F.N.B. Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2025

Key Takeaways

  • Positive Sentiment: Record quarter: EPS grew 14% to $0.41 and reported net income was $150M on record revenue of $457M, with operating pre-provision net revenue up 18% and an efficiency ratio of ~52%.
  • Positive Sentiment: Fee income and capital strength: Non-interest income hit a record $98.2M led by capital markets and mortgage banking, while CET1 reached a record 11% and tangible common equity 8.7%, enabling $162M returned to shareholders YTD.
  • Positive Sentiment: Strong deposit and loan trends: Deposits grew an annualized 7% linked quarter (non-interest-bearing 26% of deposits) and period-end loans rose ~3% annualized, with net interest margin expanding 6 bps sequentially.
  • Positive Sentiment: Stable credit and lower CRE concentration: Asset quality remained strong (delinquencies 0.65%, NPLs 0.37%, NCOs 0.22%) and non-owner CRE exposure fell another $226M to 214% of capital.
  • Positive Sentiment: Raised guidance and strategic initiatives: Full-year net interest income guidance was increased to $1.39–1.405B, non-interest income guide nudged up, provision range tightened, and management highlighted continued buybacks/dividend flexibility plus investments in branches and AI-driven capabilities.
AI Generated. May Contain Errors.
Earnings Conference Call
F.N.B. Q3 2025
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good day, and welcome to the FNB Third Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I'd now like to turn the conference over to Lisa Haidoo, Manager of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to our earnings call. This conference call of FMB and the reports it files with the Securities and Exchange Commission often contain forward looking statements and non GAAP financial measures. Non GAAP financial measures should be viewed in addition to and not in the alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non GAAP operating measures to the most directly comparable GAAP 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.

Speaker 1

A replay of this call will be available until Friday, October 24, 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 Silly, Chairman, President and CEO.

Speaker 2

Thank you, and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer and Gary Guerreri, our Chief Credit Officer. FMB's third quarter earnings per share were 14% linked quarter to a record $0.41 and reported net income available to common shareholders increased to 150,000,000 Operating pre provision net revenue increased 18% from the year ago quarter contributing to positive operating leverage and a peer leading efficiency ratio at 52%. FMB produced another quarter of record revenue totaling $457,000,000 with strong contributions from fee based businesses, most notably in capital markets and mortgage banking, driving total noninterest income to a record $98,200,000 F and B's capital position has reached record levels with tangible common equity at 8.7% and CET1 at 11%. Our growing capital base provided our company with flexibility to return $162,000,000 to shareholders year to date through our active share repurchase program and quarterly dividends.

Speaker 2

The company's profitable quarter resulted in a return on average tangible common equity of 15% and tangible book value per share growth of 11% to $11.48 Period end loans increased 3% on an annualized linked quarter basis, with growth led by equipment finance, consumer lending and seasonal residential mortgage production. Commercial and industrial loans grew 2% annualized linked quarter, impacted by lower line utilization and higher than normal attrition, driven by outsized customer M and A activity. Equipment Finance had a strong quarter with 21 annualized loan growth, reflecting activity across our footprint, likely driven by fiscal policy. We continue to maintain our strict credit discipline with a primary focus on traditional C and I lending. We are not in the business of lending to private capital providers, particularly entities that engage in direct consumer and small business lending.

Speaker 2

As we've indicated on prior calls, two areas of focus that position FMB for future growth are continuing to grow low cost deposits and reducing our CRE concentration. This quarter, we made good progress on both fronts with the loan to deposit ratio ending the quarter at 90.9% and our CRE concentration improving to 214%. Our business model and its emphasis on a diverse and attractive footprint is contributing factor to growing deposits at a favorable level. Annualized linked quarter deposit growth of 7% outpaced the industry and reflected continued commercial client acquisition. The FDIC deposit market share data released in September revealed that FNB grew in nearly 75% of the MSAs we operate in.

Speaker 2

We now rank in the top five in nearly 50% of our MSAs and in the top three market share in nearly 30%. Non interest bearing deposits comprised 26% of total deposits, stable to the prior quarter with favorable total deposit costs of 1.93% at quarter end. Our strategy has been to price our deposits competitively to support our client base while protecting our net interest margin by leveraging our digital capabilities and data analytics. We have successfully executed on broadening our household penetration and becoming the primary bank for new and existing clients through our streamlined digital customer experience in our proprietary eStore and common application. Since our in branch common app pilot concluded in May 2025, the percentage of applications originated through the common app has nearly tripled.

Speaker 2

Our data analytics team now minds the data and leverages AI to provide our customer facing team with quality leads to accelerate sales and grow revenue. We have been able to gain insight on our customers' preferences and competitor pricing from data points housed in our enterprise data warehouse system and through external data aggregation. This allows us to strategically price our deposits and analyze the relationship holistically. Implementing this pricing approach contributed to our net interest margin expanding six basis points linked quarter. Our newly formed AI and innovation team is actively reviewing and prioritizing high impact use cases from across the organization.

Speaker 2

I am energized by the transformative potential of AI to elevate operational efficiency, accelerate revenue growth and deepen client engagement. As we grow our AI footprint, we remain committed to strong risk management frameworks and controls, ensuring our innovation is both responsible and sustainable. With that, I would now like to turn the call over to Gary to discuss the strong credit results for the quarter. Gary?

Speaker 3

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Total delinquency ended the quarter at 65 basis points, up three bps from the prior quarter with NPLs and OREO up three bps remaining at a solid 37 basis points. Net charge offs totaled 22 basis points, bringing the year to date results to 21 bps, reflecting good performance despite the continuation of a somewhat volatile economic environment. Criticized loans were down 7.3% or $113,000,000 on a linked quarter basis with decreases observed throughout all of the commercial segments.

Speaker 3

We were pleased with the stability and improvements we saw during the quarter and were successful in removing some risk from the loan portfolio. Total funded provision expense for the quarter stood at $24,900,000 supporting loan growth and charge offs. Our ending funded reserve stands at $437,000,000 an increase of $5,200,000 ending at 1.25%, unchanged from the prior quarter. When including acquired unamortized loan discounts, our reserve stands at 1.32% and our NPL coverage position remains strong at three sixty eight percent inclusive of the discounts. Regarding tariffs, we continue to monitor line utilization and industry concentrations, especially customers with a higher potential impact over the longer term.

Speaker 3

Since Q1, we have not seen any material impacts on the loan portfolio and have in fact experienced positive as I mentioned earlier. Also of note, our overall C and I line utilization was down again in the quarter, including sectors that could potentially be impacted by higher tariffs remaining at stable levels. The government shutdown remains a fluid situation. We are monitoring the portfolios closely and are having discussions with our customers that are potentially impacted to support them in what should be a temporary event. Each quarter, we continue to run allowed sensitivities and a full portfolio of stress test.

Speaker 3

Our stress test results were stable with our current ACL more than covering projected charge offs in a severe economic downturn. Regarding the non owner CRE portfolio, credit metrics also improved contributing to the criticized decline I mentioned earlier with delinquency and NPLs at 53 basis and 50 basis points respectively. This reflects an improvement from 64 bps and 62 bps at the prior quarter end. We continue to aggressively manage this portfolio as we have throughout this interest rate cycle with a non owner exposure declining by another $226,000,000 in the quarter, bringing the year to date decline to $646,000,000 ending at 214% of capital. In closing, we continue to be pleased with the performance of our loan portfolio.

Speaker 3

We look forward to increasing levels of activity with the fiscal policies that have been enacted, which are already driving our equipment finance portfolio growth. As uncertainty eases, we expect broad based growth in a potentially more robust and business friendly environment. Our consistent credit results through many cycles uncertain times continue to be driven by our credit risk appetite and credit selection, our robust concentration risk management framework and our three sixty degree view of our customer activity and performance. As Vince referenced earlier, our credit philosophy continues to be focused on core C and I lending activity, which has and will continue to drive our growth into the future. I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.

Speaker 4

Thanks, Gary, and good morning. Today, I will review the third quarter's financial results and walk through our updated full year guidance. Third quarter operating net income totaled $147,700,000 or $0.41 per share. Total revenues were a quarterly record at $457,000,000 with both net interest and non interest income exceeding the high end of our prior quarterly guidance ranges. As a result, third quarter operating pre provision net revenues grew 18.3% in the year ago period.

Speaker 4

Third quarter average loans and leases totaled $34,800,000,000 a 3.6% annualized linked quarter increase. Average consumer loans increased $431,000,000 on strong residential mortgage and home equity lending growth as seasonality and a drop in interest rates provided a favorable environment for consumer lending. Average commercial balances declined $119,000,000 linked quarter due primarily to a planned reduction in commercial real estate balances, offset by growth in C and I. Average deposits totaled $37,900,000,000 a strong 8.2% annualized linked quarter increase, reflecting organic growth in new and existing customer relationships. Spot non interest bearing demand deposits grew 1% linked quarter and were stable at 26% of total deposits.

Speaker 4

The loan to deposit ratio declined nearly 1% in the second quarter level percent. The cumulative total deposit beta since the interest rate cuts began in September was 24% at quarter end, reflecting the timing of the most recent Fed cut late in the third quarter. Record net interest income of $359,300,000 grew 3.5% from the prior quarter and over 11% from the year ago period, attributable in part to our diligent management of deposit costs. The third quarter's net interest margin of 3.25% was up six basis points sequentially and 17 basis points from last year's third quarter. Earning asset yields increased three basis points linked quarter to 5.36%, driven by higher yields on the investment securities portfolio, with reinvestment rates on securities remaining well above the average portfolio rate and higher yields on new fixed rate loans compared to maturing loans.

Speaker 4

The average loan yield held steady sequentially even with lower mortgage rates and the Fed cut late in the quarter. On the funding side, the cost of total deposits and borrowings was down three basis points linked quarter as a result of a seven basis point decline in the cost of borrowings and the funding mix shift towards deposits. Average borrowings were down $424,000,000 linked quarter, primarily due to the $350,000,000 of 5.15% senior notes that matured in August 2025 and the growth recorded in deposits. Non interest income totaled a record $98,200,000 up 9.5% the year ago period. Capital markets income grew 27% on a record debt capital markets and international banking income as well as contributions from customer swap activity, syndications, public finance and advisory services.

Speaker 4

Wealth management revenues increased 8% year over year on solid trust income and double digit growth securities commissions and fees. Mortgage banking income increased $3,600,000 from last year due to strong sold loan volumes, net positive fair value adjustments from pipeline hedging activity and a $2,800,000 MSR impairment in the third quarter of twenty twenty four. Other non interest income increased $5,300,000 primarily due to a $5,400,000 recovery on an asset previously written off through purchase accounting as part of a 2017 acquisition. Operating non interest expense totaled $245,800,000 up 5% from the 2024. Salaries and employee benefits increased $5,500,000 or 4.4%, primarily reflecting strategic hiring, continued investments in our risk management infrastructure and higher production related compensation.

Speaker 4

Outside services increased $1,700,000 due to higher volume related technology and third party costs. Other non interest expense increased $3,700,000 primarily reflecting our mortgage down payment assistance program. Year over year operating revenue growth of 10.7% was more than twice the five percent increase in operating expenses. As a result, the efficiency ratio reflected strong improvement and declined nearly two eighty basis points from the third quarter of last year to 52.4%. We expect continued strength in operating leverage performance in the fourth quarter and positive operating leverage for the full year of 2025.

Speaker 4

We are in the process of developing our annual cost savings target for 2026 to maintain our positive operating leverage momentum moving forward by renegotiating vendor relationships and leveraging investments in AI, data science and machine learning. FNB continues to actively manage our capital position for ample flexibility to support balance sheet growth and optimize shareholder returns while appropriately managing risk. Our financial performance and capital management strategies resulted in our CET1 ratio reaching 11% and our TCE ratio reaching 8.7%, both record levels. Tangible book value was $11.48 per share at quarter end, an increase of $1.15 or 11.1% compared to last year. Let's now look at updated guidance for the full year of 2025.

Speaker 4

All guidance is based on current expectations while remaining cognizant of operating in an uncertain economic environment. We are maintaining our balance sheet guidance for spot balances, projecting period end loans and deposits to grow mid single digits on a full year basis as we increase our market share across our diverse geographic footprint. For loans, we expect to be towards the lower end of the mid single digit guide, given continued expectations for secondary market activity and our continued active management of CRE exposures. We are raising our 2025 net interest income guidance for the second consecutive quarter to incorporate the strong performance in the third quarter and our fourth quarter outlook. Our revised full year net interest income guidance range is 1,390,000,000.00 to $1,405,000,000 This guidance includes an expectation for a 25 basis point rate cut in October compared to our previous expectation for a cut in December.

Speaker 4

The noninterest income full year guidance range has been revised to $365,000,000 to $370,000,000 with fourth quarter levels expected to approximate 90,000,075 million to $985,000,000 The revised full year provision guidance range of 85,000,000 to $95,000,000 reflects a $5,000,000 decrease on the high end given our year to date performance and strong asset quality metrics. As always, provision will be dependent on net loan growth and charge off activity, and we continue to monitor risks posed by the current economic environment. The full year effective tax rate should be between 2122%, which does not assume any investment tax credit activity that may occur. Lastly, we also remain opportunistic and disciplined in our approach to buybacks, taking advantage of attractive valuation levels. With that, I will turn

Speaker 2

the call back to Vince. Thanks, Vince. Last month, we announced plans to further deploy our organic growth strategy by adding 30 new branches to our network by 02/1930, focused primarily in the high growth Carolina and the Mid Atlantic markets. This expansion will build upon our commitment to client service and will incorporate the modern concept design and latest technology, including our AI driven eStore platform now found in all branches throughout F and B's multistate footprint. We also recently announced a leadership transition for the consumer bank with the hiring of Alfred Cho as Chief Consumer Banking Officer, succeeding Barry Robinson upon his retirement.

Speaker 2

Over his fifteen years at FNB, Barry has been a valued leader during a period of prolific growth for our company and has contributed to the build out of our mortgage banking operations, the rollout of our retail scorecards and the expansion of our distribution network. I am grateful to Barry for his many years of dedicated service and contributions to FMB, and we wish him well in his retirement. Throughout the company, we have continued to attract talent that is aligned with our work leading culture and key strategic initiatives to drive growth and a superior client experience. As we continue to expand the depth of our strategic management team, we recently hired Frank Schiraldi as Director of Corporate Strategy, who joined us with twenty years' experience as a prominent New York based sell side analyst. I welcome Alfred, Frank and other recent strategic hires to Pittsburgh and look forward to working alongside them and our current team to create value for all of our stakeholders.

Speaker 2

F and B remains dedicated to advancing our technology, people and delivery channels to gain scale and operational efficiency. This happens by cultivating meaningful lasting relationships with our clients and communities while simultaneously creating value for our shareholders. With that, I would like to turn the call over to the operator for questions.

Operator

Thank you. We'll now begin the question and answer session. And today's first question comes from Kelly Motta with KBW. Please go ahead.

Speaker 5

Hey, good morning. Thanks for the question. So loan growth has been really solid. I know it's now expected to be sort of on the lower end of the mid single digit. I'm wondering just as a high level, you're one of the few banks who's had some really nice growth in residential mortgage.

Speaker 5

I'm wondering as you mentioned the secondary markets, but I'm wondering as we kind of look ahead here with rates coming down, if you see any sort of headwind from refi risk of your existing book that was put on at higher rates? Thank you.

Speaker 2

Yes. We obviously analyzed the mortgage book. We spent a lot of time looking at it. I think we shifted strategically a while ago in terms of pricing, pricing more aggressively in the conforming space. So we've been moving assets off the balance sheet through origination for a little bit here.

Speaker 2

I would expect that to continue. So we don't our hope is that things shift that we're able to reduce our I don't think the prepayment speeds accelerating in the mortgage book is a negative. Even though there's margin impact, we can redeploy that capital in the commercial book and get deposits and really drive return on equity at the company. Think that's really the strategy in the long run. Most of the production that's coming online for us is they're very wealthy individuals that do jumbo mortgage loans and physicians.

Speaker 2

So we're bringing that on our book, which has tremendously good credit metrics. Maybe they're priced a little thinner because it's a pretty competitive space to begin with. So that's the book I would see maybe turning over a little bit. But again, that's not a terribly negative thing because we're using data analytics on those customers to try to cross sell wealth than other products and services. And we retain the servicing.

Speaker 2

We try to refinance it if we can get it into a conforming product and then retain the servicing and retain the customer over time. So we're not that concerned about that. I think you'll see a shifting in production over time, less consumer centric, more commercially oriented as we move through this choppy period. I'm pretty optimistic in certain sectors. We're a traditional lender.

Speaker 2

We're not doing anything fancy. It's blocking and tackling. It's going after clients in the markets. It's middle market banking. It's the hard stuff.

Speaker 2

That's why we don't produce outsized loan growth. We manage the exposures. We go after the holistic relationship and try to achieve primacy from a depository and treasury management perspective. And you can see it in the results that we have, it's very steady, very stable and there's really strong credit results. We continue to grow demand deposits and deposits overall.

Speaker 2

So it's that's our business. So I don't know, I probably gave you too much information, but I wouldn't get hung up on a particular asset class within our balance sheet because we're focused on all of it from an exposure perspective and there's strategies in place to deal with margin erosion in those portfolios with acceleration of prepayment speeds.

Speaker 5

Great. That is actually that's super helpful color and underscores the strength that you guys have. Maybe since you mentioned the deposit base, maybe I could ask a follow-up on that. I mean deposit growth was really solid and most impressively in demand deposits, non interest bearing. Wondering if you could provide additional color and commentary as to how much of that is coming from your growth market?

Speaker 5

What's the drivers of that? I know you guys have been doing a lot with the eStore and AI and just hoping to get additional color.

Speaker 2

Yes. I think it's across the board. I can't just point to one specific market. We've had great success growing deposits in The Carolinas. I know everybody was a little nervous with us moving in there and said it's highly competitive.

Speaker 2

But we've grown in many, many markets there. A lot of the FDIC data that we refer specifically to those markets in Carolina where we have pretty decent share, we've been able to continue to grow. Pittsburgh, for example, is not a high growth market from a deposit expansion perspective. I think deposits declined in the market overall because there's big balances that shift around with some of the with the custody banks that are located here. There's two large institutional deposit bases that move around here and then P and C is based here.

Speaker 2

So it's kind of hard to say, but we've grown deposits outright here. I think on a relative basis, we've gained share and we've solidly positioned ourselves as the number two retail deposit bank in Pittsburgh. That comes from a whole bunch of things, really solid execution in the field, a technology offering that enables us to compete with large banks, the efficiency contained within the common app to bring customers in quickly and using AI to guide them into depository products right away and let them purchase those products instantly. So a lot of those things come into play. And then on top of all of that, the commercial bankers have really been trained to go after depository only relationships.

Speaker 2

So they do both. And that's the old traditional corporate banker, that's what I was trained to do, go after. I don't just focus on loans, I focused on whatever would drive good results for the balance sheet. And our incentive compensation plans are aligned to produce results because we incent people to originate low cost deposits, not specialty priced. They don't get incentives to bring in high priced deposits.

Speaker 2

It's the solid stuff. So there's a lot of blocking and tackling. It's not there's no silver bullet. It takes a lot of people that are pretty dedicated to making that happen and you have to stay true to the model that you've developed. And we have a very solid growth model, a very good execution in the field and laser focus on doing what we think is best for the shareholders and then incenting people to do that.

Speaker 2

So I know that doesn't give you your answer because you were looking for one specific thing, but I don't think there is. It's a combination of things and we have a very well thought out strategy and it's playing out. It's played out over fifteen years.

Speaker 4

I would add too, if you look at the FDIC market share data, the June to June, I mean, more than doubled the market growth in that period. We grew in 75% of the MSAs that we're in and outperformed the market in 38%. We're now with this growth and performance we have, we're top 5% in nearly 50% of our MSAs and top three in 30%. So it's really kind of across the footprint.

Speaker 5

That's great. Thank you for all the color there. And I will step back and let others ask. Thank you.

Speaker 6

Yes. Thank you. Thanks, Kelly.

Operator

And our next question today comes from Casey Haire at Autonomous. Please go ahead.

Speaker 2

One of our Casey.

Speaker 7

Hey, guys. Vince, a question for you on Slide 15. So the interest bearing deposit beta down to 35% from 40% cumulatively. Just where do you see that going, through the cycle versus the 54% on the upswing?

Speaker 4

Yes. I would say just as a reminder, on the way up, we finished the cycle with a cumulative beta total deposit beta of 39.8%. We outperformed the peers by eight percentage points during that period and meaningfully on the deposit cost 38 basis points. As you would expect, I mean, have a very active process discussing strategy and tactics for bringing rates down and we've started to do that in anticipation of the Fed moving and as we move through this cycle. So, I think we have a very good game plan for how to do that as we move forward.

Speaker 4

Just kind of where we think it might go, I mean, we still think mid-30s terminal down beta seems reasonable for us given our historical performance. As far as year end, I guess it depends on if you get a December cut, right, which obviously a cut late in the quarter just affects the math. If we do get that cut, we're probably in the low 20s or so. Without a December cut, we're kind of in the, I would say, mid-20s just for this year, but kind of mid-30s as we move forward through the cycle.

Speaker 7

Okay. Very good. And then switching to capital management, just to see the CET1 ratio at 11%, I don't think I mean, that's a very big number. And just wanted to get some updated thoughts. You guys do have an attractive stock price.

Speaker 7

You did hit the buyback a little. I think you could have done it more. Just what is the go forward strategy with a very strong capital ratio? And then, Vince, Steve, if you want to tell me to shut up about M and A, please take that opportunity.

Speaker 2

I'm going to preserve the comment. The M and A answer, I'll give that right away. We haven't changed our position. So we're still focused on executing our core model and it's performing very well. So I've said it before, often we'd be opportunistic, but we're focused internally and we need to be focused internally right now.

Speaker 2

I think it's paying off for us. So it's again, opportunistic but not looking to make any huge moves here. Go ahead, Vince.

Speaker 4

Sure. So I would just as far as capital management, like you mentioned, CET1 ratio at a record for us at 11% dividend payout ratio 30% below 30%. We're in a great position to deploy capital as we move forward to optimize shareholder value. And with the risk of the balance sheet combined with as you look ahead in our guidance implies higher earnings, higher capital generation. So we'll be well positioned to support the loan growth.

Speaker 4

We do expect the commercial growth to start to pick up at some point and very well positioned to be able to support that. With where the stock is trading, clearly, valuation is very attractive. So we've been active the last three or four quarters. I would expect us to be active again this quarter as we move forward. And then the dividend is another element.

Speaker 4

I mean, we have regular conversations about dividend. In the past, we had a very elevated payout ratio for a long period of time and carried a higher cash dividend. And with the sub-thirty percent level, I mean, it's definitely something we're actively talking about. We still like the flexibility of the buyback to be able to do that opportunistically with valuation, but dividend is something that we'll continue to talk about.

Speaker 7

Okay, great. And just last one for me. The Investor Day, the upcoming in a couple of weeks here, it's been a while since you guys I think it was 2019. Just you guys are a lot bigger. Just wondering what we can expect.

Speaker 7

Are you guys looking to put out profitability targets? Just a little color on what to expect. Thanks.

Speaker 2

Well, we the purpose of the Investor Day is to show off the tech to introduce you to the team. There's a lot of depth here. I think just having the ability to interact with our digital and AI people and our leadership from the field here in this building, which is brand new, I think it's going to be very impactful for the investors. So you hear a lot of things, people talk about things, but when you come and experience the tangible aspects of the new building and the tech that we have and what we're doing, I think the investors will leave energized. It's very impressive and we wanted to show it off.

Speaker 2

I think that we pulled it off and we got the building built and we got everybody in here. There's 800 people or more working in this building. It's very impressive and the employees are very, very proud of it. And I thought it would be a great opportunity to bring the investors in to show them what we've built for them, right? This is all about us driving business.

Speaker 2

So you'll see when you come through the entire building is designed to entertain clients and to drive business, to grow revenue and earnings. You'll see that when you come. First collaboration. Yes, collaboration. It's an awesome space and should bode well for us as we move into the future.

Speaker 8

Great. Thank you.

Operator

And our next question today comes from Russell Gunther at Stephens. Please go ahead.

Speaker 6

Hi, good morning guys.

Speaker 2

Good morning, Russell.

Speaker 4

Good morning.

Speaker 6

A question on the expense side of things. So nice to see the revenue guide up and expenses flat, that efficiency come down nicely for the quarter and it sounds like guided continue to improve in 4Q. I think for the year, that would still kind of get you toward the higher end of what I believe an internal target has been a 50% to 55%. So is that still the right range to think about for F and B? Do you see you guys making some progress on that ratio going forward?

Speaker 6

I guess, can that back half of the year efficiency sustain in 2026? How can we think about it?

Speaker 2

Yes. Let me can I answer quickly, and then I'll turn it over to you, Fin? We're very cognizant of the expenses. Here at this company, we spend a lot of time focused on it. We actually have a team that reports up through Vince that focuses exclusively on our line expense line items, right?

Speaker 2

We have meetings and talk about it. There's an expense initiative moving into next year that's fairly sizable. Vince mentioned it in his prepared remarks. We have over time taken expense out run rate expense out historically at a pretty healthy clip, 20,000,000 per year for consecutive years. We're planning on reengaging and working to optimize our expense base, right?

Speaker 2

There are certain things that are coming from an efficiency perspective, which is helping us. The common app over time will help us because that's a very, very efficient onboarding process with a lot of digital components to it. So we're already starting to see benefits from an operational perspective by using that those digital work streams and using that software application to originate across a variety of product areas. That's all part of the evolution. And then the other part of this is approaching $50,000,000,000 in assets.

Speaker 2

We have spent a lot of money, okay, invested a lot in our risk infrastructure. So we have automation like you couldn't believe. We're tracking thousands of metrics internally using AI in our data science. We did process mapping across our entire operations area. So we're very, let's say, well prepared to move through a cycle and to benefit from that study from an efficiency perspective.

Speaker 2

But go ahead, Vince. You can answer that.

Speaker 4

Yes. All I would really add to that, I guess, as we plan for 2026, I mean, the focus, we're always a disciplined manager of expenses. So it's the focus isn't just on cost savings, but on efficiency, scalability, kind of leveraging the stuff that Vince is talking about. We'll continue to focus on renegotiating vendor contracts. We're going after that pretty hard.

Speaker 4

It's part of every year, but we're definitely going after that in a meaningful way, kind of streamlining operations through automation. And then we've made investments in people, technology, data science, AI, and we're early stages for some of that. Some of it's been around for longer, but leveraging those investments to just really drive overall profitability.

Speaker 2

Yes. Well, our efficiency ratio is 52%, and we have been making those investments all along. So there's we opened a number of de novo branches over the last few years. We didn't even talk about it. We're better positioned to drive revenue growth today and the expense a vast majority of those expenses are baked into the run rate.

Speaker 2

And we start to see good positive operating leverage as we move forward, right, because we're going to leverage those investments to drive revenue. Go ahead.

Speaker 4

Yes. No, that's what I was going say.

Speaker 2

That's the

Speaker 4

key point is positive operating leverage, right? So we're going to have it for this year and enhance that and grow it even more as we move forward. And to the direct question on the efficiency ratio, there's still room to bring the efficiency ratio down. But it really the key is the overall positive operating leverage combined with the efficiency ratio and then return on tangible common equity driving the profitability.

Speaker 2

And the Board and the management team are laser focused on efficiency, the efficiency ratio, Vince does pretty extensive reporting to the Board about our progress. Operating leverage positive operating leverage is a mandate for operating plans. We're very focused on it. So I would expect it to continue to improve over time.

Speaker 6

That's great color guys. I appreciate both your thoughts there. And then just last one for me, Gary, would you be able to expand upon your comment about having removed some risk from the portfolio in 3Q and maybe size up the exposure you examined as potentially impacted by a government shutdown? Just be helpful to get your thoughts about how you're thinking around that issue.

Speaker 3

Yes, I'll touch on the government shutdown first, Russell. I mean, we're continuing to watch for fallout from the Doge efforts earlier in the year as well as the new government shutdown. At this point, we have seen absolutely nothing from an impact standpoint coming out of either one of those situations. The government shutdown is a fluid situation and it twists and turns every day here. But we're keeping an eye on it.

Speaker 3

We'll continue to keep an eye on those portfolios that are potentially impacted. But as mentioned, nothing at all at this point. In terms of taking the risk off the table comment, essentially, we saw again another good reduction a couple of quarters running now in our criticized asset levels on a net basis down about $113,000,000 A number of those clients were exits from the bank, just normal payouts getting refinanced at other institutions. So we were pleased to see some of that activity with those clients move off the books. We also did see a few upgrades where performance was improved, but that's a chunk of risk that has been taken off of our balance sheet.

Speaker 3

We're pleased with that and continue to manage the portfolios each and every day in that manner. So just kind of normal blocking and tackling from our perspective in what we do here every day.

Speaker 6

Excellent. Thanks, Gary. Thank you all for taking my question.

Speaker 2

Thanks, Thanks, Russ.

Operator

Thank you. And our next question comes from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 9

Some issues here with other banks with the non depository financial institution loans. You talked about it in the comments. That's really not what you guys are doing. But curious if you can provide kind of where you stand end of quarter. You had pretty low concentration relative to other banks at the end of the second quarter just from the Y-nine data, but just curious if that's changed at all in the third quarter.

Speaker 9

And then maybe if you could give a little bit of a breakdown of what those loans are that you have on the balance sheet to give us some comfort around credit? Thanks.

Speaker 3

Yes. The call report, Danny, really casts a pretty large and wide net there. I mean, customers are primarily in the other bucket and it's really diversified across the number of sectors such as wealth management firms, advisory firms, insurance firms, investment companies. And that's primarily the type of companies that we see in that bucket. And when you look at those companies, our lending arrangements are generally for working capital and expansion purposes, direct lending activities.

Speaker 3

And as Vince mentioned earlier, we're not in the business of lending to private capital funds, including private equity and private debt funds. So we're not in that business and that's not where we're going to play. That was a conscious decision that was made a long, long time ago and we're going to continue to manage the book that way. It's not a business we have any interest in.

Speaker 9

Okay. Thanks for those comments, Gary. Then maybe one as

Speaker 2

I said earlier, the bulk of our portfolio, if you look at our portfolio, it's extraordinarily granular and it's small businesses, middle market companies across the seven state footprint. So I don't think from a concentration perspective, you're going to find material concentrations that are unmanageable. And Gary and I, people have come forward with proposals on verticals. We have jointly shut them down, okay, because we have a belief that we need to stay true to focusing on serving the communities that we're in and providing capital to middle market and small businesses. That's our end consumers.

Speaker 2

That's our goal. So I don't know if you want to add our philosophy, it has been.

Speaker 3

No. And you've heard Vince use the word block and tackle a couple of times today. I mean, that's what we do each and every day here at the company. I mean, it's core banking business, core C and I and the communities that we do business with through all segments of the C and I space, small, mid and corporate. And those portfolios, we understand really well how they perform through the cycles.

Speaker 3

We've been through many cycles, this management team, and we've continued to focus on providing stable EPS streams through good and bad environments. And that's what our focus is and is going to continue to be. And we don't have

Speaker 2

verticals here to speak of. I mean, there's a CRE vertical, but that's intentional for credit management. We don't believe in institutionally originating credit. So we're character first. We have to know the customer.

Speaker 2

It's very disciplined across the footprint. I guess that's part of the reason why our performance has been so strong from a credit perspective over long periods of time.

Speaker 9

Great. Very helpful, Vince and Gary. Thank you. Maybe a follow-up just on the fee income side. So in the slide deck, you had a bullet there that said you've had 9% fee income CAGR over the last ten years, which is a certainly nice number.

Speaker 9

You talked a little bit in the conversation about efficiency ratio, about investments that you've been making. Just curious where you see runway for continued growth on the fee income side kind of in the medium term as we look forward here?

Speaker 2

We've made recent investments in our investment banking platform, in public finance. We have an effort. We've expanded our hedging offering and treasury management investments in treasury management. Those are the areas that I see the biggest lift in over time. The pipelines are building in public finance.

Speaker 2

Obviously, we're a very active player in the municipal space on the depository side. And we're not just taking the high yielding deposits, we're actually providing treasury management services and we're their principal bank. So there have been many, many requests over the last few years for us to participate in bond activity. We weren't able to do it, but we built out the platform. So we're that's something we're very excited about.

Speaker 2

We're seeing a lot of activity as we build that out. We now are a viable option for a number of municipalities across our footprint, nonprofits who want to raise capital by issuing bonds. We're there now. That's purely fee based and we're excited about that. We're seeing a pipeline build.

Speaker 2

From an M and A perspective, the people that we brought over are the best you could find. I mean, they're just terrific people. I've known Greg forever. They're going to do a great job and he's got some really great opportunities out there. So we'll get some benefit from that.

Speaker 2

I think as we see the balance sheet has grown. We're a larger organization. We have a deeper penetration in commercial across our footprint. We will see a pickup in syndications activity as we get through this period. So I'm very excited about underwritten traditional bank deals and our ability to be the left lead in those transactions.

Speaker 2

That to me is a game changer for us from a return perspective. And then to add on top of that, we've been a player, we built out our debt capital markets capability with the creation of a broker dealer focused principally on taking bond economics. That's also to help Gary because he's very risk averse. So we play in the investment grade space and the near investment grade space. And those companies that need capital in that space, they don't the spreads are pretty thin.

Speaker 2

There's a lot of unfunded commitments. But when you factor in the bond economics, the returns are north of 15%, right, because you're getting paid to provide capital through the investment banking activity. So I think that's all worked extraordinarily well for us and those will continue to drive. We'll be able to drive fee income. And then from a treasury management perspective, if you look at our treasury management platform, we really have not penetrated the small business segment.

Speaker 2

We have 90,000 to 100,000 small businesses, and we have very low penetration from a merchant and treasury management perspective. And we're using AI and we're building out tools and bundling products right now to go after that segment. So there's a lot of granularity in that segment. We already have the delivery channel through the retail distribution channel and the BDOs that we have. We're layering in additional expertise there.

Speaker 2

I'm very excited about TM as we move forward. And then there's mortgage banking. As we shift into this lower rate environment, another thing that's going to happen is you're to see we're principally a purchase money originator. So historically, we've had much, much higher gain on sale activity in a lower rate environment. So if we can get there with a more normal yield curve and lower rates, we're going to see a significant pickup in fee income from the mortgage bank as well.

Speaker 2

So hopefully, that all lines up and we continue to see an expansion in the noninterest income bucket here, our fee based businesses are poised to grow. And then wealth has grown historically 9% to 10%. So we've only scratched the surface from a wealth perspective because we really haven't fully built out the wealth capabilities across our new geography. So the Mid Atlantic, the DC market still needs we need to hire people and build that out. In The Carolinas, we have people, but there's an opportunity to add more because of the number of opportunities there.

Speaker 2

So I'm very optimistic about our ability to continue to sustain that growth and that fee income bucket and shift our dependence away from just being a spread bank, right? So fee income is north of 20%, right? I mean as non interest income increases, hopefully that fee income outpaces it and we're able to have a larger portion of our revenue contributed by those high returning businesses. Anyway, that's the strategy. I think we're in a really good place and I think we've proven over time that we can execute.

Speaker 2

Yes. And there's a couple

Speaker 4

of key points on that Slide 17, just for reference. We mentioned that we've either started from scratch or expanded from very small 10 business lines that are now multimillion dollar revenue generators. So that diversification is really important. And then the newest stuff that we've added that Vince mentioned, the public finance and the investment banking, it really allows us to serve our clients through their whole life cycle. So this has been a strategic plan that we probably started, I don't know, twelve years ago and adding these other capabilities.

Speaker 4

And now that we have that, really, there's no reason for our clients to go to another bank or have to go to another bank for those services. We can take them all the way through.

Speaker 9

That's great color, guys. Thanks for taking my questions.

Speaker 2

Come to the Investor Day, you'll see more. I'll be there. Okay.

Operator

Thank you. And our next question today comes from David Smith at Truist Securities. Please go ahead.

Speaker 8

Good morning. In the past, you've spoken about your balance sheet being short term asset sensitive, medium term neutral, long term liability sensitive. As we think about the ongoing Fed cut cycle, what should we be on the lookout for in terms of the timing of how your in and out will be reacting right now?

Speaker 4

Yes. I mean, we're essentially neutral right now. I mean, if you we're around 1% or so for 100 basis point move, at June 30, it will probably be a little bit closer to neutral. Historically, we've managed to neutral. That's really what we've managed to.

Speaker 4

As we've gone through these periods, from a profitability standpoint, we're more asset sensitive to kind of benefit from what was happening with the yield curve. So the goal moving forward would really be to stay neutral ish, I would say, and then benefit net interest income by right growing loans and deposits. So, we have a lot of levers. If you look at what's kind of driving the net interest income performance that we've seen this quarter and we've raised the guide again. Mean the new loan originations are coming on 50 basis points above the portfolio rate.

Speaker 4

Cash flows from securities, we're reinvesting 147 basis points above the roll off rate. So that's positive. We have fixed rate loans that are we're originating in total loans we're putting on the books in the $630,000,000 s. So we're originating loans there above the maturing rate. So that's all helping on that side.

Speaker 4

We have the chunk of the loans that are will adjust as SOFR adjusts, and that's kind of part of what we have to manage through. And then on the deposit side, I mean, we've kind of had a dual mandate for our team of growing deposits while really optimizing the cost side. And I think we've done a nice job bringing the cost down. And again, like I commented earlier, we're very active in the tactics and strategies we're deploying to continue to bring those rates down. And with the Fed moving and there's been plenty of cover with other banks too that have been doing the same thing.

Speaker 4

So that we've been able to start to bring rates down on slugs of the deposit portfolio and really have not had any negative customer reaction to that.

Speaker 8

Thank you. And then when you compare the 75% of the markets where you grew your deposit market share to the minority where you didn't, are there any lessons you can learn about what's working in those markets that you can apply to the ones where you're not growing share right now?

Speaker 2

Yes. It's when you look at the FDIC data, the areas that we're not growing share are all over the board. It could be a circumstance where there's a large player that controls a significant portion of the MSA, and we only have one or two branches there. So the growth that we're going to experience isn't going to move the needle there, right? So it depends on the MSA.

Speaker 2

But I think lessons learned. I think we gained more from focusing on the 75% where we grew. I think the 25% when you drill into it, the vast majority of those markets are not markets where we're going to meaningfully change our position without significant investment. So we're focusing on the markets that we're down and we do have a big investment and we need to drill in and figure out why we haven't grown like we have in the markets where we've had achieved success. So there aren't very many of those.

Speaker 2

So that's the good news. And we continuously look at it. And I listened to Alan Mulally's book on tape, and one of the things he did was he sat down with all of his executives and they had to present to him. We do the same exact thing here. I've just told our folks, when you're in a market that's not performing, you have to tell us that you're in a market that's not performing and what you're going to do to fix it.

Speaker 2

So we're very keenly focused on it. We have quarterly and monthly meetings. Daily scorecards. Daily scorecards with automation. And with AI now, it's going to be mind blowing because we have daily scorecards with all these metrics, and we're tracking performance daily.

Speaker 2

So we can layer on top of that an analysis, right, through open AI architecture. So I instead of me calling Alfred and asking him questions about where the retail bank is performing, I could just go in and queue it up myself. So that's going to be a game changer for us and for the leaders in the field who are trying to drive performance.

Speaker 3

And then you can call out.

Speaker 2

Then I can call out. Then I call them and say, what's going on? Barry is gone. I've worn him out after fifteen years. So new person here.

Speaker 2

But that's how it works. Mean that's how you keep driving results.

Speaker 8

Thank you. Yes. Thanks.

Operator

Thank you. And our next question today comes from Brian Martin at Janney. Thank you for calling Janney

Speaker 2

Montgomery Scott. We will be with you shortly. Please continue to

Operator

And it appears their line is on hold. So at this time, I'm going to move on, and I will turn the call over for final remarks to Vincent Delay. Vincent Delay, please go ahead, sir. Yes.

Speaker 2

Thank you. Yes, thank you very much for the questions and giving us an opportunity to present to you. I'm just very pleased with our people. I think we've gone through a number of challenging periods. We've had headwinds like you couldn't believe.

Speaker 2

The performance of this company has been outstanding, and it's outstanding because of the people that work here. So thank you to our employees. Take care everybody.

Operator

Thank you. This concludes today's conference. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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