Good day, and welcome to the Renasant Corporation 2018 Third Quarter Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to John Oxford of Renaissance Corporation. Please go ahead.
Thank you, Allison. Good morning and thank you for joining us for Renaissance Corporation's 2018 Q3 webcast and conference call. Participating in this call today are members of Renasant's executive management team. Before we begin, let me remind you that some of our comments during this call may be forward looking statements, which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements.
Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the SEC. We undertake no 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 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, which has been posted to our corporate site, renasant.com, under the Investor Relations tab in the News and Market Data section. Now I will turn the call over to Renasant Corporation Executive Chairman, Robin McGraw.
Robin?
Thank you, John. Good morning, everyone, and thank you for joining us today. We're pleased with our strong results for the Q3 of 2018, which are highlighted by a stable core margin and a significant improvement to our efficiency ratio. Excluding the impact from merger and conversion expenses, we once again achieved record earnings and earnings per share. Our profitability metrics are further evidence of our successful quarter as our returns on average tangible assets and average tangible equity, excluding merger and conversion expenses, improved to 1.59% and 17.28%, respectively.
In addition, on September 1, 2018, we completed our merger with Brand Group Holdings, the parent company of Brand Bank of Atlanta, Georgia, which added 13 locations throughout the Greater Atlanta area and approximately $2,000,000,000 in assets prior to any purchase accounting adjustments. The balance sheet and results of operations of Brand Mortgage are included in our results for the Q3 of 2018. As discussed in our earnings release, we currently anticipate completing the divestiture of Brand Mortgage in the Q4 of 2018 following the receipt of all necessary regulatory approvals. We're excited to welcome our new shareholders, clients and team members from Brand and we look forward to a smooth transition of client accounts and core banking systems during early Q4 2018. Now I'll turn the call over to our President and Chief Executive Officer, Mitch Waycaster, to discuss this quarter's financial results.
Mitch?
Thank you, Robin. Looking at our results for the Q3 of 2018, net income was $0.61 for the 3rd quarter as compared to 0 point 5 were $0.61 for the 3rd quarter as compared to $0.54 and $0.53 respectively for the Q3 of 2017. During the quarter, we incurred merger and conversion expenses associated with the brand merger, which reduced our EPS 0 point 17 dollars Turning our focus to our balance sheet. Total assets at September 30, 18 were approximately $12,700,000,000 as compared to approximately $9,800,000,000 at December 31, 2017. Total loans were approximately 9,100,000,000 dollars at September 30, 18, as compared to $7,600,000,000 at December 31, 2017.
BRAND added approximately $1,300,000,000 in loans held for investment at the acquisition date. Excluding the contribution of brand, net loan growth for the 1st 9 months of 2018 was 3.5% on an annualized basis. Loan production continues to be strong as new production totaled $404,000,000 for the Q3 of 2018 compared to $370,000,000 in the Q3 of 2017 $1,300,000,000 for the 1st 9 months of 2018 as compared to $1,100,000,000 for the same period in 2017. Looking forward, we are optimistic about future loan production and growth given our current pipelines, markets and talent in our core bank, commercial bank and commercial specialty lines, all of which were recently enhanced by the addition of talent and leadership from brand. At the same time, we will remain disciplined in our pricing and underwriting to manage our margin and maintain strong credit quality, while we grow both sides of our balance sheet.
Total deposits increased to $10,200,000,000 at September 30, 2018 from $7,900,000,000 at December 31, 2017. Non interest bearing deposits averaged $1,900,000,000 or 22.51 percent of average deposits for the 1st 9 months of 2018 compared to 1,700,000,000 dollars or 22.40 percent of average deposits for the same period in 2017. As of the acquisition date, BRAN added $1,700,000,000 in deposits, which included $433,400,000 in non interest bearing deposits. Shifting to our asset quality. At September 2018, our overall credit quality metrics continued to remain strong.
As a percentage of total assets, all credit quality metrics, including NPAs, loans 30 to 89 days past due and our internal watch list are at or near historic lows. Annualized net charge offs were 5 basis points for the 3rd quarter, while we provided $2,300,000 in loan losses. Looking at our capital ratios. Our tangible capital ratio was 8.80%. Our Tier 1 leverage capital ratio was 9.85%.
Our common equity Tier 1 risk based capital ratio was 10.80%. Our Tier 1 risk based capital ratio was 11.84% and our total risk based capital ratio 13.85% at September 30, 18. Our regulatory capital ratios are all in excess of regulatory minimums required to be classified as well capitalized. Now I'll turn the call over to Renasant Chief Operating and Financial Officer, Kevin Chapman, for additional discussion of our financial results. Kevin?
Thank you, Mitch. Net interest income was $99,400,000 the Q3 of 2018 as compared to $92,400,000 for the Q2 of 2018 $90,000,000 for the Q3 of 2017. Net interest income was 4.07 percent for the 3rd quarter compared to 14.15 percent for the Q2 of 2018. Excluding the impact of purchase accounting adjustments, our margin was stable when compared to the Q2 of 2018. Furthermore, the impact of our margin from purchase accounting adjustments continued to decline during the quarter.
This impact was 24 basis points for the Q3 of 2018 compared to 30 basis points for the Q2 of 2018. For the Q3 of 2018, the yield on total loans was 5 point 10% as compared to 5.05 percent for the Q2 of 2018. Excluding the impact of purchase accounting adjustments, our loan yield increased 11 basis points from the previous quarter. For the Q3 of 2018, the cost of total deposits was 60 basis points as compared to 52 basis points for the Q2 of 2018 and 33 basis points for the Q3 of 2017. Non interest income for the Q3 was $30,100,000 38.1 $1,000,000 for the Q2 of 2018 $33,400,000 for the Q3 of 2017.
Our mortgage division continues to perform well. Mortgage banking income for the Q3 of 2018 was $14,400,000 compared to $12,800,000 for the Q2 of 2018 $10,600,000 for the Q3 of 2017. Brand Mortgage contributed $1,700,000 to our mortgage banking income during the Q3 of 2018. Non interest expense was $94,700,000 for the Q3 of 2018 as compared to $79,000,000 for the Q2 of 2018 $80,700,000 for the Q3 of 2017. Included in our non interest expense for the Q3 of 2018 includes $2,000,000 attributable to the Brand Mortgage Group.
Our efficiency ratio was 58.84% for the Q3 of 2018 compared to 59.46% on a linked quarter basis, which represents a significant improvement in our core efficiency ratio and achieves our goal of maintaining an efficiency ratio below 60%. Now I'll pass the call back to Robin for closing comments.
Thank you, Kevin. In closing, we believe the 1st 9 months of 2018 have produced strong results and we're well positioned for a strong finish to 2018. Now Allison, I'll turn the call back over to you for Q and A.
Thank Our first question today will come from Stuart Lotz of KBW. Please go ahead.
Hey, guys. Good morning.
Good morning, Stuart.
First off, congrats on closing the brand deal back on September 1. But yes, my first question is just an outlook for the core margin. I know there are a lot of moving pieces this quarter with smaller balance sheet and some re leverage with the mid quarter close. But brand also brought over a higher legacy NIM. And so I just want to see what your outlook from here Q4 and and as we go into 2019 for the core margin?
And how much of that compression this quarter was related to some of the temporary items? Thanks.
Yes. Stuart, this is Kevin. So yes, as we look at margin, we still project it to be flat with the opportunity for it to increase slightly. We still are we still maintain a slightly asset sensitive rate position. Brand was similarly positioned.
In fact, they were a little bit more asset sensitive than we are. So we still view the opportunity for us as rates rise for it to be beneficial and positive to net interest income as well as to margin. If we don't see rate movement or if we saw what we saw throughout Q3, which is a flatter yield curve, that will put pressure on it. But we particularly coming out of Q3, we did see some inflection on the longer end of the curve. We saw it move up a little bit.
I think it's pulled back some, but we still view our opportunity on the margin to be flat with as rates increase for that to be positive to us. And I would just add, as it relates to brand, brand had very little impact related to our core margin. Their core margin sat right on top of ours. And so it did not put any pressure. And again, I just remind you that they are a little bit more asset sensitive than we are.
So as we see rate increases, that will come through on their operations. As we look at Brand's balance sheet, we did reposition a couple of items in their balance sheet, the security portfolio, just with where we were at acquisition date nineone, we typically do take the opportunity to reposition the securities and the wholesale borrowings just based on purchase accounting. And so we did liquidate about $150,000,000 of their security portfolio that we did not reinvest in Q in September. We did not reinvest that. We would look to reinvest that throughout Q4.
So there will be a little bit of leverage coming back into the balance sheet just from the reinvestment of those securities that we liquidated.
Thanks for the clarity there. And I guess one follow-up on the margin. I know it's hard to predict any accretion income, but any estimate right now on an impact we'll see from that as we go into the 4th quarter?
It's hard to gauge particularly just how early on we are with brand. Excluding brand, we saw we were experiencing, as we noted in the comments, that purchase accounting has been declining. We don't necessarily view that as a bad thing, by the way. Our net interest income continues to grow despite the contribution from purchase accounting continuing to decline. Right now, it's a little bit hard to gauge exactly what the contribution or at least the run rate will be, but I would expect it to continue to be at its current levels at its current levels for the next couple of quarters.
Thank you.
And then sorry, just one additional one. Why could you really start to see the brand cost saves come through on the expense side? I know you drove the tangible efficiency ratio below 60% this quarter. But just any clarity around when we or when the conversion is taking place and when we can really expect the cost saves to start to flow through? Thanks.
Yes. So last question first. The conversion is scheduled for this weekend. So we are a lot of effort has gone into preparing us for this weekend. We got a lot of people that are working diligently to make sure it's a success over the upcoming weekend.
We will be retaining a significant portion of the operations post conversion just to make sure that it goes smoothly and if there is any cleanup. We won't see the full run rate of the cost saves until Q1, but I can tell you that we are on target with our cost saves and we've actually realized a significant amount already in our run rate. The earnings that brand delivered in September sits right on top of what we projected of where we projected them to be during due diligence. So and that we've already realized some portion of those cost saves, if not a significant portion.
The next question will come from Michael Rose of Raymond James. Please go ahead.
Hey, guys. Good morning. How are you?
Good morning, Brian. Good morning.
Hey, just wanted to get the typical update on the loan pipeline, both with and without brand. And clearly, you guys had some good non purchased loan growth, certainly compares pretty favorably with a lot of other banks. Just wanted to get some thoughts on how we think about growth both at the core bank and then at Brand, now that they have a larger balance sheet to work with. Thanks.
Sure, Michael. This is Mitch. Good morning. Our current pipeline stands at 195,000,000 That compares to $175,000,000 prior quarter. And to your point, brand is adding $30,000,000 to that $195,000,000 pipeline.
And with that pipeline, we continue to see good deal flow, strong pipeline, and I'll break it down in a minute, but by state, region and business line. And to your point, we did see good production in Q3, $404,000,000 which led to 10% or about $152,500,000 growth in non acquired. And before I circle back to the pipeline, as we have seen in prior quarters, the geographic distribution of that production remains strong. If you combine Alabama and Florida, it was about 25%, 33% in Georgia, 25% in Mississippi and 17% in Tennessee. So as we've seen in the past, typically close to 20% or better of that production is coming throughout the geography.
But circling back to the pipeline of 195,000,000 looking at that, 11% of the current pipeline is in Tennessee, 13% in Alabama and Florida, 37% in Georgia, 26% in Mississippi and 13% in the commercial specialty lines. The pipeline of $195,000,000 should result in approximately $68,000,000 in growth and non acquired outstandings in 30 days. So circling back, we continue to see a strong pipeline. We expect certainly good production as we go into Q4. And with normalization of payoffs, paydowns, which continued to be somewhat elevated in the prior quarter, we would continue to guide to mid to high single net growth for 4Q.
Okay. Can you just talk on that last point, Mitch, about the normalization of payoffs because it seems commentary from a lot of other banks out there is this could be likely more structural in nature. I know you guys are dealing with still slightly smaller credits than some others out there, so maybe not much non bank competition, but it is very competitive out there. So I guess as you talk about production this quarter relative to the net growth, certainly seems like it was a little less than last quarter, obviously. What makes you or what gives you confidence that the paydowns could actually normalize over the next couple of quarters?
Thanks.
Yes. Good question. Good point, Michael. When we look at our payoffs, paydowns and it was similar to what we saw in Q3. And to your question, your point about trying to predict the outcome of those, that's somewhat hard to do.
But as we sample those for the prior quarter, we continue to see a fairly high percentage of those being attributed to borrowers selling business or the underlying asset. Matter of fact, that was the larger of the percentage that we saw of those payoffs, paydowns. Next would be loss to competition and that's simply where we chose not to match the terms, the rates or refis into the permanent market to a lesser extent. I guess what does give us confidence is our talent, our markets, our deal flow, our pipeline. We feel very good where we are positioned there, whether that be with talent that's grown that we've added this year, we've had 19 relationship managers, market leaders.
That's in addition to the team that's joined us from brand. And just our focus within our core bank, our commercial specialty lines in the commercial bank and the larger metro markets. We're really we feel good about our pipeline, again, our talent, our markets. And while it's hard to predict the payoffs, paydowns, it's logical that that would begin to subside as we go forward at some point.
Okay. That's great color. Maybe just one more for me on the mortgage business. Appreciate you guys kind of breaking out the brand mortgage and the impact there. Looks like that's going to work itself out this quarter.
But as we go forward, how are you guys thinking about the mortgage business? Clearly, volumes are projected to be down a little bit. I know you guys are mostly purchased, but any sort of color there? And rates have come in a little bit here in the past week or so. Any comments on activity since quarter end?
Thanks.
Yes, Michael, this is Jim Gray. Yes, our volumes for the Q3 were down a little from the 2nd quarter. Our mix was still at about 80% purchase, 20% refi. Wholesale is about 30%, which is down a little as a percentage. Retail is up to close to 70% now.
Definitely seeing an impact of higher rates on our particularly on our refinance. 20% is probably the lowest refinance percentage we've had in recent history that I can recall. Our focus is still on hiring seasoned originators with track records with relationships with builders and realtors in our markets that have not relied on the refi market, have always had a good purchase line of business. And then we're also continuing to focus on, I think I mentioned in our last call that we had started our consumer direct channel and have built it up now to 6 originators. We'll continue to grow that channel to supplement and complement our retail and wholesale lines of business.
Just looking into the Q4, we do anticipate a little more slowdown in our lock volume, primarily due to seasonality, some due to higher interest rates and that we still face low inventories in particularly in our metro markets. We're up to 112 originators and 6 wholesale AEs. We brought on 20 new originators over the course of 2018. We have 20 good prospects in the hopper now, which is about what we always have in the hopper and we'll convert a good percentage of those into originators for our bank. We've also just picked up a new top originator in the Savannah market and also in the Macon, Georgia market.
So we and we really haven't even gotten any of the volume from them at this point. So we're continuing to do what we've always done is continue to aggressively focus on recruiting new talent, both on the wholesale, retail and consumer direct side and continue to focus on what we've been doing, maintaining our margins. And we still see a good future in the mortgage business even though we do understand that there is some impact on the higher rates.
Hey, that's great color guys. Thanks for taking my questions.
Thank you, Mike. Thank you, Mike.
Our next question will come from Brad Milsaps of Sandler O'Neill. Please go ahead.
Hey, good morning.
Good morning, Brad.
Kevin, I just wanted to follow-up on the expense discussion. I know a lot of moving parts this quarter, particularly with the brand mortgage piece sticking around or at least for part of the quarter. I was curious if you could just give us in dollars sort of what the expense contribution from brand was this quarter in terms of expenses in dollars?
Yes, it was the total expenses and this would include duplicate and redundant or duplicate expenses that will come out in our Q1 run rate after conversion, but they were 3.6, 3.7, excluding brand mortgage and then brand mortgage on top of that added another 2
$1,000,000 Okay, great. And so the hope would be that you kind of can hit the Q1 with a little cleaner runway run rate once you get the brand mortgage out of there and then you start to some of the cost saves that you say you've already captured really start to show up?
Correct.
Okay. And then I know that Brand also had to as part of the deal, is it going to divest of 54 some odd 1,000,000 of non performing loans prior to the deal being completed? Did that happen? Were you able to move those off the books prior to closing?
This is Barto. Those were moved and we had a group of investors that we sold those to.
Okay, great.
All right.
Thank you. Fred, I'd add that, that was completed back in July. So it was done well in advance of closing of the acquisition.
Good. Great. Thank you.
Our next question will come from Matt Olney of Stephens Inc. Please go ahead.
Hey, thanks. Good morning, guys. This is Brandon Stevenson on for Matt.
Good morning.
Good morning. I wanted to start off on deposit costs. In the second quarter, we saw that the step up in deposit costs and you noted that you expected the increase to moderate and that's exactly what we saw this quarter. So I'm wondering is this level, I believe it was 8 bps increase quarter over quarter, is that a more sustainable pace of deposit cost increases going forward?
Yes. So this is Kevin. We think so. We did see deposit costs moderate. And just going back to Q2, we had taken several steps at the end of Q1 and throughout Q2 just to be responsive.
There's some of the competition and pressures we're seeing on deposits and concerns of ours that it would start eating into our core deposits. So we moved a significant portion of our deposit rates to address that. So going forward, we do anticipate that we will see more moderate levels of increases. I still would say that when it comes to funding, funding is probably one of the most fierce competitions that we have right now is the competition over funding. It doesn't mean we're going to throw in the towel, but we'll just be smart and prudent about how we fund our balance sheet from here on out, and it just puts more emphasis and more priority to continue to maintain a positive mix and continue to improve that.
We did see our non interest bearing DDA increase, not only in dollars, but as a percentage, and that's including and excluding brand. And our goal always has been to grow deposits with a core stable funding base and that will continue to be our goal, but we recognize we're in a rising rate environment and competition over funding is steep right now. I still think we have the opportunity to continue to grow a balance sheet properly with the proper funding, but we are going to see increases in our deposit costs from here on out. And as I mentioned, we do think that they'll be more moderate in line with what we saw in Q3 compared to what we saw earlier in the year.
Understood. Thanks. And then also I wanted to ask on the efficiency ratio. You mentioned before that you've again achieved the goal of being sub-sixty percent efficiency ratio. And it looks like that appears to be more sustainable now and with brand coming in and achieving some cost saves there.
Is there any expectation for to take that goal lower, the 60% efficiency goal?
Yes. So it's always been our goal. That's one of our key indicators that constantly change, much like an ROA or an ROE. There's room for continual improvement and there's room for continual improvement in our efficiency ratio. So that our first goal is to get it below 60.
I think we stated in the past that our goal would be to continue to incrementally improve it from here to get leverage off the expense base to drive higher revenue. That goal hasn't changed. And so now that we are below we're below 60, we've got a 58 handle right now. The goal would be to see incremental improvement off of that. The stated number that I will say the stated number that we have of 58.8, that does include Brand Mortgage.
If you exclude the operations of Brand Mortgage, it puts it very close to a 57 handle. It's in the low 58. So our baseline working off of here is several basis points below what the current reported is. So we're very optimistic about the improvements that we'll see in the efficiency ratio from here on out.
Great. Thanks for the color, guys. That's all for me.
Our next question will come from John Rodis of FIG Partners. Please go ahead.
Good morning, guys.
Good morning, John.
Kevin, you said mortgage expenses from Brand were roughly $2,000,000 Is that netted against the revenues? Because I know you guys said income from brand mortgage was $1,700,000 So is that $1,700,000 net of the $2,000,000
No, it's not. That's gross. So gross income of $1,700,000 and gross expenses of 2,000,000
dollars So you lost money in the mortgage they lost money in the mortgage division?
That's accurate.
Yes.
Okay. Kevin, the loan balances brought over held for investment, the 1.3 $1,000,000,000 If you look at June 30, the brand's loans were $1,700,000,000 held for investment. So you sold the $55,000,000 What's the difference? I'm assuming pay downs were elevated.
No, there's another component at least compared to June 30 and what we brought over. Brand had an indirect auto portfolio that totaled about $180,000,000 And we sold that portfolio prior to September 1. That's going to be your difference, John, is the indirect auto portfolio that we sold prior to the close. The indirect auto business, it was a small portion of our it would be a very small portion of our total balance sheet. It was a line of business that we probably weren't going to be in long term.
So we went ahead and made the decision to go ahead and liquidate that portfolio. Similar to the security portfolio, we'll take those funds in the future and leverage them back up in either other types of loan growth or maybe in the short term in the security portfolio, if it makes sense.
So that portfolio is gone or is that in held for sale right now?
No, it's gone. It's gone. Okay.
So then the increase in held for sale, roughly $300,000,000 of brand is in held for sale of the $463,000,000 looks like roughly $48,000,000 or $50,000,000 is mortgage. So what's the other $250,000,000 And how should we think about
Yes. There's another
Go ahead.
There's another portfolio of consumer loans that we're evaluating. We've been evaluating this portfolio as to whether or not we hold it for long term or whether we look at getting out of it over a quicker period of time. It's more consumer type paper, and we're still evaluating that for purpose so for purposes at 9:30, we included it in the held for sale bucket. Admittedly, as we evaluate this, we may move that over to the held for investment at a later date. But at this time, we felt appropriate to just include it in the held for sale bucket.
And how big is that portfolio? Roughly the amount that you discussed. It's over $200,000,000
Okay. Okay. And okay, I mean, so like you said, it could come back to held for investment. I was just going to say, if you're going to sell it, what sort of timeline are you looking at?
It would be over a probably a 2 quarter timeframe at the earliest.
Okay. And then, Kevin, just one other question. The effective tax rate going forward, I guess, it was roughly 21% this quarter versus 22% last quarter. What sort of rate should we use going forward?
So we the 22% range we think is appropriate.
Okay, great. Thanks, guys.
Thank you. Thank you, John.
Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.
Thank you, Allison. We appreciate everyone's time today and your interest in Renasant Corporation. We look forward to speaking with you again soon.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.