Good morning, and welcome to the Renasant Corporation 2018 second quarter earnings conference call and webcast. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to John Oxford with Renasant Corporation. Please go ahead.
Thank you, Gary. Good morning, and thank you for joining us for Renasant Corporation's 2018 second quarter 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. These factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance, and other factors discussed in our recent filings with the Securities and Exchange Commission. 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.
We incur expenses in connection with certain transactions with respect to which management may be unable to accurately predict the timing of when these expenses will be incurred or when incurred the amount of such expenses. These include merger conversion costs, prepayment penalties, among other items. 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 measures 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. Thank you for joining us today. First of all, on behalf of our board, I would like to congratulate Mitch, Kevin, and our team on a successful transition, which I believe is evident in our second quarter 2018 results, as we once again achieved record earnings. Our profitability metrics continue to improve as our returns on average tangible assets and average tangible equity, excluding merger and conversion expenses, were 1.59% and 16.92% respectively. Now I'll turn our 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 second quarter of 2018, net income was $36.7 million, as compared to $25.3 million for the second quarter of 2017. Our basic and diluted EPS were $0.74 for the second quarter, as compared to $0.57 for the second quarter of 2017. Merger and conversion costs impacted our diluted EPS by $0.01 during the quarter. Turning our focus to our balance sheet, total assets at June 30, 2018, were approximately $10.5 billion, as compared to approximately $9.8 billion at December 31, 2017. Total loans were approximately $7.8 billion at June 30, 2018, as compared to $7.7 billion at March 31, 2018, and $7.6 billion at December 31, 2017. This represents annualized loan growth of approximately 4% on a linked quarter basis.
Loans not purchased were $6.1 billion at June 30, 2018, up from $5.6 billion at December 31, 2017, compared to $5.8 billion at March 31, 2018. This represents approximately 16% annualized growth on a linked quarter basis. Our growth in loans for the quarter was driven by strong new loan production of approximately $460 million. As we have seen over the last several quarters, this growth was geographically diverse, as each of the bank's four regions accounted for more than 20% of this loan production. Although production was strong, we also experienced high levels of paydowns and payoffs in previous quarters. The majority of the paydowns during the quarter were due to either the sale of business or refinancing the underlying property to the permanent market.
For the second quarter of 2018, the yield on total loans was 5.05%, as compared to 4.95% for the first quarter of 2018, and 5.03% for the second quarter of 2017. The impact of purchase accounting adjustments on our loan yield was 35 basis points for the second quarter of 2018, as compared to 34 basis points for the first quarter of 2018 and 52 basis points for the second quarter of 2017. Total deposits increased to $8.4 billion at June 30, 2018, from $7.9 billion at December 31, 2017. Non-interest-bearing deposits averaged $1.8 billion, or 22.31%, of average deposits for the first six months of 2018, compared to $1.6 billion, or 22.17%, of average deposits for the same period in 2017.
For the second quarter of 2018, the cost of total deposits were 52 basis points, as compared to 40 basis points for the first quarter of 2018, and 30 basis points for the second quarter of 2017. Our capital ratios remain strong, with a tangible common ratio was 9.35%, Tier 1 leverage ratio of 10.65%, and the total risk-based capital ratio of 14.75% at June 30, 2018. Now I'll turn the call over to Renasant Chief Operating and Financial Officer, Kevin Chapman, to discuss our additional financial results. Kevin?
Thank you, Mitch. Net interest income was $92.4 million for the second quarter of 2018, as compared to $89.2 million for the first quarter of 2018, and $79.6 million for the second quarter of 2017. Net interest margin was 4.16% for the second quarter of 2018, compared to 4.20% for the first quarter of 2018, and 4.27% for the second quarter of 2017. The impact of purchase accounting adjustments on our margin was 30 basis points for the second and first quarter of 2018, and 43 basis points for the second quarter of 2017. Excluding purchase accounting adjustments, core margin for the second quarter of 2018 was 3.86%, down four basis points on a linked quarter basis. During the second quarter, we completed our re-leveraging strategy by purchasing approximately $200 million of investment securities. The re-leveraging contributed to approximately two basis points of linked quarter margin compression.
Non-interest income for the second quarter of 2018 was $35.6 million, as compared to $34 million in the first quarter of 2018, and $34.3 million for the second quarter of 2017. Mortgage banking income was strong for the second quarter of 2018 at $12.8 million, compared to $11 million for the first quarter of 2018, and $12.4 million for the second quarter of 2017. Non-interest expenses were $79 million for the second quarter of 2018, compared to $77.9 million for the first quarter of 2018, and $74.8 million for the second quarter of 2017. Salary and employee benefits accounted for the linked quarter increase in non-interest expenses, which was driven primarily by two items. First, higher levels of mortgage banking salaries and commissions tied to the increase in mortgage banking income, and annual merit increases which took effect in mid-March of Q1.
Shifting to our asset quality at June 30, 2018, our overall credit quality metrics continue to remain strong at or near historical lows in all credit quality metrics, including non-performing loans, non-performing assets, and predictive indicators such as loans 30 to 89 days past due, or our internal watch list. For more information on our financials, I'll refer you to our press release for additional specific numbers or ratios. Now I'll pass the call back to Robin.
Thank you, Kevin. In closing, we believe the first six months of 2018 have shown strong results. Our continued focus on profitability in this competitive interest rate environment were driving factors behind another quarter of record earnings. We believe the stage is set for another successful year for our company as we add BrandBank to the Renasant family during the third quarter, and continue to capitalize on strategic opportunities as they avail themselves. Now, Gary, I'll turn the call back over to you for Q&A.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Morning, guys. This is actually Peter Ruiz on for Brad.
Morning, Peter.
Morning, Peter.
I guess just maybe first touching on growth. Obviously, net growth after accounting for the pay downs in the acquired book there was still a little bit sluggish here relative to maybe that previous high single, low double-digit loan growth. Do you guys still think that level is attainable here in the second half? What are you seeing? The press release seemed a little optimistic here on maybe production ramping back up, or is it more of just pay downs subsiding?
Yeah, Peter, this is Mitch. Good question. Good point. We do feel good. Our current pipeline is at $175 million. That's an increase from $163 million. As you just referred, as I mentioned earlier, production at $460 million was very strong last quarter, and geographically across the four regions of the company, as well as in our business lines. With our current pipeline, we do expect that to continue. This was an unusual quarter as we saw things like sell of business, sell of property, refinance to the secondary market. Some of those things are very hard to predict.
What we do feel good about is the current pipeline coming off of a strong quarter, and really where we end up as far as net growth going forward, in large part is maybe dictated by some of the things we saw this quarter that are hard to predict. We don't expect many of those things going forward, and like I say, given the current pipeline, feel very good about the next quarter and production.
That we saw in those payoffs and pay downs, in particular, is in the one to four family. We had some credits priced with three handles that we actually saw competition move at lower rates. One thing we will certainly do is remain disciplined when it comes to pricing and underwriting, and that also contributed to some of the payoffs and pay downs we saw this quarter.
Okay, that's great. Appreciate that. Maybe just on the NIM. I guess your commentary there in your prepared remarks kind of implied that you're done with the balance sheet re-leveraging here with the securities book. Is that correct?
That's correct.
Okay. Then I guess just on deposit costs, obviously deposit betas are increasing industry-wide. I think you kind of had a deposit beta closer to maybe 50% this quarter. Can you talk about the dynamics here? Are you going to ratchet deposit pricing a little bit more? Could you lean maybe on your low 90s loan to deposit ratio? What are the dynamics there, and how do you think about that as you fund growth here in the second half?
Yeah. Our philosophy, just on how we fund that growth, really hasn't changed, in the fact that we are targeting funding sources that support our interest rate position. We continue to maintain a slightly asset sensitive interest rate position, and that's largely going to be driven off of funding. We will continue to fund with funding sources that we think is appropriate based on what's going on on the asset side of the balance sheet. As we look at just our cost of deposits on a linked quarter basis, we did step up 12 basis points in total cost of deposits. A couple of things drove that. One, we felt that with the advertising, and the competition around deposits, that we needed to take steps, proactive steps, to really solidify our base of our deposits.
The majority, if not all of our deposits, we looked at the rates, and in most cases, changed some of those rates for almost all of our deposits, really in an effort to, in a defensive measure, to just solidify our core base so that we didn't have any decay or attrition of that base. On top of that, it's really just going back to our strategy of finding stable, low-cost funding sources to fund future balance sheet growth. As we look out in the future quarters, we do think deposit betas are going to be higher than what they were last year. We also view this quarter as a little bit of a stair step, and would anticipate that future quarters, cost of deposits future quarters, to not be at levels that we had this quarter.
Okay, that's great. I'll step back for now. Thanks.
The next question comes from John Rodus with FIG Partners. Please go ahead.
Good morning, guys.
Hey, John.
Kevin, you mentioned in your prepared remarks, I think, in operating expenses, you said salary expense, the increase linked quarter was a little over $3 million. You said that was primarily driven by mortgage commissions and merit increases. Can you sort of break that out? How much of it was merit increases versus mortgage commissions, which obviously will fluctuate some?
Sure. The mortgage accounted for about 40% of that increase. Merit increases accounted for another 30% of it, with the residual just being a different day count. An additional day in second quarter compared to Q1.
Okay. Sort of assuming the seasonality in mortgage, you could see operating expenses overall sort of pull back a little bit, X the Brand merger and X the $500,000 in merger expenses this quarter. Do you sort of see $77 million-$78 million being sort of a good run rate for operating expenses before the Brand acquisition?
If you normalize the mortgage commissions, yes.
Okay. Kevin, just one other question on the tax rate. Roughly 22% for the last two quarters. Is that sort of a good run rate to use going forward? What's the impact from the BrandBank acquisition?
Yeah. Tax rate, 22.5%-23%. The impact of BrandBank, they run at a very similar tax rate. Net-net, we don't think it moves our effective tax rate significantly.
Okay, sounds good. Thanks, guys.
Again, if you have a question, please press star, then one. The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, good morning, guys. This is Brandon Steverson on for Olney.
Hey, Brandon.
Hey. On the Brand acquisition, I was wondering if you guys could provide any comments on maybe some preliminary 2Q results and any updates on the approval process, when you expect to close, and maybe conversion. Timeline of conversion. Sorry.
Sure. Yeah. We'll talk about the last question first. We've indicated that we anticipate closing on the BrandBank acquisition in Q3. Everything is in line for us to be able to do that. We are still targeting a Q3 close. Conversion is still set for Q4, and we're still targeted and gearing up for a conversion in early to mid Q4. As it relates to just how BrandBank did during the quarter, I'll give some general commentary. They have not released any of their numbers via the call report or internally to their shareholders. I'll just give some general comments. Overall, their operating results, their pre-tax income is in line or better than what we projected. Generally overall, they continue to operate as we expect, if not better, in that Atlanta market.
That's helpful. Thank you. Just moving over back to the NIM discussion. You mentioned that the core NIM, a couple of basis points were just due to the completion of the releveraging strategy. As far as going forward, when we take into account the deposit beta discussion that you just kind of laid out for us, what do you expect as we move into Q3 and Q4 this year in terms of core NIM?
We continue to expect core NIM to be flat.
Got it. Okay. Thank you. Maybe if I could sneak in one more on mortgage. Is there anything you can provide as far as volume and what the gain on sale margins did from Q1 to Q2 this year?
Yeah, this is Jim Gray. Our volume for the second quarter was $610 million. That is up from $438 million in the first quarter. 82% purchase and 18% refi in the second quarter. That mix changed. The first quarter, it was 73% purchase and 27% refi. Then the mix between wholesale and retail was 31% in the second quarter versus 39% in the first quarter, and retail 69% versus 61 in the first quarter.
Great. Thanks for the color.
This concludes our question and answer session. I would like to turn the conference back over to Robin McGraw for any closing remarks.
Thank you, Gary. We appreciate everyone's time today and your interest in Renasant Corporation. We look forward to speaking with you again soon. Thanks, everyone.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.