Fnb Corp/Pa/ Q4 FY2025 Earnings Call

Good morning, everyone. And welcome to the FNB Fourth Quarter 2025 Earnings Conference Call. Please also note that 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 FNB Corporation and the reports as filed 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 and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Wednesday, January 28, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Thank you, and welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB reported fourth quarter operating net income available to common shareholders of $182 million or $0.50 per diluted common share. Full year 2025's operating performance reflected several records, including revenue of $1.8 billion, operating net income available to common shareholders of $577 million and operating earnings per diluted common share of $1.59. Full year operating EPS grew 14% year-over-year, driven by the 9% growth in net interest income, significant margin expansion and record noninterest income. We delivered strong profitability and capital metrics with return on average tangible common equity equaling 16% and tangible book value per share of $11.87, an increase of 13% from the year ago quarter. Throughout 2025, we focused on resetting the balance sheet to best position FNB for continued future success, including managing loan concentrations as well as improving the loan-to-deposit ratio to 89.7%. In December, we transferred approximately $200 million of performing residual mortgage loans to held for sale in anticipation of a loan sale to close in the first quarter of 2026. Additionally, as I mentioned on the earnings call a year ago, we have strategically decreased our CRE concentration organically to 197% over the past few years. We are generating enough capital to support growth across our loan portfolio, including CRE and have ample capacity to achieve historical growth rates. Since launching our Clicks-to-Bricks strategy 10 years ago, FNB has introduced innovative solutions, including the eStore and common application that provide an enhanced client experience to deepen relationships and achieve customer primacy. Our comprehensive digital strategy, including our early adoption of AI, remains a driving force behind client acquisition, engagement and convenience. This quarter, we introduced payment switch, which enables customers to easily switch preauthorized payments to their primary checking to FNB through our mobile app. With direct deposit switch and payment switch, we've eliminated two of the most common barriers for customers to move their primary banking relationship to FNB. This is another great example of how FNB is leading the industry with our eStore Clicks-to-Bricks strategy and comprehensive digital capabilities. We are planning on introducing additional unique features over the coming quarters that will benefit our customers and further differentiate us in the marketplace. Concurrently, FNB continues to expand its AI and data analytics usage to drive efficiency and accelerate revenue growth. Through our disciplined expense management culture, FNB has achieved annual cost savings of $10 million to $20 million per year since 2019. Leveraging our investments in technology, AI and data analytics, we expect even higher levels of cost savings in 2026 through increased automation and process improvements. This provides FNB the ability to continue to invest in our revenue-generating businesses and differentiated omnichannel customer experience while continuing to produce meaningful positive operating leverage. With that, I would like to turn the call over to Gary to discuss the strong credit results for the quarter. Gary?

Thank you, Vince. Good morning, everyone. We ended the quarter and year-end with our asset quality metrics remaining at very strong levels. Total delinquency ended the quarter at 71 basis points, up 6 basis points from the prior quarter with NPLs and OREO down 6 basis points, ending at a multiyear low of 31 basis points. Net charge-offs totaled 19 basis points and 20 basis points for the year, showing continued strong performance throughout an uncertain economic environment. We experienced a further decline of $147 million or 10.2% in criticized loans on a linked quarter basis, driven by payoff activity with decreases again observed throughout all of the commercial segments. Once again, we were pleased with the improvements we saw during the quarter and throughout 2025. Total funded provision expense for the quarter stood at $18.7 million, supporting the C&I loan growth and charge-offs. Our ending fund reserve stands at $440 million, an increase of $2.3 million, ending at 1.26%, up 1 basis point from the prior quarter. When including acquired unamortized loan discounts, our reserve stands at 1.32%, and our NPL coverage position remained strong at 438%, 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. Since Q1, we have not seen any material impacts on the loan portfolio and have continued to experience positive credit migration since then. Furthermore, this quarter marked our strongest C&I loan production activity for the year, enabling us to achieve positive net C&I loan growth in the quarter and year-over-year which offset another decrease in line utilization. Regarding the non-owner CRE portfolio, all credit metrics improved quarter-over-quarter and year-over-year with delinquency and NPLs at 34 and 31 basis points, respectively. We have successfully managed the CRE risk and exposure to end the year within our desired range as a percentage of our capital base. We started to see some high-quality opportunities during the quarter. However, exits through ongoing secondary market activity resulted in a reduction in exposure. We continue to enhance our concentration risk and allowance for credit loss frameworks and our proprietary credit management tool that provides a comprehensive view of our customer base. Not standing periodic uncertainty in the economic environment, our core credit philosophy and strong credit risk management practices position us to successfully navigate any potential volatility across the various economic cycles. In summary, we continue to be very pleased with the performance of our loan portfolio and our team's attention to managing risk, which has positioned us well for growth in the year ahead. Building on the strong momentum we saw in the quarter, we continue to focus on core C&I and equipment finance growth with our building pipelines. Additionally, with potential for increases in line utilization, our growth expectations for high-quality CRE and our well-positioned retail franchise, we look forward to achieving our desired levels of balance sheet growth in the year ahead. 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 focus on the fourth quarter's financial results and walk through our guidance for the first quarter and full year of 2026. Fourth quarter operating net income totaled a record $181.8 million or $0.50 per share when excluding a discretionary $20 million charitable contribution to the FNB Foundation, partially offset by a reduction in the estimated FDIC special assessment. Record total revenues of nearly $458 million grew a very strong 12.4% on an operating basis and operating pre-provision net revenue grew 21.5% from the year ago quarter. The fourth quarter's performance also includes investment tax credits of $37.2 million from a renewable energy financing transaction, partially offset by related noncredit valuation impairment of $4.4 million pretax on the financing receivable, which is included in other noninterest expense. FNB's Equipment Finance business originates renewable energy financing transactions as a core element of their business strategy. While we continue to have an active pipeline in the renewable energy sector, certain types of projects are limited by changes in the tax laws. Total assets at year-end 2025 exceeded $50 billion for the first time in company history. Fourth quarter average loans and leases of $35 billion increased $169 million from last quarter or 1.9% annualized. Average consumer loans grew $223 million, primarily due to higher residential mortgage and consumer line of credit balances. Average commercial loans and leases slightly decreased $54 million linked quarter, driven by higher attrition from secondary market activity, lower line utilization and further scheduled reductions in CRE balances. Average commercial and industrial loans increased $81 million and commercial leases increased $26 million, while average commercial real estate loans declined $158 million. CRE exposure has reached our desired concentration range and combined with record capital levels and a sub-90% loan-to-deposit ratio provides FNB a meaningful opportunity to participate in an economic environment with more favorable loan growth prospects. As part of our ongoing balance sheet management strategies, approximately $200 million of performing residential mortgage loans were transferred to held for sale late in the fourth quarter with the actual loan sale expected to close in the first quarter. Residential mortgage loans are expected to roughly approximate the growth in the overall loan portfolio in 2026. Fourth quarter average deposits totaled $38.6 billion, an increase of $740 million or 7.7% linked quarter annualized driven by organic growth in new and existing customer relationships. Average interest-bearing demand balances grew strongly, particularly interest-bearing checking and money market balances. Average noninterest-bearing deposits exceeded $10 billion and were up 4.5% linked quarter annualized. The mix of noninterest-bearing deposits to total deposits on a spot basis remained at 26%. Success of our ongoing balance sheet management strategies and deposit gathering initiatives brought our loan-to-deposit ratio below 90%, a more than 170 basis point improvement from year-end 2024. Fourth quarter net interest income totaled a record $365.4 million, up 1.7% linked quarter and 13.4% above the fourth quarter of 2024. Average earning assets were up $310 million sequentially on higher loan and investment securities balances. The yield on earning assets declined 11 basis points sequentially as variable rate loans were impacted by the 75 basis points of Federal Reserve interest rate cuts since September of 2025, while the yield on the investment securities portfolio only declined slightly. Interest-bearing deposit costs decreased 13 basis points linked quarter to 2.53% and borrowing costs declined 30 basis points to 4.35%. The resulting fourth quarter net interest margin was 3.28%, up 3 basis points linked quarter and up 24 basis points year-over-year. Our total cumulative spot deposit beta since the Fed interest rate cuts began in September of 2024 ended the year at 25%. We continue to strategically lower deposit pricing in step with the downward trend in the Fed funds rate and we expect a relatively stable net interest margin in the first quarter of 2026. Operating noninterest income was $92.3 million, up 8.8% from the year ago period. Wealth Management revenues grew 15% from 2024 levels, driven by securities commissions and fees and growth across the geographic footprint. Service charges increased 4.1% from last year reflecting increased contributions from treasury management activities. Increases in SBA sold loan premiums and other miscellaneous gains drove the strong increase in other income and BOLI income was boosted by higher life insurance claims. Capital markets income included higher swap fees and increased international banking revenue. Despite higher gain on sale and net positive fair value adjustments from hedging activity, mortgage banking income declined on higher MSR amortization and a net MSR fair value recovery in the fourth quarter of 2024. Operating noninterest expense totaled $256.5 million, an $8.3 million or 3.4% increase from the year ago quarter. Salaries and employee benefits expenses were up 4.5% from the year ago quarter, primarily reflecting strategic hiring and higher performance and production-related compensation. Output Services increased 15.3% from last year due to higher volume-related technology and third-party costs and occupancy and equipment increased 7.3%, primarily due to technology-related investments and higher occupancy costs. Other operating noninterest expense decreased $3.3 million and included a financing receivable noncredit impairment of $4.4 million from the tax credit transaction mentioned earlier, which was approximately $6 million lower than the impairment recognized for the fourth quarter 2024 tax credit transaction. The efficiency ratio remained solid at 53.8% for the fourth quarter, 307 basis points better than the fourth quarter of 2024. We continue to manage our expense base in a disciplined manner which is expected to generate significant positive operating leverage in 2026. FNB's capital levels remained at record levels with a CET1 ratio at 11.4% and tangible common equity ratio at 8.9%, providing flexibility to optimally deploy capital to increase shareholder value. On a year-over-year basis, tangible book value per common share increased $1.38 or 13.2% to $11.87, demonstrating our strong profitability levels and commitment to peer-leading internal capital generation. Share repurchases totaled nearly $50 million for the full year of 2025, the highest level since the program originated in 2020. Let's now look at the guidance for the first quarter and full year 2026 starting with the balance sheet. For the full year 2026, period-end loans and deposits are expected to grow mid-single digits versus year-end 2025 as we continue to increase our market share across our diverse geographic footprint. Full year 2026 net interest income is expected to be between $1.495 billion and $1.535 billion with first quarter net interest income expected between $355 million and $365 million. Our guidance assumes 225 basis point rate cuts in April and October. Noninterest income for the year is expected to be between $370 million and $390 million, with the first quarter expected between $90 million and $95 million. Full year guidance for noninterest expense is expected to be between $1 billion and $1.02 billion, representing a 1.5% increase at the midpoint compared with 2025 operating expenses. First quarter noninterest expenses are expected in a range of $255 million to $260 million as compensation expense is seasonally higher in the first quarter due to the timing of normal long-term stock compensation and higher payroll taxes. The 2026 provision expense is expected to be between $85 million and $105 million, dependent on net loan growth and charge-off activity. Lastly, the full year effective tax rate should be between 21% and 22%, which does not include any investment tax credit activity that may occur. With that, I will turn the call back to Vince.

As you've heard in our prepared remarks, we are very pleased with our financial results and achieved a number of records for 2025 including revenue, noninterest income and EPS. Our balance sheet surpassed $50 billion in assets, and we are well positioned to benefit from technology investment and expected growth opportunities. Our performance reflects steadfast execution of our multipronged strategy, diversifying revenue streams, optimizing our balance sheet, deploying capital thoughtfully and serving as the primary bank for our clients, enabled by our technology investments in eStore and omnichannel capabilities. Successful execution of FNB's strategy has led to enhanced profitability and capital accretion, all while achieving some of the highest returns in the industry. Looking ahead to 2026, we are confident in our ability to deliver meaningful loan and deposit growth, margin expansion and further diversification of fee income. Our improved capital levels and double-digit tangible book value growth year-over-year provide strong capital flexibility and position FNB to continue to deliver sustainable long-term value benefiting our customers, employees, communities and shareholders.

Our first question today comes from Daniel Tamayo from Raymond James.

Maybe we can start by discussing fee income. At the Investor Day last quarter, you highlighted the expected growth and the investments made in the fee income businesses focusing on long-term growth opportunities. I'm curious, as you consider the guidance range for 2026, what factors do you believe could help you reach the upper end of that guidance, and how likely do you think that outcome is?

Yes. Would you like to respond, Vince?

Sure. I can jump in and you can add. I think just a couple of things on fee income, right? It again highlights the importance of diversification. So we had all-time highs for 7 of our fee-based businesses for the full year and 4 of them in the fourth quarter alone. When you look at the kind of moving parts that were there, the growth in service charges, insurance and securities commissions and BOLI offset mortgage banking and capital markets being lower than the prior quarter. So the benefit of the diversification comes through. When you look ahead to '26, we're projecting continued solid growth there. The newer businesses that we've talked about starting to contribute at higher levels is definitely baked into the guidance. I think there might be some upside to that. And then strong performance from our kind of core fee-based businesses, wealth, treasury management, capital markets and mortgage. I think there's an opportunity for them to have another strong year as we did in 2025.

The only thing I was going to add, Vince, is that the macroeconomic environment, as we mentioned, when we were all together, Danny, plays in our favor. So the interest rate environment is positive for the mortgage banking business. We sell servicing release gain on sale from the sale of mortgage loans. So that's reflected in the fee income number. More activity in treasury management moving into next year because of what Vince said, with market share gains, expect...

New initiatives there.

And new initiatives there and the build-out of our TM platform. We expect that to continue to grow with contributions from merchant and other areas that relate to treasury management. Derivatives, we would expect, given the interest rate environment from a derivatives perspective to play out in our favor. And then we built out the public finance division in the process of building it out. We're very optimistic about contributions from that business and the debt capital markets arena. So that should play out for us. And then the M&A advisory business is they're seeing a lot of opportunities that we're expecting to translate that into fee income in '26. So there are quite a few drivers, that's why we're fairly confident that we're going to be able to achieve what we've laid out in the guide.

And we did move the first quarter guidance up a bit, Danny, too. The implied guide for the fourth quarter was 88% to 93%, we moved it up to 90% to 95% in a seasonally slower quarter. So I think that's an indication too.

Great, Vince. Maybe a bigger picture question on operating leverage. Just your thoughts around operating leverage in 2026 and what might be potential issues in not getting there or levers to achieve it?

Yes, I would like to mention a couple of things. The PPNR was lower in the fourth quarter compared to the third quarter, and this is easily explainable. We incurred around $12 million in discrete non-recurring expenses in the fourth quarter, such as the solar tax impairment we discussed earlier, higher medical claims that typically arise in the fourth quarter, and our mortgage down payment program, which amounted to just over $3 million. Additionally, we had year-end performance-based accruals and 401(k) contributions, reflecting our strong overall financial performance. In the third quarter, we also experienced a $5.4 million recovery, contributing to the fluctuations between the two quarters. Moving forward into next year, our guidance includes a significant increase in PPNR and operating leverage. As we mentioned at Investor Day, we expect expenses to grow in the low single digits while we continue investing in new initiatives, like the ones Vince highlighted. Therefore, we are quite optimistic about our capacity to substantially enhance our operating leverage by 2026.

We also no longer have the expense associated with heightened standards, as we have completed many of the necessary initiatives from both a personnel and consulting systems perspective. Therefore, we don't anticipate this being a challenge going forward. We have also fulfilled our obligation to fund grants for low-income mortgage loans, which represented a significant expense in 2025, so that will be behind us as well. We are fairly confident in our ability to achieve the results outlined in our guidance. Additionally, we have implemented several expense initiatives that Vince has previously mentioned. This year, we believe we can achieve even greater cost reductions on a run rate basis than we have in the past. Efficiency will be a key focus as we move into next year, and we are leveraging the digital investments we are making by utilizing AI and data analytics to enhance our operations. The deployment of the common application in the retail delivery channel is also expected to improve back-office efficiency through digitized processing. This should benefit us as we head into next year with increased volumes in the consumer segment.

Yes, some of the initiatives baked in from a CapEx standpoint is investing in our data science platform, AI and machine learning data platform with the new leaders that we have on board, investing more to get even more benefit out of those functions there. And that's part of why we were confident with the higher cost savings goal that we have for '26. And if you baked our guidance has the efficiency ratio kind of getting down into the low 50s by the end of the year or second half of the year, I would say.

Our next question comes from Russell Gunther from Stephens.

I wanted to ask on the loan growth outlook for '26 of mid-single digits. First, Vince, I want to make sure I caught you that your expectations for the resi portfolio would be around that sort of mid-single-digit level. And then second, as you discussed at the Investor Day, C&I and CRE are expected to be the loan growth leaders going forward. So if we are thinking about resi in that mid-single digits, is it safe to assume C&I and CRE would outpunch that and maybe just some comments around the drivers of the magnitude within commercial.

If you exclude the large payoffs we experienced, especially in the commercial real estate sector, we had a very strong production quarter. Although this is not evident in the current balance due to those payouts and the quick payoffs, particularly in multifamily with some larger commercial and industrial loans shifting to capital markets instead of bank debt, the underlying production remains robust. The commercial and industrial production was particularly impressive for the fourth quarter. As we head into next year, we are carrying good momentum and have plenty of capacity. We have discussed in our prepared remarks about resetting the balance sheet, positioning our company to grow commercial real estate and commercial and industrial loans more rapidly. Our loan-to-deposit ratio has seen great success in generating deposits. Earlier, I hoped we would approach 88%, and we are currently at 89.7%, which is close. This gives us significant capacity for loan growth in 2026 while managing our margin regarding deposit costs, which are positive indicators. Historically, this company has been able to generate sufficient capital levels to easily support mid- to high single-digit loan growth. From a commercial real estate perspective, we stand out among our peers for having a comparatively low concentration in this area, and we've effectively managed that down to just under 200%.

197%.

197% capital. So this is a reset and that should give you great confidence because now we can move into '26 and be much more aggressive in the CRE space and in the C&I lending space. And we have a much stronger platform from a fee income perspective to support leading those credits. So I think all of that is why we're very optimistic about achieving the guide that we put out there. The other thing I will note is if you look at the H8 data and you exclude some of the payoffs that we've had, we've actually performed significantly better than the banks in total in the last quarter. So again, not looking at the full year because we were being very measured and we were reducing exposures in a bunch of areas that we wanted to reduce exposures in to prepare for '26. But if you strip out some of the payoffs, we were many times greater than the other banks in the industry. So we're optimistic about it. We haven't pulled back in terms of our pursuit of good C&I opportunities. We're not an NBFI. We're not a commercial finance-driven C&I shop. So this is core C&I across our markets where we're taking market share.

The line utilization is very low.

The line utilization remains low, indicating potential for improvement. Overall, I believe we are in a strong position as we head into 2026 to continue driving growth in our loan categories. Regarding mortgages, we have decided to sell some performing mortgage loans, specifically single household mortgage loans, to create capacity for other investments that could yield higher returns. This decision will influence our mortgage business growth, which I anticipate will be more subdued heading into 2026. Additionally, with the changes in rates, we may see improved gain on sale margins, which could enhance our fee income in 2026. Therefore, we expect to move more assets off the balance sheet next year. I hope this clarifies our strategy.

Okay. Great. And then my second question would be capital related. CET1 11.4% not too long ago, that target was 10% to 10.5%. It would be helpful to get a sense for where you would plan to manage that in 2026. And as you grow that CRE where are you willing to flex that concentration level to?

Yes, I would say a few things on that topic, right? Like you mentioned, the 11.4%. It wasn't that long ago that we had a goal of 10% and then 10% was the floor and now we're at 11.4%. Dividend payout for the full year, then you combine that with our expectation for strong internal capital generation based on the guidance that we have. So we're in the best position we've ever been to deploy capital to optimize shareholder value. The organic growth is the first use of that, of course. But like Vince said, we're generating enough capital to really support high single-digit loan growth. So I think that Vince...

To address your question about our capacity to maintain concentration levels, we have assessed that we generate substantial capital. Based on our guidance, we could potentially originate nearly $1 billion in commercial real estate loans without altering the concentration level at this time. I believe that's a significant point, and I apologize for interrupting you.

So there's significant capacity to do business as usual there. And we're going to pick the transactions that we want to bank. But we've got plenty of capacity with the capital generation that the company is achieving.

But if we move slightly above 200%, that's not going to kill us. We're still well below others that we compete against in the marketplace. But our goal is to stay there if we can. Go ahead.

So beyond supporting that balance sheet growth, we still think buybacks are attractive. I mean we did $50 million for the full year. We did $18 million in the fourth quarter. Even at these valuation levels, we still think it's attractive. And for 2026, I would expect we'd be at the same level or higher as far as buyback activity. And then the dividend, we've been having conversations. I mean it's something we discussed regularly, and we'll be discussing with our Board. In the past, we had that elevated payout ratio for such a long period of time. And we like the flexibility of the buybacks. So that will be a component of capital management. But our payout ratio in the 25% level at least creates the ability to increase the dividend at some point if we decide to do that. So it's definitely something that's on the table for us to discuss. There hasn't been a decision or anything, that's a Board decision, but it's something we'll take a hard look at this year. This is a strategic planning cycle for us. So it would be kind of part of our capital management planning as we look ahead.

And the Board is going to look at it through the lens of our shareholders. They want to do what's absolutely best from a capital deployment perspective. That has always been their stated mission. They want to drive returns at the company, drive higher stock price performance. So they're going to look at all of that and look at our relative valuation with buybacks in mind when they make those decisions. So deployment of capital is a focus of the Board will continue to be.

Yes. The last point I would make, too, is just when you look at our financial performance, Alfred always says and it's a good point. We have a 16.3% return on tangible common equity on a TCE ratio that's 8.9%. So that TCE ratio has built significantly from the 4.5% it was when the three of us started in our roles, it's 8.9%. So I think that's important, too. So even with the higher levels of capital, we're generating a top quartile for sure, return on tangible common equity and managing that capital will be key to our performance as we move forward.

Our next question comes from Casey Haire.

I want to discuss the margin. I'm curious about the trend of the interest-bearing deposit beta through 2026 compared to the 25% cycle to date.

Yes. I would say we've still talked and still feel that kind of mid-30s on a terminal beta makes sense to us. By the end of the year, our guidance probably get to about 30% or so, up from the '25. I think our team has done an excellent job managing the deposit rates through this cycle, being very thoughtful and strategic in how we're adjusting rates and which tranches we're adjusting rates at. So there's still opportunity for us from end of the year reference point forward to continue to bring down deposit rates and big slugs of the deposit base. So I would say 30% or so by the end of the year, Casey, and still kind of a mid-30s once this cycle finishes.

Okay. Excellent. And then just a credit question.

Total, too. Sorry, I should comment.

So that's not IBD. That's total deposit.

That's total. Yes, I'm sorry. You're asking interest. That's total.

Got you. All right. On the credit side, does the provision guide assume that the ACL ratio holds at this level to support mid-single-digit growth? And for the charge-off outlook, does that presume we stay at this 20 bps level?

Yes. I think you're spot on, Casey, with your assessment of that, all sounds pretty close to what we're expecting there with the guide.

Okay. Great. And just one more question for me on the capital front. You clearly have strong capital generation, and it's possible that you'll be above 12% CET1 in a year. So on the other hand, since you're well above your floor, are you considering if there's such a thing as too much capital? Or are you content to let the capital accumulate? You have the capacity to be more aggressive and increase the payout ratio, so I'm curious about what might be holding you back.

Nothing is really preventing us. I mean, as I commented on, the dividend will be a discussion with our Board this year as far as potentially increasing the dividend, having buybacks at or higher than the level that we did last year is kind of part of what's baked into our plan. The capital ratio, if you do the math and run it forward, you get around 12% by the end of the year. So some of that at some point, the loan growth activity picks up to get to the high single digits, right? And you want to have the ability to do that. But we're looking at all the pieces of it between funding loan growth as well as the dividend and the buyback.

Yes. We don't want to sit here and keep accumulating capital, Casey. We're focusing on a bunch of avenues to deploy capital to move some returns too. I mean, if we can invest capital in high-returning opportunities, then we're going to have a much higher return on tangible common equity on a slightly lower capital base. But it has to be sustainable. It can't just be a one-time deal where we bought back shares, and then everything rolls back. And we're looking forward and making sure that we're deploying that capital in the most productive ways on a go-forward basis, so we can drive returns.

Yes. And the industry has been moving higher, too. The peers generally have been shifting upwards. So kind of keep one eye on that and then the rest of our eyes on kind of what we're doing.

Yes. I mean, it's kind of tough when you look at the AOCI impairment that occurred a few years ago, and there's accretion going on, Casey. So some of the TBV build is just a reversal of impairments that occurred, and we didn't have that. So when you look at these big outsized numbers and TBV growth, you have to take that into consideration. Ours is core earnings and retained earnings. That's a big difference. So when you're evaluating all these banks, you should be taking that into consideration, I hope. I think you are.

And we've returned $2.2 billion capital since 2009. So I mean it's been an active part of our overall shareholder positioning.

Our next question comes from Kelly Motta from KBW.

So not to beat a dead horse with capital, but just kind of building off of the last couple of questions there. It sounds like you believe your stock is still attractive here. Can you, one, remind us any price sensitivity that you have regarding the buyback, if there's any sort of guiding principles there. And then two, I'd be remiss if not to ask about any updated thoughts on M&A here.

Yes. We believe our stock is worth considerably more than its current trading price. Over the past year or two, it traded at a price-to-earnings discount compared to our peers, which we found perplexing. It's now on par with those peers, but we think it should be valued higher. Thus, we still see value in investing at these elevated levels. There isn't a specific threshold where we would halt our activities; instead, we assess our relative position, current market conditions, and the economy. There is definitely room for us to remain active.

Yes, we are nine years past our last significant merger and acquisition transaction. We completed two very minor bank deals, but we have consistently emphasized our focus on internal capital generation for the past five to six years. Our priority remains on driving returns through organic growth, and we have been successful in this regard. We have invested in technology and have outperformed some of the largest banks in the nation in certain areas of our tech offerings. We will continue this approach. If an opportunity arises, it must align well with our existing strategies and should not dilute what we have built. We maintain a strong deposit mix, with 26% noninterest-bearing deposits, even after a decline following stimulus effects. Our objective is to continue improving this mix without diluting our tangible book value, which we have been focused on growing successfully. If an opportunity arises that can enhance our organic growth rate, we would consider it, but we have significant markets and have grown market share in 75% of the metropolitan statistical areas where we operate. We have demonstrated our ability to compete effectively at our scale. Our efficiency ratio is strong, and I no longer see M&A as a high priority. While this may surprise some, I've held this position for almost 15 years and have engaged in many M&A transactions to reach our current state.

And then leveraging the investments we made that are really early stages of contributing.

Yes. So I guess the answer is we're going to do whatever we think makes the most sense for the shareholders, and we're going to be very cautious as we move forward, just like we have been over the last 5, 6, or 7 years. And if something presents itself that checks all the boxes, sure, we'll look at it. But we're going to continue to stay focused on organic growth, driving organic growth, building out our platform leveraging our retail bank, which is, I think, the 19th, if you look at locations, it's the 19th largest retail bank in the country, right, Alfred, and one of the most efficient if we looked at metrics relative to the largest banks in the country, and we run a very efficient retail bank. So the consumer business for us is a good business. Anyway, that's our take on it. And I appreciate the question.

Got it. I appreciate all the color makes total sense. Maybe 1 follow-up for me just asking the operating leverage kind of in a different way. Clearly, you've set the stage very well for 2026 to drive positive operating leverage ahead. And you noted you anticipate the efficiency ratio getting into the low 50s kind of by the second half of the year. Looking back, you were more a mid- to high 50s efficiency ratio type bank. You've obviously made a lot of investments in tech that you're able to really leverage now. Just wondering, as you kind of think about the longer-term efficiency ratio of the bank, given these significant investments you have made in technology, do you think that low 50s is that lower run rate is sustainable? Any kind of thoughts in either direction here, particularly as de novo expansion remains a focus here?

Yes, I believe there are two key points to consider. First, the efficiency gained through automation and digitization in the banking sector is significant. We've discussed the development of our data hub, which allows us to leverage this data to enhance the efficiency of our product and service delivery. We're just beginning to explore the potential for cost reduction over time. By examining how we process transactions throughout the bank and considering the effects of AI and automation on improving efficiency, I see a promising outlook for the industry. This should be perceived positively. Secondly, regarding revenue generation, our capacity to analyze data and quickly present information to prospects and clients, as well as our internal teams, enables them to respond effectively and achieve better revenue outcomes with customers. This will also enhance our efficiency ratio. We are still in the early stages of realizing revenue growth through automation and efficiency, and while we've started to see some progress, there is much more potential ahead. I feel optimistic about this. Vince, do you want to add anything to this discussion?

No, I would just say sustaining around that low 50s to 50% level feels very achievable as we move forward, given all the things Vince just described. That's all I would say.

And I also think when you look at us relative to the other banks our size, we have a disproportionately large retail bank. So the efficiency ratio in the retail business is not what it is in the commercial business. So if we were a pure commercial bank, yes, we would be below 50%, well below. But Alfred gives us all these branches. We've got a good note, you're laughing. But the truth is, we've got this big machine that we have to run, and it's a good business for us. And as I've said, we were able to do it very efficiently, which is remarkable given our size and scale. I mean, in fairness to the retail business, we do run an incredibly efficient retail delivery channel. It compares very favorably to the largest banks in the country. And if you look at the efficiency ratio broadly speaking, there are probably going to be some puts and takes to it. We're going to continue to drive efficiency in the areas that we can through automation. But as Vince mentioned earlier, we have plan to grow fee income, which tends to be a higher efficiency ratio business in and of itself. And the idea is that all these investments that will continue to drive the efficiency ratio plus the investments in growing additional fee income. I think net-net results in a top quartile ROE that compares pretty favorably to our peers.

You saw what we've accomplished with the digitization of the retail delivery channel. We've integrated the eStore into the ITM, allowing remote engagement with customers fully digitally in a branch, enabling them to transact, cash checks accurately, and make loan payments. It also assists with their shopping cart and helps them check out right there. This development will gradually reduce the need for personnel in branches, improving our efficiency. We have built this system, and while it hasn't been fully deployed yet, it's on its way. Overall, I believe we're in a strong position and remain optimistic about our efficiency.

So it seems like there is a break with our operator. But Manuel, I think that you're on the line, if you have a question, please go ahead and ask it.

Okay. Great. I understand your points regarding lending capacity and strong production. Can you discuss the lending sentiment in your markets? How does that influence expectations for growth to be more concentrated in the latter half of the year? Are you already experiencing challenges due to payoffs and a slowdown in the secondary market?

Yes, I agree with your observation. In this industry, we generally anticipate loan growth primarily in the commercial and industrial sector. Real estate tends to vary based on project timelines, but from the C&I standpoint, growth typically ramps up in the latter half of the year as companies finalize their financial statements and share them with banks. They begin planning capital expenditures at this time and start engaging with bankers. So, we are currently seeing discussions taking place. I expect the growth to be more weighted towards the end of this year. Additionally, based on feedback we've gathered from various regions prior to this call, the commentary from our teams has been quite insightful. I found it very comprehensive and spent last night reviewing their 38 pages of notes. In markets like the Southeast, including Charlotte, Raleigh, and Greensboro, there is noticeable competition, with branches expanding throughout the region. However, our team remains committed to these markets and is actively enhancing our delivery channels by integrating digital strategies and improving treasury management capabilities. These areas have performed exceptionally well, and I anticipate that trend to continue. On the other hand, in more established markets such as Pittsburgh, Cleveland, and Baltimore, we’ve seen significant payoffs—not due to customer losses to competitors, but because we tend to serve higher-end clients. This clientele drives our debt capital markets business, generating fee income from bonds as well. Unfortunately, a downside to this is that companies with access to capital markets paid down their facilities last year, which has mostly subsided unless we see a considerable drop in short-term interest rates, which would be beneficial for our margins but could hinder capital market access. Reducing borrowing costs for clients has its advantages, so I expect next year to be promising for everyone if the markets remain stable without major disruptions. There's a growing sentiment among clients about capital investment, which is encouraging for loan growth. I've observed this trend overall. On the deposit side, we are also gaining interest from several large deposit prospects, which looks promising for next year as well.

Yes, in the past, you've mentioned that the treasury management pipelines are strong. This is reflected in the fees. Are they still strong in terms of commercial treasury management deposits?

Yes. We're seeing lots of opportunities across the footprint from a depository perspective, from a treasury management perspective. So...

We still have a large pipeline close to $1 billion of deposit prospects we're going after.

The other thing I would add, Manuel, is we are starting to see increased levels of opportunities around some high-quality CRE. Discussions were pretty active over the last 60 to 90 days here, and we're seeing some really nice opportunities there.

That's good to hear. Can you provide any more details on the mortgage sale? I understand you're just opening up capacity. Were they specific to any region? I would appreciate any additional insight on this upcoming sale in the first quarter.

Yes, they were primarily out of our immediate area, around branches. We assessed them practically and concluded that our chances of cross-selling additional services to this group are limited. There are no credit issues, as they are solid credits, but we just don't see an opportunity for cross-sell engagement. Therefore, we chose to return the capital and reallocate it towards something where we can be the primary client. This decision was influenced by our expectation that as we approach next year, prepayment speeds will likely increase, leading to attrition in that segment. Additionally, I believe we will have the capacity to move more off the balance sheet due to increased activity in the conforming space as we enter a lower rate environment. Consequently, I expect to enhance fee income, manage our exposure, and continue to grow in other higher-returning categories. However, we regarded those specific loans as a burden on our capital.

Yes. Additionally, from a concentration management perspective, mortgages represent about 25% of total loans, as shown in the slide deck. To manage this concentration, we decided to reduce our mortgage holdings by $200 million. We are strategic in our approach to these actions. Throughout the year, we implemented pricing strategies to enhance our saleable production and manage the total mortgages on our balance sheet. Looking forward to 2026, this strategy will create capacity for the commercial growth we discussed. Regarding sales, we anticipate they will align with expectations when finalized this quarter.

Right.

And our next question comes from Brian Martin from Janney Montgomery.

Regarding your last comment, it seems Gary mentioned loan growth, but I joined the call late. From what I gathered, the loan growth outlook appears to be in the mid-single digits and back-end loaded. Did you discuss the current pipeline? Additionally, could you elaborate on Vince's comment about mortgages decreasing by around 25%? Looking at the bigger picture of loan concentration levels, where do you see opportunities for making adjustments as we approach the end of '26? Is there a target for the mortgage numbers and how do other segments factor into your positioning?

I'll do a high level, and then I'll turn it back over to these guys. Our goal would be to shrink the mortgage book and redeploy over time, right? If you see prepayment speeds accelerated in a different interest rate environment, you're going to see that portfolio basically stay the same in size, right, or grow very small as a percentage of the total. But our goal would be to redeploy that capital into C&I and CRE lending. And I said earlier, I don't know if you missed it, but earlier I talked about our internal capital generation, Brian, and the ability for us now that our CRE concentration is at 197%. It's below 200%. There's capacity there to lend. So keeping that concentration at the same level, given the internal capital generation, we could still originate and fund...

About $1 billion.

$1 billion in CRE loans. So we don't have to keep it at 197%. There's some way to move up and down. That was just our internal goal from a concentration perspective. It puts us in a much better position than many of the peers. So there's a lot of capacity to lend there. We can be very selective. On the C&I side, I think we have a great opportunity to deploy capital there and grow over the next 12 months because we think that, that business will start to accelerate for us and we can move in. Again, we're not doing the consumer finance stuff, NDFI, all the other stuff that is baked into the H8 data for C&I growth that really is mass consumer growth. But we're doing true middle-market transactions across our footprint and growing that business. And I think we've done a pretty good job and the pipelines have actually built over time? And go ahead, Gary, you're going to...

Just going to add, Brian, the equipment finance business for us has been extremely strong. And you would expect that with the bonus depreciation that group had an exceptional year, and that just continues to build. They had a very strong fourth quarter, and we expect to have a really, really solid 2026 across that group through the quarters and even building more, as Vince mentioned, towards the latter part of the year with where we sit economically at the moment. So really, really excited about that piece of the business and the C&I opportunities ahead of us.

Yes, Brian, to summarize, we anticipate production levels to remain very robust. We're not trying to reduce activity in that business or the volume of originations; rather, we're focused on what ends up on the balance sheet. For context, last year, 23% of total loans were on the balance sheet at the end of '23, which was 20%, and today it's 25%. We're actively managing that concentration in the commercial activity that Gary and Vince have discussed.

Yep.

Got you. And Gary, that equipment finance, how big a piece of the loan book is that today?

That portfolio today sits at right about $1.5 billion.

Okay, perfect. Just one or two last questions on loan pricing. I'm not sure if this was mentioned earlier, but we've heard that some of the pricing has become more rational recently. I'm curious about your perspective on loan pricing and how that factors into your expectations for the margin this year and what is included in your guidance as you look ahead to 2026.

I don't think loan pricing in the C&I book or across the board? What are you referencing specifically?

I guess the commentary we've heard is that people are really looking to be aggressive on pricing just because they haven't had the ability to grow. So I guess I haven't heard that it's whether it's on CRE or C&I specifically. So just kind of wondering...

I wouldn't say that the pricing in commercial real estate has been very strong, but it has firmed up. The pricing in commercial and industrial loans is more aggressive. It’s a competitive environment; it always has been throughout my 40 years in banking. I have never experienced a time when it wasn't competitive. There is always a limit to returns as everyone uses similar models. We aim for a specific risk-adjusted return on capital, which tends to fluctuate. For solid C&I credit, not riskier options, there is typically a 25 basis point variance between extremely competitive and less competitive deals. The margin is usually narrow and can tighten sometimes, but it is crucial to offer products and services that yield returns. We consider overall returns, including deposits and treasury management fees, as well as capital markets opportunities, which contribute to our returns. We look for returns greater than 15%, 16%, or even 17% in some cases, and this drives the marketplace.

Yes. And I think we've done a good job driving that cross-sell activity across all of those fee income products that we have. We talked about the diversification of those income streams earlier. The group is very focused on it. And I can tell you, the leadership there is really driving that through the banking teams.

And Brian, I would just add 1 point. So top of the house, the new loans that we made during the fourth quarter came on at 5.92%, which is up 24 basis points above the portfolio rate. So it's still additive to the overall return.

Vince is always bringing you facts. I'm giving anecdote. He layers into the stuff you really want to hear.

It all works together.

Exactly. Can you provide any insights on the projected net interest income outlook regarding margin and its trend throughout the year, especially considering your expectations for rate cuts and the overall improved environment?

Yes. Our guidance includes two rate cuts, one in April and another in September. If we miss the next cut, the market is indicating it could happen in July. Failing to receive that cut could result in a loss of a couple million dollars for the quarter. As a reference, our guidance also anticipates a slight increase in margin, a few basis points each quarter, projecting it to reach around 3.28% by the end of the year based on calculations.

Okay. I think I'm good. And Vince, just the question on M&A, I guess, just in terms of big picture, if we do see something, if there's a great opportunity out there, does it feel like it's a smaller opportunity given you don't want to kind of take momentum away from what you have, all you've talked about today? Or is that the wrong way to think about it because the right opportunity could be something bigger. It just feels like it might be something smaller and less disruptive if there was an opportunity out there. But I guess maybe I'm reading into that.

No, I think we're primarily focused on organic growth right now. We're continuously evaluating how to best deploy capital. We've addressed similar questions before, and our goal is to do what's most beneficial for shareholders regarding returns and capital allocation. We're not actively seeking out new acquisitions. Given our current success and how valuations are positioned, it's less likely that we'll pursue a significant M&A transaction. Looking back at the past nine years since our last major deal, we've completed only two relatively small acquisitions that complemented our overall strategy. Both of these deals had a strong demand deposit mix and significantly enhanced our customer base, allowing us to integrate with the consumer bank and further develop our cross-sell strategies to increase fee income. These decisions were more about seizing opportunities than following a predetermined plan.

Yes. Okay. Yes, that answers it. Congrats on the quarter and the momentum you guys have going into '26.

Yes. Thank you very much. I appreciate it. Thanks, Brian. Thank you, everybody. I think that concludes the questions. And I want to thank our employees for a tremendous year. I know there was a lot of hard work that went into this year, and I want you to know the executive leadership team. I appreciate it. And thank you to our shareholders for continuing to believe in us and support us. Thank you.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.