Earnings Call Transcript - FNB Q3 2025

Operator, Operator

Good day, and welcome to the F.N.B. Third Quarter 2025 Earnings Conference Call. Please note, today's event is being recorded. I'd now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.

Lisa Hajdu, Manager of Investor Relations

Good morning, and welcome to our earnings call. This conference call of F.N.B. 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 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 Friday, October 24, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President, and CEO.

Vincent J. Delie, Chairman, President and CEO

Thank you, and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. F.N.B.'s third quarter earnings per share grew 14% linked quarter to a record $0.41, and reported net income available to common shareholders increased to $150 million. Operating pre-provision net revenue increased 18% from the year-ago quarter, contributing to positive operating leverage and a peer-leading efficiency ratio at 52%. F.N.B. produced another quarter of record revenue totaling $457 million with strong contributions from fee-based businesses, most notably in capital markets and mortgage banking, driving total noninterest income to a record $98.2 million. F.N.B.'s capital position has reached record levels with tangible common equity at 8.7% and CET1 at 11%. Our growing capital base provided our company with flexibility to return $162 million to shareholders year-to-date through our active share repurchase program and quarterly dividends. The company's profitable quarter resulted in a return on average tangible common equity of 15% and tangible book value per share growth of 11% to $11.48. Period-end loans increased 3% on an annualized linked quarter basis, with growth led by equipment finance, consumer lending, and seasonal residential mortgage production. Commercial and industrial loans grew 2% annualized linked quarter, impacted by lower line utilization and higher-than-normal attrition driven by outsized customer M&A activity. Equipment finance had a strong quarter with 21% annualized loan growth, reflecting activity across our footprint, likely driven by fiscal policy. We continue to maintain our strict credit discipline with a primary focus on traditional C&I lending. We are not in the business of lending to private capital providers, particularly entities that engage in direct consumer and small business lending. As we've indicated on prior calls, two areas of focus that position F.N.B. for future growth are continuing to grow low-cost deposits and reducing our CRE concentration. This quarter, we made good progress on both fronts with the loan-to-deposit ratio ending the quarter at 90.9% and our CRE concentration improving to 214%. Our business model and its emphasis on a diverse and attractive footprint is a contributing factor to growing deposits at a favorable level. Annualized linked quarter deposit growth of 7% outpaced the industry and reflected continued commercial client acquisition. The FDIC deposit market share data released in September revealed that F.N.B. grew in nearly 75% of the MSAs we operate in. We now rank in the top 5 in nearly 50% of our MSAs and in the top 3 market share in nearly 30%. Noninterest-bearing deposits comprised 26% of total deposits, stable to the prior quarter with favorable total deposit costs of 1.93% at quarter end. Our strategy has been to price our deposits competitively to support our client base while protecting our net interest margin by leveraging our digital capabilities and data analytics. We have successfully executed on broadening our household penetration and becoming the primary bank for new and existing clients through our streamlined digital customer experience in our proprietary eStore and Common application. Since our in-branch Common app pilot concluded in May 2025, the percentage of applications originated through the Common app has nearly tripled. Our data analytics team now mines the data and leverages AI to provide our customer-facing team with quality leads to accelerate sales and grow revenue. We have been able to gain insight on our customers' preferences and competitor pricing from data points housed in our Enterprise Data Warehouse system and through external data aggregation. This allows us to strategically price our deposits and analyze the relationship holistically. Implementing this pricing approach contributed to our net interest margin expanding 6 basis points linked quarter. Our newly formed AI and innovation team is actively reviewing and prioritizing high-impact use cases from across the organization. I am energized by the transformative potential of AI to elevate operational efficiency, accelerate revenue growth, and deepen client engagement. As we grow our AI footprint, we remain committed to a strong risk management framework and controls, ensuring our innovation is both responsible and sustainable. With that, I would now like to turn the call over to Gary to discuss the strong credit results for the quarter. Gary?

Gary L. Guerrieri, Chief Credit Officer

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Total delinquency ended the quarter at 65 basis points, up 3 basis points from the prior quarter, with NPLs and OREO up 3 basis points remaining at a solid 37 basis points. Net charge-offs totaled 22 basis points, bringing the year-to-date results to 21 basis points, reflecting good performance despite the continuation of a somewhat volatile economic environment. Criticized loans were down 7.3% or $113 million on a linked-quarter basis with decreases observed throughout all of the commercial segments. We were pleased with the stability and improvements we saw during the quarter and were successful in removing some risk from the loan portfolio. Total funded provision expense for the quarter stood at $24.9 million, supporting loan growth and charge-offs. Our ending funded reserve stands at $437 million, an increase of $5.2 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 remains strong at 368%, 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, in fact, experienced positive credit migration, as I mentioned earlier. Also of note, our overall C&I line utilization was down again in the quarter, including sectors that could potentially be impacted by higher tariffs, remaining at stable levels. The government shutdown remains a fluid situation. We are monitoring the portfolios closely and are having discussions with our customers that are potentially impacted to support them in what should be a temporary event. Each quarter, we continue to run allowance sensitivities and a full portfolio stress test. Our stress test results were stable with our current ACL more than covering projected charge-offs in a severe economic downturn. Regarding the nonowner CRE portfolio, credit metrics also improved, contributing to the criticized decline I mentioned earlier, with delinquency and NPLs at 53 and 50 basis points, respectively. This reflects an improvement from 64 and 62 basis points at the prior quarter end. We continue to aggressively manage this portfolio as we have throughout this interest rate cycle with the nonowner exposure declining by another $226 million in the quarter, bringing the year-to-date decline to $646 million, ending at 214% of capital. In closing, we continue to be pleased with the performance of our loan portfolio. We look forward to increasing levels of activity with the fiscal policies that have been enacted, which are already driving our equipment finance portfolio growth. As uncertainty eases, we expect broad-based growth in a potentially more robust and business-friendly environment. Our consistent credit results through many cycles and uncertain times continue to be driven by our credit risk appetite and credit selection, our robust concentration risk management framework, and our 360-degree view of our customer activity and performance. As Vince referenced earlier, our credit philosophy continues to be focused on core C&I lending activity, which has and will continue to drive our growth into the future. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Vincent J. Calabrese, Chief Financial Officer

Thanks, Gary, and good morning. Today, I will review the third quarter's financial results and walk through our updated full-year guidance. Third quarter operating net income totaled $147.7 million or $0.41 per share. Total revenues were a quarterly record at $457 million, with both net interest and noninterest income exceeding the high end of our prior quarterly guidance ranges. As a result, third quarter operating pre-provision net revenues grew 18.3% from the year-ago period. Third quarter average loans and leases totaled $34.8 billion, a 3.6% annualized linked quarter increase. Average consumer loans increased $431 million on strong residential mortgage and home equity lending growth as seasonality and a drop in interest rates provided a favorable environment for consumer lending. Average commercial balances declined $119 million linked quarter due primarily to a planned reduction in commercial real estate balances, offset by growth in C&I. Average deposits totaled $37.9 billion, a strong 8.2% annualized linked quarter increase, reflecting organic growth in new and existing customer relationships. Spot noninterest-bearing demand deposits grew 1% linked quarter and were stable at 26% of total deposits. The loan-to-deposit ratio declined nearly 1% from the second quarter level to 90.9%. The cumulative total deposit beta since the interest rate cuts began in September of last year was 24% at quarter end, reflecting the timing of the most recent Fed cut late in the third quarter. Record net interest income of $359.3 million grew 3.5% from the prior quarter and over 11% from the year-ago period, attributable in part to our diligent management of deposit costs. The third quarter's net interest margin of 3.25% was up 6 basis points sequentially and 17 basis points from last year's third quarter. Earning asset yields increased 3 basis points linked quarter to 5.36%, driven by higher yields on the investment securities portfolio with reinvestment rates on securities remaining well above the average portfolio rate and higher yields on new fixed-rate loans compared to maturing loans. The average loan yield held steady sequentially even with lower mortgage rates and the Fed cut late in the quarter. On the funding side, the cost of total deposits and borrowings was down 3 basis points linked quarter as a result of a 7 basis point decline in the cost of borrowings and the funding mix shift towards deposits. Average borrowings were down $424 million linked quarter, primarily due to the $350 million of 5.15% senior notes that matured in August of 2025 and the growth recorded in deposits. Noninterest income totaled a record $98.2 million, up 9.5% from the year-ago period. Capital markets income grew 27% on record debt capital markets, international banking income as well as contributions from customer swap activity, syndications, public finance, and advisory services. Wealth Management revenues increased 8% year-over-year on solid trust income and double-digit growth in securities commissions and fees. Mortgage banking income increased $3.6 million from last year due to strong sold loan volumes, net positive fair value adjustments from pipeline hedging activity, and the $2.8 million MSR impairment in the third quarter of 2024. Other noninterest income increased $5.3 million, primarily due to a $5.4 million recovery on an asset previously written off through purchase accounting as part of a 2017 acquisition. Operating noninterest expense totaled $245.8 million, up 5% from the third quarter of 2024. Salaries and employee benefits increased $5.5 million or 4.4%, primarily reflecting strategic hiring, continued investments in our risk management infrastructure, and higher production-related compensation. Outside services increased $1.7 million due to higher volume-related technology and third-party costs. Other noninterest expense increased $3.7 million, primarily reflecting our mortgage down payment assistance program. Year-over-year operating revenue growth of 10.7% was more than twice the 5% increase in operating expenses. As a result, the efficiency ratio reflected strong improvement and declined nearly 280 basis points from the third quarter of last year to 52.4%. We expect continued strength in operating leverage performance in the fourth quarter and positive operating leverage for the full year of 2025. We are in the process of developing our annual cost savings target for 2026 to maintain our positive operating leverage momentum moving forward by renegotiating vendor relationships and leveraging investments in AI, data science, and machine learning. F.N.B. continues to actively manage our capital position for ample flexibility to support balance sheet growth and optimize shareholder returns while appropriately managing risk. Our financial performance and capital management strategies resulted in our CET1 ratio reaching 11% and our TCE ratio reaching 8.7%, both record levels. Tangible book value was $11.48 per share at quarter end, an increase of $1.15 or 11.1% compared to last year. Let's now look at updated guidance for the full year of 2025. All guidance is based on current expectations, while remaining cognizant of operating in an uncertain economic environment. We are maintaining our balance sheet guidance for spot balances, projecting period-end loans and deposits to grow mid-single digits on a full-year basis as we increase our market share across a diverse geographic footprint. For loans, we expect to be towards the lower end of the mid-single-digit guide given continued expectations for secondary market activity and our continued active management of CRE exposures. We are raising our 2025 net interest income guidance for the second consecutive quarter to incorporate the strong performance in the third quarter and our fourth quarter outlook. Our revised full-year net interest income guidance range is $1.39 billion to $1.405 billion. This guidance includes an expectation for a 25 basis point rate cut in October compared to our previous expectation for a cut in December. The noninterest income full-year guidance range has been revised to $365 million to $370 million, with fourth quarter levels expected to approximate $90 million. Full-year guidance for noninterest expense has been maintained at $975 million to $985 million. The revised full-year provision guidance range of $85 million to $95 million reflects a $5 million decrease on the high end, given our year-to-date performance and strong asset quality metrics. As always, provision will be dependent on net loan growth and charge-off activity, and we continue to monitor risks posed by the current economic environment. The full-year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur. Lastly, we also remain opportunistic and disciplined in our approach to buybacks, taking advantage of attractive valuation levels. With that, I will turn the call back to Vince.

Vincent J. Delie, Chairman, President and CEO

Thanks, Vince. Last month, we announced plans to further deploy our organic growth strategy by adding 30 new branches to our network by 2030, focused primarily in the high-growth Carolina and Mid-Atlantic markets. This expansion will build upon our commitment to client service and will incorporate modern concept design and the latest technology, including our AI-driven eStore platform now found in all branches throughout F.N.B.'s multistate footprint. We also recently announced a leadership transition for the consumer bank with the hiring of Alfred Cho as Chief Consumer Banking Officer, succeeding Barry Robinson upon his retirement. Over his 15 years at F.N.B., Barry has been a valued leader during a period of prolific growth for our company and has contributed to the build-out of our mortgage banking operations, the rollout of our retail scorecards and the expansion of our distribution network. I am grateful to Barry for his many years and dedicated service and contributions to F.N.B., and we wish him well in his retirement. Throughout the company, we have continued to attract talent that is aligned with our award-winning culture and key strategic initiatives to drive growth and a superior client experience. As we continue to expand the depth of our strategic management team, we recently hired Frank Schiraldi as Director of Corporate Strategy, who joined us with 20 years' experience as a prominent New York-based sell-side analyst. I welcome Alfred, Frank, and other recent strategic hires to Pittsburgh and look forward to working alongside them and our current team to create value for all of our stakeholders. F.N.B. remains dedicated to advancing our technology, people, and delivery channels to gain scale and operational efficiency. This happens by cultivating meaningful lasting relationships with our clients and communities while simultaneously creating value for our shareholders. With that, I would like to turn the call over to the operator for questions.

Operator, Operator

And today's first question comes from Kelly Motta with KBW.

Kelly Motta, Analyst

Loan growth has been quite strong. It's now anticipated to be on the lower end of the mid-single digits. I'm curious, considering you are one of the few banks that has seen significant growth in residential mortgages, and as you mentioned the secondary markets, do you foresee any challenges from refinancing risks on your existing portfolio that was acquired at higher rates, especially with rates declining?

Vincent J. Delie, Chairman, President and CEO

Yes. We carefully analyze our mortgage portfolio and have been focusing on pricing more competitively in the conforming space. We've been moving assets off the balance sheet through origination, and I expect this trend to persist. Even though the acceleration of prepayment speeds in the mortgage book affects margins, it allows us to redeploy that capital into the commercial sector, which can drive better returns on equity for the company. That's part of our long-term strategy. Most of the new production involves wealthy individuals obtaining jumbo mortgages and physicians, which have excellent credit metrics. Although this market can be competitive, we're leveraging data analytics to cross-sell wealth management and other products. We also retain servicing, and whenever possible, we aim to refinance into conforming products while keeping the customer long-term. We anticipate a gradual shift in our production focus from consumer to more commercial endeavors during this uncertain period. I'm optimistic about certain sectors. Our approach is traditional and straightforward, targeting clients in the middle market. We avoid large loan growth by managing exposures and fostering holistic relationships, which is evident in our steady and stable results, including strong credit performance and growth in demand deposits. Overall, we have a balanced focus across our entire portfolio, with strategies ready to handle any margin pressures resulting from increased prepayment speeds.

Kelly Motta, Analyst

Great, that's very helpful and highlights the strength you have. Since you mentioned the deposit base, could I ask a follow-up on that? Deposit growth was impressive, particularly in noninterest-bearing demand deposits. Can you provide more insight into how much of that growth is coming from your growth markets and what the drivers are? I know you've been focused on the eStore and AI, and I would appreciate any additional information you can share.

Vincent J. Delie, Chairman, President and CEO

I believe the growth is widespread and not limited to a specific market. We've seen significant success in increasing deposits in the Carolinas, despite initial concerns about competition in that area. Our share in these markets has been good, supported by various FDIC data. In Pittsburgh, however, the deposit growth has not been as strong. The overall market has seen a decline, largely due to some large balances moving among local custody banks, including PNC. Despite this, we've still managed to grow our deposits and have established ourselves as the second-largest retail deposit bank in the area. This achievement results from effective field execution, advanced technology that allows us to compete with larger banks, and an efficient application that helps onboard customers quickly and directs them to deposit products. Additionally, our commercial bankers are trained to pursue deposit-only relationships, which aligns with my own training in the traditional corporate banking approach. Our focus is not solely on loans but on strategies that bolster our balance sheet, and our compensation plans are structured to encourage the acquisition of low-cost deposits rather than high-priced ones. Achieving these results requires dedication from our team and adherence to a well-defined growth strategy, which has been effectively implemented over the past 15 years. I understand you were seeking a singular explanation, but the reality is that our success stems from multiple factors working together.

Vincent J. Calabrese, Chief Financial Officer

I would add, too, if you look at the FDIC market share data, right, the June to June, I mean we more than doubled the market growth in that period. We grew in 75% of the MSAs that we're in, outperformed the market in 38%. We're now with this growth and performance we had, we're top 5 in nearly 50% of our MSAs and top 3 in 30%. So it's really kind of across the footprint.

Operator, Operator

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

Casey Haire, Analyst

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

Vincent J. Calabrese, Chief Financial Officer

Yes. As a reminder, we concluded the cycle with a cumulative deposit beta of 39.8%, outperforming our peers by 8 percentage points during that time, which significantly impacted our deposit costs by 38 basis points. We are actively discussing strategies to lower rates, and we have already begun this process in anticipation of the Fed's movements as we progress through the cycle. We believe we have a solid plan in place for this. Looking ahead, we consider a mid-30s terminal down beta to be reasonable based on our historical performance. The year-end outcome will depend on whether there is a rate cut in December. If such a cut occurs, we expect to be in the low 20s; without it, we anticipate being in the mid-20s for this year, but moving forward, we project mid-30s as we proceed through the cycle.

Casey Haire, Analyst

Okay. Very good. Regarding capital management, the CET1 ratio is at 11%, which is quite substantial. I would like to hear your updated thoughts on this. You have an appealing stock price and have done some buybacks, but I believe there’s potential for more. What is the strategy moving forward with such a strong capital ratio? Also, Vince, if you want me to stop discussing NA, please feel free to say so.

Vincent J. Delie, Chairman, President and CEO

I'm going to preserve the comment, Casey. The M&A answer, I'll give that right away. We haven't changed our position. So we're still focused on executing our core model, and it's performing very well. I've said it before, often we'd be opportunistic, but we're focused internally. We need to be focused internally right now. I think it's paying off for us. So it's, again, opportunistic, but not looking to make any huge moves here. Go ahead, Vince.

Vincent J. Calabrese, Chief Financial Officer

Sure. Regarding capital management, we currently have a record CET1 ratio of 11% and a dividend payout ratio below 30%. We are in an excellent position to deploy capital to enhance shareholder value. Considering the strength of our balance sheet and our guidance indicating increased earnings and capital generation, we are well positioned to support loan growth. We anticipate that commercial growth will begin to accelerate soon, and we are ready to facilitate that. Given the current stock price, the valuation appears very appealing, and we have been active in the market over the past few quarters. I expect we will continue to be active this quarter as well. The dividend is another important topic we regularly discuss. Previously, we maintained a high payout ratio and a substantial cash dividend, but with our payout ratio now below 30%, this is an area of active discussion. We value the flexibility of our buyback strategy to act opportunistically based on valuation, but we will keep the dividend in our ongoing conversations.

Casey Haire, Analyst

Okay. Great. Just one more question from me. With the Investor Day coming up in a couple of weeks, and considering it's been a while since the last one in 2019, I'm curious about what we can expect. Are you planning to set profitability targets? I would appreciate any insight on that.

Vincent J. Delie, Chairman, President and CEO

The purpose of the Investor Day is to showcase our technology and introduce the team. There's a wealth of depth here. Being able to interact with our digital, AI, and field leadership in this brand-new building will have a significant impact on investors. While discussions can cover many topics, experiencing the tangible aspects of our new building, the technology we possess, and our activities will leave investors feeling energized. It's quite impressive, and we wanted to highlight this. We succeeded in getting the building constructed and welcoming over 800 team members. The employees take great pride in it, and I believe it provides an excellent opportunity to demonstrate what we have developed for our investors. This initiative is centered on driving business. The entire building is designed to engage clients and enhance revenue and earnings, which will be evident when you visit.

Casey Haire, Analyst

It's collaboration...

Vincent J. Delie, Chairman, President and CEO

Yes, it's collaboration. It's an awesome space and should bode well for us as we move into the future.

Operator, Operator

Our next question comes from Russell Gunther at Stephens.

Russell Elliott Gunther, Analyst

A question on the expense side of things. So nice to see the revenue guide up and expenses flat, that efficiency come down nicely for the quarter, and it sounds like guided to continue to improve in 4Q. I think for the year, that would still kind of get you toward the higher end of what I believe an internal target has been of 50% to 55%. So is that still the right range to think about for F.N.B.? Do you see you guys making some progress on that ratio going forward? I guess, can that back half of the year efficiency sustain in 2026? How can we think about it?

Vincent J. Delie, Chairman, President and CEO

Let me answer quickly, and then I'll turn it over to you, Vince.

Vincent J. Calabrese, Chief Financial Officer

Yes, of course.

Vincent J. Delie, Chairman, President and CEO

We are very aware of the expenses at this company and dedicate a significant amount of time to managing them. We have a team that reports to Vince and focuses entirely on our expense line items. We hold meetings to discuss these matters. There is a substantial expense initiative planned for next year, which Vince mentioned in his remarks. Historically, we have successfully reduced expenses at a strong pace, saving $20 million per year over consecutive years. We intend to reengage and optimize our expense base. Some improvements are coming from efficiency efforts, which are proving beneficial. Over time, the Common app will enhance our process by providing a more efficient onboarding experience with many digital features. We are already noticing operational advantages from using that software application across various product areas, which is part of our overall evolution. Additionally, as we approach $50 billion in assets, we have made significant investments in our risk infrastructure. We have incorporated extensive automation and track thousands of internal metrics using AI in our data science. We conducted process mapping for our entire operations area, so we are well-equipped to navigate a business cycle and capitalize on our efficiency initiatives. Vince, feel free to provide more insights.

Vincent J. Calabrese, Chief Financial Officer

Yes, I would just add that as we plan for 2026, our focus remains on being disciplined in managing expenses. This focus is not solely on cost savings but also on efficiency, scalability, and utilizing the initiatives that Vince mentioned. We will continue to work on renegotiating vendor contracts aggressively. This is a part of our routine, but we are currently making significant efforts in this area, including streamlining operations through automation. Additionally, we have invested in people, technology, data science, and AI, some of which are in the early stages, while others have been established longer. Our aim is to leverage these investments to enhance overall profitability.

Vincent J. Delie, Chairman, President and CEO

Our efficiency ratio is 52%, and we have consistently been making investments. We opened several new branches in recent years, although we haven't highlighted this much. We are now in a better position to drive revenue growth, and most of our expenses are already accounted for in our regular operating costs. As we progress, we expect to see significant positive operating leverage as we utilize these investments to increase revenue.

Vincent J. Calabrese, Chief Financial Officer

No, that's what I was going to say. That's the key point is positive operating leverage. We're going to have it for this year and enhance that and grow it even more as we move forward. And to the direct question on the efficiency ratio, there's still room to bring the efficiency ratio down. But the key is the overall positive operating leverage combined with the efficiency ratio and then return on tangible common equity driving the profitability.

Vincent J. Delie, Chairman, President and CEO

The Board and the management team are highly focused on efficiency and the efficiency ratio. Vince provides thorough reports to the Board regarding our progress. Positive operating leverage is essential for our operating plans, and we are very committed to it. Therefore, I expect it to continue improving over time.

Russell Elliott Gunther, Analyst

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

Gary L. Guerrieri, Chief Credit Officer

Yes, I'll touch on the government shutdown first, Russell. I mean we're continuing to watch for fallout from the DOGE efforts earlier in the year as well as the new government shutdown. At this point, we have seen absolutely nothing from an impact standpoint coming out of either one of those situations. The government shutdown is a fluid situation and twists and turns every day here. But we're keeping an eye on it. We'll continue to keep an eye on those portfolios that are potentially impacted. But as mentioned, nothing at all at this point. In terms of taking the risk off the table comment, essentially, we saw another good reduction a couple of quarters running now in our criticized asset levels on a net basis, down about $113 million. A number of those clients were exits from the bank, just normal payouts getting refinanced at other institutions. So we were pleased to see some of that activity with those clients move off the books. We also saw a few upgrades where performance was improved. But that's a chunk of risk that has been taken off of our balance sheet. We're pleased with that and continue to manage the portfolios each and every day in that manner. It's just kind of normal blocking and tackling from our perspective in what we do here every day.

Operator, Operator

And our next question comes from Daniel Tamayo with Raymond James.

Daniel Tamayo, Analyst

Yes. Maybe first one for Gary here. We've had some issues here with other banks with the non-depository financial institution loans. You talked about it in the comments. That's really not what you guys are doing. But curious if you can provide kind of where you stand end of quarter. You had pretty low concentration relative to other banks at the end of the second quarter just from the Y-9 data, but just curious if that's changed at all in the third quarter? And then maybe if you could give a little bit of a breakdown of what those loans are that you have on the balance sheet to give us some comfort around credit.

Gary L. Guerrieri, Chief Credit Officer

Yes. The call report really casts a pretty large and wide net there. My customers are primarily in the other bucket. And it's really diversified across a number of sectors, such as wealth management firms, advisory firms, insurance firms, investment companies. And that's primarily the type of companies that we see in that bucket. When you look at those companies, our lending arrangements are generally for working capital and expansion purposes, direct lending activities. As Vince mentioned earlier, we're not in the business of lending to private capital funds, including private equity and private debt funds. So we're not in that business, and that's not where we're going to play. That was a conscious decision that was made a long time ago, and we're going to continue to manage the book that way. It's not a business we have any interest in.

Vincent J. Delie, Chairman, President and CEO

As I mentioned earlier, the majority of our portfolio is very diverse, consisting of small businesses and middle market companies across our seven-state area. From a concentration standpoint, there are no significant concentrations that are unmanageable. Gary and I have received proposals for various verticals, but we have decided against them because we believe in staying committed to serving our local communities and providing capital to middle market and small businesses. That's our primary focus and objective.

Gary L. Guerrieri, Chief Credit Officer

No. And you've heard Vince use the word block and tackle a couple of times today. I mean that's what we do each and every day here at the company. I mean it's core banking business, core C&I in the communities that we do business with through all segments of the C&I space, small, mid, and corporate. Those portfolios, we understand really well how they perform through the cycles. We've been through many cycles of this management team, and we've continued to focus on providing stable EPS streams through good and bad environments, and that's what our focus is and is going to continue to be.

Vincent J. Delie, Chairman, President and CEO

And we don't have verticals here to speak of. I mean there's a CRE vertical, but that's intentional for credit management. We don't believe in institutionally originating credit. So we're character first. We have to know the customer. It's very disciplined across the footprint. That's part of the reason why our performance has been so strong from a credit perspective over long periods of time.

Daniel Tamayo, Analyst

Great. Very helpful, Vince. Yes, maybe a follow-up just on the fee income side. So in the slide deck, you had a bullet there that said you've had 9% fee income CAGR over the last 10 years, which is certainly a nice number. You talked a little bit in the conversation about efficiency ratio, about investments that you've been making. Just curious where you see runway for continued growth on the fee income side kind of in the medium term as we look forward here.

Vincent J. Delie, Chairman, President and CEO

We have recently invested in our investment banking platform, particularly in public finance. We have expanded our hedging offerings and made investments in treasury management, which I believe will show significant growth over time. Our pipelines in public finance are strengthening, and we are actively engaged in the municipal space on the depository side. We are not only attracting high-yield deposits but also offering treasury management services through the principal bank. Over the past few years, there have been numerous requests for us to engage in bond activities, and we have developed the necessary platform for that. We are now a viable choice for several municipalities and nonprofits looking to raise capital through bond issuance, which is purely fee-based, and we’re eager about the potential here. From a mergers and acquisitions perspective, the individuals we’ve brought on board are some of the best in the field. They will excel in their roles and have promising opportunities ahead. As our balance sheet grows and we deepen our presence in commercial sectors, I anticipate an increase in syndication activities as we move forward. I'm genuinely enthusiastic about traditional bank deals and our capability to take the lead in such transactions, which could significantly enhance our returns. Additionally, we have strengthened our debt capital markets capabilities with the formation of a broker-dealer focused on bond economics. This will also aid in mitigating risk, as we participate primarily in the investment-grade and near investment-grade spaces. Companies requiring capital in these sectors often face tight spreads and many unfunded commitments. However, when we consider the bond economics, the returns exceed 15% due to the compensation for providing capital through investment banking activities. This strategy has yielded excellent results and will continue to enhance our fee income. Looking at our treasury management platform, we have yet to fully penetrate the small business segment despite having a substantial number of small businesses in our portfolio. We are currently utilizing AI and developing tools and bundled products to target this segment more aggressively. We already have a delivery channel through retail distribution and PBOs, and we are adding additional expertise. I am optimistic about the potential for treasury management as we progress. In mortgage banking, as we transition into a lower rate environment, we expect to experience significantly higher gain on sale activities, particularly as we focus on purchase money origination. If we reach a more normalized yield curve with lower rates, we anticipate a substantial increase in mortgage bank fee income, leading to an expansion of our noninterest income. Our fee-based businesses are well-positioned for growth. We have historically seen wealth management grow by 9% to 10%. However, we believe there is still significant untapped potential in this area, especially as we build our capabilities in new geographies such as the Mid-Atlantic and D.C. market, where further hiring is necessary. In the Carolinas, we have personnel in place but can bring on more to capitalize on available opportunities. I am very optimistic about maintaining growth in our fee income and reducing our reliance on traditional spread banking. Our fee income is already over 20%, and as noninterest income rises, we expect fee income to increase even more, resulting in a greater portion of our revenue coming from high-returning businesses. Overall, I believe we are well-positioned and have demonstrated our ability to execute our strategy effectively.

Vincent J. Calabrese, Chief Financial Officer

Yes. There are a couple of key points on that Slide 17, just for reference. We mentioned that we've either started from scratch or expanded from very small 10 business lines that are now multimillion-dollar revenue generators. So that diversification is really important. The newest stuff that we've added that Vince mentioned, the public finance and the investment banking, really allows us to serve our clients through their whole life cycle. This has been a strategic plan that we probably started, I don't know, 12 years ago, adding these other capabilities. Now that we have that, really, there's no reason for our clients to go to another bank or have to go to another bank for those services. We can take them all the way through.

Operator, Operator

And our next question today comes from David Smith at Truist Securities.

David Smith, Analyst

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

Vincent J. Delie, Chairman, President and CEO

Yes, we are essentially neutral at the moment. We're around 1% for a 100 basis point move as of June 30th, and we will likely be closer to neutral. Historically, we have managed to be neutral. Our focus during this period from a profitability perspective has been more asset sensitive, which allows us to benefit from changes in the yield curve. Moving forward, our goal is to maintain a neutral position while increasing net interest income by growing loans and deposits. There are several factors driving our net interest income performance this quarter, which has led us to raise our guidance again. New loan originations are coming in at 50 basis points above the portfolio rate, and we're reinvesting cash flows from securities at 147 basis points above the roll-off rate, which is a positive development. We are also originating fixed-rate loans, putting total loans on the books in the 6-30s and originating them above the maturing rate, all of which contributes positively. We do have a portion of loans that will adjust with SOFR, which we need to manage. On the deposit side, our team has been focused on growing deposits while optimizing costs. We have successfully reduced costs, and as I mentioned earlier, we are actively implementing strategies to continue lowering rates. With the Fed's movements, other banks have also been adjusting, which has allowed us to reduce rates on parts of our deposit portfolio without any negative reactions from customers.

David Smith, Analyst

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

Vincent J. Delie, Chairman, President and CEO

Yes. When you look at the FDIC data, the areas that we're not growing share are all over the board. It could be a circumstance where there's a large player that controls a significant portion of the MSA, and we only have one or two branches there. So the growth that we're going to experience isn't going to move the needle there, right? It depends on the MSA. But I think lessons learned. We gain more from focusing on the 75% where we grew. I think the 25%, when you drill into it, the vast majority of those markets are not markets where we're going to meaningfully change our position without significant investment. So we're focusing on the markets where we're down, and we do have a big investment, and we need to drill in and figure out why we haven't grown like we have in the markets where we've achieved success. There aren't very many of those. So that's the good news. We continuously look at it. I listened to Alan Mulally's book on tape. One of the things he did was he sat down all of his executives, and they had to present to him. We do the same exact thing here. I've just told our folks, when you're in a market that's not performing, you have to tell us that you're in a market that's not performing and what you're going to do to fix it. We're very keenly focused on it. We have quarterly and monthly meetings, daily scorecards with automation. With AI now, it's going to be mind-blowing because we have daily scorecards with all these metrics, and we're tracking performance daily. We can layer on top of that analysis through open AI architecture. Instead of me calling Alfred and asking him questions about where the retail bank is performing, I could just go in and queue it up myself. That's going to be a game changer for us and for the leaders in the field who are trying to drive performance.

Gary L. Guerrieri, Chief Credit Officer

And then...

Vincent J. Delie, Chairman, President and CEO

Yes, I've worn them out after 15 years. So new person here. But that's how it works. I mean, that's how you keep driving results.

Operator, Operator

And our next question comes from Brian Martin at Janney. And it appears their line is on hold. So at this time, I'm going to move on, and I will turn the call over for final remarks to Vincent Delie. Vincent Delie, please go ahead, sir.

Vincent J. Delie, Chairman, President and CEO

Yes. Thank you very much for the questions and giving us an opportunity to present to you. I'm just very pleased with our people. I think we've gone through a number of challenging periods. We've had headwinds like you couldn't believe. The performance of this company has been outstanding, and it's outstanding because of the people that work here. So thank you to our employees. Take care, everybody.

Operator, Operator

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