Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted earnings per share increased to $1.16 from $0.79 in the first quarter.
- Net interest income rose by 4% from the prior quarter, with a 16 basis point expansion in net interest margin.
- Adjusted non-interest revenue jumped 9% sequentially, driven by significant growth in capital markets income.
- Net charge-offs and non-performing loans declined meaningfully this quarter.
- Liquidity and capital positions are the strongest they have been in several years, with the common equity Tier 1 ratio at 10.62%.
Negative Points
- Reported a loss of $0.16 per share due to a $256 million loss from securities repositioning.
- Core deposits declined slightly, driven by a drop in non-interest-bearing deposits.
- Period-end loans were down $216 million from the prior quarter due to payoffs, paydowns, and portfolio rationalization.
- Non-interest-bearing deposit balances continued to decline, particularly in commercial operating accounts.
- Provision for credit losses, while down 51% from the first quarter, still amounted to $26 million.
Q & A Highlights
Q: Just around the comments on net interest margin expansion in the back half. If you could unpack that in terms of the drivers of margin expansion, obviously, the full quarter impact on the bond book restructuring should help. But beyond that, just remind us in terms of the back book repricing and how NII evolves in the face of potential for rate cuts starting in September.
A: Thanks, Ebrahim. When you look at the margin and the trajectory in the second half of the year, there are a few different moving parts. First, as you mentioned, the securities repositioning, we experienced about half of that benefit in the second quarter, and we'll experience the other half here in the third quarter. And so that's a tailwind to the margin this quarter. There is, as you know, a little bit of fixed rate asset repricing as well in the third quarter. That's a positive. But then there's a headwind due to average DDA balances. You can see that in the appendix, we put average balances and into period balances, and there will be a decline in average balances just given the second quarter where that landed. And so that will be a headwind to the margin in the third quarter. But we expect margin expansion in the third quarter. We expect margin expansion again in the fourth quarter, and we expect to end the year at or approaching a 3.30% margin given -- with the assumption of a rate cut in December.
Q: Incrementally, if we get a series of rate cuts, Jamie, is that a drag to the NIM at least short term?
A: It does. So for our guidance, we used the Fed dot plot from June. But if you were to pivot to a September rate cut, which is more consistent with the forward curve today, there would be pressure on the margin in the months of September and October. In the period of time leading up to these, there is NIM pressure, which is minor due to short rates declining in the expectation of an ease. And so asset yields will decline, and there's really not an offsetting benefit to a funding cost. Then, once the ease happens, the margin will be pressured further as the majority of floating rate loans repriced down. The full impact of the ease will flow through on the loans almost immediately as the majority of our floating rate loans are one month rates are shorter, but that will be partially mitigated by the 13% of floating loans that are hedged. And then when you're post easing, then you will start to see the benefit of reduced liability cost. And so you have the asset repricing, but then the reduced deposit costs, reduce funding costs will come through. And we believe that, that will neutralize the reduction in asset yields over the course of one to two months. If you were to just compare a September and December ease, the forward curve relative to the Fed dot plot, which is a December ease, there's about a $5 million to $7 million margin -- I mean, NII impact between those two scenarios, and is split between the second and the third quarter -- I mean, the third and the fourth quarter because it's a September and October impact.
Q: Can you help us better understand what's left in terms of the remaining headwind from rationalization efforts? And then, Kevin, I thought you said that the CRE payoffs would increase in the back half of the year. Maybe you could quantify that for us. And how far away do you think we are to what these cumulative headwinds are really behind the company in that strategic growth in other areas of growth we're seeing start becoming the total low growth?
A: Yes, Steven, it's a great question because I think the -- to your point, when you assess the growth of loan outstandings, there's multiple components. And we've talked a lot about our ability to grow predicated on increasing production. But as you mentioned, there's a couple of things that are driving outstanding lower in the current environment. First and foremost, we've been rationalizing some of our portfolios that either we think have lower returns or have a lower funding profile. And that specifically is senior housing, third-party consumer, our national accounts. And when you look at those portfolios, and we've run off about $2.3 billion in the last 12 months in those portfolios. That is just reduced their total percentage of outstandings from 18% to 13%. And that's largely been accomplished. And so as we look forward, for senior housing national accounts, those balances will stay roughly flat. And when you look at third-party consumer, those are going to continue to decline just because we're not putting on a lot of new production. So I would say that the headwinds around rationalization -- and any loan sales, which, as you recall, we did the MOB sale, the medical office sale last year, that's largely done. So as you look into the future, our production levels are actually increasing. When you look at this quarter alone, we were at $1.3 billion in funded production. That was up 37% quarter-on-quarter, and almost back to the levels we saw back in 2023. So production is picking up. Our pipelines are up 8% quarter-on-quarter. So then the other question, Mark, is the payoff and paydown activity. This quarter, as Jamie referenced, the payoff activity occurred more on the C&I side. It was the national accounts and senior housing, and we saw about $250 million of lower utilization on C&I. From a CRE perspective, we don't expect the payoffs to really pick up this quarter but rather in the fourth quarter. And that's just based on some of the maturities that we have. And to put it in context, we had about $570 million of payoff and paydown activity this quarter, that number could get as high as $800 million to $900 million. So we're talking about $400 million-ish increase in payoff activity. And those are the headwinds. Now, again, that's predicated on some of the renewals. As we look into 2025, as we've shared in the past, we think a lot of those headwinds are completely abated, and we returned to more of a normalized growth rate pending what the underlying economic environment looks like.
Q: In terms of the non-interest-bearing deposits, right, there was a bit of excitement last quarter, when you guys talked about seeing a trough maybe in stability in February, March, April. And then this quarter, the period non-interest-bearing came down quite a bit again. Could you walk us through what you ended up seeing there? Because it seems like they trended a bit down.
A: Yes. It's -- we had a good start to the quarter, and we saw some declines as the quarter progressed, and it was really relegated to our commercial operating accounts. And when you look at the average balance there, we're still running about 20% higher than what the average balances were prior to the pandemic. So it still suggests that there's some sort of excess cash
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
