plus or minus a couple of percentage kind of where we've been for the past few years, and I would expect on a go forward that, that number would probably be somewhere in that ballpark, maybe just a tad higher, just based on the economic environment we're in, but somewhere plus or minus 10 basis points, maybe no higher than 15 basis points.

Okay. Great. And maybe one more, if I could, on just the buyback activity. Just kind of curious now that you've got the deal closed and marks are set and you've still got high levels of capital and certainly at your high levels -- higher levels of ROTCE, you're accreting capital pretty quickly. Just curious how you kind of balance thoughts on potential buybacks.

Catherine, this is Jim again. So again, it's going to sound like a broken record. But first and foremost, it's that capital that we're accreting is there to support organic growth. And as Kevin mentioned, we're really pleased with the growth that we've had. And we've had good growth for a number of quarters, and so really pleased with that. So that's first and foremost. And then I would say certainly, any bolt-on -- we've talked about this from time to time. Any bolt-on sort of small acquisitions that add to our expertise and knowledge in specialty finance areas, factoring, asset-based lending, whatever, that's something we continue to look at. I don't envision that being significant, but we remain very interested in adding to what we've got there. And I would say talent, too. I mean that's part of the organic growth picture. But we're always thinking about addition of talent to the team and are hopeful that those opportunities will continue to be available to us. The other thing I will add is we continue to look at -- we did, I think, 2 legacy Renasant restructuring in the securities portfolio. We consider that in the mix. And then certainly, buybacks are there. But you can tell with the order, I sort of walked through those that buybacks aren't necessarily at the top of the list, but they certainly are on the list given the way we accrete capital. And lastly, in the back of our minds, although it's probably not anything in the near term. But we want to think about maintaining capital for future bank M&A down the road. So that's, I think, the way we sort of think about the pecking order in terms of capital levers.

The fourth question will come from Stephen Scouten with Piper Sandler.

Maybe just to follow up on some of the things you just said, Jim, about capital allocation longer term. I mean appreciating that you haven't even gotten to the core conversion on FBMS yet. But when would you guys be open to thinking about the whole bank M&A again if the opportunity arose? And would there be an area of focus or a size of focus at some point down the line? Or is it, again, just too early to think about that?

I'll take this. I think it's a little bit too early to really plan for anything definitive. We still have conversations with a variety of different management teams, we have continued those conversations even as we've been focused on The First. But we'd just reemphasize, and I think we -- you and I have had this conversation, the focus is The First. This has the most meaningful impact for both companies, both shareholders, and that's where our focus is. And there's a lot of focus on the cost saves. There's a lot of focus on conversion. We, as a management team, are focused on the balance sheet and the revenue that it drives. That's where our attention is. And it's on track. And we don't want anything in front of us that's going to derail us or get us off track from the benefits that are available to us with The First. So that's where our focus is. As we get past conversion, as we continue to fully and successfully integrate both companies, then maybe we'll be a little bit more -- maybe we'll change our position on what our focus will be in M&A. But right now, I would just say we are squarely focused on the largest acquisition we've done with the most customers, the most branches, most employees, that's where our focus is because it has the most impact to both shareholders. And honestly, anything that would be on our radar screen wouldn't be as positive impactful as what the opportunity is. So that's why our focus is there. And right now, we're so close to the finish line. We don't want to do things that would self-inflict an error or anything that would cause us to get off track from this opportunity. So that's where we're focused right now. That will change over time. Right now, we're focused on wrapping up the successful conversion and successful integration of The First.

Yes. That makes a lot of sense. I appreciate that color. And then on the remaining securities from The First, I mean I think you guys sold about a little less than half of their book. Was that kind of always the plan for that securities book or did you end up changing the path to any degree in terms of what you sold and what you kept? And could that -- is that still in the cards potentially to evaluate moving forward?

So I would -- as you say, we sold roughly 50% of the securities at The First. And our team had, I think pretty early on, done a lot -- did a lot of work early on. And that number may have moved around a little bit over time, frankly, not very much. And so what we ended up selling and executing on was sort of planned for a while. And I don't see -- you never preclude anything, but I think if there's additional work to do with the securities portfolio, it would -- of course, it's really all Renasant. That's the way I'm sort of thinking about it. But any future in terms of repositioning, that would likely be on the legacy Renasant side.

Got it. Perfect. And then just last thing for me. I know you guys gave a lot of good credit color. It sounds like some of the maybe noise this quarter was just kind of deal related and nothing to be overly worried about moving forward. But the provision was still obviously a bit higher than it has been ex even the kind of onetime accounting noise. So was that -- is that more about just how the model worked with the combined balance sheet and keeping the loan loss reserve percentage relatively flat? Is that the way we should think about it, the reserve percentage kind of staying in the mid-150s range? Or what were the other dynamics that kind of led to that, I guess, the $14.7 million in kind of -- I don't know, if you want to call it like core provision, if you will.

Stephen, this is David. So there's -- as you know and as you pointed, there's a lot of noise in that CECL number this quarter. As we've noted, the PCD, non-PDC marks as related to The First. If we remove those from the conversation. The other part of the provision in Q2 was largely related just to how our model works as you pointed out, particularly with the couple of losses that we had for the quarter that was charge-off, that just impacted our factors and obviously, a couple of factors that -- of our model. In particular, those 2 drove our historical loss within those reflected -- those respective books, particularly the C&I and occupied CRE. And that historical loss ratio was modified in Q2 relative to those loans. And so that just caused a change in our model. There was a relook as we do every quarter in our Q factors and had a reflection on our reserves in our model. That wasn't necessarily specifically to those 2 credits, that's something we do consistently on a quarterly basis. And then the third attribute, I would just say our loan growth, obviously, the level of loan growth in the quarter would have had a material impact on our model as well from a provisioning standpoint. So all 3 of those. But it was a model-driven side that drove the increase in provision for the quarter.

Do we still have anybody in the queue? [Technical Difficulty]

Are we ready for the next question?

We are ready for the next question, yes.

The next question comes from David Bishop at Hovde Group.

I'm not sure what happened there. A question for Jim. Just curious, the interest rate risk position post close of The First acquisition, maybe how the balance sheet sets up for a potential 25 basis point Fed rate cut, just curious what your sensitivity looks like post merger.

Sure, Dave. So as you probably recall, The First really complemented our balance sheet and then it reduced our sensitivity position a little bit. So if you look at those rate cuts, of course, they occur late in the year, but they really have virtually no impact in the margin guidance that we would give. Now full year will probably be a little -- but I can say this that without The First, it would have been a little bit different story. So The First definitely benefits our sensitivity position and that we're a little less sensitive. So that sort of came across as we -- or happened as we thought in terms of merging the balance sheet together.

Got it. And then Kevin, Jim, just curious, you talked about the opportunities on the expense side of the equation. Are there any opportunities on the fee income side of the house that really haven't been tapped yet that aren't in the numbers yet that has you pretty excited as you look forward?

Yes. Dave, I think there's a couple. And I think you're seeing it start to build in the numbers. One, I know we've had to apologize for being in the mortgage business for the last couple of years, but mortgage had a nice rebound in Q2. And I think actually, we were contrary to maybe what was happening nationally, just some of the data coming into mortgage bankers. And the opportunity we have in the new footprint with The First, there's a lot of inbound migration, there's a lot of rooftops that will only help and assist mortgage. On the treasury management side, we talked about a conversion in 10 days of our system. We've been slowly converting our treasury management solutions into The First. And so that's been ongoing. And so we think that has potential upside in the future as it relates to fee income that can be driven off that. And then also other things like capital markets and things that we've done in management, the [indiscernible] that we operate now. So these numbers are -- in some cases, 2 of those numbers may be buried in other noninterest income. They're growing at a fairly appreciable rate and there's been really good adoption, really good interest from our team members at The First about those products, what they can offer, how it will differentiate them in the market. And so I think there are several opportunities in that noninterest income line item that are bright spots and should help drive additional incremental revenue as we continue to fully integrate. But there is opportunity at the top line revenue net interest income with some of the secured business lines or business lines that we provide, lending lines that we provide that maybe The First didn't have yet, ABL, factoring, equipment leasing, a larger loan limit and some of our expertise in specific real estate or middle market C&I. We've seen early wins, early successes in the first quarter in all of those business lines of partnering up, coming up with bankers from The First as well as some of our matching up with our teammates over on the Renasant side to capture market opportunity that otherwise either one of us wouldn't have had the opportunity to win. So we're seeing early successes and early wins just in The First this quarter and excited about what that indicates can happen in future quarters and future periods.

Again, sorry for the technical difficulties. [Operator Instructions] With no further questions, this will conclude our question-and- answer session. I would like to turn the conference back over to Kevin Chapman, CEO, for any closing remarks.

All right, and I appreciate all of you that were able to join the call today. We look forward to having future conversations at conferences coming up in Q3. And again, I appreciate everybody that joined the call today. Thank you.

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