First Horizon Corporation (FHN) Q2 2024 Earnings Call Transcript

Start Time: 09:30 January 1, 0000 10:27 AM ET

First Horizon Corporation (NYSE:FHN)
Q2 2024 Earnings Conference Call
July 17, 2024, 09:30 AM ET

Company Participants

Bryan Jordan – Chairman, President and CEO
Hope Dmuchowski – CFO
Susan Springfield – Chief Credit Officer
Thomas Hung – Deputy Chief Credit Officer
Natalie Flanders – Head, IR

Conference Call Participants

Jon Arfstrom – RBC Capital Markets
Michael Rose – Raymond James
Anthony Elian – JPMorgan
Ebrahim Poonawala – Bank of America
Chris McGratty – KBW
Casey Haire – Jefferies
Ben Gerlinger – Citigroup
Samuel Varga – UBS
Christopher Marinac – Janney Montgomery Scott
John Rauh – Barclays

Operator

Good afternoon all. Thank you for joining us for the First Horizon Second Quarter 2024 Earnings Conference Call. My name is Carly and I’ll be coordinating your call today. [Operator Instructions].

I’ll now hand over to Natalie Flanders, Head of Investor Relations, to begin.

Natalie Flanders

Thank you, Carly. Good morning. Welcome to our Second Quarter 2024 Results Conference Call. 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 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 two of our presentation and in our SEC filing.

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 three 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.

Bryan Jordan

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 returns 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-provisioned 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% common equity Tier 1 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 and a 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. Hope?

Hope Dmuchowski

Thank you, Bryan. 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 cents of a penny from the prior quarter. Pre-provisioned 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-off 22 basis points and a slight increase in ACL coverage ratio to 1.41%. We achieved our near-term target of 11% CET1 this quarter, in part by returning 212 million of capital to shareholders through share repurchases. This return of excess capital drove improvement and 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 one 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 continue to improve, up six 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 relatively stable since March. Deposit costs increased two 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 in the money supply drove a 1% reduction in balances in line with the industry’s 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 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 two 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%, up 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 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 4 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 488K, resulting in a 12 million decrease to fee income. The moderation this quarter was driven by reduction in the market’s rate cut expectation and lower portfolio restructuring activity.

Absent 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 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 non-interest income increased 3 million, mostly due to incremental swap fees and a gain from a tax credit investment.

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 expense based 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 MPLs have increased clients are still managing through the higher rate environment with approximately 50% of commercial MPLs still current on their payments. Loan loss provision was 55 million this quarter increasing ACL covered 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 mixed 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 mixed shift than expected within the interest bearing portfolio. During the quarter over 1 billion of balance is 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’ returns.

Lastly, you can see that we’ve achieved our near-term CET1 target of 11%. We plan to maintain CET1 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 macroeconomic and regulatory environment. As you turn to Slide 16 I’ll give my closing thoughts. I’m extremely proud of the work that our company has accomplished in the first half of this year.

The macroeconomic 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 rise in the flexibility to efficiently and effectively navigate any economic cycle. As we advance 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.

Bryan Jordan

Thank you, Hope. I echo Hope’s sentiments. We have demonstrated our ability to execute in changing economic and competitive environments. We know how to pull the necessary levers in order to operate profitable. I have complete confidence in our ability to continue doing so over the back half of 2024 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 in serving their customers and their communities. In particular, our thoughts are with those in Houston impacted by Hurricane Beryl and the tens of thousands, hundreds of thousands that dealt for a long period without power.

We remain committed to supporting our associates, clients and the greater community as they recover. Carly, we can now open it up for questions.

Question-and-Answer Session

Operator

Thank you very much, Bryan. [Operator Instructions]. Our first question comes from Ebrahim Poonawala. Ebrahim your line is now open. Ebrahim, can we check that your line is not locally muted? It appears that we can’t connect to Ebrahim.

So we’ll move on to the next question. Next question comes from Jon Arfstrom of RBC Capital Markets. Jon, your line is now open.

Jon Arfstrom

Hi, thanks. Good morning.

Bryan Jordan

Morning Jon.

Jon Arfstrom

Hi, good morning. Can you talk a little bit more about the deposit pricing competition you’re seeing, you flagged late in the quarter. What are you seeing give us some examples of that and what do you think changes or eases that environment?

Bryan Jordan

Yes, I’ll start and then Hope to pick up from there. 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 saw them 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 an offer from somebody else at a higher rate and then our need to match or come close to matching that rate picked up over the last month or so of the quarter. It was North of probably a billion, billion and a half dollars of that occurring in the back half of the second quarter, third month of the quarter. 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 proximate cause is this competitive environment which in the most narrow sense we had to match the competitive offer to maintain and defend customer relationships.

Hope Dmuchowski

Jon, I’ll add to what Bryan said. You asked about the offers. We have a very competitive offer from a marketing perspective from a new entrance to the Southeast of a 530 guarantee through year end and that’s been aggressively marketed, walked into most of our branches and many of our employees here have been kind enough to enter office mail to me, when they’ve gotten at their houses. We saw mid-quarter as Bryan mentioned that competitive environment. Going into the quarter, we expected a rate cut this quarter or highly anticipated a rate cut. So everyone had pulled back from their promotional rates, rate guarantees 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 for the longer term and higher rate in the second half of the quarter.

Jon Arfstrom

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

Hope Dmuchowski

Jon, I do think that if we don’t get a cut in Q3 or this year the further out that cut gets, the more competitive this environment stays as the money supply continues to shrink out of the economy. I am hopeful that with that first cut we’ll start to see some 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, so even if we were to see a rate cut in September, if there’s still an offer out there that is valid through December at a 530 rate, but hopeful that that will start to subside with the first 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 so the earlier that we get the cut in the year, the more that in-year we’ll be able to see the deposit costs come down to match the loan side repricing, but the loan 58% of our loan will reprice in the month and we’ll have to work that deposit cost back. There’ll be a little bit of lag as we walk that deposit pricing back as well as promos that come off three-month, six-month rate offers.

Bryan Jordan

John I think 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 its balance sheet most importantly and particularly what impact that has on deposits across the industry. The deposit market is still very tight and I don’t think a 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 higher, 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 more competitive than we might have thought three months ago, two months ago.

Jon Arfstrom

Yes okay. All right. Thank you very much. I appreciate it.

Bryan Jordan

Thank you.

Operator

Thank you so much. Our next question comes from Michael Rose of Raymond James. Michael, your line is now open.

Michael Rose

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

Hope Dmuchowski

Michael our goal is always to start with the intent as we put together a budget to have positive operating leverage to manage 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 next year. We went into this year thinking four to six 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 think that there’s going to be a lot of uncertainty going through 2025 on deposit costs as well as money supply. We still, have an inverted curve. So our counter cyclicals, specifically our capital market fixed income fees needs to see that curve steepen. And that’ll be a huge help for us. We can see that start to flatten out, steepen at the end of next year.

Michael Rose

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, a little bit of momentum in mortgage warehouse just as rates have come down, a little bit and we’re back to a normal seasonal market. But CNI loan utilization is still relatively low. You’ve had some fund ups in multifamily and construction, things like that. Just Bryan, can you discuss the demand outlook and what you’re hearing from your customers? Is it going to take a couple rate cuts to see that utilization move up and see some better loan growth? Thanks.

Bryan Jordan

Yes particularly so back up to the first question in a macro sense, to the extent that the Fed is reducing rates, we think on the whole that will help our counter cyclical businesses. And as Hope said philosophically, we start with always trying to drive positive operating leverage. And we have these counter cyclical businesses. In particular, I think our mortgage businesses will be helped as rates set and the yield curve reset and the yield curve starts to normalize, particularly if and when it starts to drive refinancing activity, which is likely to occur as the short end comes down and adjustable arms become more affordable. I think as we ended the quarter, something like 18%, 19%, 20% of mortgage warehouse lending activity was actually refinanced. The rest was purchased 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. 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 twin mountains of change out there, what is the Fed going to do and what’s going to happen in the presidential and congressional elections and what does that mean in terms of economic policy? Because 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 spaces.

Michael Rose

Thanks. I appreciate you taking my questions.

Bryan Jordan

Sure. Thank you.

Operator

Our next question comes from Steven Alexopoulos of JPMorgan. Steven, your line is now open.

Anthony Elian

Hi, good morning. This is Anthony Elian on for Steven. Just to follow up on the question on loan growth from 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 in the second quarter? I know you mentioned CRE fund ups were slowing?

Hope Dmuchowski

Hi Anthony. This is Hope. One thing that you need to look at 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 in two and quarter three during the home buying season and then significantly tails off in Q4 and Q1. As a part of that, it 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 from loans we originated the last two years in the pro-CRE market. We are not really seeing a whole lot of originations in CRE as we continue. So we are 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.

Susan Springfield

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

Anthony Elian

Thank you. And then my follow-up, can you provide more color on the increase in outside services attributed in the press release? 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 one-time in nature? Thank you.

Hope Dmuchowski

Marketing is a seasonal spend. At year-end and going into the new year, marketing tends not to be very effective, especially with 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 — 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 than we had originally anticipated. So I think that the technology spend hitting its run right now and the marketing being seasonal throughout the year, typical in past years as well. If you look 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.

Anthony Elian

Thank you.

Bryan Jordan

Thank you, Anthony.

Operator

Next question comes from Ebrahim Poonawala of Bank of America. Ebrahim, your line is now open.

Ebrahim Poonawala

Thank you and good morning. I guess maybe first question is 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 restructuring at your clients, et cetera. So I would assume that if the September rate cut outlook forms up and the steepening of the yield curve should push that to pretty strong levels would be my understanding. So am I missing something there or are you just being conservative when you talk about the cap markets outlook?

Bryan Jordan

Yes, I’ll point you to there’s a very pretty graph that Natalie put in the appendix that sort of shows Fed funds and what it does to average daily revenue. So 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. 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 it’s likely to be better than we’ve talked about for our fixed income business.

Ebrahim Poonawala

Got it. And I guess the other side of the other counter-cyclical business around 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 trigger activity and pick up imbalances? Or is there a level of rates on the mortgage front that needs to occur to get that business sort of momentum going?

Bryan Jordan

Yes. I think you’ve got to see mortgage rates drop more significantly to see any real pickup and 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 an opportunity to pick up a little bit of share by increasing lines and we think that that will help maintain some stability and imbalances there. And we’re optimistic that that’s a business that’s going to pick up nicely as the rate environment does normalize and get a normally shaped yield curve.

Ebrahim Poonawala

Got it. And one last question, if I may. You’re mixing on deposit pricing sounds a lot more, I think circumspect relative to what I’ve heard from the banks so far this earnings season. So one, I think remind is, is there a low 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 yes, am I overeating 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 just want to make sure I’m not missing anything?

Bryan Jordan

Yes, 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 existing customer relationships. So we’re thinking about it from a relationship side of things. And that’s what’s driving the activity. If you look underneath the covers, I quoted some numbers about existing customer relationships that we up-priced. We also had a significant balance of customers where we were able to move the rate back. It’s 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 and our balance sheet to support attractively priced well-structured credit in and through any cycle. So it’s 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.

Hope Dmuchowski

Ebrahim, there’s two things I’ll add to that. We are a Southeast regional bank and I think everyone with the exception of one that’s released is a national bank. But most everybody is talking about the Southeast being their target for growth. So we are competing differently than the national banks. When you look at multiple of our competitors and they talk about their growth opportunities they’re talking about the Southeast. They’re announcing new branches. They’re announcing hiring new teams. 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 size as more banks are trying to increase their footprint or enter here. The second, on the loan-to-deposit ratio as Mortgage Warehouse funds up in Q2 and Q3, we always see that drift up. As I’ve mentioned before, we may have to go deeper into brokered or wholesale during that time but being a 300 basis point yielding asset, I’m okay with that match funding and that loan-to-deposit ratio going up during the two quarters of their heightened line increases.

Bryan Jordan

300 basis points spread.

Hope Dmuchowski

Good catch, Bryan.

Ebrahim Poonawala

All good. Thanks a lot for taking my questions.

Bryan Jordan

Thanks, Ebrahim.

Operator

Our next question comes from Chris McGratty of KBW. Chris, your line is now open.

Chris McGratty

Good morning.

Bryan Jordan

Hi, good morning. Chris.

Chris McGratty

Hi, Brian. In terms of the spot margin as of June 30, I’m trying to think about exit velocity as you go into next year with what you’re doing with the deposits?

Hope Dmuchowski

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

Chris McGratty

3.35 for June. Okay.

Hope Dmuchowski

Yes.

Chris McGratty

Great.

Hope Dmuchowski

That’s on Slide 9.

Chris McGratty

Great. I must have missed that. Thank you. 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 have that clarity in the back half of the year or is that probably a 2025 event to take down the capital ratios?

Bryan Jordan

Yes. I still think it’s a 2025 question. We’re not planning on changing our thinking about that in the near term. We want to see the path of rates and what the economy is doing. As 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.

Chris McGratty

That’s perfect. Thank you.

Bryan Jordan

Thank you.

Operator

Our next question comes from Casey Haire of Jefferies. Casey, your line is now open.

Casey Haire

Great. Thanks. Good morning, everyone. I want to follow up on NII. 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?

Bryan Jordan

This is Bryan. And Casey, 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 AOCI mark is going to creep back to earnings or capital over time. It’s 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.

Casey Haire

Got you. Okay. Then just switching to credit quality the NPL migration sounds like it was driven by CRE. I was wondering if you have any color on product or geography and what’s driving that?

Thomas Hung

Yes. Hi, Casey. This is Thomas Hung. It was predominantly driven by our pre-portfolio in particular office. What I would point to though is I think the performance is within the range of our expectations. I don’t think there was anything that was surprising to us. This is really just driven more by the longer environment we’re in as well as macroeconomic environment. What I would point to is within our office pre-portfolio, we continue to believe we have strong client selection. I think that’ll certainly prove itself out in the long run. Just to give you some high-level information, 90% of our office portfolio by square footage is nine stories or less. I think that speaks to the profile of our office portfolio. In fact, we only have eight buildings that are 10-plus stories. I believe we’re with the right projects, the right borrowers, and the right portions of office to have a good long-term outcome.

Casey Haire

Thank you.

Operator

Thank you so much. Our next question comes from Ben Gerlinger of Citigroup. Ben, your line is now open.

Ben Gerlinger

Good morning.

Bryan Jordan

Good morning.

Ben Gerlinger

I was curious if we could talk a little bit about share purchase activity. I know that the CET1, the 10.5 is probably next year outcome, with the banks having a pretty good month so far, I was curious how you guys think about the math and buyback, taking into consideration, too, that’s a relative valuation but then also the total, the math is a little bit different because the stocks are kind of curious. If you do continue to buyback, could we theoretically see another reauthorization this calendar year? Because you’ve used more than half already, so I’m just kind of curious your thoughts on overall share purchase activity?

Bryan Jordan

Yes the buyback activity, we are thoughtful about price and relative value and our expectations of long-term values. We think that even with the 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’ll look at relative valuations, and we’ll make decisions later on about whether we need to increase our authorization or not.

Ben Gerlinger

Got it. That’s helpful. And then the hope I know you said expenses, prepared remarks. I think you said flat to down in the second half of this year. I was kind of curious. There’s always leverage you can pull, especially with a pretty sizable franchise as you guys have, but is that pushing anything out into 2025 that could be done today? I’m just kind of curious on how you get down relative to flat?

Hope Dmuchowski

Yes Ben, good question. We do expect to be flat to down in the second half of the year. Part of that is in the, as we’ve spoken about before, our bond business, our FHN Financial had a really good Q1 and we had a high revenue quarter and a high expense quarter and we expect that to come back down. We’ve had the TD retention 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 in our adjustments a restructuring cost as we continue to look at ways to reduce our costs with a low growth environment. How much headcount do you need? 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 the, Bryan and I’ve talked about before, we’re very focused on our efficiency ratio and not letting that grow over time.

Ben Gerlinger

Okay that’s helpful, but there’s another being pushed that, so I’m just trying to think about the hill to climb next years. It’s not like you’re intentionally making it a little bit bigger by managing for that, correct?

Hope Dmuchowski

Correct.

Ben Gerlinger

Okay, thank you.

Operator

Thank you, Ben. [Operator Instructions]. Our next question comes from Samuel Varga of UBS. Samuel, your line is now open.

Samuel Varga

Hey good morning.

Bryan Jordan

Good morning.

Samuel Varga

I wanted to just go back to the NII guide for one second. You assume a flat-ish balance sheet, and obviously with the loan growth year to date, you’re 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 mixed shift assumption within that flat balance sheet, or should we think that loans and securities and cash are all sort of staying relatively flat for the second half of the year?

Hope Dmuchowski

Sam, thanks for the question. When you change your guidance, you run a whole set of scenarios to hopefully only change it once in the year and so the answer is the zero, the flat to down 2% takes into account all of the things that could happen, an increasing deposit cost, a flat balance sheet a 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 between flat and down 2%.

Samuel Varga

Okay understood. Thank you. And then just on the deposit side, thinking about late this year, probably 2025 on the non-interest bearing front, I wanted to get a sense for, I guess, where would you expect that growth to return from? Is it the retail franchise? Is it the commercial franchise? And so what would have to happen for your commercial clients to actually increase the dollars they hold in those NIB accounts?

Hope Dmuchowski

I think the answer is both. We’ve gotten front-footed on a checking account marketing campaign. We haven’t done that in years really since the MOE 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. I also mention as we look at that there is a small amount of non-interest 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 on the back half of that we expect to convert that complete that conversion in Q3 and some into Q4. We do expect that we’ll be able to attract and retain clients and deepen relations and attract new clients with our new and improved treasury management system.

Bryan Jordan

Yes, I think the opportunities for growth exist on both sides and in a 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 really going back a year or so, but we think there are opportunities as Hope 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’ve said a number of times we’re in 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 and grow across this 12-state footprint.

Samuel Varga

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

Bryan Jordan

Thank you.

Operator

Our next question comes from Christopher Marinac of Janney Montgomery Scott. Christopher, your line is now open.

Christopher Marinac

Thanks. Good morning. I had a question for you on the – 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 slides.

Susan Springfield

So your question is that there’s can you repeat the question, Chris?

Christopher Marinac

Is there flexibility on your reserve? Can your reserve for CRE grow less than we just saw just because you’ve got limited renewals and sort of addressed what you needed to this last quarter?

Susan Springfield

Yes I do believe that, especially as rates have continued to bit stable if they come down, we’re going to see I think a good bit of relief on commercial real estate and actually C&I and 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 and are there opportunities to release as things moderate. I absolutely think there could be.

Christopher Marinac

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

Hope Dmuchowski

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. It’s end-of-life systems like treasury management and GL, things that we had put on pause, following the MOE integration and following the 15 month dating and cording we had that didn’t end up working out. Now as we’re trying that 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. And next year we’ll be talking about – this year we’re talking about the big two which are GL and treasury management and next year we’ll share with you some of the big ones we’re doing as well.

Christopher Marinac

Great. Thanks very much, Hope. Appreciate the time.

Bryan Jordan

Thanks, Chris.

Operator

Our next question comes from Jared Shaw of Barclays. Jared your line is now open.

John Rauh

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

A – Thomas Hung

Hi, John. This is Tom Hung. A large portion of the NPL increase is driven by office. I think that’s probably not surprising. But as I mentioned I believe it’s within the range of expectations that we had based on the information we have about the broad environment and the rate environment that we’re in. I would reiterate that I believe we continue to show good underwriting and then client selection. And so even as we’re going into these deals we certainly did always stress test the portfolio for potential rises in interest rates, change in vacancy rates, and so on. And so I think what you’re seeing overall is just obviously as rates are being higher the cushion is being smaller. And so we wanted to make sure we’re always appropriately if not conservatively grading our portfolio and hence why you see some negative grade migration.

Susan Springfield

Hi, John. I’ll add a few things to what Tom said. This is Susan. You’re seeing this just in articles that are coming out from others and from just 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 some — a little bit in some of the Texas cities, but again these are more at this point we still think of these as kind of project by project and not indicative 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 lost content there, but something we continue to evaluate on a line-by-line basis.

Bryan Jordan

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 book. So that still is a pretty significant amount of cushion for any softness.

Hope Dmuchowski

John, the other thing I’ll reiterate is what we said before is we reiterate our charge-off guidance. So MPLs are up this quarter. 50% of them are current on payment and we still stand behind our charge-off guidance for the whole year.

John Rauh

Okay, great. And it’s all really good color and then I guess just on the reserve it sounded like CRE reserves expanded mostly due to office. Can you put a number on what the office reserve is and what the rest of the CRE portfolio reserve there?

Susan Springfield

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

John Rauh

Okay sounds good. That’s all for me. Thanks for all the color.

Bryan Jordan

Thank you.

Operator

We currently have no further questions. So I’ll hand back to Bryan Jordan CEO for closing remarks.

Bryan Jordan

Thank you, Carley. 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.

Operator

This concludes today’s call. Thank you to everyone for joining. You may now disconnect your lines.