F.N.B. - Earnings Call - Q1 2025

Executive Summary

• EPS beat, revenue slight miss: Q1 diluted EPS was $0.32 vs S&P consensus $0.298; revenue (S&P definition) was $394.1M vs $409.7M consensus. EPS beat driven by stable NIM, lower deposit costs, and solid fee lines; revenue shortfall reflects definitional differences and softer capital markets fees. Bold: EPS beat; revenue miss. Q1 2025 S&P estimates and actuals marked with asterisks below (S&P Global).*
• Margin stabilized; deposit costs fell: NIM (FTE) held at 3.03% with total cost of funds down 10 bps q/q to 2.32%, while interest-bearing deposit costs fell 24 bps to 2.76%.
• Asset quality solid; capital at records: NCOs 0.15% annualized, NPL/Loans 0.47%-0.48%, CET1 10.7% (record), TCE/TA 8.37%; TBVPS rose 12.3% y/y to $10.83.
• Guidance maintained; catalysts: Management maintained FY25 guides (NII $1.345–$1.385B; non-interest income $350–$370M; non-interest expense $965–$985M; provision $85–$105M; tax 21–22%) and guided Q2 NII $325–$335M, with swap drag moderating ($8M in Q1 to ~$6M in Q2). Focus near term on NII trajectory, deposit betas, and CRE de-risking.

What Went Well and What Went Wrong

• What Went Well
  • Stable NIM, lower deposit costs: NIM (FTE) 3.03% with 10 bps decline in cost of funds and 24 bps decline in interest-bearing deposit costs q/q; NII grew 0.5% q/q despite two fewer days.
  • Fee resilience; record Wealth Management: Non-interest income $87.8M; Wealth Mgmt revenues a record $21.2M (trust +8.5%, securities +8.2%), aided by diversified advisory businesses.
  • Capital and TBV strength: CET1 10.7% (record); TBVPS $10.83 up 12.3% y/y; TCE/TA 8.37%. CEO: “Record CET1 … tangible book value per share growth (non-GAAP) of 12.3% to $10.83”.
• What Went Wrong
  • Modest revenue miss vs S&P: Revenue (S&P definition) $394.1M vs $409.7M consensus; capital markets income $5.3M declined with softer commercial activity. Q1 2025 S&P estimates/actuals marked with asterisks below (S&P Global).*
  • Operating efficiency seasonally higher: Efficiency ratio 58.5% vs 56.9% prior quarter on seasonal comp/taxes; salaries and benefits +$7.1M q/q.
  • CRE still de-risking; deposit mix shift: Nonowner CRE concentration reduced to 229% of capital with target ~200%; NIB deposits stable at 26% but down y/y (mix shift toward higher-yielding products).

Transcript

Operator (participant)

Good morning, everyone, and welcome to the F.N.B. First Quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touchscreen telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.

Lisa Hajdu (Manager of Investor Relations)

Good morning and welcome to our earnings call. This conference call of F.N.B. 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 Thursday, April 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 Delie, Chairman, President, and CEO.

Vince Delie (Chairman, President, and CEO)

Thank you. Welcome to our first quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. F.N.B. reported net income available to common shareholders of $116.5 million, or $0.32 per share. The first quarter had positive momentum on several key metrics, including tangible book value per share growth of 12%, totaling $10.83, record capital levels with CET1 of 10.7%, and tangible common equity to tangible assets of 8.4%. The ever-changing macroeconomic environment emphasizes the importance of the continued execution of our long-term strategy, particularly around diversifying revenue streams, active balance sheet management, generating ample capital and liquidity, and maintaining a balanced, well-positioned loan portfolio with consistent underwriting and robust credit monitoring. F.N.B. generated modest revenue growth this quarter, reporting total revenue of $411.2 million, driven by net interest income growth and solid non-interest income.

We benefited from a higher level of earning assets and stable margin with directional improvement during the quarter. Non-interest income totaled $87.8 million, benefiting from the strategic investments we have made to develop and expand high-value business units that diversify revenue and enhance product capabilities for our clients. During the past 10 years, we have significantly enhanced our capital markets offerings, which has led to revenues more than doubling during that timeframe. We recently announced our acquisition of a boutique investment banking firm focused on delivering financial advisory services to public and private companies. This team of experienced bankers has advised on hundreds of transactions with an aggregate value of nearly $40 billion across a variety of industries for middle market and large corporate clients.

Given the scale of our company, the growth of our client base, and the changing economic outlook, this is an opportune time to invest in expanding our capabilities. The first quarter annualized loan and deposit growth in a seasonally slower period were 3.5% and 1.4%, respectively, demonstrating our success in growing client relationships and market share. F.N.B. remains focused on being our client's primary operating bank by prioritizing high-touch services and a superior digital delivery channel, including our award-winning eStore. This month, we launched automated direct deposit switch capabilities, the latest enhancement to our award-winning digital banking experience, which provides the option for customers to move their payroll direct deposits instantaneously with a few simple steps.

Our comprehensive digital strategy, including the use of AI, is designed to drive client acquisition, engagement, convenience, and primacy, and is a major force behind our success gaining share throughout our footprint and broadening our client relationships. As we demonstrated during the 2008 financial crisis, the pandemic, and the more recent banking liquidity crisis, F.N.B. maintains a diversified and granular deposit base, consistent and conservative underwriting, solid capital and liquidity levels, and sound risk management policies and governance. These practices have always been integral to F.N.B.'s long-term strategy and are ingrained in our culture and enterprise risk management program. Our team frequently engages in regular liquidity stress test analysis, capital stress testing, CECL reserve model analysis, and diligent and proactive credit monitoring, ensuring we are prepared for a range of economic scenarios. In response to the recent tariff announcements, our team completed liquidity, capital, and credit stress tests.

The results show strong coverage and ample liquidity in a severe scenario, once again demonstrating our preparedness. Our credit team has worked closely with our bankers to complete an extensive survey to identify any risk related to the tariff policy. According to our findings, F.N.B. remains well-positioned at this point with manageable exposure to the most heavily tariff-impacted businesses and consumer portfolios. We will continue to diligently monitor our loan portfolio and engage in active dialogues. F.N.B.'s approach to credit risk management has a proven history of providing strong and stable asset quality through various economic cycles, and I am confident that we will be able to manage through the current economic environment. I will now turn the call over to Gary, who will provide additional details about the potential impact of tariffs and review our overall credit performance. Gary?

Gary Guerrieri (Chief Credit Officer)

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at stable levels. Federal delinquency ended the quarter at 75 basis points, down eight basis points from the prior quarter, with NPLs and OREO unchanged at 48 basis points. Net charge-offs totaled 15 basis points, reflecting solid performance in the current economic environment. Credit-sized loans were essentially flat, up six basis points on a linked quarter basis, reflecting continued stability across the portfolio. Total funded provision expense for the quarter stood at $18.6 million, supporting loan growth, charge-offs not previously reserved for, and a qualitative adjustment for potential tariff impacts, which I will later touch on. Our ending funded reserve stands at $429 million, an increase of $6.1 million, ending at 1.25%, unchanged from the prior quarter.

When including acquired unamortized loan discounts, our reserve stands at 1.34%, and our NPL coverage position remains strong at 267%. We are monitoring the current market volatility from the recently enacted tariffs and its potential impact on our loan portfolio. In January, in anticipation of the tariffs, we required a mandatory assessment in the underwriting of all new and renewing C&I loan requests. We then surveyed more than 50% of our C&I and owner-occupied loan portfolio down to $3 million in relationship exposure, with a focus on industries more likely to be impacted. We were pleased with the outcome of that analysis, which reflected that less than 5% of the exposures were at risk of greater impact from the direct tariffs. The results further supported the qualitative allowance adjustment mentioned earlier.

Obviously, a wider credit impact could occur from a slowing or recessionary environment, which we cover in our quarterly stress testing process. Lastly, our concentration risk management framework allows us to assess the portfolios on a daily basis, including potential impacts on our reserve during a crisis or periods of economic uncertainty. Additionally, we have reviewed other potential risks to our commercial and consumer loan portfolios regarding government contracts and employment. Our government contracting portfolio is small and consists primarily of a handful of investment-grade exposures. We are in frequent contact with these customers and feel comfortable as each generally supports critical government functions. We are closely monitoring our consumer exposures, particularly in the Mid-Atlantic region, and have not observed any negative impacts at this point. Regarding the non-owner CRE portfolio, credit metrics continue to remain at satisfactory levels, with delinquency and NPLs at 82 and 77 basis points, respectively.

This reflects an improvement from 99 and 84 basis points at the end of last year. We continue to aggressively manage this portfolio as we have throughout this interest rate cycle, with the non-owner exposure declining by $283 million in the quarter, ending at 229% of capital. As we have done each quarter, we completed a full portfolio stress test. The results reflected further improvement, with our current ACL covering 97% of our projected charge-offs in a severe economic downturn. In closing, our credit results reflected continued strength and stability.

The success of our approach and strength of our leadership team through many economic cycles was recently reflected in an independent global study that named Vince Delie as one of the top CEOs in the United States across all industries based on performance and reputation, and further placed him in the top five CEOs among the largest banks in the United States. Vince and our leadership team have created a culture that understands the importance of maintaining a strong risk philosophy across the company, including a robust credit underwriting and risk management function that has enabled us to deliver consistent credit results through these periods. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Vince Calabrese (CFO)

Thanks, Gary, and good morning. Today, I will review the first quarter's financial results and walk through our second quarter and full-year guidance. First quarter operating net income totaled $116.5 million, or $0.32 per share, with total revenues coming in near the higher end of our first quarter guidance range and non-interest expenses coming in near the lower end of our guide. Total loans and leases ended the quarter at $34.2 billion on a spot basis, a 3.5% annualized linked quarter increase driven by growth of $224 million in consumer loans and $72 million in commercial loans and leases. Residential mortgages continue to lead consumer loan growth, and nearly half of the mortgage production for the quarter was saleable. Spot C&I loans and commercial leases combined grew at a mid-single-digit annualized rate from year-end 2024.

Total deposits ended the quarter at $37.2 billion on a spot basis, an increase of $132 million linked quarter. Non-interest-bearing demand deposits increased 1.1% linked quarter and comprised 26.5% of total deposits, up 19 basis points from the fourth quarter. The loan-to-deposit ratio increased slightly to 91.9%. Our total deposit costs ended the first quarter at 1.95%, down 13 basis points from year-end, leading to a cumulative total deposit beta of 28% since the interest rate cuts began in September of last year. The first quarter's net interest margin was 3.03%, stable with last quarter. The margin bottomed early in the quarter, and March's net interest margin was 3.08%, 5 basis points above the quarterly average. Interest-bearing deposit costs fell 24 basis points linked quarter, driven by lower rates paid on money market and time balances.

An 11-basis-point decrease in the total yield on earning assets to 5.23% was offset by a 10-basis-point decrease in the total cost of funds to 2.32%. The average yield on the investment securities portfolio increased three basis points linked quarter to 3.41%, benefiting from restructuring actions taken in the fourth quarter. Net interest income totaled nearly $324 million at the high end of our guide and a $1.6 million increase from the prior quarter, even with 2 fewer days. Net interest income increased 1.5% from the year-ago quarter, the first year-over-year increase since the third quarter of 2023. Turning to non-interest income and expense, non-interest income totaled $87.8 million, consistent with the year-ago quarter and right in the middle of our guidance range from January. Wealth Management revenues increased 8.4% year-over-year to a record $21.2 million, with contributions across the geographic footprint.

Capital markets income of $5.3 million was impacted by lower commercial customer activity given the current macroeconomic environment. Non-interest expense totaled $246.8 million, a slight decline from last quarter and at the low end of our guide. Salaries and employee benefits increased $7.1 million due to normal seasonal long-term compensation expense of $7.6 million and seasonally higher employer-paid payroll taxes, which increased $4.4 million. These were partially offset by lower employer-paid healthcare costs. Salaries and benefits reflect strategic hiring associated with our efforts to grow market share and continued investment in our risk management infrastructure. Compared to the year-ago quarter, outside services increased $3.5 million, or 15.1%, from higher volume-related technology and third-party costs associated with ongoing investments in our enterprise risk management framework in support of our strategic initiatives.

The seasonably affected first-quarter efficiency ratio remained solid at 58.5%, and we continue to manage our expense base in a disciplined manner. We expect improved performance with positive operating leverage in the second half of 2025. 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 TCE ratio reaching 8.4% and the CET1 ratio reaching 10.7%, both multi-decade highs. Annual book value per common share was $10.83 at March 31, an increase of $1.19 per share, or 12.3%, compared to March 31st of last year. We repurchased 741,000 shares during the quarter and expect to pursue opportunistic share repurchase activity once there's more clarity around tariff policies moving forward. Let's now look at guidance for the second quarter and full year of 2025.

All guidance is based on current expectations while remaining cognizant of the highly uncertain economic environment we are all operating in. We are maintaining our full-year balance sheet guidance for spot balances by year-end 2025, projecting period-end loans to grow mid-single digits on a full-year basis as we increase our market share across our diverse geographic footprint. Similarly, we are projecting total deposit balances to grow mid-single digits also on a year-over-year spot basis. Our projected full-year income statement guide is unchanged with last quarter. Our projected full-year net interest income is still expected to be between $1.345 billion and $1.385 billion, factoring in 25 basis-point rate cuts in both June and September. Second quarter net interest income is projected between $325 million and $335 million. The non-interest income full-year guide remains between $350 million and $370 million.

The second quarter non-interest income guide is between $85 and $90 million, with seasonality expected to carry us to the higher end of the range. Full-year guidance for non-interest expense is expected to be between $965 and $985 million, with the second quarter non-interest expense expected to be between $235 and $245 million. Full-year provisions guidance is maintained at $85 million-$105 million, given the stability in our credit performance to start the year and will be dependent on net loan growth and charge-off activity. As Gary mentioned, while we performed a deep-dive assessment of the risks caused by the current economic environment, the potential impacts are highly uncertain at this point given the fluidity of trade negotiations. Lastly, the full-year effective tax rate should be between 21% and 22%, which is to not assume any investment tax credit activity that may occur.

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

Vince Delie (Chairman, President, and CEO)

Thank you, Vince. In closing, I want to thank the entire F.N.B. team for their commitment to our core values, including innovation and collaboration. Also, thank you, Gary, for your comments. The recognition that I've received is a direct result of many contributors to F.N.B.'s success, including our board of directors and exceptional leadership team and passionate and engaged employees. Our culture, risk management, and employees' hard work and dedication have delivered strong first-quarter results and will continue to guide us through as we protect and grow shareholder value through various economic scenarios. Thank you, and we will now open the call for questions.

Operator (participant)

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press Star and then One using a touchscreen telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from Russell Gunther from Stephens. Please go ahead with your question.

Russell Gunther (Managing Director)

Hey, good morning, guys.

Vince Delie (Chairman, President, and CEO)

Morning, Russell.

Russell Gunther (Managing Director)

I wanted to start on the NII outlook. If I could, first, if you could just remind us of the cadence of the swap maturities over the course of the year and how that benefits NII this quarter. To follow up, maybe just walk us through the scenario underlying the high end of the NII guide and what that contemplates from a loan growth perspective, shape of the curve, and whether any additional security portfolio restructuring.

Vince Calabrese (CFO)

Yeah, I would say, I guess, a couple of things. The net interest income guide has cuts in June and September, as we talked about. We are maintaining the same full level for the full year. I would say that for the second quarter, based on where we exited the first quarter, kind of 308 for the month of March, as I mentioned, you could potentially see us, depending on what happens with rates during the quarter, right, it is very volatile, but you could definitely see us being in kind of the upper half of that second quarter range. For the full year, there is just too much to play out. We are still comfortable, as we reaffirmed all of our income statement guidance for the full year, so we are still comfortable with the full-year levels.

The second quarter, the two areas in our guidance where there's some upside in the range would be the net interest income and then non-interest income, as I mentioned in my prepared remarks, just seasonally getting us at the higher end of that range and then kind of upper half of the net interest income range for the second quarter.

Russell Gunther (Managing Director)

Got it.

Vince Calabrese (CFO)

As far as restructuring activities, if you have any additional restructuring activities baked in, the fourth quarter restructuring we did was a nice couple of penny benefits for the full year that we had done. We are not contemplating anything as we sit here today. The first part of your question, Russell, again, what was the first part?

Russell Gunther (Managing Director)

Just the impact of the swap maturities and how that played out this quarter.

Vince Calabrese (CFO)

Sure. I mean, that was, remember, we talked about $10 million a quarter, which is where it was in the fourth quarter. It was about $8 million drag in the first, goes down to $6 million in the second, and then it kind of goes down from there, a couple million in the third, and then a small amount, less than a million in the fourth quarter, because by then it is all rolled off. $8 million for the first quarter, about $6 million for the second quarter.

Russell Gunther (Managing Director)

Vince, that's really helpful. Thank you very much. Just last line of question for me would be on the expense side of things. I know you talked about the expectations for more positive operating leverage in the back half of the year. Just curious, as you think about 1Q result, what could take us to the low end of the range in 2Q? Is that kind of improved back half performance contemplative of any specific efficiency initiatives or maybe just some help in terms of how you're thinking about the cadence?

Vince Calabrese (CFO)

Yeah, I would say, I mean, we have the history of taking costs out every year. We've been very disciplined expense managers for as long as we've been here. In this year's guidance, has us with a similar kind of in the $15 million-$20 million kind of cost savings target through renegotiating contracts, space optimization, continued process improvement focus, leveraging AI and machine learning, and some of the tools that we already have kind of in the building. That's kind of already baked in, add some cost savings, as well as heightened standards, right? We've talked about that in the past, and that's, again, in our guidance, and that's in the $5 million-$10 million kind of area of expenses that are baked in as we're close to $50 billion and approaching that heightened standards kind of level.

I would say, I mean, to me, the expense guide kind of middle of the range is best to use for the quarter as well as for the full year based on what we know today.

Russell Gunther (Managing Director)

Okay. That's really helpful, guys. Thank you very much for taking my question.

Vince Calabrese (CFO)

Sure. Thank you.

Operator (participant)

Our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

Daniel Tamayo (VP of Banking)

Thank you. Good morning, guys. Maybe talking about, I think, the other side of that question on the NII specifically as it relates to loan growth, just curious where you see risk to that guide. Obviously, there's a lot of uncertainty right now in the environment. We all understand that. I guess curious how confident you are in that mid-single digit number, maybe some color around what you're hearing from borrowers and how they're being impacted from a pull-through rate on the loan growth side from tariffs right now.

Vince Delie (Chairman, President, and CEO)

Sure.

Vince Calabrese (CFO)

Oh, go ahead.

Vince Delie (Chairman, President, and CEO)

Yeah, I was just going to say this is Vince Delie. I was going to let Vince answer if he wanted to, but I guess I could jump in. I mean, the pipelines are softer on a year-over-year basis. If you look at them, they're down about 10% in total. The good news is the short-term pipeline has built a little bit. We look at it across the seven-state region that we cover in the United States. As you know, we have a pretty heavy focus on manufacturing within the Rust Belt states that we operate in. Gary spent quite a bit of time studying the impact of tariffs on our customers. We were able to gather quite a bit of feedback.

We put a process in place where we collected data, divided the portfolio up into segments, and then focused on the higher-risk tariff clients. There's a lot of uncertainty, obviously, around the tariffs and how it's going to impact them specifically. I mean, you could see a wide range of activities going on within the customer base, everything from some clients utilizing their excess liquidity to bring inventory in so that they don't face supply chain disruption or substantial increases in cost initially. You're seeing some of that. You see some borrowers cutting back, canceling CapEx expansion plans because they're going to wait and see what's going to happen with the tax code and what's going to happen with the tariffs individually. It's kind of a mixed bag, and it's caused, I'd say, a pause in capital investment, at least substantial capital investment.

We expect that as we move through the next several months and hopefully resolve many of the issues associated with these tariffs. Maybe not China. China might be a longer-term issue. We would expect demand to pick up in the second half of the year. Based upon the activity that we're seeing, I think that is in the cards. From a CRE perspective, CRE is slower. We have intentionally pulled back a little bit to let that normalize within the company. We are still seeing quite a bit of activity in the secondary market there. I know Gary, I do not know if you want to comment on.

Gary Guerrieri (Chief Credit Officer)

Yeah, I mean, during the quarter, we reduced that portfolio another $283 million. That's been pretty consistent. There is good secondary market activity starting to show. The projects are performing, and they're moving through the normal channels there. That is continuing to move in a good direction as we manage that level down to a level that we desire it to be at going forward as we cross the $50 billion level.

Vince Delie (Chairman, President, and CEO)

Yeah, and I think you're going to see we have probably an outsized proportion of large corporate investment-grade borrowers, right, because we have the debt capital markets platform, and we have products we can sell them to justify the returns. We're starting to see more utilization on those facilities. There is a pickup there. There are puts and takes as we move forward, but we're pretty confident, Dan, we're going to hit that guide that we put out there. There is still quite a bit of activity across the footprint. We're very fortunate in that we have a very diverse footprint. We are not reliant on one particular industry or one geography to generate asset growth. That is playing out for us. I think it will support our thesis on growth.

Vince Calabrese (CFO)

Yeah, and the guidance, again, is a spot-to-spot, right? I think that's important. Underlying it, mortgage activity picks up in the second and third quarter. That's also a component of kind of the mid-single digits. One of the things I'd comment on too, just while loan growth may be a little bit slow, it's giving us opportunity to continue to bring down deposit rates. We had our cost of interest-bearing deposits down significantly, 24 basis points this quarter. We continue to have opportunities to bring those rates down. In a slower loan growth environment, that opportunity is there. We're continuing to manage that actively.

Daniel Tamayo (VP of Banking)

That's terrific color. I appreciate all of that. I guess maybe one for Gary and anyone else who wants to chime in on credit. Gary, you talked about less than 5% of exposures at risk of greater impact from the direct tariffs. Wondering if you could just go into a little more detail on what you were referring to there. Curious kind of how you're thinking about the potential impact of a recession on reserves. Looking back at where the coverage was in the pandemic, it looks like you were about 20 basis points higher. I guess if that's about the good way to size it with CECL now, that'd be helpful. Thanks.

Gary Guerrieri (Chief Credit Officer)

Yeah, sure, Daniel. We took a very proactive approach around the tariff situation in trying to get ahead of any potential impact with our client base. Naturally, there's a lot of uncertainty around it, specifically around how's it going to impact growth that Vince was just referencing, reduced spending, higher inflation, potential supply chain issues. There's a lot of uncertainty out there. Will it drive the economy into a recession? I don't think any of us know the answer to that at the moment. Early in the year, we put a mandatory assessment around potential tariffs in our new underwritings. We identified the five sectors that we felt would be most impacted in our C&I portfolio, and we surveyed about 50% of the C&I exposure really across the company.

As I mentioned in my prepared remarks, those clients went all the way down to $3 million in relationship, and that low-risk category was less than 5% of the book. What are we focused on around that? Our plans are to really have frequent communication with those clients in that bucket, as well as in the higher end of that medium bucket of clients that we surveyed to manage the financial performance, manage their margin, discuss with them the liquidity position they're in, review fixed charge coverages, collateral monitoring, and all of the above to manage the portfolio and determine what potential impact there could be on the reserve, if any. We will continue to manage that portfolio in that fashion with frequent touches with those clients.

Just summing it up, it is a very fluid situation, and I think we're well ahead of it, and we'll manage any potential risks as the situation continues to evolve. In terms of reserves, we did run our stress test in a recessionary environment, both inclusive of a severe recession. Those reviews and those analyses are reflecting manageable builds from a reserve standpoint that we feel very comfortable with. Really nothing too alarming there from that standpoint. The portfolio at this point continues to perform in a very stable fashion. We feel we're well positioned even with all the uncertainty that's in the environment today.

Vince Calabrese (CFO)

Yeah, I would just add to the in a moderate recession scenario, I mean, I think you mentioned 20 basis points in COVID. I mean, our modest recession scenario is more like half of that.

Daniel Tamayo (VP of Banking)

That's great. Very helpful. Thanks for taking my question.

Vince Calabrese (CFO)

Thank you.

Vince Delie (Chairman, President, and CEO)

Thanks, Vince.

Operator (participant)

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

Jackson Singleton (Equity Research Associate)

Good morning. This is Jackson Singleton on for Casey Hare.

Vince Delie (Chairman, President, and CEO)

Morning.

Jackson Singleton (Equity Research Associate)

Morning. A couple of quick ones for me. First, I wanted to follow up on expenses. I know this was asked about, but it looks like the 2Q quarterly expense guidance was brought down a bit from the 1Q quarterly guide, but the full-year guidance was left unchanged. I was just wondering if you can give any color on flex and expenses to where you can maybe bring that full-year number down lower.

Vince Calabrese (CFO)

The 2Q level is reflective of the first quarter having about $16 million of seasonal expenses between long-term compensation, payroll taxes, restarting a year of 401(k) kind of thing. The delta first 1Q to 2Q is really just driven by that.

Jackson Singleton (Equity Research Associate)

Okay. Got it. If revenues come in any lower than expected, is there any flex to where you can bring expenses down?

Vince Calabrese (CFO)

Yeah. I mean, there's permissions and incentives that are tied to revenues. So if the revenue is slower, obviously those numbers would be lower. As I mentioned earlier, we already have a $15 million-$20 million kind of cost savings goal baked into our guidance overall. But definitely that piece of the expenses would flex down.

Jackson Singleton (Equity Research Associate)

Okay. Got it. Great. For my follow-up, most of the loan growth in 1Q looks like it came from the Resi Mortgage book. Is this level, do you expect to be able to continue that throughout the year, or will it subside a little bit, or can you give any color on that?

Vince Calabrese (CFO)

Yeah. I would say, I mean, the residential mortgage levels definitely pick up seasonally in the second and third quarters every year. That will kind of come through. If you look at the, I mentioned in my remarks, the C&I and leasing component kind of grew mid-single digits annualized in the first quarter. Commerc ial real estate, as Gary mentioned, was down during the quarter. Those levels were kind of baked in. I mean, mortgage is probably 40% or so of the kind of net growth that you would see in the loan portfolio as you go through the year.

Jackson Singleton (Equity Research Associate)

Okay. Got it. Thank you for taking my questions.

Russell Gunther (Managing Director)

Sure. Thank you.

Operator (participant)

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

Kelly Motta (Managing Director)

Hey, good morning. Thanks for the question. Maybe turning to the fee side of things, it was really nice to see those hold in really nicely, even with kind of just the slowdown in capital markets, which is really a testament to what you're doing, building out all these lines. Wondering, your fee income guidance to get to the high end would imply a nice step up in the second half of the year. In order to get there, would that require capital markets activity picking up, or are there other green shoots you're working on that could help offset some continued weakness there if we kind of get that going on?

Vince Delie (Chairman, President, and CEO)

Yeah. I think capital markets in the broader context of what we do is derivatives, so derivative fee income is directly linked to the interest rate environment. I would say that we've s een some pretty decent activity recently. That is one area that could help contribute to doing better in non-interest income. The other areas are we've expanded into commodities hedging. That's relatively new. We just brought the investment banking boutique on board. They'll contribute a little bit this year. I mean, it's not humongous, but it will contribute to the diversification. It's additive. Unlike other banks, large banks that relied mainly on investment banking and trading fees, we have syndications platform. I would expect there in the latter half of the year to be more activity in that space. I do anticipate I'm going to go out on a limb here.

I'm anticipating an acceleration in M&A activity in the middle market, principally because of what's happening structurally within the country. I think that there are a number of manufacturers that will look to combine or to acquire companies that may help them vertically integrate into the supply chain. You might see an acceleration in middle market M&A. I would expect that to help us on a number of fronts with syndications, with derivatives, as we finance the transaction. The advisory business that we just picked up, we should benefit from. Obviously, there's downward pressure too. I mean, if you look at our trust and investment management businesses, I mean, you're going to be facing lower outright net asset values because of what's happened to the market. I'm hopeful that that will reverse itself over time.

Maybe if we see a tax reform passed, you'll see a lift across the board or some of the tariff issues being resolved more expeditiously. That should impact the markets positively. I think those things are why we're optimistic about the guide. We've consistently delivered fee income. The other area that contributes to fee income in total for us is the mortgage business. We have always outperformed the industry metrics within that mortgage business. It's predominantly a purchase money business. We built it out from scratch. We have pretty decent market share in most of the major markets that we compete in. I know housing supply has been an issue, right, more so than outright demand. That may balance out. I would expect that business to continue to perform or outperform the industry.

They're very well managed, and our leadership there does a fantastic job. I would expect them to contribute. We have SBA. We have an SBA business that we'll see more activity from a gain-on-sale perspective as we move forward. We're positive about that. We've started to invest more heavily in our treasury management platform. Treasury management also contributes to the fee income line. We've seen some substantial growth in the payments category, and we're retooling and revamping a number of our products on the TM side to help us move up market as our portfolio shifts up market. I'm pretty excited about the opportunities there as well from a service charge perspective for treasury management services that we provide. Anyway, you can see it's a pretty balanced pool of products that contribute, and they're all high-value products.

We're not really relying on consumer fees, right, to drive anything. They're actually declining in certain categories. Having that offering built out and being able to continue—I should bring up international banking too. I'm pretty excited. Given what's happening, there are opportunities for companies to hedge currencies. You'll see quite a wide range of value changes within currencies in the exchange market because of what's happening with the tariffs. There's an opportunity for us to go out and assist clients with hedging their foreign currency needs as well. Anyway, that's why we feel good about it.

Kelly Motta (Managing Director)

That's super helpful. Thank you so much for that.

Vince Delie (Chairman, President, and CEO)

Yep. Just to be straight, that's a lot different than relying on just trading, right, trading activity and M&A advisory as our principal contributors. It's very granular. Anyway.

Kelly Motta (Managing Director)

Yep. Absolutely. I really do appreciate all the color there. On the deposit side, I think you did a really nice job bringing deposit costs down. I also saw there's on an EOP basis, the NIBs were up. It looks like that might have been end of quarter. Can you just remind us any kind of dynamics that you're seeing there on demand accounts as well as where the incremental cost of new funding is coming on relative to the overall deposit base? That would be very helpful.

Vince Delie (Chairman, President, and CEO)

I have been suggested that where the deposits are coming on relative to where we sit today. He has those statistics, I think. I will say that, Kelly, we rolled out the Common App digitally. Our strategy is clicks to bricks, which is to integrate the online experience into the branches. We are currently on that platform within the branches itself so that we can originate loans and deposits in a paperless environment and in a digital environment. The first phase of this has happened, and I have gotten pretty positive feedback back from our branches that we are in the beta experimental phase, and we are getting ready to roll that out pretty broadly. Within that application itself, the reason I am bringing this up is because we use AI.

We have a database that we have trillions of fields of data on, and we run algorithms against that database and write software, machine learning, and AI software that looks at customer behaviors and permits us to present products to customers to optimize the customer's experience, right? Once we roll out that platform, those retail people will be able to get centralized advice on what's best for the client, and they'll be able to recommend products, and you can put them in the cart and proceed to checkout without taking the client through any extra steps. I think that should help us in two ways. One, in broadening the household penetration per customer. Two, enabling us to bring on more clients where we're the primary depository, which drives demand deposits for us.

I also think our strategy around client primacy and making the investment in the FinTech Atomic and creating the opportunity for customers to move direct deposit instantaneously is also removing a huge barrier to become the primary bank. That is embedded in our process, and it's embedded in our mobile app. That just rolled out March 31. It is still pretty early to tell how we're doing there. I see a great opportunity there to drive deposit costs down by becoming the principal bank for small businesses and consumers. Anyway, go ahead, Vince. Do you have any information?

Vince Calabrese (CFO)

Yeah. I think just add, I guess, a couple of things. It's regarding kind of the special rates that we had last year. Remember, we were very focused on bringing down our loan-to-deposit ratio. If we kind of look to mid-year of last year to where we are today, and we've brought all those rates down between 100 and 150 basis points from kind of the peak levels. If you look at one of the big rolling pieces through is the CDs, obviously. We have $2.8 billion of those that are going to mature in the next quarter, 404, another $2 billion in the third quarter at like a 3.70% rate. Where we're putting CDs on today on kind of a new enrolled rate, as we call it, it's like around 3.5%. There's a pickup that happens there.

If you just step back and look at kind of the balance sheet overall, I mean, we have fixed-rate maturities in the loan portfolio, around $2.5 billion kind of for the year. We're probably picking up somewhere between 170-180 basis points on that. You have the annual cash flows from the investment portfolio. I mean, those are rolling off around the $320 million level, and we're investing in the high fours, mid- to high fours, probably high to higher end of that range. That is kind of another key dynamic there. We have the balance sheet repricing slide. There is kind of $8 billion of liabilities that are kind of repriceable today that is just part of us managing the overall balance sheet. It gives you some feel for the moving parts that are there.

Kelly Motta (Managing Director)

Got it. Thank you so much. I will step back. I really do appreciate all the color today. Nice quarter.

Vince Delie (Chairman, President, and CEO)

Yeah. Thanks, Kelly.

Operator (participant)

Our next question comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.

Frank Schiraldi (Managing Director)

Good morning.

Vince Delie (Chairman, President, and CEO)

Good morning.

Frank Schiraldi (Managing Director)

Just a quick follow-up on loan growth. Gary talked about pre and getting that in the right place as you go through kind of the next threshold asset-wise. I'm just curious if you can, is there a specific runoff portfolio at this point? Is there some timing, a specific level you guys expect to get to? Or when do you assume getting back to growth in that portfolio?

Gary Guerrieri (Chief Credit Officer)

Yeah. Frank, in terms of the positioning against the capital base, I mean, right now, we're at 229%. Our target—and we don't have a finite measure drawn in the sand—but just call it 200%, for example, give or take. That's going to put us at a level where we feel very comfortable. And truthfully, with the portfolio and the position of it today, we feel good with our levels where we sit. The target is to get it to that 200% level. As we continue to grow the capital base, it allows us to continue to generate new assets. Our team continues to look for quality assets in that space. I think we'll be able to continue to generate the desired level of assets that we have in the plan. That will offset some of the planned reduction from a capital perspective as we move forward.

I think the capital growth will be important in allowing us to do the business we want to do and maintain it and get it to that level.

Frank, to be clear, there's no runoff portfolio. We're not running customers out. We basically underwrite to a takeout, typically. We tend to be a short-term player. The volume on the origination side has been brought down because of really more macroeconomic issues. Basically, those takeouts continue to happen. If we're in office, which isn't that frequent, it's usually suburban. It's usually lined up with a lease, high-quality tenant that we're doing the construction financing for. That book tends to move out, and that market's still liquid. We're seeing those assets roll out. We're not originating as strongly as we were historically.

The multifamily continues to move into the secondary market as well. That, along with some office moving off the books in the quarter, really drove that $280 million that I referenced.

Vince Delie (Chairman, President, and CEO)

We're really not a big retail player. Some people may want to worry about tariffs relative to retail tenants, right, if you're a big box—if you're financing big box retail. We don't have.

Gary Guerrieri (Chief Credit Officer)

No, we don't. We're not.

Vince Delie (Chairman, President, and CEO)

Exposures here, so we.

Gary Guerrieri (Chief Credit Officer)

Not really. I mean, we do have some grocery-anchored retail.

Vince Delie (Chairman, President, and CEO)

Outside of grocery.

Gary Guerrieri (Chief Credit Officer)

Yeah. Outside of grocery, it's pretty minimal.

Frank Schiraldi (Managing Director)

Okay. All right. Just on the tariffs and the idea of kind of looking through the portfolio, seeing what's at risk. Just curious, an obvious sort of area of expansion for you guys, just given the geography of where you are, is further into DC and Northern Virginia. Just given some of the narrative around government cuts and real estate in and around the DC area, just curious if your thoughts have changed at all on that geography or strategy around any other geography here, just given the recent volatility and uncertainty.

Vince Delie (Chairman, President, and CEO)

Remember, there's a hole in the donut, right, and geographically. There's less density for us. I'm saying that sarcastically as people said that to me when we bought the bank in North Carolina. There's less density in the Virginia and DC area for us. While we're de novoing into those markets, we're not picking up legacy portfolios. We're very selective about what we do from a CRE perspective in those markets. From a consumer banking perspective, we are not—we're not heavily entrenched in those areas. We're not going to have as much exposure with government employees being laid off, with government agencies cutting back, having their budgets cut, right, by the efficiency initiative that's going. We're less—at this point, we're less susceptible to legacy issues.

I think it gives us an opportunity to come into the market a little more heavily, right, and pick up share because others will be forced to pull back. The timing of our expansion into the donut hole is probably the right time. Thank goodness. Gary, do you want to talk about our exposures there?

Gary Guerrieri (Chief Credit Officer)

I don't think they're material. No, they're really not material in that market. In terms of the mortgage assets and consumer assets that we have there, we're monitoring those things on a weekly basis. Those levels are right at about $3 billion, about $1.9 billion in Maryland, and about $900 million in that Virginia marketplace all the way down into Southern Virginia.

Two-thirds of that portfolio are sitting in Baltimore, just to be clear.

Vince Delie (Chairman, President, and CEO)

Yes, that's correct. From that standpoint, it's heavy Baltimore. The DC market, it's a couple hundred million dollars. It's very, very minimal. Those balances, we continue to watch them. As I mentioned, we're watching them weekly, and we have seen no change in asset quality across those books at this point. We will continue to stay on top of that and see how that all plays out. All told, we feel it's a very, very manageable exposure. It's a market that is temporarily being hit from some of the government actions. We think that that too shall play out.

Frank Schiraldi (Managing Director)

Right. Okay. Lastly, if I could sneak in one more. Just given where the industry has gone in terms of bank stock prices, and given that you have got strong capital levels and continue to create capital here, even putting up the mid-single-digit loan growth, just curious the potential, your thoughts on—I know you bought back some in the quarter, but your thoughts on ramping up the buyback here, is that something, can you possibly, if that is the case, possibly size that a bit, or is that just less of a priority here?

Vince Calabrese (CFO)

Yeah. As you mentioned, Frank, I mean, the capital ratios continue to move up as we had discussed previously. And with the level of earnings that we're generating, payout ratio in the kind of mid to high 30s, we would expect that to continue. When the loan growth picks up in earnest at some point, right, which we expect it will, we do want to have some powder to be able to support that loan growth. Even with that, I mean, there's opportunity to repurchase shares for sure. As we sit here today with all the uncertainty, we thought it made sense to kind of pause. As you mentioned, we bought about $10 million worth of stock in the first quarter, but we thought we should pause for now.

Once we get a little bit more visibility and the dust settles, I mean, the stock's very cheap, right, I mean, from a valuation standpoint, no matter how you look at it. We bought shares back in the mid-13s, I mean, and where it is today, we would be very opportunistic once we feel better just about the visibility with where the world's going. We have plenty of authorization in our share buyback program as it sits here today. Opportunistic is always the way we approach it. With valuation, definitely you would expect to see us be active as we go through the year.

Frank Schiraldi (Managing Director)

Got it. Okay. Thank you. Appreciate all the color.

Vince Calabrese (CFO)

All right. Thanks, Frank.

Vince Delie (Chairman, President, and CEO)

Thanks, Frank.

Operator (participant)

Once again, if you would like to ask a question, please press star and then one. To remove yourself from the question queue, you may press star and two. Our next question comes from Manuel Navas from D.A. Davidson. Please go ahead with your question.

Manuel Navas (Analyst)

Hey, good morning. I appreciate a lot of the commentary. A lot of my questions have been answered. Can you go a little bit deeper on the Raptor Partners acquisition? What are the expected benefits and costs? What else are you seeing out there in M&A for capital deployment? You talked about the opportunistic buybacks, just kind of what else are you seeing on the potential M&A front? Fees, banks? What are you seeing out there?

Vince Delie (Chairman, President, and CEO)

Yeah. I mean, Raptor was a long time in the making. We had a pretty—I’ve known Craig for years, decades. We both worked at the same investment bank years ago, different times, but we worked for the same investment bank. I think we picked up a tremendous person and people, a great team. They fit in culturally. They’re going to be able to leverage, basically leverage the platform that we’ve built. As we’ve grown and moved into upper middle market, large corporate, there presents many opportunities for them across a broader geography. I think it’s the perfect combination. You couldn’t find a better, more qualified person to help us build out that platform, which is what Craig has embarked on doing. I’m very excited about having him on board and having him as part of our team.

I've worked with him in the past on transactions on different sides. I've financed some companies that he had done some M&A work for, advisory work for. He's just a terrific guy. I think that'll bode well for us. Again, that's in alignment with our strategy to continue to build out our capabilities that support businesses throughout their life cycle and creates granularity within the non-interest income revenue generation basket. That's basically what we've shot for. Over time, Manuel, we've expanded eight business lines that are now multi-million dollar revenue generators. They started very small, kind of like this opportunity. This is not a substantial impact to earnings, right? It's less than a penny, I think.

The reality is we'll be able to leverage that platform and continue to invest in it and grow it just like we've grown the other businesses that we've put on the ground and started from square one. We've been able to achieve nearly a 9-10% growth rate on a compounded basis in that space in the non-interest income area. This will be additive to that. Sure, we would look for opportunities to add to our fee income capability. We just made a strategic investment in a fintech as well, which was very small. That is also helping us generate business and should help us produce really good returns on that investment just based upon what they've enabled us to be able to do. From an M&A perspective, it's the same story.

I think it becomes more challenging to get deals done in this environment, right, because it is so volatile. The banks have all seen a pullback on their share prices. It makes it more challenging. We are going to stay focused on what we have done historically, which is in market with significant cost saves, deals that are immediately accretive to earnings and have limited tangible book value dilution. We look for returns well above the cost of capital. It has not changed. It is the same story. We are also going to look at options. We are going to look at different options for us to deploy capital, not just M&A. We will look at the dividend. We will look at share repurchase. As you have seen, our capital ratios have been improving steadily and are currently at record levels.

We have the ability to do things we could not do in the past. Kind of everything is on the table. We are going to do whatever we think is absolutely best for the shareholders and the long-term prospects for creating shareholder return.

Manuel Navas (Analyst)

I appreciate that. The fintech investment and that direct deposit capability, can you talk about the potential there? I know it's early innings. Is anyone else doing that? The potential for its impact on account primacy seems pretty strong. Can you just talk about all that kind of benefits there?

Vince Delie (Chairman, President, and CEO)

I think there are a handful of banks that are doing it. We're one of the first out there. We've embedded it into our mobile app and into our eStore Common Application, the onboarding process, which makes it even more powerful. The reality is what it does is it takes a barrier away. When you're out selling to a customer and you are trying to get that customer to move their primary checking account to you, if they have to go through a ridiculous process to move direct deposit, they're never going to leave the bank that they have direct deposit established with. In this process, with a few simple steps, you can move the direct deposit instantly. They don't have to do anything except go through the app. There's a few simple steps, and then the account is opened.

Actually, I do not know if Chris, you want to comment on it. He is here. Chris was the one that really started looking at this opportunity.

Yeah. No, there are a few banks using, like Vince said, Manuel. I think where we're unique is how we're implementing it and tying it into the account onboarding process, like Vince said, and tying into relationship pricing. I think it becomes a very powerful tool for us to drive that primacy higher. I think we're very excited about what the medium term will look like. I know Vince's talked about the previous quarter about eventually adding the bill switch feature as well, which we're actively working on. That will just continue to lower barriers and be able to drive primacy even higher and make that switching cost lower for our consumers.

If you're sitting in front of a customer and they come into the branch and they want a loan product, many times we say, "We should open a checking account because we can give you bundled pricing, and then you get direct debit, and it's better for us, and it's better for them." They open an account, they don't move their principal disbursement account over. They open another account just to move money in to make the loan payment. That's not what we're really looking for. What we're looking for is to become the primary bank. Everything that we've done digitally is to enable customers to come into the bank, choose the right products and services with the help, assist of AI and our Common Application.

They have to fill out redundant fields, move their direct deposit immediately, move their repetitive ACH transactions and their bill pay instantly, and just move on. If we can do that, we're eliminating barriers that exist today, structural barriers that prevent people from moving their deposit relationships to us. That is what we're focused on. That is it in a nutshell. They help us get there. I think it was a great opportunity. I credit Chris with coming to the table with the idea and being the champion to get it done here.

Manuel Navas (Analyst)

I appreciate the color. Thank you.

Thank you.

Vince Delie (Chairman, President, and CEO)

Thanks, Manuel.

Operator (participant)

Ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Vince Delie for any closing remarks.

Vince Delie (Chairman, President, and CEO)

Thank you very much. I appreciate everybody's interest in the call. The questions were great. We had a very solid quarter. We're looking forward to outperforming throughout the year. Everybody's keenly focused on doing the absolute best we can for the shareholders. I just want everybody to know that. I appreciate the work our employees do. They're engaged. They're passionate. Like I said, it makes it easy to get recognition when you have great people around you. That's what I have. Thank you, everybody. Appreciate it. Take care.

Operator (participant)

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