First Horizon Corp
NYSE:FHN
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First Horizon Corp
Earnings Call Analysis
Q2-2024 Analysis
First Horizon Corp
The recent quarter for First Horizon showcased a robust performance, with consistent returns for shareholders and excellent service delivery to clients. Despite a competitive banking environment and a shrinking deposit base, the company managed to increase its adjusted earnings per share (EPS) to $0.36, reflecting a $0.01 improvement from the prior quarter.
First Horizon's financial health remains strong, highlighted by an 11% Common Equity Tier 1 (CET1) ratio and a 12% adjusted return on tangible common equity. The bank significantly engaged in stock repurchases, buying back $212 million worth of shares in the second quarter, totaling over $305 million year-to-date, reflecting its confidence in returning value to shareholders.
Net Interest Income (NII) experienced a $5 million increase from the prior quarter, with a slight expansion in the margin by one basis point to 3.38%. The loan portfolio continues to be a bright spot, increasing in both volume and yield, particularly in loans to mortgage companies, which is the bank's highest-yielding segment.
While noninterest-bearing balances saw a decline, they have stabilized since March. The average rate paid on interest-bearing deposits increased by 2 basis points to 3.3%. The competitive environment led to a shift of over $1 billion from lower-cost base rates to higher-rate offers, pushing the spot rate to approximately 3.35%.
First Horizon's loan portfolio grew by $1 billion, or 2% from the previous quarter. This was driven by the spring home buying season and increased lines of credit for multiple clients within mortgage companies. Commercial Real Estate (CRE) loans also grew, though at a slower pace, with loan yields improving by 6 basis points.
Fee income saw mixed results, with revenue from traditional banking fees offsetting a reduction in the fixed income business. Fees from service charges, card, and digital transactions increased due to seasonal volume trends. Brokerage, trust, and insurance fees also rose, driven by higher market indices and incremental fees for tax filing services.
Adjusted expenses increased marginally by less than $1 million. Personnel costs decreased due to lower incentives and commissions, while outside services saw an increase due to marketing campaigns and strategic third-party services. The company aims to keep the expense base flat or declining through operational efficiencies and controlled technology investments.
First Horizon's credit performance remains solid, with net charge-offs decreasing by $6 million to $34 million. Nonperforming loans (NPLs) increased by $69 million, with a notable rise in the Office CRE sector. The loan loss provision was $55 million, slightly increasing the Allowance for Credit Losses (ACL) coverage to 1.41%.
The bank has revised its net interest income outlook to a range of flat to down 2%, owing to increased deposit competition and mix shifts. Despite this, it expects stability in noninterest-bearing deposits and plans to maintain a CET1 ratio around 11%. First Horizon remains optimistic about its diversified business model and the ability to navigate the competitive and economic landscapes.
First Horizon continues its share repurchase program, considering it a strategic use of capital given current stock valuations. The bank has the flexibility to reassess buyback authorizations depending on market conditions, emphasizing returning excess capital to shareholders.
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Good afternoon, all. Thank you for joining us for the First Horizon Second Quarter 2024 Earnings Conference Call. My name is Carley, and I will be coordinating your call today. [Operator Instructions]
I will now hand over to Natalie Flanders, Head of Investor Relations, to begin.
Thank you, Carley. Good morning. Welcome to our second quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks, after which we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Susan Springfield, and our Deputy Chief Credit Officer, Tom Hong, here to do questions with you as well. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com.
As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that make our results to differ from our expectations on Page 2 of our presentation and in our SEC filings.
Additionally, please be aware that our comments will refer to adjusted results which exclude the impact of notable items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release and on Page 3 of our presentation. And last but not least, our comments reflect our current views, and you should understand that we are not obligated to update them.
And with that, I'll turn things over to Bryan.
Thank you, Natalie. Good morning, everyone, and thank you for joining our call. I'm pleased with the results we achieved in another solid quarter. We continue to demonstrate our ability to produce consistent returns for our shareholders while also providing unparalleled service to our clients. As I look back at the last couple of months, there has been a significant uptick in the competitive landscape, especially promotional deposit officers, as banks compete for growth against the backdrop of a higher for longer interest rate environment and a shrinking deposit base.
I'll start on Slide 5, where we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of $0.36 per share, which was a $0.01 increase from the prior quarter, with pre-provision net revenue increasing by $1 million. Adjusted return on tangible common equity improved to 12%, driven by the benefit of returning excess cash to shareholders.
We repurchased $212 million of stock in the second quarter and over $305 million year-to-date, ending the quarter with an 11% tangible common equity Tier 1 ratio -- excuse me, 11% common equity Tier 1 ratio. We intend to continue to stack 1 order on top of the next. We accomplished that this quarter through modest improvement to net interest income and traditional banking fees, while simultaneously managing the expense base and maintaining strong credit performance.
I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter after quarter, while serving our customers and committees just as we have for over the past 160 years. We have an attractive footprint, a competitive product set and strong credit culture that will allow us to profitably navigate whatever scenarios we encounter over the second half of the year.
With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope?
Thank you, Bryan. Good morning, everybody. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated adjusted earnings per share of $0.36, up $0.01 from the prior quarter. Pre-provision net revenue was stable to the prior quarter as net interest income and traditional banking fees offset the moderation in the fixed income business. Credit performance continues to be within our expectations with net charge-offs of 22 basis points and a slight increase in ACL coverage ratio to 1.41%. We achieved our near-term target of 11% CET1 this quarter, in part by returning $212 million of capital to shareholders through share repurchases. This return of excess capital drove improvement in adjusted return on tangible common equity to 12%.
On Slide 8, you will see that NII increased by $5 million as the margin slightly expanded by 1 basis points in the prior quarter to 3.38%. The loan portfolio continues to be a tailwind to both NII and margin. Average loans are up 1.4% from the prior quarter. Roughly 2/3 of that growth is in loans to mortgage companies, which is our highest yielding loan portfolio. Loan yields also continued to improve, up 6 basis points from first quarter, benefiting from new and renewing floating rate spreads and repricing of fixed rate cash flows. Funding mix partially offset that benefit on the asset side.
Noninterest-bearing balances were down on average, but encouragingly, those have been relatively stable since March. Deposit costs increased 2 basis points as late shift continues within the interest-bearing portfolio.
We dive further into deposits on Slide 9. Seasonality and continued contraction in the money supply drove a 1% reduction in balances in line with the industry's H8 data. Despite this, we have been successful in retaining our clients with a 95% retention versus the prior year. We have seen stabilization in noninterest balances for the first time in several quarters, which is illustrated with both average and period-end balances totaling $16.3 billion. The average rate paid on interest-bearing deposits increased 2 basis points to 3.3%. During the quarter, over $1 billion of balances migrated from lower cost base rate into higher rate retention offers, which increased the spot rate to approximately 3.35%, up 7 basis points from the end of first quarter.
On Slide 10, you will see that the period-end loans were up $1 billion or 2% from the prior quarter. The spring home dining season drove an increase in consumer real estate as we continue to focus on balance sheet production around the medical doctor program. Seasonality impacted loans to mortgage companies as well, but we all have benefited from competitive disruption in this industry, opening or increasing lines for more than 50 clients.
CRE loans also continued to fund up, though the pace of that is expected to slow in the coming quarters. As previously mentioned, loan yields were up 6 basis points from first quarter due to wider spreads and fixed cash flow repricing. Spreads on new loans increased 42 basis points year-over-year. We continue to expect fixed rate loan cash flows to provide opportunity over the next year with a roll-off yield of approximately 4.6% on $4 billion of cash flows.
On Slide 11, you can see that the growth in our banking fees helped offset the anticipated moderation within our fixed income business. Fee income, excluding deferred compensation decreased $3 million from first quarter. Average daily revenue in our fixed income business stepped down to $488,000, resulting in a $12 million decrease to fee income. The moderation this quarter was driven by a reduction in the market's rate cut expectation and lower portfolio restructuring activity. Absent a rate cut, we expect the rest of the year to be similar to this quarter. Mortgage fees increased $2 million due to home buying seasonality. Service charges, card and digital fees, are both up [ $1.1 ] million each due to seasonal volume trends that tend to be higher in the second quarter. We saw a $2 million increase in brokerage, trust and insurance fees as second quarter includes incremental fees for tax filing services within our trust department and our wealth management fees benefited this quarter from a higher market index. Lastly, other non-income increased $3 million, mostly due to incremental swap fees and a gain from a tax credit investment.
On Slide 12, we show that excluding deferred compensation, adjusted expenses increased less than $1 million. Personnel, excluding deferred comp, was down $11 million from last quarter, mostly due to reduction in incentives and commissions. The $9 million reduction to the incentives was driven by lower fixed income revenue and a step down in retention awards. Offsetting the personal decrease was a reinvestment into outside services, which increased $10 million from last quarter related to marketing for the new checking account campaigns and third-party services for strategic investments.
As we have shared before, we still expect expenses related to our technology investments to moderately increase over the remainder of the year, and we plan to offset those costs by continuing to identify men operational efficiencies, which will allow us to keep the expense base flat to down in the back half of the year.
Credit continues to perform very well, as you can see on Slide 13. Net charge-offs decreased by $6 million to $34 million or 22 basis points of average loans. Nonperforming loans increased $69 million with declines in C&I offset by an increase in CRE. Though NPLs have increased, clients are still managing through the higher rate environment with approximately 50% of commercial NPLs still current on their payments. Loan loss provision was $55 million this quarter, increasing ACL coverage slightly to 1.41%. Coverage on the CRE portfolio increased from 1.26% in first quarter to 1.51%, largely driven by the office sector. Overall, we are pleased with how our balance sheet has performed in this cycle and continue to believe credit feels very manageable.
On Slide 15, we've revisited our NII 2024 outlook. At the end of last quarter, we guided to the lower end of our previous range. However, due to mix shift and increased deposit competition that we saw late in the quarter, we are updating our expectations for net interest income range to flat to down 2%. We are assuming a relatively flat balance sheet in the back half of the year as we continue to remain disciplined on loan pricing and client selection. The higher for longer environment, in addition to heightened competition from new entrants into our market has pressured funding mix and deposit costs more than anticipated.
As I've previously mentioned, we are pleased to see stability in our noninterest-bearing deposits for the first time in several quarters. However, we've continued to see more mix shift than expected within the interest-bearing portfolio. During the quarter, over $1 billion of balances migrated from lower cost base rate accounts into higher rate retention offers. Our average base rate account yields approximately 50 basis points, while our retention offer is roughly 4%. All other guidance remains unchanged, and we will continue to seek efficiencies to help offset revenue pressures and improve shareholders' return. Lastly, you can see that we've achieved our near-term CET1 target of 11%. We plan to maintain CET1 around that 11% level and we can reassess moving towards our longer-term target of 10% to 10.5% as we gain more certainty around the macroeconomic and regulatory environment.
As we turn to Slide 16, I'll give my closing thoughts. I'm extremely proud of the work that our company has accomplished in the first half of this year. The macroeconomic outlook for 2024 has changed significantly in the last 6 months. While there are previous expectations heading into the year of 4 or more rate cuts, now we are looking at 1 to 2. But despite all the changes around us, we continue to grow earnings per share quarter after quarter. I believe that the experience and knowledge of our bankers, our teams and our leaders give First Horizon the flexibility to efficiently and effectively navigate any economic cycle.
As we advance the second half of the year, we continue to expect strong performance from our diversified business model. We will continue to identify operational efficiencies to counter headwinds in revenue. We will also remain diligent on managing our capital, our balance sheet and our credit performance in order to deliver attractive returns near term and into the future.
Now I'll give it back to Bryan.
Thank you, Hope. I echo Hope's sentiments. We have demonstrated our ability to execute and changing economic and competitive environments. We know how to pull the necessary levers in order to operate profitably. I have complete confidence in our ability to continue doing so over the back half of '24 and beyond. I firmly believe that one of First Horizon's greatest attributes is our Southeastern footprint and our established client base. While that attracts some of the greatest competition, I remain confident that we have the associates, the client relationships and the dedication to maintaining an unparalleled banking franchise in the South.
As always, I'm grateful for the great work of our associates on serving their customers and their communities. In particular, our thoughts are with those in Houston impacted by Hurricane Beryl and the thousands -- tens of thousands, hundreds of thousands that dealt for a long period without power. We remain committed to supporting our associates, clients and the greater community as they recover.
Carley, we can now open it up for questions.
[Operator Instructions] Our first question comes from Ebrahim Poonawala. It appears that we can't connect to Ebrahim. So we'll move on to the next question. Next question comes from Jon Arfstrom of RBC Capital Markets.
Can you talk a little bit more about the deposit pricing competition you're seeing, you flagged late in the quarter? And what are you seeing give us some examples of that? And what do you think changes or eases that environment?
Yes, I'll start, and then Hope pick up from there. It's interesting to see the impact it had on our balance sheet. There have been an increasing number of deposit offers that are specials across our footprint. We saw them from large and medium and small competitors. And it had the effect of driving a higher cost in our existing customer base. The number of customers who came in with offer from somebody else at a higher rate and then our need to match or come close to matching that rate picked up over the last month or so of the quarter. There was north of probably $1 billion, $1.5 billion of that occurring in the third -- the back half of the second quarter -- third month of the quarter. If you looked at deposit costs early in the quarter, our aggregate cost of deposits dropped early in the quarter was flattish in May and then really accelerated in the June time frame. And the approximate cause is this competitive environment, which in the most narrow sense, we had to match the competitive offer to maintain and defend customer relationships.
Jon, I'll add to what Bryan said. You asked about the offers. We have a very competitive offer from a marketing perspective, from kind of a new entrance to the southeast of [ 5.30 ] guarantee through year-end. And that's been aggressively marketed, walked into most of our branches and many of our employees here have been kind enough to enter office mail at me when they've gotten their houses. And so that -- we saw kind of mid-quarter, as Bryan mentioned, that competitive environment. Going into the quarter, we expected a rate cut this quarter, highly anticipated a rate cut. So everyone has pulled back from their promotional rates. The rate guarantees that we were seeing was really 3 months. We were at a 3-month rate guarantee. And as the forward curve moved to a really late in Q3 expectation for the first rate cut, we saw the offers, the marketing, the digital marketing from competitors significantly increase the longer term and higher rate in the second half of the quarter.
Okay. If we don't get a cut, Hope, do you expect this kind of pressure to persist? And I guess, to kind of clean this up, talk a little bit about the higher end or the lower end of the NII guide and kind of what gets you to the higher end or lower end?
Jon, I do think that we don't get a cut in Q3 or this year. The further out that cut gets, the more competitive this environment stays as the money supply continues to shrink out of the economy. I am hopeful that with that first cut, we'll start to see some come back. But as I mentioned, one of the major rate offers that our clients are bringing in, it is a guarantee through year-end. So even if we were to see a rate cut in September, if there's still an offer out there that is balanced through December at [ 5.30 ] rate. But hopeful that, that will start to subside with the first rate cut hopefully, a second one not too far behind that.
As far as the guidance, absolutely, a rate cut, we hope will offset the deposit pressure, but we are asset sensitive. And so the earlier that we get the cut in the year, the more that in year, we'll be able to kind of see the deposit costs come down to match the loan side repricing, but the loan -- 58% of our loan local replay in the month, and we'll have to work that deposit loss back. A little bit of lag as we walk that deposit pricing back as well as promos that come off 3-month, 6-month rate offers.
Jon, I think it's largely a gut call at this point of what happens. I think it really depends on what happens with loan demand, how the Fed normalizes its balance sheet most importantly and particularly what impact that has on deposits across the industry. The deposit market is still very tight. And I don't think a cut or 2 is likely to change that very much in the short term. I don't think it makes it very much different if rates stay higher, but I think it's going to be a competitive environment because the Fed is going through this normalization process. And that's going to keep deposit costs probably on the whole more competitive than we might have thought 3 months ago or 2 months ago.
Our next question comes from Michael Rose of Raymond James.
Just if I use the midpoint of the guidance, you guys are looking at negative operating leverage this year. I know it may be a little too early to kind of count or talk about 2025. But do you think positive -- return to positive operating leverage next year is in the cards? And kind of what are the factors, rates, improvement in fixed income and momentum and fees, stuff like that, that would kind of get you there, I assume a little bit more balance sheet growth as well?
Michael, our goal is always to start with the antennas we put together a budget to have positive operating leverage to manage our efficiency ratio year-over-year. And so at this point, it's really hard to say what's going to happen with 2024. The rate cut environment right now, the forward curve has 2 this year and 3 to 4 next year. We went into this year thinking 4 to 6, and we might end up 1 to 2. So I expect 2025, we will work hard and we will set a budget that has positive operating leverage, but I think that there's going to be a lot of uncertainty going through 2025 on deposit costs as well as money supply. We still have an inverted curve. So our countercyclical and specifically, our capital markets fixed income fees needs to see that curve steepen, and that will be a huge help for us. We can see that start to flatten out to steepen at the end of next year.
Okay. Great. Maybe just as a follow-up, as we do think about hopefully a better growth environment for you. You've clearly benefited from some -- a little bit of momentum in mortgage warehouse, just as rates have come down a little bit, and we're back to a normal seasonal market. But C&I loan utilization is still relatively low. You've had some fund-ups in multifamily and construction, things like that. Just, Bryan, can you discuss kind of the demand outlook and what you're hearing from your customers? Is it going to take a couple of rate cuts to see that utilization move up and see some better loan growth?
Yes. Particularly -- so back up to the first question, in a macro sense, to the extent that the Fed is reducing rates, we think on the whole, that will help our countercyclical businesses. And as Hope said, philosophically, we start with always trying to drive positive operating leverage, and we have these countercyclical businesses. In particular, I think our mortgage businesses will be helped as rates set and than the yield curve reset and the yield curve starts to normalize, particularly if and when it starts to drive refinancing activity, which is likely to occur as the short end comes down and adjustable arms become more affordable.
I think as we ended the quarter something like 18%, 19%, 20% of mortgage warehouse, lending activity was actually refinanced. The rest was purchased money mortgage. That tends to be more balanced over time. So to that point, I think you can see a significant pickup in mortgage warehouse lending. And I think in all likelihood, you'll see a pickup in mortgage lending as the rate curve begins to normalize.
Broadly speaking, loan demand is more tepid than we would have thought at this point in the cycle, people are generally cautious about investing. I think the twin mountains of change out there, what is the Fed going to do and what's going to happen in the presidential and congressional elections and what does that mean in terms of economic policy because there is a lot of divergence between where our 2 presidential candidates are. So at the end of the day, people are a little more tepid. But I think as rates begin to fall, I think people will become more optimistic, both on a consumer level, particularly in the mortgage space as well as in the commercial lending spaces.
Our next question comes from Steven Alexopoulos of JPMorgan.
This is Anthony Elian on for Steve. Just to follow up on the question on loan growth for Michael. So your updated NII outlook assumes a relatively flat balance sheet in the back half of the year. Can you just talk about the drivers of the slowdown in loan growth you expect following a pretty solid quarter you saw in the second quarter? I know you mentioned CRE fund-ups were slowing.
Anthony, this is Hope. One thing that we've got -- that you need to look at is the seasonality of mortgage warehouse. So about 2/3 of the -- or half the increase a little bit quarter-over-quarter on average is mortgage warehouse, which seasonally increases in [ 2 ] in quarter 3 during the home buying season and then kind of significantly tails off in Q4 and Q1. As a part of that is just the normal increase we have in loan growth. We are reaching the end of -- or near the end of the large fund ups we had from loans we originated in the last 2 years in the pro-CRE market. We're not really seeing a whole lot of originations in CRE as we continue. So we're kind of going to tread water in the back half of the year as we see paydowns, cash flows come in with what new lending will be.
Anthony, this is Susan. Add a couple of -- I do think as we go in and go into 2025, and I know Michael's question earlier about it, if there's a better growth environment. If you get some rate cuts and the outlooks are better, I do think some of our specifically C&I clients who may have put capital projects on the back burner, we'll move those back to the front burner, and you'll see some opportunities with clients who may want to reengage in some lending activity, and we stand ready to work with those clients, assuming they meet our risk profile.
And then my follow-up, can you provide more color on the increase in outside services? Are you attributed in the press release. This is tied to deposit marketing campaigns and third-party services for strategic investments. I guess how much of the $10 million increase you saw sequentially is sticky versus onetime in nature?
Marketing is a seasonal spend here at year-end and going into the new year, marketing tends not to be very effective, especially with checking accounts. It just doesn't tend to be a seasonal time where we see a lot of movement between banks. And so Q2 and Q3 are typically where we see more effective direct-to-client marketing. And so I think I wouldn't say sticky as an year-over-year as there is some seasonality there. We did mention in multiple previous calls that our technology investments were a little slower to get started at the end of last year and this year, when than we had originally anticipated. So I think that the technology spend kind of hitting its run right now and the marketing being seasonal throughout the year, typical in past years as well. If you look past back to last year's earnings, you'll see the same type of seasonality increase in marketing in Q2 and end of Q3.
Our next question comes from Ebrahim Poonawala of Bank of America.
I guess maybe first question, just around, Bryan and Hope, on fixed income, I think you said the $40 million seems like a good run rate for the back half, from what I can recall just in prior cycles, rate cuts, it is countercyclical, you should see a lot more bond book restructuring at your clients, et cetera. So I would assume that is the September rate cut outlook firms up and the steepening of the yield curve should push that to pretty strong levels would be my understanding. So am I missing something there? Or are you just being conservative when you talk about the cap markets outlook?
Yes. I'll point you to, there's a very pretty graph at Natalie put in the appendix that sort of shows what it does to average daily revenues. So your instincts are right. To the extent that rates are moving down, you're likely to see an impact on average daily revenue being up. What we've talked about there is a more steady environment. We're not making any broad assumptions about the fed making significant rate cuts basically following the But on the whole, if it is more aggressive in moving rates down is likely to be better than we've talked about for our fixed income business.
Got it. And I guess the other side of the other countercyclical business around mortgage warehouse, if we get fed cuts at mortgage rates remain around 7%. Is that enough based on what you're hearing from your mortgage clients to get activity and a pickup in balances? Or is there a level of rates on the mortgage front that needs to occur to get that business sort of momentum going?
I think you've got to see mortgage rates drop more significantly to see any real pickup in refinance activity. I think you'll still continue to see a steady flow of purchase activity. But I think to see anything meaningful in terms of refinance activity, you're going to have to see rates drop more than that. We have had an opportunity to pick up a little bit of share by increasing lines. And we think that, that will help maintain some stability and balances there. And we're optimistic that that's a business that's going to pick up nicely as the rate environment does normalize and get a normally shaped yield curve.
Got it. And one last question, if I may. You're mixing and deposit pricing sounds a lot more, I think, circumspect relative to what I've heard from the banks so far this earning season. So one, I think remind us, is there a loan-to-deposit ratio that you're managing to, which is causing First Horizon to be a lot more active in bringing in deposits or retaining deposits? And am I overreading it? Because what we're learning from most banks is some cooling and deposit pricing, things repricing lower from 3, 6, 9 months ago. So I just want to make sure I'm not missing anything. .
Yes. I think a couple of thoughts. One is we are attentive to our loan-to-deposit ratio, but that's not driving the deposit pricing strategy as much as it is protecting, defending existing customer relationships. So we're thinking about it from a relationship side of things. And that's what's driving the activity. If you look underneath the covers, I quoted some numbers about existing customer relationships that we up price. We also had a significant balance of customers where we were able to move the rate back. It's just on the whole because of competitive dynamics in certain sectors. We saw a net aggregate increase in deposit costs, but it was really driven by our desire to defend customer relationship. Clearly, as I said, we will pay attention to our loan-to-deposit ratio, but we think we have the flexibility in our balance sheet to support attractively easy for me to say. Attractively priced, well structured credit and through any cycle. So it's not really constrained in the near term. Not to say that, that won't change, but in the near term, we feel like we're well positioned to fund customer relationships that make sense for our balance sheet.
Ebrahim, there's 2 things I'll add to that. We are a Southeast regional bank, and I think everyone with the exception of one that releases a national bank. But most everybody talking about the Southeast being their target for growth, and so we are competing differently than the national banks. When you look at all of our competitors and they talk about their growth opportunities, they're talking about the Southeast. They're announcing new branches. They're announcing hiring new teams. And so I think the Southeast allows us to grow more than the average on loans, but it's also become more competitive in both the loan and deposit side as more banks are trying to increase their footprint or interfere.
The second, on the loan-to-deposit ratio, as mortgage warehouse funds up in Q2 and Q3, we always see that drift up. As I've mentioned before, we may have to go deeper into brokered or wholesale during time, but being a 300 basis point yielding asset. I'm okay with that match funding and that loan-to-deposit ratio going up during the 2 quarters, their heightened line increases.
300 basis points spread.
Good catch, Bryan.
Our next question comes from Chris McGratty of KBW.
Hope, in terms of the spot margin, do you have that as of June 30, I'm trying to think about exit velocity as you go into next year with what you're doing with the deposits?
We didn't have spot margin, but we do have on Slide 9, the spot rate for the quarter, which was 3.35.
3.35 for June. Okay. Great.
As on Slide 9.
5
Great. I must have missed that. And then Bryan, on capital, you're at the 11%. You talked about clarity on regulation and clarity on the economy being the keys to going down to 10%, 10.5%. Do you think it's a possibility that you could have that clarity in the back half of the year? Or is that probably a 2025 event to take down the capital ratios?
Yes, I still think it's a 2025 question. We're not planning on changing our thinking about that in the near term. We want to see the path of rates and what the economy is doing. And as most everybody, we're hopeful that the Fed creates a soft landing for the economy, but we're prepared for something different than that. And until we see greater clarity, we don't plan to reevaluate that.
Our next question comes from Casey Haire of Jefferies.
Follow-up on NII. Any thoughts to using some of the capital towards a bond book restructure and improving the yield there? I know it's a small asset for you, but just wondering some updated thoughts there.
Yes. This is Bryan, Casey. The short answer is probably not. In our view, the restructuring of the buying portfolio really creates a lot of friction and doesn't really create anything other than a difference in the timing of earnings. That discount or AOCI mark is going to creep back to earnings our capital over time. And so it's unlikely that, that's something that we evaluate just simply because it creates friction that doesn't create a lot of economic -- it doesn't create any economic value over time.
Got it. Okay. And then just switching to credit quality. The NPL migration, sounds like it was driven by CRE. I was wondering if you could give any color on product or geography? And what's driving that?
Yes. Casey, this is Tom Hung. It was predominantly driven by our CRE portfolio in particular office. What I point to, though, is I think the other performance is within the range of our expectations. I don't think there was anything that was surprising to us. This is really kind of a just driven more by the higher the longer environment we're in as well as macroeconomic environment. What I would point to is within our Office CRE portfolio, we continue to believe we have strong client selection and I think they certainly prove itself out in the long run. Just kind of give you some high-level information, 90% of our office portfolio footage [indiscernible] or less. That who speaks to kind of the profile of our office portfolio. In fact, we only have 8 buildings that are 10-plus stories. And so I believe we're where with the right projects, the right borrowers and the right portions of office to have a good long-term outcome.
Our next question comes from Ben Gerlinger of Citi Group.
If we could talk a little bit about share repurchase activity and note the CET1, the tenant probably next year outcome or the banks pretty good month so far. I was kind of curious how you guys think about the math and buyback kind of taking into consideration to that -- has a relation but then also a the total, the math is a little bit different because the stock has gone up. Just curious if you do continue to buy back, could we theoretically see another reauthorization this calendar year because you use So I'm just kind of curious your thoughts on overall share purchase activity.
Yes. The buyback activity, we are thoughtful about price and relative value at our expectations of long-term values. We think that even with the significant improvement in stock prices across the industry over the last few weeks, we think we're still at a relative discount and opportunistically, we will continue to use capital to repurchase shares. I don't know how to evaluate as we sit here today about whether we would reauthorize a buyback this year or next, that's a Board decision. We have plenty of capacity under the authorization that we have that expires in January of this coming year 2025. And so we will evaluate that as appropriate. But we do think maintaining excess capital when we can return it to shareholders through a buyback is probably more appropriate that we put it in the hands of our shareholders. And so we will continue to be opportunistic. We'll look at relative valuations, and we'll make a decision later on about whether we need to increase our authorization or not.
Got it. That's helpful. And then Hope, I know you said expenses in your prepared remarks. I think you said flat to down in the second half of this year. I was kind of curious there's always levers you can call especially with a pretty sizable franchises you guys have. But is that pushing anything out into 2025 that could be done today? I'm just kind of curious on how you get down relative to
Yes. Ben, good question. We do expect to be flat to down in the second half of the year. Part of that is in the -- as we've spoken about before, our bond business or financial had a really good Q1, and we had a high revenue quarter and a high expense quarter. We expect that to come back down. We've had the TD retention. The first step down in the back half of this year, and we think we've hit the stride of our technology investments. And so we are looking at operational efficiencies. We have in our adjustments, a restructuring cost as we continue to look at ways to reduce our cost with a low growth environment. How much headcount do you need. Where you previously spending money with third parties that you don't need to anymore. The environment has significantly shifted over the last year, and we're looking at every opportunity we can to be as efficient as we can and make sure that we have the -- Bryan and I commented before, very focused on our efficiency ratio, not letting that grow over time.
Okay. That's helpful. Well, there's another being cost that -- so I'm just trying to think about the hill decline next year. It's not like you intentionally kind of making it a little bit bigger by managing to that, correct?
Correct.
[Operator Instructions] Our next question comes from Samuel Varga of UBS.
I wanted to just go back to the NII guide for one second. You assume a flattish balance sheet. And obviously, with the loan growth year-to-date, you're kind of close to the middle of the guide. You said and obviously, the seasonality and the LMC vertical isn't going to help for the second half of the year. So I'm just trying to ask, is there any sort of mix shift assumption within that flat balance sheet? Or should we think that loans and securities and cash are all sort of staying relatively flat for the second half of the year?
Sam, thanks for the question. When you change your guidance, you run a whole set of scenarios to hopefully only change once in the year. And so the answer is zero, flat to down 2% take into account all of the things that could happen. Increasing deposit costs, a flat balance sheet, a slightly up, slightly down balance sheet. And we feel that whatever is going to happen in the back half of the year, we will hit the new guidance between flat and down 2%.
Okay. Understood. And then just on the deposit side, thinking about like you're probably 2025 on the sort of the noninterest-bearing front. I wanted to get a sense for, I guess, where would you expect that gross return from the retail franchise in the commercial franchise? So what would have to happen for your commercial clients to actually increase the dollars they hold in those NIB accounts?
I think the answer is both. We're -- we've gotten trusted on a checking account marketing campaign. We haven't done that in years really since the MOE. And we saw a lot of success in the second quarter. And so we hope that, that will continue and we'll see stabilization in the noninterest bearing. I'll also mention, as we look at that, there is a small amount of noninterest bearing, but also interest-bearing when we talk about the commercial clients. We've talked a lot about our technology investments. One of the biggest investments we're making is converting and upgrading our treasury management system. And on the back half of that, we expect to convert that -- complete that conversion and some into Q4. We do expect that we'll be able to attract and retain and deepen relationships and attract new clients with our new and approved treasury management.
Yes. I think the opportunities for growth exist on both sides. In Fed shrinking its balance sheet world, that money is ultimately coming out of customer accounts, too. And if you look at customer accounts, they've been declining over the last several months and really going back a year or so. But we think there are opportunities, as Hope said, to grow both on the consumer side. We've got a checking offer that is showing very good signs in the process. We think the completion of the treasury integration effort will be very significant in terms of our ability to continue to grow in the market that product, so we're optimistic on both sides. And as we said a number of times, a very attractive footprint. It's competitive, but it's a very attractive footprint, and we think that gives us plenty of opportunity to invest in some of these higher growth markets where we have in many cases, smaller shares. And so we're optimistic about our ability to invest and grow across this 12-state footprint.
Our next question comes from Christopher Marinac of Janney Montgomery Scott.
Susan, I had a question on the CRE reserves. And I was curious if there's flexibility there now that there's rose in the quarter and given that the lease renewals are very limited, as you had outlined in the slides.
So your question is Can you repeat the question, Chris?
Is there flexibility on your reserve? Can you reserve for CRE grow less than we just saw just because you've got limited renewals and sort of addressed what you needed to this last quarter?
Yes. I do believe that, especially as rates -- the rates have continued to -- well, they have been stable, if they come down, we're going to see, I think, a good bit of relief on commercial real estate and actually C&I and everybody. And so we will see some healing there. I also think that we've been very proactive and on the conservative side as we think about grading and we've done really the duration. And so as we've built reserves over time, I believe we're adequately reserved at this time. At this time, we don't expect to build and are there opportunities to release as things moderate, Absolutely, there could be.
Great. And then I just had a question for Hope as it pertains to the technology spend. I know you mentioned that there was sort of slow on the pace, but as it accelerates, is it going to be treasury management things like you mentioned? Or would it be other initiatives back towards the core of the bank?
Early on the 3-year plan and early on, a lot of it was kind of what we're calling run the bank is end-of-life systems like treasury management and GL, things that we had put on par following the MOE integration and following the 15-month dating and cording we had that didn't end up working out. As we're trying to -- that most of that run the bank is getting through, we are doing more change to that, more client facing in the back half of our 3-year investment strategy. And next year, we'll be talking about -- this year, we're talking about the big 2, which are GL treasury management. And next year, we'll share with you some of the big ones we're doing as well.
[Operator Instructions] Our next question comes from Jared Shaw of Barclays.
This is John Rau on for Jared. I guess just if we could get a little more color on migration into NPLs and the office portfolio. I guess what portion of the increase in NPLs was from office in particular? And has there been any differentiation across geographies, just on overall performance within the office portfolio?
John, this is Tom A large portion of the NPL increase is driven by office. I think that's probably not surprising. But as I mentioned, I believe it's all within the range of educations that we've had based on what we -- based on the information we have about kind of the broad environment and the rate environment that we're in. I would reiterate that I believe we've continued to show good underwriting and client selection. And so even as we go into these deals, we certainly always stress test to folio for potential rises in increase rates -- interest rates change in vacancy rates and so on. And so I think what you're seeing overall is just obviously, as rates have been higher, the cushion has been smaller. And so we wanted to make sure we're always appropriately, if not conservatively grading our portfolio, and hence, why you see some negative grade migration.
John, I'll add a few things to what Tom said. This is Susan. And you're seeing this just in articles that are coming out from others and just commercial real estate databases. Some of the geographies that have seen some weakness in the southeast around office, we at Atlanta, So a couple of areas and some -- a little bit in some of the Texas cities. So -- but again, these are more -- at this point, we still think of these as kind of project by project and not indicative of an issue necessarily with a specific geography. And to reiterate what Tom said, we've been conservative in commercial real estate underwriting for many, many years. And so the upfront equity that we report across all types of commercial real estate projects is significant. And so even with some drops in the price value that we've seen as we reappraised properties either because they've been downgraded or there's a credit event, a maturity. We've not seen a lot of loss content there. But something we continue to evaluate on a loan-by-loan basis.
Yes. We do watch it closely, and I would just add that in our traditional office portfolio based on the information we currently have, we're looking at an average stabilized LTV of about 60% on our office book. So that do is a pretty significant amount of cushion for any softness.
John, the other thing I'll reiterate is what we said before is we reiterate our charge-off guidance. So NPLs are up this quarter. 50% of them are current on payments, and we still stand behind our charge-off guidance for the full year. .
Okay. Great. That's really good color. And then I guess just on the reserve, it sounded like CRE reserves expanded mostly due to office. Just can you put a number on what the office reserve is and what the rest of the CRE portfolio reserve is that?
We don't break it down by property type, but there is -- the CRE coverage as outlined overall in the materials that were provided.
We currently have no further questions. So I'll hand back to Bryan Jordan, CEO, for closing remarks.
Thank you, Carley. Thank you, everyone, for joining our call. We appreciate your time and attention. Please let us have any further questions or need additional information. Again, thank you and have a great day.
This concludes today's call. Thank you to everyone for joining. You may now disconnect your lines.