Q2 2024 F.N.B. Corp Earnings Call
Good morning, and welcome to the F N B Corporation second quarter 'twenty 'twenty four earnings call. All participants will be in listen only mode should you need assistance. Please signal a comfort specials.
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Lisa Constantine: I would now like to turn the conference over to Lisa <unk> manager of Investor Relations. Please go ahead.
Welcome to our earnings call This conference call.
Your appointment files.
Okay.
And non-GAAP financial measures.
So I'm not sure if he in addition to and not in that alternative or reported.
All right.
Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable financial measures are included in our presentation materials.
Prior to these non-GAAP.
Pleasure.
All related materials.
Registration statement filed with the Securities and Exchange Commission.
Available on our own.
One site.
A replay of this call will be available until Thursday July to meet that and the webcast link will be posted to the about us Investor Relations section.
I will now turn the call over.
Chairman.
Yep.
Speaker Change: Thank you and welcome to our second quarter earnings call. Joining me today are his caliber he's our chief financial Officer, and Gary Guerrieri, Our Chief Credit Officer.
F&B reported solid second quarter results with net income available to common shareholders of 123 million.
34 cents per diluted common share.
Pre provision net revenue increased over 4%.
Supported by our well managed expenses and continued strong noninterest income levels.
Tangible book value per share grew 12% year over year to reach a record high at $9.
The second quarter's performance was driven by our long term strategic goals to gain market share.
<unk> growth diversify revenue streams and managers.
As we have previously mentioned F&B is well positioned to steadily increased market share in this volatile environment, given the strength of our capital and liquidity position and adherence to our consistent conservative underwriting.
F&B reported linked quarter loan and deposit growth.
6% and 1%, respectively, demonstrating our ability to execute on this strategy.
Both of these results exceeded published <unk> data this quarter.
Large and small institutions.
The loan and deposit growth benefited from our investments in our digital eastward totaled interactions increasing 22% year over year.
The increase in commercial loans was driven by activity across the footprint.
<unk> by double digit year over year growth across the Carolinas our.
Our Pittsburgh Cleveland region.
Commercial equipment finance business also posted strong contributions.
The increase in SMB or commercial real estate portfolio, including funding on previously originated projects.
On a spot basis consumer loans grew 5% led.
Led by growth in residential mortgages, while growth in this portfolio is seasonally higher in the second quarter. Our results also reflect the continued successful execution in key markets by our expanded mortgage banker team and long standing strategy of serving the purchase market.
This activity ultimately leads to increased household and deposit share.
Deposits benefited from seasonal lives as well as new production was generated through targeted deposit initiatives and promotions.
Noninterest bearing deposits ended the quarter over 10 billion, an annualized increase of three 2% prior quarter.
Mix of noninterest bearing deposits to total deposits ended the quarter at 29%.
Distant level since December of 2000.
As we have frequently discussed our strategy has been to price our deposits to protect peer leading us well.
While supporting our client base.
Our loan to deposit ratio early equals 96%.
Expecting lower loan origination and implementing a number of deposit initiatives in the second half of the year that will bring our loan to deposit ratio back or just one.
Yeah.
Another longer term strategic focus has been diversifying our revenue streams achieving stable noninterest income.
<unk> record levels 88 million in both the first and second quarter highlights the strength and range of our business.
And F&B robust suite of products and services.
First half of the year noninterest income totaled 176 million, 10% increase over the same period in 2023.
The income growth was led by our mortgage banking operations growing over 50% strong wealth management and Treasury management fee income.
Our success growing noninterest income is expected to continue as we enter the second half of the year.
F&B balance sheet strategy part of our proactive approach to risk management.
As we draw closer to a reduction in interest rates, we continue to move towards a neutral interest rate position to provide stability and potential improvement in margin in a falling.
Speaker Change: Beyond interest rate risk Fnb's comprehensive approach to credit risk management has led to strong and stable asset quality.
<unk> outperformance versus peers, our credit team proactively monitors each loan portfolio and overall concentrations at a granular level.
Which has served us well through many economic cycles.
Now I'll pass the call over to Gary to provide further detail on the overall asset quality Gary.
Gary: Thank you Vance and good morning, everyone.
We ended the quarter with our asset quality metrics remaining a solid level.
Delinquency finished the quarter at 63 basis points down one.
From the prior quarter.
Northern Europe remains unchanged ending at 33 basis points, a multiyear low net charge offs at nine basis points, reflecting solid performance in the current economic environment.
Gary: Total provision expense for the quarter stood at $22 million with 12.8 million utilized to support loan growth and the remainder providing for charge offs.
Our ending funding reserve stands at $419 million up 12, 5 million in the quarter ending at 1.24%.
When including acquired or unamortized loan discounts our reserve stands at 1.35% and our NPL coverage position remained strong at 421% inclusive of the discounts.
We continue to successfully execute on our strategy to monitor the non owner CRE portfolio.
Monthly, we analyze and segment upcoming and previously resolved maturities largest exposures as market conditions for the various property types across our footprint.
At quarter end delinquency in Npls for the non owner occupied CRE portfolio improved slightly and continues to remain very low at 16, and 12 basis points respectively.
Net charge offs reflected solid performance for the quarter at four basis points again, confirming our consistent underwriting and strong sponsorship.
The non owner occupied office portfolio delinquency totaled four basis points with no npls largely in line with the prior quarter.
We maintained a strong focus on credit risk management, and our portfolio continues to perform well throughout numerous economic cycles.
Quarterly we performed specific in depth reviews of our portfolio along with a full portfolio stress test.
Our stress testing results for this quarter has again gone lower net charge offs and stable provision compared to the prior quarter's results with our current ACL covering approximately 90% of our projected charge offs and a severe economic downturn.
Again, confirming that our well balanced loan portfolio enables us to withstand various stress economic scenarios.
In closing our asset quality metrics ended the quarter at good levels and our loan portfolio continues to remain stable.
Our continuous investments in credit risk management systems, and corresponding step compliments, our consistent underwriting and core credit philosophy.
Gary: Our experienced banking team and tenured leadership have positioned the company well to continue to achieve good prudent loan growth.
While proactively managing credit risk through many economic cycles.
Now I'll turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary and good morning.
I will focus on our second quarter financial results and walk through our third quarter and full year guidance.
As Vince mentioned total whilst leases ended the quarter $33 8 million linked quarter increase of $1 2 billion or three 6%.
This growth included $633 million in consumer loans, driven by the seasonal peak residential mortgage originations and $540 million in commercial loans and leases.
Well I think healthy activity in C&I and equipment finance as well as additional gross fundings on previously committed commercial real estate projects.
Gary: Total deposits ended the quarter at 35 billion, an increase of $259 million linked quarter.
Clearly growth in certificates of deposits of $202 million and noninterest bearing deposits of $80 million as the seasonal build in public funds deposits as we got.
Gary: Our loan to deposit ratio increased to 96% at June 30, compared to 94% at March 31.
We expect this ratio to decline in the medium term, both organically and with several initiatives our team has implemented.
Starting on the loan side of the equation. The second quarter's robust loan growth was higher than forecasted due to the seasonality of our mortgage business and stronger commercial client acquisition across the footprint.
We expect loan growth to return to historical levels for the remainder of the year as pipelines have declined somewhat given the strong production in the quarter.
Gary: And the typical pause in client activity, leading up to the presidential election.
Looking at deposits. We currently have several deposit gathering initiatives targeting both commercial and consumer balances, including a strong treasury management pipeline and a new a new five months CD consumer money market promotion.
Given the short duration of these promotions, we should be able to quickly repriced them lower when rates fall.
Over the past year, our deposit growth and mix has outperformed the industry. We believe that will continue.
This past quarter, we largely utilize short term borrowings to fund the robust loan growth.
Total borrowings increasing $1 4 billion.
When rates start to decrease the cost of these borrowings moved down quickly.
As Vince mentioned over the last several quarters, we have been strategically positioning our balance sheet to be more neutral benefit from lower interest rates.
Yeah, $4 5 billion of short term floating rate borrowings around $4 billion of non maturity deposits. They are currently priced at or above our 75%.
A $6 $9 billion CD portfolio with the nine months duration.
And lastly, as I mentioned on last quarter's earnings call, we have around $1 billion in swaps mature beginning in 2025 with rates between 75 and 100 basis points.
Additionally, the investment portfolio has an annual cash flow of $850 million and a current roll off yield of 250, and we have approximately $2 6 billion of fixed rate long repayments at an average rate of four 5% in the next 12 months.
In total we have over $16 billion of liabilities and swaps nearly $3 5 billion securities cash flows and fixed rate loan repayments. It should provide significant benefit and protection in a falling rate environment compared to the 16 billion of loans reprice within three months.
The second quarter's net interest margin was 309 nine basis point decrease largely due to the increased short term borrowings driving a 30 basis point increase in the total cost of funds to $2 46. This.
Gary: This was partially offset by a three basis point increase in the total yield on earning assets for 543.
Our spot deposit cost ended the quarter at $2 13, leading to a total cumulus spot deposit beta 38%.
Current interest rate increases began in March 2022, positioning us well against our competitors.
Net interest income totaled $315 9 million.
$1 million decrease from the prior quarter as the higher cost of funds was partially offset by higher loan balances with <unk>.
New origination yields for the quarter around 7% consistent level since the third quarter of 2023.
We expect the second quarter's net interest income to be the trough for the year, you should see modest sequential improvement in the third and fourth quarter.
Gary: Turning to noninterest income and expense noninterest income totaled $87 9 million consistent with the prior quarter strong result.
The largest quarterly increase was $2 8 million in service charges, driven by Treasury management revenues, continuing to gain momentum and seasonally higher consumer transaction levels.
Offsetting this growth were declines in capital markets, given lower commercial customer transaction activity and lower mortgage banking operations income driven by a slight decline in cell phone volume and net fair value adjustments on pipeline hedging activity.
Operating noninterest expenses were well managed and totaled $225 8 million and $8 $3 million decrease from the prior quarter. After adjusting for zero point $8 million of significant items in the current quarter and $3 million last quarter.
The largest driver for the decline in salaries and employee benefits, which decreased $8 2 million, primarily due to normal seasonal long term compensation expense $6 9 million and seasonally higher employer paid payroll taxes in the prior quarter.
The efficiency ratio remained at a peer leading level coming in at 54, 4% second quarter.
F&B capital position remains strong and we were able to support robust loan growth and maintain the tangible common equity ratio near 8% CET one ratio of 10, 2% both of which remain above our stated operating levels.
Tangible book value per common share was 988 at June 30, an increase of $1 nine or 12, 4% compared to June 32023.
Aoc I reduce tangible book value per common share by 67 cents as of quarter end compared to 99 at the end of the second quarter of last year.
Let's now look at guidance for the third quarter and full year of 2024.
We are maintaining our full year balance sheet guidance logs are expected to grow mid single digits on a full year basis.
Total deposits are expected to grow low single digits on a year over year basis.
Our mix of noninterest bearing deposits to total deposits is anticipated to remain superior to peers.
Our projected full year net interest income expectation is revised to be between one point to 712 9 billion, assuming 125 basis point rate cut in September.
This revision reflects our interest bearing liability mix as we enter the second half of the year.
Net interest income for the third quarter is expected to be between $315 million to $325 million.
Gary: Given the strength of our noninterest income generation in the first half of the year, we have increased our full year guy to be between 350 and $355 million.
Third quarter noninterest income is expected to be between 85 and $90 million.
Now anticipate the full year guidance for noninterest expense to be between 909 hundred $15 million due to production related compensation given the strong fee income results.
Gary: Third quarter noninterest expense is expected to be between 220 $230 million.
The full year provision guidance range is lowered to 75% to $95 million and remains dependent on net loan growth and charge off activity in the second half of the year.
Lastly, the full year effective tax rate should be between 21, and 22%, which does not assume any investment tax credit activity that may occur.
With that I will turn the call back to Vince.
Thank you Vince.
This year celebrates our 160 at the anniversary is a nationally charters being obtained through the national banking that in $18 60.
During the execution of our growth strategy F&B has continued to prosper and develop into a diversified $48 billion regional financial institution.
This quarter's results continued to reflect those efforts resilient balance sheet strong capital generation.
Our liquidity is.
Linked quarter growth in pre provision net revenue.
We consistently received national recognition that affirms our competitive advantage with prominent publications such as Forbes ranking F&B one of America's best banks in naming US too. It's global 2000 listed companies based on sales profit asset and market.
Our strategic emphasis on innovation is integral to our success and we continue to earn national attention for digital engagement and leadership.
Most recently in F&B E store, one best digital initiatives at the 2020, we're banking Tech Awards USA.
These awards highlight outstanding achievements and success in the U S banking and Fintech industry.
In addition to winning best digital initiatives F&B was honored among the nation's top five largest financial institution as a finalist for best use of technology in consumer banking best user or customer experience initiatives and top innovation.
We also continued to earn rewards for our commitment to our employees who enable our success during the second quarter, we extended the long list of top workplace honors we received national.
The financial services industry and throughout our footprint with specific awards for culture Excellence and leadership.
As we reflect on a solid quarter I wanted to thank our team for their many contributions we appreciate your dedication.
Maintaining our focus on our shared principles and goals, we are poised to navigate the ever changing macroeconomic landscape and deliver for our customers communities and shareholders.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, guys. Thank you for taking my questions.
Yeah.
Maybe starting on the on the balance sheet side, you talked about a slowing of loan growth in the back half of the year relative to what's been a what was a pretty strong quarter in the second quarter.
Speaker Change: You know obviously you had a lot of residential mortgage growth you had some commercial real estate growth and some commercial growth as well.
Maybe you can talk about just the mix that you're expecting in the <unk>.
And if you expect.
That's slowing to come from the residential side, obviously, some seasonality in the second quarter here, but.
If that's part of it if you're also seeing expecting a slowing on the commercial real estate side with construction fundings slowing just curious on the mix you expect.
Okay.
Instantly, that's going to turn it over to Vince.
Yes.
I think a couple of things first of all the mortgage growth and seasonal.
We've already started to see as we move into the third quarter.
Starting to see a lower loss.
Our pipeline, so we expect that to come down fairly substantially so less people put on the balance sheet as we move forward there through the second half of the year.
The construction fundings were on committed.
Primarily committed obligations, we do quite a bit where we do the construction financing and it's.
<unk> taken out by some down.
So those those fund ups occur.
Natural funding as we move through the construction period.
<unk> growth this quarter and then we had some pretty robust growth in equipment to enhance we've been doing pretty well there.
With leases pretty much across the footprint.
There were some renewable energy deals that closed I think in the last quarter of last year.
The balances there I think exceeded $1 billion in balances.
That book of business. So it has grown modestly over time continues to grow.
C&I has contributed there were some significant growth in the Carolinas Pittsburgh Cleveland contributed so.
It was really coming from a bunch of areas.
Really robust.
In certain areas. It appears we've been taking share from others. So I think the disruption that occurred really kind of mix it up with the customer base in <unk>.
Give us an opportunity to get out pitch, new transactions, which I think is very positive.
The growth was higher than I expected.
I think it's okay, because it positions us well moving into 'twenty five.
Given our shifting.
We're liability sensitive sensitive balance sheet.
Putting those assets.
Sets us up for 25 up from an earnings perspective.
It seems to generate deposits. So I think that on the loan side Thats why we are guiding our guidance Hasnt changed.
We're expecting.
To produce the same level.
Yes.
It's a little lumpy.
I'll tell Ya pipelines are down we booked quite a bit.
This quarter. So we're moving into the next quarter down about 10% in commercial pipelines and it's still a little sluggish on the consumer side. So we haven't seen as much while we have seen more mortgage first mortgage volume there was much less.
Home equity HELOC.
Bill.
Kind of offset each other.
We're not expecting that to come back this year.
That's how that's how the book performs.
The other category I think I didn't speak about was indirect auto I don't agree with you.
Your thoughts are there.
But we have a solid we had a solid growth quarter.
Q2 would choose again seasonal very similar to the mortgage.
We're getting really high quality paper there.
With focus on profitability, so improving margins and playing at the high end of the file.
Oh band.
Really working well for us.
But again, that's seasonal we're going to pick our spots and manage that.
Do those seasonal periods. So we expect that to come down as we move toward the latter half of the year as well and then from a funding perspective, if we're able to execute our plan we have seen growth in our.
Our Treasury management pipelines, so we're seeing some very large.
Speaker Change: Good opportunities were the principal bank.
That should bring in demand deposits as we move forward I think the bright spot here, while we had to fund that growth with borrowings temporarily the upside for us in the long run is to replace that with lower cost funding and I think we've proven we.
Can do that so the upside into 'twenty five as us, replacing those borrowings with.
Deposits and if you look at the demand deposit base has been stable.
Been at 29% for several quarters.
Had growth in demand deposits.
You're not seeing across.
Some pretty decent growth in certain categories and stuff to bring deposits on we have not been as aggressive as others.
Throughout this cycle.
We're starting to look at pockets for us to price up to bring in deposits was also needs low cost deposits.
Speaker Change: Our strategy on a couple of months.
Speaker Change: <unk> demand.
Well, our beta performance goes to that point too.
Very gradually last quarter at 36, five to 38, so thats again, thus protecting the overall profitability as you can imagine.
Challenging time to navigate.
Don't want to pull back I think a lot of competitors have shrunk their balance sheet or pull back I think this is an opportunity for us to go after some share bring in households, and do what we do well which is convert.
Primary clients.
Speaker Change: So I hope that helps.
Yeah, No that's terrific I really appreciate all that color.
Yeah, maybe a quick follow up just you touched on it at the end there on the on the funding side, but you also mentioned in the prepared comments about deposit initiatives in the back half of the year or two to kind of rightsize the loan to deposit ratio. Just curious if you could go into a little more detail about what you were thinking and how that could impact kind of funding costs.
Sure we've modified the incentive plans for the consumer bank, we have kind of a kicker for deposit growth.
Shifting to the loan growth is pretty good.
Speaker Change: This deal in that segment, so we thought hey will incent them.
Positive we have a number of calling initiatives across the company on larger Treasury management opportunities.
A bunch of transactions that haven't funded yet which are fairly sizable.
It seems like clients are willing to talk to us given our performance over this past cycle. So we.
<unk> proven that were capable of handling those relationships throughout a cycle.
Any issues.
<unk>.
People are very focused on it our teams are focused on it.
As long as we manage.
Our direction and focus mainly on Monday.
Yes.
Sure.
And the other thing is the east or the investment in digital and additional technology the interactions were up 22%.
We're starting to get some traction there on the consumer side.
And then yeah.
I want to get into excruciating detail, but.
There are things that we do from an incentive compensation perspective kind of across the board.
Speaker Change: Deposit growth than we've done some things on the mortgage side, where we've used data analytics to cross sell customers that we bring in particularly in the physicians book.
The jumbo mortgage segment.
We're partnering with well.
Speaker Change: They do some things.
And brokerage brokerage, we're working on our money market product that will work hand in hand, with our broker brokerage sales.
Speaker Change: Which should help so theres a bunch of things going on.
I think that it's going to take a little bit of time to get some lift out a bit but certainly as we move into the second half of this year and into 'twenty five we should see the benefits of.
Speaker Change: Everything.
Perspective.
Alright, well terrific. Thanks for taking my questions.
Okay. Thank you thanks.
The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.
Good morning, guys.
Gosh.
Speaker Change: Sure.
You know another strong fee income quarter.
Speaker Change: And.
<unk> for continued shrinks just.
Just curious bigger picture.
If you could share your thoughts as you continue to grow out of these businesses, where you think you can grow the.
Speaker Change: The fee income side of the picture of <unk> as a percentage of the total revenue pie and.
And maybe do you see any any.
Fee businesses in particular.
Speaker Change: <unk>, you want to wrap up or you need to ramp up to get them.
Speaker Change: Yes.
I think long term. This is long term we've talked about this in the past we split mission in our deck, we target at 30%.
<unk> total revenue.
Almost got there then.
Speaker Change: All changed in terms of.
Net interest income so.
Diluted that effort.
That's really the long term target, we want to continue to build out those fee based businesses.
And make sure that it starts to consume more of the total revenue.
You know that 30% target as kind of our target.
That's not something we're going to get to immediately but we strive to get there I think we've had great success in capital markets, we've done well building out our derivatives platform our syndications platform.
We have a debt capital markets group that reform.
Speaker Change: For debt offerings.
I think there is opportunity for us to do things from an advisory perspective, I think there is opportunity for us to continue to focus on building out.
Public finance there are things that.
I think in the future businesses that are bolt on businesses that will contribute.
And help continue to diversify that the income base, given our size and our the span of the company and the markets that we compete in and I think we have a terrific opportunity.
To capitalize on those segments.
I think once we move into our building.
We build a trading floor. So we can bring all of those capital markets groups together, it's fairly impressive I think bringing clients in and showing them that we have these capabilities will lead to additional opportunities for us and then on the wealth side, we have opportunities there I think we've.
We've only scratched the surface in terms of building out our teams in the markets that we moved into and they were contributing nicely on the wealth is growing 10% annually every year I think there is record that this upside we've had records year after year. So.
So building out the wealth platform continues and building out those capabilities continues to T. M. There is tremendous upside in Treasury management fee income.
Again, given the growth of the company in.
We bought banks in the southeast.
Robust treasury management offerings, so as we build out that client base on the commercial side, we will see opportunities to grow.
And then the other units mortgage is going to be cyclical.
And seasonal and then you have but I still expect mortgage to grow gradually over time as we continue to increase market share.
Our team they've done a terrific job Joe pardon me on has done a phenomenal job building out the teams and growing share and if you look at the amount of.
Production that we've had even in this off cycle, we've outperformed others.
In the markets that we compete in so we gained market share.
I would expect us to continue to do that.
Speaker Change: And then the last piece is insurance we have a.
A decent insurance offering.
Speaker Change: We have good leadership, there and we started to focus on integrating that further into our product offering with our commercial bankers that seems to be going pretty well, so I think theres upside there.
It's been a little stagnant, but I think the insurance the insurance market is firming and premiums are increasing and we're starting to pick up larger and larger quantities. So in that space there is upside.
Speaker Change: So we're pretty optimistic about those fee income categories.
And I think it shows in the performance.
It consistently.
Touted capability and discussed what we were building out and I think performance over the last five or six years really.
Illustrates the success we've had.
I would just comment that the percent of revenue is a function of both banking environment. So growing that absolute level given all the initiatives Vince talked about within the key focus and it just keeps building.
Okay Alright.
Alright, I appreciate it and then just maybe as a quick follow up just.
With with some slower loan growth relatively speaking to the second quarter of some slower growth in the back half of the year.
What do you guys already above your target capital levels.
Just wondering and I know you bought back a little bit in the second quarter, but would you expect buyback activity.
The ramp up here or are you more price sensitive.
Obviously, we've seen a recent rally in bank stocks. So just wondering how we should think about buyback activity maybe.
As you see it today.
Yeah, No I would say the level of activity we had in the second quarter was really just to kind of buy back some of the incentive shares are issued earlier in the year.
250000 that we bought as we sit here today.
Our focus on capital kind of building from here.
At this point, we don't have any plans to repurchase shares.
Second half of the year I mean that can change the environment changes, but right now using the capital to support the loan growth I think the fact that you were able to support the robust loan growth. We had this quarter our capital ratio CET, one hold at some point too and TC ratio in that one so holding those levels of capital and supporting the loan growth.
Speaker Change: It was kind of the best uses of capital at this point.
Speaker Change: The buybacks will be part of our operation every year as we go forward, but as we sit here today I think that the best use is still I think that gradually felt a little bit.
Speaker Change: Great. Okay. Thanks for the color guys.
Thanks, Brian.
The next question comes from Casey Haire with Jefferies. Please go ahead.
Great. Thanks, and good morning, everyone.
Casey Haire: Couple of follow up questions on the funding strategy. So I'm just wondering what does the guide assume in terms of the borrowings so that I'm assuming that that.
Casey Haire: Stays there or is there an opportunity with these deposit initiatives to pay some of that down.
Yeah, I would say that the guide basically has the liability position that we're entering the third quarter, what's baked into that so the better we do on the initiatives that Vince has described there's obviously opportunity.
An additional loan growth as well as.
Replace some other short term borrowings and I should comment too. The other short term borrowings are that short term. So when the fed does cut rate on those is going to come down in tandem with the rates coming down. So we made a decision during the quarter given the loan growth to kind of.
I got a little better earnings in the short run in the second quarter, but position us so that we can benefit from on the downgrades. We go forward.
No I understood, Okay, and it sounds like these deposit initiatives are.
It doesn't sound like Theyre Cds so.
So I'm just wondering to the extent that they're successful what is the new money rate on these on these deposits.
Hope to bring in.
Versus the 5% borrowing yield.
Yes, I mean, it'll be a mix <unk> I mean, you know we still have some level of Cds coming down I mean, it's definitely slowed so that this kind of remixing of what it was last year.
We looked at the second quarter literally.
Cds $36 million on average per month, so well.
We had a high of 164 million last July so.
Shifting there has definitely slowed but they're still customers are still grabbing those rates right now are people aren't incentives to originated CD.
That's helpful.
I think the operating talent initiatives.
Calling on companies new customers to come in and bring it into their operating accounts noninterest bearing is obviously policy itself.
Speaker Change: Hard to predict with certainty the mix, but it'll be it'll be a little bit of both.
The C D. That's their customer autograph it before rates start to come back.
We have some attractive offerings there I think the importance as we move forward is just growing the total deposits.
Yes sure.
Okay, and then just last one for me slide 16, our balance sheet repricing, thanks for sharing that.
So the new money bond yield on the roll off rate of $2 50, or just curious what yields you're getting on reinvestment and then that swap.
With an 87 bip average received rate.
Is that $1 billion does that mature is that ratable throughout 25, just looking for the maturity date on that.
Speaker Change: Yeah.
Speaker Change: Just a couple of comments on that I think.
Speaker Change: We added this content just give everybody a little more understanding of what kind of whats underneath so we kind of roll through the pieces now the cash flow.
<unk> annual cash flow coming off of $2 50, I mean today, we're investing four and a half to 475.
During the second quarter, our guys did a great job opportunistically investing earlier in the quarter.
South north of 5%. So we're speaking to page 16.
Yeah.
No.
I'm sorry.
Good point, because I do want to talk to that and then these other pieces here.
Some flexibility as well.
Sure I mean, $6 9 billion in time deposits.
We have a maturity of nine months.
The CD promotions, we've had over the last year.
13 months today are our best freight is on a five months. So that the idea is that when the fed does start to move we have the ability now maturing and kind of reprice. Those so that's an important point we have another 4 billion non maturity deposits raised about 475 those are very repriced. The book again once the fed moves in this way if the fed is expected to continue to move.
After that first move so that gives us some flexibility to $4 5 billion of short term or floating rate borrowings again, those will just repriced down. So that's another lever for us and then the $1 billion of swaps at the bottom there Casey is really going to mature in $2 50, a quarter next year.
87 basis points is what we're getting today I mean, thats a negative carry today of $10 million to $11 million a quarter.
That's going to start to go away in January.
Great. Thanks, guys.
The next question.
The next question comes from Russell Gunther with Stephens. Please go ahead.
Hey, good morning, guys.
And in Russia.
Maybe just following up on the discussion we were just having.
Given your move toward neutral and some of the balance sheet repricing, we just discussed.
As an initial fed cut still a negative to the NIM.
As deposit cost lag or can some of that fixed repricing dynamic overcome the headwind from an initial step down.
Hey, Chris Yeah, I think it depends on kind of what the expectation is for a cut kind of after that first cut.
<unk> kind of talked about if you know that.
On rates are expected to continue that gives us a lot more cover to be aggressive on the deposit pricing side I'd say, if it's one and done like we kind of have in our guidance. There probably is some short term timing issues, where it probably is a near term negative and then there are some timing constraints with how fast we can reprice deposits, but you know if there is.
Several more cuts baked into the curve and that's kind of expected on the on the client side that gives us a lot more cover to act more aggressively and hopefully we can we can capture some of that downside made a little bit quicker than we think here.
Okay got it thanks, Chris.
And then just could you guys talk about deposit pricing competition in your markets just broadly.
Getting some mixed messages early in earnings season, particularly out of the southeast.
Where some peers are talking about accelerated competition, others talking about successfully walking down promo rates. Just your overall thoughts would be helpful. In terms of where you think deposit costs are headed over the next couple of quarters.
I think that many of our competitors have kind of shifted one state panic.
Priced up deposits too.
Basically what it is.
We have backed off so I think a lot of the larger competitors have backed off a little bit. So if you look at their promotional pricing.
Speaker Change: Out there.
Youre going to see 25 to 50 basis point reduction versus what was running.
Heath.
I call it the micro liquidity prices.
But I think that's why you're getting mixed signals I think it's different for each institution and then all of a sudden youll see somebody emerge and don't have a really aggressive rate.
So I think they've moved people generally move companies generally moved bank to a strategy that we had when they were selectively pricing of products.
Maybe doing a more quiet promotional pricing versus whats on their website.
Youre going to Youre going to hear a mixed bag I mean, it is going to be all of them.
So I would say, it's less competitive than it was I didn't spots. There is still some irrational pricing out there so depending on who's calling on your client.
You need to react to that right. So.
That's where I think we are.
But I do just in the surveys that we do.
A lot of work on.
Monitoring whose pricing one.
We've seen a pullback.
And the stated pricing promotional pricing that's out there that we can see.
Many of our competitors so it's come down, but then like I said.
Every once in a while somebody merchants.
But as the term is coming.
Speaker Change: A lot of the competitors are doing what we're doing on shortening the duration of the.
The time deposit portfolio by.
Putting out a more aggressive CD.
Yes, that's priced shorter five months three months six months.
Let's see.
The pricing has moved in.
Anyway.
Yes.
That's what we're that's what we're seeing now.
Just to add there to it depends on if the bank is Berlin military not right. So depending on who you're talking to us and that is true, but banks that aren't growing loans at all.
Managing the rates down more because they're not trying to generate deposits with our growth and bringing it all those new customers.
It's a different environment, but what's it about.
So it really depends on the market and the bank as you read through the as I read through the earnings release as I can see that I can see.
Margin contracted because we were lending others to improve their margin.
We have seen inflows.
Positive pricing is all over the board.
It's choppy.
It's still competitive.
And I think people were just retrenching to deal with the situation.
On an individual basis.
I would just add to the margin compression as Vince said it was down nine basis points for the quarter, but if you look at the dollars of net interest income right, which is most critical from a bottomline profitability standpoint, I mean, we were down $3 1 million this quarter $5 million decline last quarter from 6 million the quarter before we're kind of in line with that and then the go forward.
As I mentioned earlier more success, we have with the deposit initiatives and then rates come down we can reprice. All these items online 16 that I talked about it gives you that kind of positive momentum as you go forward.
Got it well guys I appreciate both your thoughts on the question I guess the last one for me and understanding it sounds like we are.
Poised to be flat to up on NII going forward, but.
A little incremental pressure overall.
Overall for the guide would you guys consider another securities portfolio repositioning or how does that currently sitting here.
Opportunity set.
Yeah, I would just say the net interest income I mean, we expect the second quarter to be the trough in net interest income dollars. So we do expect it to move up the next couple of quarters.
Speaker Change: Just given all the things that we've described and then we evaluate the whole balance sheet on a regular basis. So.
As we said with what we did in the fourth quarter, we were very thoughtful about the size of that.
Now the nature of the overall optimization strategy, we deploy so we look at everything so everything's kind of on the table on the necessity standpoint, but I think we're focused primarily on the organic growth in the loans and that all of the deposit initiatives really funded.
It really helps us to bring those households on that that helps us.
<unk> helps us generate additional business.
Good job.
Cross selling to that customer base.
Understood. Okay, guys. That's it for me thanks, very much for taking my question.
Thanks, Rob.
The next question comes from Manuel Novice with D. A Davidson. Please go ahead.
Hey, good morning.
If the fed points to kind of a continued downrate cycle.
Could you have upside to the high end of your NII range or would it actually maybe exceed it.
Kind of some thoughts on that.
Speaker Change: Kind of variability that you kind of touched on briefly before.
Yeah, Manuel I think.
Like I said our guide.
As one cut in it right now and that's it for the year if there were more.
Kind of cuts baked into the curve I think the upside really would shop at 25, I think that sets us up really well for what 25 could look like especially.
Especially in off the curve.
Unearned births after I don't know how long it two years out.
Then version, so I think that would be more but by 'twenty five impact.
Sure it would be helpful, but like I said theres some mechanics on the timing of when Cds mature some of Thats locked in so with five month Cds that are coming on now a lot of the repricing happens at the end of the year I think that really sets us up at our 2025.
And our band is pretty tight as you look at the guide for net interest income, it's a pretty tight band there.
Okay.
Okay.
The last three years. This third quarter has definitely been pretty good deposit growth quarter. I think you have some seasonality that you touched on and meeting flows can you just kind of touch on that kind of just organic better deposit trends this quarter.
Potential.
Yes.
Yeah go ahead, obviously can say you have a normal seasonal surge that we see in deposits.
Municipal side happens kind of now through October November timeframe.
That can be $6 million to $800 million kind of peak to trough.
Bottom in the first quarter.
That seasonality, we expect and that will be supplemented by the initiatives Vince talked about earlier as far as the commercial and consumer deposits.
Can you can you at least where your NIM kind of ended the quarter, sometimes you show where its progression monthly basis.
Yes, the monthly I mean, the monthly margin there was some noise in the last month of the quarter. It was within a basis point or two in a quarterly average.
Okay.
Great.
Thank you.
Okay.
Thank you thank you Ed.
The next question comes from Kelly Motta with K B W. Please go ahead.
Hey, good morning, Thanks for the question.
Hmm.
I think you've touched on it a bit but I clearly loan growth was incredibly strong and it's a great opportunity to win new households, and clients to the firm.
Just wondering where you're seeing the greatest opportunity to take share whether it's you know a certain region or a segment of.
That's the business. Thanks.
Yes, and we've seen some pretty decent growth coming out of the Carolinas that continues to be.
An area with upside for us.
I think we've only started to scratch the surface in terms of our calling activity there. So.
There's quite a bit on the table.
And as we moved into South Carolina, we've built out.
Our Greenville, and Charleston, Theres, a lot of opportunity there for us both of them well.
Wealth private banking and commercial banking.
No.
We continue to see good growth in those areas in Charlotte we've had some good success.
We've had success in the top.
From a deposit perspective, we've had great success in Wilmington, Greensborough. So we're we're pretty optimistic about the southeast.
And then Pittsburgh then.
This work continues to perform very well.
We have a lot of upside there we have significant share here.
Pittsburgh market, So I think in certain business lines were undersized.
Mortgage I don't think we are sized appropriately given the deposit share that we have here. So you know there is some opportunity there for us to continue to grow in the Pittsburgh market.
And the lending perspective.
Basically from a C&I perspective, we're not.
Penetration in this market, so there's quite a bit to do Leland.
With sluggish over the last few years, but I think there is upside in the Cleveland market for us in C&I, and then I mentioned equipment finance I think enhances.
Has done very well and should continue to do well.
As we move through this period get through the election.
And then kind of a hold up on some small ticket capital spending from the C&I base, you'll see that release as.
As we move past November.
When theres more clarity on what's going to happen.
I think those are the areas that I think have the most upside for us.
And then on the on the flip side of that Theres less activity going on in CRE, obviously right.
Okay.
Got it that's super helpful.
And then on.
Understanding these things take time, just wondering if we could get your updated thoughts on M&A clearly.
You know valuations across the board have improved and assess.
Especially in light of potentially more accommodating regulatory environment potentially.
On the Horizon, just wondering updated thoughts any.
Thoughts on potentially where you would be looking to add density or fill in thank you.
Yes, I think it's going to be the same answer we've given the last few quarters, we're going to be opportunistic we are focused internally.
We have a number of major initiatives going on right now and building out heightened standards capabilities were.
Focusing on building out the digital platform you remember when you came in.
With us we had quite a bit.
If we were tackling.
Speaker Change: That doesn't mean M&A is off the table, it's just that we've been focused.
Internally to strengthen the platform right so that we can.
We expanded and benefit from this deal.
On.
So I would say, it's the same you know it.
We will be opportunistic and look for opportunities in market.
We've been building out Virginia on a de novo basis.
So you'd want to branch announcements in northern Virginia.
We are open to with one or two.
Two more coming.
In the near term and then Richmond, we've been focusing on.
So that's kind of happening organically.
And then in the Carolinas were building out.
Speaker Change: The Charlotte market, the inner city, Charlotte market Yadkin largely outside the us.
The city of Charlotte So yes.
We're looking at opportunities to go in there so youll see some de novo expansion in those markets, which I think Charlotte in particular should bring us some good opportunities.
From the consumer and small business perspective.
We build out that channel.
Jim.
I understand you guys certainly have a plenty of green shoots internally.
Maybe last question for me just a model refresher here.
On the expense side.
You have about a $7 million double carry from.
The excess lease expand without while you're still leasing can you remind us does that that.
Speaker Change: It doesn't carry through to 2025 is that correct or is there any kind of change in plans or timing. We then move to the new building.
Okay.
Yeah, Kelly, it's Jim duty, that's exactly right yeah once we move in.
Fourth quarter is our planned move in date of about 24 that double carry on the current leases that we have all in so its not a carry forward into 'twenty five.
Awesome. Thank you so much.
Thanks, Kelly and thank you Kelly.
The next question comes from Brian Martin with Janney. Please go ahead, hey, good.
Morning, guys.
Hello.
Good morning.
That expense reduction can you remind us what that is on the on the building on the property.
It's basically the timing of our move.
Speaker Change: <unk> lease.
Speaker Change: Number of locations here, because we have a lot of people spread across five locations here in the north shore. So it was the timing it's the rent expense that started on the building.
We're paying rent on all these other locations until we can ship into the building which were scheduled to do in November.
Early December of this year.
So the question was what happens with that additional rent expense that goes away.
So we're double double.
Now we have double expenses right.
Brian There's a footnote on the slide 20, the guidance slides interest.
A million of rent expense and we're not actually paying a double.
It's we got free rent for the Moon, but from a GAAP accounting.
We had a record.
Got you always said or device.
Okay, and then just on the on the funding cost can you talk of I mean can you give any sense and I know you talked about the market and selecting as far as the cost of deposits kind of do those begin to plateau here I guess I guess they've been the rate of increase has obviously been narrowing.
Narrowing, but just I guess when do you expect that deposit costs to kind of plateau.
I mean, it's hard to say I mean, it's still moving up a little bit I mentioned that STD.
Mix shift definitely slowed quite a bit so.
If you look at the total deposit cost at the end.
On a spot basis 2013.
In the first quarter.
Went back it's definitely the increase has slowed.
Yes, it becomes a function of what Chris was talking about earlier is if the fed does cut and there was an expectation you're going to keep cutting obviously that gives you more ability to write that down and all the pieces on slide 16 that I went through you know theres a lot of levers there flexibility that again the expectation is that that's going to continue to cut.
Hopefully putting in September then a lot of those pieces are and by Abbott.
I'd say if you look at the makeup of the deposit base, it's not going to be I don't see pricing increasing to drawing deposits like I said, we've seen a number of competitors reduced their promotional.
So I think it's more a function of shift.
Are we able to hold the demand deposits will be able to hold the low cost.
Interest checking and be able to hold that dumped.
Migration I think the outflows have slowed dramatically. So we should be seeing right and the new initiatives that for him right new initiatives or focus more on.
Lower cost deposit categories.
I think would help us.
But it's all a function of mix at this point.
Speaker Change: Got it so Brian from a beta standpoint I.
I guess, our beta has been very strong 38 versus the peers, we've been a good bit better than peers, and we would expect that just to gradually go up a little bit more from here.
Probably similar to what it did kind of first and second quarter. So just as another indicator yes. Okay. That's helpful. And then maybe just one for Gary on the.
Credit side, the stress testing Gary anything.
Anything you are seeing for signs of weakness or potential concerns given that things sound very good.
So granularity and all of the credit performance, but as you kind of do the stress test every quarter is anything coming up that you know.
Speaker Change: I got you, maybe more alerted to or just paying closer attention to it.
Speaker Change: You know, Brian I think over the last three quarters, no and we stress test as you know every quarter over the last three quarters, we have seen improvements.
From a potential charge offs and loss perspective, so those those updates in those reviews around the severe economy continued to show improvement.
We're very very aggressive in managing the book as you all know and.
That test that our team goes through each and every quarter is really showing positive results for us as we've continued to migrate through that.
The current economy.
Okay.
Yes.
Okay.
Alright.
Okay I think that's really it for me I guess, maybe one last modeling question I think you guys mentioned that there were some impairment on the mortgage.
This quarter or was it not.
I hear that right.
No just normal fair value marks.
Overall portfolio fine that Paul and I mean that swings quarter to quarter anywhere from a million one way to 1 billion or two one way to a million or two the other way. So it was just kind of hedging the pipeline yeah. Okay. That's all I can make sure that okay. Thank you guys for taking the questions everything else was answered.
Yeah, Alright, thanks, Brian.
This concludes our question and answer session I would like to turn the conference back over to Vincent <unk> delete for any closing remarks.
Thank you.
So everybody I appreciate your interest and great questions I hope, we answered everybody's questions.
Very optimistic as we move forward I think we had a great opportunity as we said.
The previous call. We go after market share because we were in a position to do that I think we have a great opportunity.
You know creates some pretty positive financial outcomes as we move forward and execute our plan.
Drive deposit growth in the second half of the year. So.
Really appreciate it and appreciate your interest and thank you again and thank you to all of our employees for their hard work and a lot of you are listening.
I know we all appreciate it so thank you.
Take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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