F N B (NYSE:FNB) reported second-quarter financial results on Friday. The transcript from the company's second-quarter earnings call has been provided below.

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The full earnings call is available at https://event.choruscall.com/mediaframe/webcast.html?webcastid=7LR0IMLF

Summary

FNB Corporation reported a 17% year-over-year increase in earnings per share to $0.42, with net income reaching $149 million for Q2 2026.

The company achieved record revenue of $463 million, driven by net interest income of $366 million and non-interest income of $97 million.

FNB Corporation's tangible book value per common share rose 10% to $12.24, and the company repurchased 2.7 million shares of common stock.

Loans increased 7.5% on an annualized linked quarter basis, led by growth in commercial, industrial, and residential mortgage sectors.

The company emphasized its data analytics and AI capabilities, particularly highlighting its upcoming Insight360 tool, expected to launch by year-end.

FNB Corporation maintained strong asset quality metrics, with improvements in delinquency and non-performing loans.

The company provided guidance for Q3 and full-year 2026, projecting continued growth in loans and deposits, and revised net interest income guidance due to deposit competition.

Management highlighted successful strategic hires and third-party recognition, including awards for client service and financial innovations.

Full Transcript

OPERATOR

Good morning and welcome to the FNB Corporation second quarter 2026 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the STAR key then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press STAR then one on your telephone keypad. To withdraw the question, please press STAR then two.

Please note this event is being recorded. I would now like to turn the conference over to Lisa Haidoo, Manager of Investor Relations. Please go ahead.

Lisa Haidoo, Manager of Investor Relations

Good morning and welcome to our earnings call. This conference call of FNB Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials 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, July 24th, 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 Dillee, Chairman, President, and CEO.

Vince Dillee, Chairman, President, and CEO

Thank you and welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerreri, our Chief Credit Officer. FNB's second quarter earnings per share grew 17% year over year to $0.42 with net income of 149 million. Our results included another quarter of record revenue totaling 463 million driven by net interest income of 366 million and solid non-interest income of 97 million. The solid quarterly performance contributed to pre-provision net revenue increasing 9% from the year-ago quarter and positive operating leverage on a year-over-year basis.

Tangible book value per common share increased 10% to $12.24, demonstrating our strong profitability levels and commitment to peer-leading internal capital generation. FNB repurchased 47 million or 2.7 million shares of common stock at a weighted average share price of $17.46. FNB's capital levels remain strong with TC at nearly 9% and with a solid return on average tangible common equity at 14%. Period-end loans increased 7.5% on an annualized linked quarter basis with growth led by commercial and industrial consumer lending and seasonal residential mortgage production.

DI's 8% annualized linked quarter growth was driven by lower risk-rated high-quality commercial borrowers. By leveraging our deep product set in capital markets, we were able to produce double-digit returns for the overall relationship while maintaining our strict credit discipline and originating lower-risk assets in a volatile geopolitical and economic environment. Our commitment to deepening customer relationships and serving as their primary operating bank was a key driver for 3% annualized growth in total average deposits with average non-interest-bearing deposit balances growing nearly 5% annualized despite the competitive environment.

At quarter-end, non-interest-bearing deposit balances were over 10 billion for the second consecutive quarter, allowing us to maintain a 26% mix of non-interest-bearing to total deposits for the seventh consecutive quarter. Our data analytics team has been able to leverage the success of our proprietary ESTORE and common application to gather additional data points for meaningfully improved insights on customers' preferences and competitive pricing.

This ability enables us to use our significant investments in our data hub and machine learning to analyze the relationships holistically to strategically price deposits. Our ability to utilize insights to drive pricing decisions contributed to the total cost of deposits decreasing 3 basis points, linked quarter, and 21 basis points from the year-ago quarter. Our wealth management revenue is up 8% year over year, aided by the utilization of new tools to improve client engagement with advanced financial planning, better portfolio analysis, and increased efficiencies.

For example, our brokerage advisors have been able to quickly translate complex financial data into intuitive visuals for our clients. These tools, paired with the key strategic financial advisory hires across our footprint, help to expand client relationships and produce record brokerage fee income. This quarter, we have also achieved solid progress on the development of our new AI-enabled customer aggregation and insight tool, Insight360. The ultimate goal will provide our clients and bankers with the ability to optimize their banking relations and improve product penetration.

Our Insight360 tool is expected to go live by the end of the year with additional enhancements to be introduced over time. In combination with the Common App, Insight360 will enable FNB to continue to grow our share of wallet and customer primacy based upon positive outcomes for our clients. As we've demonstrated over the past decade, we can successfully introduce innovative digital data solutions while also achieving a top quartile efficiency ratio.

We will maintain the same disciplined approach towards managing expenses to implement AI through the reallocation of resources, leveraging our current technology investments, and analyzing the efficiency gained over the long term. We believe FNB is one of the best-positioned financial institutions to strategically expand AI and data analytics usage to drive efficiency and accelerate revenue growth. Our value proposition is being a trusted and regulated financial institution with fintech capabilities.

These attributes will serve us well as we continue to adapt to a changing competitive landscape. With that, I will now turn the call over to Gary to discuss our credit results for the quarter.

Gary Guerreri, Chief Credit Officer

Thank you, Vince, and good morning everyone. We saw improvement in our continued solid asset quality metrics this quarter with both delinquency and NPLs in OREO decreasing 3 basis points compared to the prior quarter, totaling 71 and 31 basis points respectively. Net charge-offs continued to show solid performance totaling 19 basis points, up 1 basis point compared to the prior quarter. Criticized loans declined slightly in the quarter with a 68 basis point reduction compared to the prior year.

Total funded provision expense for the quarter stood at 21.3 million, again supporting strong loan growth. Our ending funded reserve now stands at $447 million, an increase of 4.3 million ending at 1.25%. When including acquired unamortized loan discounts, our reserve stands at 1.3% and our NPL coverage position remains strong at 420% inclusive of the discounts. We continue to maintain qualitative overlays for potential supply chain impacts due to the events in the Middle East as ongoing tariff uncertainty.

Our consistent underwriting and strong credit risk curriculum allow us to grow high-quality earning assets throughout various economic cycles as shown in our results. With our focus on less volatile industries and asset classes, we remain optimistic that our diversified customer base will continue to show resilience as it has in the past. Our consumer portfolio is very strong despite continued inflationary pressures. Average origination FICO scores were 784 in the quarter with delinquency of 66 basis points and charge-offs of 6 basis points, both remaining at multi-year lows.

During the quarter, we saw solid C&I loan growth including a slight uptick in line utilization along with higher CRE production. However, our overall CRE exposure declined in the quarter due to planned secondary market activity ending at 187% of tier one capital plus allowance. We are continuing to see increasing levels of CRE activity in our desired asset classes throughout our markets. In closing, despite the continued volatility in the markets, we saw solid loan growth across the portfolios.

Our loan book is strong and well diversified and pipelines continue to remain at solid levels positioning us to achieve our growth targets as we move into the second half of the year. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Vince Calabrese, Chief Financial Officer

Thanks, Gary, and good morning. Today, I will review the second quarter's financial results and walk through our third quarter and full-year guidance. Second quarter net income totaled 148.7 million or 42 cents per share, a 17% year-over-year increase driven by total revenues up 5.6% and prudent management of operating expenses generating a 9% PPNR increase. Turning to the balance sheet, loan activity was robust. Spot total loans and leases ending the quarter at 35.8 billion, a 7.5% annualized linked quarter increase.

Growth of 547 million in consumer loans and 111 million in commercial loans and leases drove the increase. Spot C&I loans and commercial leases were up over 8% linked quarter annualized or 186 million, driven primarily by growth in the Mid Atlantic and Pittsburgh markets. CRE balances continued to be impacted by payoffs as expected and were down 129 million linked quarter. Seasonal strength in residential mortgages and HELOC growth fueled the rise in consumer loans.

Average total deposits grew at a 3% annualized rate in the first quarter, driven by growth in non-interest-bearing balances, low-cost transaction deposits, and time deposits of note. Spot non-interest-bearing deposits increased $53 million, exceeding $10 billion for the second consecutive quarter and remaining stable at 26% of total deposits. Looking forward, public funds deposits typically build in the second half of the year, and the treasury management deposit pipeline was strong at quarter-end.

The loan-to-deposit ratio ended the quarter at a healthy level of 92.5%, while the second quarter's net interest margin of 3.25% was equal to last quarter's NIM. Net interest income increased more than 7% on a linked quarter annualized basis. Total yield on earning assets declined only 1 basis point linked quarter to 5.13%, with a 4 basis point decline in loan yields offset by a 7 basis point increase in investment securities yields. The decline in loan yields reflects the impact of lower 1-month SOFR on adjustable-rate loans and tighter spreads on new originations.

Reinvestment rates on investment securities remained well above our overall portfolio yield. Interest-bearing deposit costs declined 4 basis points, driven by lower rates on money market and CD balances, while total borrowing costs improved by 1 basis point. As a result, the total cost of funds decreased 2 basis points to 1.99% on a year-over-year basis. Net interest income increased 5.3% from the year-ago quarter as the NIM expanded 6 basis points and earning assets grew 3%.

Turning to non-interest income and expense, non-interest income totaled $97 million, up 6.5% from the second quarter of 2025. Capital markets income increased 16% to $8 million on solid contributions from debt capital markets, interest rate derivatives, and international banking, as well as early contributions from our newer businesses of investment banking and public finance. Wealth management revenues increased nearly 8% year-over-year to $22 million with contributions across the geographic footprint.

Non-interest expense totaled $253 million, a 2.9% increase from the year-ago quarter. Salaries and employee benefits increased 4.4%, reflecting strategic hiring and normal merit increases. Occupancy and equipment increased 5.1%, primarily due to technology-related investments and higher occupancy costs. Outside services increased 11.6%, driven by higher third-party legal and consulting costs. Even with these increases, the second quarter efficiency ratio remains solid at 53.7%, down more than 100 basis points from the year-ago quarter, and we continue to manage our expense base in a disciplined manner.

FNB continues to actively manage our capital position to support balance sheet growth and optimize shareholder returns while appropriately managing risk. Share repurchases totaled $47 million in the second quarter, more than $80 million for the first half of the year, a more than 300% increase from the dollar amount repurchased during the first half of 2025. Over $250 million in share repurchase authorization remained at quarter-end. Stepped-up repurchase pace and our recent quarterly common dividend increase reflect our strong financial performance and capital levels, as evidenced by the TC ratio of nearly 9% and a stable CET1 ratio of 11.4% in the quarter. Let's now look at guidance for the third quarter and full year of 2026. All guidance is based on current expectations while remaining cognizant of the highly uncertain macroeconomic and geopolitical environments. We are maintaining our full-year balance sheet guidance for spot balances, projecting period-end loans and deposits to grow mid-single digits on a full-year basis. Full-year net interest income guidance has been revised to a range of $1.485 billion to $1.515 billion due to a combination of our first-half results and our expectation for a continuation of heightened deposit competition within the industry.

We are assuming no Fed interest rate actions for 2026. Third-quarter net interest income is projected between $375 million and $385 million. Non-interest income full-year guidance remains $370 million to $390 million. The third-quarter level is expected between $93 million and $98 million. The full-year guidance range for non-interest expense has been tightened to $1.01 billion to $1.02 billion. We expect to be toward the high end of the range. Third-quarter non-interest expense is expected to be between $255 million and $260 million.

We continue to expect strong positive operating leverage for full-year 2026. Full-year provision guidance has been revised to a range of $80 million to $95 million, now from $85 million to $105 million previously, given our favorable credit performance during the first half of the year. We'll be dependent on net loan growth and charge-off activity for the rest of the year. Lastly, the full-year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur.

With that, I will turn the call back to Vince.

Vince Dillee, Chairman, President, and CEO

Thank you, Vince. Our results are a testament to the talent, dedication, and hard work of our employees, supported by our ongoing investments in AI and data analytics. The culture at FNB is rooted in teamwork and collaboration, where we strive to collectively win together. FNB continues to earn independent recognition for our client service, financial performance, and culture. This quarter, we were proud to be named as the Lender of the Year by the Export-Import Bank of the United States and a Top Workplace by Newsweek, as well as earning the Top Financial Innovations in North America Award by Global Finance.

These select examples of FNB's third-party recognition highlight the strength of our business model, financial achievements, and quality of our team. We've been able to recruit a number of highly talented executives in recent months, which adds to the depth of our leadership team and bankers. Earlier this month, Bryant Mitchell retired as Chief Wholesale Banking Officer. Since joining FNB in 2018, he has played a significant role in executing our strategy and was particularly instrumental in the early build-out of our capital markets capabilities.

I would like to thank Bryant and convey our appreciation for his contributions over the past nine years. As FNB continues to evolve into an elite commercial bank and a formidable competitor in our markets, I wish him all the best in his retirement. With that, I will now turn the call over to the operator for questions.

OPERATOR

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Daniel Tamayo with Raymond James.

Please go ahead.

Daniel Tamayo, Raymond James

Thank you. Good morning, everyone. Maybe starting just on the reduction in the net interest income guidance. Just curious where you think the biggest change that occurred in the second quarter that drove that was. And then assuming it's on the competition side. I know you talked a little bit about tighter loan spreads but you know as well as on the, on the deposit side. Just curious if you think we are nearing kind of the end of the improvement on the deposit cost side.

Vince Calabrese, Chief Financial Officer

Yeah, I would say a couple of things, Danny. You look at where we came in, $366 million slightly below the guidance range. The two factors you just mentioned are part of it for sure that we commented on in the prepared remarks. And the decline in one-month SOFR, like from peak to trough, was 9 basis points during the quarter, kind of bottomed right at the end of May. So that has a significant impact. And we have $13 billion worth of loans that are tied to one-month SOFR.

So that really coming from peak to trough down nine basis points during the quarter. The expectation is with the futures market saying that that kind of 9 comes back and gets to like 3.73 on average in the third quarter. So that clearly affected the second quarter quite a bit. The competitive environment for deposits is there for everybody. We still had an ability, we reduced our interest-bearing deposit cost by four basis points. So that was an accomplishment given kind of the environment that we were in during the quarter.

And then the spreads on kind of higher quality, lower risk loans that are tighter than other loans was definitely a factor too. But if you kind of go forward to the next quarter, I mean, so the, you know, the SOFR bounce back, as I mentioned, the normal seasonality in deposits that occurs from July through kind of October, November on the municipal side, we do expect that to come through. And that replaces short-term borrowings. It helps to pay and fund for the loans.

I mean, the higher short-term borrowings in the second quarter alone was like an extra $4 million interest expense or reduction in net interest income. So that seasonality comes through. Continue to have a very strong treasury management deposit pipeline on the commercial side of the house, kind of over a billion dollars that we're going after. And some of those are larger, there's more, a longer lead time, but that's still very active and continues to be worked.

And then the CRE headwind from payoffs, we expect another quarter of that the third quarter and then expect that to dissipate some as you get into the fourth quarter. And those are loans that are probably 25 basis points or so higher than other loans. So as those pay down, it definitely has an impact on the overall margin and then the reinvestment rates on the security side, you know, we're reinvesting 125 to 150 basis points above kind of the roll-off rate.

And for the next 12 months, it's $100 million a month in cash flow, kind of 3.09 on average. Rolling off and picking up 125, 150 basis points on that. And I guess the last thing I'll pause then is just kind of the exit margin. So for the month of June was at 3.27, a couple basis points higher than where the full quarter came in. And there's fees and stuff that fluctuate from month to month. But that's kind of our exit point, you know, into the third quarter.

Daniel Tamayo, Raymond James

Really helpful. Thanks, Vince, for all that color. And you hit on this a little bit on my next question on the CRE. Payoffs remaining elevated in the second quarter. But just kind of taking a step back a little bit here. Certainly impacted by the payoffs, but the CRE has really the concentration ratio. But also just a percentage of the book has shrunk over the last several quarters. Going back for a while now and mostly replaced by an increase in resy mortgage.

I think you guys talked about coming into the year that was expected to grow at a similar pace to the book has outpaced so far. You've got some seasonality in the second quarter. Certainly that impacts that. But just curious how you think about that mix going forward. If you have a reduction in payoffs and the CRE starts to pick up. Do you think you portfolio fewer residential mortgage loans and that mix starts to get back to where it was or you're still willing to grow the balance sheet with the RESI side even as the CRE starts to pick up?

Vince Dillee, Chairman, President, and CEO

Yeah, I think the residential, the contributions to growth from the RESI portfolio, that's largely physicians loans. Very, very, very high quality, larger mortgage loans coming on the book. Our expectation. We're not trying to rely on that to drive net interest income. That's not the case. And we've actually sold portfolios. So we've actually sold some of the stuff that we've originated that doesn't, you know, contribute deposits and other things that sits outside of market.

So we packaged up a portfolio and sold it actually. I don't know when it closed. First quarter. First quarter, yeah. So the impact of that's going to be in this quarter too. Some of those assets had higher yields on. But, you know, I think our goal is to try to drive growth across the portfolio, not to be reliant on one particular asset class. I think the CRE runoff, you know, that's a train that you can't stop easily. You know, we're financing construction and you know, this stuff's going to the permanent market and quite frankly, there just isn't enough.

There aren't enough projects driving loan demand in that space. But that's starting to change. So I think. I don't know, Gary, you could comment on it.

Gary Guerreri, Chief Credit Officer

Yeah. During the, during the quarter, Danny, the CRE growth was right at about $284 million. That compared to 190 in Q1. We are seeing a lot of very solid opportunities in that space. It is competitive, as I think everyone is aware. The industry is really focused on CRE at this point and there are some nice opportunities that have come through the organization. So we do expect that to continue to ramp up in the asset classes that we want to play in.

In reference to the mortgage that you had mentioned and Vince referenced, the second quarter is an extremely high seasonal quarter for us because the doctors come out of school in March and you know, they move into their new roles at the hospital organizations that they're joining and they go right into purchasing the home. So the second quarter is our seasonal peak there. Third quarter is. The volume is still good, but generally lower around that doctor's program.

And then it really tails off in Q4, Q1 from that part of the, part of the program.

Vince Dillee, Chairman, President, and CEO

You know, I'll add to that too. We were talking about this a little earlier, you know, Gary and I. The pipeline is at a record. The total pipeline, which includes CRE, is at a record level for us at this point. So you remember, it lagged for a little bit. You know, historically it had been growing and then we flattened out and it actually declined for a period or two, but now is back up above, you know, the all-time highs. So the short-term pipeline has contracted because we pushed a lot of volume through.

We closed a lot of deals this quarter. So, you know, we should see that pick up again because it'll, it'll pull through, right? From the larger pipeline. It's up, you know, at least nearly 10% over where it was last quarter. So we expect the second half of the year, particularly this quarter coming up, just to see some good activity in CNI and CRE fundings. Right, Gary? And then, you know, that'll make up the fall off of the RESI Mortgage and the consumer growth that we've seen.

So we're expecting to have a pretty decent second half of the year from a commercial perspective. With that, there are a bunch of deposit clients, treasury management clients that we have in the pipeline that are pulling through again, some of the largest clients in our history. So we're, we were able to win business at some pretty sizable entities. And it's going to help us in the second half of the year with deposit growth in addition to the seasonal inflows that we should see.

I don't know if you want to comment, Alfred, on the deposits in general and what's happening in the consumer bank.

Alfred

Yeah, I mean it continues to remain competitive. I think what we're, what we've had great success with is driving engagement with our existing and new clients. And oftentimes, particularly in the mortgage space, oftentimes that comes with low-cost DDA accounts. And we're being strategic about how we price deposits. In some areas we have opportunities to reduce deposit costs. In some areas we want to be competitive, particularly in some of our new markets.

Vince Dillee, Chairman, President, and CEO

Well, I'm never pleased with our cost of funds. You know, I'm always critical of every move that our people make. I think it's part of my job. Alfred, you know, you made a comment earlier, we were monitoring the reporting that's occurred to date. So how do we compare? Yeah, I mean, deposit perspective and to that point we're, we're obviously managing to the, to dual mandates of lowering our deposit costs and growing debt as a balance the impossible chore.

But this quarter we were one of the few banks, I think, you know, we're attracting something like 15 banks that have reported so far. I think we're one of three that actually had a lower cost of deposit from the prior quarter. So despite the fact that the rate environment meaningfully changed from the beginning of the quarter to now, it kind of highlights the discipline that we've had in how we price these things. Yeah, it's actually two things. It's discipline from a pricing perspective and strategy in the pricing using the insights that we have to maintain, you know, or try to maintain our margin, plus the investments that we've made to maintain privacy and some of the initiatives that Alfred and his team have launched, particularly the mortgage company with Wingspan, which is a bundling of services that we do. So you'll see more of that. And our Insight360 tool that we mentioned is going to be right in the sweet spot of driving better outcomes from cost of deposit perspective and gaining share and primacy. So I'm very excited about that. I can't wait until you guys get to see it. Really cool.

Anyway, hope that was helpful.

Daniel Tamayo, Raymond James

Very, very helpful Vince. And appreciate the color Vince, Gary and Alfred as well. I'll step back.

OPERATOR

Thanks guys. Thank you. Thanks Vince. Our next question comes from David Smith with Truist. Please go.

David Smith, Truist

Hey, good morning. Could you help us size the impact of the public funds deposit seasonality? Just deposits are down a little bit year to date right now and you're still calling for mid single digit growth and it sounds like it's going to be another solid quarter of loan growth for your commentary. So just think about the impact here and how much of the deposit cost decreases Cora might have to come back amid the continued competitive backdrop for deposits. You cite particular if we do end up getting fed hikes.

Vince Dillee, Chairman, President, and CEO

Before Vince answers that, I just wanted to make a comment. The municipal business that we have is we're the primary operating bank for the municipalities. We don't just go out and accept deposits to replace pliggit from one of the high yielding money market options that they have. So that's not our strategy. Our strategy is to go in, provide the operating accounts, you know, provide the treasury management services for those entities, disbursements and collections and then you know, benefit from the excess balances as they flow in.

So you know while there will be a surge in the deposit balances there is a, you know, it doesn't significantly change the mix because we'll see should see a lift in demand deposits as well because they use those deposits to cover the cost of services which is accelerating when the activity, you know, the taxing activity occurs. There's cost associated with that that they offset with demand deposits. But why don't you answer directly his question?

Vince Calabrese, Chief Financial Officer

Yes, the volume side of it. I mean it's historically been about a half a billion dollars kind of plus or minus a couple hundred million dollars from kind of peak to trough used to be the three to 500. And as we've grown and have larger, more relationships, you know it's a little bit bigger but half a billion or so kind of we would expect to kind of surge through as we go through the end of the second quarter through kind of the October, November timeframe.

And to Vince's point it's a mix. It's clearly a mix of the different deposit categories. Okay so the public funds are a little bit of the implied increase in deposits for the second half but it's not the majority or anything. And then on expenses we just take kind of the midpoint to the 3Q and full year guidance implies a decent step down in non-interest expenses in the fourth quarter. Your seasonality has typically been for a small increase quarter on quarter in the fourth quarter.

Just looking at adjusted deposit trends the last few, excuse me, adjusted expense trends the past few years. I wonder if you could help us unpack that a little bit. If there's anything unusual either in the third quarter or fourth quarter that's driving that abnormal seasonality.

Vince Dillee, Chairman, President, and CEO

The fourth quarter typically doesn't have additional expense associated with the tax credit deals. So you know, they're very the way we book them, which is important I'm told, you know, we end up with this big expense up front. So that's reflected in the 44 that I heard for at least the last three, four quarters. Right. So there's going to be a little bit of distortion there. But Vince, I don't know if you want to comment generally on the total expenses seasonality in the expense base in the last two quarters of the year.

Vince Calabrese, Chief Financial Officer

Yeah, I would, I guess a couple of things. Right. So again, for the quarter, you know, we came in right in the middle of our range efficiency ratio, you know, down to 53.7 over 100 basis points kind of year over year, which takes out the seasonality there, you know, as we go forward, I mean there's things that in the first couple of quarters that have occurred, you know, we had higher fraud losses, we brought that down significantly. We have a down payment assistance program that's come down meaningfully in dollars kind of second to third quarter.

And I mean we expect a nice step down second to third quarter and then again into the fourth quarter. I mean that should reduce by 1 to $1.5 million kind of per quarter. I mean, there's a commission component that's tied to revenue largely on the mortgage origination side. So that kind of fluctuates, you know, as the activity fluctuates. And then on the marketing side, you know, there's some seasonality in marketing or more timing of it when we choose to do that.

So we expect to see some increase in marketing dollars as you go from kind of the second to the third quarter. So, you know, there's a lot of moving parts in there. And with all those kind of normal bank operation items, we continue to invest, as Vince was talking about, in our tech investments, between the digital initiatives we have and the AI initiatives, but we're being very disciplined in how we fund that.

Vince Dillee, Chairman, President, and CEO

Yeah, we also had. It's also lumpy on the de novo branch expansion too, because we announced we were opening branches over a five year period and the timing of one of those branches open isn't, you know, it isn't scheduled out in a month by month. So it's lumpy. So you'll see some lumpiness in the expense base, particularly in the first half of this year. You know, two branches went online in Charleston, South Carolina that brought the expense online as well.

And then we also have the investments in Insight360, the tool that I mentioned. So that's reflected in the first half of the year and probably will continue to be an expense burden into the second half right until development's completed and it's launched. So there are some impacts. But I think the important points here are we have positive operating leverage and we're forecasting positive operating leverage. The expense based, our guidelines year over year.

Vince Calabrese, Chief Financial Officer

Well, yeah, efficiency ratio low 50s by the NR.

Vince Dillee, Chairman, President, and CEO

So the expense base itself and the guidance only single. Low single digits. Yeah. The full year to full year. Yes. So we've been able to take cost out and invest in tools, AI tools. And that's, you know, that's a unique thing because, you know, a lot of companies are expending tremendous resources taking on capital expenditures prior to receiving any benefit from an AI investment. And you know, we're seeing that all over the place, even within the customer base.

So, you know, it takes time to get the actual benefits and we're focusing more on revenue opportunities right now than we are expense takeouts. And there's a combination of both a little more heavily weighted towards generating revenue with our AI investment, which also speaks to the infrastructure that we built because that requires a much more complex data governance framework within the company. So I believe we're in a really good position. I said that in my prepared comments to benefit from this and it should not impact materially our expense base on a run rate basis and move forward.

All right, thank you.

OPERATOR

Our next question comes from Casey Hare with Autonomous. Please go ahead.

Casey Hare (Equity Analyst)

Great, thanks. Good morning, guys. So Vince, see question for you following up on the nim. So the guide does not assume any Fed action, but it does, it sounds like you, you do expect SOFR to bounce back to 373. That's 11 bips higher than where it is today. Just wondering where, assuming SOFR holds this level, you know, where, where does NII track versus, you know, within this guy.

Vince Dillee, Chairman, President, and CEO

Yeah, what I was referring to, Casey was right. If you look at the. What happened during the quarter went from a peak of 367, April 15 down to 358, May 20. And we have a lot of loans that reset at the end of the month. Today we're at 367. So you know what the futures market is saying, there's just another six basis points of pickup in that. So, you know, on the $13 billion, if that comes through, I mean, it may or may not. There's, you know, there's a lot of volatility with interest rates with everything going on in the world.

And you know, whether the, you know, we went from an environment where the Fed was going to cut time, where they're going to raise and it's October, it's December, I mean, it moves around quite a bit. So just based on what we know today, I mean, if six basis points up from where we are today on that 13 billion is kind of the math you would do there.

Casey Hare (Equity Analyst)

Okay. Okay. Yeah. It's one month you might have been referring to overnight, right? Oh, right. It's one month. Yes. Yeah. Oh, gotcha. Okay, gotcha. All right, I'll take a look. Okay. And then just, I guess, switching to capital. Any updated thoughts on what the Basel III proposal does for you guys? I think you didn't quantify it last quarter. You said it was meaningful. And then do you lean into that in terms of buyback? The buyback was very strong this quarter. How do we think about that appetite going forward? Are we going to hold this 11, 4 level or is there room to push the payout ratio? Just trying to think about how you guys think about the buyback.

Vince Dillee, Chairman, President, and CEO

Yeah, I would say, I mean, for the Basel III and then I'll turn it over to Frank. I mean, you know, based on what we know. And you need to get the final, final rules right before you can say with certainty. I mean, it's, it's a 80 to 100 basis point kind of pick up to the capital ratios. And you know, if that does happen at that point, and I don't know if they're talking January 1st of next year potentially, you know, once that would happen, we'd definitely step back and take a fresh look at the overall capital allocation approach that we want to use going forward.

Turn it to Frank for kind of comment on our buyback philosophy today.

Frank

Casey? Yeah, you know, we think buybacks continue to be attractive here. We transacted them at around 1750 on average in the quarter as we talked about at that point that was sort of a three year earn back. Obviously markets have moved higher, but even, even at these levels, we're still talking about sort of a four and change year earn back here. And for buybacks where you don't have things like deal integration risk, obviously you can be pretty confident in that earn back.

I still think that. We still think that's a pretty good return and so good return, good capital management tool. As you pointed out over the last few quarters we've reported flattish CET1 ratio at 11:4. Obviously very comfortable at those levels. And you know, while we don't give quarterly guide on repurchases, I think holding capital around those current levels is a pretty good sort of expectation or bogey here.

Casey Hare (Equity Analyst)

Great, thank you. Thanks.

OPERATOR

Thank you, Casey. Our next question comes from Russell Gunther with DA Davidson. Please go ahead.

Russell Gunther (Equity Analyst)

Hey guys. Yeah, hey, good morning. I appreciate all the color on the margin dynamics this quarter. Was hoping to unpack some of the assumptions or what under bellies that June 327 NIM and really focus on the loan yield. So the 552 maybe just give us a sense for where overall new loan production is coming on if possible to share kind of where pipeline loan yield stands and perhaps the spot loan yield as of June.

Vince Dillee, Chairman, President, and CEO

Yeah, the new loans if we look at what happened in the second quarter, Russell came on at 554 for the second quarter. For reference that was 557 in the first quarter. So I'm just a few basis points lower. If you look at kind of on a spot basis throughout overall portfolio Yield was down 8 basis points to 553 again with no Fed actions but with the impact of one month. So for running through there. So again that obviously affects the yield level. So the portfolio came down that 8bps comparison last quarter was kind of down 1 basis point. So it's the new stuff is coming on at 554.

Russell Gunther (Equity Analyst)

Okay, got it. Thank you. And then just the other side of that please on the deposit front. So sounds like should have some good growth this quarter. Bring that loan to deposit ratio kind of back into the 90s perhaps where you're more comfortable. But could you give us a help in terms of where spot deposit costs were for the quarter or for June?

Vince Dillee, Chairman, President, and CEO

Let's see on the loan to deposit ratio we have been higher than 92% historically. I mean it's not that we want to. I would prefer to be sub 90 of course but Alfred can produce deposits without pricing. So you know we're being very selective in trying to maintain the margin. But you know there's a trade off between that strategy of margin from reservation and even though I want everything, the loan to deposit ratio. But typically as we move into the second half of the year, we do see those seasonal inflows and we do get back to the area that you mentioned as a comfortable spot for us.

Just to be candid, I mean that's. It was somewhat intentional for us to be where we are. So we're not uncomfortable where we are. Just want to make sure. No, I think that strategy was important for us to get it down to 90 so that if you have quarters where loans are growing faster than deposits, you know, we're at 92, 5, 93. So there's plenty of buffer there to levels. In the past, you know where we started to take action was it 96, 97%. So you know, being at 90 is a reference point and going up a few percentage points is fine.

So I think that that was an intentional strategy and I think that's working very well for us as far as the spot rate. So for the month of June, total deposits we're at 174. Total interest bearing deposits we're at 233.

Russell Gunther (Equity Analyst)

Okay. Total cost of fund is one. That one. No, that's very helpful guys. Thank you, Vincent. Thank you. I guess, last one for me, guys. On the fee income side, as you look at the back half of the year, what verticals are kind of the key drivers of growth in 3Q, 4Q and if you were to kind of come in at the high end, what operating environment and C verticals get you there?

Vince Dillee, Chairman, President, and CEO

Yeah, I think clearly there's opportunity. In our investment banking segment, we have a number of deals, both public finance and corporate finance transactions that are going to pipeline. So that should benefit us moving into the second half of the year. So there's some benefit there. We're still optimistic about derivatives. Our derivatives business has been down because of the interest rate environment, but we think things are starting to break because of the capex spend.

Right. That requires a need for fixing rates. And as you know, we fix, we use derivatives. We don't put large extra loans on our balance sheet. Typically we will, we prefer to push it off balance sheet. So you know, those businesses should do particularly well. We have opportunities on the upside merchants as we move into the second half of the year with interchange fees and you know, some of the initiatives we pushed in wealth and brokerage should benefit us.

So there's a lot of momentum there. We have, you know, record levels, record levels of growth and brokerage and we continue to add to the team and continue to build out in the Carolinas which has been very helpful for us. So those are the areas that I would view as being pretty favorable. And obviously you want to. You also ask about the economic backdrop. You know of course if we were in a different scenario where we were expecting rates to decline, I think you'd see an acceleration in some of those business units particularly mortgage would continue to contribute probably at a stronger level.

Given where we are, I would expect our mortgage business to be pretty stable in the second half of the year. Not declining because a lot of the production that we do is purchase money production and you know, you tend to see more activity. You know people buy homes between now and September. Right. So we'll see that coming through in the next quarter or so. But third quarter mortgage banking should step up nicely. Second quarter.

Russell Gunther (Equity Analyst)

Exactly. So thank you. Sure Vince.

Vince Dillee, Chairman, President, and CEO

We've also seen as we've talked some increasing opportunities in the FX space with the international group. I mean they've really continued to ramp those opportunities up and we're seeing some. Yeah with that capex spend for larger entities you'll see more cross border activity and we were able to benefit from that. Our foreign exchange area did particularly well and they should continue to do well bitcoin area throughout the rest of the year. So all of that combined and while individually they're not huge numbers but combined it gives you a pretty good base moving into the second half.

Yeah, the debt capital markets piece too has been performing at a really high level consistently this quarter. Management is at the key top peak too. I mean we're record level there and that should continue because I mentioned we have a lot of very large treasury management customers in the pipeline that are coming online in the second half of this year which will contribute to fee income because they'll use, they'll pay fees and not just use balances.

So you'll see an increase there as well. Yeah, I think what you're seeing a bit here Russell is you know the building out and the diversity of all these fee income business lines is really taking hold and really, really providing a good source of fee income that's, that's diverse across the company and it's, you know there's puts and takes throughout the mix and you know it's insane we've been able to on different interest rate environments. So it's as Gary said, it's pretty well assembled and there's a lot of diversification within that base.

So we're very optimistic about the fee income categories and the upside here.

Russell Gunther (Equity Analyst)

That's great guys, I appreciate all Your thoughts and thank you for taking my question. Thanks, Russell.

OPERATOR

Our next question comes from Manuel Navas with Piper Sandler. Please go ahead.

Manuel Navas (Equity Analyst)

Hey, good morning. Can we go back to some of the deposit pipelines? You have those in the treasury management area. You talk about the seasonality in munis. How are retail deposits flowing as well? And as you look at those pipelines, what kind of are they coming in above current deposit costs? What is kind of the pipeline rate on the deposits?

Vince Calabrese, Chief Financial Officer

Well, I mean, I think that our deposit activity within the consumer bank has been pretty favorable. You know, we've begun to grow households at a faster clip. We've got the Penn State initiative that we haven't even really launched yet. It's in its infancy, but those initiatives should contribute. Wingspan we mentioned in the mortgage business, they're all starting to contribute. And I would say that our goal when we bring on a consumer depositor, and I'll segment it, because there's a difference between a consumer and a small business depositor.

But a consumer depositor is coming on very low cost. Right, because we typically are striving to be the disbursement bank for the consumer, you know, their operating bank. So, you know, they keep balances there and then, you know, we get the benefit of excess balances moved into money market products. So we priced our money market product to be attractive enough to retain those deposit balances, but we're relying on the free balances. And, you know, those accounts average like $4,000, I think.

So they're. There's a lot of them, but it's very granular. The business side is a little different. The deposit balances are, I think, averaging what Alfred and business bank, like 12,000 per account. It's a bit higher, but again, it's still relatively granular. And to Vince's point, when we're bringing on any kind of client, it's always a holistic onboarding process. So it's not just, hey, it's a single service. Our focus is really to drive privacy across multiple products that both on the deposit side and on the lending side on the TM side, there's two pieces to it as well.

I mean, there's the three balance piece which we forecast. We can't really predict whether a client will use earnings credits or not. But, you know, there's the fee income side and then there's the forecasting that goes on with rebalances to compensate for services. So, you know, we're feeling pretty good about both, you know, the Fee income piece and our ability to drive compensating balances by bringing in new clients because we have a pretty strong pipeline.

That's, that's what we're trying to say. I don't know if I answered your question or not, but I would say if you look at our cost of deposits, we've done a pretty good job of bringing clients over and picking up non interest bearing deposits, which is really helped us because it's very competitive right now and you know, we basically are pricing to retain our existing customer base and then we'll go out and we'll become a little more aggressive on new opportunities and you know, try to position those opportunities to benefit from the free balances and the compensating balances in the structure.

The new relationships are designed to go after the whole relationship, the lending side, the deposit side, the wealth businesses, the entire kind of capital market side of it. So there's, so you can't just look at one pipeline and draw a conclusion about what the direction of the deposits are. So it varies from quarter to quarter. But I would say in the second half of the year we're expecting contributions from both consumer and the treasury management pipeline for deposit growth. That's why we're you know, optimistic about the guide.

Manuel Navas (Equity Analyst)

I just wanted to make sure to kind of pin down where's greater competition expected on those two.

Vince Calabrese, Chief Financial Officer

It's all over the place. But I hate to say that I think we've got a pretty good handle on it and you know, I think we've got some really good opportunities and we're willing to compete but we can compete with higher yielding competitors, particularly smaller competitors who we may see them more frequently in the consumer space and then you move into the larger depositors and commercial space. It's a function of being able to win both, not just go after, we don't want to just go after the high yielding, low margin deposit relationships. We want the whole thing. So holistically pursuing those opportunities is the right thing. And that tends to bring the cost of those deposits down considerably. Based on the component, the no cost component, the overall profitability of the relationship expands.

So there's a lot of science associated with it. It's not as simple as just looking at a pipeline.

Manuel Navas (Equity Analyst)

I appreciate that color. Hopefully it's a simpler question. Are loan yields also structurally going to benefit I understand the SOFR side, are loan yields also going to structurally benefit from resi real estate originations kind of falling off a little bit seasonally and more commercial originations. Is that also part of the go forward on loan yields?

Vince Calabrese, Chief Financial Officer

Yeah, that's also a very complex question, Manuel. Just kidding. I'm just teasing. No, actually we should see, we were talking about that. If you look at the originations that we experienced this quarter, we have some higher yielding growth in the commercial finance segment. Our leasing financing arm is seeing pretty decent margin. It's still under competitive pressure, but better than you would see in the CNI book. Because the CNI book is a lot of very large middle market and upper middle market transactions that we've seen capex spend in.

So higher quality originations with lower yields this quarter, it really impacted the numbers. When you look at it, it's fairly sizable impact. Our goal is to bring those in. Typically if you just went straight credit, you know, extending your balance sheet pricing to market in that space, you're going to see like a 6 to 9% return which isn't good enough for us. So we would have to have some ancillary business, either the depository business or our debt capital markets business or FX business that we look at in our models that takes us north of, you know, 12, 13, 14 or more in return.

So we, you know, we want to be way above our cost of capital in terms of bringing these things on. So we have models that the line runs. But the point of this is a lot of those originations that occurred this past quarter were larger, either syndicated deals or large middle market single names where they're lower priced, lower risk. We brought those on this quarter. I'd say as we move into the second half of the year, the real estate originations price higher.

So you know, there's a big differential, probably, you know, 75 to 100 basis points in spread on those CRE opportunities. And then, you know, as we make gain traction in the traditional middle market in CNI as well, we should see better yields coming in, still under competitive pressure, but better than what we originated so far this year. From a yield perspective, I hope that helps scary payoffs diminish as we go through the year. Yeah, that headwind, that's right, you're seeing stuff going out that's 225 to 275 over SOFR and we're originating at, you know, a buck 50, that that's not a great sustainable environment. But that's an anomaly because you brought in, you've got the tailwind from the big deals coming in and then you get the headwind of the higher margin CRE both running off and then you know, lower originations in that space, but that we see that turning because the CRE runoff is pretty much done.

And as we move into the second half of the year, the real estate lenders are more optimistic. If you look at the pipeline, they've got some good stuff coming on. That doesn't mean it's not under the higher quality paper is not under pressure. It is, but it's a higher margin than what we've originated. Right. So could be a better story.

Manuel Navas (Equity Analyst)

Thank you.

Vince Calabrese, Chief Financial Officer

So it's kind of tough to model. I know you're trying to model it. I, I hope I helped. It helps.

Manuel Navas (Equity Analyst)

Thank you.

OPERATOR

Our next question comes from Brian Martin with Breen Capital. Please go ahead.

Brian Martin

Hey, good morning guys. Thanks for all the colors so far. So just one or two things for me. Most of it was just covered there in the last question, but just on the loan pipeline. Vince, I think you commented that the pull through this quarter, so the short term is maybe a little bit down, but the long term is the strongest. Just kind of, if you could just frame up just big picture, you know, just either geographically or kind of by segment where the, that long term pipeline that's at the peak today, kind of where the strength is there.

Vince Calabrese, Chief Financial Officer

Yeah, we were just, Gary and I were just talking about it. I mean Cleveland starting to come on pretty strong. You know, the central Pennsylvania areas, you know we call it the, the central Mountain capital region are both doing really well and they've got pretty strong pipelines. From a historical perspective, both of them are at an all time high. And then, you know, South Carolina is at a high or near an all time high. I mean they're right at their all time high. So there was one other quarter back in 24 when they, they were at a similar level. So that's all looking good, you know, and then their cities are strong. Pittsburgh is really strong. Yeah, that's, that's. I don't know if it's an all time high, but it's at least a high relative to the last three or four years and it's up meaningfully, it's up big.

So, you know, there's, there's some really bright spots, you know, the more competitive markets we're still up in, you know, Charlotte and Raleigh, but you know, not at at all time highs. So there's upside I see in some of those markets as we build out those teams because we're still focusing on adding to the teams there.

Brian Martin

Gotcha. And then just by segment, like, you know, where is the real strength there?

Vince Calabrese, Chief Financial Officer

Yeah, I'd say CNI is the winner. I mean, I don't care. You're seeing it definitely on the CNI side. The CRE pipelines are big building, Brian, but the CNI is carrying the small business has been building recently too. Small business has been, has been building and it has been a steady increase in the first half of the year. Equipment finance has been a nice steady. It's been good, yeah. Equipment finance is all CNI that's been very strong because of the capex spend that's going on in the tax tax environment.

Right. With the capital gains treatment.

Brian Martin

Gotcha. And that CNI, it's got to your point, it's got better yields. It's not all the stuff you put on this quarter that you know, kind of the higher quality, you know, I guess call it lower risk.

Vince Calabrese, Chief Financial Officer

There's a mix in there that those yields are better than what you brought on this quarter. That's kind of your point.

Vince Dillee, Chairman, President, and CEO

Yeah, because we, you know, it was very lumpy this quarter. There were a lot of large transactions, M and A transactions, refinancing activity going on within the large corporate and upper middle market space. You know and some of them even, you know, they restructured and went to the bond market which is why we had strong performance in our broker, in our, you know, debt capital markets group. The broker dealer that we stood up for capital markets, you know, that that was all concentrated.

So we saw a lot of concentration in the order of lower yielding assets coming on which are very high quality. That's why I said in my comments I don't mind doing that in this environment. I would rather our teams not go out and compete foolishly for assets because it is still very volatile. I know we feel like we're in a great economic environment but you know, you're seeing cracks here and there. You've got the war in Iran that could, you know, throw us into a weird situation with oil prices rising and interest rates have been more volatile, you saw.

So as Vince mentioned, there was a little imbalance in SOFR for a period of time and it contracted and then expanded for no apparent reason. Not consistent with the rest of the yield curve. So you know, there was a little inflection in supply and demand and you know that happens from time to time. So you know, I'd rather see us go out and do higher quality paper. Right. And then stage what we go after in the second half of the year to bring some higher yielding assets on that are manageable and we can manage from a risk perspective.

I still think you know, we're one of the best banks in the country in terms of risk management. And we have yet to be tested here, you know, for a long time, because we performed extraordinarily well through the last downturn, which was a long time ago. I've been in the seat, I've been at least president of the bank for 20 years, nearly 20 years. So I got to see it last time. We performed extraordinarily well through that period and Gary's very good and very conservative and our portfolio is extraordinarily well positioned.

Our reserves are strong given the risk profile in our portfolio. So I think the way we go about doing things is the right way because when the floor does fall out, you will see us stand up. I mean, we're going to be a high performer throughout that period. So based on the quality of the portfolio and the asset classes that we went into anyway, Gary, I think you feel the same way.

Gary Guerreri, Chief Credit Officer

I feel exactly that way. And I think the portfolio is very nicely positioned where we sit today and we're excited for the future opportunities that we have in front of us. And Gary and I are in lockstep. We don't disagree on many things. I think we're pretty consistent here forever, right? Yeah. For a long time. Together for a long time.

Brian Martin

Yeah. Well, thanks for that and great job, Gary, and your team on the crowd. That's a proven, it's a long-term trend for you guys and great work. So just the last two for me, just on the, just the net. I appreciate all the color on the CRE, I guess bottom line is, if you look at the net growth in CRE, do you expect that to rebound in 27? So I get the payoffs. It sounds like they're dissipating. So maybe some net growth you'd expect in 27. Is that fair?

Vince Dillee, Chairman, President, and CEO

I think that's a very fair view of it at this point, Brian. Based on what we're seeing here halfway through the year and looking out through the end of the year and into early 27, I would expect that to be the case.

Brian Martin

Okay, that's clear enough. And then the last two, just the funding costs, it sounds like this quarter is kind of being obviously standout relative to those 16 banks, but maybe this is kind of the bottom on funding costs. I appreciate all that. I mean, what's going to happen in the second half with the dynamics of the municipal funding and the treasury deposits you've got coming in? But maybe kind of we're at a bottom here on the funding side is that especially given a potential outlook for rate hikes, it really depends on what we bring in.

I mean, the new relationships that Vince was talking about, that's where the operating bank for those clients then bringing demand deposits and new relationships, bringing in kind of the full relationship is what we go after. So obviously the more DDAs you have, that has nice positive impact on the overall rate that's there. The municipal stuff comes in at a mix. Like Vince said earlier, you know, the CDs are close to a bottom. Kind of like, you know, we were.

I think the overall portfolio is like just over three. And we're probably close to a bottom on the CDs. So the new CDs coming in are pretty close to the CDs that are maturing. So that's been like that probably for the last quarter or two. So it's really a function of our success bringing in the new relationships.

Vince Dillee, Chairman, President, and CEO

And then the very last one, sorry, was the. Just appreciate the color. On the fee income side, just where do you see, you know, given all the momentum you have with all the build-out and the broadening out on the fee income side, that where it's at today at 21% of total revenues or core revenues, do you see that trending up on a relative basis? Is it kind of pretty steady in this range or how are you thinking about that? Just maybe longer term given the momentum you have?

Yeah, obviously we would like it to be higher always because it creates more stability for us rather than relying on net interest income solely. So I think we would like to see it higher. I think it's hard for us, given the interest rate environment and the impact on revenue, to throw a number out there because it'll get higher with lower net interest income. You wouldn't like that as a percentage. So we want to make sure we're growing both and you know, we would love to see it, you know, approaching 25% someday, 30%.

So some of these businesses are very new and there's a lot of upside in them. Yeah. So I think, you know, we're going to continue to manage this like we have. You know, we grew it. If you remember, you know, back in 2017, we were about 160, 180 million. You know, 2015 was 172. Yeah, we're guiding to what this year it's almost 400. It's been a pretty remarkable ride. But I think there's upside as we build out these other business units, particularly investment banking, public finance, continuing to invest in debt, capital markets, and we're adding team members in large corporates so that we could pursue more.

I think derivatives has been flat, you know, for several years and you know, maybe we're getting through the end of some of those fixed rate cycles. So some, some of these borrowers are going to have to do something. So you know, we'll probably see that pick up a little bit. Commercial real estate activity creates some. Yeah, commercial real estate activity. So certainly will create it because that's a big driver of derivative fee income. So those are all the benefits.

And then we haven't even begun to focus on optimization of interchange, you know, and we're building out payment platforms today that, you know, will enable us to do certain things. Insight360 is an exciting tool that should drive the income because we're going to give customers the ability to use, we're going to use AI, looking at an aggregate portfolio of products and then make product recommendations, which includes wealth and insurance products.

Right. So all that is exciting. I think there's upside there long term. Yeah.

Gary Guerreri, Chief Credit Officer

And Brian, that slide 17 we have in the deck is a key one. To summarize it, I mean we've established or expanded 10 business lines that we started from scratch or started small and really expanded. And the newer ones since mentioned, investment banking, public finance, are brand new. They're starting to contribute this year and there's quite a bit of upside there. And TM, we're at record levels, but what Vince just commented on, there's meaningful upside there.

So building out a new portal for TM, there's a bunch of things happening on the commercial side which will be additive moving into 27. You know, I'm excited about that too. So I, I think TM is definitely an area that we could perform better in, in the years to come. I think the important thing to note here is that all these fee income businesses are being brought on efficiently. It's not as though our efficiency ratio jumps. All this stuff happens.

And that's the same with our AI approach. You know, we want to make sure that we're taking cost out to invest in certain businesses that have a higher growth trajectory and produce higher returns for our shareholders. So we basically are very careful about launching these businesses. So we launch them very gradually and then build them over time so that we can sustain profitability and sustain a decent return. Which is why the efficiency ratio has generated revenue, you know, faster than we're taking in new people, adding new people and adding expense to those areas.

We're gradually building it and reallocating resources, too. We constantly look at the allocation of personnel and resources to ensure that we're getting that most optimal deployment of those expenses.

Brian Martin

Yeah, no, it's all, it's all super helpful just with the, I mean, I guess, kind of just worth shining a spotlight on. It's going to grow for the right reason and that's what you just were talking about there, rather than at the expense. Expense of NII and just a better ratio. So thank you for.

Vince Dillee, Chairman, President, and CEO

And it's not pie in the sky. I mean, you can see the growth over a long period of time. It's not like we're making this up. There's a historical framework that you can point to, and we're very excited about continuing to grow it.

Brian Martin

Yeah, no, it sounds like a lot of opportunities ahead, especially given the young businesses here. So. So, well, thank you for all the help and all the color today.

Vince Dillee, Chairman, President, and CEO

All right, thanks, Brian.

OPERATOR

Our next question comes from Kelly Mata with KBW. Please go ahead.

Kelly Mata (Equity Analyst)

Hey, good morning. Thanks for the question. A lot of great things have been covered today. So I think most of mine have been asked and answered at this point. But maybe stepping back at a high level, when I look at FNB through the years, you have generally generated above average profitability on a ROCE basis at least. And the peers have narrowed that gap here with, with you guys at 14%, you clearly have made a lot of investments in the platform and technology and AI.

I'm wondering as you look ahead and you're thinking about, you know, a normalized profitability for FNB, if there's still additional room for improvement as you, you leverage those investments, generate positive operating leverage. Or at this point, we're thinking this is where we're leveling off here with the reinvestment back in the business. I'm just trying to kind of balance how to think about that. Thank you.

Vince Dillee, Chairman, President, and CEO

Yeah, I think, you know, we, Alfred and I had a long conversation about that exact topic last night. When I called him on my walk for an hour, he basically, you know, what our conversation was about was our returns, you know, 14% return on tangible common equity. It doesn't sound impressive, but if you look at the capital accumulation because of our profitability, it is pretty impressive considering that we're not near 9% TCE CET 1 and you know, we've got a 14% return.

I mean, we, we don't need to because of the risk profile within the portfolio. We are operating with less leverage than our peers. So, you know, we have opportunities to drive the returns two ways. One, by continuing to invest in the businesses that produce a higher return on capital. And two, basically repatriating capital, returning capital to the shareholders because of our risk profile. So both of those things are going to happen because we're not going to sit here and accumulate capital for no reason.

Our goal is to drive shareholder value, and to do that, we have to be very judicious about capital deployment. So we're going to continue to focus on ways to leverage that capital and drive returns and managing both sides of it.

Frank

Yeah, I mean, but you're spot on. I mean, we were having exactly last night because I don't want to be, you know, in the middle of the pack. It's part of our compensation. Right. We get, we get scored on that, the board. So, you know, we need the highest return on tangible common equity in the risk environment, risk profile that we, we maintain. Right. Which means we can't, we really shouldn't have excess capital. We should be thinking about managing our capital, returning capital.

And we are. And, you know, Frank answered the question about, you know, buybacks and our TC ratio, if you compare it to, you know, the peer group, for us, we're 50 basis points higher. So that's another important element in looking at the overall return on equity there. And as Vin said, we're going to continue to manage the denominator. You know, our growth in our capital is not AOCI. We're not benefiting. We didn't have big impairments, so we're not getting accretion from, you know, AOCI impairments.

We're actually earning our way to these higher capital levels. And, you know, that's a distinction that people fail to take into consideration when you look across the peer group.

Russell Gunther (Equity Analyst)

Got it. That's helpful. Okay. Maybe last question for me. I apologize if you've answered it already. But just in terms of your rate sensitivity profile here, if you look at the static balance sheet, you are asset sensitive. But I am wondering, given the competitive pressures through your markets, how you feel NIM reacts in response to a rate cut. And absent cuts, I think you said the spot is in the high 320s if there's any further levers or if that's of a stasis point or potential pressure off of that.

Thank you.

Vince Calabrese, Chief Financial Officer

Yeah, I would say, I mean, we've brought our interest rate position down. I mean, we're pretty near neutral now. We're still slightly asset sensitive, but as we've kind of gone back towards more like neutral. I mean, the impact of one cut, you know, if we get an increase, let's use that as a reference point in October. I mean, that's worth probably a penny or so to the fourth quarter potentially. I don't know whether we're going to get it or not.

I guess we'll see how the year plays out. But the magnitude of the impact of either a cut or a hike is not as large as it used to be because we intentionally brought it back down towards near neutral. This way we're not taking a risk either way and let growth in loans and deposits and investments drive the net interest income.

Russell Gunther (Equity Analyst)

Got it. And I guess the last question about NIM, you did take your NII guide down. Just wondering if you know, this any this high 320s margin, if, you know, it seems like loan yields are coming in right around where the book is. There's probably limited, you know, room on deposits or is some increased pressure. If this is, you know, it's up relative to the blended quarter and if this is kind of flattish from here, absent moves in. Great. Thank you.

Vince Calabrese, Chief Financial Officer

Yeah, I would say what's baked in is kind of, I would call it a drifting up from this level. You know, very kind of very gradual. Not a lot, but there's some movement up. Drifting is a good word.

Russell Gunther (Equity Analyst)

Thanks so much for all the time.

Vince Dillee, Chairman, President, and CEO

All right, thank you, Kelly.

OPERATOR

This concludes our question and answer session. I would like to turn the conference back over to Vincent Jennifer Jay Delis for any closing remarks.

Vince Dillee, Chairman, President, and CEO

I'd just like to thank everybody, thank the employees again for another great quarter. I know, you know, a little disappointing on the NIM, but, you know, more macroeconomic than effort. And I look forward to a really strong ending to the year. A lot of momentum in a lot of areas. So we're going to keep that momentum up and work really hard for the shareholders. So thank you. Thank you for the questions, too. They were great questions. I'm glad we had a chance to answer.

You know, take care, everybody. Thank you. Bye.

OPERATOR

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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