Fulton Financial - Q2 2023
July 19, 2023
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the Fulton Financial second quarter 2023 results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Jozwiak, Director of Investor Relations. Please go ahead.
Matt Jozwiak (Director of Investor Relations)
Good morning, thanks for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the second quarter, which ended June 30th, 2023. Your host for today's conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt is Mark McCollom, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations, then on News. The slides can also be found on the Presentations tab under Investor Relations on our website. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business.
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the safe harbor statement on forward-looking statements in our earnings release and on slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton takes no obligation, other than as required by law, to update or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 16 through 20 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now I'd like to turn the call over to your host, Curt Myers.
Curt Myers (Chairman and CEO)
Thanks, Matt, and good morning, everyone. Today I'll provide summary comments on our company and on our financial report performance. Mark will share more details on our financial results and step through our outlook for the remainder of 2023. After our prepared remarks, we'll be happy to take any questions you may have. We were pleased with our second quarter results. We continued to support our customers and generated solid loan growth. We saw credit rep metrics remain stable and credit losses return to historically low levels. In addition, fee income was strong across the entire company. Operating earnings were $0.47 per share. Pre-provision net revenue, or PPNR, for the second quarter was approximately $106 million, an increase of 19% year-over-year. This was a result of earning asset growth and net interest margin expansion year-over-year.
During the second quarter, we saw loan growth of $374 million and deposit declines of $110 million. As a result, our loan-to-deposit ratio increased to 99%, right in the middle of our long-term target of 95%-105%. Fee income increased $8.9 million, significantly above the first quarter levels. Commercial banking had a record quarter, driven by strong capital markets and merchant and card processing income. Wealth management continued to deliver strong results as the market value of assets under management and assets under administration reached $14.3 billion. Mortgage banking fees were up modestly quarter, and consumer banking fees were solid as well. Expenses increased during the period. They were in line with our expectations for the quarter. We also had other positive notable events during the quarter.
We released the second edition of our corporate social responsibility report, highlighting achievements on our purpose of changing lives for the better. We raised our quarterly common dividend by 7% to $0.16 per share. We welcomed a new member of our executive team. Karthik Sridharan joined us as a newly created role of Chief Operations and Technology Officer. In this role, he will lead our efforts to further enhance our operational excellence for our customers and our team. We celebrated our first full year impact of the Prudential Bancorp acquisition. In looking back on the acquisition, we were pleased with our ability to get regulatory approval and close the transaction in under four months. We achieved the systems conversion on time and on budget.
We realized our cost savings and met our one-time merger cost targets. We are pleased to have the Prudential team on board and contributing to Fulton's success every day. Our second quarter results met our expectations. We believe we are positioned well for continued success. We remain focused on growing core deposits, effectively managing our deposit mix, achieving the appropriate risk-adjusted return on our loan portfolio, and improving our operating efficiency. During the quarter, we and the industry continued to experience the migration from non-interest-bearing balances into higher cost deposit products. What is critically important is to continue to grow households and customer accounts. During the quarter, we grew 4,000 total net new households and 8,000 total net new deposit accounts. We believe those are meaningful increases in this environment. On slide three, we have provided updated disclosures on our deposit base.
We have approximately 742,000 deposit accounts, with an average age of 11.4 years on a weighted balance basis. The average balance of these accounts is only $28,500. Our balance sheet remains strong, and our capital ratios continue to improve. Our liquidity position increased to over $8.2 billion in committed funds. Turning to credit, we have provided more detail on our loan portfolio and specifically on our office portfolio on slides four and five. I'd like to note our overall concentration in commercial real estate remains at approximately 180% of total capital, well below our proxy peer average. On slides four and five, a small component of our CRE portfolio is the discrete office-only portfolio, which includes all loans with a primary revenue stream from office rents.
As a reminder, this segment is a diversified and granular portfolio, originating consistently over time, spread throughout our footprint, and with only five individual loans in excess of $20 million. Looking at overall credit, net charge-offs were $2 million or 4 basis points annualized. Overall credit performance remains within our expectations, NPAs, NPLs, and loan delinquency have all declined for the past three quarters. While we are encouraged by these credit trends, we remain focused on potential economic headwinds that could affect future performance and our credit outlook. Now I'll turn the call over to Mark to discuss our second quarter financial performance and 2023 outlook in more detail.
Mark McCollom (CFO)
Thanks, Curt. Good morning to all of you on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the first quarter of 2023, and the loan and deposit growth numbers I will be referencing are annualized % on a linked quarter basis. Starting on slide six, as Curt noted, operating earnings per diluted share this quarter were $0.47 on operating net income available to common shareholders of $77.8 million. This compares to $0.39 of operating EPS in the first quarter of 2023. Looking at the balance sheet, loan growth slowed marginally in the second quarter to $374 million, or 7% annualized. Commercial loans were $119 million of this increase, or about 1/3 of our overall growth.
Commercial real estate lending grew $100 million or 5% annualized, with most of this growth coming in owner-occupied commercial real estate. As noted earlier, our commercial real estate concentration remains low, approximately 180% of total capital. Consumer lending produced growth of $256 million, or 15% during the quarter. Mortgage lending was the majority of our consumer loan growth, as the second quarter is typically the peak of the home buying season. We continue to raise new loan rates across all products and remain focused on the risk-adjusted returns we are getting on new originations. As a result, we expect to see loan growth moderate, both in residential mortgage and in the overall portfolio during the back half of 2023. Total deposits declined $110 million during the quarter.
Interest-bearing deposits grew $428 million during the period, or approximately 11%. This growth was offset by the pace of decline in our non-interest-bearing DDA accounts. Non-interest-bearing balances declined $538 million during the period, which is down from a $603 million decline in the first quarter. Our loan-to-deposit ratio ended the quarter at 99.2%, up from 97% at the end of the first quarter. Many investors are focused on where non-interest-bearing deposit levels will ultimately end up, we've included on slide seven, a 30+ year history of our non-interest-bearing deposit percentage. Our bank has grown and our C&I capabilities have expanded, this percentage has trended upward over time.
Recently, rising rates have caused a deposit mix shift to occur. We believe we should end the year at around 23% non-interest-bearing deposits as a percentage of total deposits, down from 28% at June 30th. This estimate assumes an additional deposit shift of approximately $800 million into interest-bearing deposits during the back half of 2023. This mix shift is reflected in the refreshed NII guidance I will provide at the end of my comments. Our investment portfolio declined modestly during the quarter, closing at $3.9 billion. During the first quarter, we chose to build cash reserves from the cash flows in our investment portfolio. Going forward, we expect to revert back to our longer-term cash targets with incremental cash flows used to reduce overnight borrowings.
Putting together those balance sheet trends on slide eight, our net interest income was $213 million for the quarter, a $3 million decrease from the first quarter. Our net interest margin for the second quarter and for the month of June were both 3.40% versus 3.53% in the first quarter. Loan yields expanded 31 basis points during the period, increasing to 5.52 versus 5.21 last quarter. Cycle to date, our loan beta has been 46%. Our total cost of deposits increased 50 basis points to 132 basis points during the quarter. Cycle to date, our total deposit beta is approximately 26%. Where our through the cycle deposit beta ultimately ends up will be very closely tied to where the non-interest bearing percentage ends up landing.
Based on our earlier estimate of around 23% by the end of the year, this would imply a deposit beta of approximately 40%. We expect our loan beta to continue to drift up between now and the end of the year as well. Ultimately, we believe our ending loan beta will remain meaningfully higher than our ending deposit beta due to the asset sensitive nature of our balance sheet. Turning to credit quality on Slide 9, our non-performing loans declined $17 million during the quarter, which led to our NPL to loans ratio improving from 80 basis points at March 31st to 70 basis points at June 30th. Overall loan delinquency improved to 105 basis points at June 30th versus 128 basis points last quarter.
Despite these positive trends, our loan growth during the 2Q and modest changes to the economic outlook led to the increase in our allowance for credit losses. Our ACL as a percentage of loans increased slightly during the quarter from 1.35% of loans at March 31st to 1.37% at quarter end. Turning to non-interest income on Slide 10, wealth management revenues were $18.7 million, up from $18.1 million for the 1Q. We continue to invest in our wealth business, and it now represents almost 1/3 of our fee-based revenues. The market value of assets under management and administration increased $100 million to $14.3 billion at June 30th. Commercial banking fees increased significantly to $23.1 million during the quarter.
Capital markets revenue was very strong. Merchant and card revenues bounced back from seasonal declines we typically see in the first quarter. SBA gains on sale were also strong during the quarter. Consumer banking fees were up modestly for the quarter, with seasonal pickups in debit and credit card revenues offset by a continuing decline in overdraft fees. Mortgage banking revenues picked up from seasonal lows in the first quarter. However, application volumes are down 14% year-over-year, and rate increases are beginning to influence applications and overall volumes. Moving to Slide 11, non-interest expenses were $168 million in the second quarter, an $8 million increase from the first quarter. The increase in day count accounted for about one quarter of this increase.
In addition, the following material items are noted: higher salaries and benefits costs due to the April first merit increases, as well as higher healthcare claims as we are largely self-insured, and also higher data processing costs of $700,000 due to the timing of certain IT initiatives. On Slides twelve and thirteen, we are continuing to provide you with expanded metrics on capital and liquidity. First, on slide 12, as of June 30th we maintained solid cushions over the regulatory minimums for all of our regulatory capital ratio. We have also provided you with an alternative view of our regulatory ratios, including the impact of AOCI. While we do not expect banks of our size to be required to calculate our ratios this way, we believe this information may be useful to you.
Our tangible common equity ratio was 7% at quarter end, in line with last quarter. Included in tangible common equity is accumulated other comprehensive loss on the available for sale portion of our investment portfolio and derivatives. This number totaled $312 million after tax on a total AFS portfolio of $2.6 billion. On Slide 13, if we include the loss on our held to maturity investments, which is $115 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would still be 6.6% at June 30th, representing over $1.7 billion in tangible capital. On Slide 14, we provided you with a comprehensive look at our liquidity profile.
When combining cash, committed and available FHLB capacity, the Fed discount window, and unencumbered securities available to pledge under the Fed's Bank Term Funding Program, our committed liquidity is $8.2 billion at June 30th. In addition, we maintain over $2.5 billion in Fed funds lines with other institutions. On Slide 15, we're providing you our updated guidance for 2023. Our guidance now assumes a 25 basis point Fed funds increase at the July meeting, followed by constant rates for the balance of the year. Based on this rate outlook, our 2023 guidance is as follows: We expect our net interest income on a non-FTE basis to be in the range of $830 million-$840 million. We expect our provision for credit losses to be in the range of $55 million-$65 million.
We expect our non-interest income, excluding securities gains, to be in a range of $220 million-$230 million. We expect core non-interest expenses to be in the range of $645 million-$660 million for the year. This core amount excludes any special FDIC assessment, which may need to be recorded in the second half of the year, if finalized during that period. Lastly, we expect our effective tax rate to be in the range of 17.5% ± for the year. With that, I'll now turn the call over to the operator for your questions.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.
Frank Schiraldi (Managing Director)
Good morning.
Curt Myers (Chairman and CEO)
Good morning, Frank.
Frank Schiraldi (Managing Director)
Just Mark, first on the non-interest bearing, by year end, the 23%. Is that ultimately where you know, expect Fulton to sort of end up? Do you think it could continue to trend lower? I just, you know, it's interesting to me. It seems like, with all the focus on rates over the last few months, there you know, guys who wanted to shift out of non-interest bearing would have. I guess there's some sort of stimulus dollars that are still running down, and that's where they're running out of. Just are you starting to see a slowdown in that mix shift as well, that gives you comfort on your year-end expectations?
Mark McCollom (CFO)
Frank. Ultimately, where that number ends up beyond 2023, we'll obviously be coming out with 2024 guidance at the early part of 2024, which will reflect that. To answer the second part of your question, I would tell you that in the months of February, March, and April, in each of those months, our total cost of deposits increased about 20 basis points on average per month. In May and June, that average fell to about 10 basis points. We're still seeing an increase month to month, we're starting to see that lessen a little bit.
You know, now that can still change, obviously, but that, you know, certainly influenced, you know, some of the guidance that we're giving today.
Frank Schiraldi (Managing Director)
Gotcha. From here, Is it more of just kind of running down balances as opposed to shifting balances into, you know, interest-bearing balances when, you know, when these clients are thinking about moving money around?
Mark McCollom (CFO)
I mean, again, we're still seeing some shift, you know, out of non-interest bearing. I mean, obviously we're, you know, giving guidance that, you know, still thinks we're going to have, you know, $800 million of that shift in the back half of the year. That's down, you know, from what we saw in the first half.
Frank Schiraldi (Managing Director)
Okay. Then just on the capital. Just given all the focus, you know, the news flow about new capital rules, obviously, for a larger contingent of banks than Fulton. Just curious, your thoughts on what the right sort of capital ratios are, either CET, you know, CET1 or TCE. You know, what sort of ratios you guys target here? Thanks.
Mark McCollom (CFO)
Yeah. Frank, in terms of what we target, you know, we look at, you know, the regulatory minimums and then by ratio, depending on that ratio, you know, our house minimums are going to be 100 to 150 basis points above that. You know, but where we sit right now, particularly on all of those regulatory ratios, you know, which is our primary focus, you know, on those, we have comfortable cushions, you know, even to our house minimums.
Frank Schiraldi (Managing Director)
Okay. I guess asked another way, do you expect these ratios to build in the near term? Not necessarily. Any color there, you know, tied into the into the earnings guide?
Curt Myers (Chairman and CEO)
Frank, I think, you know, we would see them build over time with earnings, with the earnings stream. Really the question is then how would we deploy that capital? You know, our capital strategy is to support organic growth first and then use for M&A or buybacks, you know, as we move forward. We feel comfortable with our current capital levels, and as we generate more capital, we'll look to deploy that in those ways.
Frank Schiraldi (Managing Director)
Okay. All right, great. Thank you.
Operator (participant)
One moment for our next question. Our next question comes from the line of Daniel Tamayo from Raymond James. Your line is open.
Daniel Tamayo (VP)
Hey, good morning, guys. Thanks for taking my question.
Mark McCollom (CFO)
Hey, Danny.
Daniel Tamayo (VP)
Maybe we just start out just a clarification on the loan growth guidance. I think, Mark, you talked about that moderating. I'm assuming you're talking about from the prior guidance of a 4%-6%, and not relative to the strong growth in the second quarter.
Mark McCollom (CFO)
Well, no, what I'm referring to is the strong growth that we've seen really in the first half of the year, you know, relative to what, you know, a typical year would be. My comments on moderation is from the pace that we've seen in the first half of the year.
Daniel Tamayo (VP)
Okay. How should we think about those comments? I mean, is that mid-single digit then still kind of in line with what you're thinking about for the back half of the year?
Curt Myers (Chairman and CEO)
Yeah, Danny, we would, those targets in the 4%-6% range as we look forward. You know, we had, very strong loan growth in the first quarter. We had, good growth again in the second quarter. You know, as we're focused on, appropriate risk-adjusted returns on loan pricing, we think we'll moderate from there. All our long-term targets and, full year, you know, we expect us to still be in that 4%-6% range.
Daniel Tamayo (VP)
In terms of funding that growth, you mentioned your loan-to-deposit ratio is kind of in the middle of the range that you're comfortable with now. Should we infer that you could continue to let that drift up if you do lose some deposits? Or do you think you would be inclined to fund it with brokered or something kind of on the higher end of funding costs if you want to maintain that around 99%?
Curt Myers (Chairman and CEO)
Yeah. Our goal is to grow the deposit base. As we move forward, we reference we're growing accounts, we're growing deposit accounts specifically. We're fighting that trend of average account balances coming down. We are very focused on growing deposits at a measured pace with loans. If that doesn't happen, we feel we have access and to other sources to continue to support loan growth. Our strategy is what our long-term strategy has been, is to grow loans and deposits in a more equal basis as we get back to, and are now at, historical kind of fully loaded position.
Daniel Tamayo (VP)
Okay. Yeah, that makes sense. As we think about kind of the rest of the year in terms of the net interest income guidance, you're that assumes you talked about with the non-interest bearing, but that's kind of a mixture of what's already there. If you're growing loans, that assumes you're funding it with what kind of deposit? I mean, are you assuming when you're, in terms of rate?
Curt Myers (Chairman and CEO)
Yeah. I mean, we want to grow non-interest-bearing deposits. It's really difficult in this environment. You know, then, we would look to grow through deposit acquisition of new customers, which are typically promotional rate. Then we have plenty of capacity on broker deposits from there. We think we have sources, you know, our organic growth. We've done a good job over time, and we really want to grow customer by customer. We recognize in this environment it's tough to grow deposits. We're making sure we have capacity to continue to support loan customers if we're getting the appropriate risk-adjusted return.
Daniel Tamayo (VP)
Understood. Okay. Well, I appreciate we, you giving me some color and digging in there on the funding side. Thanks, guys.
Curt Myers (Chairman and CEO)
Thanks, Danny.
Mark McCollom (CFO)
You bet, Dan.
Operator (participant)
One moment for our next question. Our next question will come from the line of Chris McGratty from KBW. Your line is open.
Chris McGratty (Managing Director)
Oh, great. Thanks. Mark, the clarification on the 40% beta. That's interest-bearing deposit beta, full cycle?
Mark McCollom (CFO)
that is the total deposit beta.
Chris McGratty (Managing Director)
Okay. Total deposit beta. Okay. Thank you. Second, on costs, obviously the quarter was a touch heavy, but you said it was in line with kind of your expectations. Is there anything beyond what you've given us in your guidance that you're considering if the environment, if the revenue environment stays like it is, a little bit challenging, anything you can pull on the expense lever in the back half or early next year?
Curt Myers (Chairman and CEO)
Chris, it's Curt. you know, we are committed to managing expenses appropriately. you know, as we see the back half of the year unfold, with growth in revenue, you know, we'll take the appropriate cost actions that we need to. We're committed to being within target range on expenses. And, you know, we'll manage those as we have in the past to make sure we have an appropriate cost structure.
Chris McGratty (Managing Director)
Got it. Thank you very much.
Curt Myers (Chairman and CEO)
Thanks, Chris.
Operator (participant)
One moment for our next question. Our next question comes from the line of David Bishop from Hovde Group. Your line is open.
David Bishop (Director)
Yeah. Good morning, gentlemen.
Mark McCollom (CFO)
Hey.
Curt Myers (Chairman and CEO)
Hey.
David Bishop (Director)
Hey, Mark, I wasn't sure if I heard you correct, but during the preamble, in terms of your outlook for maintaining cash and investments, I understand that you think cash has sort of reached a floor here, you're looking to build to liquidity or, I'm just curious what your what our expectations should be for cash and equivalents and investments from here?
Mark McCollom (CFO)
Yeah, we had sat on some excess cash, you know, post March 8th, you know.
a two and a half month stretch, you know, and then as I think, you know, as we felt like we had gotten past the liquidity crisis in the industry, we reverted back to our longer term, you know, kind of cash targets. With respect to the investment portfolio, we've always targeted that to be around 15% of assets. So, you know, you'll see that, you know, continue to grow, you know, in step with the total balance sheet growth.
David Bishop (Director)
Got it. Then, you know, I appreciate the disclosures on the office, the CRE portfolio. Just curious, maybe turning the prism, you know, with interest rates rising here, are you seeing any sort of degradation yet on the, on the consumer side of the house from a credit quality perspective?
Curt Myers (Chairman and CEO)
Dave, we are not. Credit metrics remain stable across the board. We're doing, you know, a lot of work on interest rate sensitivity for at a customer level. We, you know, we see pretty stable credit scores. Delinquency is good. You know, those leading indicators continue to be positive.
David Bishop (Director)
Got it. Final question, I think you mentioned, you know, maintaining the risk-adjusted pricing. Just curious maybe what you're able to onboard new commercial loans that across your markets during the quarter? Thanks.
Mark McCollom (CFO)
Sure. Yeah, yeah. Commercial loans will vary a little bit, obviously by product. In general, in the second quarter, you know, new money came on generally between 7%, low to mid 7s%.
David Bishop (Director)
Great. Appreciate the color.
Mark McCollom (CFO)
You bet.
Curt Myers (Chairman and CEO)
You bet.
Operator (participant)
One moment for our next question. Our next question comes from Feddie Strickland from Janney Montgomery. Your line is open.
Feddie Strickland (VP of Equity Research)
Thanks. Good morning.
Mark McCollom (CFO)
Hey, Feddie.
Curt Myers (Chairman and CEO)
Hey, Feddie.
Feddie Strickland (VP of Equity Research)
Just on expenses, it sounds like we should expect quarterly expenses to decline in the third, fourth quarter, just given your guidance. Can you walk us through some of the drivers and timing there just over the next couple quarters?
Mark McCollom (CFO)
The drivers there is, you know, you know, there were a couple of items in the second quarter again, that we would deem to be things that will not recur, which probably in the aggregate total about $2 million. You're correct, if you take, you know, the guide and look to where we are mid-year, you know, we would expect over the next couple quarters for expenses to come down a little bit. You know, you know, there's also, you know, just some normal things with real estate and otherwise, which should, you know, back off a little bit in the second half of the year.
Feddie Strickland (VP of Equity Research)
Got it. That's helpful. Switching gears to the margin, you know, I know you haven't provided 2024 guidance yet, but is it reasonable to see the margin bottoming towards the end of this year and then potentially expand into early 2024, just as loans reprice and earning assets potentially remix, with the assumption that the Fed stops hiking this year after one or two more hikes?
Mark McCollom (CFO)
Well, yeah. Yeah, I was going to start my comments with what you just said at the end. I mean, I think depending, you know, if we all had that crystal ball to know when rates will stop and when we'll start to actually then how long will the pause be before we start to see the expected declines? You know, I think if that scenario plays out the way you're saying it, yeah, I think it's reasonable to assume that, you know, somewhere in the first half of 2024 is where you'd see things bottom out.
Feddie Strickland (VP of Equity Research)
Understood. Just one last question from me. kind of on that same discussion point, as we potentially near the end of the hiking cycle, have you considered restructuring the securities portfolio for additional interest income and potentially taking, you know, some unrealized losses, I guess, realizing them? Can you remind us the duration of the securities portfolio today?
Mark McCollom (CFO)
Yeah. Yeah. We have looked at those, you know, haven't found, you know, one that was compelling enough to actually execute on. I mean, we consider, you know, those kind of transactions. We've certainly seen some other institutions do it. You know, for us, the total duration of the portfolios, you know, between, it's around five and a half to six years. You know, we're a little bit longer there, because, you know, we have so much commercial loans that are short. From a, you know, just an interest rate risk perspective, we've taken a little bit more duration, in the investment portfolio, to balance out our overall interest rate risk.
Feddie Strickland (VP of Equity Research)
Got it. Thanks for taking my questions.
Mark McCollom (CFO)
You bet. Thanks.
Operator (participant)
One moment for our next question. Our next question comes from Manuel Navas, from D.A. Davidson. Your line is open.
Manuel Navas (SVP and Senior Research Analyst)
Hey, good morning. Just following up on the securities portfolio. If, how much, you know, given that duration, how much of that AOCI and given if rates stayed, we just had one more hike and rates were then paused, how fast would that AOCI build back by the end of 2024?
Mark McCollom (CFO)
You know, a lot of that, Manuel, really depends on do you think do rates pause and the curve stays inverted? You know, or do rates I mean, because it's really what happens in kind of that intermediate portion of the curve is going to have the most influence over that AOCI level. You know, but I mean, assuming it stays exactly where it is, you know, if you just look at kind of the, you know, what that total number is today of $320-some odd million that would bleed out over that duration, you know, and revert back to par.
Manuel Navas (SVP and Senior Research Analyst)
Okay, that's helpful. Can you remind me on some of the seasonality you see in deposit flows coming into in the back half of the year?
Mark McCollom (CFO)
Yeah, yeah, sure. Typically, what we see in the third quarter, you know, that's our high watermark because of our municipal book. If we look back over the last five years, you know, we've typically seen between, you know, a $300 million and a $500 million increase in the third quarter. You know, I would expect this year, you know, for that to be at the lower end of that range versus the higher end of that range. We typically see from then the third quarter to the fourth quarter, most of that money flow out. We typically see, you know, the same kind of numbers between $275 million and, you know, call it $350 million of outflows is what we've experienced.
Manuel Navas (SVP and Senior Research Analyst)
It looks, you know, you're having success in growing number of accounts. Have you kind of looked at where flows have gone? Are you seeing just a lot of net increases and you're really not seeing anyone exit, and it's just more people using their funds? Or do you feel confident that your deposit flows are staying and not necessarily exiting the bank?
Curt Myers (Chairman and CEO)
Well, I mean, we're growing net new accounts. I mean, we have flows and accounts that close or really the average balance comes down. What we're seeing more is the impact of average balance as customers migrate internally to higher yielding products. We see some outflows, and we are aggressive in all of our markets to grow new households and bring new deposits into the organization. You know, we have a very low average account balance, you know, at small business and consumer. And we're consistently adding accounts, but fighting those headwinds of average balance declines, then, you know, really aggressive pricing strategies in the market that we won't follow.
You know, we do have some attrition based on that. That's why we focus on the net growth in accounts.
Manuel Navas (SVP and Senior Research Analyst)
Mm-hmm.
Curt Myers (Chairman and CEO)
you know, because over time, that's what we really need to be winning.
Manuel Navas (SVP and Senior Research Analyst)
Just a follow-up on loan growth and pricing. Are you seeing how fast are you seeing demand come down? You know, you're being more selective on pricing and kind of pricing up. Are you seeing uptake? Are you getting the growth you want to see on that commercial side at the pricing you want?
Curt Myers (Chairman and CEO)
Where we're seeing the biggest impact would be residential mortgage. I mean, it's just a much more of a rate sensitive market.
Manuel Navas (SVP and Senior Research Analyst)
Okay.
Curt Myers (Chairman and CEO)
As you adjust those, that's where we would see growth moderating the most, based on actions we took in the first and second quarter. You know, there's a long pull-through rate, until those actually hit the balance sheet. So that's where you'll see the most volatility from first half to second half, in loan growth. On commercial loan growth, we think we can continue to generate steady, organic originations, even at higher yields, as we continue to support customers, continue to support all segments, within the marketplace. We think we can continue to generate steady, reasonable, organic growth going forward in commercial.
Manuel Navas (SVP and Senior Research Analyst)
Just to follow up on your comment that the loan beta is around 46%, do you see that staying constant with each rate hike, or you actually see that creeping up towards, like, the 50% level as old loans reprice higher?
Mark McCollom (CFO)
Yeah. Yeah, exactly. We, you know, we expect to see that creep up a little bit higher. That was, you know, the point of my earlier comment that, you know.
Manuel Navas (SVP and Senior Research Analyst)
Great
Mark McCollom (CFO)
end of the cycle, you know, why we still expect to see that loan beta higher than the deposit beta.
Manuel Navas (SVP and Senior Research Analyst)
I appreciate it. Thank you, guys.
Mark McCollom (CFO)
You bet,
Curt Myers (Chairman and CEO)
you bet.
Operator (participant)
One moment for our next question. Our next question will come from the line of Matthew Breese from Stephens. Your line is open.
Matthew Breese (Managing Director)
Hey, good morning.
Mark McCollom (CFO)
Hey, Matt.
Curt Myers (Chairman and CEO)
Hey, Matt, good morning.
Matthew Breese (Managing Director)
Just curious, on the margin, could you give me some idea for how the margin progressed throughout the quarter? You know, for the end of June or for the month of the June, you know, how does that compare to the full quarter?
Mark McCollom (CFO)
Yeah. So the full, the full quarter average, you know, we went from 3.53 in the first quarter to 3.40 in the second quarter. You know, as I noted earlier, you know, we saw a 20 basis point increase in our cost of deposits in the month of April. You know, some of that was really just kind of full quarter impact of some of the broker deposits that we put on in the first quarter. You know, we saw in the months of May and June, we saw that cost of deposits, you know, increase only 12 basis points and 8 basis points.
You know, our progression on margin then, was that we ended the month of June, at 340, you know, which was the average, for the quarter as well. You know, we did not finish the month of June lower than the average for the quarter.
Matthew Breese (Managing Director)
Understood. Okay. Then maybe thinking about incremental loan yields today in the low to mid 7% range. you know, there's one more Fed hike it appears to be. Beyond that last Fed hike, you know, how should we be thinking about the quarterly increase in loan yields in a pause scenario versus what we've seen over the past handful of quarters?
Mark McCollom (CFO)
Yeah. Could you just repeat that again? I just wanna make sure I got it right.
Matthew Breese (Managing Director)
Yeah. you know, once the Fed is done in the ensuing quarters, how should we be thinking about the ramp in average loan yields, you know, to what extent will they continue to go higher? What's next?
Mark McCollom (CFO)
Yeah. Yeah, yeah, we have as we look to, you know, loans that mature and come off, I mean, we are still seeing, you know, while that's starting to narrow a little bit, you know, we still see new loans, you know, reprice higher, you know, for the past several quarters, on both the consumer side and the commercial side.
Matthew Breese (Managing Director)
Okay. Going back to the flat NIM in, you know, end of June at 3.40, you know, just thinking about the NII guide for the year, you know, it implies that there's a ramp down in quarterly NII towards, you know, call it $200 million-$205 million. Where do you see that bottoming? When do you see that bottoming? Do you think you can hold, you know, $200 million in NII per quarter, you know, through the end of the year, maybe even in the beginning of 2024?
Mark McCollom (CFO)
Yeah. Yeah. Again, you know, really, I feel like such a broken record on this, Matt. It really comes back to, you know, where that non-interest bearing percentage ultimately ends up. You know, so we feel comfortable with the guide that we're giving for the balance of the year. We're gonna be tracking that really closely here over the third quarter. You know, then be able to kinda, you know, revise again for the final quarter of the year. Then we're gonna track the fourth quarter really closely to be able to give our guides for 2024.
You know, it appears from, you know, the runoff, which was, you know, over $1.3 billion, or, you know, $1.2 billion in non-interest bearing declines in the first half of the year. You know, it appears that that's starting to slow. You know, does that slow, you know, to a nominal number by the end of the year or, you know, there's gonna be some trickle into next year, remains to be seen. You know, the other factor in your question is, you know, does the Fed, you know, truly pause, you know, after, you know, one or two more rate increases? How long is the pause until we start to see the rate decline?
Matthew Breese (Managing Director)
Okay. You know, switching to commercial swap fees, you know, very strong this quarter, strong as we've seen in some time. One, how sustainable is that? Two, what caused the ramp in commercial swap fees? Just curious what was behind it.
Curt Myers (Chairman and CEO)
Yeah, Matt, they're predominantly tied to originations, and they really depend on the mix of originations. When you get some larger C&I loans, you know, or CRE loans, they typically are swapped, and they really drive the numbers. That was timing to really tie to originations in the second quarter. We do see that moderating, but we feel we can have that land in more historical levels. We probably will see that come off late quarter, but we still have a good pipeline, and would expect good performance, maybe not great performance, in third, fourth quarter. For the full year, you know, we're expecting to hit our targets, and have that be a meaningful line item for us.
Matthew Breese (Managing Director)
Okay. Bigger picture, not that it applies to you, but I just wanted your thoughts on it. You know, in late June, there was joint interagency guidance from the FDIC, the Fed, the OCC, on prudent commercial real estate loan accommodations and workouts. I guess I wanted your perspective on how this plays out from a practical standpoint. You know, what does it look like in terms of how you help customers? What are the expected tools that you can use, and how will these accommodations, you know, and workouts be disclosed if and when they occur?
Curt Myers (Chairman and CEO)
Yeah, I think there's really a lot more to learn there on what the what we could do that would be different than historical standards. I mean, we work with borrowers when the borrowers work with us over time, and you know, we try to bridge to the best individual loan resolution for the bank and the customer. We don't really anticipate that that would change our workout strategy or customer strategy. If there are new tools or new ways that we can look at it based on regulatory stance, we'll certainly look at that and see how it impacts our strategy.
Matthew Breese (Managing Director)
Do you expect in those cases where you do help somebody out, you know, beyond kind of what's allowable by the market, that these loans will be disclosed?
Curt Myers (Chairman and CEO)
We certainly will disclose them if we have to. Again, it's as these the new rules would be developed or any changes would be developed, how that would impact disclosures of accommodations. You go back to during the COVID pandemic response, where were granted the TDR changes and the ability to do deferrals. I think that had a really positive effect overall on the marketplace, and it was a regulatory allowance that made sense. We'll see how these rules play out. In that event, we were very transparent and disclosed exactly what deferrals we had done, how we're thinking about that. As these rules would play out, we would do the same thing.
Matthew Breese (Managing Director)
Okay. Last one for me is just in terms of M&A. Obviously, multiples across the industry are depressed, but just wanted to get a sense for if there are any conversations that are ongoing, whether or not conversation levels have increased and, you know, how you think about M&A in this type environment. That's all I have. Thank you.
Curt Myers (Chairman and CEO)
Yeah, Matt, we have M&A opportunities that we're always looking at. We do think there will be opportunities for us in the marketplace. There are certainly headwinds right now, based on stock price, based on the marks that we would need to take on loan book and investment book to make those happen. I guess where we are right now is, as the market stabilize, we would certainly engage in those discussions, and we want to make sure we're positioned to take advantage of opportunities that come up in this more challenging time. We would, as you know, be very prudent and thorough on our credit book review in this environment and just the overall analysis of a deal.
You know, we feel we will have opportunities, and we're working hard to make sure we're positioned to take advantage of any of those opportunities that make sense for us.
Operator (participant)
Thank you. One moment for our next question. All right. It looks like there's no more questions in the queue. I'd like to turn the call back over to Curt Myers for closing remarks.
Curt Myers (Chairman and CEO)
Well, thank you again for joining us today. We hope you'll be able to be with us when we discuss third quarter results in October. Thanks, everyone.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.