Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Core earnings per share of $0.36 beat consensus estimates by $0.01.
- Net interest margin expanded by 5 basis points to 3.57%.
- Deposit balances grew 8.7% in the second quarter.
- Non-interest income grew $1.2 million to $25.2 million, driven by higher wealth management fees and interchange income.
- Expenses were well controlled at $65.8 million, with a core efficiency ratio improving to 53.6%.
Negative Points
- Non-performing loans increased by $14.7 million for the quarter, with 75% of the increase attributable to loans from the Centric acquisition.
- Provision expense was elevated due to further specific reserves for non-performing loans.
- The company expects a $3.5 million quarterly downdraft in interchange income due to the Durbin impact starting next quarter.
- Loan growth was modest, with total loans growing just under 1%.
- Charge-offs remained relatively flat at $4.4 million quarter over quarter.
Q & A Highlights
Q: You mentioned you would buy back stock even if it's rather expensive. How does M&A fit into the picture, especially as your multiples have gone up?
A: (James Reske, CFO) Our priorities haven't changed. We prefer to use capital generation to support organic growth, maintain a steady dividend, and pursue accretive M&A. If M&A opportunities aren't present, we consider buybacks to maintain leverage. (Mike Price, CEO) We're interested in strategic and financial opportunities that are low risk and at the right price. We've looked at many deals but only completed a few, maintaining discipline in our approach.
Q: Can you talk about your appetite for continued equipment finance build-out and balancing risk-reward in that area?
A: (Mike Price, CEO) Our equipment finance volume has been lighter than expected due to lower demand for CapEx. We maintain strict risk appetite and have kept charge-offs within budgeted amounts. We see potential for growth in consumer categories if rates drop, particularly in indirect auto loans.
Q: How confident are you in growing deposits, especially low-cost deposits?
A: (Jane Grebenc, Chief Revenue Officer) We're confident in growing deposits but acknowledge that low-cost deposits are always competitive. We're not raising CD rates and are demanding full relationships on credit extensions. (Mike Price, CEO) Regionally, our deposit growth has been strong across various markets.
Q: Are we nearing peak deposit costs, and how quickly could they shift with rate cuts?
A: (James Reske, CFO) While the rate of increase on the asset side has outpaced the deposit side, we don't see deposit costs reversing yet. The rate of increase may slow, but we don't expect a significant drop in the near term.
Q: Can you provide more color on the migration related to the Centric portfolio and its performance relative to expectations?
A: (Mike Price, CEO) We marked the Centric acquisition heavily and adjusted the price accordingly. About half of our current NPLs are related to Centric loans. (Brian Karrip, Chief Credit Officer) We've largely identified problems at Centric and expect to return to strong credit metrics over the next several quarters.
Q: How should we think about the trajectory of expenses given expected loan growth?
A: (James Reske, CFO) Consensus estimates for expenses in the second half of the year seem accurate, around $67 to $68 million per quarter. Our expense culture remains strong, and we are comfortable with the current projections.
Q: What is the impact of a 25 basis point Fed rate cut on the NIM?
A: (James Reske, CFO) Historically, a 25 basis point cut would impact NIM by about 3 to 5 basis points. However, current dynamics, including positive repricing and macro swaps, make it difficult to apply this rule of thumb in the near term.
Q: Can you provide details on the sub-debt that was retired and any upcoming repricing?
A: (James Reske, CFO) We redeemed $50 million of sub-debt at 7.5% without needing to replace it, thanks to strong capital generation. We have another $50 million at 5.5% maturing in four years and $70 million in trust preferred securities at fixed rates in the low fours.
Q: How is the Centric portfolio performing, and are there any significant loans that could lead to outsized charge-offs?
A: (Brian Karrip, Chief Credit Officer) We increased specific reserves by $5.8 million this quarter, largely due to one $9 million credit. We believe we've identified most problems and expect to return to strong credit metrics.
Q: What are your expectations for fee income, particularly mortgage banking?
A: (Jane Grebenc, Chief Revenue Officer) Mortgage originations increased quarter over quarter, with 92% of originations sold. Wealth management also performed well, with strong sales of fixed annuities. SBA production is up, and we expect it to be a tailwind for fee income.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
