FNB Corp
NYSE:FNB
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FNB Corp
Earnings Call Analysis
Q2-2024 Analysis
FNB Corp
F.N.B. Corporation reported strong financial performance for the second quarter of 2024, with net income available to common shareholders of $123 million, translating to $0.34 per diluted share. Pre-provision net revenue grew by over 4% from the previous quarter, bolstered by well-managed expenses and high noninterest income. Tangible book value per share saw a 12% year-over-year increase, reaching a record high of $9.88.
The company demonstrated robust growth in loans and deposits. Total loans and leases grew by $1.2 billion, or 3.6%, to $33.8 billion. This included $633 million in consumer loans and $540 million in commercial loans and leases. Deposits also increased by $259 million, reaching $35 billion, with certificates of deposit growing by $202 million and noninterest-bearing deposits by $80 million.
F.N.B. Corporation is well-positioned to gain market share in the current volatile environment. The company’s capital and liquidity positions are strong, and its consistent and conservative underwriting policies are effective. The loan and deposit growth exceeded industry averages, driven by a successful digital eStore and a strategic focus on key markets like the Carolinas, Pittsburgh, and Cleveland.
Investments in the company’s digital eStore have paid off, with total interactions increasing by 22% year-over-year. This digital push has not only supported loan and deposit growth but has also led to increased customer engagement and improved operational efficiency.
Noninterest income remained strong at $88 million for both the first and second quarters, largely supported by mortgage banking operations, wealth management, and treasury management fee income. Noninterest expenses were well managed, totaling $225.8 million, an $8.3 million decrease from the previous quarter.
For the full year 2024, F.N.B. Corporation expects mid-single-digit loan growth and low-single-digit deposit growth. The company has revised its net interest income forecast to be between $1.27 billion and $1.29 billion, assuming a 125 basis point rate cut in September. Noninterest income for the third quarter is expected to be between $85 million and $90 million, with noninterest expenses projected to range from $220 million to $230 million.
The company’s asset quality metrics remain solid, with total delinquency at 63 basis points and net charge-offs at 9 basis points. The total provision expense for the quarter was $20.2 million, supporting loan growth and covering charge-offs. The allowance coverage ratio, including unamortized loan discounts, stands at a robust 421% of nonperforming loans.
F.N.B. Corporation continues to focus on innovation and employee engagement. The company’s eStore won Best Digital Initiative at the 2024 Banking Tech Awards USA. Additionally, F.N.B. earned numerous awards for workplace excellence, further solidifying its position as a top employer in the financial services industry.
The company received national recognition from Forbes, ranking among America’s Best Banks and being named to the Global 2000 list based on sales, profit, assets, and market value. These accolades highlight F.N.B.’s competitive advantage and strong market presence.
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Good morning, and welcome to the F.N.B. Corporation Second Quarter 2024 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I'd now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.
Welcome to our earnings call. This conference call of F.N.B. Corporation and the reports that filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable financial measures are included in our presentation materials and in our earnings release.
Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website.
A replay of this call will be available until Thursday, July 25, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website.
I'll now turn the call over to Vince Delie, Chairman, President and CEO.
Thank you, and welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.
FNB reported solid second quarter results with net income available to common shareholders of $123 million or $0.34 per diluted common share. Pre-provision net revenue increased over 4% linked quarter, supported by our well-managed expenses and continued strong noninterest income levels. Tangible book value per share grew 12% year-over-year to reach a record high at $9.88.
The second quarter's performance was driven by our long-term strategic goals to gain market share through loan and deposit growth, diversified revenue streams and manage risk.
As we've previously mentioned, FNB is well positioned to steadily increase market share in this volatile environment, given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidance. FNB reported linked quarter loan and deposit growth of 3.6% and 1%, respectively, demonstrating our ability to execute on this strategy. Both of these results exceeded the published H8 data this quarter for both large and small institutions.
The loan and deposit growth benefited from our investments in our digital eStore with total interactions increasing 22% year-over-year. The increase in commercial loans was driven by activity across the footprint, highlighted by double-digit year-over-year growth across the Carolinas. Our Pittsburgh and Cleveland regions and commercial equipment finance business also posted strong contributions. The increase in FNB's commercial real estate portfolio included fundings on previously originated projects.
On a spot basis, consumer loans grew 5% linked quarter, led by growth in residential mortgages. While growth in this portfolio is seasonally higher in the second quarter, our results also reflect the continued successful execution in key markets by our expanded mortgage banker team and long-standing strategy of serving the purchase market. This activity ultimately leads to increased households and deposit share growth.
Deposits benefited from seasonal inflows as well as new production that was generated through targeted deposit initiatives and promotions. Noninterest-bearing deposits ended the quarter over $10 billion, an annualized increase of 3.2% in the prior quarter. The mix of noninterest-bearing deposits to total deposits ended the quarter at 29%, a consistent level since December of 2023.
As we've frequently discussed, our strategy has been to price our deposits to protect our peer-leading deposit data while supporting our client base. Our loan-to-deposit ratio currently equals 96%. We're expecting lower loan originations and implementing a number of deposit initiatives in the second half of the year that will bring our loan-to-deposit ratio back towards historical levels.
Another longer-term strategic focus has been diversifying our revenue streams. Achieving stable noninterest income at near record levels of $88 million in both the first and second quarters highlights the strength and range of our business model and FNB's robust suite of products and services. For the first half of the year, noninterest income totaled $176 million, a 10% increase over the same period in 2023.
Fee income growth was led by our mortgage banking operations growing over 50%, strong wealth management revenue and treasury management fee income growth. Our success growing noninterest income is expected to continue as we enter the second half of the year.
FNB's balance sheet strategy is part of our proactive approach to risk management. As we drop closer to a reduction in interest rates, we continue to move towards a neutral interest rate position to provide stability and potential improvement in margin in a falling rate environment. Beyond interest rate risk, FNB's comprehensive approach to credit risk management has led to strong and stable asset quality and consistent outperformance versus peers. Our credit team proactively monitors each loan portfolio and overall concentrations at a granular level, which has served us well through many economic cycles.
I'll now pass the call over to Gary to provide further detail on the overall asset quality. Gary?
Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Total delinquency finished the quarter at 63 basis points, down 1 bp from the prior quarter. NPLs and OREO remained unchanged, ending at 33 basis points, a multiyear low with net charge-offs at 9 basis points, reflecting solid performance in the current economic environment.
Total provision expense for the quarter stood at $20.2 million with $12.8 million utilized to support loan growth and the remainder providing for charge offs.
Our ended funding reserve stands at $419 million, up $12.5 million in the quarter, ending at 1.24%. When including acquired unamortized loan discounts, our reserve stands at 1.35%, and our NPL coverage position remains strong at 421% inclusive of the discounts.
We continue to successfully execute on our strategy to monitor the nonowner CRE portfolio. Monthly, we analyze and segment upcoming and previously resolved maturities, largest exposures and market conditions for the various property types across our footprint. At quarter end, delinquency and NPLs for the nonowner-occupied CRE portfolio improved slightly and continue to remain very low at 16 and 12 basis points, respectively.
Net charge-offs reflected solid performance for the quarter at 4 basis points, again, confirming our consistent underwriting and strong sponsorship. The nonowner-occupied office portfolio of delinquency totaled 4 basis points with no NPLs, largely in line with the prior quarter.
We maintained a strong focus on credit risk management and our portfolio continues to perform well throughout numerous economic cycles. Quarterly, we perform specific in-depth reviews of our portfolios, along with a full portfolio stress test.
Our stress testing results for this quarter have again shown lower net charge-offs and stable provision compared to the prior quarter's results with our current ACL covering approximately 90% of our projected charge-offs in a severe economic downturn, again, confirming that our well-balanced loan portfolio enables us to withstand various stressed economic scenarios.
In closing, our asset quality metrics ended the quarter at good levels, and our loan portfolio continues to remain stable. Our continuous investments in credit risk management systems and corresponding staff complements our consistent underwriting and core credit philosophy.
Our experienced banking teams and tenured leadership have positioned the company well to continue to achieve prudent loan growth, while proactively managing credit risk through many economic cycles.
I'll now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Thanks, Gary, and good morning. Today, I'll focus on the second quarter's financial results and walk through our third quarter and full year guidance.
As Vince mentioned, total loans and leases ended the quarter at $33.8 billion, a linked quarter increase of $1.2 billion or 3.6%. This growth included $633 million in consumer loans, driven by the seasonal peak for residential mortgage originations and $540 million in commercial loans and leases, reflecting healthy activity in C&I and equipment finance as well as additional growth from fundings on previously committed commercial real estate projects.
Total deposits ended the quarter at $35 billion, an increase of $259 million linked quarter, including growth in certificates of deposits of $202 million and noninterest-bearing deposits of $80 million as the seasonal build in public funds deposits have begun.
The loan-to-deposit ratio increased to 96% at June 30 compared to 94% at March 31. We expect this ratio to decline in the medium term, both organically and with several initiatives our team has implemented.
Starting on the loan side of the equation, the second quarter's robust loan growth is higher than forecasted due to the seasonality of our mortgage business and stronger commercial client acquisition across the footprint. We expect loan growth to return to historical levels for the remainder of the year as pipelines have declined somewhat given the strong production in the quarter and the typical pause in client activity leading up to the presidential election.
Looking at deposits. We currently have several deposit gathering initiatives targeting both commercial and consumer balances, including a strong treasury management pipeline and a new 5-month CD in consumer money market promotion. Given the short duration of these promotions, we should be able to quickly reprice them lower when rates fall.
Over the past year, our deposit growth and mix has outperformed the industry, and we believe that will continue. This past quarter, we largely utilized short-term borrowings to fund the robust loan growth with total borrowings increasing $1.4 billion. When rates start to decrease, the cost of these borrowings will move down quickly.
As Vince mentioned, over the last several quarters, we've been strategically positioning our balance sheet to be more neutral to benefit from lower interest rates. We've $4.5 billion of short-term or floating rate borrowings, around $4 billion of non-maturity deposits that are currently priced at or above 4.75%, a $6.9 billion CD portfolio with a 9-month duration. And lastly, as I mentioned on last quarter's earnings call, we've around $1 billion of swaps that mature beginning in 2025 with rates between 75 and 100 basis points.
Additionally, the investment portfolio has an annual cash flow of $850 million at a current roll-off yield of 2.50%, and we've approximately $2.6 billion of fixed rate loan repayments at an average rate of 4.5% in the next 12 months.
In total, we've over $16 billion of liabilities and swaps, nearly $3.5 billion of securities cash flows and fixed rate loan repayments that should provide significant benefit and protection in the falling rate environment compared to the $16 billion of loans that reprice within 3 months.
The second quarter's net interest margin was 3.09%, 9 basis point decrease largely due to the increased short-term borrowings, driving a 13 basis point increase in the total cost of funds to 2.46%. This was partially offset by a 3 basis point increase in the total yield on earning assets of 5.43%. Our spot deposit costs ended the quarter at 2.13%, leading to a total cumulative spot deposit beta of 38% since the current interest rate increases began in March of 2022, positioning us well against our competitors.
Net interest income totaled $315.9 million, a $3.1 million decrease from the prior quarter as the higher cost of funds was partially offset by higher loan balances with new origination yields for the quarter around 7%, consistent level since the third quarter of 2023. We expect the second quarter's net interest income to be the trough for the year and should see modest sequential improvement in the third and fourth quarter.
Turning to noninterest income and expense. Noninterest income totaled $87.9 million, consistent with the prior quarter's strong results. The largest quarterly increase was $2.8 million in service charges, driven by treasury management revenues continuing to gain momentum and seasonally higher consumer transaction levels. Offsetting this growth were declines in capital markets given lower commercial customer transaction activity and lower mortgage banking operations income, driven by a slight decline in sold loan volume and net fair value adjustments on pipeline hedging activity.
Operating noninterest expenses were well managed and totaled $225.8 million, an $8.3 million decrease from the prior quarter after adjusting for $0.8 million of significant items in the current quarter and $3 million last quarter. The largest driver for the decline was salaries and employee benefits, which decreased $8.2 million, primarily due to normal seasonal long-term compensation expense of $6.9 million and seasonally higher employer-paid payroll taxes in the prior quarter. The efficiency ratio remained at a peer-leading level coming in at 54.4% in the second quarter.
FNB's capital position remained strong as we were able to support robust loan growth and maintain a tangible common equity ratio of near 8% and CET1 ratio at 10.2%, both of which remain above our stated operating levels. Tangible book value per common share was $9.88 at June 30, an increase of $1.09 or 12.4% compared to June 30, 2023. AOCI reduced tangible book value per common share by $0.67 as of quarter end, compared to $0.99 at the end of the second quarter of last year.
Let's now look at guidance for the third quarter and full year of 2024. We're maintaining our full year balance sheet guidance. Loans are expected to grow mid-single digits on a full year basis. Total deposits are expected to grow low single digits on a year-over-year basis. Our mix of noninterest-bearing deposits to total deposits is anticipated to remain superior to peers.
Our projected full year net interest income expectation is revised to be between $1.27 billion and $1.29 billion, assuming 125 basis point rate cut in September. This revision reflects our interest-bearing liability mix as we enter the second half of the year.
Net interest income for the third quarter is expected to be between $315 million and $325 million. Given the strength of our noninterest income generation in the first half of the year, we've increased our full year guide to be between $350 million and $355 million. Third quarter noninterest income is expected to be between $85 million and $90 million.
We now anticipate the full year guidance for noninterest expense to be between $900 million and $915 million due to production-related compensation given the strong fee income results. Third quarter noninterest expense is expected to be between $220 million and $230 million.
The full year provision guidance range is lowered to $75 million to $95 million and remains dependent on net loan growth and charge-off activity in the second half of the year.
Lastly, the full year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur.
With that, I'll turn the call back to Vince.
Thank you, Vince. This year celebrates our 160th anniversary as a nationally chartered bank obtained through the National Banking Act in 1864. Through the execution of our growth strategy, FNB has continued to prosper and develop into a diversified $48 billion regional financial institution.
This quarter's results continue to reflect those efforts with a resilient balance sheet, strong capital generation, ample liquidity and linked quarter growth in pre-provision net revenue. We consistently received national recognition that affirms our competitive advantage with prominent publications such as Forbes ranking FNB one of America's Best Banks and naming us to its global 2,000 listed companies based on sales, profit, assets and market value. Our strategic emphasis on innovation is integral to our success, and we continue to earn national attention for digital engagement and leadership.
Most recently, FNB's eStore won Best Digital Initiative at the 2024 Banking Tech Awards USA. These awards highlight outstanding achievements and success in the U.S. banking and fintech industry. In addition to winning Best Digital Initiative, FNB was honored among the nation's top 5 largest financial institutions as a finalist for Best Use of Technology in Consumer Banking, Best User or Customer Experience Initiative and Top Innovation.
We also continue to earn awards for our commitment to our employees to enable our success. During the second quarter, we extended the long list of top workplace honors we received national in the financial services industry and throughout our footprint with specific awards for culture, excellence and leadership.
As we reflect on a solid quarter, I want to thank our team for their many contributions. We appreciate your dedication by maintaining our focus on our shared principles and goals. We're poised to navigate the ever-changing macroeconomic landscape and deliver for our customers, communities and shareholders.
We'll now begin the question-and-answer session. [Operator Instructions] The first question comes from Daniel Tamayo with Raymond James.
Maybe starting on the balance sheet side. You talked about a slowing of loan growth in the back half of the year relative to what's been -- or what was a pretty strong quarter in the second quarter. Obviously, you had a lot of residential mortgage growth. You had some commercial real estate growth and some commercial growth as well.
Maybe you can talk about just the mix that you're expecting in the back half if you expect that's slowing to come from the residential side? Obviously, some seasonality in the second quarter here, but if that's part of it, if you're also seeing -- expecting a slowing on the commercial real estate side with construction fundings slowing. Just curious on the mix you expect.
I don't do mortgage mix. [indiscernible] I was going to turn it over to Vince Calabrese, so I can mix it. I think a couple of things. First of all, the mortgage growth is seasonal. So we've already started to see, as we move into the third quarter period, started to see a lower loss in our pipeline. So we expect that to come down fairly substantially. So less big put on the balance sheet as we move forward there through the second half of the year.
The construction fundings were on committed -- on primarily committed obligations. We do quite a bit where we do the construction financing and it's taken out by someone down the road. So those fund-ups occur -- just natural funding as we move through the construction period. So that presented growth this quarter.
And then we had some pretty robust growth in equipment finance. We've been doing pretty well there with leases pretty much across the footprint, and there were some renewable energy deals that closed, I think in the last quarter of last year, and the balance is there. I think we've exceeded $1 billion in balances in that book of business. So it's growing nicely over time and continues to grow.
C&I has contributed. There was some significant growth in the Carolinas, Pittsburgh, Cleveland contributed. So -- it was really coming from a bunch of areas, really robust. In certain areas, it appears we've been taking share from others. So I think the disruption that occurred really kind of mixed it up with the customer base and gave us an opportunity to get out and pitch new transactions, which I think is very positive.
The growth was higher than I expected, but I think it's okay because it positions us well moving into '25. Given how we're shifting to a more liability sensitive balance sheet and putting those assets on really sets us up for '25 from an earnings perspective that we can continue to generate deposits.
So I think that on the loan side, that's what we're guiding. Our guidance hasn't changed. We're expecting to produce the same level that we forecasted at the beginning of the year, but it's a little lumpy. And I'll tell you, pipelines are down. We've booked quite a bit this quarter. So we're moving into the next quarter down about 10% of commercial pipelines. And it's still a little sluggish on the consumer side.
So we haven't seen as much. While we've seen more mortgage -- first mortgage volume, there was much less home equity HELOC volume. So they kind of offset each other. And we're not expecting that to come back this year. So that's how the book just performs. The only other category I think I didn't speak about was indirect auto.
I don't know, Gary, what your thoughts are there, right?
We had a solid growth quarter in Q2, which is, again, seasonal very similar to the mortgage. We're getting really high-quality paper there with focus on profitability. So improving margins and playing at the high end of the FICO band is really working well for us. But again, that's seasonal, we're going to pick our spots and manage that through those seasonal periods. So we expect that to come down as we move toward the latter half of the year as well.
And then from a funding perspective, if we're able to execute our plan, we've seen growth in our treasury management pipeline. So we're seeing some very large good opportunities where we're the principal bank. That should bring in demand deposits as we move forward.
I think the bright spot here, while we had to fund that growth with borrowings temporarily, the upside for us in the long run is to replace that with lower cost funding. And I think we've proven that we can do that. So the upside into '25 is us replacing those borrowings with deposits. And if you look at the demand deposit base, it's been stable. We've been at 29% for several quarters. We had growth in demand deposits, which you're not seeing across [Audio Gap] some pretty decent growth in certain categories when we priced up to bring deposits on.
We've not been as aggressive as others throughout the cycle. We're starting to look at pockets for us to price up to bring in deposits, which also leads low-cost deposits. So our strategy is kind of coupled with -- attracting those demand deposits as well.
Our beta performance goes to that point too, right? It's very -- up very gradually from last quarter, 36.5% to 38%. So that's again is us protecting the overall profitability.
Yes. As you can imagine, it's a challenging time to navigate. We don't want to pull back. I think a lot of competitors have shrunk their balance sheet or pulled back. I think this is an opportunity for us to go after some share, bring in households and do what we do well, which is converting the primary clients. I hope that helps, right?
Yes. No, that's terrific. I really appreciate all that color. Maybe a quick follow-up. Just you touched on it at the end there on the funding side, but you also mentioned in the prepared comments about the positive initiatives in the back half of the year to kind of rightsize the loan-to-deposit ratio. Just curious if you could go into a little more detail about what you were thinking and how that could impact kind of funding costs in the next....
Sure. We've modified the incentive plans for the consumer bank. We've kind of a kicker for deposit growth. So shifting the way -- loan growth is pretty really miniscule in that segment. So we thought, hey, we'll incent them to go after deposits.
We've a number of calling initiatives across the company on larger treasury management opportunities. We've won a bunch of transactions that haven't funded yet, which are fairly sizable. It seems like clients are willing to talk to us given our performance over this past cycle.
So we kind of proven that we're capable of handling those relationships throughout a cycle when -- without any issues. I think that the people are very focused on it. Our teams are focused on it. And as long as we manage them in that direction and focus mainly on them that's going to pay off.
And the other thing is the eStore, the investment in digital and digital technologies, the interactions are up 22%. We're starting to get some traction there on the consumer side. Then, I don't want to get into excruciating detail, but there are things that we do from an incentive compensation perspective kind of across the board to incent deposit growth.
And then we've done some things on the mortgage side, where we've used data analytics to cross-sell customers that we bring in, particularly in the physicians' book in the jumbo mortgage segment. And we're partnering with wealth to do some things and brokerage. Brokerage, we're working on a money market product that will work hand in hand with our brokerage sales, which should help.
So there's a bunch of things going on. And I think that it's going to take a little bit of time to get some lift out of it. But certainly, as we move into the second half of this year and into '25, we should see the benefits of everything we do from a funding perspective.
The next question comes from Frank Schiraldi with Piper Sandler.
Another strong fee income quarter and guide for continued strength. Just curious, bigger picture, if you could share your thoughts as you continue to grow out these businesses, where you think you can grow the fee income side of the picture to as a percentage of the total revenue pie. And maybe do you see any fee businesses, in particular that you want to ramp up or you need to ramp up to get there?
Yes. We -- I think long term, this is long term. We've talked about this in the past. We just put information in our deck. We targeted a 30% of total revenue. We almost got there. But then the world changed in terms of net interest income. So it diluted that effort, but I think that's really the long-term target.
We want to continue to build out those fee-based businesses and make sure that it starts to consume more of the total revenue. That 30% target is kind of our target. That's not something we're going to get to immediately, but we strive to get there.
I think we've had great success in capital markets. We've done well building out our derivatives platform, our syndications platform. We've debt capital markets group that we've formed. It's been a bond record with debt offerings. We -- I think there's opportunity for us to do things from an advisory perspective. I think there's opportunity for us to continue to focus on building out public finance.
There are things that I think in the future businesses that are bolt-on businesses that will contribute and help continue to diversify that fee income base. Given our size and our -- the span of the company, the markets that we compete in, I think we've a terrific opportunity to capitalize on those segments. And I think once we move into our building, we build a trading floor so we could bring all those capital markets groups together. It's fairly impressive. I think bringing clients in and showing them that we've these capabilities will lead to additional opportunities for us.
And then on the wealth side, we've opportunities there. I think we've only scratched the surface in terms of building out our teams in the markets that we moved into, and they were contributing nicely. I mean wealth has grown 10% annually every year. I think there's tremendous upside. We've had records year-after-year. So building out the wealth platform continues and building out those capabilities continues.
TM, there's tremendous upside in treasury management fee income. Again, given the growth of the company and we bought banks in the Southeast. They didn't have robust treasury management offerings. So as we build out that client base on the commercial side, we'll see opportunities to grow TM.
And then the other units, mortgage is going to be cyclical and seasonal. And then you've -- but I still expect mortgage to grow gradually over time as we continue to increase market share. Our team, they've done a terrific job. Joe Cartellone has done a phenomenal job building out the teams and growing share. And if you look at the amount of production that we've had even in this off cycle, we've outperformed others in the markets that we compete in. So we've gained market share. I'd expect us to continue to do that.
And then the last piece is insurance. We've a decent insurance offering and we've good leadership there, and we started to focus on integrating that even further into our product offering with our commercial bankers. And that seems to be going pretty well. So I think there's upside there. It's been a little stagnant, but I think the insurance market is firming and premiums are increasing and we're starting to pick up larger and larger clients. So in that space, there's upside.
So we're pretty optimistic about those fee income categories. And I think it shows in the performance. We've consistently touted the capability and discussed what we were building out. And I think performance over the last 5 or 6 years really illustrates the success we've had.
In fact, I'd just comment that the percent of revenue is a function of the [ interest rate ] environment. So growing that absolute level given all the initiatives Vince talked about has been the key focus and that just keeps building.
Got it. Okay. All right. I appreciate it. And then just maybe as a quick follow-up, just with some slower loan growth, relatively speaking, to the second quarter, some slower growth in the back half of the year. And with you guys already above your target capital levels, just wondering and I know you bought back a little bit in the second quarter, but would you expect buyback activity to maybe ramp up here? Or are you more price sensitive? Obviously, we've seen a recent rally in bank stocks. So just wondering how we should think about buyback activity maybe as you see it today?
Yes. No, I'd say the level of activity we had in the second quarter was really just to kind of buy back some of the incentive shares that were issued earlier in the year. So $250,000 that we bought. As we sit here today, our focus is on capital kind of building from here. At this point, we don't have any plans to repurchase shares looking at the second half of the year. I mean that can change -- I think the environment changes, but right now, using the capital to support the loan growth.
I think the fact that we were able to support the robust loan growth that we had this quarter at capital ratio, CET1 hold at 10.2% and TCE ratio in that 0.1%. So holding those levels of capital and supporting the loan growth, I think, is kind of the best use of the capital at this point. And the buybacks will be part of our operation every year as we go forward.
But as we sit here today, I think the best use is still letting that gradually build a little bit as we go through the.....
The next question comes from Casey Haire with Jefferies.
Great. A couple of follow-up questions on the funding strategy. So just wondering, what does the guide assume in terms of the borrowings, I'm assuming that stays there? Or is there an opportunity with these deposit initiatives to pay some of that down?
Yes, I'd say that the guide basically has the increased liability position that we're entering the third quarter that what's baked into that. So the better we do on the initiatives that Vince has described, there's obviously opportunity to fund additional loan growth as well as replace some of those short-term borrowings.
And I should comment, too, the short-term borrowings are that short term. So when the Fed does cut, the rate on those is going to come down in tandem with the rate coming down. So we made a decision during the quarter, given the loan growth to kind of forgo a little bit of earnings in the short run in the second quarter, but position us so that we can benefit from the down rates as we go forward.
No, understood. Okay. And it sounds like these deposit initiatives are -- it doesn't sound like they're CDs. So just wondering to the extent that they're successful, what is the new money rate on these deposits that you hope to bring in versus the 5% borrowing yield?
Yes. I mean it will be a mix, Casey. I mean we still have some level of CDs coming in. I mean, it's definitely slowed. So the kind of remixing of what it was last year. If we look at the second quarter, literally, these CDs, $36 million on average a month. So where we had a high of $164 million last July. So the shifting there has definitely slowed, but there's still -- customers are still grabbing those rates, right?
Yes. Our people aren't incentive to originate CDs.
Right. That's a key point. And I think the operating account initiatives that Vince talked about calling on companies, new customers to come in, bringing in their operating accounts, noninterest-bearing is obviously the key focus. So it's hard to predict any certainty of the mix, but it will be a little bit of both. And the CD that's their customers want to drive it before rates start to come down. So you've some attractive off ones there. I think that the importance as we move forward is just growing the total deposits.
Okay. And then just last one for me. Slide 16, the balance sheet repricing. Thanks for sharing that. So the new money bond yield on the roll-off rate of 2.50%, just curious what yield you're getting on reinvestment. And then that swap with an 87 bps average received rate. Is that $1 billion, does that mature? Is that ratable throughout '25? Just looking for the maturity date on that?
Yes. A couple of comments on that. I think we added this content just to give everybody a little more understanding kind of what's underneath. So if we kind of roll through the pieces, the cash flow $850 million, annual cash flow coming off of 2.50% million. I mean today, we're investing $4.5 billion to $4.75 billion. During the second quarter, our guys did a great job opportunistically investing earlier in the quarter, kind of south -- I mean, north of 5%. So.....
We're speaking to Page 16 in the deck. Just to make sure everyone knows. I'm sorry, Vince.
No, no, no. It's good point because I do want to talk through that. And then these other pieces here give us some flexibility as we move forward. I mean, $6.9 billion of time deposits, weighted average maturity in 9 months. And the CD promotions we've had over the last year, 7 months, 13 months, today, our best rate is on a 5 month. So the idea is that when the Fed does start to move, we've the ability of maturing and we can kind of reprice those. So that's an important point.
We've another $4 billion in non-maturity deposits with rates above 4.75%. Those are very repriceable. Again, once the Fed moves and basically if the Fed is expected to continue to move after that first move. So that gives us some flexibility. The $4.5 billion of short-term or floating rate borrowings, again, those will just reprice down. So that's another lever for us.
And then the $1 billion of swaps at the bottom there, Casey, is really -- they're going to mature $250 million a quarter next year. The 87 basis points is what we're receiving today. I mean that's a negative carry today of $10 million to $11 million a quarter. And that's going to start to go away in January.
The next question comes from Russell Gunther with Stephens.
Maybe just a follow up on the discussion we were just having. Given your move towards neutral and some of the balance sheet repricing we just discussed, is an initial Fed cut still a negative to the NIM as deposit costs lag or can some of that fixed repricing dynamic overcome a headwind from an initial step down?
Russell, It's Chris. Yes. I think it depends on kind of what the expectation is for cut kind of after that first cut, as Vince kind of talked about. If that down rates are expected to continue, that gives us a lot more cover to be aggressive on the deposit pricing side. I'd say if it's one and done, like we kind of have in our guidance, there probably is some short-term timing issues where it probably is a near-term negative and then there's some timing constraints with how fast we can reprice deposits.
But if there is several more cuts baked into the curve, and that's kind of expected on the client side that gives us a lot more cover to act more aggressively and hopefully, we can capture some of that downside beta a little bit quicker than we think here.
Okay. Got it. And then just could you guys talk about deposit pricing competition in your markets just broadly. Getting some, I don't know, mixed messages early in earnings season, particularly out of the Southeast where some peers are talking about accelerated competition, others talking about successfully walking down promo rates. Just your overall thought would be helpful in terms of where you think deposit costs are headed over the next couple of quarters.
I think that many of our competitors have kind of shifted once they connect and priced up deposits to basically -- where they've backed off. So I think a lot of the larger competitors have backed off a little bit. So if you look at the promotional pricing that's out there, you're going to see 25 to 50 basis point reduction versus what was running in the heat of, I call it, the micro liquidity crisis.
But I think that's why you're getting mixed signals. I think it's different at each institution. And then all of a sudden, you'll see somebody emerge and they'll have a really aggressive rate. So I think they've moved -- people have generally moved -- companies have generally moved in to a strategy that we had where they were selective repricing their products and maybe doing a more quiet promotional pricing versus what's on their website.
So you're going to hear a mix of that. I mean, it's going to be all of -- so I'd say it's less competitive than it was other than spots. There's still some irrational pricing out there. So depending on who's calling on your client you need to react to that, right? So that's where I think we're.
But I do -- just in the surveys that we do, we do a lot of work on monitoring whose pricing what. We've seen a pullback in the stated pricing, the promotional pricing that's out there that we can see from many of our competitors. So it's come down. But then, like I said, every once in a while somebody emerges with a really aggressive rate.
But if the term has come in. A lot of the competitors are doing what we're doing, they're shortening the duration of the time deposit portfolio by putting out a more aggressive CD that's priced shorter, 5 months, 3 months, 6 months. We see it all over the place, the pricing has moved in anyway. That's what we're seeing.
I'd just add there, too, it depends on if the bank is growing loans or not, right? So depending on who you're talking to. If the banks are not growing loans at all, they're just managing the rates down more because they're not trying to generate deposits. With our growth and bringing in all those new customers, it's a different environment that you want the deposits in. So it really depends on the market and the bank.
As you read through the -- as I read through the earnings release, I can see that. I can see we're -- our margin contracted because we were lending, others have improved their margin, right? We've seen inflows of deposits and given the pricings all over the board. So it's choppy. It's still competitive. And I think people are just retrenching to deal with the situation on an individual basis.
Yes. I'd just add, too, to the margin compression as Vince said, it was down 9 basis points for the quarter. But if you look at the dollars of net interest income, right, which is most critical from our bottom line profitability standpoint. I mean, we were down $3.1 million this quarter, $5 million decline last quarter from $6 million the quarter before.
So kind of in line with that. So -- and then to go forward, as I mentioned earlier, more success we've with the deposit initiatives and then rates come down, we can reprice all those items on Slide 16 that I talked about that gives you a kind of positive momentum as you go forward.
Got it. Well, guys, I appreciate both your thoughts on the question. I guess the last one for me and understanding it sounds like we're poised to be flat to up on NII going forward, but a little incremental pressure overall to the guide. Would you guys consider another securities portfolio repositioning? Or how does that currently sit in your opportunity set?
Yes. I'd just say that the net interest income, I mean, we expect the second quarter to be the trough in net interest income dollars. So we do expect it to move up the next couple of quarters just given all the things that we described. And then we evaluate the whole balance sheet on a regular basis.
So as we said, with what we did in the fourth quarter, we were very thoughtful about the size of that and the nature of the overall optimization strategy we deployed. So we look at everything. So everything is kind of on the table from a recessive standpoint. But I think we're focused primarily on the organic growth in the loans and then all the deposit initiatives really fund the loan growth.
It really helps us to bring those households on. I mean that helps us -- in the future helps us generate additional business. I think we've done a pretty good job of selling to that customer base. So...
The next question comes from Manuel Navas with D.A. Davidson.
If the Fed points to kind of a continued down rate cycle, could you have upside to the high end of your NII range? Or would it actually maybe exceed it? Just kind of some thoughts on that kind of variability that you kind of touched on briefly before.
Yes. Manuel, I think -- like I said, our guide has one cut in it right now and that's it for the year. If there were more kind of cuts baked into the curve. I think the upside really would show up at '25. I think that sets us up really well for what '25 could look like, especially if the curve un-inverts after, I don't know how long it's been 2 years now of inversion. So I think that would be more of a '25 impact. I'm sure it would be helpful.
But like I said, there's some mechanics on the timing of when CDs mature, some of that's locked in. So with 5 months CDs that are coming on now, a lot of the repricing happens at the end of the year. I think that really sets us up for 2025.
And our band is pretty tight. As you know, if you look at the guide for net interest income. It's a pretty tight band there.
In the last 3 years, this third quarter has certainly been pretty good deposit growth quarter. I think you've some seasonality that you touched on in meeting flows. Can you just kind of touch on that kind of just organic better deposit trends this quarter potential?
Yes. Go ahead, Vince.
I was going to say, yes, the normal seasonal surge that we see in deposits, particularly on the municipal side, happens kind of now through October, November time frame, and that can be $600 million to $800 million kind of peak to trough and usually we got them in the first quarter and then -- so that seasonality we expect, and that will be supplemented by the initiative Vince talked about earlier as far as the commercial and consumer deposits.
Can you -- at least where your NIM kind of ended the quarter? Sometimes you show where it's progressed monthly basis?
Yes. The monthly -- I mean, the monthly margin there was some noise in the last month of the quarter, it was within 1 basis point or 2 of the quarterly average.
The next question comes from Kelly Motta with KBW.
I think you've touched on it a bit, but clearly, loan growth was incredibly strong, and it's a great opportunity to win new households and clients to the firm. Just wondering where you're seeing the greatest opportunity to take share, whether it's a certain region or segment of the business?
Yes. And we've seen some pretty decent growth coming out of the Carolinas. I think that continues to be an area with upside for us. I think that we've only started to scratch the surface in terms of our calling activity there. So there's quite a bit on the table. And as we moved into South Carolina, we've built out building out Greenville and South Charleston. There's a lot of opportunity there for us, both from a wealth private banking and commercial banking.
So we continue to see good growth in those areas in Charlotte. We've had some good success. We've had success in the -- from a deposit perspective, we've had great success in Wilmington and Greensboro. So we're pretty optimistic about the Southeast.
And then Pittsburgh continues to perform very well. We've a lot of upside there. We've significant share here in the Pittsburgh market. So I think in certain business lines we're undersized. Mortgage, I don't think we're sized appropriately given the deposit share that we've here. So there's some opportunity there for us to continue to grow in the Pittsburgh market from the consumer lending perspective. And basically, from a C&I perspective, we're not penetrated in this market. So there's quite a bit to do.
Cleveland had -- was sluggish over the last few years, but I think there's upside in the Cleveland market for us in C&I. And then I mentioned equipment finance, I think, equipment finances has done very well and should continue to do well as we move through this period, get through the election because there's been kind of a hold up on some small ticket capital spending from the C&I base. We'll see that release as we move past November when there's more clarity on what's going to happen.
I think those are the areas that I think have the most upside for us. And then on the flip side of that, there's less activity going on in CRE, obviously, right? There's -- these are happenings.
Got it. That's super helpful. And then understanding these things take time. Just wondering if we could get your updated thoughts on M&A, clearly, valuations across the board have improved and especially in light of potentially more accommodating regulatory environment potentially on the horizon. Just wondering, updated thoughts, any thoughts on potentially where you'd be looking to add density or fill in.
Yes, I think it's going to be the same answer we've given in the last few quarters. We're going to be opportunistic. We're focused internally. We've a number of major initiatives going on right now and building out heightened standards capabilities. We're focusing on building out the digital platform.
You remember when you came and met with us, we had quite a bit that we were tackling. That doesn't mean M&A is off the table. It's just that we've been focused internally to strengthen the platform, right, so that we can grow and expand and benefit from the scale that we put on.
So I'd say it's the same. We'll be opportunistic and look for opportunities in market. We've been building out Virginia on a de novo basis. So we've seen a lot of branch announcements in Northern Virginia. I think we're open to more coming online in the near term.
And then Richmond, we've been focusing on. So that's kind of happening organically. And then in the Carolinas, we're building out the Charlotte market, the intercity Charlotte market, yet can largely outside of the city of Charlotte. So that we're looking at opportunities to go in there. So you'll see some de novo expansion in those markets, which I think Charlotte, in particular, should bring us some good opportunities from a consumer and a small business perspective when we build out that channel.
Understood. You guys certainly have plenty of green shoots internally. Maybe last question for me, just a model refresher here. On the expense side, you've about a $7 million double carry from the excess lease expense while you're still leasing. Can you remind us, does that doesn't carry through to 2025? Is that correct? Or is there any kind of change in plans or timing with the move to the new building?
Yes, Kelly, it's Jim Dutey. That's exactly right. Yes. Once we move in, in fourth quarter. This is our planned move-in date of about '24, that double carry on the current leases that we've will pull in. So it's not a carryforward in '25.
The next question comes from Brian Martin with Janney.
That net expense reduction, can you remind us what that is on the building and on the property?
It's basically the timing of our move. We lease a number of locations here because we've a lot of people spread across 5 locations here in North Shore. So it was the timing, if the rent expense that started on the building, right, that we're paying rent on all these other locations until we can shift into the building, which we're scheduled to do in November, early December this year. So the question was, what happens with that additional rent expense that goes away. So we're double -- right now, we've double expenses, right.
Brian, there's a footnote on the Slide 20, the guidance slide, which just report $7 million of rent expense. And we're not actually paying double -- it's -- we got free rent for the move, but from a GAAP accounting period, we had to reckon.
Okay. And then just on the funding cost, can you talk up -- I mean, can you give any sense on -- I know you talked about the margin inflecting as far as the cost of deposits, kind of do those begin to plateau here? I guess they've been -- the rate of increase has obviously been narrowing. But just, I guess, when do you expect the deposit cost to kind of plateau?
I mean it's hard to say. I mean, it's still moving up a little bit. I mentioned the CD mix shift has definitely slowed quite a bit. So if you look at the total deposit costs at the end of [indiscernible] on a spot basis, it was [ 213 ] with [ 204 ] in the first quarter. And if you went back, it's definitely an increase that has slowed.
I guess it becomes a function of -- what Chris was talking about earlier is if the Fed does cut and there's an expectation, they're going to keep cutting obviously, that gives more ability to raise that down. And all the pieces on Slide 16 that I went through, there's a lot of levers there and flexibility that, again, if the expectation is that that's going to continue to cut after hopefully cutting in September, then a lot of those pieces are in play and have ability....
But I'd say if you look at the makeup of the deposit base, it's not going to be -- I don't see pricing increasing to draw in deposits. Like I said, we've seen a number of competitors reduced their promotional pricing. So I think it's more a function of shift.
So are we able to hold the demand deposits to be able to hold the low-cost interest checking, are we able to hold that right without migration. I think the outflows have slowed dramatically. So we should be seeing right -- and the new initiatives that we're in, right? New initiatives we're focused more on, lower cost deposit categories. So I think it would help us, but it's all a function of mix at this point.
And Brian, from a beta standpoint, I guess our beta has been very strong. The 38% versus the peers. We've been a good bit better than peers and we'd expect that just to gradually go up a little bit more from here, probably similar to what it did kind of first to second quarter. So just as another indicator.
Yes. Okay. That's helpful. And then maybe just one for Gary. On the credit side, the stress testing, Gary, anything -- I mean, anything you're seeing from a sign of weakness or potential concerns given things sound very good and just the granularity and all the credit performance. But as you kind of do the stress test every quarter, is there anything coming up that's got you maybe more alerted to it, just paying closer attention to it?
Brian, I think over the last 3 quarters now, and we stress test, as you know, every quarter. Over the last 3 quarters, we've seen improvements from a potential charge-off and loss perspective. So those updates and those reviews around the severe economy continued to show improvement. We're very, very aggressive in managing the book, as you all know. And that test that our team goes through each and every quarter is really showing positive results for us as we continue to migrate through the current economy.
Got you. Okay. Yes, that's -- sorry, okay. I think that's really it for me. I guess maybe one last just modeling question. I think did you guys mention that there was some impairment on the mortgage this quarter? Or was that -- did I not hear that right?
No, just normal fair value marks on the overall portfolio. Brian, that's all. And I mean, that swings any quarter-to-quarter, anywhere from $1 million one way to $1 million or $2 million one way to $1 million or $2 million the other way. So it was just kind of hedging the pipeline.
This concludes our question-and-answer session. I'd like to turn the conference back over to Vincent J. Delie for any closing remarks.
Thank you. Thank you, everybody. I appreciate your interest and great questions. I hope we've answered everybody's questions. We're very optimistic as we move forward. I think we had a great opportunity.
As we said in the previous call, we'll go after market share because we were in a position to do that. I think we've a great opportunity to create some pretty positive financial outcomes as we move forward and execute our plans to drive deposit growth in the second half of the year.
So really appreciate it and appreciate your interest and thank you again, and thank you to all of our employees for their hard work and a lot of you who are listening. I know we all appreciate it. So thank you. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.