First Horizon Corp (FHN) 2024 Q2 法說會逐字稿

Yes, good afternoon, all, and thanks for joining us for the First Horizon second quarter 2024 our earnings conference call. My name is Carly, and I'll be coordinating your call today. (Operator Instructions) I will now hand over to Natalie Flanders, Head of Investor Relations to begin.

Thank you, Carly, and good morning. Welcome to our second quarter 2024 results conference call and thank you for joining us. Today our Chairman, President and CEO, Bryan Jordan, and Chief Financial Officer, Hope Dmuchowski will provide prepared remarks after which we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Susan Springfield, and our Deputy Chief Credit Officer, Thomas Hung here to do have questions with you as well.

Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties therefore we ask you to review the factors that may cause our results to differ from our expectations on page 2 of our presentation and in our SEC filings.

Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items. These are non-GAAP measures so it's important for you to review the GAAP information in our earnings release and on page 3 of our presentation. And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them.

And with that, I'll turn things over to Bryan.

Thank you Natalie, good morning, everyone, and thank you for joining our call. I'm pleased with the results we achieved in another solid quarter. We continue to demonstrate our ability to produce consistent return for our shareholders while also providing unparalleled service to our clients. As I look back at the last couple of months, there has been a significant uptick in the competitive landscape, especially promotional deposit officers, as banks compete for growth against the backdrop of a higher for longer interest rate environment and a shrinking deposit base.

I'll start on slide 5, where we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of $0.36 per share, which was a $0.01 increase from the prior quarter, with pre-provision net revenue increasing by $1 million. Adjusted return on tangible common equity improved to 12%, driven by the benefit of returning excess capital to shareholders. We repurchased $212 million of stock in the second quarter and over $365 million year to date, ending the quarter with an 11% tangible common equity Tier one ratio, achieving 11% common equity Tier one ratio.

We intend to continue to stack one good quarter on top of the next. We accomplished that this quarter through modest improvement to net interest income and traditional banking fees, while simultaneously managing the expense base and maintaining strong credit performance. I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter after quarter, while serving our customers and communities. Just as we have for over the past 160 years.

We have an attractive footprint, a competitive product set, a strong credit culture and strong credit culture that will allow us to profitably navigate whatever scenarios we encounter over the second half of the year.

With that, I'll hand the call over to Hope to run through our financial results in more detail.

Thank you, Bryan, and good morning, everybody. On slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated adjusted earnings per share of $0.36 up a penny from the prior quarter. Pre-provision net revenue was stable to the prior quarter as net interest income and traditional banking fees offset the moderation in the fixed income business.

Credit performance continues to be within our expectations with net charge-offs of 22 basis points and a slight increase in ACL coverage ratio to 1.41%. We achieved our near term target of 11% and CET 1 this quarter in part by returning $212 million of capital to shareholders through share repurchases. This return of excess capital, further improvement in adjusted return on tangible common equity to 12%.

On slide 8, you will see that NII increased by $5 million as the margin slightly expanded by 1 basis point from the prior quarter to 3.38%. The loan portfolio continues to be a tailwind to both NII and margin. Average loans are up 1.4% from the prior quarter. Roughly two-thirds of that growth is in loans to mortgage companies, which is our highest yielding loan portfolio.

Loan yields also continued to improve up 6 basis points from first quarter, benefiting from new and renewing floating rate spreads and repricing of fixed rate cash flows. Funding mix partially offset that benefit on the asset side, non-interest bearing balances were down on average, but encouragingly, those balances have been relatively stable since March. Deposit costs increased 2 basis points as late cycle mix shift continues within the interest-bearing portfolio.

We dive further into deposits on slide 9. Seasonality and continued contraction of supply drove a 1% reduction in balances in line with the industry H8 data. Despite this we have been successful in retaining our clients with a 95% retention versus the prior year. We have seen stabilization in non-interest bearing book balances for the first time in several quarters, which is illustrated with both average and period end balances totaling $16.3 billion. The average rate paid on interest-bearing deposits increased 2 basis points to 3.3%. During the quarter, over $1 billion of balances migrated from lower cost base rate accounts into higher rate retention offers, which increased the spot rate to approximately 3.35%, 7 basis points from the end of first quarter.

On slide 10, you will see that the period-end loans were up $1 billion or 2% from the prior quarter. The spring home buying season drove an increase in consumer real estate as we continue to focus on balance sheet production around the medical doctor program. Seasonality impacted loans to mortgage companies as well, but we also benefited from competitive disruption disruption in this industry opening or increasing lines for more than 50 clients.

CRE loans also continued to fund up, though the pace of that is expected to slow in the coming quarters. As previously mentioned, loan yields were up 6 basis points from first quarter due to wider spreads and fixed cash flow repricing. Spreads on new loans increased 42 basis points year over year. We continue to expect fixed-rate loan cash flows to provide opportunity over the next year with a roll-off yield of approximately 4.6% on over $1 billion of cash flows.

On slide 11, you can see that the growth in our banking fees helped offset the anticipated moderation within our fixed income business. Fee income, excluding deferred compensation, decreased $3 million from first quarter average daily revenue in our fixed income business stepped down to $4,88.000, resulting in a $12 million decrease to fee income. Moderation this quarter was driven by reduction in the market's rate cut expectation and lower portfolio restructuring activity. From a rate cut we expect the rest of the year to be similar to this quarter, mortgage fees increased $2 million due to home buying seasonality.

Service charges, card and digital fees are both up $1.1 million each due to the seasonal volume trends that tend to be higher in second quarter. We saw a $2 million increase in brokerage trust and insurance fees as second quarter includes incremental fees for tax filing services within our trust department and our wealth management fees benefited this quarter from a higher market index.

Lastly, other noninterest income increased $3 million mostly due to incremental swap fees and a gain from a tax credit investments.

On slide 12, we show that excluding deferred compensation, adjusted expenses increased less than $1 million. Personnel excluding deferred comp was down $11 million from last quarter, mostly due to reduction in incentives and commissions. The $9 million reduction to the incentives was driven by lower fixed income revenue and a step down in retention awards. Offsetting the personal decrease was a reinvestment into outside services, which increased $10 million from last quarter related to marketing for the new checking account campaigns and third party services for strategic investments.

As we have shared before, we still expect expenses related to our technology investments to moderately increase over the remainder of the year and we plan to offset those costs by continuing to identify and implement operational efficiencies, which will allow us to keep the business that stays flat to down in the back half of the year.

Credit continues to perform very well. As you can see on slide 13, net charge-offs decreased by $6 million to $34 million or 22 basis points of average loans. Non-performing loans increased $69 million with declines in C&I, offset by an increase in CRE. Though NPLs have increased. Clients are still managing through the higher rate environment with approximately 50% of commercial NPLs, still current on their payments. Loan loss provision was $55 million this quarter, increasing ACL coverage slightly to 1.41% coverage on the CRE portfolio increased from 1.26% in first quarter to 1.51%, largely driven by the office sector. Overall, we are pleased with how our balance sheet has performed in this cycle and continue to believe credit feels very manageable.

On slide 15, we've revisited our NII 2024 outlook at the end of last quarter, we guided to the lower end of our previous range. However, due to mix shift and increased deposit competition that we saw late in the quarter, we are updating our expectations for net interest income range to flat to down 2%. We are assuming a relatively flat balance sheet in the back half of the year as we continue to remain disciplined on loan pricing and client selection.

The higher for longer environment, in addition to heightened competition from new entrants into our markets has pressured funding mix and deposit costs more than anticipated. As I previously mentioned, we are pleased to see stability in our non-interest bearing deposits for the first time in several quarters. However, we've continued to see more mix shift than expected within the interest-bearing portfolio. During the quarter, over $1 billion of balances migrated from lower cost base rate accounts into higher rate retention offers.

Our average base rate account yields approximately 50 basis points, while our retention offer is roughly 4%. All other guidance remains unchanged and we will continue to seek efficiencies to help offset revenue pressures and improve shareholders' return. Lastly, you can see that we've achieved our near term CET 1 target of 11%. We plan to maintain the CET 1 around that 11% level and we can reassess moving towards our longer-term target of 10% to 10.5% as we gain more certainty around the macro, economic and regulatory environment.

As we turn to slide 16, I'll give my closing thoughts. I am extremely proud of the work that our company has accomplished in the first half of this year. The macro economic outlook for 2024 has changed significantly in the last six months, while there were previous expectations heading into the year of four or more rate cuts, now we are looking at one to two. But despite all the changes around us, we continue to grow earnings per share quarter after quarter. I believe that the experience and knowledge of our bankers, our teams and our leaders give First Horizon the flexibility to efficiently and effectively navigate navigate any economic cycle.

As we advance to the second half of the year, we continue to expect strong performance from our diversified business model, we will continue to identify operational efficiencies to counter headwinds in revenue. We will also remain diligent on managing our capital, our balance sheet and our credit performance in order to deliver attractive returns near term and into the future.

Now I'll give it back to Bryan.

Thank you Hope. I echo Hope's sentiments, we have demonstrated our ability to execute and changing economic and competitive environments. We know how to pull the necessary levers in order to operate profitably. I have complete confidence in our ability to continue doing so over the back half of '24 and beyond. I firmly believe that one of First Horizon's greatest attributes is our Southeastern footprint and our established client base.

While that attracts some of the greatest competition. I remain confident that we have the associates, the client relationships and the dedication to maintaining an unparalleled banking franchise in the South. As always, I'm grateful for the great work of our associates and serving their customers and their communities. In particular, our thoughts are with those in Houston impacted by Hurricane barrel and the thousands that dealt with tens of thousands, hundreds of thousands at dealt for a long period without power. We remain committed to supporting our associates, clients and the greater community as they recover. Carley, we can now open it up for question.

(Operator Instructions)

Jon Arfstrom, RBC Capital Markets.

Hey, thanks. Good morning, can you talk a little bit more about the deposits, pricing competition you're seeing you flagged late in the quarter and what are you seeing give us some examples of that? And what do you think changes or eases that environment?

Yes, I'll start. And then I Hope pickup from there. It's it's interesting to see the impact it had on our balance sheet. There have been an increasing number of deposit offers that are specials across our footprint. We sell from large and medium and small competitors, and it had the effect of driving a higher cost in our existing customer base. The number of customers who came in with the offer from somebody else at a higher rate than our need to match or come close to matching that rate picked up over the last month or so of the quarter.

And there was know north of probably a billion billion and a half dollars of that occurring in the in the third, the back half of the second quarter, third month of the quarter, have you if you looked at deposit costs early in the quarter. Our aggregate cost of deposits dropped early in the quarter was flattish in May and then really accelerated in the June timeframe and the approximate calls is competitive environment, which in the most narrow sense, we had to match the competitive offer to maintain and defend customer relationships.

Jon, I'll add to what Brian said. You asked about the offers. We have a very competitive offer from a marketing perspective from kind of a new entrance to the southeast of a 530 guarantees through year end. And that's been aggressively marketed walked into most of our branches than many of our employees here have been kind enough to interop as mandates me when they've gotten their houses.

And so we saw kind of mid corps, as Brian mentioned, that competitive environment going into the quarter, we expected a rate cut this quarter, highly anticipated rate cuts and everyone had pulled back on their promotional rates. The rate guarantees were that we were seeing was really three months. We were at a three month rate guarantee and as the forward curve moved to a really late in Q3 expectation for the first rate cut, we saw the offers, the marketing, the digital marketing from competitors significantly increase the longer-term and higher rate in the second half of the quarter.

Okay. If we don't get a cut, Hope do you expect this kind of pressure to persist? And I guess, um, you know, to kind of clean this up was talk a little bit about the higher end of the lower end of the NII guide and kind of what gets you to the higher end or lower end.

Thank you.

Jon, I do think that we don't get a cut in Q3 or this year. The further out that cut gets the more competitive environment stays as the money supply continues to shrink out of the economy. I have and I'm hopeful that with that first cut, we'll start to see consumption come back. But as I mentioned, one of the major rate offers that our clients are bringing in. It is a guarantee through year-end. And so even if we were if you recut September, there's still an offer out there that is valid through December at [530].

But hopeful that that will start to subside with the most rate cut and hopefully a second one not too far behind that. As far as the guidance, absolutely a rate cut we hope will offset the deposit pressure, but we are asset sensitive and the way they're earlier that we get the cut in the year. The more that in you will be able to kind of see the deposit costs come down to match the loan side repricing with Colombia, 58% of our loan book will recover, you know, for them in the months, and we'll have to work that deposits cost back. They'll be able to little bit of lag as we walk that deposit pricing back as well as promos that come off of three month, six month break offers?

Jon, I think it's it's largely a gut call at this point. What happens I think it really depends on what happens with loan demand, how the Fed normalizes balance sheet, most importantly and particularly what impact that has on on deposits across the industry. The deposit market is still very tight and I don't think the cut or two is likely to change that very much in the short term. I don't think it makes it very much different if rates stay are. But I think it's going to be a competitive environment because the Fed is going through this normalization process and that's going to keep deposit costs probably on the whole it's more more competitive than we might have thought three months ago, two months ago.

Okay. All right. Thank you very much. Appreciate it.

Thank you.

Michael Rose of Raymond James.

Good morning, everyone. Thanks for taking my questions. I'm just if I use the midpoint of the guidance you guys are looking at negative operating leverage this year. I know maybe a little too early to kind of count talking about 2025, but do you think positive return to positive operating leverage next year is in the cards and kind of what are the factors rates, improvement in fixed income and momentum and fees, stuff like that would kind of get you there assume a little bit more balance sheet growth and as well?

Michael. Our goal is always to start with the intent as we put together a budget to have positive operating leverage to manage our mix, our efficiency ratio year over year. And so at this point, it's really hard to say what's going to happen with 2024 the rate cut environment right now, the forward curve has two this year and three to four in the next year. We went into this year thinking four to segments, and we might end up one to two.

So I expect 2025, we will work hard and we will set a budget that has positive operating leverage but I think that there's going to be a lot of uncertainty on going through 2025 on deposit costs as well as money fly. We still have an inverted curves are countercyclical and specifically our capital markets, fixed income fees, nice to see that curve steepen and there will be a huge help for us. We can see that calm start to flatten out steepenat the end of next year.

Okay, great. Maybe just as a follow-up, as we do think about, hopefully a better growth environment for you you've clearly benefited from some little bit momentum in mortgage warehouse just as rates come down a little bit, and we're back to a normal seasonal market. But C&I loan utilization is still relatively low you've had some fund up some multi-family construction, things like that just Bryan, can you can you discuss kind of the demand outlook and what you're hearing from your customers is it going to take a couple of rate cuts to keep that utilization move up and see some better loan growth?

Yes, particularly as a backup to the first question in a macro sense to the extent that the Fed is reducing, rate, we think on the whole that will help our countercyclical businesses. As I've said, philosophically, we start with always trying to drive positive operating leverage. And we have these countercyclical businesses. In particular, I think our mortgage businesses will be helped as rates set and then the yield curve a reset in the yield curve starts to normalize, particularly and if and when it starts to drive refinancing activity, which is likely to occur occur as the short end comes down and adjustable ARMs become more affordable.

I think is we ended the quarter something like 18%, 19%, 20% of mortgage warehouse lending activity was actually refinance. The rest was purchase money mortgage. That tends to be more balanced over time.

So to that point, I think you can see a significant pickup in mortgage warehouse lending. And I think in all likelihood, you'll see a pickup in mortgage lending as the rate curve begins to normalize. And broadly speaking, loan demand is more tepid than we would have thought at this point in the cycle, people are generally cautious about investing, I think the, you know, the twin mountains of change out there. What does the FED and do what's going to happen in the in the presidential and congressional elections and what does that mean in terms of economic policy because of that?

There is a lot of divergence between where our two presidential candidates are. So at the end of the day, people are a little more tepid, but I think as rates begin to fall, I think people will become more optimistic both on a consumer level, particularly in the mortgage space as well as in the commercial lending space.

Thanks. I appreciate you taking my questions.

Steven Alexopoulos, JPMorgan.

Hi, good morning. This is Anthony Elian on for Steve. Just to follow up on the question on loan growth for Michael. So your updated NII outlook assumes a relatively flat balance sheet in the back half of the year. Can you just talk about the drivers of the slowdown in loan growth you expect following a pretty solid quarter. You saw second quarter. I know you mentioned CRE fund notes were slowing.

Elian, one thing that we've got that you need to look at. It is the seasonality of mortgage warehouse. So about two thirds of the or half the increase a little bit more quarter over quarter on average is mortgage warehouse, which seasonally increases into quarter two and quarter three during the home buying season and then kind of significantly tailed off in Q4 and Q1.

As a part of that is just the normal increase we have in loan growth. We are reaching the end of or near the end of the large fund ups. We had some loans we originated the last two years in the [Procuri] market. We're not really seeing a whole lot of originations in CRE as we continue. So we're kind of going to tread water in the back half of the year as we see paydowns, cash flows come in with what new lending will be.

Do you think as we go into 2025. And I know Michael's question earlier about if there's a better growth environment, if you get some rate cuts and the outlooks are better, I do think some of those are specifically, C&I clients who may have put capital projects on the back burner will move those back to the front burner. And you'll see some opportunities with with clients who may want to reengage in some lending activity, and we stand ready to come to work with those clients assuming they meet our risk profile.

Thank you.

And then my follow-up, can you provide more color on the increase in outside services contribute in the press release. This is this is tied to deposit marketing campaigns and third party services for strategic investments. I guess how much of the $10 million increase you saw sequentially is sticky versus onetime in nature?

Thank you.

Marketing is a seasonal spend there at year end and going into the new year marketing tends not to be a very effective, especially with the checking accounts. It just doesn't tend to be a seasonal time where we see a lot of movement between banks and so Q2 and Q3 are typically where we see more effective direct to client marketing. And so I think, yes, I wouldn't say sticky as in year over year as there is some seasonality there. We did mention in multiple previous calls that our technology investments were a little slower to get started the end of last year. And this year, what I would say than we had originally anticipated. So I think that the technology spend kind of hitting its run right now and the marketing being seasonal throughout the year, typical in past years. When you look past back to last year's earnings, you'll see the same type of seasonality increase in marketing in Q2 and towards the end of Q3.

Thank you.

Ebrahim Poonawala of Bank of America.

Thank you and good morning. I guess maybe first question is just around Bryan and Hope on fixed income, I think you said the $40 million seems like a good run rate for the back half from what I can recall just in prior cycles, rate cuts, it is counter-cyclical. You should see a lot more bond book restructurings that your clients, et cetera. So I would assume that if the September rate cut outlook firms up and the steepening in the yield curve should push that to pretty strong levels, would be my understanding as well. Am I missing something there or are you just being conservative when you talk about the cap markets outlook.

Yes, I'll point you to there's a very pretty graphs that Natalie put in the appendix, it sort of shows Fed funds and what it does to average daily revenues that your instincts are right to the extent that rates are moving down, you're likely to see an impact on average daily revenue being up and what we've talked about there is a more steady environment. We're not making any broad assumptions about the Fed making significant rate cuts basically following the forward curve. But on the whole, if the Fed is more aggressive in moving rates down is likely it would be better than we've talked about for our fixed income business.

And I guess the other side of the on the countercyclical business and on mortgage warehouse if we get fed cuts, but mortgage rates remain around 7%. Is that enough based on what you're hearing from your mortgage warehouse clients to ticket activity and a pickup in balances? Or is there a level of rates on the mortgage front that needs to get that business sort of momentum going?

Yes, I think you've got to see mortgage rates drop more significantly to see any real pickup in refinance activity. I think you'll still continue to see a steady flow of purchase activity, but I think to see anything meaningful in terms of refinance activity, you're going to see rates drop more than that. We have had a opportunity to pick up a little bit of share by increasing lines. And we think that that will help maintain some stability in balances there. And we're optimistic that that's a business that's going to pick up nicely as a base rate environment does normalize and get a normally shape yield curve.

Got it. And one last question, if I may. Your mexican deposit pricing. So there's a lot more, I think, circumspect relative to what I've heard from the banks so far this earnings season. So one, I think the minus is the loan to deposit ratio that you're managing to, which is causing First Horizon to be a lot more active in bringing in deposits or retaining deposits. And am I overstating it because what we're hearing from most banks is some cooling in deposit pricing, things repricing lower from three, six, nine months ago. So I just want to make sure I'm not missing anything?

Yes, I think, but I think a couple of thoughts. One is we are attentive to our loan to deposit ratio, but that's not driving the deposit pricing strategy as much as it is protecting defending the existing customer relationships. So we're thinking about it from a relationship side of things in and that would driving the activity.

If you look underneath the covers, I quoted some numbers about our existing customer relationships. It would be our price. We also had a significant balance of customers where we were able to move right back is just on the whole because of competitive dynamics in certain sectors, we saw a net aggregate increase in deposit costs, but it was really driven by our desire to defend customer relationship.

Clearly, as I said, we will pay attention to our loan to deposit ratio, but we think we have the flexibility in our balance sheet to support attractively block of fixed fees for me to say attractively priced well, structured credit and then through any cycles. So is not really constraining our ability in the near term, not to say that that won't change. But in the near term, we feel like we're well positioned to fund customer relationships that make sense for our balance sheet.

Ebrahim, I still think we'll add to that we are a Southeast regional bank. And I think everyone with the exception of one that's releases a national bank, but most everybody is coming talking about the Southeast being their target for growth. And so we are competing differently than the national banks. As you know, when you look at multiple of our competitors and they talk about their growth opportunities, they're talking about the Southeast are announcing new branches. They're announcing hiring new teams. And so I think the Southeast allows us to grow more than the average on loans, but it's also become more competitive on both the loan and deposit side as more banks are trying to increase their footprint or enter here.

Second, on the loan to deposit ratio as mortgage warehouse funds up in Q2 and Q3. We only see that drift up. As I've mentioned before, we may have to go deeper into brokered or wholesale during that time of being a 300 basis point yielding asset, I'm okay with that match funding and that loan deposit ratio going up during the two quarters, their high end line increases.

300 basis points.

Good catch, Brian.

All right. Thanks a lot for taking my questions.

Chris McGratty of KBW.

Good morning maybe a run to help them in terms of the spot margin, do you have as of June 30? I'm trying to think about exit exit velocity as you go into next year with what you do with the deposits?

We didn't have spot margin, but we do have on slide 9 the spot rate for the quarter, which was 3.35.

Okay. Great, I must have missed that. Thank you.

And then, Bryan, on capital, you're at the [11] you talked about clarity on regulation and clarity on the economy being the keys to going down to [10, 10.5]. Do you think it's a possibility that you could you could have that clarity in the back half of the year? Is that probably a 2025 event to take down the capital ratios?

Yes, I still think it's a 2025 question. We're not planning on own change in our thinking about that in the near term. We want to see the path of rates and what the economy's doing. And it is most everybody. We're hopeful that the Fed creates a soft landing for the economy, but we're prepared for something different than that until we see greater clarity, we don't plan to reevaluate that.

That's perfect. Thank you.

Casey Haire, Jefferies.

Good morning, everyone. From the board all up on NII Any any thoughts to using some of the capital towards a bond book restructure and improving the yield there? I know it's a small asset for you, but just wondering some updated thoughts there.

Yes, this is Bryan, Casey. And the short answer is probably not in our view, the restructuring of the bond portfolio really creates a lot of friction and doesn't really create anything other than a difference in the timing of earnings that discount or or from [AOCI] mark is going to accrete back to earnings or capital over time. And so it is unlikely that's something that we evaluate just simply because it creates friction that doesn't create a lot of economic. It doesn't create any economic value over time.

Got you. Okay. And then just switching to credit quality, the NPL migration sounds like it was driven by CRE I was wondering if you give any color on product or geography and what's driving that.

Yes, Casey, this is Tom Hung. It was predominantly driven by our credit portfolio and that particular office. What I would point to, though is I think the underperformance is within the range of our expectations. I don't think there was anything that was surprising to us this is really kind of a just driven more by the higher for longer environment wherein the 12 macro macro economic environment.

What I would point to is within our office portfolio, we continue to believe we have strong client selection and I think that will certainly prove itself out in the long run. I'm just give kind of give you some high-level information 90% of our office portfolio by square footage does nine stories or less. So I think that speaks to kind of the profile of our office portfolio. In fact, we only have eight building better ten-plus stories. And so I believe where we're with the right projects, the right borrowers in the right portions of office to, they have a good long-term outcome.

Thank you.

Ben Gerlinger at Citigroup spend.

Morning. I was curious if we could talk a little bit about share repurchase activity and other the CET 1, the 10 kind of add probably next year outcome are the banks at a pretty good month so far down just kind of curious how you guys think about the math on buybacks, kind of taking into consideration to that a relative valuation. And then also the total the math is a little bit different because the stocks have gone up. Just kind of curious if you do continue the buyback, could we theoretically see another reauthorization this calendar year? Because if it's viewed more accurate. So just kind of curious, thoughts on overall share repurchase activity.

Yes. The buyback activity, we are thoughtful about price and relative value and our expectations of long-term values. We think that even with this significant improvement in stock prices across the industry over the last few weeks, we think we're still at a relative discount and opportunistically we will continue to use capital to repurchase shares.

I don't know how to evaluate as we sit here today about whether we would reauthorize a buyback this year or next. That's a Board decision we have plenty of capacity under the authorization that we have that expires in January of this coming year 2025. And so we will evaluate that as appropriate. But we do think maintaining excess capital when we can return it to shareholders through a buyback is probably more appropriate that we put it in the hands of our shareholders. And so we will continue to be opportunistic. We will look at relative valuations, and we'll make decisions later on about whether we need to increase our authorization or not.

Got it. Helpful. And then I hope I know you said expenses in your prepared remarks. I think you said flat to down in the second half of this year is kind of curious. It is always levers you can call it actually has a pretty sizable franchise as you guys have. But is that pushing anything out into 2025 that could be done today and just kind of curious on how you get down both on the cloud.

Yeah Ben good questions. We do expect to be flat to down in the second half of the year or part of that is that, you know, as we've spoken about before, bond business or any just Financial had a really good Q1 and we had a high revenue quarter and a high expense quarter. We expect that to come back down. We've had the TD. retention in the first step down in the back half of this year. We think we've hit the stride of our technology investments. And so we are looking at operational efficiencies. We have another adjustment, a restructuring costs as we continue to look at ways to reduce our costs with a low growth environment, how much headcount do you need where were you previously spending money with third parties that you don't need to anymore?

The environment has significantly shifted over the last year. And we're looking at every opportunity we can to be as efficient as we can and make sure that we have, though we're buying less of it before we're very focused on our efficiency ratio, not letting that grow over time.

Okay. That's helpful. But there's nothing being push that. So I'm just trying to think what the hill to climb next year. It's not like in intentionally kind of maybe a little bit bigger by managing to that, correct?

Correct.

Okay. Thank you.

(Operator Instructions)

Samuel Varga of UBS.

Good morning. I wanted to just go back to the NII guide for second. You assume a flattish balance sheet. And obviously with the loan growth year to date, you're kind of close to the middle of the guide you said and obviously seasonality and the LMC vertical isn't going to help for the second half of the year. So I'm just trying to ask, is there any sort of mix shift assumption within that flat balance sheet or should we think that that loans and securities and cash are all sort of staying relatively flat for second half of the year?

Sam, thanks for the question. Yes, when you when you change your guidance, you run a whole set of scenarios and to hopefully only two things at once in the year end. So the answer is zero. The flat to down 2% takes into account all of the things that could happen and increasing deposit costs, a flat balance sheet, slightly up slightly down balance sheet. And we feel that whatever is going to happen in the back half of the year, we will hit the new guidance being flattened 2%.

Okay, understood. Thank you. And then just on the deposit side, I'm thinking about I'm late this year, probably 2025 on the sort of the bearing front. I wanted to get a sense for where would you expect that growth to return from the retail franchises of the commercial franchise and sort of what would have to happen for your commercial clients, to actually increase the dollars they hold in those IB accounts.

I think the answer is both as we've gotten front-footed on the checking account marketing campaign. We haven't done that in years really since the MOV and we saw a lot of success in the second quarter. And so we hope that that will continue, and we'll see stabilization in the non-interest bearing and also mentioned, as we look at that, there's there is a small amount of noninterest-bearing, but also interest bearing.

When we talk about the commercial clients, we've talked a lot about our technology investments. One of the biggest investments we're making is converting and upgrading our treasury management system and the back half of that. And we expect to convert that you complete that conversion in Q3 and some into Q4. We do expect that we'll be able to attract and retain retain clients and deepen relationships and attract new clients with our new and improved treasury management system.

Yes, I think the opportunities for growth exist on both sides and have been Fed shrinking its balance sheet world. That money is ultimately coming out of customer accounts, too. And if you look at customer accounts, they've been declining over the last several months and then really going back a year or so. But we think there are opportunities, as I said, to grow both on the consumer side, we've got a checking offer that is showing very good signs early in the process.

We think the completion of the treasury integration effort will be very significant in terms of our ability to continue to grow and to market that product. So we're optimistic on both sides. And as we said a number of times, we're in a bit of a very attractive footprint. It's competitive, but it's a very attractive footprint. And we think that gives us plenty of opportunity to invest in some of these higher growth markets where we have in many cases, smaller shares. And so we're optimistic about our ability to invest in growth across this in a 12 state footprint.

Got it. Thanks for all the color. I appreciate it.

Christopher Marinac of Janney Montgomery Scott.

Good morning, I had a question for you on me. I had a question on the CRE reserves and was curious if there's flexibility there now that those rose in the quarter and given that the lease renewals are very limited, as you had outlined in the slide?

Your question is [incorrect] Can you repeat the question, Chris?

Is there flexibility on your reserve? Can you reserve for CRE grow less than we just saw just because you're kind of limited renewals and sort of address what you needed to this last quarter.

Yes, I do believe that especially as rates rates have continued, have they've been stable if they come down. And we're going to see, I think, a good bit of relief on commercial real estate. And I actually see and I think everybody and so we will see some healing there. I also think that we've been very proactive and on the conservative side, as we think about grading and we've done that for really the duration. And so as we've built some reserves over time, I believe we're adequately reserved at this time. At this time, we don't expect to build in and are there opportunities to release as things moderate. I absolutely think there could be great.

Thanks for that. And then I just had a question for Hope as it pertains to the technology spend I know you mentioned that there was sort of slow the pace, but as it accelerates, is it going to be treasury management things like you mentioned or would it be upping other initiatives back towards the core at the bank.

Early on, we have a three-year plan and early on, a lot of it was kind of what we're calling run the bank is end of life system like treasury management, NGL things that we had put on pause following the MOE integration. And following of the 15-months dating and courting, we had that didn't end up working out. Now as we're trying to get most of that run, the bank is getting through. We are doing more change the bank more client facing in the back half of our three year investment strategy next year, we'll be talking about this year. We're talking to the bank as to what your GL treasury management next year, we'll share with you some of the big ones we're doing as well.

Great. Thanks very much. I appreciate the time.

Thanks, Chris.

Jared Shaw of Barclays.

Well, this is John on for Jared. I guess just if we could get a little more color on that migration into NPLs and the office portfolio, I guess what portion of the increase in NPLs was from office in particular and on, has there been any differentiation across geographies just on overall performance within the office portfolio?

Hey, John, this is Tom. A large portion of the NPL increase is driven by office. I think that's probably not surprising, as I mentioned, I believe as of within the range of expectations that we had based on what we see from the information we have about kind of the broader environment and the rate environment that we're in. I would reiterate that I believe we've continued to show good underwriting and then client selection. And so even as we go into these deals, we certainly did always stress test the portfolio for potential rises in interest rates, interest rates, change in vacancy rates and so on. And so, you know, I think what you're seeing overall is just obviously, as rates have been higher, the cushion has been smaller.

And so we wanted to make sure we're always appropriately not conservatively grading our portfolio and hence why you see some negative grade migration.

I'll add a few things to what Tom said. This is Susan and I think you're seeing this just in articles that are coming out from others and from commercial real estate databases, some of the geographies that have seen some weakness in the southeast around office would be Atlanta Raleigh. So a couple of areas and are some little bit in in some of the Texas cities. So but again, these are more at this point, we still think of these as kind of project by project and not indicative of a of an issue necessarily with a specific geography.

And to reiterate what Tom said, we've been conservative in commercial real estate underwriting for many, many years. And so the upfront equity that we require across all types of commercial real estate projects is significant and so even with some drops in appraised values that we've seen as we've reappraised properties, either because they've been downgraded or there's a credit event maturity, we've not seen a lot of loss content there, but we could tell them we continue to evaluate on a loan-by-loan basis.

Yes, we do watch it closely. And I would just add that in our traditional office portfolio based on the information we currently have, we're looking at an average stabilized LTV of about 60% on an office club. So that still is a pretty significant amount of cushion for any softness.

John, the other thing I'll reiterate what we said before. We reiterate our charge-off guidance. So NPLs are on this quarter, 50% of them are current on payments still stand behind our target on guidance for the full year.

Okay, great. That's a good color. And then I guess just on the reserve, it sounded like on [CRE] reserves expanded mostly due to office. I just can you put a number out with the officers? There isn't one. What's the rest of the CRE portfolio from reserves there?

We don't break it down by property type, but there is it the CRE coverages outlined overall in the materials that were provided.

Okay. Sounds good. That's all for me. Thanks for all the color.

We currently have no further questions. So I'll hand back to Brian Jordan, CEO for closing remarks.

Thank you, Carly. Thank you, everyone, for joining our call. We appreciate your time and attention. Please let us know if you have any further questions or need additional information. Again, thank you and have a great day.

This concludes today's call, and thank you to everyone for joining. You may now disconnect your line.