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spk10: good day and thank you for standing by welcome to the fulton financial second quarter 2023 results at this time all participants are in a listen only mode after the speaker's presentation there will be a question and answer session to ask a question during a session you need to press star 1 1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 101 again please advise that today's conference is being recorded I would now like to hand the conference over to speaker today, Matt Joswak, Director of Investor Relations. Please go ahead.
spk03: Good morning, and thanks for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the second quarter, which ended June 30, 2023. Your host for today's conference call is Kurt Myers, Chairman and Chief Executive Officer. Joining Kurt is Mark McCollum, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement which we released yesterday afternoon. These documents can be found on our website at FULT.com by clicking on investor relations and then on news. The slides can also be found on the presentations tab under investor relations on our website. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the Safe Harbor Statement on forward-looking statements in our earnings release and on slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton takes no obligation other than as required by law to update or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 16 through 20 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now, I'd like to turn the call over to your host, Curt Myers.
spk05: Thanks, Matt, and good morning, everyone. Today, I'll provide summary comments on our company and on our financial performance. Then Mark will share more details on our financial results and step through our outlook for the remainder of 2023. After our prepared remarks, we'll be happy to take any questions you may have. We were pleased with our second quarter results. We continued to support our customers and generated solid loan growth. We saw credit metrics remain stable and credit losses return to historically low levels. In addition, fee income was strong across the entire company. Operating earnings were 47 cents per share. Pre-provision net revenue, or PPNR, for the second quarter was approximately $106 million, an increase of 19% year over year. This was a result of earning asset growth and net interest margin expansion year over year. During the second quarter, we saw loan growth of $374 million and deposit declines of $110 million. As a result, our loan-to-deposit ratio increased to 99%, right in the middle of our long-term target of $95 to $105. Fee income increased $8.9 million, significantly above the first quarter levels. Commercial banking had a record quarter, driven by strong capital markets and merchant and card processing income. Wealth management continued to deliver strong results as the market value of assets under management and assets under administration reached $14.3 billion. Mortgage banking fees were up modestly late quarter, and consumer banking fees were solid as well. Expenses increased during the period. However, they were in line with our expectations for the quarter. In addition, we also had other positive notable events during the quarter. We released the second edition of our corporate social responsibility report, highlighting achievements on our purpose of changing lives for the better. We raised our quarterly common dividend by 7% to 16 cents per share. We welcomed a new member of our executive team, Karthik Sridharan, joined us as a newly created role of chief operations and technology officer. In this role, he will lead our efforts to further enhance our operational excellence for our customers and our team. We celebrated our first full-year impact of the Prudential Bancorp acquisition. In looking back on the acquisition, we were pleased with our ability to get regulatory approval and close the transaction in under four months. We achieved the systems conversion on time and on budget. We realized our cost savings and met our one-time merger cost targets. And we were pleased to have the Prudential team on board and contributing to Fulton's success every day. Our second quarter results met our expectations and we believe we are positioned well for continued success. We remain focused on growing core deposits, effectively managing our deposit mix, achieving the appropriate risk-adjusted return on our loan portfolio, and improving our operating efficiency. During the quarter, we and the industry continue to experience the migration from non-interest bearing balances into higher cost deposit products. What is critically important is to continue to grow households and customer accounts. During the quarter, we grew 4,000 total net new households and 8,000 total net new deposit accounts. We believe those are meaningful increases in this environment. On slide three, we have provided updated disclosures on our deposit base. We have approximately 742,000 deposit accounts with an average age of 11.4 years on a weighted balance basis. The average balance of these accounts is only $28,500. Our balance sheet remains strong, and our capital ratios continue to improve. Our liquidity position increased over $8.2 billion in committed funds. Turning to credit, we have provided more detail on our loan portfolio and specifically on our office portfolio on slides 4 and 5. I'd like to note our overall concentration in commercial real estate remains at approximately 180% of total capital, well below our proxy peer average. On slides 4 and 5, a small component of our CRE portfolio is the discrete office-only portfolio, which includes all loans with a primary revenue stream from office rent. As a reminder, this segment is a diversified and granular portfolio, originated consistently over time, spread throughout our footprint, and with only five individual loans in excess of $20 million. Looking at overall credit, net charge-offs were $2 million, or four basis points annualized. Overall credit performance remains within our expectations, and NPAs, NPLs, and loan delinquency have all declined for the past three quarters. While we are encouraged by these credit trends, we remain focused on potential economic headwinds that could affect future performance and our credit outlook. Now I'll turn the call over to Mark to discuss our second quarter financial performance and 2023 outlook in more detail.
spk04: Thanks, Kirk, and good morning to all of you on the call. Unless I knew it otherwise, the quarterly comparisons I will discuss are with the first quarter of 2023, and the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis. Starting on slide six, as Curt noted, operating earnings per diluted share this quarter were 47 cents on operating net income available to common shareholders of 77.8 million. This compares to 39 cents of operating EPS in the first quarter of 2023. Looking at the balance sheet, loan growth slowed marginally in the second quarter to 374 million or 7% annualized. Commercial loans were $119 million of this increase, or about one-third of our overall growth. Commercial real estate lending grew $100 million, or 5% annualized, with most of this growth coming in owner-occupied commercial real estate. As noted earlier, our commercial real estate concentration remains low, approximately 180% of total capitals. Consumer lending produced growth of $256 million, or 15% during the quarter. Mortgage lending was the majority of our consumer loan growth, as the second quarter is typically the peak of the home buying season. We continue to raise new loan rates across all products and remain focused on the risk-adjusted returns we are getting on new originations. As a result, we expect to see loan growth moderate, both in residential mortgage and and in the overall portfolio during the back half of 2023. Total deposits declined $110 million during the quarter. Interest bearing deposits grew $428 million during the period, or approximately 11%. This growth was offset by the pace of decline in our non-interest bearing DDA accounts. Non-interest bearing balances declined $538 million during the period, which is down from a $603 million decline in the first quarter. Our loan-to-deposit ratio ended the quarter at 99.2%, up from 97% at the end of the first quarter. As many investors are focused on where non-interest-bearing deposit levels will ultimately end up, we've included on slide seven a 30-plus year history of our non-interest-bearing deposit percentage. As our bank has grown and our CNI capabilities have expanded, this percentage has trended upward over time. Recently, rising rates have caused a deposit mix shift to occur, and we believe we should end the year at around 23% non-interest-bearing deposits as a percentage of total deposits, down from 28% at June 30th. This estimate assumes an additional deposit shift of approximately $800 million into interest-bearing deposits during the back half of 2023. This mix shift is reflected in the refreshed NII guidance I will provide at the end of my comments. Our investment portfolio declined modestly during the quarter, closing at $3.9 billion. During the first quarter, we chose to build cash reserves from the cash flows in our investment portfolio. Going forward, we expect to revert back to our longer-term cash targets with incremental cash flows used to reduce overnight borrowings. Putting together those balance sheet trends on slide eight, our net interest income was $213 million for the quarter, a $3 million decrease from the first quarter. Our net interest margin for the second quarter and for the month of June were both 3.40% versus 3.53% in the first quarter. Loan yields expanded 31 basis points during the period, increasing to 5.52% versus 5.21 last quarter. Cycle to date, our loan beta has been 46%. Our total cost of deposits increased 50 basis points to 132 basis points during the quarter. Cycle to date, our total deposit beta is approximately 26%. Where our through the cycle deposit beta ultimately ends up will be very closely tied to where the non-interest bearing percentage ends up landing. Based on our earlier estimate of around 23% by the end of the year, this will imply a deposit beta of approximately 40%. But we expect our loan beta to continue to drift up between now and the end of the year as well. So ultimately, we believe our ending loan beta will remain meaningfully higher than our ending deposit beta due to the asset-sensitive nature of our balance sheet. Turning to credit quality, on slide nine, our non-performing loans declined 17 million during the quarter, which led to our NPL to loans ratio improving from 80 basis points at March 31st to 70 basis points at June 30th. Overall loan delinquency improved to 105 basis points at June 30th versus 128 basis points last quarter. Despite these positive trends, our loan growth during the second quarter and modest changes to the economic outlook led to the increase in our allowance for credit losses. Our ACL as a percentage of loans increased slightly during the quarter, from 1.35% of loans at March 31st to 1.37% at quarter end. Turning to non-interest income on slide 10, wealth management revenues were $18.7 million, up from $18.1 million for the first quarter. We continue to invest in our wealth business, and it now represents almost one-third of our fee-based revenues. The market value of assets under management and administration increased $100 million to $14.3 billion at June 30th. Commercial banking fees increased significantly to $23.1 million during the quarter. Capital markets revenue was very strong, and merchant and card revenues bounce back from seasonal declines we typically see in the first quarter. SBA gains on sale were also strong during the quarter. Consumer banking fees were up modestly for the quarter, with seasonal pickups in debit and credit card revenues offset by continuing decline in overdraft fees. Mortgage banking revenues picked up from seasonal lows in the first quarter. However, application volumes are down 14% year-over-year and rate increases are beginning to influence applications and overall volumes. Moving to slide 11, non-interest expenses were $168 million in the second quarter, an $8 million increase from the first quarter. The increase in day count accounted for about one quarter of this increase. In addition, the following material items are noted. Higher salaries and benefits costs due to the April 1st merit increases as well as higher healthcare claims, as we are largely self-insured, and also higher data processing costs of $700,000 due to the timing of certain IT initiatives. On slides 12 and 13, we are continuing to provide you with expanded metrics on capital and liquidity. First, on slide 12, as of June 30th, we maintained solid cushions over the regulatory minimums for all of our regulatory capital ratios. We have also provided you with an alternative view of our regulatory ratios, including the impact of AOCI. While we do not expect banks of our size to be required to calculate our ratios this way, we believe this information may be useful to you. Our tangible common equity ratio was 7%, a quarter end, in line with last quarter. Included in tangible common equity is accumulated other comprehensive loss, on the available for sale portion of our investment portfolio and derivatives. This number totaled $312 million after tax on a total AFS portfolio of $2.6 billion. On slide 13, if we include the loss on our held to maturity investments, which is $115 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would still be 6.6% at June 30th. representing over $1.7 billion in tangible capital. On slide 14, we provided you with a comprehensive look at our liquidity profile. When combining cash, committed and available FHLB capacity, the Fed discount window, and unencumbered securities available to pledge under the Fed's bank term funding program, our committed liquidity is $8.2 billion at June 30th. In addition, we maintain over $2.5 billion in Fed funds lines with other institutions. On slide 15, we're providing you our updated guidance for 2023. Our guidance now assumes a 25 basis point Fed funds increase at the July meeting, followed by constant rates for the balance of the year. Based on this rate outlook, our 2023 guidance is as follows. We expect our net interest income on a non-FTE basis to be in the range of 830 to 840 million. We expect our provision for credit losses to be in the range of 55 to 65 million. We expect our non-interest income, excluding securities gains, to be in the range of 220 to 230 million. We expect core non-interest expenses to be in the range of 645 to $660 million for the year. This core amount excludes any special FDIC assessment, which may need to be recorded in the second half of the year if finalized during that period. And lastly, we expect our effective tax rate to be in the range of 17.5% plus or minus for the year. And with that, we'll now turn the call over to the operator for your questions.
spk10: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from Frank Chiraldi from Piper Sandler. Your line is open. Good morning.
spk08: Good morning, Frank. Just, Mark, first on the non-interest bearing by year end, the 23%, is that ultimately where you expect Fulton to sort of end up? Do you think it could continue to trend lower? And then I just, you know, it's interesting to me. It seems like with all the focus on rates over the last few months, you know, guys who wanted to shift out of non-juris sparing, um, would have, I guess there's some sort of stimulus dollars that are still running down and that's where they're running out of. But, um, just, are you starting to see a slowdown in, in that mixed shift as well that gives you comfort on, on your year end expectations?
spk04: Yeah, Frank. So, um, so ultimately where, where that number ends up beyond, you know, 2023, we'll obviously be coming out with 24 guidance, you know, um, you know, at the end, at the early part of 2024, which will reflect that. You know, but the answer, you know, the second part of your question, you know, I would tell you that in the months of February, March, and April, in each of those months, you know, our total cost of deposits increased about 20 basis points on average per month. In May and June, you know, that average fell to about 10 basis points. You know, so we're still seeing an increase, you know, month to month, But we're starting to see that lessen a little bit. Now, that can still change, obviously, but that certainly influenced some of the guidance that we're giving today.
spk08: Gotcha. And from here, do you think, is it more of just kind of running down balances as opposed to shifting balances into interest-bearing balances when these clients are thinking about moving money around?
spk04: I mean, again, we're still seeing some shift, you know, out of non-interest bearing. I mean, obviously, we're giving guidance that, you know, still thinks we're going to have, you know, $800 million of that shift in the back half of the year. But that's down, you know, from what we saw in the first half. Okay.
spk08: And then just on the capital, just given all the focus, you know, the news flow about the New capital rules, obviously, for a larger contingent of banks than Fulton. Just curious your thoughts on what the right sort of capital ratios are, either CET1 or TCE, and what sort of ratios you guys target here. Thanks.
spk04: Yeah, Frank, in terms of what we target, we look at the regulatory minimums and then by ratio, depending on that ratio, our house minimums are going to be 100 to 150 basis points above that. But where we sit right now, particularly on all of those regulatory ratios, which is our primary focus, on those we have comfortable cushions even to our house minimums. Okay, I guess that's another way.
spk08: Do you expect these ratios to build in the near term? Not necessarily. Any color there, you know, tied into the earnings guide?
spk05: Frank, I think, you know, we would see them build over time with earnings, with the earnings stream. Really, the question is then how would we deploy that capital and, you know, our capital strategy is to support organic growth. first and then use for M&A or buybacks, you know, as we move forward. So, we feel comfortable with our current capital levels, and as we generate more capital, we'll look to deploy that in those ways. Okay. All right. Great. Thank you.
spk10: One moment for our next question. Our next question comes from the line of Daniel Tamayo from Raymond James. Your line is open.
spk01: Hey, good morning, guys. Thanks for taking my question. Hey, Danny. Maybe we just start out just a clarification on the loan growth guidance. I think, Mark, you talked about that moderating. I'm assuming you're talking about from the prior guidance of the 4% to 6% and not moderating relative to the strong growth in the second quarter?
spk04: Well, no. What I'm referring to is the strong growth that we've seen really in the first half of the year relative to what a typical year would be. So my comments on moderation is from the pace that we've seen the first half of the year.
spk01: Okay. So how should we think about those comments? I mean, if you could I mean, is that mid-single digit then still kind of in line with what you're thinking about for the back half of the year?
spk05: Yeah, Danny, we would – those targets in the 4% to 6% range as we look forward. You know, we had very strong loan growth in the first quarter. We had good growth again in the second quarter. You know, as we're focused on appropriate risk-adjusted returns on loan pricing and
spk01: um we think we'll moderate from there but all our long-term targets and and full year um you know we expect us to still be in that four or six range okay um and then in terms of of funding that growth um you mentioned your loan deposit ratio is kind of in the middle of your of the range uh that you're comfortable with now are does that should we infer that you could continue to let that drift up if you do lose some deposits, or do you think you would be inclined to fund it with brokered or something kind of on the higher end of funding costs if you want to maintain that around 99%?
spk05: Yeah, our goal is to grow the deposit base. As we move forward, we reference, we're growing accounts. We're growing deposit accounts specifically. We're fighting that trend of average account balances coming down. So, we are very focused on growing deposits in a measured pace with loans. If that doesn't happen, we feel we have access to other sources to continue to support loan growth. is what our long-term strategy had been is to grow loans and deposits in a more equal basis as we get back to and are now at historical kind of fully loaned position.
spk01: Okay. Yeah, that makes sense. But as we think about kind of the rest of the year and in terms of the net interest income guidance, you're That assumes you talked about with the non-interest bearing, but that's kind of a mix shift of what's already there. If you're growing loans, that assumes you're funding it with what kind of deposit? I mean, are you assuming when you're in terms of rates?
spk05: Yeah, so, I mean, we want to grow non-interest-bearing deposits. It's really difficult in this environment. You know, so then we would look to grow through deposit acquisition of new customers, which are typically promotional rate. And then we have plenty of capacity on broker deposits from there. So we think we have sources, you know, or organic growth. We've done a good job over time and we really want to grow customer by customer. We recognize in this environment it's tough to grow deposits, so we're making sure we have capacity to continue to support loan customers if we're getting the appropriate risk-adjusted return.
spk01: Understood. Okay. Well, I appreciate you giving me some color and digging in there on the funding side. Thanks, guys. Thanks, Danny. You bet, Danny.
spk02: One moment for our next question.
spk10: And our next question will come from the line of Chris McGrady from KBW. Your line is open.
spk06: Oh, great. Thanks. Mark, just a clarification on the 40% beta. That's interest-bearing deposit beta, full cycle?
spk04: That is the total deposit beta. Okay.
spk06: Total deposit beta. Okay. And then, thank you. And then second, on costs, obviously the quarter was a touch heavy, but you said it was in line with kind of your expectations. Is there anything beyond what you've given us in your guidance that you're considering if the environment, if the revenue environment stays like it is, a little bit challenging, anything you can pull on the expense lever in the back half early next year?
spk05: Yeah, Chris, it's Curt. You know, we are committed to managing expenses appropriately, you know, as we see the back half of the year unfold with growth and revenue. You know, we'll take the appropriate cost actions that we need to. We're committed to being within target range on expenses. And, you know, we'll manage those as we have in the past to make sure we have an appropriate cost structure.
spk09: Got it. Thank you very much.
spk02: One moment for our next question. Our next question will come from the line of David Bishop from Hove Group.
spk10: Your line is open.
spk07: Yeah, good morning, gentlemen. Hey, Mark. I wasn't sure if I heard you correct, but during the preamble, in terms of your outlook for maintaining cash and investments, I understand that you think cash has sort of reached a floor here. You're looking to build to liquidity or just curious what our expectations should be for for cash and equivalents and investments from here?
spk04: Yeah, we had sat on some excess cash, you know, post-March 8th, you know, for about a two, two and a half month stretch. You know, and then as I think, you know, as we felt like we had gotten past the liquidity crisis in the industry, we reverted back to our longer term, you know, kind of cash targets. And with respect to the investment portfolio, we've always targeted that to be around 15% of assets. And so, you know, you'll see that, you know, continue to grow, you know, in step with the total balance sheet growth.
spk07: Got it. And then, you know, I appreciate the disclosures on the office theory portfolio. Just curious, maybe turning the prism. You know, with interest rates rising here, are you seeing any sort of degradation yet on the consumer side of the house from a credit quality perspective?
spk05: Dave, we are not credit metrics remain stable across the board. We're doing a lot of work on interest rate sensitivity at a customer level. But, you know, we see pretty stable credit scores. Delinquency is good. You know, those leading indicators continue to be positive.
spk07: Got it. And final question, I think you mentioned, you know, maintaining the risk, adjusted pricing. Just curious maybe what you're able to onboard new commercial loans at across your markets during the quarter. Thanks.
spk04: Sure. Yeah, commercial loans will vary a little bit, obviously, by product. But in general, in the second quarter, you know, new money came on generally between low to mid-sevenths.
spk02: Great. Appreciate it, Keller. You bet. One moment for our next question.
spk10: Our next question comes from Fetty Strickland from Janie Montgomery. Your line is open.
spk09: Thanks. Good morning. Hey, Fetty.
spk05: Hey, Fetty. Just on expenses, it sounds like we should expect quarterly expenses to decline in the third, fourth quarter, just given your guidance. Can you walk us through some of the drivers and timing there just over the next couple quarters?
spk04: Yeah, so the drivers there is, you know, there were a couple of items in the second quarter, you know, that we would deem to be things that will not recur, which probably in the aggregate totaled about $2 million. But you're correct if you take, you know, the guide and look to where we are mid-year, you know, we would expect over the next couple quarters for expenses to come down a little bit. You know, there's also, you know, just some normal things with – real estate and otherwise, which should, you know, back off a little bit in the second half of the year.
spk05: Got it. That's helpful. And then switching gears to the margin, you know, I know you haven't provided 2024 guidance yet, but is it reasonable to see the margin bottoming towards the end of this year and then potentially expand into early 2024 just as loans reprice and earning assets potentially remix? with the assumption that the Fed stops hiking this year after one or two more hikes?
spk04: Well, yeah, I was going to start my comments with what you just said at the end. I mean, I think depending, you know, if we all had that crystal ball to know when rates will stop and when we'll start to actually, then how long will the pause be before we start to see the expected declines? You know, but I think if that scenario plays out the way you're saying it, Yeah, I think it's reasonable to assume that somewhere in the first half of 24 is where you see things bottom out.
spk05: Understood. And just one last question for me. Kind of on that same discussion point, as we potentially near the end of the hiking cycle, have you considered restructuring the securities portfolio for additional interest income and potentially taking some unrealized losses, I guess realizing them, And can you remind us the duration of the securities portfolio today?
spk04: Yeah, so we have looked at those, you know, having found, you know, one that was compelling enough to actually execute on. But, I mean, we consider, you know, those kind of transactions. We've certainly seen some other institutions do it. You know, for us, the total duration of the portfolios, you know, between, it's around five and a half to six years. You know, we're a little bit longer there because, you know, we have so much commercial loans that are short. So from a, you know, just an interest rate risk perspective, we've taken a little bit more duration in the investment portfolio to balance out our overall interest rates.
spk05: Got it. Thanks for taking my questions.
spk04: You bet.
spk00: Thanks.
spk02: One moment for our next question. Our next question is from T.A.
spk10: Davidson. Your line is open. Hey, good morning.
spk09: Just following up on a securities portfolio. Given that duration, how much of that AOCI, and given if rates stayed, we just had one more hike and rates were then paused, how fast would that AOCI build back by the end of 2024?
spk04: You know, a lot of that, Manuel, really depends on, you know, do you think do rates pause and the curve stays inverted? You know, or do rates pause? I mean, because it's really what happens in kind of that intermediate portion of the curve, you know, is going to have the most influence over that AOSVI level. You know, but, I mean, assuming it stays exactly where it is, you know, if you just look at kind of the, you know, what that total number is today of, you know, $320-some-odd million, you know, that would bleed out, you know, over that duration, you know, and revert back to par.
spk09: Okay, that's helpful. Can you remind me on some of the seasonality you see in deposit flows coming into the back half of the year?
spk04: Yeah, sure. Typically, what we see in the third quarter, you know, that's our high watermark because of our municipal book. And if we look back over the last five years, we've typically seen between a three and a $500 million increase in the third quarter. I would expect this year for that to be at the lower end of that range versus the higher end of that range. And then we typically see from then the third quarter to the fourth quarter, most of that money flow out. We typically see the same kind of numbers between 275 and call it $350 million of outflows of what we've experienced.
spk09: You're having success in growing a number of accounts. Have you kind of looked at where flows have gone? Are you seeing just a lot of net increases and you're really not seeing anyone exit? Is it just more people using their funds? Do you feel confident that your deposit flows are staying and not necessarily exiting the bank?
spk05: Well, I mean, we're growing net new accounts. I mean, we have flows and accounts that close or really the average balance comes down. So what we're seeing more is the impact of average balance as customers migrate internally to higher yielding products. We see some outflows and we are aggressive in all of our markets. to to grow new households and bring new deposits in into the organization you know we have a very low average account balance you know it's small business and consumer and and we're consistently adding accounts but fighting those headwinds of average balance declines then you know really aggressive pricing strategies in the market that we won't follow. You know, we do have some attrition based on that. And that's why we're focused on the net growth in accounts. You know, because over time, that's what we really need to be winning.
spk09: Just a follow-up on loan growth and pricing. Are you seeing... How fast do you see demand come down? And, you know, you're being more selective on pricing and kind of pricing up. Are you seeing uptake? Are you getting the growth you want to see on that commercial side at the pricing you want?
spk05: Yeah, where we're seeing the biggest impact would be residential mortgage. I mean, it's just much more of a rate-sensitive market. So as you adjust those, that's where we would see growth moderating the most. based on actions we took in the first and second quarter. You know, there's a long pull-through rate until those actually hit the balance sheet. So that's where you'll see the most volatility from first half to second half in loan growth. On commercial loan growth, we think we can continue to generate steady organic originations even at higher yields as we continue to support customers, continue to support all segments of within the marketplace, we think we can continue to generate steady, reasonable, organic growth going forward in commercial.
spk09: And just to follow up on your comment that the loan beta is around 46%, do you see that staying constant with each rate hike, or do you actually see that creeping up towards the 50% level as old loans reprice higher?
spk04: Yeah, exactly. You know, we'd expect to see that creep up a little bit higher, and that was, you know, the point of my earlier comment that, you know, by the end of the cycle, you know, why we'd still expect to see that loan beta higher than the deposit.
spk09: I appreciate it. Thank you, guys.
spk04: You bet. You bet.
spk02: One moment for our next question.
spk10: And our next question will come from Matthew Breeze from Stevens. Your line is open.
spk06: Hey, good morning. Hey, Matt. Hey, Matt. Good morning.
spk05: Just curious, on the margin, could you give me some idea for how the margin progressed throughout the quarter? And, you know, for the end of June or for the month of the June, you know, how did that compare to the full quarter?
spk04: Yeah, so the full quarter average, you know, we went from 353 in the first quarter to 340 in the second quarter. As I noted earlier, we saw a 20 basis point increase in our cost of deposits in the month of April. Some of that was really just kind of full quarter impact of some of the broker deposits that we put on in the first quarter. So then we saw in the months of May and June, we saw that cost of deposits increase only 12 basis points and eight basis points. So our progression on margin then was that we ended the month of June at 340, you know, which was the average for the quarter as well. You know, so we did not finish the month of June lower than the average for the quarter.
spk06: Understood. Okay.
spk05: And then maybe thinking about incremental loan yields today in the low to mid-seven range, you know, there's one more Fed hike, it appears to be, Beyond that last Fed hike, how should we be thinking about the quarterly increase in loan yields in a pause scenario versus what we've seen over the past handful of quarters?
spk04: Can you just repeat that again? I just want to make sure I got it right.
spk05: Once the Fed is done in the ensuing quarters, how should we be thinking about the ramp in average loan yields? To what extent will they continue to go higher?
spk04: Yeah, we have, as we look to, you know, loans that mature and come off, I mean, we are still seeing, you know, while that's starting to narrow a little bit, you know, we still see new loans, you know, repriced higher, you know, for the past several quarters on both the consumer side and the commercial side.
spk05: Okay. I think going back to the flat NIM, you know, end of June at 340, you know, just thinking about the the NII guide for the year, you know, it implies that there's a ramp down in quarterly NII towards, you know, call it 200 to 205 million. Where do you see that bottoming? When do you see that bottoming? And do you think you can hold, you know, 200 million in NII per quarter, you know, through the end of the year, maybe even in the beginning of 2024?
spk04: Yeah, yeah. And again, you know, really, I feel like such a broken record on this, Matt. It really comes back to, you know, where that non-interest-bearing percentage ultimately ends up. And, you know, so we feel comfortable with the guide that we're giving for the balance of the year. We're going to be tracking that really closely here over the third quarter, you know, and then be able to kind of, you know, revise again for the final quarter of the year. And then we're going to track the fourth quarter really closely to be able to give our guides for 2024. You know, but, you know, it appears from, you know, the runoff, which was, you know, over 1.3 billion, you know, or, you know, 1.2 billion in non-interfering declines in the first half of the year, you know, it appears that that's starting to slow, you know, but does that slow, you know, to a nominal number by the end of the year, or, you know, there's going to be some trickle into next year remains to be seen. You know, the other factor in your question is, you know, does the Fed, you know, truly pause, you know, after, you know, one or two more rate increases? And then how long is the pause until we start to see the rate decline?
spk05: Okay. You know, switching to commercial swap fees, you know, very strong this quarter, strongest we've seen in some time. One, how sustainable is that? And two, what caused the ramp in commercial swap fees? Just curious what was behind it. Yeah, Matt, they're predominantly tied to originations, and they really depend on the mix of originations. When you get some larger C&I loans or CRE loans, they typically are swapped, and they really drive the numbers. So that was timing to really tie to originations in the second quarter. So we do see that moderating, but we feel we can have that land in more historical levels. So we probably will see that come off-linked quarter, but we still have a good pipeline and would expect good performance, maybe not great performance in third, fourth quarter. For the full year, we're expecting to hit our targets and have that be a meaningful line item for us. Okay. Bigger picture, not that it applies... To you, but I just wanted your thoughts on it. In late June, there was joint interagency guidance from the FDIC, the Fed, the OCC on prudent commercial real estate loan accommodations and workouts. And I guess I wanted your perspective on how this plays out from a practical standpoint. What does it look like in terms of how you help customers? What are the expected tools that you can use? And how will these accommodations and workouts be disclosed if and when they occur? Yeah, I think there's really a lot more to learn there on what we could do that would be different than historical standards. I mean, we work with borrowers when the borrowers work with us over time, and we try to bridge to the best individual loan resolution for the bank and the customer. So we don't really anticipate that that would change our workout strategy or customer strategy. But if there are new tools or new ways that we can look at it based on regulatory standards, we'll certainly look at that and see how it impacts our strategy. Do you expect in those cases where you do help somebody out beyond kind of what's allowable by the market that these loans will be disclosed? We certainly will disclose them if we have to. Again, it's as these new rules would be developed or any changes would be developed, how that would impact disclosures of accommodations. You go back to during the COVID pandemic response where we were granted the TDR changes and the ability to do deferrals. I think that had a really, really positive effect. overall on the marketplace, and it was a regulatory allowance that made sense. We'll see how these rules play out. But in that event, we were very transparent and disclosed exactly what deferrals we had done, how we're thinking about that. As these rules would play out, we would do the same thing. Okay. Last one for me, just in terms of M&A, obviously multiples across the industry are depressed, but just wanted to get a sense for if there are any conversations that are ongoing, whether or not conversation levels have increased and, you know, how you think about M&A in this type of environment. That's all I had. Thank you. Yeah, Matt. And so we have M&A opportunities that we're always looking at. So we do think there will be opportunities for us in the marketplace. There are certainly headwinds right now based on stock price, based on the marks, that we would need to take on loan book and investment book to make those happen. I guess where we are right now is as the market stabilized, we would certainly engage in those discussions. And we want to make sure we're positioned to take advantage of opportunities that come up in this more challenging time. We would, as you know, be very prudent and thorough on our credit book review in this environment and just the overall analysis of a deal. But we feel we will have opportunities and we're working hard to make sure we're positioned to take advantage of any of those opportunities that make sense for us.
spk02: Thank you. One moment for our next question. Once again, one moment for our next question.
spk10: All right. It looks like there's no more questions in the queue. I'd like to turn the call back over to Kirk Myers for closing remarks.
spk05: Well, thank you again for joining us today. We hope you'll be able to be with us when we discuss third quarter results in October. Thanks, everyone.
spk10: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
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