First Commonwealth Financial - Q2 2024
July 24, 2024
Transcript
Operator (participant)
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation second quarter 2024 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Ryan Thomas (VP of Finance and Investor Relations)
Thanks, Regina, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation second quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jane Grebenc, Bank President and Chief Revenue Officer, Brian Karrip, Chief Credit Officer, and Mike McCuen, our Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements.
Please refer to our forward-looking statements disclaimer on page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike.
Mike Price (President and CEO)
Hey, thank you, Ryan, and welcome everyone. Core earnings per share of $0.36 beat consensus estimates by $0.01 for the second quarter of 2024. Pre-tax, pre-provision net revenue was up by $3.6 million over last quarter. Headline numbers for the second quarter include a core return on assets of 1.29%, a core pre-tax, pre-provision ROA of 1.88%, a core return on tangible common equity of 15.93%, and a core efficiency ratio of 53.34%. Importantly, the net interest margin expanded by five basis points to 3.57% as the increase in loan yields outpaced the increase in funding costs for the 1st time since the fourth quarter of 2022. Other trends follow.
Loan outstandings were flat, even as average deposit balances grew 8.7% in the second quarter. Looking at loans a little closer, total loans grew just under 1%, with growth centered on equipment finance and to a lesser extent, SBA. Over the last year, we pinched consumer loans, mortgages, home equity loans, and indirect auto and have not chased volume at the expense of spread. We've moved prices up and now with the prospect of rate cuts, these consumer categories could become more attractive to us in the next few quarters. Similarly, we have been cautious over the last year with investment real estate, and coupled with tepid demand, originations have dropped. We are starting to see more good looks in both C&I and commercial real estate, and pipelines are building.
As we've shared in the past, our loan growth in Ohio continues to outpace our Pennsylvania loan growth. Looking ahead, we are confident in our loan origination capabilities, and we believe we can get to well-structured and well-priced mid-single-digit loan growth by the fourth quarter and into 2025. Conversely, deposit gathering has been broad-based across most of our footprint. Deposit performance in our Community PA market continues to be exceptional. Community PA just happens to be our largest low-cost deposit region as well. We've seen an increasing number of competitors lower deposit rates in our market area, taking some pressure off of pricing. We continue to offer competitive rates on time deposits because we want to bring our loan-to-deposit ratio down to create the liquidity to fund expected loan growth. But we're doing so at shortened terms to allow for repricing as rates fall.
One other important dynamic worth noting is that we saw non-interest-bearing balances increase slightly over last quarter. We're hopeful that means we're nearing the end of outflow of pandemic surge deposits, as Jim likes to call them. Non-interest-bearing was 24.5% of total deposits this quarter, relatively unchanged from 24.9% last quarter. Non-interest income grew $1.2 million to $25.2 million in the second quarter on the strength of higher wealth management fees and interchange income. The increase in wealth management fees was due to strong fixed annuity sales in our wealth division as consumers, customers sought out instruments to protect their investments from falling rates. The increase in interchange income was welcome, but we expect a roughly $3.5 million quarterly downdraft in interchange income due to the Durbin impact.
Starting next quarter, which appears to be already have been baked into our estimates. Expenses continue to be well controlled at $65.8 million, as our FTE remained down from year-end, even as we staff appropriately to support crossing $10 billion. Our core efficiency ratio improved to 53.6%. Charge-offs of $4.4 million were relatively flat quarter-over-quarter. Provision expense, however, was elevated as we set aside further specific reserves for non-performing loans. Non-performing loans increased $14.7 million for the quarter. Roughly 75% of the increase in NPLs was attributable to the former Centric loans. Of course, Centric is fully integrated into First Commonwealth, now as our Capital region, so we'll soon stop reporting such items separately.
But for now, we would note that approximately half of all of our current NPLs are related to loans acquired in that acquisition, which was about 10% of our total assets at the time. We understood we would have credit pressure during due diligence. We set a fairly robust credit mark and priced the transaction accordingly, and given the achievement of announced cost saves, the transaction has been accretive to income despite the obvious credit workout headwinds. As Jim Reske will discuss in more detail, we also used a gain of $5.6 million from the sale of Visa B shares to absorb a loss on the sale of $75 million of low-yielding securities, which were replaced with securities at current market rates. We also redeemed a $50 million tranche of sub debt in early June.
Both of these will result in an annual pickup in pre-tax income and will be accretive to our net interest margin. In closing, second quarter financials were solid, particularly pre-tax, pre-provision profitability and ongoing efficiency, and we continue to take steps to grow deposit liquidity to support broad-based loan growth into the future. With that, I'll turn it over to Jim.
Jim Reske (CFO)
Thanks, Mike. We had a few unusual transactions in the quarter that I'd like to walk you through before I turn to our core operating results. 1st, as previously disclosed, and as Mike just mentioned, on June 1st, we redeemed $50 million of the $100 million in subordinated debt that we had outstanding. The sub debt was issued at the bank level in 2018. The $50 million that we redeemed was a 10-year instrument, so the Tier 2 capital treatment was already in the phase-out period and was about to lose another 20% of its capital treatment. The other $50 million that remains outstanding is a 15-year instrument and so remains eligible for 100% Tier 2 capital treatment for another 4 years at a fixed rate of 5.5%.
The $50 million that we redeemed was floating at a rate of about 7.5%, and we called it using excess cash on hand. So calling it on June 1st gave us one month of benefit in our net interest margin for the quarter. This was the perfect quarter to redeem the sub debt, since capital ratios grew strongly due to capital generation combined with limited balance sheet growth. On its own, the sub debt redemption would have resulted in a 44 basis point reduction in the total risk-based capital ratio, but that ratio only went down by eight basis points this quarter. And in fact, the tangible common equity ratio actually improved from 8.4% to 8.7% of the quarter, as did the CET1 ratio from 11.4% to 11.7%.
The sub debt redemption contributed to the NIM improvement for one month in the second quarter, and going forward, it should contribute about two basis points of NIM, in part because we used cash to pay it off and shrunk the balance sheet by $50 million. The redemption should also add about $1 million of net interest income on an annual basis. 2nd, we had two offsetting non-core items in the quarter. We, along with approximately 98% of banks holding Visa shares, accepted Visa's offer to sell half our holdings, an action which we previously disclosed as well. As a result, we recognized approximately $5.6 million of gain on the stock in the second quarter. Offsetting that was a sale at the very end of the quarter of $75 million in underwater securities at a $5.5 million loss.
As a result, these two non-core items offset each other in terms of their effect on second quarter earnings, leaving GAAP and core EPS exactly the same for the quarter at $0.36. But the net effect going forward is selling low-yielding securities and in their place, repurchasing securities at current market rates, should provide a 2 basis point tailwind to NIM, along with approximately $2.25 million in improved net interest income per year. Now, on to our core operating results. Notwithstanding provision expense and the non-core items mentioned above, our pre-tax, pre-provision net revenue improved by $3.6 million over last quarter as the NIM expanded and fee income improved. After four quarters of NIM compression, the margin finally expanded this quarter by 5 basis points to 3.57%.
Yields on earning assets improved by 12 basis points, while the cost of funds only went up by 7 basis points. The cost of deposits went up by 10 basis points, but the impact of the total cost of funds was muted by the sub debt redemption. The NIM also benefited by about 2 basis points from the recognition into net interest income of deferred interest on 1 loan that had previously been placed on non-accrual status. Purchase accounting accretion contributed 8 basis points to the NIM this quarter, and we still expect that to fade out by about 1 basis point per quarter. The other big story with regard to the NIM this quarter was a fairly dramatic slowdown in the deposit, quote unquote, "rotation" that we've seen in the past year.
While there's no standard industry definition for that term, we use it to mean declines in balances in the traditionally low-cost deposit categories of non-interest bearing, NOW and savings accounts, and growth in the balances of the higher cost categories of money market and time deposits. In the first quarter of 2024, for example, we experienced a decline of approximately $233 million in the less expensive categories and an increase of $283 million in the more expensive categories. That was the first quarter of 2024. That's been the pattern for the last six quarters. Deposit rotation began in earnest in the first quarter of 2023 and has been running at roughly $200-$250 million in each of the last three quarters.
In the second quarter, just ended, however, the less expensive categories, rather than decreasing, actually increased by $27 million, while the more expensive categories only increased by $173 million. Perhaps more importantly, the deposit growth that we had in the first quarter came at an incremental cost of about 4.5%, and in the second quarter, the incremental cost on new deposit funds fell to 3.4%. That, combined with the rotation slowdown, are noteworthy shifts and give us increased confidence in our NIM forecast going forward. As a result of these dynamics, we would expect NIM stability or even slight improvement from current levels the remainder of 2024, give or take 5 basis points as usual, but with a bias towards the higher end of that range, even with 2-3 cut rate cuts.
Over the long haul, we are asset sensitive, but in the near term, even with rate cuts, our loan portfolio yields will continue to drift upwards for a while before they start to fall. Most importantly, the notion that we've turned a corner to a falling rate environment should further reduce pressure on funding rates over the medium term, which has been the hardest part to predict. When we forecast using anywhere from 0-4 rate cuts for the remainder of 2024 and 2025, we get the same pattern for NIM and net interest income. Slow, steady increases for the remainder of 2024, flat through the first quarter of 2025 as lower rates start to have their effect, and then a meaningful lift starting in the second quarter of next year as the macro swaps start to mature.
In all of these scenarios, the quarter just ended appears to be the low point in terms of both NIM and net interest income at least through 2025. Though, to be clear, our forecast has certainly been wrong in the past. Higher for longer is certainly better for us, but even in an aggregate, aggressive rate cut scenario where there are 4 cuts this year and the Fed funds rate ends 2025 at about 3%, our NIM and NII are both still higher than where they are now over the next 6 quarters, even assuming only modest loan growth.
In terms of capital management, tangible book value per share increased by $0.30, or 13% annualized from the previous quarter to $9.56, due to about $24 million in retained earnings, combined with a $5.7 million reduction in AOCI, which ended the quarter at $113.4 million, or 11.6% of tangible common equity. We repurchased just under 23,000 shares this quarter at prices below $12.50, and have $17.1 million of authorization remaining in our current buyback program.
Given the recent run-up in our stock price, the earn back on buybacks becomes longer than we'd like, but if we continue to experience modest balance sheet growth combined with consistent capital generation and reductions in AOCI, and especially now that the subdebt redemption is behind us, we may repurchase shares anyway simply to avoid becoming underleveraged. With that, we'll take any questions you may have.
Operator (participant)
At this time, I'd like to remind everyone, in order to ask a question, press Star, followed by the number one on your telephone keypad. Again, that is Star one for any questions. Our 1st question will come from the line of Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo (Analyst)
Thank you. Good afternoon, everybody. Jim, I appreciate all the detail on the loans and the securities and the margin in general. You know, I guess 1st, you know, normally one of the last things we address, but just curious, you know, you mentioned you would buy back stock if even if it's kind of rather expensive to do so, relative to current levels. But you know, just curious how M&A fits into the picture, if you guys are still interested in that, especially as, as your multiples have gone up and, you know, how dry powder perhaps influences the amount of buybacks you would be willing to do as well.
Jim Reske (CFO)
Well, you know, I'll answer that from just a technical perspective, because our priorities are like a lot of other banks, they really haven't changed, and then Mike may want to comment more on M&A appetite. But we'd prefer always, like most banks, to use capital generation to support organic growth. And then we have a dividend, but we just want smooth and steady increases in the regular dividend. We have no appetite for special dividends, and then we would love to do accretive M&A, but if that's not presenting itself, then we'll buy back the stock to maintain the leverage that we want. I mean, if a tangible common ratio starts creeping up to 9% and 10%, the bank just gets to be underleveraged.
And so even if you're buying back stock at 1.75x book, you have to do something to get the capital where you want it to be. So that's that order priority hasn't really changed that much. It's pretty and I think it's pretty, pretty typical. I don't know if, Mike, if you want to talk about just M&A appetite in general?
Mike Price (President and CEO)
... Just, I mean, we're interested, obviously, as all of you know, in contiguous opportunities that are both strategic and financial. We also have to see a clear path to execute a deal with low risk. That's been another hurdle, if it doesn't look like that's there. And they've been good for our company. Every one has expanded our geography, brought us into new markets. I think with our regional business model over the last five or six years, we're getting more effective at delivering in geographies that aren't in our backyard and cross-selling other products and services and gathering deposits. So we're extremely interested. The other thing is, it has to be at the right price.
You know, we, we've finished 2nd or 3rd, and we just won't go to the nth degree to do a deal, where it really pushes out and ceases to make good financial sense and work for us in the next year or two. You've heard that from me before, Daniel, so I apologize. But I think we've also now are probably up to 70 deals that we've looked at, and we've done 6. So our batting average is lower than most. So I hope that's helpful. I do think we're going to have more opportunities. It seems like there's chatter than there's been for several years, and hopefully they're right for us.
Daniel Tamayo (Analyst)
No, that, that is helpful. I, I appreciate all that color, Mike. Yeah, I, I guess,
Mike Price (President and CEO)
The only other-
Daniel Tamayo (Analyst)
Yep, go ahead.
Mike Price (President and CEO)
The only other thing I would add is we've done smaller deals. I mean, we tend to groove in that smaller category where we think there's less risk, and we tend to be able to make it happen seamlessly.
Daniel Tamayo (Analyst)
Yeah.
Mike Price (President and CEO)
Yeah.
Daniel Tamayo (Analyst)
No, understood. And then maybe just a follow-up, kind of unrelated on the organic side, on loan growth. You know, you talked about building back up to the mid-single-digit growth by the fourth quarter, and C&I and CRE pipeline's improving. Maybe you could just talk about, you know, your appetite for continued equipment finance build-out as that happens or how you think about that. And then just curious how you're balancing the risk-reward in equipment finance, and I think you talked about growth in SBA in the quarter as well as we started to see some other banks talk about some credit concerns in those areas.
Mike Price (President and CEO)
Yeah. I think with equipment finance, we've... Our volume has been lighter this year than we thought it would be. I think we've grown just about $45 million. I think so we had budgeted more. We saw that the growth rate has slowed because there's less demand for CapEx, for trucking, construction equipment. We've had lower approval rates for submitted applications just because on the margin, we're not stretching our risk appetite, but we don't really apologize for that. I'm looking at the P&L that Jim does on equipment finance, and we're profitable.
And it's not perhaps where we had hoped to be after two years, but it's a nice business for us with good returns, and we've been able to keep our annualized charge-offs at a budgeted amount, which we kind of signed up for at about, you know, 55-65 basis points. So we're actually pleased with the business. It's well-run. It's staying within our risk appetite, and there'll be a time where that will grow a little quicker, but probably not right now. And just like with all of our consumer categories that Jane and the team have run so well, we're just not going to compromise volume for risk and price. We just are not. We haven't pushed that envelope. We didn't do it on the consumer side, and we haven't done it on the commercial side.
So, I hope that's helpful with equipment finance. The other businesses, I just like the way we're teed up on the consumer side. I think if rates drop a bit, those businesses could become more attractive to us pretty quickly, within a quarter or two, particularly in indirect auto, and we've maintained a lot of pricing discipline, even as we've moved our average costs up, you know, from the... or not costs, but yield from the 5s to almost 7, over 7%. So the team has done a nice job there, and we could drop 0.5 point and get a lot more volume. We just haven't done that. And again, that's our good people under Jane's leadership.
On the commercial side, I just think, you know, just after First Republic and everything, we just kind of hit the pause and on commercial real estate, and we're seeing good deals come back and opportunities. We have a great stable of developers in the Midwest and Pennsylvania. In our C&I, under Mike McCuen's leadership, I just feel really good about pipelines and talent. And, you know, we're already pretty good there. We're probably about 60-65 percentile, but I just think that's where we've got to get a lot better in terms of the concentration in our portfolio and all the value that gets bought through family-owned business, depository, all that good stuff, and cross-selling wealth management and pushing that through the regional model.
I just think that's how we go from being a pretty good company, to maybe a much, much better company over the next five or 10 years.
Daniel Tamayo (Analyst)
Terrific. Very helpful, Mike. Thanks for all the color.
Operator (participant)
Our next question comes from the line of Karl Shepard with RBC. Please go ahead.
Karl Shepard (Analyst)
... Hey, good afternoon, everybody. Mike, I wanted to follow up on loan growth real quick. It sounds like you're confident in getting back to mid-single digit by the end of the year. Is that a year-over-year pace, or do you want us to think about that more like an annualized kind of pace for 4Q?
Jim Reske (CFO)
It's just annualized. Set the bar low.
Karl Shepard (Analyst)
Okay. And then I wanted to follow up on loan growth a little bit more too. You mentioned the impact of consumer loan growth accelerating here and alluded to a rate cut. Is that expectation from better consumer demand, or is it your ability to price if your funding position improves?
Jim Reske (CFO)
I think we could maybe almost do it without consumer, but I'm counting on it, and then maybe that gets us to the higher end of the range; is the way we're thinking about it. We just have really good people leading those consumer businesses in mortgage or underwriting, and it's just been kind of on hot idle, and I think it won't be hard there to kind of strike the iron and just do a solid job, and so that - for better or worse, that's how we're thinking about it.
Karl Shepard (Analyst)
Okay. Switching over to deposits. We've talked a lot about deposit costs, and I know aligning loan growth and deposit growth has been a priority for you guys. Can you just talk about your confidence in growing deposits?
Jim Reske (CFO)
Hey, Jane, why don't you pick up on that? It's your-
Jane Grebenc (Bank President and CRO)
Sure. Sure, glad to. So we're always confident that we can grow deposits. You know, it's a little trickier to grow the low-cost deposits, and we're starting to turn that corner. We are not raising CD rates. We've started to tamp those back a little bit. You know, one of the reasons that we are as focused as we are on the loan categories that we are is we are really demanding the full relationship on our credit on our in-market extensions of credit. So I think we'll do just fine, but low-cost deposits are always going to be a knife fight for us and for everybody else.
Jim Reske (CFO)
Yeah, we look—I would just add to Jane's comments. I mean, we look at all of this regionally, just not by product category, and I'm just looking at growth year-over-year. And, and our lowest market is 2%, and our highest is over 10%. I mean, it's just an area of emphasis that's come from Jane for years.
Karl Shepard (Analyst)
All right. Well, good quarter, and thanks for all the help.
Jim Reske (CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Manuel Navas with D.A. Davidson. Please go ahead.
Manuel Navas (Analyst)
Hey, with the lower kind of marginal deposit costs, are we getting...? It's still above where you're pricing the book right now, but how close do you think we're getting to, like, peak deposit costs? And how quickly could they shift in rate cuts?
Jim Reske (CFO)
That's a great question, and I'll turn it over to Jane.
Jane Grebenc (Bank President and CRO)
Yeah, really insightful. You know, I've used for the loans and deposits, Manuel, I've used this motorboat analogy, and I was hoping it would catch on like wildfire in the industry, and it doesn't seem to have done so. But you cut the throttle, and you keep drifting forward. And we see that on loan. All the projections on the loan book are the same thing on the deposit book. So I wouldn't call the peak just yet. I think that, you know, I'm very encouraged to see the rate of increase on the asset side beat the rate of increase on the deposit side, but the rate of increase on the deposit side is not going to reverse. This is not the high point, I don't think. It'll still drift upward.
Manuel Navas (Analyst)
I appreciate that. What are new loans coming on at? Just the loan yield improvement was nice, but I know some of it was an interest rate recovery. What are new loans coming at, and how is that expected to proceed going forward?
Jim Reske (CFO)
Yeah, I'll give you the total and a little bit of color. The new loans coming out a little over 8% in the aggregate. 8.11% actually for the quarter was new originations. So just for originations, there's run off as well, so they net. But I mean, just for originations, over $850 million of new loan originations, about $630 million of that was variable. That came out at 8.25%. So customers are choosing. That's what 95% of the originations are variable. Customers are choosing. They're choosing to go variable. As much as we would like them to stay fixed and go long in a lower rate environment, they make choices too, and they want variable rate loans, so three-quarters of the new production is variable.
That's 8.25. But the fixed stuff was 7.75. So the variable this quarter, the new rate on that, I just gave 8.25, was about almost exactly the same rate as the rate at which the variable was running off. So nice new loans, the same replacement yields as the run off and variable, but the new fixed coming out at 7.75 was 250 basis points more than what ran off. That's because that's part of that story that gives us confidence that even if rates are cut, you've got to you've got to go through a number of cuts before the new fixed comes on at lower rates than the fixed that runs off. It. That's the motor boat. That, that will cause this, upward drift, even the fixed rate portfolio, even with rate cuts.
That's how I think.
Manuel Navas (Analyst)
I appreciate that commentary. What rate scenario are you using in the swap discussion of 10 basis points? Is that like a September or December and a couple in the first half of next year? Like, how many cuts, roughly?
Jim Reske (CFO)
So I'm glad you mentioned it. So on the, on the PowerPoint supplement that we put on the, investor relations portion of our website, on page 14, we give two scenarios. One is flat, rates unchanged. Fed funds at 5.50, just unchanged. That's in the—if you go to that page later, it's in the bottom right corner. But that shows 11 basis points of cumulative NIM benefit by the end of 2025, and an unchanged rate scenario. Then we—something we call baseline, that's a baseline scenario. That's 10 basis points of NIM improvement, and that's our standard forecast, where we have, we put a 40% weight on Moody's baseline scenario, then a 30% weight on an upside scenario, and a 30% weight on the downside.
We've been doing that consistently for our forecasting and also for our CECL model for ever since we adopted CECL. But that's a scenario that it's still improved by 10 basis points cumulatively to NIM.
Manuel Navas (Analyst)
Okay. I appreciate that commentary. I just wanted to understand if I-
Jim Reske (CFO)
Yeah.
Manuel Navas (Analyst)
Getting that into my forecast and such. Okay, I appreciate it. I'll step back into the queue.
Jim Reske (CFO)
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Kelly Motta with KBW. Please go ahead.
Kelly Motta (Analyst)
Hi. Thanks so much for the question. Most of mine have been asked and answered at this point, but I was hoping to get a bit more color on the migration related to the Centric portfolio. I know you mentioned that when you did that acquisition, you expected some hiccups there and had put on an appropriate credit mark accordingly. Just wondering if from a high level, if you could provide how that portfolio is performing relative to your expectations at the time you inked that deal, and if there's, you know, any other sort of migration down the line that you would expect to come from that or, you know, what we saw this quarter is likely the bulk of that?
Mike Price (President and CEO)
Yeah. This, this is Mike, and, and thanks for the question. I'll, I'll turn over to, to Brian Karrip, our Chief Credit Officer, in a minute. But we put, like a 323 or 327 mark, which was in the $30 million, and I think we're about $8 million short of that at this point. So we still have a little bit of room. It was pretty heavy-handed. We also adjusted the price, and, as we think about that, right now, it's about half of the NPLs, and it's about half of most of our categories that are challenged. And, Brian and the team, we do a pretty extensive, line sheet review, and we just finished it, probably 30+ hours and 3,000 notes, here in the last month. And we-- So that's intensive.
It's every credit over a million, and that group in the Capital region performed very well. We just didn't see that many directed downgrades. With Brian, I'll, I'll let you pick it up from there.
Brian Karrip (Chief Credit Officer)
Yeah, thank you for your question, Kelly. So 51% of our special mention and 55% of our substandard credits are related to loans that were originated from Centric Bank. But we've—we believe that we've largely identified our problems at the acquired bank, and we're comfortable that we'll return to our historically strong credit metrics over the next several quarters. So we're committed to that, and we're working towards it.
Kelly Motta (Analyst)
Got it. That's, that's really helpful. And then next question for me is on expenses. You know, you've had a pretty strong quarter, and loan growth is expected to pick up in the latter part of the year. Just wondering, as you look ahead with, you know, the investments you're making internally into the franchise, as well as, your outlook for, loans to pick up, wondering how we should be thinking about, the trajectory of expenses over the latter part of this year?
Jim Reske (CFO)
Yeah. Hey, Kelly, it's Jim. Yeah, when I looked at the consensus estimates, I didn't look at yours in particular, but a consensus estimate for NIE going forward for the third and fourth quarter this year, they looked about right. So I didn't really feel a need to give corrective disclosure, but the consensus has us at around $67 million-$68 million in the second half per quarter, and that, that seems about right. Obviously, could go on and on about our expense culture and how much, how important that is to us, and we actually think we're doing quite well there. But, the consensus looks like it's dialed in, so we're okay with that.
Kelly Motta (Analyst)
Got it. Thank you. I'll step back.
Brian Karrip (Chief Credit Officer)
Thank you.
Jim Reske (CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Matthew Breese with Stephens. Please go ahead.
Matthew Breese (Analyst)
Hey, good afternoon, everybody.
Jim Reske (CFO)
Matthew.
Matthew Breese (Analyst)
Jim, I was really hoping to. You gave some great detail on the NIM. I wanted to, to parse it out just a little bit more. You know, maybe just to set the stage, it sounds like your, your floating rate book is yielding 8.25, and the fixed-rate book, if I have it right, is in kind of the low 5s, 5.25. Is that, is that right?
Jim Reske (CFO)
Well, that the numbers I was giving a minute ago were just for new originations in the quarter, not the whole book.
Matthew Breese (Analyst)
Right. But you said 7.75 is for the new fixed-rate stuff, which is 250 bits better than what's running off. So I assume the runoff was around 5.25.
Jim Reske (CFO)
Yeah. Yeah, the runoff is. So, that's, and the actual portfolio yield is in between there somewhere.
Matthew Breese (Analyst)
Okay. And what is the duration on that book? How much kind of rolls off every quarter-
Jim Reske (CFO)
The duration-
Matthew Breese (Analyst)
-on the fixed-rate stuff?
Jim Reske (CFO)
Yeah, the fixed-rate stuff, the duration, you know, I don't have the actual duration on the fixed-rate stuff. I think I have to get that for you. The duration on the entire loan portfolio is 2.85 years, but that includes both fixed and variable. I'll give you a little color that I do have. So you may probably recall our investor deck, where we break out and a pie chart the different slices of the portfolio. We try to say that half is fixed and half is variable, and we say that from a risk management perspective, to give people an understanding that we try to build a diversified loan portfolio. But in the variable portion of that, the part that really reprices right away with rate cuts is only about 33% of the total portfolio.
And about 5%, 5 points of that 33% have been fixed with macro swaps. So it's really only about 27%. That portfolio right now has a weighted average rate of 7.92%. So that's the piece that will reprice downward. So it's not 33% of the portfolio, but really, after the macro swaps, until the macro swaps fade off or roll off, it's 27% of the total portfolio. Then there's another slice that's to get to your half of the portfolio that's variable, about 18% of the portfolio, and those are variable, but they just don't reprice immediately. They reprice over time. These are when a commercial loan is originated, it has a reprice date that's 5 years hence, or a 5-1 ARM and a mortgage or something like that.
That portfolio, that slice, has a weighted rate of about 5.65%. The weighted average term on those is about 4 years. The weighted average time to the next repricing date for those is only about 20 months. But this goes into our forecasting because that little slice, it, we say that half the portfolio is variable, half is fixed. It gives the impression that fully half the portfolio will price downward at a rate cut. That's not true. This little slice of 18% is yielding 5.65%. When those loans come to repricing date, they could be loans that originated 3 years ago in a low-rate environment and are repricing. Even though rates are lower than they are today, they can still be repricing upwards, especially if that overall portfolio is only 5.65%.
I know that doesn't answer your question directly or the duration. I'll have to get back to you on that, but hopefully, that gives you a little color on the fixed and variable portfolios.
Matthew Breese (Analyst)
No, it, it helps, and I think it helps build the point you made at the beginning, which is that it takes a lot of cuts before the margin starts to feel some pain because the back book still has so much room to reprice higher.
Jim Reske (CFO)
That's right.
Matthew Breese (Analyst)
And-
Jim Reske (CFO)
That's right.
Matthew Breese (Analyst)
So I was curious when you made your remark that the baseline NIM improvement was about 10 basis points. Is that through the end of this year, or is that through the end of 2025?
Jim Reske (CFO)
It depends on the rate scenario. So if we have a rate scenario that seems kind of moderate, rate scenario that is just run using Moody's baseline forecast. And Moody's baseline right now has three cuts by the end of this year, even though the whole world thinks there's going to be two. And the Moody's baseline has seven cuts in total by the end of 2025. So that gets the—in this Moody's baseline, gets the Fed funds rate to about 3.75 by the end of 2025. And in that rate scenario, the NIM goes up. Our NIM, again, with a caveat, the forecast can be wrong. They often are, but it goes—NIM goes up at the end of this year and then goes up another...
I don't know how to say this, but it really goes up strongly next year because you get that cumulative effect of the burn off of the macro swaps.
Matthew Breese (Analyst)
Right.
Jim Reske (CFO)
High end of the range I gave you in my prepared remarks by the end of this year, and then in this forecast, it's like another 10 basis points next year with the macro swaps coming off in a cumulative effect. So it's every forecast is wrong the day it's printed, right? The future always unravel or rolls out differently than you think, but that's what the Moody's baseline forecast would show.
Matthew Breese (Analyst)
Okay. So a NIM ending 2025 in kind of the 3.75%-3.80% range.
Jim Reske (CFO)
That's right, under that forecast.
Matthew Breese (Analyst)
And to what extent does securities help? Like, that was my other question is, how much in securities repricing, what is it rolling off at, and what are you putting new securities on at?
Jim Reske (CFO)
The ones they're rolling off are the low 2s. The ones that are coming off are in the mid 5s. So all the securities we purchased are very plain vanilla. We're trying to buy more Fannie Mae because they have a 0% risk weight. The yields we're seeing now are in the mid 5s. We actually bought from this quarter, I think $160-$170 million, including, that includes the $75 million at the loss rate we bid. But they're coming out at the 5.5% rate. We think that security portfolio is light. It's kind of low, but our forecasts don't have an aggressive build in the security portfolio. We're just not that-
Matthew Breese (Analyst)
Okay.
Jim Reske (CFO)
-for loans.
Matthew Breese (Analyst)
I'm sorry if I missed it. What was the duration of the securities book?
Jim Reske (CFO)
Duration total is, I think, 4.7. It went down from 4.8 last quarter by one tick, just because the— Oh, no, I got that backwards. It was 4.7. It went up to 4.8 for by one tick because the new securities we just bought, that $75 million, were slightly longer durations. But everything we buy is usually in the 4- to 5-year duration.
Matthew Breese (Analyst)
Okay. I'm sorry to be long-winded, but I have the same set of questions for your CD book. What's rolling off, and what are your CDs rolling on at, at?
Jim Reske (CFO)
Oh.
Matthew Breese (Analyst)
Are you starting to see a lower, you know, roll-on versus roll-off at—
Jim Reske (CFO)
Yeah.
Matthew Breese (Analyst)
At what point do you see that?
Jim Reske (CFO)
I'm sorry if I was answering questions on the securities book. I'm sorry if I misheard you.
Matthew Breese (Analyst)
No, no. You—I, I'd asked about the securities. Now I'm asking about the CDs.
Jim Reske (CFO)
Okay. The CDs, so we're still offering competitive market rate specials. In fact, in the first quarter, we were pricing CDs really, like in the 90th percentile, competitively, very competitive with the peer banks. We dialed that back a little bit in the second quarter, because we had such a successful first quarter in growth. But we're staying very competitive here right now. What we've done is shorten the term a little bit, so instead of seven months, we're doing five months. And so what we're trying to do is give ourselves a chance to reprice those CDs, if you know, rates fall. So, I think the rate special we have right now is 5.2% for five months, and it's been quite successful.
The other part of this dynamic that you should understand is that a lot of the stuff we've been doing since rates have come up have been 7-11-month special, short-term CD specials, but they're maturing now. And so we're seeing those mature, and we're seeing about an 80% retention rate on the CDs that come due... and some of those will be rates that are lower than the nominal rate, and a lot of, but a lot of times a customer will come in and say, "Yeah, I don't want that rack rate." We're not migrating people down a rack rate of five basis points. But I mean, if it's a rack rate that's lower than their current rate, most will come in and say they want the current rate. But it's, but the retention's been really strong in the CD book.
So, hope that's a little bit of color that helps you.
Matthew Breese (Analyst)
Very helpful. Just last one on fee income, particularly mortgage banking was a bit stronger this quarter. Maybe just some comments on overall levels of fee income and mortgage in particular.
Jim Reske (CFO)
Yeah. Jane, any thoughts on mortgage? Jane has done a good job, but we're also making some more money this year.
Jane Grebenc (Bank President and CRO)
Since the opportunity to talk about it, to sell virtually all of the production. So we are preserving the balance sheet a bit, and we're probably selling between 80% and 90% of everything we're booking, and that's really, or everything that we're originating, and that's really helping the,
Jim Reske (CFO)
Hey, Jane, we lost you a bit, but we got most of that. We're selling most of the origination, boosting the fee income side of it, but it's well run.
Mike Price (President and CEO)
Can I add that actually mortgage originations went up quarter-over-quarter?
Jim Reske (CFO)
Yeah.
Mike Price (President and CEO)
So despite the rate environment, we might think they actually went up. The amount that we sold, the originations, as Jane was saying before we lost her, was 92% in the first quarter, 92% in the second quarter. So it's going just like we're going according to plan.
Jim Reske (CFO)
Yeah.
Matthew Breese (Analyst)
Okay.
Jim Reske (CFO)
Oh, can I also add-
Matthew Breese (Analyst)
Do you think-
Jim Reske (CFO)
on fee income, because wealth was really strong this quarter. Really good sales of fixed annuities in our wealth division. So customers who really want to lock in long-term fixed rates are able to do that in a fixed annuity, and that's a good source of fee income from.
Mike Price (President and CEO)
Yeah. And just, I'll just add one more is SBA.
Jim Reske (CFO)
Mm-hmm.
Mike Price (President and CEO)
Although our fee income is down a bit, we're keeping a little bit more on the balance sheet this year, about $38 million more, with a little higher yield. And we like that business. Our production will be up year-over-year, and gain on sale is weighted average premiums are in the high 8s. So, and we have a good team there as well. So hopefully, that can continue to grow and be a tailwind to our fee income.
Matthew Breese (Analyst)
Okay. So we have $25 million less Durbin next quarter. Is it safe to say it's a $22-$23 million dollar run rate from here?
Jim Reske (CFO)
Yeah. I think that, that's right. Hang on a sec, because I-- again, I looked at the consensus estimates for our fee income. It looked like they really had baked in the Durbin impact. They were talking about $3.5 million a quarter, so that sounds about right. Yeah, the consensus is $22.2 million and $22.3 million for the next two quarters, and that's about right.
Matthew Breese (Analyst)
I appreciate taking all my questions. I apologize for being long-winded again. Thank you.
Jim Reske (CFO)
Other questions?
Operator (participant)
Again, for any questions, press star one, and your next question will come from the line of Frank Schiraldi with Piper Sandler. Please go ahead.
Frank Schiraldi (Analyst)
Hey, guys. Just a few I had remaining were the subdebt that you retired or redeemed. Sounds like given capital levels, you no need to replace that with additional debt. Just curious if that's the case and what else you might have coming up that may be repricing, that would either you know be retired or refinanced in this market.
Jim Reske (CFO)
Yeah. No, thanks very much, Frank, and appreciate that because we actually spent a lot of time with bankers looking at replacement options, starting over well over a year ago, to look at what was available in the market to replace that capital instrument in case we needed the capital. That's why we're so pleased that capital generation, especially just capital generation from a dollar perspective and a ratio perspective, is strong enough that we didn't have to replace it at all. I think that a couple of quarters ago, the message was the window for subdebt issuance was really closed, and then what we saw was starting to open, but still would have been possible, but more expensive than what we just got rid of. So what we just got rid of was 7.5%.
We were probably hearing indicative price talk of 8.5-9 for new subdebt issuance. So we're just so glad that we didn't have to do that. That's the subdebt, and there were other options we would have looked at, like preferred, because of the Tier 1 treatment. But at the end of the day, we're just really glad we could just let it go and pay it off and not have to do anything to replace it. The only other thing we have, I guess there's the other piece of the subdebt that I mentioned, but we got 4 years to go at 5.5%. So when rates fell to 0, that seemed like a bad deal. Now it seems like a good deal. We've got that.
That's four years to go with full treatment, so we'll hang on to that. It's not callable anyway for four years. And then we'll reexamine the call at that time. And then we still have a trust preferred outstanding, about $70 million with the holding company. And we swapped that into fixed rates. It was floating. We swapped into fixed rates. I don't have that off the top of my head. I think it's swapped into the fours. So it's pretty good money, and it's still we're grandfathered in, so that's a Tier 1 instrument. The only thing that would make us call that, because we're grandfathered in, is if we grew over $15 billion in total assets through acquisition, because from a regulatory perspective, that's when you lose the grandfather Tier 1 treatment.
If that day ever comes, that would trigger a desire to refinance that, but not, not right now.
Frank Schiraldi (Analyst)
Okay. Just, I know acquisition math and provisioning can be a little different, but just when I'm thinking about the Centric deal, which obviously closed, I think, last year, and you mentioned the NPAs that came over in the migration in the quarter. I think the majority was from the Centric deal. The provisioning that was associated with the migration, so I would have thought that because Centric was marked already, you know, no need for additional provisioning. Is that, can you just walk me through that? Was that more so on the other piece that was originated in-house and I guess just anything kind of bulky that significant on one significant loan where we could end up seeing you know outsized charge-offs down the road?
Jim Reske (CFO)
Yeah. So Frank, I'll start a little bit with just a little bit from a maybe more technical accounting perspective of what, what the marks were at origination and then ultimately, final marks, and then I'll turn it to Brian for the extra color you're asking for. So the marks, like Mike mentioned earlier, were around the 3.2%-3.3% at the time of the deal was closed. Under the accounting rules, we were able to take some more, and once we owned it, up until June thirtieth, of last year, take some of the, marks that we saw back, to goodwill. And so the total credit mark ended up being 3.76% on that deal.
As Mike said, that was priced into the deal, so we thought that was marked appropriately and priced appropriately. But of that credit mark, that ended up being $36-$37 million credit mark. $27 million was for PCD, and about $9.6 million was non-PCD. So that $27 million was went into the reserve. On top of that, there was a day one reserve of about $10 million. Now, so when we earlier prepared remarks, we were saying we added about $11 million to the $14 million this quarter to specific reserves for Centric. Those aren't related to the time of acquisition. We've owned it now for a while, so those are just for whatever happens in that portfolio since then.
So the $11 million of new specific reserves that we put on this quarter related to Centric-originated loans were not from acquisition. That's from our-- under our period of ownership. So that's additional reserves on top of what I just described as the marks. And then for additional color on maybe yeah. Yeah, go ahead, Brian.
Brian Karrip (Chief Credit Officer)
Yeah. So, Frank, we did put on $5.8 million in increase in specific reserves this quarter. That was largely due to one $9 million credit that we needed to add $4.8 million of specifics for. So you'll see our specific reserves did increase. Correspondingly, our reserves went up to 137 basis points from 132 basis points, and we're well reserved.
Frank Schiraldi (Analyst)
Okay. So that was one Centric loan then, that caused the bulk of the additional reserves in the quarter?
Brian Karrip (Chief Credit Officer)
That's exactly right.
Frank Schiraldi (Analyst)
Okay. And then just lastly, on the NIM, just want to make sure I understand. If I'm looking at page 14 of the presentation, so, the cumulative NIM impact scenarios you give at the bottom there, the two scenarios, that's just the swap terminations, correct? Not your expectation of NIM in total, over the next, you know, several quarters.
Jim Reske (CFO)
You have that exactly right.
Frank Schiraldi (Analyst)
Okay.
Jim Reske (CFO)
That's the contribution of the swaps, not any projection of the rest of that.
Frank Schiraldi (Analyst)
Right. Okay. And then, if you could just remind—sorry, if I missed it, but, obviously, recognizing, given your commentary, that you think you're at trough on NIM anyway, regardless of the near-term rate picture, and the NIM should move higher. What does a 25 basis point cut to Fed funds—what is the projection? What does that do to the NIM on an annualized basis, all else equal?
Jim Reske (CFO)
All else equal, normally, our answer has always been about 5 basis points. Probably, it depends on the season, maybe it's 3-5 basis points, but it's just not, it's not working that way right now. So when I look at, for example, those forecasts that I was talking about earlier, like with the Moody's baseline forecast, you know, and the Fed funds are being cut down to 4.75 by the end of this year, our loan yield still goes up. So our NIM, so our NIM keeps drifting up. That's the motor boat effect. So it's not. If, if all else was equal, and we've been in this rate environment for a long time, and everything is stabilized, and you didn't have positive replacement yields still going on, and then you had a cut, maybe you'd see that 5 basis points per quarter.
Maybe you could say it's still five basis points per cut, but not per quarter. That's over the long, long haul. It's just not modeling out that way right now, so it's hard to even describe it that way. That's been our rule of thumb for a while. We said that for, I mean, years ago. But where we're just positioned right now, that drift up, we're still the fixed loans are still pre-pricing upwards. We still have a little drift up in deposit rates before we're able to bring those down. And then the macro swaps coming off, there's just so many dynamics...
Frank Schiraldi (Analyst)
Right
Jim Reske (CFO)
-affecting it, that as you say, I hate, I hate to use that rule of thumb.
Frank Schiraldi (Analyst)
Gotcha. Okay. No, I appreciate it. I mean, I assume that, all else equal to higher for longer, like you said, is better. So there is some negative impact, you know, even if the NIM is going to go higher either way, there's still some, it'll move even higher in a higher for longer environment. So, yeah, I just, I guess that three to five, maybe longer term, could still be sort of a good rule of thumb. Just doesn't seem like in the near term, you would see that.
Jim Reske (CFO)
Yeah. No, you're exactly right. You're exactly right. And we are, we still are, you know, we're praying for a flat rate environment, so, 'cause we do much better.
Frank Schiraldi (Analyst)
Right.
Jim Reske (CFO)
There are other effects too. I think the little bit lower rates do help, and this came up earlier in the call, spur a little consumer demand. They help some of our clients with credit quality. So there are some benefits from a couple cuts and burst the bubble on deposit rate demand. So there are some benefits too.
Frank Schiraldi (Analyst)
Right.
Jim Reske (CFO)
Mathematically, though, higher for longer is definitely better.
Frank Schiraldi (Analyst)
Gotcha. Okay. I appreciate all the color. Thanks.
Jim Reske (CFO)
You bet.
Operator (participant)
We have no further questions at this time. I'll hand the call back to Mike Price for any closing remarks.
Mike Price (President and CEO)
Just as always, appreciate your interest, in our company and look forward to being with a number of you over the course of the next quarter. Thank you very much.
Operator (participant)
That will conclude our call today. Thank you all for joining. You may now disconnect.