Good morning, and welcome to the Renaissance Corporation 2018 Second Quarter Earnings Conference Call and Webcast. 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 with Renasant Corporation. Please go ahead.
Thank you, Gary. Good morning and thank you for joining us for Renasant Corporation's 2018 Q2 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 risks 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 of 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 able to accurately predict the timing of when these expenses will be incurred or when it occurs 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 Q2 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% 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 Q2 of 'eighteen, net income was $36,700,000 as compared to $25,300,000 for the Q2 of 'seventeen. Our basic and diluted EPS were $0.74 for the 2nd quarter as compared to $0.57 for the Q2 of 'seventeen.
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, 18 were approximately $10,500,000,000 as compared to approximately $9,800,000,000 at December 31, 2017. Total loans were approximately $7,800,000,000 at June 30, 'eighteen as compared to $7,700,000,000 at March 31, 'eighteen and $7,600,000,000 at December 31, 2017. This represents annualized loan growth of approximately 4% on a linked quarter basis. Loans not purchased were $6,100,000,000 at June 30, 'eighteen, up from $5,600,000,000 at December 31, 'seventeen, compared to $5,800,000,000 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 $460,000,000 As we have seen over the last several quarters, this growth was geographically diverse as each of the bank's 4 regions accounted for more than 20% of this loan production. Although production was strong, we also experienced high levels of pay downs and payoffs in previous quarters. The majority of the pay downs during the quarter were due to either the sale of business or refinancing the underlying property to the permanent market. For the Q2 of 2018, the yield on total loans was 5 0.05% as compared to 4.95% for the Q1 of 2018 and 5.03% for the 2nd quarter of 2017.
The impact of purchase accounting adjustments on our loan yield was 35 basis points for the Q2 of 2018 as compared to 34 basis points for the Q1 of 2018 and 52 basis points for the Q2 of 2017. Total deposits increased to $8,400,000,000 at June 30, 18 from $7,900,000,000 at December 31, 2017. Non interest bearing deposits averaged $1,800,000,000 or 22.31 percent of average deposits for the 1st 6 months of 2018 compared to $1,600,000,000 or 22.17 percent of average deposits for the same period in 2017. For the Q2 of 2018, the cost of total deposits were 52 basis points as compared to 40 basis points for the Q1 of 2018 and 30 basis points for the 2nd quarter of 2017. Our capital ratios remain strong with a tangible common ratio was 9.35 percent Tier 1 leverage ratio of 10.65 percent and the total risk based capital ratio of 14.75% at June 30, 18.
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 $92,400,000 for the Q2 of 'eighteen as compared to $89,200,000 for the Q1 of 'eighteen and $79,600,000 for the Q2 of 'seventeen. Net interest margin was 4.16 percent for the Q2 of 'eighteen compared to $420,000,000 for the Q1 of 'eighteen and $427,000,000 for the Q2 of 2017. The impact of purchase accounting adjustments on our margin was 30 basis points for the second and Q1 of 2018 and 43 basis points for the Q2 of 2017. Excluding purchase accounting adjustments, core margin for the Q2 of 2018 was 3.86%, down 4 basis points on a linked quarter basis.
During the Q2, we completed our re leveraging strategy by purchasing approximately $200,000,000 of investment securities. The re leveraging contributed to approximately 2 basis points of linked quarter margin compression. Non interest income for the Q2 of 2018 was 35 point $6,000,000 as compared to $34,000,000 in the Q1 of 2018 $34,300,000 for the Q2 of 2017. Mortgage banking income was strong for the Q2 of 'eighteen at $12,800,000 compared to $11,000,000 for the Q1 of 'eighteen and $12,400,000 for the Q2 of 2017. Non interest expenses were $79,000,000 for the Q2 of 2018, compared to $77,900,000 for the Q1 of 2018 $74,800,000 for the Q2 of 2017.
Salary and employee benefits accounted for the linked quarter increase in non interest expenses, which was driven primarily by 2 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 our internal watch such as loans 30 days 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 1st 6 months of 'eighteen 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 brand bank to the Renasant family during the Q3 and continue to capitalize on strategic opportunities as they avail themselves. Now Gary, I'll turn the call back over to you for Q and A.
We will now begin the question and answer session. The first question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Good morning, guys. This is actually Peter Ruiz on for Brad.
Good morning, Peter. Good morning, Peter.
So I
guess just maybe first touching on growth. Obviously, net growth after accounting for the paydowns in the acquired book there, it 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 that level kind of attainable here in the second half? What are you kind of seeing at the press release kind of seemed a little optimistic here on maybe
point. And we do feel good. Our current pipeline is at $175,000,000 That's an increase from $163,000,000 And as you just referred, as I mentioned earlier, production at $460,000,000 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. But 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 and in large part is maybe dictated by some of the things we saw this quarter that are hard to predict. But we don't expect many of those things going forward. And like I said, given the current pipeline, feel very, very good about the next quarter and production. One area in particular that we saw in those payoffs and paydowns in particular, is in the 1 to 4 family, we had some credits priced with 3 handles that we actually saw competition move at lower rates.
And 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 paydowns we saw this quarter.
Okay. That's great. I 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. And then I guess just on deposit costs, obviously deposit betas are increasing industry wide. I think you kind of had a deposit beta Can you talk about the dynamics here? Are you going to ratchet deposit pricing a little bit more? And how does that 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?
Yes. So 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. So we continue to maintain a slightly asset sensitive interest rate position. And that's largely going to be driven off the funding. So we will continue to fund with funding sources 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, it did we did step up 12 basis points in total cost of deposits. A couple of things drove that. But one, we felt that with the advertising and the competition around deposits that we needed to take steps, proactive steps to really solidify our core base of our deposits. So the majority, if not all of our deposits, we looked at the rates and in most cases change 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. And then 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. But we also view this quarter is a little bit of a stair step and would anticipate that future quarters, cost of deposit future quarters to not be at levels that we had this quarter.
The next question comes from John Rodis 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. So the increase linked quarter was about 3 little over $3,000,000 And 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. So 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 Q2 compared to Q1.
Okay. So sort of assuming the seasonality in mortgage, you could see operating expenses overall sort of pull back a little bit ex the brand merger and ex the $500,000 in merger expenses this quarter. So did you sort of see $77,000,000 to $78,000,000 being sort of a good run rate for operating expenses before the brand acquisition?
If you normalize the mortgage commissions, yes.
Okay. Okay. And then Kevin, just one other question on the tax rate, 20 little roughly 22% for the last two quarters. Is that sort of a good run rate to use going forward? And then what's the impact from the brand acquisition?
Yes. So tax rate, 22.5% to 23%. Brand the impact of brand, they run at a very similar tax rate. So net net, we don't think it moves our effective tax rate significantly.
Okay, sounds good. Thanks, guys.
The next question comes from Matt Olmosin with Stephens. Please go ahead.
Hey, good morning, guys. This is Brandon Stevenson 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?
Sure. Yes. So
we'll talk about the last question as far as just we've indicated that we anticipate closing on the brand acquisition in Q3. We everything is in line for us to be able to do that. So 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 brand 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. So I'll just give some general comments. Overall, their operating results, their pretax income is in line or better than what we projected. So generally, overall, they continue to operate as we expect, if not better, in that Atlanta market.
That's helpful. And then just moving over back to the NIM discussion. You mentioned that a couple of the core NIM, a couple of basis points were just due to the completion of the re leveraging 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 3Q and 4Q this year in terms of core NIM?
We continue to expect core NIM to be flat.
Got it. Okay. Thank you. And 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 1Q to 2Q this year?
Yes, this is Jim Gray. Our volume for the Q2 was $610,000,000 That is up from $438,000,000 in the first quarter. 82% purchase and 18% refi in the second quarter. That mix changed the Q1, it was 73% purchase and 27% refi. And then the mix between wholesale and retail was 31% in the 2nd quarter versus 39% in the 1st quarter and retail 69% versus 61% in the Q1.
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.