Earnings Call Transcript - FCF Q2 2024

Operator, Operator

Hello and thank you for joining us. My name is Regina and I will be your conference operator today. I would like to welcome everyone to the First Commonwealth Financial Corporation Second Quarter 2024 Earnings Release Conference Call. All lines have been muted to minimize background noise. After the speakers' presentations, there will be a question-and-answer session. I will now hand the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please proceed.

Ryan Thomas, Vice President of Finance and Investor Relations

Thanks, Regina, and good afternoon, everyone. Thanks for joining us today to discuss First Commonwealth Financial Corporation's 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 McKeon, 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 statements. 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. Reconciliation of these measures can be found in the appendix of today's slide presentation. And with that, I will turn the call over to Mike.

Mike Price, President and CEO

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 5 basis points to 3.57% as the increase in loan yields outpaced the increase in funding costs for the first 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 restricted 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 promising deals 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 achieve 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 lowering 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 with 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 are nearing the end of the 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 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 decline in interchange income due to the Durbin impact starting next quarter, which appears to have already been factored 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 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 savings, 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 subordinated debt in early June. Both of these actions 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, Chief Financial Officer

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. First, as previously disclosed, and as Mike just mentioned, on June 1 we redeemed $50 million of a $100 million in subordinated debt that we had outstanding. The 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 four 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 1 gave us one month of benefit in our net interest margin for the quarter. This was the perfect quarter to redeem the subordinated debt, since capital ratios grew strongly due to capital generation combined with limited balance sheet growth. On its own, the subordinated 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 8 basis points this quarter, and in fact, the tangible common equity ratio actually improved from 8.4% to 8.7% in the quarter, as did the CET1 ratio from 11.4% to 11.7%. The subordinated debt redemption contributed to the NIM improvement for one month in the second quarter, and going forward it should contribute about 2 basis points of NIM, in part because we used cash to pay it off and shrank the balance sheet by $50 million. Second, we had two offsetting non-core items in the quarter. We, along with approximately 98% of banks holding Visa shares, expected Visa's offer to sell half our holdings, an action we had 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 36%. But the net effect going forward of 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, onto 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 on the total cost of funds was muted by the subordinated debt redemption. The NIM also benefited by about 2 basis points from the recognition into net interest income of deferred interest on one loan that had previously been in 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 regarding the NIM this quarter was a fairly dramatic slowdown in the deposit "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 accounts 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'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 million to $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 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 for 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 two to three cuts in rates. 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 the 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 zero to four 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 aggressively rate cut scenario where there are four 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 six quarters, even assuming only modest loan growth. In terms of capital management, tangible book value per share increased by $0.30 to 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 subordinated debt redemption is behind us, we may repurchase shares anyway simply to avoid becoming under-leveraged. And with that, we'll take any questions you may have.

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. I guess, first, normally one of the last things we address, but just curious, you mentioned you would buy back stock even if it's kind of rather expensive to do so relative to current levels. But just curious how M&A fits into the picture, if you guys are still interested in that, especially as your multiples have gone up, and how dry powder perhaps influences the amount of buybacks you would be willing to do as well.

Jim Reske, Chief Financial Officer

I'll respond from a technical perspective because our priorities are similar to many other banks and they haven't changed. Mike may want to add more on our M&A appetite. Our preference, like most banks, is to use capital generation to support organic growth. We aim for smooth and steady increases in the regular dividend and have no interest in special dividends. We are open to accretive M&A, but if opportunities don’t arise, we will buy back stock to maintain our desired leverage. If our tangible common ratio approaches 9% to 10%, we would be under-leveraged. Therefore, even if we are buying back stock at a high price relative to book value, we need to take action to adjust our capital as necessary. This priority has remained consistent and is quite typical. Mike, do you want to discuss the overall M&A appetite?

Mike Price, President and CEO

Yes. 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 it's been good for our company. Everyone 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. We finished second or third, 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 probably looked at 70 deals and we've done six. 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 is helpful. I appreciate all that information, Mike. Yes, please continue.

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

Yes. No, understood. And then maybe just a follow-up, unrelated on the organic side on loan growth. You talked about building back up to the mid-single-digit growth by the fourth quarter, and C&I and CRE pipelines improving. Maybe you could just talk about 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 that area this quarter as well as we started to see some other banks talk about some credit concerns in those areas.

Mike Price, President and CEO

Yes. Our volume in equipment finance has been lighter this year than expected, with growth around $45 million, which is less than we had budgeted. The growth rate has slowed due to decreased demand for capital expenditures in trucking and construction equipment. We have seen lower approval rates for applications because we are not expanding our risk appetite. However, we do not apologize for this cautious approach. Looking at the profit and loss, we remain profitable in equipment finance, albeit not at the level we had hoped for after two years. Nonetheless, it remains a solid business with good returns, and we have maintained our annualized charge-offs within the budgeted range of 55 to 65 basis points. Overall, we are satisfied with our performance. The business is well-managed, operates within our risk parameters, and while growth may eventually accelerate, it is not likely to happen immediately. We are committed to maintaining the balance between volume and risk across all our consumer categories, led effectively by Jane and her team. If interest rates decrease, these areas could become more appealing quickly, especially in indirect auto. We have upheld strong pricing discipline, even as our yield has increased from 5% to over 7%. The team has done well, and we could easily increase volume by slightly lowering rates, but we have chosen not to do so. Under Jane's leadership, we could drop half a point without compromising our standards. On the commercial side, following developments with First Republic, we are cautious in the commercial real estate sector, although we are starting to see advantageous deals and opportunities with a strong group of developers in the Midwest and Pennsylvania. In commercial and industrial under Mike McKeon's leadership, I feel optimistic about our pipelines and talent, which are currently in the 60 to 65 percentile. However, we must improve our concentration in the portfolio and enhance the value derived from family-owned businesses, cross-selling, wealth management, and leveraging our regional model. This approach is key to potentially transforming our company from good to much better over the next 5 to 10 years.

Daniel Tamayo, Analyst

Terrific. Very helpful, Mike. Thanks for all the color.

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?

Mike Price, President and CEO

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?

Mike Price, President and CEO

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, our 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 for better or worse, that's how we're thinking about it.

Karl Shepard, Analyst

Okay. And then switch over to deposits. We 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?

Jane Grebenc, Bank President and Chief Revenue Officer

Sure. Sure. Glad to. So we're always confident that we can grow deposits. 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. And 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 nice fight for us and for everybody else.

Mike Price, President and CEO

Certainly. I would like to add to Jane's comments. We approach this analysis regionally rather than just by product category. I'm observing year-over-year growth, which is quite strong in nearly every market. Our slowest market shows a growth of 2%, while our strongest exceeds 10%. This has been a focus area emphasized by Jane for several years.

Manual Navas, Analyst

Hey, with the lower kind of marginal deposit costs we're 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?

Mike Price, President and CEO

That's a great question. I'll turn it over to Jim.

Jim Reske, Chief Financial Officer

Yes, really insightful. I've used for the loan-to-deposits made in law; I've used this motorboat analogy. I was hoping it would catch on like wildfire in the industry. It doesn't seem to have done, so to speak. But quickly you cut the throttle and you keep thinking 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, I was 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 will still go separate.

Manual Navas, Analyst

I appreciate that. What are the new loans coming in at? The improvement in loan yield was nice, but I know some of it was due to interest rate recovery. Can you provide insights on the current new loan rates and expectations for future trends?

Jim Reske, Chief Financial Officer

Yes. I'll give you 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, for us, there's one 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 eight in the quarter. So customers are choosing; that's what 95% of new originations are variable. Customers are choosing, they're choosing to go variable. As much as we would like them to stay fixed and go wrong in a long way environment, they make choices too. And they want variable rate loans, so three quarters of the new production is variable that's eight in a quarter. But the fixed stuff was $775 million. So the variable this quarter, the new rate on that I just gave you in the quarter was about almost exactly the same rate as the rate at which variable was running off. So nice new loans, that same replacement yield is the runoff and variable. But the new fixed coming out of $775 million was 250 basis points more than what ran off. That's part of that story that gives us confidence that even if rates are cut, you got to go through a number of cuts before the new fixed comes on at lower rates than the fixed that runs off. That's the motorboat that will cause an upward drift even in the fixed rate portfolio, even with rate cuts.

Manual Navas, Analyst

Absolutely. I appreciate that commentary. What rate scenario are you using in the swap discussion of 10 basis points? Is that for like a September or December and a couple the first half of next year? Like how many cuts roughly?

Jim Reske, Chief Financial Officer

I'm glad you mentioned it. On the PowerPoint supplement available on the Investor Relations section of our website, on Page 14, we present two scenarios. One scenario assumes flat rates, keeping the Fed funds at 550 without any changes. This scenario shows an 11 basis points cumulative benefit to net interest margin by the end of 2025. The other scenario, which we refer to as the baseline scenario, projects a 10 basis points improvement in net interest margin. This is based on our standard forecast, where we assign a 40% weight to Moody's baseline scenario, 30% to an upside scenario, and 30% to a downside scenario. We have consistently applied this approach for our forecasting and modeling, which has proven useful. In this scenario, we anticipate a cumulative increase of 10 basis points to net interest margin.

Manual Navas, Analyst

Okay, I appreciate that commentary. I just wanted to understand if I didn't add into my forecast and such. Okay, I appreciate it. I'll step back into the queue.

Kelly Motta, Analyst

Hi, thanks so much for the question. Most of mine have been asked and answered at this point. 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, if there's any other sort of migration down the line that you would expect to come from that or what we saw this quarter is likely the bulk of that.

Mike Price, President and CEO

Yes, this is Mike, and I appreciate the question. I'll hand it over to Brian Karrip, our Chief Credit Officer, shortly. We initially set a mark of around 3.23% to 3.27%, which amounted to approximately $30 million. Currently, we're about $8 million below that target, giving us some leeway. The adjustments we made were significant, and as we assess the current situation, it's affecting roughly half of our non-performing loans and most of our other troubled categories. Brian and the team have conducted an extensive review of our line sheet, totaling over 30 hours of work on about 3,000 notes in the past month. This review covered every credit over a million. The capital region performed quite well, and we didn't observe many downgrades. Brian, you can take it from here.

Brian Karrip, Chief Credit Officer

Yes. 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 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 really helpful. And then next question for me is on expenses, you 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 the investments you're making internally into the franchise, as well as your outlook for loan to pick up, wondering how we should be thinking about the trajectory of expenses over the latter part of this year.

Jim Reske, Chief Financial Officer

Yes, when I reviewed the consensus estimates, I didn't specifically focus on yours, but the overall estimates for net interest income in the third and fourth quarters seem reasonable. Therefore, I didn't feel the need to provide any updated information. The consensus has us projected at around $67 million to $68 million per quarter for the second half, which appears accurate. We are performing well with our expense management and believe the consensus expectations are aligned with our situation, so we are comfortable with these figures.

Matthew Breese, Analyst

Hey, good afternoon, everybody.

Mike Price, President and CEO

Hey, Matt.

Matthew Breese, Analyst

Jim, I was really hoping to give you some great detail on the NIM. I wanted to parse it out just a little bit more, maybe just to set the stage. It sounds like your floating rate book is yielding 8.25. And the fixed rate book, if I have it right, is in kind of the low fives, 5.25, is that right?

Jim Reske, Chief Financial Officer

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 775 is for the new fixed rate stuff, which is 250 bps better than what’s running off. So I assume the runoff was around 5.25.

Jim Reske, Chief Financial Officer

Yes, yes, the runoff is, 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 on the fixed rate stuff?

Jim Reske, Chief Financial Officer

I don't have the exact duration for the fixed rate loans at the moment, but I can provide some information. The duration for the entire loan portfolio is 2.85 years, which includes both fixed and variable loans. In our investor deck, we show a pie chart that indicates that roughly half of the portfolio is fixed and half is variable. This diversification in our loan portfolio is a risk management strategy. However, only about 33% of the portfolio is subject to immediate repricing with rate cuts. Of that 33%, approximately 5% has been fixed in macro swaps, leaving us with about 27% that will reprice downwards. Currently, this portion has a weighted average rate of 7.92%. The other part of the portfolio, accounting for about 18%, comprises variable loans that do not reprice immediately, with repricing dates scheduled over time. These loans, such as a five-year commercial loan or a five-one ARM mortgage, typically have a weighted average rate of 5.65% and an average time to the next repricing date of about 20 months. This aspect is important for our forecasting, as it may give the impression that half of the portfolio will reprice downwards in the event of a rate cut, which is not entirely accurate. The 18% that is yielding 5.65% could reprice upwards when they reach their repricing dates if they were originated in a lower interest rate environment. I will follow up with you on the specific duration information. I hope this provides some clarity on the fixed and variable portions of our loan portfolio.

Matthew Breese, Analyst

No, 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, Chief Financial Officer

That's right.

Matthew Breese, Analyst

And so I was curious when you made your remark that the NIM, the baseline NIM improvement is about 10 bps. Is that through the end of this year or is that through the end of 2025?

Jim Reske, Chief Financial Officer

It depends on the rate scenario. If we follow a moderate rate scenario based on Moody's baseline forecast, which predicts three cuts by the end of this year, while the general consensus anticipates two cuts, and a total of seven cuts by the end of 2025, we can expect the Fed funds rate to reach approximately 3.75% by the end of 2025. In this scenario, our net interest margin (NIM) is projected to increase. While our calculations can sometimes be incorrect, it suggests an improvement by the end of this year, with a significant rise expected next year due to the cumulative effect of the macro swaps.

Matthew Breese, Analyst

Right.

Jim Reske, Chief Financial Officer

At the high end of the range I mentioned in my prepared remarks for the end of this year, and in this forecast, we expect an additional 10 basis points next year due to the macro swaps effect. Every forecast is essentially incorrect the moment it is published, as the future often unfolds differently than anticipated. However, that is the projection provided by the Moody baseline forecast.

Matthew Breese, Analyst

Okay, so a NIM ending 2025 in kind of the 3.75 to 3.80 range?

Jim Reske, Chief Financial Officer

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 is in securities repricing? What is it rolling off at? And where are you putting new securities on?

Jim Reske, Chief Financial Officer

The securities rolling off are in the low 2s, while those coming off are in the mid-5s. All the securities we purchased are quite standard. We are attempting to acquire more Ginnie Mae due to its 0% risk weight. The yield we are experiencing is around the mid-5s. This quarter, we bought approximately $160 million to $170 million, which includes $75 million related to the loss rate we recorded. Currently, they are coming out of the 5.5% rate. We believe our security portfolio is somewhat low, but our forecasts do not indicate an aggressive increase in the securities portfolio.

Matthew Breese, Analyst

I'm sorry if I missed it, what was the duration on the securities book?

Jim Reske, Chief Financial Officer

The total duration is 4.8, which increased from 4.7 last quarter. This change is due to the new securities purchased for $75 million, which have slightly longer durations. Typically, the items we acquire fall within the four to five-year duration range.

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? Are you starting to see a lower roll-on versus roll-off and do you see that?

Jim Reske, Chief Financial Officer

Yes, yes. I'm sorry if I was answering questions. I was curious, but I'm sure if I missed…

Matthew Breese, Analyst

No, no, I had asked about the securities. Now I'm asking about the CD.

Jim Reske, Chief Financial Officer

We're still offering competitive market rate specials on CDs. In the first quarter, we were pricing CDs in the 90th percentile competitively, which was very strong compared to other banks. We scaled that back a bit in the second quarter due to our successful growth in the fourth quarter. Currently, we are maintaining a competitive stance. We've shortened the term from seven months to five months to give ourselves the opportunity to reprice those CDs if rates decrease. Right now, we have a rate pressure of 5.2% for five months, which has been quite successful. As rates have risen, we have offered short-term CD specials of seven to eleven months, and those are now maturing. We are experiencing about an 80% retention rate on the maturing CDs, although some of the rates will be lower than the nominal rate. Many customers express a preference for the current rate instead of going with a lower nominal rate. Overall, retention in the CD book has been very strong.

Matthew Breese, Analyst

Very helpful. Just last one on fee income particularly in mortgage banking was a bit stronger this quarter. Maybe just some comments on overall levels of fee income and mortgage in particular?

Mike Price, President and CEO

Jane, any thoughts on mortgage? Jane has done a good job. We bought out, but we're also making some more money this year.

Jane Grebenc, Bank President and Chief Revenue Officer

We believe there is an opportunity to sell nearly all of our production. This approach is allowing us to maintain our balance sheet. We are selling approximately 80% to 90% of everything we're booking, which is beneficial for all of our originating activities.

Mike Price, President and CEO

And Jane, we lost you a bit, but we've got most of that. We're selling most of the originations pricing the fee income side of it. But it's well run.

Jim Reske, Chief Financial Officer

And I add that actually, mortgage originations went up quarter-over-quarter. So despite the rate environment, we might think they actually went up. And the amount that we sold, originations, as Jane was saying before, we lost there was 92% in the first quarter, 92% in the second quarter. So going just like you're doing according to plan.

Matthew Breese, Analyst

Yes, okay.

Jim Reske, Chief Financial Officer

On fee income because wealth was really strong this quarter. Really good sales of fixed annuities and our well-positioned. 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 for us.

Mike Price, President and CEO

I'll just add that even though our fee income from SBA has declined slightly, we are retaining more on the balance sheet this year, approximately $38 million more with a slightly higher yield, which we appreciate. Our production will increase year-over-year, and the gain on sale weighted average premiums are in the high 8s. We have a strong team in place, so we hope this can continue to grow and support our fee income.

Matthew Breese, Analyst

$25 million less Durbin next quarter? Is it safe to say it's a $22 million, $23 million run rate from here?

Jim Reske, Chief Financial Officer

Yes. I think that's right, hang on a second because again, I looked at the consensus estimates for our fee income. It looked like they really had baked in the served an impact here; we're talking about $3.5 million a quarter. So that sounds about right. Yes. The consensus is $22.2 million and $22.3 million for the next two quarters, that's about right.

Matthew Breese, Analyst

I appreciate take all my questions. I apologize for being long-winded again. Thank you.

Mike Price, President and CEO

Thank you. Other questions?

Operator, Operator

Your next question will come from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi, Analyst

Hey guys, just a few I had remaining where the sub debt that you retired or redeemed. It sounds like given capital levels, you don't 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 be retired or refi in this market?

Jim Reske, Chief Financial Officer

Yes, thank you very much, Frank. I appreciate that. We spent a lot of time with bankers over a year ago looking at replacement options for our capital instrument in case we needed it. We're very pleased that our capital generation is strong enough that we didn't need to replace it all. A couple of quarters ago, we indicated that the window for subordinated debt was closing, but then it started to open again, although it would have been more expensive than what we just eliminated. We removed 7.5% and were hearing pricing indications of 8.5% to 9% for new subordinated debt issuance, so we’re relieved we didn’t have to pursue that option. There were other possibilities, like preferred shares due to their Tier 1 treatment, but ultimately we are just glad we could pay it off without needing to replace it. Additionally, we have four years remaining on another piece of subordinated debt at 5.5%. Initially, it seemed unfavorable when rates dropped to zero, but now it looks quite favorable. We will stick with that for now and reassess it in four years. We also have about $70 million in trust preferred stock for the holding company, which we swapped into fixed rates. I believe the fixed rate is in the 4% range, which is quite favorable, and it remains a grandfathered Tier 1 instrument. The only reason we might consider calling that would be if we exceed $15 billion in total assets through acquisition, as that would impact our grandfathered Tier 1 status, but that is not a concern at this time.

Frank Schiraldi, Analyst

Okay. I know that acquisition calculations and provisioning can vary, but regarding the Centric deal, which closed last year, you mentioned the NPAs that came over during the quarter's migration. I believe the majority of those came from the Centric deal. Given that Centric was already assessed, I wouldn't have expected additional provisioning. Could you clarify that? Was it more related to another component originated in-house? Also, is there anything substantial regarding a significant loan that could lead to larger charge-offs in the future?

Jim Reske, Chief Financial Officer

Sure, Frank. I'll start from a more technical accounting view regarding the marks at origination and the final marks, and then I'll transition to Brian for further details. The marks Mike mentioned earlier were approximately 3.2% to 3.3% when the deal closed. According to accounting rules, we had the ability to adjust some of those marks back to goodwill until June 30 of last year. Consequently, the total credit mark for that deal reached 3.76%. As Mike indicated, we believe this was accurately priced. Of the credit mark totaling around $36 million to $37 million, $27 million pertained to purchased credit deteriorated (PCD) assets, and about $9.6 million was from non-PCD assets. The $27 million represented the reserve, along with an additional day one reserve of approximately $10 million. Earlier in the prepared remarks, we noted that we added about $11 million to $14 million this quarter to specific reserves for Centric. These additions are not connected to the time of acquisition, as we have owned it for a while now. The $11 million in new specific reserves this quarter relates to loans originated under our ownership period, not from acquisitions. This amount is in addition to the previously described marks. Now, for more context on this, go ahead, Brian.

Brian Karrip, Chief Credit Officer

Yes. We increased our specific reserves by $5.8 million this quarter. This was mainly due to a $9 million credit for which we needed to add $4.8 million in specifics. As a result, our specific reserves increased, and our reserves rose to 137 basis points from 130 or 132 basis points, indicating that we are 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 several quarters?

Jim Reske, Chief Financial Officer

You have that exactly right. That's the contribution of that or any projection of the rest of that.

Frank Schiraldi, Analyst

Right. Okay. And if you could just remind us, sorry if I missed it, but acknowledging your comments, you believe you're at the lowest point for NIM, regardless of the near-term rate outlook, and that NIM should increase. What would a 25 basis point cut to Fed funds project to the NIM on an annualized basis, all else equal?

Jim Reske, Chief Financial Officer

All else being equal, our typically expected answer has been around 5 basis points. It could fluctuate between 3 to 5 basis points depending on the season. However, that's not the situation currently. When I review forecasts like Moody's baseline, with the Fed funds projected to drop to 4.75 by year-end, our loan yields are still expected to increase. This results in our net interest margin moving upward, which is the significant outcome. If all factors were stable for an extended period with no positive replacement yields occurring, a cut might yield a 5 basis point increase per quarter. You could argue that while it remains 5 basis points per cut, it doesn't apply per quarter; this is more of a long-term view. Presently, it’s not reflecting that trend, making it challenging to explain. This has been a guideline for several years. Currently, we are inclined to drift upwards. Fixed loans continue to reprice higher, and we have yet to reduce deposit rates. The macroeconomic situation also plays a role, adding to the complexity of the dynamics involved, making it tricky to quantify in real time.

Frank Schiraldi, Analyst

I understand. I appreciate it. I assume that hiring more people for a longer duration, as you mentioned, is beneficial. Even though the net interest margin will increase, there will still be some negative effects. It is likely to rise even more in a prolonged higher interest rate environment. So, I think that the 3 to 5 range, or maybe even longer-term, could still be a useful guideline, but it doesn't seem like we will see that in the near term.

Jim Reske, Chief Financial Officer

Yes, you are correct. We are still operating within a flat rate environment, which is beneficial for us. There are additional factors at play as well. Slightly lower rates can stimulate some consumer demand and improve credit quality for some of our clients. Therefore, there are advantages to these lower rates, as they could enhance deposit rate demand. Overall, having higher rates for a longer period is certainly advantageous. You bet.

Operator, Operator

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, Operator

That will conclude our call today. Thank you all for joining. You may now disconnect.