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spk01: good morning and welcome to the fnb corporation second quarter 2024 earnings call all participants will be in listen only mode should you need assistance please signal a conference specialist by pressing star then zero on your telephone keypad after today's presentation there will be an opportunity to ask questions to ask a question you may press star then one on your telephone keypad to withdraw your question please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.
spk12: Welcome to our earnings call. This conference call of FMB Corporation and the reports it files with the Securities and Exchange Commission often contain overlooking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not an alternative for a reported financial results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly preparable financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Thursday, July 25th And the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince Lee, Chairman, President, and CEO.
spk06: Thank you, and welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. F&B reported solid second quarter results with net income available to common shareholders of $123 million. or $0.34 per diluted common share. Pre-provision net revenue increased over 4% late quarter, supported by our well-managed expenses and continued strong non-interest income levels. Tangible book value per share grew 12% year-over-year to reach a record high at $9.98. The second quarter's performance was driven by our long-term strategic goals to gain market share through loan and deposit growth diversify revenue streams, and manage risk. As we have previously mentioned, F&B is well positioned to steadily increase market share in this volatile environment given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidance. F&B reported link quarter loan and deposit growth at 3.6% and 1% respectively, demonstrating our ability to execute on this strategy. Both of these results exceeded the published H-8 data this quarter for both large and small institutions. The loan and deposit growth benefited from our investments in our digital e-store, with total interactions increasing 22% year-over-year. The increase in commercial loans was driven by activity across the footprint, highlighted by double-digit year-over-year growth across the Carolinas. Our Pittsburgh and Cleveland Region's commercial equipment finance business also posted strong contributions. An increase in FMB's commercial real estate portfolio included fundings on previously originated projects. On a spot basis, consumer loans grew 5% link quarter, 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 longstanding strategy of serving the purchase market. This activity ultimately leads to increased households and deposit share growth. Deposits benefited from seasonal inflows as well as new production that was generated through targeted deposit initiatives and promotions. Non-interest-bearing deposits ended the quarter over $10 billion, an annualized increase of 3.2% in the prior quarter. The mix of non-interest-bearing deposits to total deposits ended the quarter at 29%, a consistent level since December of 2023. As we have frequently discussed, our strategy has been to price our deposits to protect our peer-leading deposit data while supporting our client base. Our loan-to-deposit ratio currently equals 96%. We are 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 toward historical levels. Another longer-term strategic focus has been diversifying our revenue streams. Achieving stable non-interest income at near record levels of $88 million in both the first and second quarters, highlights the strength and range of our business model and FMV's robust suite of products and services. For the first half of the year, non-interest income totaled $176 million, a 10% increase over the same period in 2023. E-income growth was led by our mortgage banking operations growing over 50%, strong wealth management revenue, and treasury management fee income growth. our success growing non-interest income is expected to continue as we enter the second half of the year. F&B's balance sheet strategy is 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 rate. Beyond interest rate risk, FMV's comprehensive approach to credit risk management has led to strong and stable asset quality and consistent 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. I will now pass the call over to Gary to provide further detail on the overall asset quality. Gary?
spk10: Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Federal delinquency finished the quarter at 63 basis points, down one dip from the prior quarter. NPLs and OREO remained unchanged, ending at 33 basis points, a multi-year low with net charge-offs at nine basis points. reflecting solid performance in the current economic environment. Total provision expense for the quarter stood at $20.2 million, with $12.8 million utilized to support loan growth and the remainder providing for charge-offs. Our ended funding reserve stands at $419 million, up $12.5 million in the quarter, ending at 1.24%. When including acquired unamortized loan discounts, our reserve stands at 1.35%, and our NPL coverage position remains 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, and market conditions for the various property types across our footprint. At quarter end, delinquency and NPLs for the non-owner occupied CRE portfolio improved slightly and continue 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 of delinquency totaled four basis points with no NPLs, largely in line with the prior quarter. We maintain a strong focus on credit risk management and our portfolio continues to perform well throughout numerous economic cycles. Quarterly, we perform specific in-depth reviews of our portfolios along with a full portfolio stress test. Our stress testing results for this quarter have again shown 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 in a severe economic downturn. Again, confirming that our well-balanced loan portfolio enables us to withstand various stressed 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 staff complements our consistent underwriting and core credit philosophy. Our experienced banking teams and tenured leadership have positioned the company well to continue to achieve prudent loan growth while proactively managing credit risk through many economic cycles. I'll now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk09: Thanks, Jerry, and good morning. Today I will focus on the second quarter's financial results and walk through our third quarter and full year guidance. As Vince mentioned, total loans and leases ended the quarter 33.8 billion, a linked quarter increase of 1.2 billion, or 3.6%. This growth included 633 million in consumer loans driven by the seasonal peak for residential mortgage originations, and $540 million in commercial loans and leases, reflecting healthy activity in CNI and equipment finance, as well as additional growth from fundings on previously committed commercial real estate projects. Total deposits ended the quarter at $35 billion, an increase of $259 million linked quarter, including growth in certificates of deposits of $202 million and non-interest-bearing deposits of $80 million as the seasonal build in public funds deposits has begun. The loan-to-deposit ratio increased to 96% at June 30th compared to 94% at March 31st. 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 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 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 five-month CD consumer money market promotion. Given the short duration of these promotions, we should be able to quickly reprice them lower when rates fall. Over the past year, our deposit growth and mix has outperformed the industry, and we believe that will continue. This past quarter, we largely utilized short-term borrowings to fund the robust loan growth, with total borrowings increasing $1.4 billion. When rates start to decrease, the cost of these borrowings will move down quickly. As Vince mentioned, over the last several quarters, we have been strategically positioning our balance sheet to be more neutral to benefit from lower interest rates. We have $4.5 billion of short-term or floating rate borrowings, around $4 billion of non-maturity deposits that are currently priced at or above 4.75%, a $6.9 billion CD portfolio with a nine-month duration, And lastly, as I mentioned on last quarter's earnings call, we have around $1 billion of swaps that 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 loan repayments at an average rate of 4.5% in the next 12 months. In total, we have over $16 billion of liabilities and swaps, nearly $3.5 billion of securities cash flows and fixed-rate loan repayments that should provide significant benefit and protection in a falling-rate environment compared to the $16 billion of loans repriced within three months. The second quarter's net interest margin was $3.09, a nine-basis-point decrease largely due to the increased short-term borrowings, driving a 13-basis-point increase in the total cost of funds This was partially offset by a three basis point increase in the total yield on the earning assets for 543. Our spot deposit cost ended the quarter at 213, leading to a total cumulative spot deposit beta of 38% since the current interest rate increases began in March of 2022, positioning us well against our competitors. Net interest income totaled 315.9 million, $3.1 million decrease from the prior quarter as the higher cost of funds was partially offset by higher loan balances with 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 and should see modest sequential improvement in the third and fourth quarter. Turning to non-interest income and expense, non-interest income totaled $87.9 million, consistent with the prior quarter's 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 sole loan volume and net fair value adjustments from pipeline hedging activity. Operating non-interest expenses were well managed and totaled $225.8 million, an $8.3 million decrease from the prior quarter after adjusting for $0.8 million of significant items in the current quarter and $3 million last quarter. The largest driver for the decline was 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 pure leading level, coming in at 54.4% in the second quarter. F&B's capital position remained strong as we were able to support robust loan growth and maintain the tangible common equity ratio near 8% and CET1 ratio at 10.2%, both of which remain above our stated operating levels. Tangible book value for common share was $9.88 at June 30th, an increase of $1.09 or 12.4% compared to June 30th of 2023. AOCI reduced tangible book value for common share by $0.67 as of quarter end compared to $0.99 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. loans are expected to grow mid-single digits on a full-year basis. Full deposits are expected to grow low single digits on a year-over-year basis. Our mix of non-interest-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 $1.27 and $1.29 billion, assuming one 25 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 and 325 million. Given the strength of our non-interest income generation in the first half of the year, we have increased our full-year guide to be between 350 and 355 million. Third quarter non-interest income is expected to be between 85 and 90 million. We now anticipate the full-year guidance for non-interest expense to be between $900 and $915 million due to production-related compensation given the strong fee income results. Third quarter non-interest expense is expected to be between $220 and $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.
spk06: Thank you, Vince. This year celebrates our 160th anniversary as a nationally chartered bank, obtained through the National Banking Act in 1864. Through 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 continue to reflect those efforts with a resilient balance sheet, strong capital generation, ample liquidity, and linked quarter growth in pre-provisioned net revenue. We consistently receive national recognition that affirms our competitive advantage, with prominent publications such as Forbes ranking F&B one of America's best banks, and naming us to its global 2,000 listed companies based on sales, profit, assets, and market value. Our strategic emphasis on innovation is integral to our success, and we continue to earn national attention for digital engagement and leadership. Most recently, F&B's eStore won Best Digital Initiative at the 2024 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 Initiative, FMV was honored among the nation's top five largest financial institutions as a finalist for Best Use of Technology and Consumer Banking, Best User or Customer Experience Initiative, and Top Innovation. We also continue to earn awards for our commitment to our employees To enable our success, during the second quarter, we extended the long list of top workplace honors we received nationally in the financial services industry and throughout our footprint with specific awards for culture, excellence, and leadership. As we reflect on a solid quarter, I want to thank our team for their many contributions. We appreciate your dedication. By 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.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, Please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Tomeo with Raymond James. Please go ahead.
spk00: Good morning, guys. Thank you for taking my questions. Maybe starting on the balance sheet side, you talked about a slowing of loan growth in the back half of the year relative to what was a pretty strong quarter in the second quarter. 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 back half 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.
spk06: I think a couple of things. First of all, the mortgage growth is seasonal. So we've already started to see, you know, as we move into the third quarter, we've started to see lower locks in our pipeline. So, you know, we expect that to come down fairly substantially. So less big foot 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. You know, we do, you know, quite a bit where we do the construction financing and it's taken out by some form down the road. So those fund-ups occur in natural funding as we move through the construction period. So that presented growth this quarter. And then we had some pretty robust growth in equipment finance. We've been doing pretty well there with leases pretty much across the footprint. And there were some renewable energy deals that closed I think in the last quarter of last year, the balance is there. I think we've exceeded a billion dollars in balances in that book of business. So it's grown immensely over time and continues to grow. CNI has contributed. There was some significant growth in the Carolinas. Pittsburgh, Cleveland contributed. So it was really coming from a bunch of areas. fairly robust. In certain areas, it appears we've been taking share from others. So I think the disruption that occurred really kind of mixed it up with the customer base and gave us an opportunity to get out and catch new transactions, which I think is very positive. The growth was higher than I expected, but I think it's OK, because it positions us well moving into 25, given how we're shifting. a more liability-sensitive balance sheet, then putting those assets on really sets us up for 25 from an earnings perspective if we continue to generate deposits. So I think that, you know, on the loan side, that's why we're guiding. Our guidance hasn't changed. You know, we're expecting to produce the same level that we forecasted at the beginning of the year, but it's a little lumpy. And, you know, I'll tell you, pipelines are down. You know, we've looked quite a bit. this quarter. So we're moving into the next quarter down about 10% with commercial prep funds. And it's still a little sluggish on the consumer side. So we haven't seen as much. We've seen more mortgage, first mortgage volume. There was much less home equity HELOC volume. So they kind of offset each other. And we're not expecting that to come back this year. So that's how the book is performed. The only other category I think I didn't speak about was indirect auto. I don't know, Gary, what your thoughts are there.
spk10: We had a solid growth quarter in Q2, which is, again, seasonal. It's 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 FICO band is really working well for us. But again, that's seasonal. We're going to pick our spots and manage that through those seasonal periods. So we expect that to come down as we move toward the latter half of the year as well.
spk06: And then from a funding perspective, if we're able to execute our plan, we have seen growth in our treasury management pipeline, so we're seeing some very large know good opportunities for where 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 what we you know can do that so the upside in If you look at the demand deposit base, it's been stable. We've been at 29% for several quarters. We had growth in demand deposits, which you're not seeing across the board. Some pretty decent growth in certain categories when you price up 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 strategy is kind of going to overlook, you know, attracting those demand deposits as well.
spk09: Our beta performance goes to that point too, right? It's very gradually from last quarter, 36.5 to 38. So that, again, is us protecting the overall profitability.
spk06: Yeah, as you can imagine, you know, it's a challenging time to navigate. We don't want to pull back. I think, you know, a lot of competitors have shrunk their balance sheet or pulled 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 them to primary clients. I hope that helps.
spk00: Yeah, no, that's terrific. I really appreciate all that color. Maybe a quick follow-up. You touched on it at the end there on the funding side, but you also mentioned in the prepared comments about deposit initiatives in the back half of the year, too.
spk06: kind of right size the the loan deposit ratio just curious if you go into a little more detail about what you were thinking and how that could impact kind of funding costs yeah we sure we've modified the incentive plans for the consumer bank we have you know kind of a kicker for deposit growth so you know shifting the loan growth is pretty pretty minuscule in that segment so we thought hey we'll incent them to go after deposits uh we have a number of calling treasury management opportunities. We've won 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've proven that we're capable of handling those relationships throughout a cycle and without any issues. I think that the people are very focused on it. Our teams are focused on it. As long as we manage them in that direction and focus mainly on our funding, that's going to pay off. The other thing is the e-store, the investment in digital and additional technology. The interactions are up 22%. We're starting to get some traction there on the consumer side. I don't want to get into excruciating detail, but there are things that we do from an incentive compensation perspective. And then 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 physician's book and the jumbo mortgage segment. And we're partnering with Wealth to do some things. And brokerage, we're working on a money market product that we'll work hand-in-hand with our brokerage sales. which should help. So there's a bunch of things going on, and I think that it's going to take a little bit of time to get some lift out of it, but certainly as we move into the second half of this year and into 25, we should see the benefits and everything we need from a funding perspective.
spk00: All right. Well, terrific. Thanks for taking my questions. Okay. Thank you. Thank you.
spk01: The next question comes from Frank Chiraldi with Piper Sandler. Please go ahead.
spk08: Good morning, guys. You know, another strong fee income quarter and guide for continued strength. Just curious, bigger picture, if you could share, you know, your thoughts as you continue to grow out these businesses, where you think you can grow The fee income side of the picture, too, as a percentage of the total revenue pie. And maybe do you see any, you know, fee businesses in particular that you want to ramp up or you need to ramp up to get there?
spk06: Yeah, we, you know, I think long-term, you know, this is long-term. We've talked about this in the past. We split information in our deck. You know, we targeted at 30% of total revenue. We almost got there. But then, you know, the world changed in terms of, you know, net interest income. So it diluted that effort. But I think, you know, that's really the long-term target. We want to continue to build out those fee-based businesses and, you know, make sure that it starts to consume more of the total revenue. You know, that 30% target is kind of our target. You know, that's not something we're going to get to immediately, but, you know, we strive to get there. I think we've had great success in capital markets. You know, we've done well building out our derivatives platform, our syndications platform. You know, we have a debt capital markets group that we formed. It's a bond record for debt offerings. You know, I think there's opportunity for us to do things from an advisory perspective. I think there's opportunity for us to continue to focus on building out public finance. There are things that, you know, I think in the future businesses, on businesses that will contribute and help continue to diversify that fee income base. Given our size and the span of the company, the markets that we compete in, I think we have a terrific opportunity to capitalize on those segments. And I think once we move into our building, we build a trading floor so that we can bring all 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 only scratched the surface in terms of building out our teams in the markets that we moved into, and they were contributing nicely. I mean, wealth has grown 10% annually every year. I think there's a tremendous upside. We've had records year after year. So building out the wealth platform continues, and building out those capabilities continues. TM, there's tremendous upside in treasury management fee income. Again, given the growth of the company, and we bought banks in the southeast that really didn't have robust treasury management offerings. So as we build out that client base on the commercial side, we will see opportunities to grow TM. In the other units, you know, mortgage is going to be, you know, cyclical and seasonal. And then you have, but I still expect mortgage to grow gradually over time as we continue to increase market share. You know, our team, they've done a terrific job. Joe Cartelion 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, you know, we've outperformed others. in the markets that we compete in, so we gain market share. I would expect us to continue to do that. And then the last piece is insurance. We have a decent insurance offering, and we have good leadership there, and we've started to focus on integrating that even further into our product offering with our commercial bankers. That seems to be going pretty well. So I think there's upside there. It's been a little stagnant, but I think the insurance market is firming, and premiums are increasing, and we're starting to pick up larger and larger clients. So in that space, there's upside. So we're pretty optimistic about those fee income categories. And I think it shows in the performance. We've consistently touted the capability and five or six years really illustrates the success we've had.
spk09: In fact, I would just comment that the percent of revenue is a function of the environment. So growing that absolute level, given all the initiatives Vince talked about, has been the key focus, and it just keeps building.
spk08: Got it. Okay. All right. I appreciate it. And then just maybe as a quick follow-up, just, you know, with some slower loan growth, relatively speaking, to the second quarter, some slower growth in the back half of the year, And with you guys already above your target capital levels, just wondering, and I know you bought back a little bit in the second corner, but would you expect buyback activity to maybe ramp up here? Or, you know, are you more price sensitive? Obviously, we've seen a recent rally in bank stocks. So just wondering how you think about buyback activity, maybe, as you see it today.
spk09: 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 that were issued earlier in the year. So, you know, $250,000 that we bought. You know, as we sit here today, you know, the focus on capital kind of building from here. At this point, we don't have any plans to repurchase shares, you know, looking at the second half of the year. I mean, that can change if the environment changes. But right now, using the capital to support the loan growth, I think the fact that we were able to support the robust loan growth that we had this quarter at capital ratios, CEQ1 hold at 10.2 and TCE ratio came down 0.1. So holding those levels of capital and supporting the loan growth, I think is kind of the best use of the capital at this point. And the buybacks will be part of our operation every year as we go forward. But as we sit here today, I think the best use is still letting that gradually build a little bit as we go through the year.
spk08: Great. Okay, thanks for the caller, guys.
spk01: The next question comes from Casey Hare with Jefferies. Please go ahead.
spk03: Great, thanks. Good morning, everyone. A couple follow-up questions on the funding strategy. So I'm just wondering, what does the guide assume in terms of the borrowings? I'm assuming that that stays there. Or is there an opportunity with these deposit initiatives to pay some of that down?
spk09: I would say that the guide basically has the interest liability position that we're entering the third quarter is what's baked into that. So the better we do on the initiatives that Vince has described, there's obviously opportunity to fund additional loan growth as well as replace some of those short-term borrowings. And I should comment, too, that the short-term borrowings are that short-term. So when the Fed does cut, the rate on those is going to come down in tandem with the rate coming down.
spk03: made a decision during the quarter given the loan growth to kind of you know forego a little bit of earnings in the short run in the second quarter but position us so that we can benefit from from the down rates as we go forward no understood okay and and it sounds like these deposit initiatives are uh you know it doesn't sound like they're cds um so just wondering you know to the extent that they're successful what what is the new money rate on these on these deposits that you hope to bring in versus the, you know, the 5% borrowing yield?
spk09: Yeah, I mean, it'll be a mix, Casey. I mean, you know, we still have some level of CDs coming in. I mean, it's definitely slow, so the kind of remixing of what it was last year, you know, if we look at the second quarter, literally we increased CDs 36 million on average a month, so where we had a high of 164 million last July, so The shifting there has definitely slowed, but customers are still grabbing those rates, right?
spk06: Yeah, our people are an incentive to originate CDs.
spk09: Right, that's a key point. I think the operating account initiatives that then talk about calling on companies, new customers to come in, bringing in their operating accounts, non-interest bearing, is obviously the key focus. So it's hard to predict with any certainty the mix, but it'll be a little bit of both. And the CD that's there, customers want to grab it before rates start to come down. So we have some attractive offerings there. I think that the importance as we move forward is just growing the total deposits. Yeah, for sure.
spk03: Okay. And just last one for me, slide 16, the balance sheet repricing. Thanks for sharing that. So the new money bond yield on the roll-off rate of 250, just curious what yield you're getting on reinvestment. And then that swap, with an 87 BIP average received rate. That billion, is that mature? Is that ratable throughout 25? Just looking for the maturity date on that.
spk09: Yeah, a couple comments on that. I think we added this content just to give everybody a little more understanding of kind of what's underneath. So if you kind of roll through the pieces, the cash flow, annual cash flow coming off at $2.50. I mean, today we're investing $4.50 to $4.75. You know, during the second quarter, you know, our guys did a great job opportunistically investing earlier in the quarter, kind of south, I mean, north of 5%.
spk06: We're speaking to page 16 of the deck. I'm sorry. No, no, no.
spk09: Good point. I do want to talk through that. And then, you know, these other pieces here would give us some flexibility as we move forward. I mean, $6.9 billion of time deposits, you know, way to have a maturity of nine months. And the CD promotions we've had over the last year, you know, seven months, 13 months, today our best rate is on a five month. So the idea is that when the Fed does start to move, we have the ability to mature and we can kind of reprice those. So that's an important point. We have another $4 billion in non-maturity deposits with rates above $4.75 billion. Those are very repricable. Again, once the Fed moves, and particularly if the Fed is expected to continue to move after that first move, so that gives us some flexibility. The $4.5 billion of short-term or floating rate borrowings, again, those will just reprice down. So that's another lever for us. And then the billion of swaps at the bottom there, Casey, is really, they're going to mature $2.50 a quarter next year. 87 basis points is what we're receiving today. I mean, that's a negative carry today of $10 to $11 million a quarter. And that's going to start to go away in January.
spk03: Great. Thanks, guys.
spk01: The next question comes from Russell Gunther with Stevens. Please go ahead.
spk07: Hey, good morning, guys. Good morning, Russell. Maybe just follow up on the discussion we were just having. Given your move toward neutral and some of the balance sheet repricing we just discussed, Is an initial Fed cut still a negative to the NIM as deposit cost lags, or can some of that fixed repricing dynamic overcome a headwind from an initial step down?
spk05: Well, both, Chris. Yeah, I think it depends on kind of what the expectation is for cuts kind of after that first cut, as Vince kind of talked about. If, you know, that – Down 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's some timing constraints with how fast we can reprice deposits. You know, if there is, you know, several more cuts baked into the curve, and that's kind of expected on the client side, that gives us a lot more cover to act more aggressively. And hopefully, you know, we can capture some of that downside beta a little bit quicker than we think here.
spk07: Okay, got it. Thanks, Chris. And then just could you guys talk about deposit pricing competition in your markets just broadly? Getting some, I don't know, 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 thought would be helpful in terms of where you think deposit costs are headed over the next couple quarters.
spk06: I think that many of our competitors have kind of shifted. Once they panicked and priced up deposits to basically create liquidity, they have backed off. So I think a lot of the larger competitors have backed off a little bit. So if you look at the promotional pricing that's out there, you know, you're going to see 25 to 50 basis point reduction versus what was running in the, you know, the heat, I call it the micro liquidity crisis. But I think, you know, that's why you're getting mixed signals. I think it's different at each institution. And, you know, then all of a sudden you'll see somebody emerge and they'll have a, you know, a really aggressive raise. So I think they've moved, people have generally moved, companies have generally moved back to a strategy that we had where they were selectively pricing our products and maybe doing a more quiet promotional pricing versus, you know, what's on their website. So you're going to hear a mix of that. I mean, it's going to be all over the place. So I would say it's less competitive than it was, but in spots. there's 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, you know, just in the surveys that we do, we do a lot of work on monitoring who's pricing what. You know, we've seen a pullback in the stated pricing, the promotional pricing that's out there. many of our competitors. So it's come down. But then, like I said, every once in a while somebody emerges with a really aggressive rate. But the term has come in. A lot of the competitors are doing what we're doing. They're shortening the duration of the time deposit portfolio by putting out a more aggressive CD that's priced shorter, five months, three months, six months. We see it all over the place, but The pricing's moved in. Anyway, that's what we're seeing.
spk09: I would just add there, too, it depends on if the bank is growing loans or not, right? So depending on who you're talking to, the banks that aren't growing loans at all, they're just managing the rates down more because they're not trying to generate deposits. With our growth and bringing in all those new customers, it's a different environment. You want the deposits. So it really depends on the market and the bank.
spk06: As I read through the earnings releases, I can see that. I can see our margin contracted because we were lending. Others have improved their margin. They've seen inflows of deposits and the pricing is all over the board. It's choppy. It's still competitive. I think people are on an individual basis.
spk09: Yeah, I would just add, too, to the margin compressions. Vince said it was down nine basis points for the quarter. But if you look at the dollars in that interest income, right, which is most critical from a bottom-line profitability standpoint, I mean, we were down $3.1 million this quarter, $5 million decline last quarter, and $6 million the quarter before. So it's kind of in line with that. And then to go forward, as I mentioned earlier, the more success we have with the deposit initiatives, and then rates come down, we can reprice all these items on line 16 that I talked about, it gives you that kind of positive momentum as you go forward.
spk07: 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, you know, poised to be flat to up on NII going forward, but a little incremental pressure overall to the guide. Would you guys consider another securities portfolio repositioning, or how does that currently sit in your – opportunity set?
spk09: Yeah, I would just say the net interest income, I mean, we expect the second quarter to be the trough and net interest income dollars. So we do expect it to move up the next couple of quarters, you know, just given all the things that we described. And then we evaluate the whole balance sheet on a regular basis. So, you know, as we said with what we did in the fourth quarter, we were very thoughtful about the size of that and, you know, the nature of the overall optimization strategy we deployed. So, We look at everything, so everything's kind of on the table from an assessment standpoint. But I think we're focused primarily on the organic growth and the loans and then all the deposit initiatives to really fund the loan growth.
spk06: It really helps us to bring those households on. I mean, that helps us in the future. It helps us generate additional business. I think we've done a pretty good job of selling to that customer base.
spk07: Understood. Okay, guys, that's it for me. Thanks very much for taking my questions. Thank you. Thanks, Russ.
spk01: The next question comes from Manuel Navas with DA Davidson. Please go ahead.
spk09: Hey, good morning. If the Fed points to kind of a continued down rate cycle, could you have upside to the high end of your NII range, or would it actually maybe exceed it? Just kind of some thoughts on that kind of variability that you kind of touched on briefly before.
spk05: Yeah, Manuel, I think, you know, like I said, our guide has one cut in it right now, and that's it for the year. If there were more, you know, kind of cuts baked into the curve, I think the upside really would show up at 25. I think that sets us up really well for what 25 could look like, especially, you know, if the curve, you know, un-inverts after, I don't know how long, it's been two years now. of inversion. So I think that would be more of a 25 impact. I'm sure it would be helpful, but like I said, there's some mechanics on the timing of when CDs mature. Some of that's locked in. So, you know, 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 better for 2025.
spk09: Yeah, our band is pretty tight, as you know, if you look at the guide for that interesting song. It's a pretty tight band there. All right. In the last three years, this third quarter has generally been a pretty good deposit growth quarter. I think you have some seasonality that you touched on in meeting flows. Can you just kind of touch on that kind of just organic, better deposit trends this quarter potential? Yeah, go ahead. I was just going to say, yeah, the normal seasonal surge that we see in deposits, particularly on the municipal side, happens kind of now through October, November time frame and That can be six to 800 million kind of peak to trough, and usually we bottom in the first quarter and then we go. So that's seasonality we expect, and that would be supplemented by the initiatives Vince talked about earlier as far as commercial and consumer deposits. Can you release where your NIM kind of ended the quarter? Sometimes you show where it's progressed monthly basis. The monthly margin, there was some noise in the last month of the quarter. It was within a basis point or two of the quarterly average. Great. Thank you.
spk06: Thank you. Thank you.
spk01: The next question comes from Kelly Mata with KBW. Please go ahead.
spk02: Hey, good morning. Thanks for the question. Go ahead. I think you've touched on it a bit, but clearly loan growth is 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 a certain region or segment of the business. Thanks.
spk06: Yeah, and we've seen some pretty decent growth coming out of the Carolinas. I think that continues to be An area with upside for us, you know, I think that we've only started to scratch the surface in terms of our calling activity there. So, you know, there's quite a bit on the table. And, you know, as we moved into South Carolina, you know, we've built out, building out Greenville and South Charleston. There's a lot of opportunity there for us, both from wealth, wealth private banking and commercial banking. So, you know, we continue to see good growth in those areas. In Charlotte, we've had some good success. You know, we've had success in the, from a deposit perspective, we've had great success in Wilmington and Greensboro. So, you know, we're pretty optimistic about the southeast. And then Pittsburgh, Pittsburgh continues to perform very well. We have a lot of upside there. We have significant share here. in the Pittsburgh market. So I think in certain business lines, we're undersized. Mortgage, I don't think we're sized appropriately given the deposit share that we have here. So there's some opportunity there for us to continue to grow in the Pittsburgh market from a consumer lending perspective. And basically from a CNI perspective, we're not penetrating in this market. So there's quite a bit to do. Cleveland was sluggish over the last few years, but I think there's upside in the Cleveland market for us in CNI. And then I mentioned equipment finance. I think equipment finance has done very well and should continue to do well as we move through this period, get through the election, because there's been kind of a holdup on some small-ticket capital spending from the CNI base. We'll see that release. as we move past November, you know, when there's more clarity on what's going to happen. I think, you know, those are the areas that I think have the most upside for us. And then on the flip side of that, you know, there's less activity going on in CRE obviously, right, because of what's happening.
spk02: Got it. That's super helpful. And then, you know, 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, especially in light of a 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.
spk06: Yeah, I think it's going to be the same answer we've given the last few boards. We're going to be opportunistic. We are focused internally. We have a number of major initiatives going on right now in building out heightened standards capabilities. We're focusing on building out the digital platform. Do you remember when you came and met with us? We had quite a bit that we were tackling. 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 grow and expand and benefit from the scale that we put on. So I would say it's the same. We'll be opportunistic and look for opportunities in market. We've been building out Virginia on a de novo basis, so we've seen a lot of branch announcements in northern Virginia. I think we have open to with that two more that are coming online in the near term. And then Richmond, we've been focusing on. So that's kind of happening organically. And then in the Carolinas, we're building out the Charlotte market, the inner city Charlotte market. Yeah, it can move largely outside of the city of Charlotte. we're looking at opportunities to go in there. So you'll see some de novo expansion in those markets, which I think, you know, Charlotte in particular should bring us some good opportunities from a consumer and small business perspective when we build out that channel.
spk02: Understood. You guys certainly have plenty of green shoots internally. Maybe last question for me, just a model refresher here. um on the expense side um you have about a seven million dollar double carry from um the excess lease expense while while you're still leasing can you remind us does that that doesn't carry through to 2025 is that correct or is there any kind of change in in plans or timing with the move to the new building
spk06: Yeah, Kelly, it's Jim Doody. That's exactly right, yeah. Once we move in in fourth quarter is our planned move-in date of 24, that double carry on the current leases that we have will end. So it's not a carry forward in 25.
spk02: Awesome. Thank you so much.
spk06: Thanks, Kelly. Thank you, Kelly.
spk01: The next question comes from Brian Martin with Jannie. Please go ahead.
spk11: Hey, good morning, guys. That expense reduction, can you remind us what that is on the building, on the property?
spk06: It's basically the timing of our move. We lease a number of locations here because we have a lot of people spread across five locations here on the North Shore. So it was the timing, it's the rent expense that started on the building that started We're paying rent on all these other locations until we can ship into the building, which we're scheduled to do in November, early December this year. So the question was, what happens with that additional rent expense? It goes away. Right now, we have double expenses, right?
spk09: Brian, there's a footnote on the slide 20, the guidance slide that just reflects $7 million of rent expenses. And we're not actually paying.
spk06: Yeah, yeah, I got you. You know, it's, you know, we got free rent for the move, but from a GAAP accounting, we had to recognize it. Gotcha, understood.
spk11: Yeah, okay. And then just on the funding cost, can you talk about, I mean, can you give any sense on, I know you talked about the margin inflecting as far as the cost of deposits. Do those, you know, begin to plateau here? I guess they've been The rate of increase has obviously been narrowing, but just, I guess, when do you expect the deposit cost to kind of plateau?
spk09: I think it's hard to say. I mean, it's still moving up a little bit. I mentioned the CD mix shift has definitely slowed quite a bit. So if you look at total deposit costs at the end of June on a spot basis, it was 213. It was 204 in the first quarter. If you went back, it's definitely an increase that has slowed. I guess it becomes a function of what Chris was talking about earlier is if the Fed does cut and there's an expectation they're going to keep cutting, obviously that gives you more ability to lower that down. All the pieces on slide 16 that I went through, there's a lot of levers there and flexibility that, again, if the expectation is that the Fed's going to continue to cut after hopefully cutting in September, then a lot of those pieces are in play and have ability to cut.
spk06: But I would say if you look at the makeup of the deposit base, It's not going to be, I don't see pricing increasing to draw in deposits. Like I said, we've seen a number of competitors reduce their promotional pricing. So I think it's more a function of shift. So are we able to hold the demand deposits? Are we able to hold the low-cost interest checking? Are we able to hold that without migration? I think the outflows have slowed dramatically, so we should be seeing And the new initiatives beforehand. New initiatives are focused more on lower cost deposit categories. I think it should help us, but it's all a function of mix at this point.
spk09: From a beta standpoint, I guess our beta has been very strong, the 38 versus the peers. We've been a good bit better than the peers and you know, we would expect that just to gradually go up a little bit more from here, probably similar to what it did kind of first to second quarter. So just as another indicator.
spk11: Yeah. Okay. That's helpful. And then maybe just one for Gary. You know, on the credit side, the stress testing, Gary, anything, I mean, anything you're seeing from a sign of weakness or, you know, potential, you know, concerns given things sound very good and just the granularity and all the credit performance. But, you know, as you kind of do the stress test every quarter, is anything, coming up that's got you maybe more alerted to it, just paying closer attention to it?
spk10: You know, Brian, I think over the last three quarters now, and we stress test, as you know, every quarter. Over the last three quarters, we've seen improvements from a potential charge-off and loss perspective. So those updates and those reviews around the severe economy continue to show improvement. We're very, very aggressive in managing the book, as you all know. And, you know, that test that our team goes through each and every quarter is really showing positive results for us as we continue to migrate through, you know, the current economy.
spk11: Gotcha. Okay.
spk10: Yeah, that's what it is.
spk11: Sorry. Okay, I think that's really it for me. I guess maybe one last just modeling question. I think, did you guys mention that there was some impairment on the mortgage this quarter, or did I not hear that right?
spk09: No, just normal fair value marks on the overall portfolio, Brian, that's all. I mean, that swings quarter to quarter anywhere from a million one way to a million or two one way to a million or two the other way. So it was just kind of hedging the pipeline.
spk11: Yeah, okay. That's what I thought. I should make sure of that. Okay. Thank you guys for taking the questions. Everything else was answered. All right.
spk04: Thanks, Brian.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Vincent J. DeLee for any closing remarks.
spk06: Thank you. Thank you, everybody. I appreciate your interest and great questions. I hope we've answered everybody's questions. you know, we're very optimistic as we move forward. I think we had a great opportunity. As we said in the previous call, we were going to go after market share because we were in a position to do that. I think we have a great opportunity to, you know, create some pretty positive financial outcomes as we move forward and execute our plans to 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. I know a lot of you are listening. I know we all appreciate it, so thank you. Take care.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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