Hancock Whitney Corp
NASDAQ:HWC
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Hancock Whitney Corp
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Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded.
I would now like to introduce your host for today’s conference, Kathryn Mistich, Investor Relations Manager. Please go ahead.
Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing.
Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.
Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Chris Ziluca, Chief Credit Officer.
I will now turn the call over to John Harrison.
Thank you, Kathryn, and good afternoon to everyone. The second quarter of 2023 exhibited the continued benefits and challenges of the current operating environment. Our balance sheet remains solid with loan growth funded by both client deposit growth and cash flow from the securities portfolio. The precautionary liquidity added in March was eliminated in May as planned. So by June 30, we were back to normal levels of liquidity.
As expected, loan growth moderated somewhat this quarter. Total loans were up $384 million, primarily driven by project draws in multifamily real estate, small to medium-ticket business lending and mortgage. As a note, about 60% of the volume, we show as mortgage growth on Slide 8 is in reality, reclassification to mortgage from construction as residential projects are completed.
Our indirect auto portfolio continues to amortize, but has now reached generally immaterial levels. As of mid-year, demand continues to soften in new construction, middle market and corporate banking as disciplined pricing, more conservative terms, inflationary pressure and debt costs sideline clients waiting for a more advantageous borrowing moment. Interestingly, demand in small and medium business ticket items is more resilient as economic activity in that space remains brisk.
The net effect is a slowing of net loan growth, but becoming more granular with better yields and in more self-funding sectors. So we would say at this point, the efforts of the Federal Reserve Bank to slow economic activity down a bit seem to be taking hold and thankfully, without creating any significant recessionary pressures.
Looking forward, we expect further moderation in our loan growth will be driven by selective appetite in CRE, a focus on full relationship banking and disciplined loan pricing and terms. Within investor CRE, growth in second quarter was 90% multifamily and 10% industrial, which we expect to continue in the short run. We maintained our guidance for the year with loan growth expected to finish the year in low to mid-single digits. We continue to maintain a seasoned, stable and diversified deposit base.
As shown on Slide 6 of the investor deck, consumer and wealth deposits make up 49% of the deposit base, while the remainder is comprised of 11% public funds, 35% commercial and small business and only 5% brokered CDs. Uninsured deposits are 34%. The ICS product, which is available to clients as a way to ensure deposits above FDIC limits has stabilized after an initial and brief surge following the March bank failures.
We remain pleased with the quality of our book of deposits. However, growth remains a challenge in today's environment. While we reported deposit growth of $430 million this quarter, it is important to note that growth was influenced by a couple of factors. During the quarter, we issued broker deposits of $590 million to support lending activities. Later in the quarter, we received approximately $250 million in temporary trust deposits. These deposits were invested by our clients shortly after quarter end.
DDA remix continued this quarter given the current banking environment drives promotional CD pricing. Clients are highly rate sensitive and we don't expect that will go away anytime soon, especially if we see another rate hike this month. Where CDs reprice in second half '23 is a meaningful part of the NIM story going forward, which Mike will address further in his comments.
Our guidance for deposit growth in 2023 remains unchanged. However, given the continued pressure on gathering DDAs, ongoing mix shift and increasing betas, we have updated our guidance for PPNR for the year and now expect PPNR to decline 1% to 3% from 2022. Earnings and a lower level of tangible assets contributed to improving capital levels. TCE was up 34 basis points to 7.5% and Tier 1 at 11.83% improved 23 basis points.
We have been and continue to be cognizant of the current macroeconomic environment that is impacting our industry. We've maintained a robust ACL, we have solid capital and multiple sources of liquidity and which will help us manage through any continuing volatility. We remain confident in our ability to remain strong and stable as we have for 124 years.
With that, I'll turn to Mike for further comments.
Thanks, John. Good afternoon, everyone. Second quarter's net income totaled $118 million, or $1.35 per share. Those levels were down $8.7 million and $0.10 per share, respectively. PPNR was $158 million for the quarter and was also down $9.2 million. The challenges we face as an industry from rates and deposits both mix and betas has led to higher than expected NIM compression in turn driving linked quarter decreases in net interest income and earnings.
Our cost of deposits increased again in the second quarter to 1.4% from 0.91% last quarter. For the month of June, our cost of deposits was 1.57%. That drove our total deposit beta for the quarter to 104% or 28% cycle to date, or 25% excluding the recently issued brokered CDs. We expect that our total deposit data for the cycle to now approach 35%, assuming the Fed raises rates to 5.5% in July and holds through year-end.
The reality of higher rates for longer and the growing dependence on CDs as a non-interest bearing deposit remix destination is driving this reality. Reminder that our total deposit beta in the atlas upgrade cycle was 29%. As was the case in the first quarter, our deposits in the second quarter continue to remix between non-interest bearing deposits and primarily time deposits. Our mix of non-interest bearing deposits to total deposits moved from 43% at March 31 and to 40% at June 30.
Given the pressure on deposit cost and assumed continued remix of non-interest bearing deposits, we do see additional NIM compression in the second half of 2023, although likely at a slower pace than what we experienced in the first half of the year. Again, assuming Fed funds topped out at 5.5%, we could see NIM compression of about 5 basis points to 8 basis points in each of the next few quarters. Included in our assumptions is the expectation that our non-interest bearing deposit mix could fall to just below pre-pandemic levels by the end of the year or about 35%.
Slides 14 and 15 in the deck provide additional details related to our NIM and interest rate sensitivity.
Turning to credit. Criticized levels were relatively stable and have been for several quarters. We did have an uptick in non-accrual loans as those levels have begun to normalize. Net charge-offs were down $3.4 million from last quarter and came in at 6 basis points of average loans. During the quarter, we built reserves by $4.2 million, which resulted in a solid ACL of 1.45% to loans at June 30.
Fee income improved this quarter driven by increases in service charges on commercial accounts and specialty income. Expenses were up slightly linked quarter driven by higher insurance and regulatory costs, but also higher technology related costs. Otherwise, expenses were well controlled. We have continued to reinvest back into the company through additional revenue generating staff, technology improvements and automation, all leading to increases in personnel and technology related expense.
We intend to continue these reinvestments to support adding additional value in the future, but of course, are paying attention to the impact of inflation on expenses during the challenging top line revenue environment. We are pleased to see stability in other expense categories and as noted previously, we will have to manage through items outside of our control such as retirement cost, benefits, insurance cost as well as normal FDIC assessment increases.
All of this leads to a few updates to guidance called out on Slide 20, reflecting both second quarter activity as well as changes in the operating environment. John mentioned the change to the PPNR guidance, we have also updated guidance on fees, expenses and the efficiency ratio. One important note, the PPNR and expense guidance does not include any impact from the expected FDIC special assessment related to the March 2023 bank failures.
I will now turn the call back to John.
Thanks, Mike. And moderator, if we could, let's open the call for questions.
Thank you, sir. [Operator Instructions] We'll go first to Michael Rose, Raymond James.
Hey. Good afternoon, everyone. Thanks for taking my questions. Mike, I appreciate the commentary around the NIB mix settling a little bit lower than maybe what you had talked about before. Can you just give us a sense for the realm of confidence or the range of confidence here, the 35% roughly is kind of the floor and what would be kind of the puts and takes there? Because I think we're just trying to get a sense for -- are we approaching a bottom here in terms of mix shift and beta expectations? Thanks.
Yeah, Michael. Obviously, this is Mike, I'd be glad to. And the 35% mix that we kind of called out is really what we're looking at that to come in at really towards the end of this calendar year. So obviously, this quarter, we came in at 40%. We could see that trajectory kind of moving to around 37% or so, by the end of the third quarter and then down to maybe 35% by the end of the fourth quarter. And obviously, it's this environment related to higher rates for longer, that's driving that. But then also, if you look at our average account balances, there's still about 20% to 25% higher now compared to where they were pre-pandemic.
So I think to get full confidence on where that NIB mix actually ends up, we really need rates to start to come down and we need that average account balance also to come down some. So the 35% is what we're looking at by the end of this year. And into '24, I mean, obviously, we're not here to give guidance for 2024. But certainly, if we don't have lower rates and we don't have at average account balance down, we could end up lower than 35% as we move into '24. But for now, our focus is pretty high confidence that I think it will be around that 35% level by the end of this year.
Thanks for the color, Mike. Maybe just as a follow-up, just switching to expenses. I think they were a little bit higher than what I was looking for and you raised the guidance a little bit. Can you just talk about some of the expense reduction efforts? I understand you're investing in the franchise technology investments, things like that. But just given the pressure on spread revenue, what kind of actions could we expect to see you guys take to get that efficiency ratio down back closer to your CSOs? I know it's 10 quarters out from here, but just trying to get a better sense of what actions you could take? Thanks.
Yeah. I mean, obviously, we did a lot of hard work throughout our company to get our efficiency ratio down to the levels that we reported the last couple of quarters. So there's necessarily no joy in being above or slightly above 55% like we are right now. But going forward, in terms of continuing to control expenses. I mean that's something that I think everyone knows is pretty well institutionalized at our company and it's something that we focus on and I think, do a good job of the things that are kind of driving the change in expense guidance compared to last quarter really have to do with visibility that we have in the second half of the year to certain expense categories. We called out higher pension, higher regulatory costs and then higher insurance costs related to the P&C insurance on our facilities. So we really do look at those as kind of one-off items.
And I think if you look at the change guidance, so the 7.5% to 8.5%, if you back out all retirement costs and all regulatory costs kind of that core expense run rate is more in the neighborhood of 5% to 6%. But getting to your question directly, again, we'll continue to focus on expense reduction and expense control. We've talked in the past around standing up a very professional and very effective strategic procurement process. That process is becoming mature and we certainly expect to harvest expense savings through the full implementation of that program. You mentioned reinvesting back in the company. That's something we feel strongly about continuing to do. I mentioned that in the prepared comments. And John, I don't know if you wanted to add a little bit of color or your thoughts around. Go ahead.
I'll be glad to. I think -- I mean you answered a lot of the -- I think, of the question already. I won't take too much time. But Michael, and this is John. We've invested a great deal of money and technology over a number of years. In the last two or three years, the bulk of that technology spend was about 75% towards frontline effectiveness in terms of implementing sales force throughout the revenue bearing part of the company, a much more professional marketing and lead generating a lead follow-up organization and all those things happen. And we've I think done some good work and had some good news coming back and you don't have to look any further than the continued growth in both deposits and loans in the small and mid-sized ticket area of business lending to see that benefit.
At the same time, as we're rolling out all that technology. I mean, the turnover rate in our industry has been horrendous and we've not been immune to that, particularly in the hourly levels. So some of the productivity improvement, I expected by this time to get due to some of that automation really hasn't fully been realized yet and I'd like to see that get completed. So between that work, the strategic procurement area that Mike mentioned and I think some thoughtful consideration of how long we should expect to take in this environment given the spread differences for the revenue bearing individuals we've hired to get up to their full profitability, I think that's probably where we focus for the next couple of quarters.
So I think Mike's word choice was good. There's no joy being about 55%. About half of that driver were things that we really couldn't control. But what goes up will come down and the assessments will decrease. The insurance cost will potentially decrease both on property and in FDIC. And I think I'd like to see a little bit better efficiency in our back of the house through some of the automation over the next couple of quarters. So we've got some work to do there, if we're going to continue the reinvestment pace we've been on. I appreciate the question.
Thanks for taking my questions. Appreciate the color.
You bet, Michael. Thank you.
The next question comes from Casey Haire, Jefferies.
Yeah. Thanks. Good afternoon, guys. I guess a question on capital, you guys approaching 12% on CET1. I think I know the answer, but I just want to just curious if your appetite for buybacks.
Yeah, Casey. This is Mike. So appreciate the question on capital. And yeah, you're right. I mean really for the next couple of quarters, buybacks is not something that's a big priority for us. So I don't know that we'll be participating in that, at least for the next couple of quarters. In this environment, our stance really is more around preserving and growing capital. And we're pleased to see those capital levels move on up. So we will kind of continue that approach.
Okay. And then, what about potentially rejiggering the bond book, given things are a lot much -- a lot calmer versus March and April. Is there any appetite to use some of the excess capital towards that?
Yeah, I think there is, and that’s a great question. And so that’s something that we’ve looked at through this environment and continue to look at not here today to announce that we’re executing on anything per se. But I think it’s a fair expectation to have that we would certainly look very seriously at doing something like that in the second half of this year.
Okay. Great. Thanks very much.
You bet.
Next up is Catherine Mealor, KBW.
Thanks. A question on the margin. It feels like from your margin guidance, we're going to be ending the year somewhere around $315 million to $320 million, I think depending on where the deposit remix shifts out. And as you think about next year, we're just trying to get this year done, but as we think about next year, we're exiting the year around that kind of margin level. How do you think about higher for longer? And what type of, I don't know, kind of tailwinds you maybe will have on the loan portfolio or maybe what some defenses you may have if we stay kind of at that 550 Fed funds through next year? Thanks.
You bet, Catherine. I think to kind of start the narrative on that question is, we talked just now about the potential restructuring of the bond portfolio. That could certainly, I think, be a nice lead into 2024. And look, just depending on the rate environment and kind of where we are with our deposit remix, that will play a big role and a big part in how we think about our NIM for next year. It certainly appears that deposit costs might be leveling out and that's part of our narrative and assumption for the second half of this year.
And if that's the case and continues into next year, there's certainly the opportunity for potentially for CDs to reprice a little bit lower next year. And then, obviously, the operating environment is a big -- is a bit better, the potential certainly exists for us to add loan growth next year. So again, a bit premature to talk about strict guidance for 2024. But those are the things I think we kind of think about in that regard. John, anything you want to add?
Yeah, Catherine. This is John. This is obviously not easy to model, but just thinking about conceptually have the higher for longer environment could affect our book. We have about two, maybe three quarters, maybe 2.5 quarters of growth out of sort of all things real estate. We have a pretty big C&D booked and a really excellent team that's done great with terrific quality and good spreads for a long time, but that pipeline is crimping a bit. And so the growth we see in CD on Slide 8 is really more driven by draws on existing projects.
So as those projects are completed, a minority of that book will move into real estate and a good bit of it will get sold off in the permanent finance markets. Ditto mortgage, those projects come out if their resi construction project get reclassed in the mortgage and then begin to amortize. And right now, about 90% of our applications are directed to the secondary market on mortgage.
So when you sort of apply all that together between that and the disciplined pricing and conservative credit appetite that we have in middle market, corporate and certain syndications, there should be some repatriation of liquidity next year out of that sector of the portfolio back and the intent is to deploy that in more granular, better spread and less lumpy areas that are better for margin. We're also getting about $2 of liquidity until the back of lending in those small business side sectors.
So I think I don't want to talk about ‘24 too much, Catherine, but there is some self-generated relief in liquidity next year. And if the policy folks don't continue taking as much money out of the system as they have the last 12 months and with bank rates being more competitive versus treasuries, those massive amounts of exit from the banking system to federal instruments should begin to wane some.
So how all that mixes together should -- and if the Fed stops raising rates, as we all hope they will here in the back half of the year, then we should see a little bit better picture in '24 for stability, both portfolio and spread and NIM, if that all makes sense. So too early for '24 right now, but that's just a ton.
That's very helpful, very helpful. And then, John, you hinted that there was some CD repricing to be aware over the back half of the year. Can you just remind us of what that looks like?
Catherine, this is Mike. Back half of '23?
Yes.
Yeah. So we have about $1.2 billion of CDs maturing in the third quarter. Those are coming off at about $386 million. And then in the fourth quarter, we have about $900 million of CDs maturing and those are coming off at right at about 4%. We also have about $500 million of the brokered CDs that we added back in March that will be coming off in the month of December. Those are coming off at 5.45%. So those are the CD maturities we have in the second half.
And so that story, I think I used the words NIM story earlier Catherine, that if -- we were a little more hopeful that we would not see another rate increase. And I think the tone from the Fed here lately sounds as if that's in the cards for July. Whether there's another one, we don't know yet. But we had hoped that we would have a little bit more room to reprice those down. The guidance presumes that we don't.
So we're trying to play realistic ball in terms of the Fed does raise rates again and perhaps even again and tightening continues, then the competitiveness around us for CD rates may not relent until after the end of the year. And if that happens, our ability to reprice down from the levels Mike mentioned really is challenged. And so the change in guidance is really more derivative of that tone not because anything is not going well or anything like that. It's just simply the way the competition does not appear to be getting any easier as we look at the next six months or so.
Got it. That makes sense. Yeah. That makes perfect sense. And then maybe one last one. Just there was one commercial NPL that increased this quarter. If you could just give us a little bit of color on that.
Chris, do you want to take that one?
Yeah, sure. Hi, Catherine. It's Chris Ziluca. Yeah, It was a credit that we've been tracking for a while and it kind of migrated from criticized to NPL, which is why you don't see the criticized going up at all really. And frankly, it's just a customer in the kind of retail space, it's a C store operator that probably just over expanded a little bit. So they're kind of going through a little bit of a restructuring our staff so therefore, we needed to move it into the NPL category.
Great. Thank you.
You bet. Thank you, Catherine.
Your next question comes from Brett Rabatin, Hovde Group.
Hey. Good afternoon. Thanks for the questions. I wanted to first start on fee income and just the guidance, the change there linked quarter, if that was a function of less annuity fee growth than maybe you were expecting or if there were dynamics in the back half of the year that resulted in that change?
Yeah. Great question. This is John. Great question and you're pretty right on top of it. The guidance change is really sort of like in the deposit conversation we just had with the prior question. When we look at the effect of higher rates for longer, there are two areas of the fee income buckets that should see less activity. So it's not our lack of appreciation for the sector. It's just the reality that we will likely sell less annuities in the back half of the year than we saw in the front. We had a terrific year up until now.
But when we look at less traffic with the pie of opportunity shrinking a bit in both annuities and in non-amortized loan fees. If we're doing less lumpy loans, then you get less fees that you bring to the bottom line in that same quarter. And so with a little bit more anemic outlook for that traffic for the back half of the year, we resized the guidance down a bit to accommodate it. So nothing going particularly wrong, no threat just trying to be thoughtful and ensure that we're being as transparent as we can about the chatter we're getting back when we look at competitive assessment and the outlook for opportunities. So if the opportunities were the same as they had been, we wouldn't have changed the guidance. So it really is just an issue of the pie getting smaller.
Okay. That's helpful. And then just wanted to make sure I understood the thought process around the competitive environment. I think last quarter, banks kind of felt like things were settling down in the earnings season in April after the crazy March and I feel like everyone kind of realized a ratcheting higher and competitiveness in May and June. And just was curious you felt like it was still ratcheting higher in terms of what you're seeing promotional activity in your markets or is it -- maybe it adds a little bit since maybe the heavy period of late May?
Is your question specific to deposit pricing, Brett, just to make sure we hear you right?
Yes. Just the deposit pricing and what you're seeing in your markets in terms of your competitors' pricing.
Yeah. This is Mike. I think you hit the nail on the head there. And certainly, over the course of the second half of the second quarter, we saw that ratcheting up of primarily deposit pricing competition. A couple of folks have kind of stepped out there. So that's more or less, I think it's kind of calmed down a bit. We certainly don't see that getting any worse as we move into the first couple of weeks of July.
Okay. Great. And then maybe one last quick one. One of the pushbacks I get on Hancock is just the markets might not perform as well in a recession. So I was just curious what you were seeing economically in some of the coastal markets, how norms was behaving. I know that gas was probably the best one ever in May. So I know there's been some solid tourism.
Yeah. Well, I hope you came down to visit. It was a good show this season. But really in our markets, you can kind of bifurcate the markets into the high growth markets like in the larger MSAs of Texas. And then in Florida, where they've had such massive inflow of population in the COVID and pandemic and pandemic recovery area, those would sort of be in one group and then a little bit slower growth there in the core of the area, but very dependable. So in the last recessive period, we were really pleased with how those books performed.
I mean, we had a bad time with energy, but it was not because of the economies in our markets. It was because we had too high a concentration at a bad time. The market is actually in sales performs well and as you saw, once we get it to the book, the AQ measures were actually quite superior. So I think we have a lot of confidence in the sentiment being positive. And when we talk to our clients, particularly the larger clients, four or five months ago or so, there was a lot more -- when I say concern, I don't mean concern like handing it but just very, very mindful of the risk that if the Fed's increase in rates was so steep and so long and kept going, then we could see that proverbial hard landing.
We really don't hear that kind of concern from our clients anymore. So they may be tightening down a bit to grow capital and to preserve liquidity and to get as much return as they can for but it's not fear of an economic downturn. It's just more respectfulness of a slower accounting that may lead to slower opportunities for them to gather revenue. So I think we're in a great part of the country to go through a recessive period. I hope we don't have one, but I feel good about it.
The tourism this summer has been off the hook really across our overall footprint. New Orleans that suffered mightily during the pandemic because the convention center and family tourism economies shut down hard in ‘20 and really only family came back in ‘21 then everything began opening back up in ‘22. It’s fully back. I mean restaurants are full, reservation list are long. The convention center is running a brisk business. The festivals are all back.
The only thing that’s not, I guess, back to its original form is the number of attendees per convention or trade show is still 15%, 20% off where it was. And I don’t think the cause of that is any worry about the city of New Orleans, I think, is just more – that’s a tendency we’re seeing throughout the country. And so I hope that kind of gives you the tone of a lot of confidence in our markets. We actually feel pretty good about.
That’s great. That’s very helpful. Thanks for the color.
You bet. Thank you.
Kevin Fitzsimmons from D. A. Davidson is up next.
Hey. Good afternoon, guys.
Hi, Kevin.
Just one thing I wanted to ask about the margin. I know it's been very clear that there's ongoing margin compression ahead maybe at a less of the pace than what we've seen in the second quarter. But I was a little actually encouraged to see the margin for the month of June was equal to the full quarter margin, if I saw that right, as opposed to it being lower, like I think we're used to seeing indicating going lower coming out of the quarter. And I was just curious, were there any unusual items driving that? Or is that a source of encouragement?
Yeah, Kevin. This is Mike. That's correct. Our NIM for the month of June came in at $330 million, which as you pointed out was equal to what we are reporting for the quarter. So yeah, that is encouraging and I think that speaks probably as much as anything else to the fact that we do see deposit costs kind of leveling out a bit. Certainly, I think there's more of that to come in the second half of the year. In fact, if we look at the increases in our cost of deposits for the second half of the year compared to the first half of the year, much less. So in the first half of the year, we had about 90 basis points or so of increased deposit costs.
We think that will be roughly about half of that in the second half of the year. And again, those are broad numbers but, yeah, you're correct. I do think and believe that the NIM compression will lessen as we go through the rest of the year. And really, the primary driver and probably the biggest wild card will be the continued level of NIB remix if that lets up a bit for whatever reason as we go through the second half of the year. And obviously, I think that bodes well for us coming in at maybe the lower end of the NIM compression range that I gave in the prepared comments.
And Mike, the -- I'm assuming you're tracking on obviously, quarterly, but monthly, weekly, the deposit remix. But I guess it can -- it's hard to draw conclusions on it, if you see it settling a bit because it can be very chunky, right? So if we have a Fed hike and that could lead to a big chunk, and then it's a question if we have more hikes after that. But I guess do we get at a certain point, even if there are more hikes, do we get to a point where just the nature of those accounts that you have that outflow would decline because who's left in there that hasn't taken it out, I guess?
Yeah. I mean that's a great point. And obviously, you're right. I mean we watch that very closely. You could even say on a daily basis. But -- and there was a point during the quarter where we thought there was a bit of a fighting chance for maybe for the quarter to show a little bit lessening of that remix. But if you look at the percentage numbers, in the first quarter, that remix was about 3.5% in the second quarter, pretty much 3.5%, maybe just a tad lower than that.
But the other thing, as I mentioned a little bit earlier that we watch very carefully is kind of the average balance per account. And again, as I mentioned, that's still a bit higher now compared to where it was in the second quarter. So really for that to end up in the rearview mirror, we think at either lower rates or some combination of lower rates and that average deposit balance coming down to pre-pandemic levels, we think we'll spell kind of the end of the remix at the beginning at the end, if you will.
And what are you thinking you might trigger that average balance per account to go to down? Is that just being stubbornly high because there's just less activity going down [indiscernible]?
It's obviously coming down and has come down not only for us but for most banks. But it still is meaningfully higher right now than it was on a pre-pandemic basis. That's something that I think has to play out.
I'm sorry I stepped in.
No. Go ahead.
Kevin, this is John. I can't remember which quarter it was, it may have been as long as a year ago. We had said that when we apply both the type of account, the GAAP to the pre-pandemic average balance and the spending rate [indiscernible] of the things people want and then later what they need, it trended to be about literally June of 2024, when we would reach the pre-pandemic average balance in a pretty complex piece of algebra. And that's really still where it seems to be heading.
Now at that time, we didn't see a 5.25% overnight money rate materializing at this pace that it did. And so one would think that we would be getting a little closer than average balance, if it's really the new bottom sooner than June simply because we're already seeing as we monitor traffic and tone from clients, spending habits of consumers has certainly changed to they're doing more trips than buying bigger houses right now. So the sources and uses of cash have changed a bit in '23 versus '22 which should suggest we should be getting closer to the average balances by the end of the year.
But I mean, picking those behavioral trends and trying to blend them into forecast is not easy for us to do. And so we truly simply extrapolated the behavior we're seeing right now tried our best to migrate what we thought that book would look like by the end of the year and guided to it. And we take no pleasure in guiding to anything that's not positive, but the environment we're in and the competitors that we have who are loaned up way too close to 100%. They -- we want liquidity. They have to have liquidity and they're pricing accordingly, and that's driving some of our cost up a little faster than we would like to see them.
So our thought of normalization may be a little bit further maybe over past year end and into '24 versus the back half of this year like we had hoped a quarter or so ago.
That's great, John. And one last one for me. You mentioned earlier how the level of borrowings has come down. That was an abundance of caution post the bank failures and now you've kind of taken that off. Should we assume that level of borrowings at second quarter end remains fairly stable or could there be more moves in that line item?
Yeah, Kevin. This is Mike again. I think we're more or less back to managing the balance sheet in a normal fashion. So the level of liquidity we kept on the balance sheet at June 30, maybe a bit higher than what we would normally do, but not much more than a couple of $100 million or so. So maybe that comes down a little bit more, but I don't know that, that's a significant number.
Okay. Great. Thanks very much.
You bet. Thanks for the questions.
We'll go next to Brandon King, Truist Securities.
Hey. Good afternoon.
Good afternoon.
Yeah. So I wanted to know what your expectation was the pace of increases in loan yields on the balance sheet, so as a 270 basis point benefit in the quarter. And new loan yields are coming on at 7.4%. So I wanted to know to what extent could you potentially offset some of this deposit pricing pressure over the next couple of quarters?
Yeah, Brandon. This is Mike. I mean that's absolutely part of what we're thinking about for the second half of the year. Certainly, our earning asset yields will move up as the Fed raises rates. We have a very focused effort also on improving our loan yields both on new-to-bank business as well as renewals. So that's something that's a big, big focus on what we're trying to accomplish. And I think as part of our assumptions as we think about maybe less NIM compression in the second half of the year versus the first half of the year.
Related to the bond portfolio aside from a potential restructuring, no change in how we think about reinvesting back in the bond portfolio right now will continue at least for the next couple of quarters and maybe beyond with putting those cash flows and maturities, help fund loan growth and other needs on the balance sheet. So I think that's how we think about this. John, anything you want to add on the loan side?
No. The only thing I'd add, Mike, I’d like to do a great job let me answer. Brandon, the -- I mean it's a very astute question and point. And while I don't want to be tempted to get too far into 2024, about half our book is fixed and a lot of that fixed book is going to begin -- are going to continue renewing into '24. And so at the point that the variable rate business plains off a bit from the index increases as the Fed makes 25 bp increases, we'll continue to see the fixed rate book expanding.
And what hasn't happened yet in our industry, at least in our region that I believe will start occurring is banks have settled in to having a certain amount of NIBs relative to revolving lines, especially on the commercial side. And if those balances continue to come down because people are prepared to pay the fee in the account instead of -- get those fees waived then that does bring up the notion that we may see the index to prime on the revolvers begin to reprice up a little bit beyond where they are today I think just as banks settle. And when that happens, we probably all move at about the same pace.
So I think we may see better spreads against prime. If prime stabilizes, and we may see -- we will see the fixed rate money actually get repriced higher as we go into the next year. So if deposits do stabilize toward the end of the year and the competition from T-bills has waned from where the ferocious competition has been in the past few quarters. And that does indicate that the NIM story for '24 and '25 may be a lot brighter than the compression we took in '23. But I don't want to tell any numbers around at this point in time. We'll need to wait until we get a little closer in the year to talk about it, but that's kind of our outlook.
Got it. Understood. And then I noticed C&I line utilization ticked a bit lower in the quarter. So I just wanted to get some more context behind that. And if you're still seeing some new customers kind of delever themselves in this sort of economic environment and what they're anticipating?
Sure. I'll tackle that. This is John again. And look, I love this business and I'll talk too much about stuff like that because I really enjoyed talking about it. So I hope I don't take up too much time or give you more detail. But ultimately, there's three different classes of loans outside that revolver. You've got -- we have -- we're a real consumer bank. So we have a robust home equity line business that is revolving.
And those utilizations have been ticking downward really ever since Prime got to about 100 basis points below where it is right now. So volume of new applications has come down, I think, as people decide not to borrow and put their home up to do it for the time being. And the utilization actually has come down some as people trading some of those excess balances and paid down the debt because they didn't like the ticket price on the revolver.
The other area of utilization that's come down is just normal commercial utilization came down. As rates went up, our clients had a lot of liquidity. We have a great book of clients and they use some of that liquidity to pay down the line and just opted to pay the fee on their analysis accounts. So you have those two of the three total sectors and line utilization coming down. The contract of that was on the construction side, where as projects move through the pipeline, they start off on the first day at zero and then they move up, say, 85% or 90% as they get to the completion of the project and then it either flips out of the bank to farm or into real estate for a period of time until it leases up and the project is sold.
So if the pipeline is a little bit crimped on the way in as new projects volume come down, then there's a natural utilization increase that occurs as the average project gets closer to completion. So if you follow me with all those three right now, the downward pressure from consumer revolvers and commercial revolving lines of credit are offsetting the increase that we're getting on the construction utilization side. And so that will continue for a couple of quarters until it eventually normalizes. Is that where you were headed with your question?
Yeah. That makes sense. Yes, that makes sense. Okay. Thank you so much taking my questions.
You bet. Thank you.
Your next question is Stephen Scouten, Piper Sandler.
Hey. Good afternoon. I appreciate the time here. I wanted to follow up just going back to that CD conversation. I know you said there might not be as much room to reprice those lower as you thought at 1 point in time. Can you give us a feel for where you saw new CDs come on out on a percentage basis this quarter?
Yeah, Stephen. This is Mike. What I can share with you that probably as equally as useful is kind of where our current rates are. So that gives you a little bit of insight into where we think those maturities may land. So the highest rate we have right now is a 5.25% at eight months. We also have a 5% in three months. But then we also have a little bit longer maturities, nine and 11 months at 4.5% and 4%, respectively.
So I think where those maturities land in terms of people re-upping their CDs will depend a little bit on their outlook for rates. So people want to lock in a little bit lower rate for a bit longer than some of the damage to our NIM related to the CD maturities won't be as bad. If folks ought to stay short and higher and obviously, that's a little pain that we have to endure.
Yeah. That makes sense. And then I have a question kind of around your asset sensitivity modeling and this is just something I've been curious about this industry-wide really, but you still screen asset sensitive. I think it was up 1.9% and up 100 basis points. But obviously, in the near term, the balance sheet isn't really reacting that way. So I'm wondering, what is it about the modeling that isn't encapsulated in real time? Is it just the pace of the deposit moves? And would we actually see this play out if we do get stability in rates and get that back book repricing that John was speaking to a minute ago?
Yeah. I think the short answer to your second question is, yes. So we do think that, that introduces some level of stability. And related to your first question, just about the fact that we are -- we kind of described is modestly asset sensitive. We have 59% of our loan book is variable. Probably the wildcard through this cycle that really has been different compared to prior cycles that kind of interfere with some of the theory around how an asset sensitive bank might behave in a rising rate environment is really related, I think, to the non-interest bearing remix. That's occurred on our balance sheet, obviously, as well as most other banks. So certainly no secret that if we go back a year or so ago, our NIB mix was nearly 50%. We had three quarters in a row where we were kind of at that 49%, 50% level. And now we're down to 40% in a couple of quarters, potentially 35% by the end of this year. So I do think that, that introduces a little bit different variable that maybe distorts that model in a little bit.
Got it. That makes a lot of sense. Yeah. That makes a lot of sense. I appreciate that. And then just last thing for me. I know you said earlier kind of expense management is an institutional mindset at this point. But I'm wondering, obviously, given the difficult revenue environment, is that something that you take an even deeper and closer look at maybe a more the potential for a more fulsome expense plan or anything along those lines? Do you see that in future quarters by any chance?
Yeah, I think so. But again, keep in mind, our commentary narrative around continuing to reinvest back in the company. So as a reminder, back in the days of the pandemic back in 2020, we were really one of the first banks that really made a concerted effort to use the pandemic as a period to get a lot more efficient. And that resulted in a pretty significant decrease in our expense run rate and a pretty nice increase, obviously, in our efficiency. In fact, our efficiency ratio actually went slightly below 50%, just a couple of quarters ago.
So that's something that we know how to do, and that's what I mean what we mean when we say that expense management is really kind of institutionalized at our company. But again, in this environment, we also see the opportunity to reinvest. And so that's important to us as well. So the notion of being able to cut expenses or save expenses so that we can be efficient and also have room to reinvest back in the company. Those things are very important to us. John, anything you want to add?
Not to belabor the question further, Stephen, there. We gave that target of 55% out there. And while it's in the CSOs, we're really not pleased to see it go above 55% at all, even though we haven't gotten to the CSO period. But I mean the drivers for that are largely deposit pricing, the progression on them. And FDIC insurance expenses are just a lot more expensive than '23 than they were in '22, we didn't expect that a year ago, but here we are.
So all those things are real. They're true and they don't matter. We still need to get back to below 55%. So I think our reality is not to make it overly dramatic, but we kind of go off a defcon (ph) level, so to speak, when we get above 55%. And so there will be curtailments and discretionary expenses that will be implemented as we move along. And if the benefit of continuing in our reinvestment pace outlines some of the pain of doing some of the more board across the board expense curtailments, then we're not bashful about making that call.
Our goal though is, we don't think about everything in quarters, we think of it in years and it's very important that our company is in super and very strong shape to execute and play very offensive all when the economy turns and we start seeing a better opportunity to grow. And so I don't want to curtail investments to the degree that we will wish we had a year or two down the road. So we're still adding bankers. We're still adding technology, but the pace with which we're doing it is going to need and require some belt tightening elsewhere.
So not really talk about those techniques and all that now, but it's all the things that you would imagine based on our history of being pretty good at managing expenses.
Yeah. That’s extremely helpful. Thank you all for the time and color.
You bet. Thanks for the questions.
We'll go next to Christopher Marinac, Janney Montgomery Scott.
Thanks for hosting the call today. A quick question for Chris on the criticized assets. I see that they were stable, obviously, this quarter, but just curious kind of what's out there that would cause that trend either go down in a good way or perhaps see some inflection with the deterioration in future periods?
Yeah. Good question, Christopher. We're not really seeing any specific sector related confluence of events. Obviously, we're operating at a historically low level on the criticized loan levels. So there's probably a little chance of substantial improvement from where we are. But our goal, obviously, is to maintain as high asset quality as we can. I think some of the sectors that are always going to have pressure are the ones that have had to absorb the wage increases and some of the higher operating costs associated with some of the inflation that is starting to cool off, but obviously has not come down.
So they're having to kind of manage through that as well as companies that are maybe having some continued staffing challenges just because of the relatively low unemployment rate. So I think those are the sectors that we keep an eye on. We're not necessarily seeing any significant or any sort of connected issues in any one sector, but we pay particular attention to those that are getting squeezed from a margin perspective and also the higher interest rates if they have fixed rate debt, they're going to have to obviously absorb when they renew the higher interest rate for that debt at renewal. So we're looking at that closely as well.
Are those drivers for potential changes to the reserve beyond where you're positioned now?
I mean not really. I mean it could be, but generally speaking, we are factoring that into the decisions that we take. We think that the reserve is adequate for the risk that we have in the portfolio. So our objective is to kind of match the reserve to any sort of direction of risk in the portfolio, either as it increases decreases. So I would say, generally speaking, no.
Great. My follow-up is for Mike Achary, just has to do with kind of your longer-term experience on kind of the length of your deposit relationships. I'm just thinking out a couple of quarters if we get some stability on pricing kind of trying to reassess how to value the franchise and the sort of funding advantage that you've always had?
Yeah. So Chris, I assume you’re talking about our NIB mix and the long-term stability related to that. And so, yes, if so, look, that’s been a hallmark of our companies and continues to be. And while that NIB mix has certainly come down. It’s where it is now from a peak of nearly 49%. We think and believe that when the cycle is done that where our mix ends up, we’ll still be in an enviable position. And certainly, we would think it would be top quartile. So that’s something that we’re very focused on. And we think and believe, again, that will continue to be a hallmark of our company and our balance sheet.
Great. Thanks for taking all the questions today.
Sure. You bet.
Next up is Matt Olney, Stephens.
Okay. Thanks. Just want to follow up on that loan growth discussion and that onetime closed product that drove the 2Q growth. I appreciate this was kind of a reclassification as far as the driver. But I'm curious about the product itself. Are these loans all originated by the bank? And then when they move from construction into the mortgage classification, do any of the terms of the loan change?
Not many at all. They're pretty much fixed, but the volume of that, just to make sure I explained it clearly, about 60% of that number was the reclass but the pipeline is zero and has been zero for some time. So what we see in that category is largely the back quarter of the back quarter of the egg going through the snake, so to speak. And so I think we're probably two quarters away from that beginning to fall pretty dramatically, and then the portfolio itself against the shrink as we go into '24. Did I answer your question?
Yeah. That's helpful. And then just one more follow-up here for Mike on the discussion of those time deposits for pricing in the back half of the year. I heard those current offering rates that are out there that you disclosed. I'm curious if the current guidance assumes those are the roll-on rates kind of in line with those promotional rates that you've mentioned or does it assume some other type of roll-on rate for those time deposits?
Matt, it absolutely assumes some combination of those current rates, along with a reup number that we have in mind, so around 80% or so. So we think roughly 80% of our CDs will reprice into some configuration of the current rates that I gave on those CDs.
Okay. Great. That’s all from me. Thanks, guys.
Yeah. Thank you very much for the questions.
And everyone, at this time, there are no further questions. I'll hand things back to management for additional or closing remarks.
Sure. Thanks, Lisa, to you for moderating today. Everyone, have a wonderful day and a wonderful weekend and we'll see you on the road.
Once again, everyone, that does conclude today's conference. Thank you all for your participation. You may now disconnect.