Fulton Financial Corporation (NASDAQ:FULT) Q2 2023 Earnings Conference Call July 19, 2023 10:00 AM ET
Company Participants
Matt Jozwiak – Director of Investor Relations
Curtis Myers – Chairman and Chief Executive Officer
Mark McCollom – Senior Executive Vice President and Chief Financial Officer
Conference Call Participants
Frank Schiraldi – Piper Sandler & Co.
Daniel Tamayo – Raymond James & Associates, Inc.
Christopher McGratty – Keefe, Bruyette, & Woods, Inc.
David Bishop – Hovde Group, LLC
Feddie Strickland – Janney Montgomery Scott LLC
Manuel Navas – D.A. Davidson & Co.
Matthew Breese – Stephens Inc.
Operator
Good day, and thank you for standing by. Welcome to the Fulton Financial Second Quarter 2023 Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Matt Jozwiak, Director of Investor Relations. Please go ahead.
Matt Jozwiak
Good morning, and thanks for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the second quarter which ended June 30, 2023. Your host for today’s conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt is Mark McCollom, Chief Financial Officer.
Our comments today will refer to the financial information and related slide presentation included with our earnings announcement which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations tab under Investor Relations on our website.
On this call, representatives of Fulton may make forward-looking statements with respect to Fulton’s financial condition, results of operations and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, and actual results could differ materially.
Please refer to the safe harbor statement on forward-looking statements in our earnings release and on Slide 2 of today’s presentation for additional information regarding these risks, uncertainties and other factors. Fulton takes no obligation other than as required by law, to update or revise any forward-looking statements.
In discussing Fulton’s performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton’s earnings announcement released yesterday in Slides 16 through 20 of today’s presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.
Now, I’d like to turn the call over to your host, Curt Myers.
Curtis Myers
Thanks, Matt, and good morning, everyone. Today, I’ll provide summary comments on our company and on our financial performance. Then Mark will share more details on our financial results and step through our outlook for the remainder of 2023. After our prepared remarks, we will be happy to take any questions you may have.
We were pleased with our second quarter results. We continue to support our customers and generated solid loan growth. We saw credit metrics remain stable and credit losses return to historically low levels. In addition, fee income was strong across the entire company.
Operating earnings were $0.47 per share. Pre-provision net revenue, or PPNR, for the second quarter was approximately $106 million, an increase of 19% year-over-year. This was a result of earning asset growth and net interest margin expansion year-over-year. During the second quarter, we saw loan growth of $374 million and deposit declines of $110 million. As a result, our loan-to-deposit ratio increased to 99%, right in the middle of our long-term target of 95% to 105%.
Fee income increased $8.9 million, significantly above the first quarter levels. Commercial Banking had a record quarter, driven by strong capital markets and merchant and card processing income. Wealth Management continued to deliver strong results as the market value of assets under management and assets under administration reached $14.3 billion. Mortgage banking fees were up modestly linked quarter and consumer banking fees were solid as well. Expenses increased during the period. However, they were in line with our expectations for the quarter. In addition, we also had other positive notable events during the quarter.
We released the second edition of our corporate social responsibility report, highlighting achievements on our purpose of changing lives for the better. We raised our quarterly common dividend by 7% to $0.16 per share. We welcomed a new member of our executive team, Karthik Sridharan joined us as a newly created role of Chief Operations and Technology Officer. In this role, he will lead our efforts to further enhance our operational excellence for our customers and our team.
We celebrated our first full-year impact of the Prudential Bancorp acquisition. In looking back on the acquisition, we were pleased with our ability to get regulatory approval and close the transaction in under four months. We achieved the systems conversion on time and on budget. We realized our cost savings and met our onetime merger cost targets, and we are pleased to have the Prudential team on board and contributing to Fulton’s success every day.
Our second quarter results met our expectations, and we believe we are positioned well for continued success. We remain focused on growing core deposits, effectively managing our deposit mix, achieving the appropriate risk-adjusted return on our loan portfolio and improving our operating efficiency.
During the quarter, we and the industry continue to experience the migration from non-interest-bearing balances into higher cost deposit products. What is critically important is to continue to grow households and customer accounts. During the quarter, we grew 4,000 total net new households and 8,000 total net new deposit accounts. We believe those are meaningful increases in this environment.
On Slide 3, we have provided updated disclosures on our deposit base. We have approximately 742,000 deposit accounts with an average age of 11.4 years on a weighted balance basis. The average balance of these accounts is only $28,500. Our balance sheet remains strong, and our capital ratios continue to improve. Our liquidity position increased to over $8.2 billion in committed funds.
Turning to credit. We have provided more detail on our loan portfolio and specifically on our office portfolio on Slides 4 and 5. I’d like to note our overall concentration in commercial real estate remains at approximately 180% of total capital, well below our proxy peer average.
On Slides 4 and 5, a small component of our CRE portfolio is the discrete, office-only portfolio, which includes all loans with a primary revenue stream from office rents. As a reminder, this segment is a diversified and granular portfolio, originated consistently over time, spread throughout our footprint and with only five individual loans in excess of $20 million.
Looking at overall credit, net charge-offs were $2 million or 4 basis points annualized. Overall credit performance remains within our expectations and NPAs, NPL and loan delinquency have all declined for the past three quarters. While we are encouraged by these credit trends, we remain focused on potential economic headwinds that could affect future performance and our credit outlook.
Now I’ll turn the call over to Mark to discuss our second quarter financial performance and 2023 outlook in more detail.
Mark McCollom
Thanks, Curt, and good morning to all of you on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the first quarter of 2023, and the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis.
Starting on Slide 6. As Curt noted, operating earnings per diluted share this quarter were $0.47 on operating net income available to common shareholders of $77.8 million. This compares to $0.39 of operating EPS in the first quarter of 2023.
Looking at the balance sheet. Loan growth slowed marginally in the second quarter to $374 million or 7% annualized. Commercial loans were $119 million of this increase or about one-third of our overall growth. Commercial real estate lending grew $100 million or 5% annualized, with most of this growth coming in owner-occupied commercial real estate. As noted earlier, our commercial real estate concentration remains low, approximately 180% of total capital.
Consumer lending produced growth of $256 million or 15% during the quarter. Mortgage lending was the majority of our consumer loan growth as the second quarter is typically the peak of the home buying season. We continue to raise new loan rates across all products and remain focused on the risk-adjusted returns we are getting on new originations. As a result, we expect to see loan growth moderate both in residential mortgage and in the overall portfolio during the back half of 2023.
Total deposits declined $110 million during the quarter. Interest-bearing deposits grew $428 million during the period or approximately 11%. This growth was offset by the pace of decline in our non-interest-bearing DDA accounts. Non-interest-bearing balances declined $538 million during the period, which is down from a $603 million decline in the first quarter. Our loan-to-deposit ratio ended the quarter at 99.2%, up from 97% at the end of the first quarter.
As many investors are focused on where non-interest-bearing deposit levels will ultimately end up, we’ve included on Slide 7 a 30-plus year history of our non-interest-bearing deposit percentage. As our bank has grown and our C&I capabilities have expanded, this percentage has trended upward over time.
Recently, rising rates have caused the deposit mix shift to occur and we believe we should end the year at around 23% non-interest-bearing deposits as a percentage of total deposits, down from 28% at June 30. This estimate assumes an additional deposit shift of approximately $800 million into interest-bearing deposits during the back half of 2023. This mix shift is reflected in the refreshed NII guidance I will provide at the end of my comments.
Our investment portfolio declined modestly during the quarter, closing at $3.9 billion. During the first quarter, we chose to build cash reserves from the cash flows in our investment portfolio. Going forward, we expect to revert back to our longer-term cash targets with incremental cash flows used to reduce overnight borrowings.
Putting together those balance sheet trends on Slide 8, our net interest income was $213 million for the quarter, a $3 million decrease from the first quarter. Our net interest margin for the second quarter and for the month of June were both 3.40% versus 3.53% in the first quarter. Loan yields expanded 31 basis points during the period, increasing to 5.52% versus 5.21% last quarter. Cycle-to-date, our loan beta has been 46%.
Our total cost of deposits increased 50 basis points to 132 basis points during the quarter. Cycle-to-date, our total deposit beta is approximately 26%. Where are through-the-cycle deposit beta ultimately ends up will be very closely tied to where the non-interest-bearing percentage ends up landing.
Based on our earlier estimate of around 23% by the end of the year, this will imply a deposit beta of approximately 40%. But we expect our loan beta to continue to drift up between now and the end of the year as well. So ultimately, we believe our ending loan beta will remain meaningfully higher than our ending deposit beta due to the asset-sensitive nature of our balance sheet.
Turning to credit quality on Slide 9. Our non-performing loans declined $17 million during the quarter, which led to our NPL-to-loans ratio improving from 80 basis points at March 31 to 70 basis points at June 30. Overall loan delinquency improved to 105 basis points at June 30 versus 128 basis points last quarter.
Despite these positive trends, our loan growth during the second quarter and modest changes to the economic outlook led to the increase in our allowance for credit losses. Our ACL as a percentage of loans increased slightly during the quarter from 1.35% of loans at March 31 to 1.37% at quarter end.
Turning to non-interest income on Slide 10. Wealth Management revenues were $18.7 million, up from $18.1 million for the first quarter. We continue to invest in our wealth business, and it now represents almost one-third of our fee-based revenues. The market value of assets under management and administration increased $100 million to $14.3 billion at June 30.
Commercial banking fees increased significantly to $23.1 million during the quarter. Capital markets revenue was very strong and merchant and card revenues bounced back from seasonal declines we typically see in the first quarter. SBA gains on sale were also strong during the quarter.
Consumer banking fees were up modestly for the quarter, with seasonal pickups in debit and credit card revenues, offset by a continuing decline in overdraft fees. Mortgage banking revenues picked up from seasonal lows in the first quarter. However, application volumes are down 14% year-over-year, and rate increases are beginning to influence applications and overall volumes.
Moving to Slide 11. Non-interest expenses were $168 million in the second quarter, an $8 million increase from the first quarter. The increase in day count accounted for about one quarter of this increase. In addition, the following material items are noted. Higher salaries and benefits costs are due to the April 1 merit increases as well as higher healthcare claims as we are largely self-insured and also higher data processing costs of $700,000 due to the timing of certain IT initiatives.
On Slides 12 and 13, we are continuing to provide you with expanded metrics on capital and liquidity. First, on Slide 12, as of June 30, we maintained solid cushions over the regulatory minimums for all of our regulatory capital ratio. We have also provided you with an alternative view of our regulatory ratios, including the impact of AOCI. While we do not expect banks of our size to be required to calculate our ratios this way, we believe this information maybe useful to you.
Our tangible common equity ratio was 7% at quarter end, in line with last quarter. Included in tangible common equity is accumulated other comprehensive loss on the available-for-sale portion of our investment portfolio and derivatives. This number totaled $312 million after tax on a total AFS portfolio of $2.6 billion.
On Slide 13, if we include the loss on our held-to-maturity investments, which is $115 million after tax on an HTM portfolio of $1.3 billion, our tangible common equity ratio would still be 6.6% at June 30, representing over $1.7 billion intangible capital.
On Slide 14, we provided you with a comprehensive look at our liquidity profile. When combining cash, committed and available FHLB capacity, the Fed discount window and unencumbered securities available to pledge under the Fed’s bank term funding program, our committed liquidity is $8.2 billion at June 30. In addition, we maintained over $2.5 billion in Fed funds lines with other institutions.
On Slide 15, we are providing you our updated guidance for 2023. Our guidance now assumes a 25 basis point Fed funds increase at the July meeting, followed by constant rates for the balance of the year. Based on this rate outlook, our 2023 guidance is as follows. We expect our net interest income on a non-FTE basis to be in the range of $830 million to $840 million. We expect our provision for credit losses to be in the range of $55 million to $65 million. We expect our non-interest income, excluding securities gains to be in the range of $220 million to $230 million.
We expect core non-interest expenses to be in the range of $645 million to $660 million for the year. This core amount excludes any special FDIC assessment, which may need to be recorded in the second half of the year if finalized during that period. And lastly, we expect our effective tax rate to be in the range of 17.5%, plus or minus for the year.
And with that, I’ll now turn the call over to the operator for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.
Frank Schiraldi
Good morning.
Curtis Myers
Good morning, Frank.
Frank Schiraldi
Just Mark, first on the non-interest-bearing by year-end, the 23%, is that ultimately where you expect Fulton to sort of end up? Do you think it could continue to trend lower? And then I just – it’s interesting to me, it seems like with all the focus on rates over the last few months, guys who wanted to shift out non-interest-bearing would have. I guess there’s some sort of stimulus dollars that are still running down, and that’s where they’re running out of. But – are you starting to see a slowdown in that mix shift as well that gives you comfort on your year-end expectations?
Mark McCollom
Yes, Frank. So ultimately, where that number ends up beyond 2023, we’ll obviously be coming out with 2024 guidance at the early part of 2024, which will reflect that. But to answer the second part of your question, I would tell you that in the months of February, March and April, in each of those months, our total cost of deposits increased about 20 basis points on average per month. In May and June, that average fell to about 10 basis points. So we’re still seeing an increase month-to-month, but we are starting to see that lessen a little bit. Now that can still change, obviously, but that certainly influenced some of the guidance that we are giving today.
Frank Schiraldi
Got it. And from here, is it more of just kind of running down balances as opposed to shifting balances into interest-bearing balances when these clients you’re thinking about moving money around?
Mark McCollom
I mean, again, we’re still seeing some shift out of non-interest bearing. I mean, obviously, we’re giving guidance that still thinks we’re going to have $800 million of that shift in the back half of the year. But that’s down from what we saw in the first half of the year.
Frank Schiraldi
Okay. And then just on the capital. Just given all the focus in these flow about new capital rules, obviously, for a larger contingent of banks than Fulton. Just curious your thoughts on what the right sort of capital ratios are, either CET1 or TCE? And what sort of ratio do you guys target here? Thanks.
Mark McCollom
Yes, Frank, in terms of what we target, we look at the regulatory minimums and then by ratio, depending on that ratio, our house minimums are going to be 100 to 150 basis points above that. But where we sit right now, particularly on all of those regulatory ratios, which is our primary focus, on those, we have comfortable cushions even to our house amount.
Frank Schiraldi
Okay. I guess asked another way, do you expect these ratios to build in the near-term, not necessarily? Any color there tied into the earnings guide?
Mark McCollom
Frank, I think we would see them build over time with the earnings stream. Really, the question is then how would we deploy that capital. Our capital strategy is to support organic growth first and then use for M&A or buybacks as we move forward. So we feel comfortable with our current capital levels. And as we generate more capital, we’ll look to deploy that in those ways.
Frank Schiraldi
Okay. All right. Great. Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Daniel Tamayo from Raymond James. Your line is open.
Daniel Tamayo
Hey. Good morning, guys. Thanks for taking my question.
Mark McCollom
Hey, Danny.
Daniel Tamayo
Maybe we just start off, just a clarification on the loan growth guidance. I think, Mark, you talked about that moderating. I’m assuming you’re talking about from the prior guidance of the 4% to 6% and not relative to the strong growth in the second quarter?
Mark McCollom
Well, no, what I’m referring to is the strong growth that we’ve seen really in the first half of the year relative to what a typical year would be. So my comments on moderation is from the pace that we’ve seen in the first half of the year.
Daniel Tamayo
Okay. So how should we think about those comments? I mean if you could – I mean is that mid-single digit then still kind of in line with what you’re thinking about for the back half of the year?
Mark McCollom
Yes, Danny, we would – those targets in the 4% to 6% range as we look forward, we had very strong loan growth in the first quarter. We had good growth again in the second quarter. As we’re focused on appropriate risk-adjusted returns on loan pricing, we think we’ll moderate from there. But our long-term targets and full-year, we expect us to still be in that 4% to 6% range.
Daniel Tamayo
Okay. And then in terms of funding that growth, you mentioned your loan-to-deposit ratio is kind of in the middle of your – of the range that you’re comfortable with now. Is that – should we infer that you could continue to let that drift up if you do lose some deposits? Or do you think you would be inclined to fund it with brokered or something kind of on the higher end of funding cost if you want to maintain that around 99%?
Curtis Myers
Yes. Our goal is to grow the deposit base. As we move forward, we referenced we’re growing accounts, we’re growing deposit accounts specifically. We’re fighting that trend of average account balances coming down. So we are very focused on growing deposits in a measured pace with loans. If that doesn’t happen, we feel we have access to other sources to continue to support loan growth. But our strategy is – what our long-term strategy has been is to grow loans and deposits in a more equal basis as we get back to and are now at historical kind of fully loaned position.
Daniel Tamayo
Okay. Yes, that makes sense. But as we think about kind of the rest of the year and in terms of the net interest income guidance, that assumes you talked about with the non-interest bearing, but that’s kind of a mix shift of what’s already there. If you’re growing loans, that assumes you’re funding it with what kind of deposit? I mean are you assuming when you’re – in terms of rate?
Curtis Myers
Yes. So I mean, we want to grow non-interest bearing deposits. It’s really difficult in this environment. So then we would look to grow through deposit acquisition of new customers, which are typically promotional rate. And then we have plenty of capacity on broker deposits from there. So we think we have sources. Organic growth, we’ve done a good job over time, and we really want to grow customer-by-customer. We recognize in this environment, it’s tough to grow deposits. So we’re making sure we have capacity to continue to support loan customers if we’re getting the appropriate risk-adjusted return.
Daniel Tamayo
Understood. Okay. Well, I appreciate we – you giving me some color into getting there on the funding side? Thanks guys.
Curtis Myers
Thanks, Danny.
Mark McCollom
You bet, Danny.
Operator
[Operator Instructions] And our next question will come from the line of Chris McGratty from KBW. Your line is open.
Christopher McGratty
Great. Mark, just a clarification on the 40% beta. That’s interest-bearing deposit beta full cycle?
Mark McCollom
That is the total deposit beta.
Christopher McGratty
Total deposit beta. Okay. Thank you. And then second, on costs. Obviously, the quarter was a touch heavy, but you said it was in line with kind of our expectations. Is there anything beyond what you’ve given us in your guidance that you’re considering if the environment – if the revenue environment stays like it is a little bit challenging? Anything you can pull on the expense lever in the back half or early next year?
Curtis Myers
Yes, Chris, it’s Curt. We are committed to managing expenses appropriately. As we see the back half of the year unfold with growth in revenue, we’ll take the appropriate cost actions that we need to. We’re committed to being within target range on expenses and we’ll manage those as we have in the past to make sure we have an appropriate cost structure.
Christopher McGratty
Got it. Thanks. Thank you very much.
Curtis Myers
Thanks.
Operator
[Operator Instructions] Our next question will come from the line of David Bishop from Hovde Group. Your line is open.
David Bishop
Yes. Good morning, gentlemen. Hey, Mark, I wasn’t sure if I heard you correct, but during the preamble. In terms of your outlook for maintaining cash and investments, I understand that you think cash has sort of reached a floor here. You’re looking to build the liquidity or just curious what our expectation should be for cash and equivalents and investments from here?
Mark McCollom
Yes. Yes. We had sat on some excess cash post March 8 for about a 2, 2.5-month stretch. And then as I think – as we felt like we had gotten past the liquidity crisis in the industry, we reverted back to our longer-term kind of cash targets. And with respect to the investment portfolio, we’ve always targeted that to be around 15% of assets. And so you’ll see that continue to grow in step with the total balance sheet growth.
David Bishop
Got it. And then I appreciate the disclosures on the office – the CRE portfolio. Just curious maybe turning the prism with interest rates rising here, are you seeing any sort of degradation yet on the consumer side of the house from a credit quality perspective?
Curtis Myers
Dave, we are not – credit metrics remain stable across the board. We’re doing a lot of work on interest rate sensitivity at a customer level. But we see pretty stable credit scores, delinquency is good. Those leading indicators continue to be positive.
David Bishop
Got it. And final question, I think you mentioned maintaining the risk adjusted pricing. Just curious maybe what you’re able to onboard new commercial loans at across your markets during the quarter? Thanks.
Mark McCollom
Sure. Yes, commercial loans will vary a little bit, obviously, by product. But in general, in the second quarter, new money came on generally between 7 – low to mid-7s.
David Bishop
Great. Appreciate the color.
Mark McCollom
You bet.
Operator
[Operator Instructions] Our next question comes from Feddie Strickland from Janney Montgomery. Your line is open.
Feddie Strickland
Thanks. Good morning.
Curtis Myers
Hey, Feddie.
Mark McCollom
Hey, Feddie.
Feddie Strickland
Just on expenses, it sounds like we should expect quarterly expenses to decline in the third and fourth quarter, just given your guidance. Can you walk us through some of the drivers and timing there just over the next couple of quarters?
Mark McCollom
Yes. So the drivers there is, there were a couple of items in the second quarter that we would deem to be things that will not recur, which probably in the aggregate totaled about $2 million. But you’re correct. If you take the guide and look to where we are mid-year, we would expect over the next couple of quarters for expenses to come down a little bit. There’s also just some normal things with the real estate and otherwise, which should back off a little bit in the second half of the year.
Feddie Strickland
Got it. That’s helpful. And then switching gears to the margin. I know you haven’t provided 2024 guidance yet, but is it reasonable to see the margin bottoming towards the end of this year and then potentially expand into early 2024, just as loans reprice and earning assets potentially remix with the assumption that the Fed stops hiking this year after one or two more hikes?
Mark McCollom
Well, yes, I was going to start my comments with what you just said at the end. I mean I think depending – if we all had that crystal ball to know when rates will stop and when will start to actually then how long will the pause be before we start to see the expected declines. But I think if that scenario plays out the way you’re saying it, yes, I think it’s reasonable to assume that somewhere in the first half of 2024 is where you see things bottom out.
Feddie Strickland
Understood. And just one last question for me, kind of on that same discussion point as we potentially near the end of the hiking cycle. Have you considered restructuring the securities portfolio for additional interest income and potentially taking into some unrealized losses, I guess, realizing them? And can you remind us the duration of the securities portfolio today?
Mark McCollom
Yes. Yes. So we have looked at those and haven’t found one that was compelling enough to actually execute on. But I mean, I mean, we consider those kind of transactions. We’ve certainly seen other – some other institutions do it. For us, the total duration of the portfolios between – it’s around 5.5 to 6 years. We’re a little bit longer there because we have so much commercial loans that are short. So from – just an interest rate risk perspective, we’ve taken a little bit more duration in the investment portfolio to balance out our overall interest rate risk.
Feddie Strickland
Got it. Thanks for taking my questions.
Mark McCollom
You bet. Thanks.
Operator
[Operator Instructions] Our next question comes from line of Manuel Navas from D.A. Davidson. Your line is open.
Manuel Navas
Hey. Good morning. Just following up on the securities portfolio. If – how much – given that duration, how much of that AOCI and given if rates stayed, we just had one more hike and rates were that paused, how fast would that AOCI build back by the end of 2024?
Mark McCollom
A lot of that, Manuel, really depends on do you think do rates pause and the curve stays inverted or the rates – I mean, really what happens in kind of that intermediate portion of the curve is going to have the most influence over that AOCI level. But I mean, assuming it stays exactly where it is, if you just look at kind of the – what that total number is today of $320-some-odd million, that would bleed out over that duration and revert back to par.
Manuel Navas
Okay. That’s helpful. Could you remind me on some of the seasonality you see in deposit flows coming into the back half of the year?
Mark McCollom
Yes, sure. Typically, what we see in the third quarter, that’s our high watermark because of our municipal book. And if we look back over the last five years, we’ve typically seen between a $300 million and a $500 million increase in the third quarter. I would expect this year for that to be at the lower end of that range versus the higher end of that range. And then we typically see from then the third quarter to the fourth quarter, most of that money flow out. We typically see the same kind of numbers between $275 million and call it, $350 million of outflows of what we’ve experienced.
Manuel Navas
And look – you’re having success in growing number of accounts. Have you kind of looked at where flows have gone? And you probably – are you seeing just a lot of net increases and you’re really not seeing any one exit, it’s just more people using their funds? Or do you feel confident that you’re deposit flows are staying and not necessarily exiting the bank?
Curtis Myers
Well, I mean, we’re growing net new accounts. I mean, we have flows and accounts that close or really the average balance comes down. So what we’re seeing more is the impact of average balance as customers migrate internally to higher-yielding products. We see some outflows, and we are aggressive in all of our markets to grow new households and bring new deposits into the organization.
We have a very low average account balance, it’s small business and consumer, and we’re consistently adding accounts but fighting those headwinds of average balance declines then really aggressive pricing strategies in the market that we won’t follow, we do have some attrition based on that. And that’s why we’re focused on the net growth in accounts because over time, that’s what we really need to be winning.
Manuel Navas
And just a follow-up on loan growth and pricing. Are you seeing – how fast do you see demand come down? And you’re being more selective on pricing and kind of pricing up? Is it – are you seeing uptake – you’re getting the growth you want to see on that commercial side at the pricing you want?
Curtis Myers
Where we’re seeing the biggest impact would be residential mortgage. I mean it’s just much more of a rate-sensitive market. So as you adjust those, that’s where we would see growth moderating the most based on actions we took in the first and second quarter. There’s a long pull-through rate until those actually hit the balance sheet. So that’s where you’ll see the most volatility from first half to second half in loan growth.
On commercial loan growth, we think we can continue to generate steady organic originations even at higher yields as we continue to support customers, continue to support all segments within the marketplace if we think we can continue to generate steady reasonable organic growth going forward in commercial.
Manuel Navas
And just a follow-up on your comment that the loan beta is around 46%. Do you see that staying constant with each rate hike or you actually see that creeping up towards like the 50% level as old loans re-price higher?
Mark McCollom
Yes, exactly. We would expect to see that creep up a little bit higher, and that was the point of my earlier comment that by end of the cycle, why we still expect to see that loan beta higher than the deposit beta.
Manuel Navas
I appreciate it. Thank you guys.
Mark McCollom
You bet.
Curtis Myers
You bet.
Operator
[Operator Instructions] Our next question will come from the line of Matthew Breese from Stephens. Your line is open.
Matthew Breese
Hey. Good morning.
Curtis Myers
Hey, Matt. Good morning.
Matthew Breese
Just curious, on the margin, could you give me some idea for how the margin progressed throughout the quarter? And for the end of June or for the month of June, how does that compare to the full quarter?
Mark McCollom
Yes. So on the full quarter average, we went from 3.53% in the first quarter to 3.40% in the second quarter. As I noted earlier, we saw a 20 basis point increase in our cost of deposits in the month of April. Some of that was really just kind of full quarter impact of some of the broker deposits that we put on in the first quarter. So then we saw in the months of May and June, we saw that cost of deposits increased only 12 basis points and 8 basis points. So our progression on margin then was that we ended the month of June at 3.40%, which was the average for the quarter as well. So we did not finish the month of June lower than the average for the quarter.
Matthew Breese
Understood. Okay. And then maybe – maybe thinking about incremental loan yields today in the low to mid-7% range. There’s one more Fed hike it appears to be. Beyond that last Fed hike, how should we be thinking about the quarterly increase in loan yields in a pause scenario versus what we’ve seen over the past handful of quarters?
Mark McCollom
Yes. Can you just repeat that again? I just want to make sure I got it right.
Matthew Breese
Yes. So once the Fed is done in the ensuing quarters, how should we be thinking about the ramp in average loan yields? To what extent will they continue to go higher? What’s the mix?
Mark McCollom
Yes. We have – as we look to loans that mature and come off. I mean, we are still seeing – while that’s starting to narrow a little bit, we still see new loans reprice higher for the past several quarters on both the consumer side and the commercial side.
Matthew Breese
Okay. I think going back to the flat NIM end of June at 3.40%. Just thinking about the NII guide for the year, it implies that there’s a ramp down in quarterly NII towards, call it, $200 million to $205 million. Where do you see that bottoming? When do you see that bottoming? And do you think you can hold $200 million in NII per quarter through the end of the year, maybe even in the beginning of 2024?
Mark McCollom
Yes. Really, I feel like such a broken record on this, Matt. It really comes back to where that non-interest bearing percentage ultimately ends up. And so we feel comfortable with the guide that we’re giving for the balance of the year. We’re going to be tracking that really closely here over the third quarter and then be able to kind of revise again for the final quarter of the year, and then we’re going to track the fourth quarter really closely to be able to give our guidance for 2024.
But it appears from the runoff, which was over $1.3 billion – $1.2 billion in non-interest bearing declines in the first half of the year, it appears that, that’s starting to slow, but does that slow to a nominal number by the end of the year or there’s going to be some trickle into next year remains to be seen. The other factor in your question is, does the Fed truly pause after one or two more rate increases and then how long is the pause until we start to see the rate declines.
Matthew Breese
Okay. Switching to commercial swap fees, very strong this quarter, as strong as we’ve seen in some time. One, how sustainable is that? And two, what caused the ramp in commercial swap fees, just curious what was behind it?
Curtis Myers
Yes, Matt, they’re predominantly tied to originations, and they really depend on the mix of originations when you get some larger C&I loans or CRE loans, they typically are swap and they really drive the number. So that was timing to really tied to originations in the second quarter. So we do see that moderating, but we feel we can have that land in more historical levels.
So we probably will see that come off linked quarter, but we still have a good pipeline and would expect good performance, maybe not great performance in the third, fourth quarter. For the full year, we’re expecting to hit our targets and have that be a meaningful line item for us.
Matthew Breese
Okay. Bigger picture, not that it applies to you, but I just wanted your thoughts on it. In late June, there was joint interagency guidance from the FDIC, the Fed, the OCC on prudent commercial real estate loan accommodations and workouts. And I guess I wanted your perspective on how this plays out from a practical standpoint? What does it look like in terms of how you help customers? What are the expected tools that you can use? And how are these accommodations and workouts be disclosed if and when they occur.
Curtis Myers
Yes. I think there’s really a lot more to learn there on what we could do that would be different than historical standards. I mean we work with borrowers when the borrowers work with us over time. And we try to bridge to the best individual loan resolution for the bank and the customer. So we don’t really anticipate that, that would change our workout strategy or customer strategy. But if there are new tools or new things that we can look at it based on regulatory standards, we’ll certainly look at that and see how it impacts our strategy.
Matthew Breese
Do you expect in those cases where you do help somebody out beyond kind of what’s allowable by the market that these loans will be disclosed?
Curtis Myers
We certainly will disclose them if we have to. Again, as these new rules would be developed or any changes would be developed how we – how that would impact disclosures of accommodations. You go back to during the COVID pandemic response where we are granted the TDR changes and the ability to due deferrals. I think that had a really, really positive effect overall on the marketplace, and it was a regulatory allowance that made sense. We’ll see how these rules play out. But in that event, we were very transparent and disclose exactly what deferrals we had done, how we’re thinking about that. As these rules would play out, we would do the same thing.
Matthew Breese
Okay. Last one for me, just in terms of M&A, obviously, multiples across the industry are depressed, but just wanted to get a sense for – if there are any conversations that are ongoing, whether or not conversation levels have increased and how you think about M&A in this type of environment? That’s all I had. Thank you.
Curtis Myers
Yes, Matt. And so we have M&A opportunities that we’re always looking at. So we do think there will be opportunities for us in the marketplace. There are certainly headwinds right now based on stock price based on the marks that we would need to take on loan book and investment book to make those happen.
I guess where we are right now is as the market stabilize, we would certainly engage in those discussions. And we want to make sure we’re positioned to take advantage of opportunities that come up in this more challenging time. We would, as you know, be very prudent and thorough on our credit book review in this environment and just the overall analysis of a deal. But we will – we feel we will have opportunities and we’re working hard to make sure we’re positioned to take advantage of any of those opportunities that make sense for us.
Operator
Thank you. [Operator Instructions] All right. It looks like there’s no more questions in the queue. I’d like to turn the call back over to Curt Myers for closing remarks.
Curtis Myers
Well, thank you again for joining us today. We hope you’ll be able to be with us when we discuss third quarter results in October. Thanks, everyone.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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