Renasant Corporation (RNST) Q2 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Renasant Corporation 2015 Second Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that today’s event is being recorded. I would now like to turn the conference over to Mr. John Oxford, Vice President, Director of Corporate Communications. Please go ahead.

Thank you, Casey. Good morning and thank you for joining us for Renasant Corporation’s second quarter 2015 earnings conference call. Participating in this call with me today are members of Renasant Corporation’s executive management team. Before we begin, let me remind you that some of our comments in 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. Those factors include but are not limited to interest rate fluctuations, 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. And now I will turn the call over to Renasant’s Chairman and CEO, Robin McGraw. Robin?

Thank you, John. Good morning, everyone, and welcome to our second quarter 2015 conference call. We are pleased with our second quarter financial results which were highlighted by 16.37% annualized linked quarter non-acquired loan growth and strong revenue growth driven from our mortgage operations. Net income for the second quarter of '15 was $15.4 million or basic and diluted EPS of $0.49 and $0.48 respectively, as compared to $14.9 million or basic and diluted EPS of $0.47 for the second quarter of '14. During the second quarter of 2015, we incurred merger expenses of approximately $1.5 million or 906,000 on an after tax basis, which equated to $0.03 of diluted EPS, which were related to the – our Heritage merger which we did complete on July the 1st. Focusing on profitability for the quarter, our reported diluted earnings per share was $0.48. Excluding merger expenses related to the Heritage merger, operating EPS was actually $0.51 which was a record quarter, excluding quarters which we recognized one time gains associated with our acquisitions. For the second quarter of '15, our return on average assets and return on average equity were 1.06% and 8.42%, which includes the aforementioned merger expenses. Excluding merger expenses, our ROA and ROE were 1.12% and 8.92% respectively. This marks the fifth consecutive quarter that we've achieved greater than 1% return on assets. Total assets as of June 30, '15, were approximately $5.90 billion, as compared to $5.81 billion at year end. Total loans, including loans acquired in either the First M&F merger or the FDIC-assisted transactions, which we referred to collectively as acquired loans, we’re approximately $4.04 billion at June 30, '15, as compared to $3.95 billion on a linked quarter basis, and $3.99 billion at year end. Excluding acquired loans, loans grew at an annualized rate of 16.37% to $3.41 billion on a linked quarter basis, and grew 8.67% on an annualized basis from Q4, '14. Breaking down loan growth on an annualized basis as compared to year end, our Alabama market grew loans by 3%, our Mississippi market increased loans by 15.4% and our Tennessee market grew loans by 3.6%. In Georgia, we grew loans by 17.5%. Looking ahead, our loan pipelines and opportunities for growth throughout all our markets project more pronounced loan growth for the remainder of ’15. Total deposits were $4.89 billion at June 30, '15, as compared to $4.84 billion at year end. Our cost of funds was 40 basis points for the second quarter of '15, as compared to 48 basis points for the same quarter in '14. The decrease in cost of funds is a result of time deposit repricing and our continued improvement in our funding mix. In regards to our funding mix, non-interest-bearing deposits averaged approximately 20% of average total deposits for the second quarter of '15, as compared to approximately 18% for the second quarter of '14. At June 30, '15, our Tier 1 leverage capital ratio was 9.90%, our Tier 1 risk-based capital ratio was 12.52%, and our total risk-based capital ratio was 13.54%. Our common equity Tier 1 capital ratio was 10.44% and our tangible common equity ratio stands at 7.78% at quarter end. In all capital ratio categories our regulatory capital ratios continue to be in excess of the regulatory minimums required to be classified as well-capitalized. Net interest income was $51.7 million for the second quarter of '15, as compared to approximately $52.2 million for the second quarter of '14. Net interest margin was 4.17% compared to 4.24% for the second quarter of '14. Additional interest income recognized in connection with the acceleration of pay downs and payoffs from acquired loans was $3.6 million in the second quarter of '15, compared to $3.5 million for the same quarter of '14. This additional interest income increased margin in both quarters by 28 basis points. Non-interest income increased 17.70% to $22.9 million for the second quarter, as compared to $19.5 million for the second quarter of '14. The increase in non-interest income was primarily attributable to the growth in the company's mortgage operations. Non-interest expense was $51.2 million for the quarter, as compared to approximately $49.4 million for the second quarter of '14. In addition to our merger expenses, the increase in non-interest expense was primarily attributable to an increase in salary and employee benefits due to higher levels of commissions paid in our mortgage banking division. At June 30, '15, non-performing loans, which were loans 90 days or more past due and non-accrual loans were $44.3 million, and OREO was $27.1 million. Our non-performing loans and OREO that were acquired either through the First M&F merger or in connection with FDIC-assisted transactions which we collectively refer to as acquired non-performing assets were $23.1 million and $12.1 million respectively at June 30, '15. Since the acquired non-performing assets were recorded at fair value at the time of acquisition or subject to loss-share agreements with the FDIC, which significantly mitigates our actual losses, the remaining information in this discussion on non-performing loans, OREO and the related asset quality ratios, excludes these acquired non-performing assets. Our non-performing loans were $21.2 million at June 30, '15, as compared to $20.2 million at year end. The increase in NPLs was due to $2.8 million matured loan that was carried as 90 days past due at June 30, '15, but was paid off in full subsequent to the quarter end. Non-performing loans as a percentage of total loans were flat at 62 basis points as of June 30, '15 compared to year end. Excluding the aforementioned NPL that was paid off after quarter end, NPL as a percentage of loans were 57 basis points. Annualized net charge-offs as a percentage of average loans were 16 basis points for the quarter, as compared to 23 basis points for the second quarter of '14. We recorded a provision for loan losses of $1.2 million for the second quarter, as compared to $1.5 million for the second quarter of '14. The allowance for loan losses totaled $41.9 million or 1.23% of total loans at June 30, '15, as compared to $42.3 million or 1.29% at year end. Our coverage ratio or allowance for loan losses as a percentage of non-performing loans was 197.95% as of quarter end, as compared to 209.49% at year end. Loans 30 to 89 days past due as a percentage of total loans were 19 basis points at June 30, as compared to 32 basis points at year end. OREO was approximately $15 million at quarter end, as compared to $17 million at year end. OREO under contract to sell at quarter end was $1.4 million. We continue to see many opportunities on the horizon, specifically strong commercial loan pipelines which support our annual loan growth goals and a robust mortgage loan pipeline, both of which should drive continued revenue growth. As of July 1, we have approximately $7.77 billion in total assets with 171 banking, mortgage, wealth management, investment, insurance offices throughout the five southeastern states of Mississippi, Tennessee, Alabama, Georgia and Florida. Looking forward, and with the addition of the Heritage team, its customers and operations were going to continue to be well positioned to accelerate profitability and earnings growth, which in turn, we believe will generate more shareholder value. Now Casey, I'll turn it back over to you for any questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Catherine Mealor from KBW. Please go ahead.

Good morning, everyone.

Morning, Catherine.

I just wanted to dig into the margin a little bit, and Kevin I know we've talked about it before. But you've - even in the past given us three pieces of your margin, your core margin, and then accelerated fair value accretion and then the normal fair value accretion. In that normal piece you've said there is been about 15 bps or so historically, is that still at this current level or did that come down a little bit this quarter, maybe making – because it looks like the core margin fell late quarter. But I am wondering if a little piece of that was also a decline in the normal fair value accretion?

Catherine, the normal, the interest rate mark, that is a – that is a number that will decline over time. We are 2 years into the Heritage acquisition and that number has started – I am sorry, the M&F acquisition; that interest rate mark has started to decline early – in the earlier period it was 15 basis points, this quarter it was in the 12, 10 to 12 basis point range. So it did pull margin down a little bit. A couple of other factors impacting margins is a little bit of mix change. Our mortgage loans held for sale, the balance of that if you look on the average balance side is up about a double and those loans have an average yield of somewhere between 350, 375 and that’s also pulling margin down a basis point or two. There is a little bit of mix change and we made a cognizant decision to hold on to those mortgage loans held for sale. Typically our turnover, our inventory turnover in the held for sale bucket is about 30 days historically. We have been holding on to those loans in the more 45 to 60 days, to really just pick up additional interest income, that isn’t impacting pricing upon sale. And so it’s just a way for us to hold on to those loans and just pick up a little bit more interest income and spread for the time that we have them. That did pull margin back, like I said a basis point or two. The other margin compression is what we've discussed in the past and that is what we are seeing just with loan repricing and kind of really competitive factors that are driving loan yields down. We continue to see new levels of irrational loan pricing in the market. I can't – I am not going to say that we are participating in that, but we are defending relationships, long-term existing relationships, against, what we think will be short term, irrational decision making going on at some competitive banks.

As we think about the outlook for the direction of the core margin and then your reported margin, once we have – including the accelerated accretion and then HBOS coming on next quarter?

The reported margin won't change significantly and let me also disclaim that we are still finalizing all of our fair value marks, interest rate, credit mark. But based on our early projections and then what we've seen in changes in interest rates or credit, changes in the credit profile, I think our reported margin will be very similar to what we're reporting now. After we back out additional interest income from credit reserve release, I still think we'll be in that 390 range as far as a – going forward margin. Again, factors that will impact that is what we're seeing in loan yields that continue to compress margins 2 basis points, 2 to 3 basis points per quarter.

Got it. Okay. That’s very helpful. Thank you.

Thank you, Catherine.

The next question comes from Emlen Harmon of Jefferies. Please go ahead.

Hey. Good morning, guys.

Morning, Emlen.

I was hoping you could or maybe a little early on this, but hoping you could provide us with an update on earnings at Heritage in the second quarter. I don’t know if you guys have a rough idea on net income. I’d just also be interested to hear how the mortgage business did there in 2Q?

Emlen, since they've not announced earnings, as they get - it wouldn’t be appropriate for us to comment on that right now. But we can say that their mortgage production was higher than expected, loan production was at the levels that we did anticipate.

And I'll just add to that, Emlen. If you look at it, they will be filing a call report, they won't be filing a 10-Q, but they will be filing a call report. And one thing that we were pleased with, as Heritage went through what was a very vulnerable time for the end of six months period where we went from announcement to closing, they did experience balance sheet growth, balance sheet growth in line with what we were projecting. The mortgage operation as Robin mentioned are performing better than we anticipated. As we look, if you look specifically at the Q2 call repot, you will see some noise in there, much like we have, much like we experienced in Q2, they will have merger expenses. But overall their operations are in line with what we projected back in December when we were doing our due diligence.

Got it. Thanks. Okay. And then just on the expenses, you guys had attributed some of the salaries and benefits increase to mortgage commission. Just seems like the expensed there kind of outstripped, kind of what we saw in mortgage revenue growth? I guess, two questions, kind of what was the overall profitability change in mortgage quarter-over-quarter? And then just anything else underlying the expense trend in that salaries and benefits line?

Yes. There is a couple of other items in salaries and employee benefits. And if we just look at - if we compare Q2, '15 expenses to Q2 '14 expenses, the big difference there is the mortgage pipeline, mortgage commission. If we look at a linked quarter basis, there are a couple of more factors in the equation. Mortgage commissions are up about $600,000, against revenue increases of over $1 million. There is also some other variable cost, our loan production was up. We had strong loan production, as a result lender incentives were up, as well just overall corporate incentives. We are on target to be slightly ahead of corporate target. So also some variable cost in the form of incentive comp. All of those combined equated to about a $1.2 million to a $1.3 million in additional expenses and that be lender, mortgage and corporate incentives. Another thing that I think is worthwhile to note that’s skewing - that’s showing maybe a higher increase to salary and employee benefit that isn’t evident is, as we approach the Heritage merger closing, at Renasant we started adding employees that were lost on the Heritage side. We had planned on retaining some of these employees at Heritage and they ultimately took opportunities elsewhere. And that necessitated us go ahead and hiring individuals. I can say for example in the accounting department we had slotted the key three people that ultimately ended up not – were not retained at Heritage, we replaced all of those individuals on the Renasant side at the end of Q1 beginning of Q2. So we've already got some of our Heritage expense embedded in our run rate that upon closing will – the offset to that expense is over on the Heritage side. And to quantify that, and this was primarily in the back office area, it being compliant, it’d be some in loan review, some in accounting, to quantify that impact for the quarter is probably upward or just the quarterly impact is upward of $200, 000, $300,000 of an impact.

Got you.

Emlen, this is Jim Gray. Just you had asked about profitability of mortgage quarter-to-quarter, Q1 mortgage pretax net income was $1.735 million, Q2 mortgage pretax net income was $2.886 million. So the revenue did far outstrip the increase in expenses.

Perfect. Thank you.

Thank you, Emlen.

The next question comes from Michael Rose of Raymond James. Please go ahead.

Hey. Good morning, guys. How are you?

Morning, Michael.

I missed some of your prepared remarks, as I jumped on late. But can you give some color on where the loan pipeline is, and maybe how that compares to last quarter? And then if you didn’t touch on run rate, may be if Mike Ross is there, if you can comment on loan growth by market? Thanks.

Sure. Mitch Waycaster, will you give you comment about the pipeline.

Yes, Michael the 30 day loan pipeline is $146 million, pre-merger of the pipeline at quarter end was $115 million, which was an increase from $85 million the last quarter end with Heritage adding an additional $31 million. If you breakdown the $146 million pipeline by state, 17% was in Tennessee, 25% in Alabama, 22% in Georgia, 34% in Mississippi and 2% in Florida. We believe this pipeline should result in approximately $48 million in growth and un-acquired loans in the next 30 days and of course at $146 million we continue to experience strong pipeline as we entered the third quarter and expect continued healthy loan growth.

And Michael, the – as far as the loan growth by region, Alabama grew right around 3%, Tennessee was up 3.5%, Mississippi was up a little over 15% and Georgia was up a little over 17%.

Okay. Did any of the specialty business drop the growth in any of those markets?

Yes. Actually a decent amount of the growth in Georgia was attributed to the ABL team and then the leasing [ph] team actually contributed to a decent amount of growth in the Alabama franchise.

Okay. And then just one more for Mitch, I guess, on the HBOS offer pipeline, it looks like it’s, you said $31 million as of now. Is that kind of inline with your expectations, and maybe how does that compare to the pipelines over the past few quarters? Thanks.

I am going to - Michael, I would say it’s certainly is inline and Lynne Dominy [ph] is in room, Lynne, do you want to comment on the past?

Sure. Michael, let me just address in general the transition is going very well. We haven’t lost any production people. In fact, as Kevin said we are experiencing loan growth, the pipeline is continuing to grow. We're very pleased with it. And so we think it’s not only in line, but will continue to stay that way after the merger which is important.

Michael, let me add that, Mike Ross talked a little bit about new individual in one of our specialty commercial lines.

Yes. We are real excited. We've added a gentlemen by the name of Craig Gardella to our team. He is going to work at [indiscernible] He is going to head our healthcare banking division for the company. And Craig is – he is only been on board for a little less than six weeks and we've already got a very robust pipeline. Lot of the numbers that were not in the numbers that Mitch gave you because what Mitch gives you is already approved and accepted. But we've got a very robust list of opportunities within the healthcare space already that we feel very good about being able to covert. So that would actually be in addition to those numbers that Mitch gave you if we're successful in converting some of those.

Okay. Very helpful.

The other piece on that is, we actually also added a gentlemen by name of John Teasley [ph] to our credit organization and he has a very extensive background in healthcare banking. So those two as a team we feel very, very good about.

Okay. Great, guys. Thanks for taking my questions.

Thank you, Michael.

The next question comes from Brad Milsaps of Sandler O’Neill. Please go ahead.

Hey, good morning.

Morning, Brad.

Kevin, I just wanted to follow up on the expense question, just curious anything changed with your outlook on potential cost savings from the HBOS deal, and the timing of how those might flow-through? And then secondly, I know you guys had a laid out some efficiency goals, any update on those. I know it’s going to modeled for the next couple of quarters, and you're drawing more mortgage, its going exclude [ph] as well. So just any updates on efficiency goals and how you see those cost saves flowing through the income statement, it will be great?

Let me comment first, and then I am going to let Kevin get a little more granular on it. Brad. As Kevin mentioned awhile ago, we already made some hires here. So I guess as you look at it the cost saves coming from Heritage, following the quarter end will be a little bit more, but it will be offset by the increases here. But we do anticipate cost saves being about where we look at them from day one, I think going forward in that particular regard. Kevin you want to?

Yes. To just reiterate what Robin said, our total expense base number hasn’t changed, probably what has changed is just the realization and the timing of the realization. I think we were projecting to realize about 75% this year. The realization rate will be high. So we won't realize a 100%. We won't have our first look at a true run rate, including all expenses until Q1 of next year. But with the attrition that we've seen particularly on the back office side of Heritage pre-acquisition that will accelerate some of the cost savings.

All right. Kevin, and any update in terms of kind of what maybe Q1 type of efficiency ratio you guys might be targeting once the companies are – you kind of get a cleaner quarter or looking out further than that?

Yes. Just going back to what we said in the past, our goal is to get below, so 60 on the efficiency ratio. Heritage will slow the decline of that, just the amount of fee income that they have. They've got a large mortgage group. That will slow the pace of the decline. But we still – our trajectory will still be a declining efficiency ratio with our stated goal of that we get in at – our run rate for '16 will be sub 60. The Heritage acquisition won't prohibit us from getting to that, but it will slow the pace that we are able to decline that ratio. And to give the [indiscernible] is that with mortgage it is a little less efficient. The profitability of it is significantly higher. The amount of capital we have to tie in that operation is far less than the capital we have to tie up in the core commercial bank.

Great. Thank you, guys.

Thank you, Brad.

The next question comes from Kevin Fitzsimmons of Hovde Group. Please go ahead.

Hey. Good morning, guys.

Morning, Kevin.

Kevin, when you were commenting on earlier about the yield pressure and the competition you guys are seeing. Can you just dig into that a little more in terms of what geographies or what loan types or what size loans that is most prevalent in and just to get a sense of where it’s really coming from? Thanks.

Let me give you just a top of the house information and then I'll let Mike Ross give a little bit more detail on. Specifically where and what types, I would make a general statement that it is everywhere, what you used to exist in more metropolitan markets, as far what we would deem to be here rational pricing, they have now sneaked into every market that we are in. If you look at our new and renewed loan portfolio, we've – the new and renewed rights that we saw were in the 425 range for this quarter. That compares to 430 in Q1 and Q4 and as we get to the early parts of last year we were in the 450 range. We are still doing more variable rate loans that we've done historically. Our mix of variable and fixed was 50% fixed, 50 to 58% fixed and about 40% to 38% variable. But we continue to see the new and renewed yield come down, primarily due to competition and again we think what the rights that we're seeing that is short term, but it is something that we're having to come back right in all markets. Mike?

Yes. And as Kevin said, it’s fairly consistent across the board. We are seeing most of it is coming from frankly the larger super regional banks that we're seeing very intense pressure on long-term, low fixed rate financings and we're just not – we are not going to play in that arena and we're going to maintain our discipline in how we're going about approaching things. We're defending relationships, but clearly you can see from our numbers we're not getting down to the level of some of our competition on competing for bank for loans. When we're winning loans, we're winning on relationships, we're not winning on price.

Okay. Great. That’s helpful. Robin, just a quick follow up, if you can now with the Heritage deal closed, maybe a bit early to bring up this topic. But how do you think about the future timing, size, geography of type acquisition opportunities you guys might maintain or might look at? Thanks.

We definitely are looking within the vast state region that we're currently in. For any future acquisitions we feel like that with closing of Heritage that we're in a position today that we can in fact start working with some partners within that region in order to maybe put together a merger. Size wise, our preference right now would be less than $1 billion, would no preclude us from looking larger, as we go forward. But right now we're more in the less than $1 billion range.

And how would you characterize Florida when you talk about the states in your footprint, in terms of what might interest you or might just be off the table in that state?

Right now our interest probably lies, down at 7 to 5 [ph] quarters, if you look or maybe own over as you look from Tampa, Orlando, Jacksonville, and up the Carter [ph] up to where we are currently in Ocala and gains what we think those are the markets that appeared, attracted us in Florida. We think the Georgia markets, especially Atlanta is still very attractive to us. We think the Tennessee markets are very attractive to us. And there are some attractive markets in the state of Alabama also.

Okay. Great. Thank you.

Thank you, Kevin.

The next question comes from David Bishop of Drexel Hamilton. Please go ahead.

Hey. Good morning, Robin.

Morning, Dave.

I am not sure you touched upon on this in the [indiscernible] But do you have the breakdown in terms of the mortgage banking production second quarter versus first quarter maybe some numbers behind the details there?

Yes. Let me Jim comment on that for you Dave.

Yes, David, volume for the first quarter was $207 million, second quarter was $265 million. Just a little breakdown on that, first quarter our wholesale was 34%, retail was 66%. We were pretty much inline with that for the second quarter at 36% wholesale and 64% retail. Looking at purchase refi mix, first quarter we were right at 50-50, purchase and refi in the second quarter our purchase volume had gone up to 65%, refi at 35%. So we saw good increase and what was very encouraging about that that a lot of that increase came in purchase volume.

Got it.

Just to give you a little bit of color on Heritage. The first quarter for Hertiage and as we mentioned our Heritage does have a large mortgage operation. Their second quarter volume was $483 million, that’s compared to a first quarter volume of $447 million. Their mix for the second quarter with 70% retail, 30% wholesale. So little more on the retail side, and very encouraging and this is one thing that’s very attractive with Heritage is mortgage operation. They are very much a purchase money shop build that way with a number of standalone mortgage offices. They do have originators in the branch footprint as well. But their purchase volume for the second quarter was 76%, refi 24%.

Great. Appreciate the detail. And then Robin, maybe sort of looking out across some of the markets there as you look maybe the corporate wide to loan efficiency. In terms of some of the more recent de novo markets, are any of those hitting I will say critical mass, at sort of the inflexion point in terms of that 60% efficiency ratio, are you seeing any of these markets sort of hit their critical mass and do you see a need to add capacity in some of the newer markets?

I think if you look Dave, some of our de novos, the first de novos are beginning to hit that critical mass. We've – historical Mississippi obviously with the combination of the growth that we had there in the M&F merger. It’s definitely hit the critical mass, its doing very well. But Macgammery [ph] our Columbus market has and we've added a new main office. We started off and a very small branch facility there. We are in the process of building a new main office not large, but a new main office in the Columbus, Mississippi market. I think we're getting close in Macgammery and we just opened up our main office in Tuscaloosa. Now Tuscaloosa has had remarkable growth and it was basically a loan production type office and Mike you want to comment on Tuscaloosa?

Yes. Tuscaloosa we've continued to do very well. We've actually seen since we opened our new office we've actually seen our deposit base has start to grow and catch up with a little bit of lending growth we've seen there. Macgammery continues to grow. We've had – we've actually added one more team member there to the original team and we're seeing some good activity, Macgammery went over $100 million in loans during the quarter and we see a – still see a very active pipeline there.

Dave, I would just add a few, we've seen some pick up in M&A throughout the system, and that is creating opportunity to have conversations with other teams, some end market already to have existing locations either de novo or more legacy branches. But we are seeing more opportunity to add some more scale in all of our markets particularly higher growth metro markets.

East Tennessee is continuing to grow. I don’t believe we've had our critical mass there, but we're looking for opportunities there to expand in those East Tennessee markets also.

Thank you. Appreciate the color.\

Thank you, Dave.

The next question comes from Matt Olney from Stephens Incorporated. Please go ahead.

Hi, thanks. Good morning, guys.

Morning, Matt.

Hey, I appreciate the comments on the core loan yield pressure that you guys made and it sounds like you guys aren’t too excited about participating in some of the longer term fixed rate deals. I want to get a better idea of what the strategic alternatives are to doing that, should we be thinking that net loan growth could flow from recent levels, if you are not willing to do some of those or is it more of a matter of the capital deployment alternative, could lean more towards M&A than in the past? any commentary on that?

Yes, I would just say, it really hasn’t changed our philosophy Matt. We've analyzed capital to really identify where we get the best returns. But at the same time, I think we've realized that we've got to also protect long standing relationships and that maybe a little bit, that’s not a change, but from our attitude over the past, but it is requiring us to evaluate the total relationship and make sure that we're not second hard line stances purely for the sake of trying to build capital or looking at other investment alternative that really would be the security portfolio for that cash. So we are looking at the total profitability of the relationship, rather than one off loan transaction. But our allocation of capital hasn’t changed, it will go with where we get the highest level of returns and that is a combination, that’s a mix bag, it’s a combination of organic loan growth, augmented by M&A as well as deploying it in new investment opportunity. So the investment opportunities will be additional team members or additional new market. But we look at all of those in total, that hasn’t changed.

Yes. Our philosophy hasn’t changed since '09 and we started the process of what we're doing, we're looking for the best way to deploy our capital and a combination of M&A and loan growth we felt have really been the two best markets there. Along with adding talent into de novo markets over that timeframe.

And Matt, I don’t think that it’s safe to might believe that our loan growth should slow. Frankly our loan growth has continued just like it has for the last several years and this dynamic of the pricing pressure is really been there for quite some time now. So I think it safe to assume we have continued to generate good loan growth and so that we have no reason to believe that won't continue.

Yes. If it’s a good customer, we are in fact going to protect our tariff as far as some of the pricing is out there right now. But as far as being aggressive, and trying to bring in new business at those levels we are not going to, we feel like they are better usage of our capital.

Yes. This time is in for the Heritage conversation. We are going to spend some capital, our capital ratios will come down in Q3, but again the return for giving [indiscernible] that use of capital will build those capital ratios back very efficiently. So that’s what we're doing with Heritage, what we're doing with – the discussion we're having with our organic loan growth that hasn’t changed. We're picking up opportunities to use capital for the highest levels of return.

Understood. Thanks, guys.

Thanks, Matt.

The next question comes from Andy Stapp of Hilliard Lyons. Please go ahead.

Good morning.

Good morning, Andy.

Hey, any material change in your interest rates since in a position from what was reported in your Q1?

Andy, there wasn’t, we're still showing that we're basically neutral, slight asset sensitivity. But for the most part neutral and that’s really our mindset is that we are right neutral but we need to get more asset sensitive and so a lot of our discussions our decisions they are based on the need and urgency to get more asset sensitive. However we are not going to make bet on when rates are going to rise, but we feel that the prudent approach [indiscernible] that asset sensitivity over time. If right move, quicker than we anticipate we can always come back and layer in swaps, something synthetic to add more sensitivity but we don’t see a need to do it at this time. So we're still hold position that we are right neutral with the need to get more asset sensitive.

And just trying to get a sense of your longer term asset sensitivity, what does your mile show [ph] for seg going out 2 years?

In year two, for instant staying up 100, a shock of 100 basis points. Our net interest income in year two is 3% and that’s you know, a percentage point or two from zero our view is neutral. So I don’t view this heavily asset sensitive, we're slightly asset sensitive and again 3% often year or two assuming 100 basis point movement.

Okay. Great. Thank you.

Thanks, Andy.

There are no further questions at this time.

Okay. Thank you, Casey. We appreciate everyone’s time and interest in Renasant Corporation today. And look forward to speaking again with everyone in the future.

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