Good morning, and welcome to the F.N.B. Corporation Second Quarter 2024 Earnings Call. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.

Welcome to our earnings call. This conference call of FNB Corporation and the reports that filed with the Securities and Exchange Commission also contain forward-looking statements and 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. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Thursday, July 25, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Thank you, and welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB reported solid second quarter results with net income available to common shareholders of $123 million or $0.34 per diluted common share. Pre-provision net revenue increased over 4% linked-quarter supported by our well-managed expenses and continued strong non-interest income levels. Tangible book value per share grew 12% year-over-year to reach a record high at $9.88. The second quarter's performance was driven by our long-term strategic goals to gain market share through loan and deposit growth, diversify revenue streams, and manage risk. As we mentioned previously, FNB is well-positioned to steadily increase market share in this volatile environment given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidance. FNB reported linked-quarter loan and deposit growth of 3.6% and 1% respectively, demonstrating our ability to execute on this strategy. Both of these results exceeded the published H8 data this quarter for both large and small institutions. The loan and deposit growth benefited from our investments in our digital eStore with total interactions increasing 22% year-over-year. The increase in commercial loans was driven by activity across the footprint highlighted by double-digit year-over-year growth across the Carolinas. Our Pittsburgh and Cleveland regions and commercial equipment finance business also posted strong contributions. The increase in FNB's commercial real estate portfolio included fundings on previously originated projects. On a spot basis, consumer loans grew 5% linked-quarter led by growth in residential mortgages. While growth in this portfolio is seasonally higher in the second quarter, our results also reflect the continued successful execution in key markets by our expanded mortgage banker team and longstanding strategy of serving the purchase market. This activity ultimately leads to increased households and deposit share growth. Deposits benefited from seasonal influx as well as new production that was generated through targeted deposit initiatives and promotions. Non-interest bearing deposits ended the quarter over $10 billion, an annualized increase of 3.2% from the prior quarter. The mix of non-interest bearing deposits to total deposits ended the quarter at 29%, a consistent level since December of 2023. As we have frequently discussed, our strategy has been to price our deposits to protect our peer-leading deposit data while supporting our client base. Our loan-to-deposit ratio currently equals 96%. We are expecting lower loan origination and implementing a number of deposit initiatives in the second half of the year that will bring our loan-to-deposit ratio back toward historical levels. Another longer-term strategic focus has been diversifying our revenue streams, achieving stable non-interest income at near record levels of $88 million in both the first and second quarters highlights the strength and range of our business model and FNB's robust suite of products and services. For the first half of the year, non-interest income totaled $176 million, a 10% increase over the same period in 2023. The income growth was led by our mortgage banking operations growing over 50%, strong wealth management revenue, and treasury management fee income growth. Our success growing non-interest income is expected to continue as we enter the second half of the year. FNB's balancing strategy is part of our proactive approach to risk management. As we draw closer to a reduction in interest rates, we continue to move towards a neutral interest rate position to provide stability and potential improvement in margin in a falling rate index. Beyond interest rate risk, FNB's comprehensive approach to credit risk management has led to strong and stable asset quality and consistent outperformance versus peers. Our credit team proactively monitors each loan portfolio and overall concentrations at a granular level, which has served us well through many economic cycles. I will now pass the call over to Gary to provide further detail on the overall asset quality.

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Our loan-to-deposit ratio finished the quarter at 63 basis points down one basis point from the prior quarter. Non-performing loans (NPLs) and Other Real Estate Owned (OREO) remain unchanged, ending at 33 basis points, a multi-year low, with net charge-offs at 9 basis points, reflecting solid performance in the current economic environment. Total provision expense for the quarter stood at $20.2 million, with $12.8 million utilized to support loan growth and the remainder providing for charge-offs. Our ending funding reserve stands at $419 million, up $12.5 million in the quarter, ending at 1.24%. When including acquired unamortized loan discounts, our reserve stands at 1.35%, and our NPL coverage position remains strong at 421%, inclusive of the discounts. We continue to successfully execute on our strategy to monitor the non-owner commercial real estate (CRE) portfolio. Monthly, we analyze and segment upcoming and previously resolved maturities, largest exposures, and market conditions for the various property types across our footprint. At quarter end, delinquency and NPLs for the non-owner occupied CRE portfolio improved slightly and continued to remain very low at 16 and 12 basis points, respectively. Net charge-offs reflected solid performance for the quarter at 4 basis points again confirming our consistent underwriting and strong sponsorship. The non-owner occupied office portfolio delinquency totaled 4 basis points with no NPLs largely in line with the prior quarter. We maintained a strong focus on credit risk management and our portfolio continues to perform well throughout numerous economic cycles. Quarterly, we perform specific in-depth reviews of our portfolios along with a full portfolio stress test. Our stress testing results for this quarter have again shown lower net charge-offs and stable provision compared to the prior quarter's results with our current allowance for credit losses (ACL) covering approximately 90% of our projected charge-offs in a severe economic downturn. Again confirming that our well-balanced loan portfolio enables us to withstand various stressed economic scenarios. In closing, our asset quality metrics ended the quarter at good levels and our loan portfolio continues to remain stable. Our continuous investments in credit risk management systems and corresponding staff complement our consistent underwriting and core credit philosophy. Our experienced banking teams and tenured leadership have positioned the company well to continue to achieve prudent loan growth while proactively managing credit risk through many economic cycles. I'll now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.

Thanks, Gary, and good morning. Today, I will focus on the second quarter's financial results and walk through our Q3 and full year guidance. As Vince mentioned, total loans and leases ended the quarter at $33.8 billion, a linked-quarter increase of $1.2 billion or 3.6%. This growth included $633 million in consumer loans driven by the seasonal peak of residential mortgage originations and $540 million in commercial loans and leases reflecting healthy activity in C&I and equipment finance as well as additional growth from fundings on previously committed commercial real estate projects. Total deposits ended the quarter at $35 billion, an increase of $259 million linked-quarter, including growth in security deposits of $202 million and non-interest bearing deposits of $80 million as the seasonal build and public funds deposits has begun. The loan-to-deposit ratio increased to 96% at June 30th, compared to 94% at March 31st. We expect this ratio to decline in the medium term, both organically and with several initiatives our team has implemented. Starting on the loan side of the equation, the second quarter's robust loan growth was higher than forecasted due to the seasonality of our mortgage business and stronger commercial client acquisition across the footprint. We expect loan growth to return to historical levels for the remainder of the year as pipelines have declined somewhat given the strong production in the quarter and the typical pause in client activity leading up to the presidential election. Looking at deposits, we currently have several deposit-gathering initiatives targeting both commercial and consumer balances, including a strong treasury management pipeline and a new 5-month CD consumer money market promotion. Given the short duration of these promotions, we should be able to quickly reprice them lower when rates fall. Over the past year, our deposit growth and mix has outperformed the industry and we believe that will continue. This past quarter, we largely utilized short-term borrowings to fund the robust loan growth, with total borrowings increasing $1.4 billion. When rates start to decrease, the cost of these borrowings will move down quickly. As Vince mentioned, over the last several quarters, we have been strategically positioning our balance sheet to be more neutral to benefit from lower interest rates. We have $4.5 billion of short-term or floating rate borrowings, around $4 billion of non-maturity deposits that are currently priced at or above 4.75%. A $6.9 billion CD portfolio with a nine-month duration. And lastly, as I mentioned on last quarter's earnings call, we have around $1 billion of swaps that mature beginning in 2025 with rates between 75 and 100 basis points. Additionally, the investment portfolio has an annual cash flow of $850 million at a current roll-off yield of $250 million. And we have approximately $2.6 billion of fixed-rate loan repayments at an average rate of 4.5% in the next 12 months. In total, we have over $16 billion of liabilities in swaps, nearly $3.5 billion of securities cash flows, and fixed-rate loan repayments that should provide significant benefit and protection in a falling-rate environment compared to the $16 billion of loans that we priced within three months. The second quarter's net interest margin was 3.09%, a 9 basis points decrease largely due to the increased short-term borrowings, driving a 13 basis point increase in the total cost of funds to 2.46%. This is partially offset by a three basis point increase in the total yield on earning assets for 5.43%. Our spot deposit cost ended the quarter at 2.13%, leading to a total cumulative spot deposit beta of 38% since the current interest rate increases began in March of 2022, positioning us well against our competitors. Net interest income totaled $315.9 million, a $3.1 million decrease from the prior quarter as the higher cost of funds was partially offset by higher loan balances with new origination yields for the quarter around 7%, consistent level since the third quarter of 2023. We expect the second quarter's net interest income to be the trough for the year and should see modest sequential improvement in the third and fourth quarters. Turning to non-interest income and expense. Non-interest income totaled $87.9 million, consistent with the prior quarter's strong result. The largest quarterly increase was $2.8 million in service charges, driven by treasury management revenues continuing to gain momentum and seasonally higher consumer transaction levels. Offsetting this growth were declines in capital markets given lower commercial customer transaction activity and lower mortgage banking operations income driven by a slight decline in sole loan volume and net fair value adjustments from pipeline hedging activity. Operating non-interest expenses were well managed at $225.8 million, an $8.3 million decrease from the prior quarter after adjusting for $0.8 million of significant items in the current quarter and $3 million last quarter. The largest driver for the decline was salaries and employee benefits which decreased $8.2 million, primarily due to normal seasonal long-term compensation expense, $6.9 million, and seasonally higher employer-paid payroll taxes in the prior quarter. The efficiency ratio remained at a peer-leading level coming in at 54.4% for the second quarter. FNB's capital position remained strong as we were able to support robust loan growth and maintain the tangible common equity ratio near 8% and CET1 ratio at 10.2%, both of which remain above our stated operating levels. Tangible book value per common share was $9.88 at June 30, an increase of $1.09 or 12.4% compared to June 30, 2023. An Accumulated Other Comprehensive Income (AOCI) reduced tangible book value per common share by $0.67 as of quarter end compared to $0.99 at the end of the second quarter of last year. Let's now look at guidance for the third quarter and full year of 2024. We are maintaining our full year balance sheet guidance. Loans are expected to grow mid-single digits on a full-year basis. Total deposits are expected to grow low single digits on a year-over-year basis. Our mix of non-interest bearing deposits to total deposits is anticipated to remain superior to peers. Our projected full year net interest income expectation is revised to be between $1.27 billion and $1.29 billion assuming a 125 basis point rate cut in September. This revision reflects our interest-bearing liability mix as we enter the second half of the year. Net interest income for the third quarter is expected to be between $315 million and $325 million. Given the strength of our non-interest income generation in the first half of the year, we have increased our full year guidance to be between $350 million and $355 million. Third quarter non-interest income is expected to be between $85 million and $90 million. We now anticipate the full year guidance for non-interest expense to be between $900 million and $915 million due to production related compensation given the strong fee income results. Third quarter non-interest expense is expected to be between $220 million and $230 million. The full year provision guidance range is lowered to $75 million to $95 million and remains dependent on net loan growth and charge-off activity in the second half of the year. Lastly, the full year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.

Thank you, Vince. This year celebrates our 160th anniversary as a Nationally Chartered Bank obtained through the National Banking Act in 1864. Through the execution of our growth strategy, FNB has continued to prosper and develop into a diversified $48 billion regional financial institution. This quarter's results continue to reflect those efforts with a resilient balance sheet, strong capital generation, ample liquidity, and linked-quarter growth in pre-provision net revenue. We consistently received national recognition that affirms our competitive advantage with prominent publications such as Forbes ranking FNB as one of America's best banks and naming us to its Global 2,000 listed companies based on sales, profit, assets, and market value. Our strategic emphasis on innovation is integral to our success, and we continue to earn national attention for digital engagement and leadership. Most recently, FNB's eStore won Best Digital Initiative at the 2024 Banking Tech Awards USA. These awards highlight outstanding achievements and success in the U.S. banking and FinTech industry. In addition to winning Best Digital Initiative, FNB was honored among the nation's top 5 largest financial institutions as a finalist for best use of technology in consumer banking, best user or customer experience initiative, and top innovation. We also continue to earn awards for our commitment to our employees who enable our success. During the second quarter, we extended the long list of top workplace honors we received nationally in the financial services industry and throughout our footprint with specific awards for culture, excellence, and leadership. As we reflect on a solid quarter, I want to thank our team for their many contributions. We appreciate your dedication. By maintaining our focus on our shared principles and goals, we are poised to navigate the ever-changing macroeconomic landscape and deliver for our customers, communities, and shareholders.

We will now start the question-and-answer session. The first question comes from Daniel Tamayo from Raymond James.

Good morning, everyone. Thank you for taking my questions. I wanted to start by discussing the balance sheet. You've mentioned a slowdown in loan growth for the second half of the year compared to a strong performance in the second quarter. There was significant growth in residential mortgages, as well as some increases in commercial real estate and commercial lending. Can you share your expectations for the mix in the latter half of the year? Specifically, do you anticipate the slowdown to be more pronounced in residential loans? There seems to be some seasonality affecting the second quarter, but I'm also curious if you're expecting a slowdown in commercial real estate, especially with the recent decline in construction funding. What mix do you foresee?

I don't focus on mortgage growth. I was planning to hand it over to Vince Calabrese. First, the mortgage growth is seasonal. As we enter the third quarter, we've already started to see a decline in locks in our pipeline, so we expect that to decrease significantly. This means less will be added to the balance sheet throughout the second half of the year. The construction fundings are primarily for committed obligations, where we provide construction financing that will be funded down the line. These fund-ups naturally occur during the construction period, which contributed to our growth this quarter. Additionally, we experienced robust growth in equipment finance, performing well with leases across our footprint. Some renewable energy deals closed in the last quarter of last year, and the balances in that sector have exceeded $1 billion, showing considerable growth over time. Commercial and Industrial (C&I) lending also saw significant growth, particularly in the Carolinas, Pittsburgh, and Cleveland. This growth came from multiple areas, and in certain regions, we've been gaining market share. The recent disruption has mixed up the customer base, giving us a chance to pitch new transactions, which is very encouraging. The growth exceeded my expectations, but it's a positive sign as we head into 2025, especially as we transition to a more liability-sensitive balance sheet and continue to generate deposits. Our guidance hasn't changed; we're still forecasting the same levels we projected at the beginning of the year, although it's somewhat variable. Our pipelines are down, approximately 10% in commercial pipelines as we head into the next quarter. It's still a bit slow on the consumer side, where we've seen more first mortgage volume but less home equity volume, which offsets each other. We're not expecting that to rebound this year. The only other area I didn't mention was indirect auto. Gary, do you have any thoughts on that?

Yes. But we had a solid growth quarter in Q2, which is again seasonal, very similar to the mortgage. We're getting really high-quality paper there with a focus on profitability. So improving margins and playing at the high end of the FICO band is really working well for us. But again, that's seasonal; we're going to pick our spots and manage that through those seasonal periods. So we expect that to come down as we move toward the latter half of the year as well.

And then from a funding perspective, if we're able to execute our plan, we have seen growth in our treasury management pipeline. So we're seeing some very large good opportunities where we're the principal bank that should bring in demand deposits as we move forward. I think the bright spot here while we had to fund that growth with borrowings temporarily, the upside for us in the long run is to replace that with lower-cost funding. And I think we've proven what we can do that. So the upside into '25 is us replacing those borrowings with deposits. And if you look at the demand deposit base, it's been stable. We've been at 29% for several quarters. We had growth in demand deposits, which you're not seeing across some pretty decent growth in certain categories we've priced up to bring the targets on. We have not been as aggressive as others throughout the cycle. We're starting to look at pockets for us to price up to bring in deposits which also leads to low-cost deposits in the fourth-store strategies kind of in the whole book, attracting those demand deposits as well.

Our beta performance goes to that point too, right? It's up very gradually from last quarter 36.5% to 38%. So that again is thus protecting the overall profitability.

Yes. As you can imagine, it's a challenging time to navigate. We don't want to pull back. I think a lot of competitors have shrunk their balance sheet or pulled back. I think this is an opportunity for us to go after some share bring in households and do what we do well, which is convert them to primary clients. So I hope that helps.

Yes. No, that's terrific. I really appreciate all that color. Maybe a quick follow-up. Just you touched on it at the end there on the funding side, but you also mentioned in the prepared comments about deposit initiatives in the back half of the year to kind of right size the loan-deposit ratio. So just curious if you can go into a little more detail about what you were thinking and how that could impact funding costs.

Sure. We've modified the incentive plans for the consumer bank. We have kind of a kicker for deposit growth. So you're shipping the loan growth is pretty miniscule in that segment. So we thought, hey, we'll incentive to go after the deposits. We have a number of calling initiatives across the company on larger treasury management opportunities. We've won a bunch of transactions that haven't funded yet, which are fairly sizable. It seems like clients are willing to talk to us, given our performance over this past cycle. So, we've proven that we're capable of handling those relationships without a cycle and without any issues. I think that the people are very focused on it. Our teams are focused on it. And as long as we manage them in that direction and focus mainly on funding, that's going to pay off. And the other thing is the eStore, the investment in digital and additional technology, the interactions are up 22%. We're starting to get some traction there on the consumer side. And then I don't want to get into excruciating detail, but there are things that we do from an incentive compensation perspective, kind of across the board to send deposit growth. And then we've done some things on the mortgage side where we've used data analytics to cross-sell customers that we bring in, particularly in the physician's group and the jumbo mortgage segment. And we're partnering with wealth to do some things. And brokerage, we're working on a money market product that we'll work in hand with our brokerage sales, which should help. So there's a bunch of things going on. And I think that it's going to take a little bit of time to get some lift out of it. But certainly, as we move into the second half of this year and into '25, we should see the benefits and everything from a funding perspective.

The next question comes from Frank Schiraldi with Piper Sandler.

Good morning, guys. Another strong fee income quarter and guide for continued strengths. Just curious, a bigger picture if you could share your thoughts as you continue to grow out these businesses where you think you can grow the fee income side of the picture as a percentage of the total revenue pie. And maybe do you see any fee businesses in particular that you want to ramp up or you need to ramp up to get there?

Yes, I believe our long-term goal is to reach 30% of total revenue from fee-based businesses. We came close, but changes in net interest income impacted that progress. We aim to continue building our fee-based sectors and increase their share of total revenue. While we may not reach that goal immediately, we are working towards it. Our capital markets division has seen great success; we have expanded our derivatives and syndications platforms and created a debt capital markets group to handle bond offerings. There are further opportunities for advisory services and growth in public finance. Additionally, we see potential for complementary businesses that can enhance and diversify our income streams. Given the scale of our company and the markets we operate in, we have excellent opportunities to leverage these segments. Once we move into our new building and establish a trading floor, it will allow us to consolidate our capital markets teams, which should impress clients and create new opportunities. In the wealth management area, we have only begun to tap into our potential as our teams contribute positively after our recent market expansions, showing 10% annual growth. We have achieved record results year after year, and we will continue to develop our wealth management capabilities. In treasury management, there is significant potential for fee income growth, particularly with our company's expansion and the integration of robust trading management services from the banks we have acquired. As we grow our commercial client base, we will also see opportunities for growth. The mortgage sector is cyclical and seasonal, but I anticipate gradual growth as we increase our market share. Our team, led by Joe Cartellone, has done an excellent job expanding our presence. Despite the current market conditions, we have outperformed competitors and gained market share, and I expect this to continue. Finally, our insurance offerings are decent, and under strong leadership, we are focusing on better integration with our commercial banking services. The insurance market is stabilizing, with rising premiums and an increasing number of larger clients coming on board, presenting further opportunities. Overall, we are optimistic about our fee income categories, which is reflected in our performance. Over the past five to six years, our results demonstrate the success we have had in building these capabilities.

In fact, I would just comment that the percent of revenue is a function of the industry environment. So, growing that absolute level given all the initiatives Vince talked about has been the key focus, and that just keeps building.

And then just maybe a quick follow-up just with some slower loan growth relatively speaking to the second quarter, some slow growth in the back half of the year. And with you guys already above your target capital levels, just wondering, and I know you bought back a little bit in the second quarter, but would you expect buyback activity to maybe ramp up here? Or are you more price sensitive? Obviously, we've seen a reasonable rally in bank stocks. So just wondering how we should think about buyback activity maybe as you see it today.

Yeah, I would say the level of activity we had in the second quarter, we really just to kind of buyback some of the incentive shares that were issued earlier in the year. So $250,000 that we bought. As we sit here today the focus on capital kind of building from here. At this point, we don't have any plans to repurchase shares looking at the second half of the year. I mean, I can change if the environment changes, but right now, using the capital to support the loan growth, I think the fact that you were able to support the robust loan growth that we had this quarter at capital ratio CET1 holds at 10.2% and TCE ratio at 10% is healthy. So holding those levels of capital and supporting the loan growth, I think is kind of the best use of the capital at this point. The buyback will be part of our operation every year as we go forward. But as we sit here today, I think the best use is still letting that gradually build a little bit.

The next question comes from Casey Haire with Jefferies.

Great. Thanks. Good morning, everyone. A couple of follow-up questions on the funding strategy. So just wondering, what does the guide assume in terms of the borrowings? I'm assuming that stays there or is there an opportunity with these deposit initiatives to pay some of that down?

Yes. I would say that the guide basically has the increased liability position that we're entering the third quarter that's baked into that. So the better we do on the initiatives that are described, there's obviously opportunity, additional loan growth, as well as replace some of those short-term borrowings. And I should comment too, the short-term borrowings are that short-term. So when the Fed does cut, the rate on those is going to come down in tandem with the rate coming down. So we made a decision during the quarter, given the loan growth to kind of forego a little bit of earnings in the short run in the second quarter, but position us so that we can benefit from the down rates as we go forward.

No, understood. Okay. It seems that these deposit initiatives are not like CDs. I'm curious to know what the new money rate on these deposits might be, should they prove successful, compared to the 5% borrowing yield.

Yes, it will be a mix, Casey. We still have some level of CDs coming in, but it's definitely slow. When we looked at the second quarter, we found that these CDs were averaging $36 million per month, down from a high of $164 million last July. The change is occurring slowly, but customers are still taking advantage of those rates.

Yes. Our people aren't incentivized to originate CDs.

That's a key point. The operating account initiatives are focused on attracting new customers to bring in their operating accounts, particularly non-interest bearing ones. It's challenging to predict the exact mix, but there will be some combination of both. Customers are looking for rates to come down, which offers attractive options. Moving forward, the key focus will be on increasing total deposits.

Okay. And for my last question, regarding Slide 16 and the balance sheet repricing, thank you for sharing that information. I'm interested in knowing the yield you're obtaining on the reinvestment of the $250 million roll-off rate bond. Additionally, concerning the swap with an 87 basis points average received rate, does the $1 billion mature evenly throughout 2025? I'm looking for the exact maturity date on that.

Yes. A couple of comments on that. I think we added this content just to give everybody a little more understanding kind of what's on the need. So if we kind of roll through the pieces. Now the cash flow the $50 million annual cash flow coming off of $250 million. I mean today, we're investing $4.5 billion to $4.75 billion. During the second quarter, our guys did a great job opportunistically investing earlier in the quarter, kind of north of 5%.

So we're speaking to Page 16 in the deck. It's still over nine months. Absolutely.

No, that's not a good point because I want to address that. The other components provide us some flexibility as we move forward. We have $6.9 billion in time deposits with a weighted average maturity of 9 months. Over the past year, our CD promotions have varied from 7 months to 13 months, and currently, our best rate is on a 5-month term. The objective is that when the Fed begins to adjust rates, we will have the ability to mature and reprice those deposits. This is significant. We also have $4 billion in non-maturity deposits with rates exceeding 4.75%, which can be repriced when the Fed acts, especially if the Fed is anticipated to continue moving after the initial adjustment. This gives us flexibility with $4.5 billion in short-term or floating-rate borrowings, which will reprice down. Additionally, we have $1 billion in swaps that will mature at a rate of $250 million per quarter next year. Currently, we are receiving 87 basis points; however, this results in a negative carry of $10 million to $11 million per quarter, which will begin to diminish in January.

The next question comes from Russell Gunther with Stephens.

Maybe just a follow-up on the discussion we were just having. Given your move towards neutral and some of the balance sheet repricing we just discussed, is an initial Fed cut still a negative to the NIM as deposit costs lag or can some of that fixed repricing dynamic overcome a headwind from an initial step down?

Yes, it really depends on the expectations regarding the cuts after the first one, as Vince mentioned. If further rate reductions are anticipated, that allows us to be more aggressive with deposit pricing. However, if it's a one-time cut as we forecasted, there may be some short-term challenges, affecting our ability to reprice deposits quickly. But if clients expect several additional cuts, that would give us more leeway to take action more aggressively, possibly allowing us to mitigate some of the negative impacts more swiftly than anticipated.

And then just could you guys talk about deposit pricing competition in your markets just broadly. Getting some, I don't know, mixed messages early in the earnings season, particularly out of the Southeast. There are some peers are talking about accelerated competition, others talking about successfully walking down promo rates. Just your overall thought would be helpful in terms of where you think deposit costs are ahead of the next couple of quarters.

I believe many of our competitors have adjusted their approach after raising deposit prices and have reduced their offerings. Larger competitors have scaled back somewhat, which is evident in the promotional pricing available now, showing a reduction of 25 to 50 basis points compared to the peak during what I refer to as the micro liquidity crisis. This creates a mixed signal environment that varies by institution. Occasionally, a competitor may appear with an aggressive rate. Overall, companies are adopting strategies similar to ours, being selective with repricing their products and employing quieter promotional pricing rather than what’s visible on their websites. It seems to be less competitive overall, although there are still instances of irrational pricing. Depending on who engages your clients, you may need to adjust your approach. From our surveys and monitoring of competitive pricing, we have noticed a general decline in stated promotional prices among many of our competitors. However, from time to time, a competitor will come out with a strong offering. Many have also begun shortening the term of their time deposit portfolios by offering more aggressive certificates of deposit with shorter durations, such as 3 or 6 months. We observe these pricing shifts consistently across the industry.

I would just add there, too, it depends on if the bank is from in loans or not, right? So depending on who you're talking to the banks that aren't growing loans at all, they're just managing the rates down more because they're not trying to generate deposits with our growth and bringing in all those new customers. It's a different environment that you want to deposits. So it really depends on the market and the bank.

As I read through the earnings release, I can see that our margin contracted because we were lending to improve it. We've noticed inflows of deposits, but pricing is inconsistent and the situation remains competitive. People are assessing their situations on an individual basis.

I would just add that our margin compression was down 9 basis points for the quarter. However, looking at our net interest income, which is crucial for our online profitability, we experienced a decrease of $3.1 million this quarter, following a $5 million decline last quarter and a $6 million drop the quarter before. This trend aligns with what we've seen. Moving forward, as I mentioned earlier, the more successful we are with our deposit initiatives and as rates decrease, we can replace higher funding costs with lower beta funding.

Got it. Well, guys, I appreciate both your thoughts on the question. I guess the last one for me and understanding it sounds like we are poised to be flat to up on NII going forward, but a little incremental pressure overall to the guide. Would you guys consider another securities portfolio repositioning? Or how does that currently sit in your opportunity set?

Yes. I would just say that the net interest income, I mean, we expect the second quarter to be the trough in net interest income dollars. So we do expect it to move up the next couple of quarters just on all the things that we described. And then we evaluate the whole balance sheet on a regular basis. So as we said, with what we did in the fourth quarter, we were very thoughtful about the size of that and the nature of the overall optimization strategy we deployed. So we look at everything. So everything is kind of on the table from a recess standpoint. But I think we're focused primarily on the organic growth in the loans and then all the deposit initiatives really fund the loan growth.

It really helps us to bring those households on. That assists us in generating additional business in the future. I believe we've done a pretty good job of selling to that customer base.

The next question comes from Manuel Navas with D.A. Davidson.

If the Fed points to kind of a continued down rate cycle, could you have upside to the high end of your NII range? Or would it actually maybe exceed it? Just kind of some thoughts on that kind of variability that you kind of touched on briefly before.

Yes, Manuel, as I mentioned, our guidance currently includes only one adjustment for this year. If there were additional adjustments anticipated, the potential for growth would likely become evident in 2025. This positions us favorably for what 2025 could bring, particularly if the yield curve returns to a normal state after two years of inversion. The impact would be more noticeable in 2025. Additionally, there are some timing considerations related to the maturity of certificates of deposit, some of which are already established. With five-month CDs coming due now, most of the repricing will occur at the end of the year, which I believe will effectively prepare us for 2025.

And our brand is pretty tight. As you know, if you look at the guide for that interest income. It's a pretty tight band there.

In the last 3 years, this third quarter has certainly been pretty good deposit growth quarter. I think you have some seasonality that you touched on meeting flows. Can you just kind of touch on that kind of just organic better deposit trends this quarter potential?

Yes. Go ahead.

I was going to say, normally, we expect that normal seasonal surge that we see in deposits, particularly on the municipal side, happens kind of now through October, November timeframe, and that can be $600 million to $800 million kind of peak to trough and usually we got them in the first quarter and then spread from there. So that seasonality we expect, and that will be supplemented by the initiative Vince talked about earlier as far as the commercial and consumer deposits. Yes. The monthly margin experienced some fluctuations in the last month of the quarter, but it remained close to the quarterly average, within one or two basis points.

The next question comes from Kelly Motta with KBW.

I think you've touched on it a bit, but clearly, loan growth was incredibly strong, and it's a great operating need to win new households and clients to the firm. Just wondering where you're seeing the greatest opportunity to take share, whether it's a certain region or segment of the business?

Yes. We've observed solid growth emerging from the Carolinas, which continues to show promise for us. We believe we're just beginning to explore our calling activity in that region, indicating significant potential. In South Carolina, we've expanded our presence in Greenville and South Charleston, presenting ample opportunities in both wealth private banking and commercial banking. We also see promising growth in Charlotte, along with strong deposit gains in Wilmington. Overall, we feel positive about our prospects in the Southeast. Pittsburgh is also performing well, and we hold a considerable market share there. However, in certain business areas, we feel undersized, particularly in mortgage lending considering our deposit share. There's room for us to expand in consumer lending in Pittsburgh and we have not fully penetrated this market from a commercial and industrial standpoint. Cleveland has been slow in recent years, but we see potential growth in that market for C&I. As for equipment finance, we've seen good performance and expect that to continue as we navigate through this period and get past the election. There has been a pause in small ticket capital spending from the C&I sector, but we anticipate a release of that activity after November, once there is more clarity regarding future developments. These areas appear to offer the most potential for us, while on the other hand, activity in commercial real estate is evidently lower at the moment.

And then understanding these things take time. Just wondering if we could get your updated thoughts on M&A, clearly, valuations across the board have improved and especially in light of potentially more accommodating regulatory environment potentially on the horizon. Just wondering, updated thoughts, any thoughts on potentially where you would be looking to add density or fill in?

Yes, I think it's going to be the same answer we've given in the last few quarters. We're going to be opportunistic; we are focused internally. We have a number of major initiatives going on right now and building out heightened standards capabilities, we're focusing on building out the digital platform. You remember when you came and met with us, we had quite a bit that we were tackling. That doesn't mean M&A is off the table. It's just that we've been focused internally to strengthen the platform, right, so that we can grow and expand and benefit from the scale that we put on. So I would say it's the same. We'll be opportunistic and look for opportunities in the market. We've been building out Virginia on a de novo basis. So we've seen a lot of branch announcements in Northern Virginia. I think we are open to 2 more coming online in the near term. And then Richmond, we've been focusing on. So that's kind of happening organically. And then in the Carolinas, we're building out the Charlotte market, the intercity Charlotte market, largely outside of the city of Charlotte. So that we're looking at opportunities to go in there. So you'll see some de novo expansion in those markets, which I think Charlotte, in particular, should bring us some good opportunities from a consumer and a small business perspective. We build out that channel.

Understood. You guys certainly have plenty of green shoots internally. Maybe the last question for me, just a model refresher here. On the expense side, you have about a $7 million double carry from the excess lease expense while you're still leasing. Can you remind us, does that doesn't carry through to 2025? Is that correct? Or is there any kind of change in plans or timing with the move to the new building?

Yes, Kelly, it's Jim Dutey. That's exactly right. Yes. Once we move in, in the fourth quarter is our planned movement date of about ‘24 that double carry on the current leases that we have will end. So it's not a carry forward to '25.

The next question comes from Brian Martin with Janney.

Can you remind us what the net expense reduction is regarding the building and the property?

It's essentially about the timing of our relocation. We lease several locations since our staff is distributed across lab sites in North Shore. The rent expense started for the new building, and we are currently paying rent for all these other sites until we can move into the new building, which is scheduled for November or early December this year. The question was about the additional rent expense that will no longer be relevant. At the moment, we are facing double expenses.

Brian, there's a note on Slide 20 regarding the guidance, which shows $7 million in rental expense. Yes, and we're not actually paying double; we have free rent for the move, but from a GAAP accounting perspective, we show it as indirect.

Can you provide some insight on the funding cost? Specifically, you mentioned the margins improving in relation to deposit costs. Do you think those costs will start to stabilize soon? The rate of increase has been slowing down, so when do you anticipate the deposit costs will level off?

It's difficult to determine. It seems to be gradually increasing. I've noted that the change in CD mix has significantly slowed down. If we look at total deposit costs based on a recent snapshot, they were at 204 in the first quarter. Compared to the past, the increase is definitely slowing down. This ties back to what Chris mentioned earlier about the possibility of the Fed cutting rates. If there’s an expectation of ongoing cuts, it creates more opportunity to bring costs down. As outlined on Slide 16, there are numerous factors and flexibility available, particularly if the expectation is for continued rate cuts after what we hope will be a decrease in September.

If you examine the composition of the deposit base, I don't anticipate an increase in deposit pricing. We've noticed that several competitors have lowered their promotional pricing recently. Therefore, it's more about the shift in strategy. Our aim is to maintain demand deposits and retain the low-cost interest checking accounts without any significant migration. I believe the outflows have decreased significantly, which aligns with the initiatives we are pursuing. Our new initiatives are concentrating on lower-cost deposit segments, which should benefit us, but ultimately, it depends on the mix at this stage.

And Brian, from a beta standpoint, I guess our beta has been very strong. The 38% versus the peers. We've been a good bit better than peers and we would expect that just to gradually go up a little bit more from here, probably similar to what it did kind of first to second quarter. So just as another indicator.

Yes, that's helpful. I have a question for Gary regarding credit and stress testing. Are you noticing any signs of weakness or concerns, considering all the good credit performance? As you conduct the stress test each quarter, is there anything increasing your awareness or prompting you to pay closer attention?

Brian, I think over the last 3 quarters now, and we stress test, as you know, every quarter. Over the last 3 quarters, we've seen improvements from a potential charge-off and loss perspective. So those updates and those reviews around the severe economy continued to show improvement. We're very, very aggressive in managing the book, as you all know. And that test that our team goes through each and every quarter is really showing positive results for us as we continue to migrate through the current economy.

Yes, I think that's all from me. I have one last modeling question. Did you mention that there was some impairment on the mortgage this quarter, or did I misunderstand?

No, it's normal fair value marks on the overall portfolio, Brian, that's all. And I mean, acting any quarter-to-quarter, anywhere from $1 million one way to $2 million one way or $1 million or $2 million the other way. So it was just kind of hedging the pipeline.

This concludes our question-and-answer session. I would like to turn the conference back over to Vincent Delie for any closing remarks.

Thank you. Thank you, everybody. I appreciate your interest and great questions. I hope we've answered everybody's questions. We're very optimistic as we move forward. I think we had a great opportunity. As we said in the previous call, we will go after market share because we were in a position to do that. I think we have a great opportunity to create some pretty positive financial outcomes as we move forward and execute our plans to drive deposit growth in the second half of the year. So really appreciate it and appreciate your interest and thank you again, and thank you to all of our employees for their hard work. A lot of listening, I know we all appreciate it. So thank you. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.