Sitio Royalties Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2024

There are 12 speakers on the call.

Operator

Good morning, and welcome to the FNB Corporation Second Quarter 2024 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Lisa Haidu, Manager of Investor Relations. Please go ahead.

Speaker 1

Welcome to our earnings call. This conference call of FMB Corporation and the reports it files 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 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.

Speaker 1

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 our corporate website. I will now turn the call over to Vince Lee, Chairman, President and CEO.

Speaker 2

Thank you, and welcome to our Q2 earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer and Gary Guerrieri, our Chief Credit Officer. F and B reported solid second quarter results with net income available to common shareholders of 123,000,000 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 non interest income levels. Tangible book value per share grew 12% year over year to reach a record high at $9.18 The second quarter's performance was driven by our long term strategic goals to gain market share through loan and deposit growth, diversify revenue streams and manage risk.

Speaker 2

As we've previously mentioned, F and B is well positioned to steadily increase market share in this volatile environment given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidance. F and B reported linked quarter loan and deposit growth of 3 point 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 e store with total interactions increasing 22% year over year. The increase in commercial loans was driven by activity across the footprint highlighted by double digit year over year growth across the Carolinas.

Speaker 2

Our Pittsburgh and Cleveland regions and commercial equipment finance business also posted strong contributions. The increase in FMB'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.

Speaker 2

Deposits benefited from seasonal inflows as well as new production that was generated through targeted deposit initiatives and promotions. Non interest bearing deposits ended the quarter over $10,000,000,000 an annualized increase of 3.2% from the prior quarter. The mix of non interest bearing deposits to total deposits ended the quarter at 29%, a consistent level since December of 2023. As we have frequently discussed, our strategy has been to price our deposits to protect our peer leading deposit data while supporting our client base. Our loan to deposit ratio currently equals 96%.

Speaker 2

We are 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 toward historical levels. Another longer term strategic focus has been diversifying our revenue streams, achieving stable non interest income at near record levels of $88,000,000 in both the 1st and second quarters highlights the strength and range of our business model and FMB's robust suite of products and services.

Speaker 3

For the first half of

Speaker 2

the year, non interest income totaled 176,000,000 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 non interest income is expected to continue as we enter the second half of the year. FMB's balance sheet strategy is part of our proactive approach to risk management. As we draw closer to a reduction in interest rates, we continue to move towards a neutral interest rate position to provide stability and potential improvement in margin and a falling rate.

Speaker 2

Beyond interest rate risk, FMB's comprehensive approach to credit risk management has led to strong and stable asset quality and consistent outperformance versus peers. Our credit team proactively monitors each loan portfolio and overall concentrations at a granular level, which has served us well through many economic cycles. I will now pass the call over to Gary to provide further detail on the overall asset quality. Gary?

Speaker 4

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Federal delinquency finished the quarter at 63 basis points, down 1 bp from the prior quarter. NPLs and OREO remained unchanged ending at 33 basis points, a multi year 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 $20,200,000 with $12,800,000 utilized to support loan growth and the remainder providing for charge offs.

Speaker 4

Our ended funding reserve stands at $419,000,000 up $12,500,000 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 4 21%, inclusive of the discounts. We continue to successfully execute on our strategy to monitor the non owner CRE portfolio. Monthly, we analyze and segment upcoming and previously resolved maturities, largest exposures and market conditions for the various property types across our footprint. At quarter end, delinquency and NPLs for the non owner occupied CRE portfolio improved slightly and continued to remain very low at 16 12 basis points respectively.

Speaker 4

Net charge offs reflected solid performance for the quarter at 4 basis points, again confirming our consistent underwriting and strong sponsorship. The non owner occupied office portfolio of delinquency totaled 4 basis points with no NPLs, largely in line with the prior quarter. We maintain strong focus on credit risk management and our portfolio continues to perform well throughout numerous economic cycles. Quarterly, we performed 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.

Speaker 4

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.

Speaker 3

Thanks, Gary, and good morning. Today, I will focus on the 2nd quarter's financial results and walk through our Q3 and full year guidance. As Vince mentioned, total loans and leases ended the quarter $33,800,000,000 a linked quarter increase of $1,200,000,000 or 3.6 percent. This growth included $633,000,000 in consumer loans, driven by the seasonal peak of residential mortgage originations and $540,000,000 in commercial loans and leases, reflecting healthy activity in C and I and equipment finance as well as additional growth from fundings on previously committed commercial real estate projects. Total deposits ended the quarter at $35,000,000,000 an increase of $259,000,000 linked quarter, including growth in certificates of deposits of $202,000,000 dollars and non interest bearing deposits of $80,000,000 as the seasonal build and public funds deposits has begun.

Speaker 3

The loan to deposit ratio increased to 96% at June 30th compared to 94% at March 31st. We expect this ratio to decline in the medium term, both organically and with several initiatives our team has implemented. Starting on the loan side of the equation, the 2nd quarter's robust loan growth was 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 consumer money market promotion.

Speaker 3

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 $1,400,000,000 When rates start to decrease, the cost of these borrowings will move down quickly. As Vince mentioned, over the last several quarters, we have been strategically positioning our balance sheet to be more neutral to benefit from lower interest rates. We have $4,500,000,000 of short term or floating rate borrowings, around $4,000,000,000 of non maturity deposits that are currently priced at or above 4.75 percent, a $6,900,000,000 CD portfolio with a 9 month duration And lastly, as I mentioned on last quarter's earnings call, we have around $1,000,000,000 of swaps that mature beginning in 2025 with rates between 75 basis points and 100 basis points.

Speaker 3

Additionally, the investment portfolio has an annual cash flow of $850,000,000 at a current roll off yield of 250 and we have approximately $2,600,000,000 of fixed rate loan repayments at an average rate of 4.5% in the next 12 months. In total, we have over $16,000,000,000 of liabilities and swaps, nearly $3,500,000,000 of securities cash flows and fixed rate loan repayments that should provide significant benefit and protection in a falling rate environment compared to the $16,000,000,000 of loans repriced within 3 months. The 2nd quarter's net interest margin was 309, 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 to 5.43. Dollars Our spot deposit costs ended the quarter at 2.13 dollars 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.

Speaker 3

Net interest income totaled $315,900,000 a $3,100,000 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 Q3 of 2023. We expect the 2nd quarter's net interest income to be the trough for the year and should see modest sequential improvement in the 3rd and 4th quarter. Turning to non interest income and expense. Non interest income totaled $87,900,000 consistent with the prior quarter's strong results. The largest quarterly increase was $2,800,000 in service charges, driven by treasury management revenues continuing to gain momentum and seasonally higher consumer transaction levels.

Speaker 3

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 from pipeline hedging activity. Operating non interest expenses were well managed and totaled $225,800,000 an $8,300,000 decrease from the prior quarter after adjusting for $800,000 of significant items in the current quarter and $3,000,000 last quarter. The largest driver for the decline was salaries and employee benefits, which decreased $8,200,000 primarily due to normal seasonal long term compensation expense of in at 54.4 percent 2nd quarter. F and B's capital position remained strong as we were able to support robust loan growth and maintain the tangible common equity ratio near 8% and CET1 ratio at 10.2%, both of which remain above our stated operating levels. Tangible book value per common share was $9.88 at June 30, an increase of $1.09 or 12.4 percent compared to June 30, 2023.

Speaker 3

AOCI reduced tangible book value per common share by $0.67 as of quarterend compared to $0.99 at the end of the Q2 of last year. Let's now look at guidance for the Q3 and full year of 2024. We are maintaining our full year balance sheet guidance. Loans are expected to grow mid single digits on a full year basis. Those deposits are expected to grow low single digits on a year over year basis.

Speaker 3

Our mix of non interest bearing deposits to total deposits is anticipated to remain superior to peers. Our projected full year net interest income expectation is revised to be between $1,270,000,000 and $1,290,000,000 assuming 1 25 basis point rate cut in September. This revision reflects our interest bearing liability mix as we enter the second half of the year. Net interest income for the 3rd quarter is expected be between $315,000,000 $325,000,000 Given the strength of our non interest income generation in the first half of the year, we have increased our full year guide to be between $350,000,000 $355,000,000 3rd quarter non interest income is expected to be between $85,000,000 $90,000,000 We now anticipate the full year guidance for non interest expense to be between $900,000,000 $915,000,000 due to production related compensation given the strong fee income results. 3rd quarter non interest expense is expected to be between $220,000,000 $230,000,000 The full year provision guidance range is lowered to 75 $1,000,000 to $95,000,000 and remains dependent on net loan growth and charge off activity in the second half of the year.

Speaker 3

Lastly, the full year effective tax rate should be between 21% 22%, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.

Speaker 2

Thank you, Vince. This year celebrates our 100 and 60th anniversary as a nationally chartered bank obtained through the National Banking Act in 18/64. Through the execution of our growth into a diversified $48,000,000,000 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 1 of America's Best Banks and naming us to its Global 2,000 listed companies based on sales, profit, assets and market value.

Speaker 2

Our strategic emphasis on innovation is integral to our success and we continue to earn national attention for digital engagement and leadership. Most recently, F and B's e store 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.

Speaker 2

In addition to winning best digital initiative, FMB was honored among the nation's top 5 largest financial institutions as a finalist for best use of technology and consumer banking, best user or customer experience initiative and top innovation. We also continue to earn awards for our commitment to our employees who enable our success. During the Q2, we extended the long list of top workplace honors we received nationally in the financial services industry and throughout our footprint with specific awards for culture, excellence and leadership. As we reflect on a solid quarter, I want to thank our team for their many contributions. We appreciate your dedication.

Speaker 2

By maintaining our focus on our shared principles and goals, we are poised to navigate the ever changing macroeconomic landscape and deliver for our customers, communities and shareholders.

Operator

We will now begin the question and

Speaker 3

answer

Operator

The first question comes from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 5

Good morning, guys. Thank you for taking my questions. Maybe starting on the balance sheet side, you talked about a slowing of loan growth in the back half of the year relative to what's been a 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 slowing to come from the residential side, obviously some seasonality in the Q2 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?

Speaker 5

Just curious on the mix you expect?

Speaker 2

Vince to Leah is going to turn it over to Vince Gallego. 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 Q3, we started to see lower locks in our pipeline. So we expect that to come down fairly substantially.

Speaker 2

So less being put on the balance sheet as we move forward there through the second half of the year. The construction fundings were on committed primarily committed obligations. We do quite a bit where we do the construction financing and it's taken out by some form down the road. So those fund ups occurred natural funding as we move through the construction period. So that presented growth this quarter.

Speaker 2

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 exceeded $1,000,000,000 in balances in that book of business. So it's growing nicely over time and continues to grow.

Speaker 2

C and I has contributed. There was some significant growth in the Carolinas, 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 2025 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.

Speaker 2

So I think that on the loan side that's why 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 booked quite a bit this quarter.

Speaker 2

So we're moving into the next quarter down about 10% in 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, 1st mortgage volume, there was much less home equity HELOC volume. So they kind of offset each other.

Speaker 2

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.

Speaker 4

Yes. But we had a solid growth quarter in Q2, is again seasonal, it's very similar to the mortgage. We're getting really high quality paper there with focus on profitability. So improving margins and playing at the high end of the FICO band is really working well for us. But again, that's seasonal.

Speaker 4

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.

Speaker 2

And then from a funding perspective, if we're able to execute our plan, we have seen growth in our treasury management pipeline. So we're seeing some very large 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 what we can do that. So the upside into 'twenty five is us replacing those borrowings with deposits.

Speaker 2

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 some pretty decent growth in certain categories we've priced up to bring deposits on. We have 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 in the North Star strategies kind of an open book, attracting those demand deposits as well.

Speaker 3

Our beta performance goes to that point too, right? It's very gradually from last quarter 36.5% to 38%. So that again is us protecting the overall profitability.

Speaker 2

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 convert them to primary clients.

Speaker 2

So I hope that helps.

Speaker 5

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 deposit initiatives in the back half of the year to kind of right size 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 and then

Speaker 3

Yes, we

Speaker 2

sure. We've modified the incentive plans for the consumer bank. We have kind of a kicker for deposit growth. So shifting the way loan growth is pretty minuscule in that segment. So we thought, hey, we'll incent them to go after deposits.

Speaker 2

We have 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 have proven that we're capable of handling those relationships throughout a cycle and without any issues. I think that the people are very focused on it.

Speaker 2

Our teams are focused on it. And as long as we manage them in that direction and focus mainly on funding, that's going to pay off. And the other thing is the e store, the investment in digital and the digital technology, the interactions are up 22%. We're starting to get some traction there on the consumer side. And 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.

Speaker 2

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 and 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.

Speaker 2

But certainly as we move into the second half of this year and into 2025, we should see the benefits of everything we're doing from a funding perspective.

Speaker 5

All right. Well, terrific. Thanks for taking my questions.

Speaker 2

Okay. Thank you. Thanks.

Operator

The next question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Speaker 2

Good morning, guys.

Speaker 6

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 of 2 as a percentage of the total revenue pie? And

Speaker 3

maybe do you

Speaker 6

see any fee businesses in particular that you want to ramp up or you need to ramp up to get there?

Speaker 2

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 30% of total revenue. We almost got there, but then the world changed in terms of net interest income.

Speaker 2

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. It's not something we're going to get to immediately, but we strive to get there.

Speaker 2

I think we've had great success in capital markets. We've done well building out our derivatives platform, our syndications platform. We have debt capital markets group that we've borne with their offerings. 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.

Speaker 2

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 have a terrific opportunity to capitalize on those segments. And I think once we move into our building, we build a trading floor so that we could bring all those capital markets groups together. It's fairly impressive. I think bringing clients in and showing them that we have these capabilities will lead to additional opportunities for us.

Speaker 2

And then on the wealth side, we have opportunities there. I think we've only scratched the surface in terms of building out our teams in the markets that we moved into and they were contributing nicely. I mean wealth is growing 10% annually every year. I think there's tremendous upside. We've had records year after year.

Speaker 2

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, we didn't have robust treasury management offerings. So as we build out that client base on the commercial side, we will see opportunities to grow EM. And then the other units mortgage is going to be cyclical and seasonal and then you have.

Speaker 2

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 Cardellione 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 a decent a decent insurance offering and we have good leadership there and we started to focus on integrating that even further into our product offering with our commercial bankers. That seems to be going pretty well.

Speaker 2

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.

Speaker 2

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.

Speaker 3

In fact, I would just comment that the percent of revenue is a function of the environment. So growing that absolute level given all the initiatives Vince talked about has been the key focus and it just keeps building.

Speaker 6

Got it. Okay.

Speaker 7

All right. I appreciate it.

Speaker 8

And then just maybe as

Speaker 6

a quick follow-up, just with some slower loan growth relatively speaking to the 2nd 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,

Speaker 3

we've seen a recent rally

Speaker 6

in bank stocks. So just wondering how about buyback activity maybe

Speaker 3

as you see it today? Yes. No, I would say the level of activity we had in the Q2 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, the focus 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. That can change if the environment changes, but right now using the capital to support the loan growth, I think the fact that we were able to support the robust loan growth that we had this quarter at capital ratios, CET1 hold at 10.2 and TCE ratio in down 0.1.

Speaker 3

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. Great. Okay.

Speaker 3

Thanks for the color, guys.

Speaker 2

Thanks, Brian.

Operator

The next question comes from Casey Haire with Jefferies. Please go ahead.

Speaker 9

Great, thanks. Good morning, everyone. 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 that stays there or is there an opportunity with these deposit initiatives to pay some of that down?

Speaker 3

Yes, I would say that the guide basically has the interest liability position that we're entering the Q3 is what's baked into that. So the better we do on the initiatives that Vince just described, there's obviously opportunity to fund additional loan growth as well as replace some of those short term borrowings. 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 forego a little bit of earnings in the short run-in the 2nd quarter, but position us so that we can benefit from the down rates as we go forward.

Speaker 9

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?

Speaker 3

Yes. I mean, it will be a mix, H. C. I mean, we still have some level of CDs coming in. I mean, it's definitely slowed.

Speaker 3

So the kind of remixing of what it was last year, if we look at the Q2, literally we increased CDs $36,000,000 on average a month. So where we had a high of $164,000,000 last July. So the shifting there has definitely slowed, but there's still customers are still grabbing those rates, right?

Speaker 2

Yes. Our people aren't incented to originate CDs.

Speaker 3

Right. That's people. I think that the operating account initiatives that have been talked about calling on companies, new customers to come in, bringing in their operating accounts, non interest bearing is obviously the key focus. So it's hard to predict any certainty the mix, but it will be a little bit of both and the CD that's there, customers want to drive it before rates start to come down. So we have some attractive offerings there.

Speaker 3

I think that the importance as we move forward is just growing the total deposits.

Speaker 9

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 bp average received rate, is that $1,000,000,000 does that mature? Is that ratable throughout 'twenty five?

Speaker 9

Just looking for the maturity date on that?

Speaker 3

Yes. A couple of comments on that. I think added this content just to give everybody a little more understanding of kind of what's underneath. So if you kind of roll through the pieces, the cash flow, 8.50, annual cash flow coming off of 2.50, I mean, today we're investing 4.5 to 4.75. During the second quarter, our guys did a great job opportunistically investing earlier in the quarter, kind of south I mean north of 5%.

Speaker 2

We're speaking to Page 16 of the deck.

Speaker 3

No, no, no. It's a good point. I do want to talk through that. And then these other pieces here give us some flexibility as we move forward. I mean, dollars 6,900,000,000 of time deposits, we'd have a maturity of 9 months.

Speaker 3

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 have the ability of maturing and we can kind of reprice those. So that's an important point. We have another $4,000,000,000 in non maturity deposits with rates above 4.75 dollars Those are very repriceable. Again, once the Fed moves and typically if the Fed is expected to continue to move after that first move, so that gives us some flexibility.

Speaker 3

The $4,500,000,000 of short term floating rate borrowings, again, those will just reprice down. So that's another lever for us. And then the $1,000,000,000 of swaps at the bottom Casey, is really they're going to mature $2.50 a quarter next year. 87 basis points is what we're seeing today. I mean, that's a negative carry today of $10,000,000 to $11,000,000 a quarter.

Speaker 3

And that's going to start to go away in January.

Speaker 9

Great. Thanks guys.

Operator

Thanks. The next question comes from Russell Gunther with Stephens. Please go ahead.

Speaker 7

Hey, good morning, guys.

Speaker 2

Hey, Roshan.

Speaker 7

Maybe just following up on the discussion we were just having. Given your move toward neutral and some of the balance sheet repricing we just discussed, is an initial Fed cut still a negative to the NIM as deposit cost lags? Or can some of that fixed repricing dynamic overcome a headwind from an initial step down?

Speaker 3

Hey, Wafel, it's Chris.

Speaker 10

Yes, I think it depends on kind of what the expectation is for cuts kind of after that first cut, as Vince kind of talked about. If that move if 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

Speaker 3

how fast we

Speaker 10

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 more cover to act more aggressively and hopefully we can capture some of that downside beta a little bit quicker than we think here.

Speaker 7

Okay, got it. Thanks, Chris. And then just could you guys talk about deposit pricing competition in your markets just broadly? Getting some, I don't know, mixed messages early in earning 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?

Speaker 2

I think that many of our competitors have kind of shifted once they panicked and priced up deposits to basically liquidity, they have backed off. So I think a lot of the larger competitors have backed off a little bit. So if you look at the promotional pricing that's out there, you're going to see 25 to 50 basis point reduction versus what was running in the heat. I call it the micro liquidity crisis. But I think that's why you're getting mixed signals.

Speaker 2

I think it's different at each institution. And then all of a sudden you'll see somebody emerge and don't have a really aggressive rate. So I think they've moved people generally move companies generally move banks to a strategy that we had where they were selectively pricing our products and maybe doing a more quiet promotional pricing versus what's on their website. So you're going to hear a mix back. I mean it's going to be all over the board.

Speaker 2

So I would say it's less competitive than it was. But in spots, there's still some irrational pricing out there. So depending on who's calling on your client, you need to react to that, right? So that's where I think we are. But I do just in the surveys that we do, we do a lot of work on monitoring who's pricing a lot.

Speaker 2

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 merges with a really aggressive rate. But as 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.

Speaker 2

We see it all over the place. The pricing has moved in. Anyway, that's what we're seeing.

Speaker 3

I would just add there too, it depends on if the bank is growing loans or not, right. So depending on who you're talking to, the banks that aren't growing loans at all, they're just managing the rates down more because they're not trying to generate deposits. With our growth and bringing in all those new customers, it's a different environment that you want the deposits, you want to bring in. So it really depends on the market and the bank.

Speaker 2

As you read through the as I read through the earnings releases, I can see that. I can see our margin contracted because we were lending. Others have improved their margin, right? They've seen inflows of deposits and the pricing is all over the board. So it's choppy, it's still competitive.

Speaker 2

And I think people are just retrenching to deal with the situation on an individual basis.

Speaker 3

Yes, I would just add to the margin compression. As Vince said, it was down 9 basis points for the quarter. If you look at the dollars and net interest income, right, which is most critical from a bottom line profitability standpoint, I mean, we were down 3.1 $1,000,000 this quarter, dollars 5,000,000 decline last quarter, dollars 6,000,000 the quarter before. So kind of in line with that. So and then the go forward, I mentioned earlier, more success we have with the deposit initiatives and then rates come down, we can replace all these items on line 16 that I talked about.

Speaker 3

It gives you that kind of positive momentum as you go forward.

Speaker 7

Got it. Well, guys, I appreciate both your thoughts on the question. I guess the last one for me and understanding it sounds like we are 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 fit in your opportunity set?

Speaker 2

Yes, I would just say the

Speaker 3

net interest income, I mean, we expect the Q2 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 Q4, we're very thoughtful about the size of that and the nature of the overall optimization strategy we deployed. So, we look at everything.

Speaker 3

So everything is kind of on the table from an investment standpoint. But I think we're focused primarily on the organic growth and then all the deposit initiatives really fund the loan growth.

Speaker 2

It really helps us to bring those households on. I mean that helps us future helps us generate additional business. I think we've done a pretty good job of cross selling to that customer base.

Speaker 7

Understood. Okay, guys. That's it for me. Thanks very much for taking my question.

Speaker 2

Thank you.

Speaker 3

Thanks, Ross.

Operator

The next question comes from Manuel Neves with D. A. Davidson. Please go ahead.

Speaker 3

Hey, good morning. If the Fed points to kind of a continued down rate cycle, could you have upside to the high end of your NII range or would it actually maybe exceed it? Just kind of some thoughts on that kind of variability that you kind of touched on briefly before?

Speaker 10

Yes, Manuel, I think you know, like I said, our guide has one cut in it right now and that's it for the year. If there were more 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 uninverts after, I don't

Speaker 2

know how long, it's been 2 years now of inversion.

Speaker 10

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 month CDs that are coming on now, a lot of the repricing happens at the end of the year. I think that really sets us up better for 2025.

Speaker 3

And our band is pretty tight as you know if you look at the guide for that interesting, it's a pretty tight band there. Okay. The last 3 years, this Q3 has certainly been pretty good deposit growth quarter. I think you have some seasonality that you touched on in muni flows. Can you just kind of touch on that kind of just organic better deposit trends this quarter potential?

Speaker 3

Yes, go ahead Vince. I was just 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 timeframe. That can be $600,000,000 to $800,000,000 kind of peak to trough and usually we bottom in the Q1. So that seasonality we expect that would be supplemented by the initiatives Vince talked about earlier as far as commercial and consumer deposits. Can you release where your NIM kind of ended the quarter?

Speaker 3

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 a basis point or 2 of the quarterly average.

Operator

The next question comes from Kelly Motta with KBW. Please go ahead.

Speaker 11

Hey, good morning. Thanks for the question.

Speaker 8

Good morning, everyone.

Speaker 11

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? Thanks.

Speaker 2

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.

Speaker 2

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 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 Greensboro.

Speaker 2

So we're pretty optimistic about the Southeast. And then Pittsburgh, Pittsburgh continues to perform very well.

Speaker 3

We have a

Speaker 2

lot of upside there. We have significant share here in the Pittsburgh market. So I think in certain business lines we're undersized. Mortgage, I don't think we're sized appropriately given the deposit share that we have here. So there's some opportunity there for us to continue to grow in the Pittsburgh market from a consumer lending perspective.

Speaker 2

And basically from a C and I perspective, we're not penetrating in this market. So there's quite a bit to do. Cleveland was sluggish over the last few years, but I think there's upside in the Cleveland market for us in C and I. And then I mentioned equipment finance. I think equipment finance has done very well and should continue to do well as we move through this period, get through the election because there's been kind of a hold up on some small ticket capital spending from the C and I base.

Speaker 2

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, business,

Speaker 3

business,

Speaker 2

it's happening.

Speaker 11

Got it. That's super helpful. And then understanding these things take time, just wondering if we could get your updated thoughts on M and A. Clearly, valuations across the board have improved and especially in light of a potentially more accommodating regulatory environment potentially on the horizon. Just wondering updated thoughts, any thoughts on potentially where you would be looking to add density or fill in?

Speaker 11

Thank you.

Speaker 2

Yes. I think it's going to be the same answer we've given the last few quarters. We're going to be opportunistic. We are focused internally. We have a number of major initiatives going on right now in building out heightened standards capabilities.

Speaker 2

We're focusing on building out the digital platform. Do you remember when you came and met with us, we had quite a bit that we were tackling. That doesn't mean M and A is off the table. It's just that we've been focused internally to strengthen the platform, right, so that we can grow and expand and benefit from the scale that we put on. So I would say it's the same.

Speaker 2

We'll be opportunistic and look for opportunities in market. We've been building out Virginia on a de novo basis. So you've seen a lot of branch announcements in Northern Virginia. I think we are open to with that 2,000,000 that are coming online in the near term. And then Richmond, we've been focusing on.

Speaker 2

So that's kind of happening organically.

Speaker 7

And

Speaker 2

then in the Carolinas, we're building out the Charlotte market, the inner city Charlotte market, yet it can move largely outside of the city of Charlotte. So we're looking at opportunities to go in there. So you'll see some de novo seen from a consumer and small business perspective when we build out that channel.

Speaker 11

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 have about a $7,000,000 double carry from the excess lease expense while you're still leasing. Can you remind us, does that doesn't carry through to 2025?

Speaker 11

Is that correct? Or is there any kind of change in plans or timing with the move to the new building?

Speaker 2

Yes, Kelly, it's Jim Doody. That's exactly right. Yes, once we move in 4th quarter is our planned move in date of 'twenty four, that double carry on the current leases that we have will pull in. So it's not a carry forward in 'twenty five.

Operator

The next question comes from Brian Martin with Janney. Please go ahead.

Speaker 8

Hey, good morning, guys. Good morning. That expense reduction, can you remind us what that is on the building on the property?

Speaker 2

It's basically the timing of our move. We lease a number of locations here because we have a lot of people spread across flat locations here in the North Shore. So it was the timing, it's the rent expense that started on the building, right, that we're paying rent on all these other locations until we can ship into the building, which we're scheduled to do in November, early December this year. So the question was what happens with that additional rent expense? It goes away.

Speaker 2

So we're double right now we have double expenses, right?

Speaker 3

Brian, there's a footnote on the slide 20, the guidance slide, which is $7,000,000 of rent expense.

Speaker 2

Yes, and we're not actually paying double so you know. It's we got free rent for the move, but from a GAAP accounting we had to record.

Speaker 3

Got you.

Speaker 2

We're just doing that. Yeah.

Speaker 8

Okay. And then just on the funding cost, can you talk about, I mean, can you give any sense on, I know you talked about the margin inflecting as far as the cost of deposits kind of do those begin to plateau here? I guess they've been the rate of increase has obviously been lower narrowing, but just I guess when do you expect the deposit cost to kind of plateau?

Speaker 3

I think it's hard to say. I mean, it's still moving up a little bit. I mentioned that the CD mix shift has definitely slowed quite a bit. So if you look at total deposit costs, dollars 15,000,000 on a spot basis, dollars 213,000,000 to $204,000,000 in the Q1. If you went back, it's definitely an increase has slowed.

Speaker 3

I guess it becomes a function of what Chris was talking about earlier is if Fed does cut and there's an expectation you're going to keep cutting, obviously that gives you more ability to

Speaker 2

lower that down.

Speaker 3

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 running in September then a lot of those pieces are implied and have ability to

Speaker 2

cut. But I would say if you look at the makeup of the deposit base, it's not going to be I don't see pricing increasing to draw in deposits. Like I said, we've seen a number of competitors reduce their promotional pricing. So I think it's more a function of shift. So are we able to hold the demand deposits?

Speaker 2

Are we 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.

Speaker 3

And the new initiatives that are in right.

Speaker 2

New initiatives are focused more on lower cost deposit categories. So I think it could help us, but it's all a function of mix at this point.

Speaker 8

Got you.

Speaker 3

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 would expect that just to gradually go up a little bit more from here, probably similar to what it did kind of 1st to 2nd quarter, so just as another indicator.

Speaker 8

Yes. Okay. That's helpful. And then maybe just one for Gary. On the credit side, the stress testing, Gary, anything you're seeing from a sign of weakness or potential concerns given that things sound very good and just a granularity in all the credit performance.

Speaker 8

But as you kind of do the stress test every quarter, is anything coming up that's got you maybe more alerted to it, just paying closer attention to it?

Speaker 4

Brian, I think over the last three quarters now and we stress test as you know every quarter. Over the last three quarters, we've seen improvements from a potential charge off and loss perspective. So those updates and those reviews around the severe economy continue to show improvement. We're very, very aggressive in managing the book as you all know. And 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.

Speaker 8

Got you. Okay. Okay. I think that's really it for me. I guess maybe one last just modeling question.

Speaker 8

I think did you guys mention that there were some impairment on the mortgage this quarter or was that did I not hear that right?

Speaker 3

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 $1,000,000 one way to $1,000,000 or $2,000,000 one way to $1,000,000 or $2,000,000 the other way. So it was just kind of hedging the pipeline. Yes. Okay.

Speaker 3

That's it. I just want

Speaker 8

to make sure of that. Okay. Thank you guys for taking the questions. Everything else was answered.

Speaker 3

Yes. All right. Thanks, Brian.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Vincent J. Delee for any closing remarks.

Speaker 2

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.

Speaker 2

I think we had a great opportunity. As we said in the previous call, we were going to go after market share because we were in a position to do that. I think we have a great opportunity to create some pretty positive financial outcomes as we move forward and execute our plan 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.

Speaker 2

I know a lot of you are listening. I know we all appreciate it. So thank you.

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Earnings Conference Call
Sitio Royalties Q2 2024
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