First Interstate BancSystem Inc
NASDAQ:FIBK
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
24.37
34.45
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Good morning, and welcome to the First Interstate Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded.
I would now like to turn the conference over to Lisa Slyter-Bray. Please go ahead, ma'am.
Thanks, Rocco. Good morning. Thank you for joining us for our second quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements and factors that could affect future results contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward-looking statements made today.
A copy of our earnings release, which contains non-GAAP financial measures is available on our Web site at fibk.com. Information regarding our use of the non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most comparable GAAP financial measure is included at the end of the earnings release for your reference.
Joining us from management this morning are Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer; along with other members of our management team.
At this time, I'll turn the call over to Kevin Riley. Kevin?
Thanks, Lisa, and good morning and thanks again to all of you for joining us on our call today. I'm going to start today by providing an overview of the major highlights for the quarter, and then I'll turn the call over to Marcy, so she can provide more details on our financials.
Folks, we had a good quarter. This was highlighted by the positive impact of our recent acquisition of Idaho Independent Bank and Community First Bank, solid growth in our non-interest income, and a higher level of loan production across most of our markets, while maintaining our net interest margin.
We generated $37.9 million in net income in the second quarter or $0.59 per share, which included $13.5 million of merger-related expenses, which had a negative impact of $0.16 per share. The integration of our two most recent acquisitions has gone incredibly well. With each acquisition, we learn new things that allow us to consistently improve our integration process. And even though we integrated two banks over the same weekend, we had a smooth transition for our new colleagues and customers. With every acquisition, we seem to improve the process, and these were easily the smoothest integrations we have ever had, and honestly, the best I've ever seen.
Over the years, both of these banks have had customers who could benefit from the product set of a larger bank. Now as part of First Interstate, we have already seen opportunities to better serve these clients. Going forward, we believe we can enhance our new colleagues' business development capabilities and our overall growth rates.
The economy in Idaho continues to be robust, and we are very excited about how our larger presence in the state will impact our overall growth profile of the bank. Further supporting our two recent acquisitions, when we look at our tangible book value dilution, after all acquisition expenses, issuing of equity, recording of goodwill and core deposit intangible, our net tangible book value dilution will be approximately $0.09 per share, resulting in about one-year payback period, which is shorter than we originally anticipated.
In terms of organic loan growth, we are pleased with the trends we saw this quarter. From an organic standpoint, our total loans increased to 7.2% at an annualized rate with nice growth across most of our footprint. This quarter, the Montana markets were solid. In the past, we have spoken about challenges we've had in our Billings market. So we're pleased to see that that has turned around this quarter. Western South Dakota is experiencing economic expansion, and we've seen solid loan growth out of that market.
More recently, Wyoming is undergoing some challenges with the pressure on the coal industry. Our decision to venture West and the diversification that has added to our geographic footprint in organic growth potential has proven to be effective. Our organic loan growth was well diversified with increases across all of our major portfolios. In particular, we saw a growth in our commercial, consumer and ag portfolios, with the ag portfolio being seasonally higher due to draws on operating lines.
We had a nice quarter across all of our fee generating areas. Our mortgage banking revenue was up 56% from last quarter and 17 % from the second quarter of 2018. The increase reflects the seasonal strength we typically see in the second quarter, as well as the impact of lower mortgage rates driving higher demand and our expansion into new markets. Our efforts to expand originations in some of our newer markets along with our online application process will further help us to effectively capitalize on this demand, resulting in higher loan originations and gain on sale revenue going forward.
Turning to other trends in the quarter, our reported net interest margin expanded four basis points quarter-over-quarter. On a relative basis to the broader banking industry, we continue to have an attractive cost of funds at just 56 basis points. However, because we have consistently passed along some of the interest rate increases on our non-maturity deposit products to our clients over the past few years, we have the ability and the intent to pass through rate cuts as well. As a result, we can offset some of the pressure we will see on earning asset yields if rate cuts the curve.
So with those comments, I'd like to turn the call over to Marcy for a little more detail behind the numbers. Go ahead, Marcy.
Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2019. I'll begin with our income statement.
Our net interest income increased 8% from the prior quarter, primarily due to the impact of our two recent acquisitions. Included in net interest income this quarter were recoveries of previously charged-off interest of $1.5 million, an increase of $600,000 from last quarter.
Total accretion income on the acquired portfolios was $5.2 million this quarter, up from $3.9 million in the first quarter. Included in this number with accretion related to early payoffs of $2.6 million this quarter, which was up from $1.7 million last quarter. We have completed the initial purchase accounting adjustments related to loans on the two deals we closed in April. Including the impact of the two newly acquired portfolios, we now expect scheduled accretion to read at approximately $2.7 million per quarter for the remainder of 2019, decreasing to an average of $2.2 million per quarter in 2020.
On a reported basis, our net interest margin increased four basis points to 4.08% in the second quarter. Excluding the impact of interest recoveries and loan accretion, our operating net interest margin decreased one basis point to 3.86%. The decline in our operating net interest margin was driven by a four basis point increase in our cost of funds, which was offset by three basis point increase in our yield on earning assets. Again, this excludes the impact of charged-off interest and loan accretion.
The average yield on our investment portfolio declined one basis point in the quarter as we saw higher levels of securities that were called, which had yields approaching 3%. Interest bearing deposits in banks accounted for 5.8% of our average earning assets in the quarter, which was up from 5.1% last quarter. This was largely a result of $130 million in CDs we inherited from the acquired banks. We continue to focus on redeploying liquidity into higher yielding assets, but that's a challenge in this rate environment.
Heading into the third quarter, we're prepared to drop interest rates on our deposit accounts. We would expect our operating interest margin to remain within one basis point of two basis point of the current level, even with the rate cut.
Moving to non-interest income, we saw an increase of approximately $5 million quarter-over-quarter to $39.4 million. Consistent with our seasonal trends, we saw higher debit and credit card volumes in the second quarter, which helped drive a $1.1 million increase in payment services revenues.
Adjusted for the Durbin Amendment impact, our payment services revenue continues to grow close to double digits on a year-over-year basis. Mortgage banking revenues was strong this quarter, increasing $3 million from the prior quarter. Within the industry, lower rates have increased demand for refinancing. However, we continue to see most of our originations coming from the purchase market.
In the second quarter, loans originated for home purchases accounted for 81.4% of our total loan production, up from 79.1% in the prior quarter. All of our other fee income lines were relatively consistent with the prior quarter.
Moving to non-interest expense, we incurred $13.5 million in acquisition-related expenses this quarter. Excluding these expenses, our non-interest expense came in at near our expectations and reflects a nearly full quarter impact of the two recent acquisitions, prior to the cost savings expected in the second half of the year.
A couple of items to note, occupancy expense looks a bit odd, but it remains flat at $10.5 million despite the branches added through the two acquisitions. In the first quarter, we have higher maintenance costs resulting from additional snow removal expense as a result of the harsh winter in our market.
Going forward, we expect occupancy costs to come down by the fourth quarter as we realize the savings from branch consolidation. Exclusive of acquisitions, we had slightly severance and relocation costs than anticipated of approximately $720,000 this quarter. Outside of this, most of the variances in our expense line items were attributable to the impact of the acquisition. We continue to expect to see the full benefit of cost saves from the two recent acquisitions starting in the fourth quarter, which should put our fourth quarter expense run rate in the range of $96 million.
Moving to the balance sheet, our total loans increased $566.1 million, from the end of the prior quarter. $417 million of the increase was attributable to the acquisitions with the remaining $149 million attributable to organic growth. Our total deposits increased $675.2 million from the end of the prior quarter. We added $707 million in deposits from the acquisitions and had a $32 million decline in organic deposits, which is slightly less than the seasonal decline we typically see in the second quarter.
Moving to asset quality, we saw nice improvement in health of our legacy portfolio although the quarter-to-quarter trends are skewed by the addition of loans from the acquisition. Criticized loans reflect $26.8 million related to the acquisition. Within the legacy bank, our criticized loans declined by $15.3 million this quarter. And overall, we saw improvement in total criticized loans to 4.6% of total loan.
Within the non-performing asset bucket, our non-accrual loans decreased by $4.1 million, while other real estate increased by $6.5 million. This is primarily due to $2.4 million in additions related to the acquisitions, and two loans that were transferred to other real estate through foreclosure. We have signed sales agreements for a number of our other real estate properties and we expect to see at least $10 million of other real estate outflows in the third quarter.
We had $2 million of net charge offs during the quarter or nine basis points of average loans on an annualized basis, which was a significant improvement over last quarter. We recorded $3.8 million in provision expense, which is higher than we would typically expect given the low level of charge offs and positive trends in the portfolio.
The driver of the higher-than-expected provision was an increase in the number of loans from our acquired portfolios that we financed earlier than expected and migrated over to our originated portfolio. The reserves related to these loans accounted for approximately $1 million of the provision expense this quarter.
Our allowance for loan losses declined three basis points to 82 basis points of total loans, while our coverage and non-performing loans increased to 161%. And as you know, the allowance does not take acquired loans into consideration, but the combination of the allowance with remaining loan discount on the acquired portfolios represents 1.28% total loans, up two basis points from last quarter.
And lastly, as Kevin mentioned, the acquisitions had minimal impact to our tangible book value, which actually increased this quarter by $0.63 per share. Additionally, we saw all of our other capital ratios increase over the quarter.
So with that, I'll turn it back over to Kevin.
Thanks, Marcy. Nice job. I'm going to wrap up with a few comments about our outlook. Heading into the second half of the year, we feel good about our opportunities to continue our positive trends and revenue generation. The investments we have made in personnel, technology and product development are having a positive impact on our business developing capabilities that we have targeted.
On a personal front, I couldn't be happier with a great group of people that work for this bank. We continue to tap into existing talent within the company for promotions into leadership positions, and we are fortunate to be attracting new talent from within the industry. Related to technology and product development, we continue to build our digital application and fine-tune our infrastructure.
Our loan transformation process is in full swing, which will allow us to be more efficient and provide our clients with a better experience. Our core transformation process is also moving forward. And one of the outcomes here will be the standardization of our product offerings, which will allow us to have a more effective interaction in our contact center and also create a better client experience.
As we continue to look for ways to gain efficiency, we also look for opportunities to transform our branches. This quarter we were able to move out of a 25,000 square foot branch in Rapid City into a 2,600 square foot branch. The smaller branch is in a better location and is well suited to meet our clients' needs. Our loan pipeline is healthy and we expect to see continued solid loan growth heading into the third quarter. We expect another strong quarter of mortgage banking revenue, along with consistent contributions from our other fee generating areas.
And as Marcy said, we expect to have cost savings from our recent acquisitions by the end of the third quarter, setting us up for a lower run rate of expenses beginning in the fourth quarter. The higher revenue combined with lower expenses should lead to higher levels of profitability toward the end of 2019, and put us in a good position to deliver another strong solid year of earnings growth for 2020.
Finally, as we announced last month, our board of directors authorized a new stock repurchase program to replace our previous program that only had a few thousand shares remaining. The new authorization will allow us to maintain the balance approach of capital allocation that has served as well. Through organic growth, acquisitions, and attracted dividends, and share repurchases, we continue to have many tools at our disposal for deploying capital in a way that we believe will create value for our shareholders in the future.
So with that, I'll open the call up for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Jared Shaw of Wells Fargo. Please go ahead.
Hi. Good morning, guys.
Good morning, Jared.
Good morning, Jared.
Maybe starting on the margin, can you give us an update on -- do any of your loans have floors, so as we're looking at rate cuts here, I mean, is it -- how much that's going to flow through on the lending side? And then on the securities side, should we assume that yield stay, say, similarly to where they are?
There are some floors. Marcy, there's 13 -- we'll get that number. And on the security portfolio, we think the security portfolio probably would main -- the yield would probably maintain kind of a stable level, where there is business right now.
Yes. So, Jared 28% of our floating rate loans have floors, that's $1.2 billion.
Okay, that's helpful. Thanks. Then on the accretion info that you gave, that's the scheduled accretion. Does your sort of margin outlook assume any accelerated accretion in that as well or is that just the scheduled accretion?
So the margin outlook that I gave was based on operating net interest margin. So that excludes all accretion and charge-offs.
Okay.
Yes, because we think it's going to be pretty much flat, but we don't know how unscheduled accretion, oil accretion comes in? So, that's always bumpy.
Okay, all right. That's helpful as well, and then, on the mortgage banking, obviously some great strength there. Good to hear, I guess, that a lot of that's driven by purchase. So, as rates continue to lower, you expect to see that refi 5% increase? And -- could we see actually, mortgage banking grow from here over the next few quarters?
We're feeling good about our mortgage banking growth in revenue, so we feel it could grow. Again, a growth in third quarter, but as we entered into fourth quarter, as always, that seasonality will start slowing down. So we believe that we'll have a robust third quarter, but fourth quarter will then show some of that seasonality.
And where we didn't see much refinance in the second quarter, we are beginning to see a little bit as we head into the third quarter.
Okay. What was the breakdown roughly on mortgage banking between Columbia and Western markets, and the mountain markets?
Well, we're looking at that right now. It mostly comes in the mountain area, but we are starting to pick up strength in the West.
Jared, Renee Newman here. Our West accounted for a little over 26% of our total mortgage originations during the second quarter.
Great. Thanks a lot. I appreciate the details.
Thank you, Jared.
And our next question today comes from Matthew Clark of Piper Jaffray. Please go ahead.
Hey, good morning.
Good morning, Matthew. On deposit costs, sounds like we could see some relief maybe after the third quarter. Just wondered how much of that -- how much of the 25 basis point cut might you pass through the depositors? Our feeling right now is that we're going to hold the margin steady, so we're going to pass pretty much the whole -- we're planning on passing the whole impact to our customers because we have room.
Okay, great. And then in the quarter, do you happen to have the weighted average rate on new loans?
Yes, it's 5.49% this quarter.
Okay. And Kevin, you mentioned the pipeline healthy. Can you quantify it and how it compares to a year ago?
Renee is going to do that. But it is healthy and she is going to quantify it for you.
Renee Newman, here. It's significantly larger than last year. We look at a quarter-over-quarter, and we're really on part from what we're seeing from Q2.
Okay. And then As you look out to next year with the expenses coming out in the fourth quarter, I guess, Kevin, how do you feel about the operating efficiency ratio maybe next year and what you might be looking to achieve?
I think the operating efficiency ratio is targeted to be down just slightly above 55%, 56% to 57%. So that's where we believe the efficiency ratio will be at.
Okay. Thank you.
And ladies and gentlemen, our next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.
Good morning, Jeff.
Good morning, Jeff.
Marcy, you mentioned that you had a sort of an acceleration of acquired loans that refi-ed into the originated portfolio. I just wanted to confirm, one, what was that amount if you have that, and two, I assume that's included then in your organic loan growth calculation?
No, it's not included in the organic loan growth calculation. But what happens is it comes out of having the discount against it, and then it ends up with a little bit higher reserve, and it was $111 million.
Okay, that's helpful. And I guess as it relates to the provisioning level, it sounded -- and I guess you had a higher charge-offs in the first quarter and higher growth in the second quarter. You said that that -- the provision was elevated. Safe to assume that that growth continues at the same pace. What does that mean on a provisioning level?
Well, I think the provision came at $3.8 million. We're hoping that maybe some of the refinancing and moving from the acquired portfolio into the originator portfolio was slowed down a bit. So we're hoping the growth is there. So I would say we could probably target the provision to be right around $3 million to $3.3 million.
Got it. Okay. And on the margin, just trying to break out the interest recovery piece of that. So if you had 22 basis points of accretion and interest recovery, is it safe to say, was the interest recovery, say six basis points of that. Is that fair?
So the charge-off interest recoveries were five basis points actually. Early payoffs were nine basis points, and then regular accretion was eight basis points.
Got it. And then the -- do you happen to have that interest recovery last quarter with that five basis points compared with last quarter?
It was three basis points last quarter.
Okay. That was it for me. Thanks.
Yes.
Thank you.
And our next question today comes from Gordon McGuire of Stephens. Please go ahead.
Good morning.
Good morning, Gordon.
Marcy the one or two basis points on the NIM. That was -- just to clarify, that was for the third quarter, assuming the Fed cuts today.
Yes, and that's operating.
Yes. And would you expect that to be pretty linear if we get more cuts throughout the year?
I believe we have room probably to keep pretty stable, up to 75 basis point cut. I think after that we'll probably start getting some pressure.
Got it. Just thinking about the liquidity, the cash this quarter, that was a 31 basis points. Would you expect those to be pretty high beta in a down rate environment or did you locked in some of that rate?
Can you ask that question again? I'm sorry.
I'm just looking at the interest bearing cash, the $729 million.
Yes.
Yes.
I'm just wondering if that --
Yes, most of that will reprice with a rate cut except for the $130 million in CDs, all that is floating.
Is there a sense of urgency to kind of lock in some more duration or bring that liquidity down?
We're looking at it and enforcing it, but we don't -- you know right now, the bond market is not being very kind to us. So we're hoping that maybe the rate cut could give us a better opportunity, and steepening the yield curve. So we're hoping that, you know, there's better opportunities going forward. But we're picking up places here.
Because even if we go out four, five years on our duration, we're still looking at between 240 and 250, putting at what we can put on.
Got it.
We rather have our bankers put on more loans to suck up that liquidity.
Just wealth management and look like those revenues moved back down to 2018 levels. Is this a good run rate going forward or is there something unusual?
Yes, it's going to stay just right on that level. I think it was -- went down -- let me just skip to that sheet, it went down slightly this quarter, but I think it bounces right between 5.8% and 6% pretty regularly, and that's what we would expect.
And then last thing just on capital, would there be a specific capital ratio that you try to pinpoint toward or a payout that you would pinpoint toward? Just trying to think about the activity on repurchases or special dividends, and then just any updated thoughts on M&A?
On the dividend aspect, we've mentioned before, our payout ratio is somewhere between 35% and 40% of earnings, is 35%, 45%, right?
Yes, 35%, 45%.
Let's say 40%.
Yes.
35% to 45%, and I think we're pretty much right around the 40% mark. With regards to share repurchase, and I'll be straight up, we're only going to buy shares back if it's not -- we can get a payback, that's not too long, and we always target under five years as payback on tangible book value dilution because I rather utilize the capital in acquisitions than diluting our tangible book value just by a share repurchase. So we're pretty cautious on how we use our share repurchase program. But if our stock drops down to a level where we think it's -- you know, it's a good buy, we will be in and buying shares.
Got it. And just any updated thoughts on M&A?
You know, I would be honest with you. It's a little quieter than it has been. I think I've mentioned before on a conference call that I would get one or two calls a week. I would say that I'm probably only getting one call a month with a potential deal. So I think it's a little quieter out there. I think there was a real kind of rush in the first quarter. People looking at opportunities, but it has slowed, and I don't know if it's the price that they might realize or what, but it's a little quieter, but not saying that it won't pick up in the near term.
All right. Thank you.
Thank you, Gordon.
And our next question today comes from Luke Wooten of KBW. Please go ahead.
Hi. How's it going? Good morning, guys.
Good morning, Luke.
Good morning, Luke.
I was wondering if you could just quantify, was there any costs saves embedded in the expenses in this quarter? Just saw that it was slightly higher than we were expecting for the salaries line, didn't know if there was any cost savings in that or if we should kind of expect those more in 3Q and 4Q.
There were no cost savings in this quarter, or very, very limited, if any, because most of those employees didn't term until after June 30th.
Okay, that's helpful. And then just on the -- I know you guys mentioned at the beginning just that there was -- you're noticing a little bit of pressure in Wyoming. You just kind of speak more to that, just kind of thinking about how that market is viewed going forward.
Well, it's some in the markets in Wyoming. I would say, mainly around the Gillette market, which is more of a coal area. You know, we're still just waiting. I mean, some of the big coal companies have filed bankruptcy and the workers are still kind of work. There's been some layoffs. But we don't know how that's going to turn around. The same type of thing happened two years ago where they laid a bunch of people off and within six months they hired them all back. So we're not sure what the impact was. But I would say it's mainly around the Gillette markets, not really in the Casper or Cheyenne or Laramie, some of the Jackson or Sheridan, it's really just mainly in the probably Gillette market, which is not one of our largest market, but it's an important market to us.
Got you. That's helpful just thinking about that going forward. And then with the acquisitions closing this quarter, you guys found that the pipeline for the two banks that were acquired, they kind of grow just due to the lending limits that they had restricted before that are now being able to grow with First Interstate, and just kind of want to get an idea on how much of the pipeline growth is due to those relative to just organic pipeline growth.
There's some there, but I think the majority of growth is organic growth throughout the footprint. But there is some, you know, other customers are looking for larger loans and we are accommodating that. But I will not say that's the majority of our growth. It's just -- it's adding to the growth.
Okay, that's helpful. And then just lastly on deposits, I know that 2Q is usually seasonally down, and have you begun to see those kind of come back so far third quarter and kind of just looking at that deposit growth going forward toward the end of the year. I know it's sometimes kind of comes in waves.
Yes. We feel that we will come back and, you know, I'll just give you a little, you know, kind of a thing. Within like the first two weeks of April, our deposits, you know, because of tax time, we're down over $250 million. So it's -- that was timing and as we've been growing back ever since. So it's -- it moves up and down during the first quarter.
Yes. If you look at our historical trend, they just kind of follow right on. So there's no reason to think that from anything we've seen so far, that it won't just continue to -- deposits won't continue to react as they are or have historically.
Okay, that's helpful. Thank you so much for taking the questions.
And our next question today comes from Andrew Liesch of Sandler O'Neill. Please go ahead.
Good morning, everyone.
Good morning, Andrew.
Can you guys just provide a quick update on where you stand with preparation for Cecil?
Marcy, go ahead.
It's my favorite topic. So, you know, we actually have worked with an accounting firm to run our loan portfolio to look at some initial estimates. We also are developing our own models that we will run quarter-to-quarter you know in-house on the Oracle platform. We're leveraging Moody's and CoStar for certain portfolios to help do some projections there. We kind of have some initial thoughts about Cecil that I'm not prepared to share at this point, but yes, we're well on our way.
Got you. Fair enough. I know it's still pretty early. And then you referenced in the release like some fixed asset sales and a life insurance gain and other free income line item. Can you quantify those for us, please?
Yes, so we had a gain on the sale of fixed assets of about $1.4 million. Life insurance were a little bit smaller than that, and we had some last year, last quarter that were as well. So, you know, that other income line, it stays pretty steady with kind of ins and outs from whether it's life insurance or fixed asset sales or things like that.
Got you. And I think you said there was -- swap fees were higher in the first quarter as well, so…
Exactly.
Got you. All right. That you've answered all my other questions. Thanks so much.
Thank you.
And the next question comes from Garrett Holland of Baird. Please go ahead.
Thanks for taking the questions. It sounds like there's good momentum with the loan pipeline. I just wondered, is the Q2 level of organic growth sustainable in your view?
I think we can sustain it going into the third quarter. Again we have seasonal slowdown in the fourth quarter. We have our ag borrowers paying down their lines in the fourth quarter. So I think that it's sustainable going into the third quarter, but it will come down a little bit some in the fourth quarter, as it always has.
And loans held for -- held to maturity, held for sale, excuse me, also impact that in the fourth quarter, the mortgage loans, held for sale.
That's helpful. Then maybe a bigger picture question. I hear you on the cost savings benefits coming online here in the back half, but where do you see other opportunities for modest acceleration or revenue growth and improvement in profitability in the back half of the year, given the likely NIM headwind from rate cuts?
First of all, I think, we're going to continue to grow our revenue stream nicely. And I think as we fully get into our loan transformation project as well as our core transformation, we're going to start seeing some efficiencies in those areas. So that will help our overall profitability. So that's kind of what we're seeing.
Great. And then…
And payment services revenue will also drive that. I mean -- I think that's been pretty consistent year-over-year.
That's great. And then just one more quick one, not that it's a primary NIM lever, but talk about the flexibility to lower loan to deposit ratio provides to offset some of the potential margin pressure.
Well, the thing is, as we -- the margin pressure -- we have increased our cost of funds steadily since the Fed has been increasing rates on our non-maturity deposits. So most of our cost of funds and deposits has been kind of self-inflicted and we've been taking care of our customers, but we are highest in pretty much the market with regards to these non-maturity deposits. So we have plenty of room to offset any kind of rate cuts as we go forward. So we plan out and intend to that to keep our margin stable.
That's very helpful. Thanks for taking the questions.
Thank you.
And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to the management team for any final remarks.
Thanks. Thank you for your questions. And as always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions, and thanks for tuning in today. Goodbye.
Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.