This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

F.N.B. Corporation
7/18/2025
Good morning, everyone, and welcome to the FMB second quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Lisa Hajdu, Manager of Investor Relations. Ma'am, please go ahead.
Good morning, and welcome to our earnings call. This conference call of FMB Corporation 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 as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials in our earnings release. Please refer to these non-GAAP and forward-looking statements disclosed within our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Friday, July 25th, 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 DeLee, Chairman, President, and CEO.
Thank you, and welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. The second quarter's strong financial performance led to net income available to common shareholders of $130.7 million, or $0.36 per share. FMV achieved link quarter revenue growth of 6.5%, driven by net interest income of $347 million and non-interest income of $91 million, all at record levels. Pre-provision net revenue rose 16% from the prior quarter to $192 million. Because of our sustained strong profitability, we continue to grow capital and have achieved record levels with the CET1 ratio approaching 11%, tangible common equity at 8.5%, and tangible book value per share of $11.14, up 13% year over year. The expansion of our capital base provides flexibility as F&B repurchased 725,000 shares this quarter, at a weighted average price of $13.85. Even with strong growth of capital, we continued to produce solid returns, with return on average tangible common equity at 14%. There was significant margin expansion of 16 basis points linked quarter, resulting in a net interest margin of 3.19%. F&B benefited from continued organic growth throughout our diverse geographic footprint, As spreads on new commercial originations in the second quarter remained relatively stable, an average annualized loan growth totaled 5.3%. Additionally, our aggregate funding costs declined late quarter, while overall deposit balances and other funding sources grew to nearly $600 million. Average total deposits grew to over $37 billion, while we continue to maintain a non-interest-bearing demand deposit level of 26%. Our success in growing deposits and maintaining a favorable deposit mix is a key part of our strategy to grow profitably. The loan-to-deposit ratio ended the quarter at 91.9%, down slightly from the last quarter and down 450 basis points since June 2024. These results were driven by our focus on deepening customer relationships by growing deposits and serving as their primary bank. F&B continues to invest in capabilities to gain market share and further outpace our competitors, particularly around non-interest income and initiatives to diversify our revenue streams. Adding to a series of records, we reported the highest level of non-interest income in the company's history, more than doubling our non-interest income over the last 10 years. Debt, capital markets, and treasury management reached record levels this quarter, and are examples of how FMV has established or significantly expanded eight business lines that are now multimillion-dollar revenue generators. The returns produced are significantly greater than our cost of capital, creating value for our shareholders. We continue to deploy this strategy with additional high-value businesses, including our recent expansion into public finance and corporate investment banking services. We have fulfilled an important milestone in our Clicks to Bricks strategy by integrating the eStore Common application into our in-branch origination platform across our physical delivery channel. This is a major milestone as we've completed our industry-leading online channel approach to onboarding customers with the eStore Common app now aligning originations across online, mobile, and in-branch channels. This aids in quicker processing times for our retail team, stronger risk and fraud controls, and provides a better experience for our clients. Common App submissions increased 108% link quarter, with our full branch network originating applications on this platform starting in June. Through the use of the Common Application, multi-product purchasing is expected to grow as our bankers will now be able to leverage AI to identify the next best products and services tailored for our customers within the same streamlined application process. In addition, business deposit account origination was launched this week, providing small business owners with the opportunity to open a business checking account and apply for a loan product simultaneously with the Common App. The increasing utilization of the Common App provides additional data that our data science team leverages for personalization and better customer experiences. AI, data science, and digital technology play such an integral role in our operations and ongoing success that we've realigned our organizational structure. FMV's digital channels, e-commerce, data science, data management and governance, corporate strategy, and a new vertical of AI and innovation will now report to our Chief Strategy Officer. This organizational structure further expands the utilization of our digital tools, data-driven analysis, predictive modeling, and artificial intelligence to position the company for ongoing success. Our organizational alignment is necessary as we continuously invest in our digital and data capabilities to efficiently scale development, data consumption, business insights, lead generation, and client personalization across F&B's digital ecosystem. From clicks to bricks to our proprietary e-store and opportunity IQ, F&B has been an innovation leader in banking. Our team is working to further expand our use of AI and evaluate other emerging technologies such as stable coin and tokenization. We have created a generative AI task force to monitor our existing applications intake and source new use cases across the enterprise and ensure that we are upholding responsible risk management frameworks and controls around our growing AI usage. This past year, our credit team developed an internal performance monitoring tool that provides a 360-degree view of our commercial clients. By using internal and external data aggregation through our enterprise data warehouses, we are able to evaluate the real-time risk profile of our customers and monitor changes. Our team continues to assess the impact from tariffs and geopolitical events as we monitor our loan portfolio and manage our strong liquidity and capital position. Gary and his team remain steadfast in our consistent underwriting standards and credit management program with aggressive and proactive actions, which led to continued strong credit results for the quarter. I will now pass the call over to Gary to provide further detail on the overall asset quality. Gary?
Thank you, Vance, and good morning, everyone. We ended the quarter with our asset quality metrics showing notable improvement. Total delinquency ended the quarter at 62 basis points, down 13 bps from the prior quarter, with NPLs and Oreo down 14 bps, ending at a very solid 34 basis points. Net charge-offs totaled 25 bps, bringing the year-to-date results to 20 basis points, reflecting good performance despite the somewhat volatile economic environment. Criticized loans were down 4.5% on a linked quarter basis, driven by a 20% decline in classified loans. We were pleased with the improvements we saw across these categories during the quarter. Total funded provision expense for the quarter stood at $24.9 million, supporting loan growth and charge-offs, as we were successful in removing some risk from the loan portfolio. Our ending funded reserve stands at $432 million, an increase of $3.2 million, 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 improved significantly to 393%, inclusive of the discounts. As mentioned in the previous quarter, we continue to closely review the loan portfolio for tariff impacts, which remains a fluid situation. This includes very granular monitoring of line utilization and industry concentrations by portfolio and country, which we highlighted during the Q1 survey. Of note, our CNI line utilization was down in the quarter, as we are not experiencing significant tariff-related draw activity. Each quarter, we continued to run allowance sensitivities and a full portfolio stress test. The stress test results reflected further improvement with our current ACL more than covering our projected charge-offs in a severe economic downturn. Regarding the non-owner CRE portfolio, Credit metrics also improved, contributing to the decline in rated credits that I mentioned earlier, with delinquency and NPLs at 64 and 62 basis points, respectively. This reflects an improvement from 82 and 77 BIPs 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 $137 million in the quarter, bringing the year-to-date decline to $420 million, ending at 223% of capital. In closing, our active credit risk management further strengthened the position of our portfolio, as shown in this quarter's results. I would like to thank our banking teams for managing risk in their portfolios throughout a challenging economic environment. With more clarity now around fiscal policy and a somewhat stabilizing economy, we look forward to increasing opportunities to achieve prudent loan growth through the remainder of the year. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Thanks, Gary, and good morning. Today I will review the second quarter's financial results and walk through our third quarter and full-year guidance. Second quarter operating net income totaled $130.7 million, or $0.36 per share. Total revenues were our quarterly record at $438 million, with both net interest income and non-interest income exceeding the high end of our prior quarterly guidance ranges. As a result, second quarter operating pre-provision net revenues grew 7.9% from the year-ago period. Second quarter average loans and leases totaled $34.5 billion, a 5.3% annualized length quarter increase driven by growth of $365 million in consumer loans and $86 million in commercial loans and leases. Seasonal growth in residential mortgage loans was the primary driver of the consumer loan increase. Owner-occupied commercial real estate advances and commercial leases were the primary growth drivers on the commercial side. While C&I loan production was solid in the second quarter, it was largely offset by decrease in line utilization that Gary mentioned. Looking ahead, we are optimistic for a pickup of commercial loan growth in the second half of 2025, given the strong increase in the short-term commercial loan pipeline we saw during the second quarter. Average deposits totaled $37.1 billion, a 1.7% annualized linked quarter increase, reflecting organic growth in new and existing customer relationships. Average non-interest-bearing demand and interest-bearing demand balances grew linked quarter, while time deposits were relatively stable and savings deposits declined. Spot non-interest-bearing demand deposits were up slightly the last two quarters and and stable at 26% of total deposits, and the loan-to-deposit ratio held steady at 91.9%. The cumulative total deposit beta, since the interest rate cuts began in September of last year, was 28% at quarter end. Net interest income of $347.2 million was more than $12 million above the high end of the quarterly guide and grew nearly 10% from the year-ago period. The quarter's net interest margin of 319 was up 16 basis points sequentially and 10 basis points from last year to the highest level since the fourth quarter of 2023. Earning asset yields increased 10 basis points linked quarter to 533, driven by increased yields for both loans and investment securities. The second quarter average loan origination yield was more than 50 basis points above the total loan portfolio yield, and cash flows from the investment portfolio were reinvested 165 basis points higher than the roll-off rate. Purchase accounting accretion from payoffs of previously acquired loans added two basis points to the margin for the quarter. On the funding side, interest-bearing deposit costs fell 10 basis points linked quarter on lower average rates paid across the deposit franchise. Turning to non-interest income and expense, Non-interest income totaled a record $91 million. Capital markets income grew strongly from the year-ago period due to record debt capital markets income and contributions from international banking and customer swap activity. Wealth management revenues increased 5.2% year-over-year with contributions across the geographic footprint, and other income included higher-than-normal gains from our leasing business. Operating non-interest expense totaled $246.2 million. Salaries and employee benefits increased $8.9 million from the year-ago period, primarily reflecting strategic hiring associated with our efforts to grow market share and continued investments in our risk management infrastructure, as well as higher production-related compensation. Net occupancy and equipment increased 10% year-over-year, largely from technology investments and de novo branch expansion. Other non-interest expense increased $4.3 million from the year-ago period, primarily due to the impact of Community Uplift, our mortgage down payment assistance program that was enhanced and expanded in conjunction with our previously announced settlement agreement with the Department of Justice. The second quarter efficiency ratio remained favorable at 54.8%, as we continue to manage our expense base in a disciplined manner and expect positive operating leverage for the second half and full year of 2025. FMV 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 10.8%, and our TCE ratio reaching 8.5%. Tangible book value was $11.14 per share at quarter end, an increase of $1.26, or 12.8%, compared to last year. Let's now look at guidance for the third quarter and full year of 2025. All guidance is based on current expectations while remaining cognizant of risks in an uncertain economic environment. We are maintaining our balance sheet guidance for spot balances, projecting period-end loans and deposits to gross mid-single digits on a full-year basis as we increase our market share across our diverse geographic footprint. We are raising our 2025 net interest income guidance to incorporate strong performance in the second quarter. Our revised full-year guidance range is $1.37 to $1.39 billion. This guidance includes an expectation for 25 basis point rate cuts in both September and December compared to our previous expectation for cuts in June and September. For the third quarter, we expect to be in the upper half of our $345 million to $355 million guidance range. The non-interest income full-year guidance range has been revised to $355 million to $365 million with third quarter levels expected between $87.5 and $92.5 million, building off the record levels in the second quarter. Full-year guidance for non-interest expense has been revised to $975 million to $985 million, a $10 million increase to the low end, the prior guidance range, with the high end of the range left unchanged. This guide reflects results through the first half of the year and the down payment assistance program costs referenced earlier. Third quarter non-interest expense is expected to be between $240 and $250 million. The revised full year provision guidance range of $85 to $100 million reflects a $5 million decrease on the high end given our first half performance and the improvement in asset quality metrics during the second quarter. As always, provision will be dependent on net loan growth, a charge-off activity, and we continue to monitor risks posed by the current economic environment. Lastly, the full-year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.
FMB consistently achieves great results through superior execution from the hard work and dedication of our employees. We remain keenly focused on driving long-term shareholder value, benefiting from our strong balance sheet with record capital levels and ample liquidity, organic loan and deposit growth across our dynamic geographic footprint, investments in our e-store initiatives, diversified fee income streams, and exceptional credit risk management. Thank you, and we will now open the call up for questions.
Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Daniel Tomeo from Raymond James. Please go ahead with your question.
Thank you. Good morning, guys.
Good morning.
Maybe one for Vince on the margin guidance to start. Looks like the third quarter number, I mean, you had a significantly wider margin in the second quarter, including some benefit from payoffs. But is there an assumption of a little bit of a contraction in the third quarter to get to that guidance you're talking about before it starts to expand again in the fourth quarter? Is that the way to think about it?
No, the margin, I would say, flattish to up a tick as we go through the next two quarters of the year. I mean, just a comment on the results for the second quarter, too. I mean, you saw the dollar increase. That interest income up $23 million. Really a combination of a few things kind of hitting very well. We had growth in earning assets. We had higher yields on earning assets. We had a lower cost of funds as we had some good success bringing down interest-bearing deposit costs during the quarter, as well as benefit from $250 million a quarter in swaps that rolled off. So, You know, that all contributed to that big jump in the margin, moving up 16 basis points. And when you look at the underlying activity, I mean, we were putting new loans on 56 basis points above the portfolio rate. We were reinvesting securities 165 basis points above the roll-off rate, and then the interest-bearing deposit cost that I mentioned. So what's baked into our guidance is kind of flattished up a little bit in net interest income moving forward. And we have a September rate cut and a December rate cut baked in there. So None of us really know what the Fed's going to do, but that's what's baked into our numbers.
Okay. So flat to up on the margin, so probably not much. Average earning asset growth, I suppose, to get to that upper end.
The average earning asset growth will still be there, Danny. I'm sorry. The average earning asset growth in the second half of the year, you know, to get to our mid-single digits. And, you know, we had a really nice move in our short-term pipeline, less than 90 days on the commercial side. If we get a significant pickup in commercial activity, that would even move us above the kind of mid-single-digit level.
Okay. All right. I'll follow up with you offline if I have additional questions on the margin. And then I think you guys kind of addressed what was going to be my second question on the expenses. It sounds like most of the increase in the – in the guide was due to the payment assistance program. Anything else on that? Is there any kind of additional investment that you're looking to make now that you're expecting the NII side to be stronger than three months ago and the credit environment looking to be more clear?
Yeah, I would say, I mean, the down payment assistance program you mentioned, which was $3.1 million for the quarter, probably at that same kind of level as what's baked into the guidance for the rest of the year. And then that should start to come down next year as we've kind of fulfilled the commitments that we had from that settlement. So, you know, the higher commissions are always a swing item. Those are tied to revenue. So, you know, that was high this quarter, a lot of it tied to the mortgage volume. And depending on how well we do on the revenue side, right, you always have that higher commission level that would come through in accordance with that. As far as investments, I mean, you know, we mentioned last quarter about a couple of new things that will drive fee revenue going forward. You know, the commodities hedging that we added, as well as adding public finance and the investment banking firm that joined the team. So those are items that are on board, and we expect to start to contribute revenue in the second half of the year. So those are our newest investments as far as driving fee revenue.
Okay, terrific. Well, thanks for taking my questions.
Thank you. Our next question comes from Russell Gunther from DA Davidson. Please go ahead with your question.
Hey, good morning, guys. Russell Gunther. I wanted to follow up on the margin conversation we just had. What are you guys expecting from a deposit cost perspective? We've heard some kind of increased competition in mid-Atlantic southeast this quarter. I know you guys are trying to continue to match loan growth like you've done successfully. So really just trying to get a sense for how that incremental margin or spread would be with a focus on deposit costs. And then in the past, I think you've shared sort of where that deposit rate ended the quarter, even end of the month NIM. So all of those puts would be helpful.
Yeah, I would say, I mean, the total deposit cost is between now and the end of the year, probably around the level that it's at until you get the Fed move, right? So I think we've reduced rates where it's made sense strategically for us to do that, and we got the benefit of that in the second quarter. I think as far as any meaningful move down going forward, it's really going to be more tied to a Fed cut, and our team has tactics and strategies to kind of in place to how we're going to try to capture as much of that as possible once there is movement down there.
Russell, we feel pretty confident about our ability to gather deposits given the diverse geographic footprint. I had our folks go back and calculate organic growth rates in loans and deposits over the last 15 years. We've averaged 9%, you know, 9%. roughly 9% both loans and deposits in organic growth, not including any acquired loans or deposits. So I think we're pretty well situated and we've invested in the right tools to help our team gather deposits as we move forward. You can see that we had a decent pickup at margin and we still grew our deposits and the demand deposit mix remained at 26%. So Some of the things we've been talking about is playing out in the numbers here, which is very positive for us.
And then our total spot deposit cost at the end of the quarter was 196, kind of all in. Okay. The other thing I should mention, too, is that, Russell, we continue to have a strong pipeline of commercial deposit prospects that we're calling on, and we've had good success bringing in new relationships, which helps to support the non-interest-bearing deposit growth. So there's a pretty strong pipeline that the team's going after as we sit here today.
So our goal internally, whether we achieve it or not, is a question given the competitive environment. But we would like to grow earning assets and get the loan-to-deposit ratio down if we can't continue to drive it down. So it gives us the capacity to scale when things start to really turn. So that's the internal strategy. And, you know, we've got a huge pipeline.
That's all very helpful color, guys. I appreciate it. And then just thinking through, you know, yeah, the NII guide, I hear you on 3Q in the, you know, upper half of that. Just trying to get a sense for the puts and takes that would potentially get you to the high end. It sounds like commercial loans could pick up again. in the absence of any Fed cuts, you know, could we see you guys through the high end? It just seems like you're in a good position relative to Guy and would be helpful to get a sense for, you know, the drivers behind the high end are potentially exceeding.
Yeah, I would say the September Fed cut is a big swing item, right? So if that doesn't happen, you know, we still have a benefit from that. We're still very slightly asset sensitive. I mean, I think we've done a nice job kind of managing the overall balance sheet, interest rate risk position. And, you know, we're at a point now where I think it's like 1%. If you go to a down 100 basis point ramp, it's like 1.2%. So it's really – we're very much approaching kind of neutral there. But if we don't have the September cut, that's additive. That moves you up into that upper end. And then to mix the loans that we put on, obviously, I mean, we've – you know, the second quarter – at a good level of mortgage loans that we put on, which are in the mid to high sixes. So that kind of comes through. And even on the reinvestment side, I mean, you know, we continue to have a billion one cash flows over the next 12 months, you know, rolling off at like 322. So, you know, we're reinvesting in the four and a half, you know, kind of mid to high fours right now. So depending on where we can reinvest, that could be additive too. And then the success we have bringing in non-experient deposits, right? So we mentioned that the pipeline. The better we do there, the better the net interest income and margin is.
Great. All right, guys. That's it for me. Thanks so much for taking my questions.
Thanks, Russell. Thank you.
And our next question comes from Casey Hare from Autonomous Research. Please go ahead with your question.
Great. Thanks. Good morning, everyone. So another margin question for you guys. So I guess number one, like the guide for NII feels a little conservative. Just wondering if you're doing that on purpose. And then two, just color on the loan yields and the bond yields, you know, which were obviously a positive swing factor for you guys in the second quarter. How are they trending or looking ahead?
Casey, what was the first part of your question? Because we had to raise the volume a little bit. It was kind of coming in softly.
I'm sorry, guys. So I was just making a point. The NII guy seems a little bit conservative, given you have, you know, your NIM up and accelerating loan growth. Just wondering if that's on purpose. I mean, a follow-up question on the loaned and bond yields, which were obviously, you know, can that momentum continue going ahead?
You know, I would say, I mean, we're guided to the upper half. And I think, you know, Russell's question kind of went to the, what are the things that moved you into the higher end of that? And just commented on. So I think it's a reasonable, the September cut, who knows what's going to happen. Again, that's probably the biggest swing item. If that doesn't happen, then that's, you know. I think it's too early to really call.
You know, there's still a lot of noise out there. You know, who knows what could happen. There's geopolitical issues. You've got, you know, the interest rate scenario changing. So that's why our guide is what it is. I don't think it's too conservative. I think it's spot on. I don't think that's what you think. Yeah, and there's still a lot of uncertainty. If we had more clarity, Casey, we would be more optimistic. But there's still a lot of fog. But we're guiding to the upper half. Yes, the upper half. I don't know if that helps.
Okay. Yeah, no, no, that's fine. And then just, Vince, a question for you, you know, as we, you know, potentially enter an upcycle in M&A activity here. You guys, you know, in the past have been pretty acquisitive, and that's really the Yadkin deal, obviously, has provided a lot of the growth, organic growth opportunities that you're enjoying today. But it's not – it was not without its, you know – Without a pause, given the tangible book value dilution at that time. Just wondering, how do you guys feel the need to be as aggressive going forward, or do you feel like you can enjoy the current footprint that you have without being very aggressive?
Well, we haven't really done – we've done very little over the last 10 years. That was almost 10 years ago. So, I mean, we're starting to get to the point where – That's ancient history. I mean, it's part of the company. It's contributed nicely. We're very optimistic about the markets we're in. We've made heavy investments in tech that are paying off. You know, I mentioned in the prepared comments our applications as we integrate the eStore Common App into the branch delivery channel. So now in-store originations are happening on that same platform. The reason that's important is because now the client can start an application and online, come into the branch and finish it, right? And that AI oversight that helps those salespeople find opportunities is going to be available to them in the branches. So we can accelerate, you know, additional sales, hopefully, of products and services that meet the needs of the customers that come in. So, you know, we're very excited about that. We're very excited about The markets that we entered and the market share growth that we've experienced over the last few years. And if you go back and look at our company over the last 10 years, we've grown tangible book value. It accelerated in the last five years. I think we're an outlier, one of the better growers of tangible book value. And it's been 12% over the last two years. So, you know, it's high single-digit growth. I think that all keeps me pretty excited and excited. Sure, I mean, I know the landscape changes, the M&A landscape changes all the time, and I think we're in a great position where we sit today. And a 9% organic growth, too. Oh, yeah, the organic growth. By the way, we look back over the last 15 years. Our loan and deposit growth organically was 9%, loan and deposit. That's setting aside the assets that we acquired. So our business model from an origination perspective, organic origination perspective, It works perfectly fine, and there's opportunity for us to continue to grow. And that becomes much more, you know, with the capital that we're accumulating, the deployment of that capital, we're much better off deploying that capital with loan growth because the returns on that capital deployed is much greater. So, you know, we're seeing, you know, high teams to, you know, low 20 returns on that capital that's going towards loan and deposit growth, customer growth. in the commercial segment in particular. So I think that's why, you know, we're pivoting and have pivoted, and I think we have a great franchise, so we're going to leverage that.
Plus the new businesses we've entered that I mentioned earlier.
Yeah, we've also invested. You can go back and look at that chart, too. It's in our deck. I mean, we said a long time ago, 10 years ago, this is really going to help us accelerate our non-interest income. It's more than doubled. So, you know, from $160 million to $350 million last year and growing. And I think there's opportunities for us to continue to grow those businesses. And they were organically grown. We didn't go out other than the small boutique we bought in the investment banking business and having a very, very small mortgage business. The rest of those businesses were all organically grown. well north of our cost of capital and are extremely accretive to the shareholders. So, you know, I think all of that, keeping SYNC focused on that, keeping people focused on the deployment of AI and the tools that we've developed internally, which is why we restructured, realigned the company's organizational structure to focus on it, that excites me more than M&A. So, of course, you know, opportunistically, if something comes up, sure, you know, we might look at it, but it better be pretty high-quality opportunity and provide us with the right tools, like, you know, really good deposit mags or additional appliance that we could use our – deploy our model against.
All I would add, too, is our de novo expansion strategy has been a key part of us expanding. And, you know, we continue to be active into northern Virginia and D.C. and other key markets for us, Charleston. So, you know, that's been kind of quietly – way for us to expand geographically and get more customer opportunity?
Yeah, we've, you know, basically either planned to open or have opened 30 branches in these high-growth areas over the last few years. So some of the expense build is related to the expansion of those de novo operations. But if you look at the markets that we went into, they're performing very well. Charleston's, you know, purely de novo, purely organic, and it's doing extraordinarily well. So that's an example of a market we went into, you know, and, you know, we didn't buy anything. So I think given our model and what we have, what we've invested in, we're positioning the company to grow without, you know, without capital dilutive acquisitions.
Excellent. Yeah, totally agree. Didn't mean to bring up ancient history, but –
It's just good to hear that you guys – Well, you gave me an opportunity, Casey, to lecture, so thank you for letting me go on and on. Thank you. Thanks, guys. Appreciate it.
All right.
Thanks, Casey. We'll see you.
Our next question comes from Timur Brazilia from Wells Fargo. Please go ahead with your question. Hi. Good morning.
Hi there. Good morning to you. I'm hoping to get some color on what you guys think the composition of future loan growth is going to look like. Obviously, it's been led by mortgage more recently, some constructive comments around the C&I pipeline. I guess as commercial loan growth becomes a more meaningful part of the story, does that lessen your appetite on the resi side, or is that additive? And I guess where do you think loan growth could ultimately end up once commercial starts to manifest in a more meaningful capacity?
Yeah, I think our guide kind of directs you to what our expectations are globally. So I don't think we want to shift off of the guide yet, right? We will update you next quarter once we see what's happening. Like I said, it's a very difficult time to forecast because it is so volatile. But I will tell you that the commercial pipeline, as Vince mentioned, you know, the short-term, We have a 90-day pipeline. We have a long-term pipeline. And long-term pipeline is kind of flat, and the 90-day pipeline is up 20%. So we've got a lot of deals moving through our pipeline, you know, headed towards closure in the CNI business. You know, CRE continues to decline. We expect that to continue to come down. I think we're what, Gary? 223% of capital at the moment. Yeah, so, you know, our expectation is that continues to decline over time. You know, the mortgage lending business should start to taper off because we're moving out of the peak of the mortgage lending business. And the commercial business that we have in that short-term pipeline hopefully lands in the next quarter. So the shift will be towards commercial, probably less emphasis on mortgage, right, and then we'll see some growth there. in the balance sheet in the CNI segment, offset by probably continued CRE declines. That's what we're seeing. That's what we're using in our forecast for the model. And, you know, I will tell you, like Vince said, you know, we haven't exclusively been focusing on the asset side of the balance sheet because it's very competitive. We've been focusing our folks on the depository side with, you know, very, very significant treasury managements. opportunities. And, you know, we've landed some huge deals recently. So that strategy seems to be paying off. And as I mentioned earlier, I'd love to see our loan-to-deposit ratio continue to come down with high-quality deposits. And I'm very excited to see the FDIC data when it comes out, because we've been monitoring our performance relative to last year's FDIC data, and we're showing some pretty strong results across the board in market share gains. So I'm going out on a limb here. I don't know what it's going to say. Maybe I'll be wrong. But we've grown ourselves in those markets, in some of those markets, fairly substantially. So we've closed the gap. And, you know, we want to be in the top five share in most of the markets, top ten of the ones that are dominated by some of the largest banks. But, you know, anyway, that's what we're seeing. And I think we're optimistic about deposit growth. We're optimistic about our C&I pipeline in the short run. I think real estate will taper off a little bit on the resi side, and CRE, you know, commercial real estate loans should continue to decline with, you know, institutional takeouts on the construction financing that we've done.
And I would just add, too, that, you know, Vince mentioned earlier the 9% long-term loan growth organically. I mean, while we're guiding it mid-single digits today, we've historically been in that mid to high single digits. And over that period, we were high single digits at 9%. So I think that gives you kind of a range.
Yeah, that's good.
Well said.
Thank you, Vince. To more actually during the quarter, we had really strong gross C&I originations. It was a really solid quarter. As I mentioned in my remarks, the line utilization was down fairly significantly from which reduced that loan growth there. With tax policy now finalized and, you know, the 100% depreciation, you know, clients are very excited about that, and I think there's going to be some heavy investment as we move forward. So, you know, we're very optimistic, you know, when we look at those.
To that point, our equipment finance business has done phenomenally well. It has. It continues to be strong, good credit metrics, good leadership there. even though I tease them all the time, Tim's done a great job. You know, I think they're going to do well in this environment. That's another area that could potentially start to accelerate because of the bonus depreciation.
Great. That's a good color. Thank you. And then one for Gary. You had mentioned that you had some success in reducing some of the risk on the balance sheet this quarter. Can you just maybe provide a little bit of color around that statement?
Yeah, we were successful in resolving and removing a few CRE credits from the balance sheet. We also saw a little improvement from a migration standpoint. But bringing some CRE exposure down, as I mentioned in my remarks earlier, You know, another significant amount there continues to be a strategy that we focus on. And, you know, in terms of the performance of the migration, we were very pleased with, you know, a 20% reduction in classified loans is a significant move in any period, let alone one quarter. And, you know, it's the work that we were doing. doing earlier in the year and late in last year in setting those credits up to be removed from the balance sheet. So, you know, it doesn't happen overnight, I'll tell you. But, you know, we saw some resolutions, and we were really, really pleased with those results.
Great. And then just a final modeling question, the increase in down payment assistant costs this quarter, is that one time in nature? Is that more or less a catch-up, or is that something that sticks around with us as we go forward?
I was saying that we'd be at that same level kind of next quarter, and it would start to kind of come down.
It's not a forever thing. But just so you know, I mean, we made a commitment. We significantly increased the grant money that we were providing on a per-loan basis significantly to jumpstart our lending activity in certain areas where we need loans. And I think that's going to taper off. It's going to be sustained for a little bit, and then it's going to taper off. We're going to revert back to our normal state. We always have a grant program. It's reflected in the run rate, just so you understand that we significantly increased it to search volume in certain markets for fair lending purposes. And, you know, we expect that to taper off because the markets that we were targeting were above, well above the pure median. So, you know, that'll taper off over time. But it is something that we felt was important to call out so you understood what was happening there with the expenses. Got it. Thank you. Sorry.
No, no. Yes.
Thank you. Our next question comes from Kelly Mata from KBW. Please go ahead with your question.
Hey, good morning. Thanks for the question. Maybe turning to the capital base, capital, you know, impressively continues to grow. It's at near record levels, even with the balance sheet growth you're seeing. It sounded like from your commentary M&A is in top of mind, but maybe you could walk us through how you're thinking of managing your capital base. It's a good problem to have excess capital, but how you're thinking of managing that and if there's any target ratios in mind that you're looking, you have in mind while managing the balance sheet. Thank you.
Yeah, I would just say that, you know, when the 10% level we've been talking about was a target, obviously when we were below that, and, you know, now that we're above that, we kind of think about that as like an operating floor, I guess is one way to refer to it. We think, you know, it's very appropriate given the risk profile, the balance sheet, combined with the higher levels of earnings and capital that we're generating and pay ratio in the low 30s. So I think, you know, that it talks about to the overall position of And with the prospect of earnings and internal capital generation moving forward, we have flexibility. You know, we've been active on the share repurchase. We've had some level of that each quarter. We're studying dividend as another way, something that we may do at some point. So we have that opportunity. And then to Vince's point earlier, the first thing we're going to do is fund loan growth. So I think having the capital cushion or buffer that we have to fund the loan growth when it does accelerate I think is important. But we have the flexibility really to generate shareholder value through all those different means.
To sum it all up for you, we're going to do what is absolutely best for the shareholders. We're going to look at the earn back on share repurchases versus, you know, valuation and earn back. We're going to look at, well, everything's on the table, right, because we want to be as efficient as possible.
We feel the shares are still undervalued, so at this point, we'd still be active repurchasing.
Right.
Got it. That's helpful. And then on a high level, you've mentioned at length the de novo expansion you've done in the past couple years, I think 30 branches. As you look at your footprint, can you opine on any areas where you see additional need for expansion or density of the footprint? Just wondering how – how much of a driver that is of the growth outlook over the longer-term horizon. Thank you.
Yeah, no, that's a great question. I think, you know, because we haven't been very vocal about our expansion. But as those locations start to take off, we've also been hiring commercial bankers in these markets, right, Charleston, Richmond. You know, we're looking at Virginia, you know, southern Virginia. There's some very attractive markets there. from both the C&I lending perspective and from a consumer perspective, mortgage banking, consumer depository services, and the like. So, you know, that's where we've been focusing. D.C., we've continued to add in the D.C. market. You know, I think those will be a creative – you know, it takes a while for a de novo branch, right? That's the difference between going with M&A and taking costs out and having contributions. expenditure and then needing to grow the customer base over time, there's a period of time that it takes to get to break even and then get to the returns that you're targeting. And usually that's three to five years to get the maximum return on capital. It's usually five years on these things. Three years. It's three years to break even. To break even. And I think we're going to be seeing that growth. it's going to come through because we have those locations rolled out. So that will be part of our guides as we move forward. But we're doing very well. I mean, we're surprisingly doing well in these markets, even with big competitors. So I think it's been a good strategy, and it's going to pay off for us in the long run.
Awesome. I appreciate all the callers today. Thank you, guys.
Yeah, thank you. Appreciate your time. Thank you.
Our next question comes from Manuel Navis from DA Davidson and Company. Please go ahead with your question.
Hey, good morning. Can you talk about that confidence on deposit growth? Kind of touch on seasonal trends and where the current pipeline is strong. I mean, you talked a little bit about commercial. CD growth was really strong. I'm just wondering how much of that was new versus old customers. Just kind of talk through that confidence on the deposit side.
I mean, it's been a focus here for as long as we've been here, particularly on the non-expiry deposit side. So I think we've had, if you look at our success, you know, last year, remember the deposit ratio got up into the 96s and really had tremendous growth in deposits across the footprint. You know, what we have in the guidance to kind of mid-single digits is very comfortable and The prospect list and pipeline that I commented on on the commercial side, you know, could even bring us above that.
Yeah, if you go to page 13 in the deck that we put out with the deposit composition, we take you all the way back to 2009, which is when you're reading this and when I took over, right, as president of the bank. You know, you could see the difference. I mean, my God, we've done extraordinarily well. There was 9% organic growth. driving this deposit growth. The mix has improved substantially over time. You know, we were able to maintain a fairly high demand deposit level even after the surge, right, that occurred during the pandemic in 21 and 22. And, you know, that's despite almost $38 billion in total deposits. So, you know, again, I'm very optimistic about our ability to grow deposits organically and to do it in a way that that's accretive to earnings. And, you know, we have a very strong, we're a very strong deposit franchise. And I think if you really drill into the banking industry, that's what matters the most. So, you know, your ability to fund yourself, to have granularity, to be able to be the primary bank, all that stuff that we talk about is really important to ensuring that we can continue to sustain that growth in a very profitable way. So I think this kind of sums it up. if you look at it, man, well, that's why I'm optimistic about what's coming. In addition to that, you know, we have retold, we've refocused people, we've changed our comp structure slightly, we've reorganized our, you know, we reorganized our data management and, you know, the digital bank put it up under Chris. So, you know, we've got corporate strategies in alignment with the data consumption area, the data hub, and the digital folks. And we now have an AI czar that we put into effect. So, you know, I mean, we're trying to really use all of those tools to drive the appropriate deposit mix and growth. We've rolled out the e-store common app across all those branches so that we can feed leads to those people in real time. that are actionable, and they can just simply ask the client if they would like an additional product, put it in the cart, and they don't have to do anything additional. You know, that common app basically enables them to do that seamlessly. Removes obstacles.
Yeah.
So, you know, I think all of that, plus our commercial calling effort, beefing up treasury management, you know, we've added significantly to the treasury management area. We have an initiative to upgrade our treasury management product and services. We're in the middle of And, you know, that's happening. Our investment in payments is occurring. And I think that's going to be an area we're going to have to stay keenly focused on, given the changes that are happening, particularly with the Genius Act and, you know, stablecoin and the use of blockchain technology. So, you know, we're focused on it. And I think, you know, we're going to continue to be focused on it, continue to drive deposit growth.
And the de novo strategy obviously feeds that. And, you know, if you look at some of the regions, I mean, year over year, Carolinas are up 17% in deposits, Pittsburgh's up 7%. So, I mean, some of our critical markets really grown quite nicely.
Did I answer your question or did I just go on too long? I don't know.
No, that's all great. Big Carolinas is good to see that regional strength. And That is an area that's attracting more interest. You are winning there. How are you kind of fending off competition?
How are we fending off competition? Was that the question? I'm having trouble hearing.
Yeah, the Carolinas. I'm sorry.
The Carolinas? Yeah. Really good people that work really hard, and they're very focused. You know, we're very focused on it. So we monitor pipelines. I know the team down there monitors, you know, calling activity and Our incentive compensation plans are lined up. You should watch my podcast, Manuel. I talk about it. But, you know, we try to align all of those things so that we can compete more effectively. And I think it works. I think, you know, paying attention and ensuring that we have a compensation aligned with what our expectations are and being able to report information back to the field very quickly about their performance, that all matters. It's not just one thing. It's not just hiring talent or, you know, it's everything. There's a lot that goes into it. So, you know, the banks that are succeeding are doing, you know, the same thing. And the lead generation keeps getting better and better. Yeah, our ability to produce leads and focus people. There's a finite amount of time per person. So, you know, all this technology really helps make people that maybe weren't able to focus as well as others successful. focus on what they need to do to get the job done, to win, to get paid, to benefit the shareholders. So I think that's what's happening. I spend a lot of time with those people and down there, so I can tell you they're very hungry. They're good people. It's a good culture, too. That's the other thing. They want to be there. They want to work. They get awards, and they get recognized for what they're doing, and it keeps driving success.
Shifting over to the asset side, I mean, I appreciate all that commentary. Shifting over to the asset side, the C&I pipeline increase, is there any, like, one single driver that kind of increased optimism this quarter in the pipeline? Is it the tax bill? Gary touched on that.
I would say it briefly. I think we were a little slower, so there's a lot of penned-up demand, and people were waiting to see what happened with tax reform because of the bonus depreciation. So this is my guess. I haven't, this is anecdotal. I haven't gone out and surveyed the clients. I've talked to some of them and they've said the same thing. So all of a sudden that just broke, right? And they're all like, we're doing it now. So there's, you know, we're going to finance this piece of equipment. We're going to expand our facility. You know, we're a little more optimistic about demand in the future. A little bit tamer view on tariffs. People were very concerned. Now they're not as concerned, still concerned, but not as concerned. So You know, they were worried about supply chain disruption and other things. So I think with that out of the way, that's what happened. Everything got pushed forward. The deals that were more likely to get done moved into the 90-day category, and hopefully we can get them closed and impact the C&I, you know, footings.
I appreciate that. Thank you.
Yep, yep, yep. And our next question comes from Brian Martin from Janie Montgomery. Please go ahead with your question.
Hey, good morning, guys.
Brian.
Sorry, I joined here a little bit late. So if you address this, I'll go back and re-listen. But I know you talked a little bit about M&A and less focus there. Just to be clear, just on the M&A, but if you do look at M&A strategically, would it be more today given all the opportunities you have elsewhere? It's just kind of like a fill-in. That's the way to think about how you'd be looking at M&A rather than entrance to a new market? Or is that the wrong way based on kind of less focus on M&A today?
I'm just less focused on M&A. I have been for the last – since we built out the franchise and we spread across that broad geography, we've not been as focused on it. People keep talking about it because early on – by the way, if you look at the total number – if you look at total assets, acquired assets here, since Vince and I started in – what was it, 2009? I think it's like $15 billion. So add 8.7 to 15 – Half the company came from organic growth, okay? So let's stop talking about it. I mean, we have a better opportunity to grow accretive earnings through – I mean, honestly, you have to really take a step back and say, what did they really buy other than Yadkin? Everything is small. So, you know, the reality is we're focused on what I think are the right things to drive organic growth at the company, and we're going to continue to focus on it. I think we have big enough –
Sorry. Yeah, I figured that was a question that was more a fill-in because, like you said, you've got great opportunities with what you've already done and what you're doing, but it's just more clarification. So I'm not – Not suggesting you need to do more. What you've done has been great, but what you've gotten out in front of you now that you've gone to those markets.
Stop pushing M&A on me, okay? Stop pushing it on me.
I'm not pushing it on you. I appreciate the color, Vince. And then how about just on one other question. I know you talked a little bit earlier about M&A, but on the margin, just in terms of, You know, if we see some benefit to the yield curve, kind of a more normalized level, kind of where the margin could trend, you know, over time in the out quarters, maybe as you get into 26 and you get a little bit of benefit there from the curve. You know, I appreciate the comment that it's more static here in the near term, but just longer term, what that could look like. Thank you.
We're going to let our corporate strategy guy answer this question because it's long term. So go ahead, Chris. Go ahead. Okay.
Yeah, no, Brian, I think, you know, there's still a great opportunity for margin in the long term to head higher. I mean, if you just look at the building blocks, you know, clearly loan origination, security yields will continue to move up. If you get more rate cuts, I mean, that's just going to help us generate more deposits and continue to grow that base. So, I mean, you can look at where the pieces can go ultimately and kind of come to your own determination as where that level is. But, you know, this is a better rate environment. that we're potentially heading to than we've had for the last, you know, 15, 20 years in the banking industry. So I think you can kind of think about it that way as well.
Gotcha. Okay. I appreciate taking the questions, guys. Thank you.
Thanks, Brian. Thanks, Brian. Thank you.
And, ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the floor back over to Vince DeLee for any closing remarks.
Okay, thank you very much. Again, I'd like to thank all of our employees for the hard work that they've done. This was a terrific quarter. We've got to keep it going. It's over, so we now need to focus on the next quarter. So everybody, keep doing what you're doing. You're doing a great job. And I want to thank the shareholders for continuing to support us. The best is yet to come, so we're very excited about it. Thank you.
And, ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.