F.N.B. Corporation (NYSE:FNB) Q1 2023 Earnings Call Transcript April 20, 2023
F.N.B. Corporation beats earnings expectations. Reported EPS is $0.4, expectations were $0.39.
Operator Good morning, and welcome to the F.N.B Corporation First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.Lisa Hajdu Thank you. Good morning and welcome to our earnings call. This conference call of F.N.B. Corporation and the reported files with the Securities and Exchange Commission often contains 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, April 29 and the webcast link will be posted under 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 Thank you, and welcome to our first quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.
FNB reported first quarter net income available to common stockholders of $144.5 million or $0.40 per diluted common share. On an operating basis, EPS grew 54% over the first quarter of 2022. Operating pre-provision net revenue increased 68% from the year ago quarter, as we managed the positive operating leverage of 21%. The overall success of FNB’s financial performance was due to the consistent execution of our previously stated strategic initiatives.For example, we set out to diversify income and rely on various sources to maintain performance. This quarter, FNB reported record wealth management revenue of $18 million. On a linked-quarter basis, contributing to our stable non-interest income. We also strive to be our customers’ primary operator.
And through our deep customer relationships and granular deposit base, we were able to maintain stable average deposit balances.Our philosophy of maintaining consistent and prudent underwriting standards regardless of the macroeconomic environment contributed to FNB growing average loans 3.6% from quarter without compromising on asset quality. The first quarter also had positive momentum on several key performance metrics, including return on tangible common equity of 20%, return on average assets of 1.4%, and a tangible common equity ratio of 7.5, one of the highest levels in company history.We are pleased with this quarter’s results and believe it validates the aforementioned execution of our strategy, especially our conservative and diligent balance sheet management with ample capital liquidity to withstand the adversity of the industry in a more challenging economic environment.The recent bank failures, however, idiosyncratic in nature, have placed a spotlight on the importance of liquidity and maintaining a diversified new granular deposits, conservative and prudent balance sheet management, solid capital levels and sound Risk Management policies and governance.
These practices have always been integral to FNB’s long-term strategy and are ingrained in our Enterprise Risk Management program which includes regular liquidity stress test analysis, capital stress testing, CECL reserve model analysis and diligent proactive credit model.As I previously mentioned on multiple calls, we foster close relationships with our customers and remain focused on being their primary operating bank. In addition to prioritizing high-touch service, we have made strategic investments in our digital technology treasury management platform, containment solution capabilities, which enables our customer privacy.The first quarter deposit levels through the industry disruption are a testament to the success of our focus on growing client relationships with deposits ending the quarter at $34.2 billion, a slight decline of 1.7% from the prior quarter, outperforming the H.8 deposit data for small and large banks.Between March 8, when the industry volatility began in quarter end, our deposit balances were essentially flat, declining 0.7%, primarily due to seasonal outflows from normal wholesale and retail customer activity.
Another strength is the diversity of our deposit base throughout the different customer segments with consumer account balances comprising the largest segment of total deposits at 41%.The consumer segment is comprised of approximately one million accounts with a median consumer deposit balance at quarter end around $5,000. Additionally, since March 8, we experienced a net increase in the number of accounts across all customer segments, positioning FNB is a benefactor as deposit inflows are restored to normal levels and customers diversified funds between banks.Because of the granularity in our deposit base, FNB ended the quarter with approximately 76% of deposits, either insured by the FDIC or collateralized, which exceeds the peer median for the 50 banks in the KRX Bank invested at year-end.
If necessary, we also have available liquidity to fund up to 170% of our uninsured and non-collateralized deposit balances, as of March 31, placing FNB in a very strong liquidity position. FNB’s investment portfolio philosophy is also conservative by nature with respect to duration and risk. We manage to an average duration of between three to five years and have historically maintained a fairly even split between available for sale and held to maturity.At the onset of the current banking industry disruption, FNB Management activated our contingency funding plan. Our team’s response was swift and working diligently over the weekend to ensure that our Board of Directors were briefed, employees were reassured of our stability and customer-facing personnel began proactive client outreach with talking points regarding the strength of our balance sheet, including FNB’s capital and liquidity position on a relative and outright basis.In addition, we bolstered our liquidity position by increasing cash on the balance sheet by nearly $1 billion.
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Through the financial crisis, pandemic and now the banking industry disruption, FNB has earned our customers’ trust, and we promised to uphold that trust as we have positioned the company to outperform the industry in a wide array of potential economic and industry scenarios. Credit continues to remain as one of our strengths. I’m very pleased to once again report solid credit position with low delinquency at 60 basis. I will now turn the call over to Gary to give more details on our asset quality and our consistent management of credit risk. Gary?Gary Guerrieri Thank you, Vince, and good morning, everyone. We ended the quarter with our credit portfolio well positioned, and our asset quality metrics remaining near historically low levels. Our performance for the period reflects total delinquency that ended the quarter at 60 basis points, NPLs and OREO at 38 basis points and net charge-offs at 18 basis points.
Criticized loans were up moderately at 19 basis points quarter-over-quarter, although down 55 basis points year-over-year and still at historically low levels. I will cover these GAAP asset quality highlights for the quarter in more detail, followed by some insight into our credit strategy we used to manage the loan portfolio throughout economic cycles.Let’s now walk through our credit results. Total delinquency declined 11 basis points in the quarter, maintaining the historically low delinquency levels seen in previous quarters. NPLs in OREO were down 1 basis point compared to the prior quarter with 55% of our NPLs in a contractually current payment status.Net charge-offs for the quarter totalled $13.2 million or 18 basis points on an annualized basis, with 11 basis points reflecting the use of previously established specific reserves.
Total provision expense for the quarter stood at $14.9 million, providing for loan growth and charge-offs that did not have a previously established specific reserves.CECL related model builds were moderate at approximately $4 million. Our ending funded reserve increased $1.7 million in the quarter and stands at $403 million, or a solid 1.32% of loans, reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.49%, and our NPL coverage position remains strong at 356%.We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced well-positioned portfolio throughout economic cycles. We proactively review and stress test portfolios on an ongoing basis, including in the current quarter where we performed an in-depth review of commercial real estate loans maturing in 2023 and ’24.We were pleased with the outcome of that exercise and did not have any risk rating changes which was not unexpected as we maintain a diversified commercial real estate portfolio backed by strong sponsors and low LTVs. Regarding the office portfolio, delinquency remains very low at 27 basis points and criticized loans are below 10%.
Our top 25 office exposures averaged $28 million and 43% of the loans are less than $5 million. We have and will continue to aggressively manage this portfolio on a loan-by-loan basis as part of the in-depth reviews we regularly perform.In closing, we had a successful quarter marked by the strength and favourable positioning of our credit portfolio as we continue to generate diversified loan growth in attractive markets. We closely monitor macroeconomic trends and the individual markets in our footprint, and we’ll continue to manage risk proactively and aggressively as part of our core credit philosophy, which has served us well in softer economic times.I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.Vince Calabrese Thanks, Gary.
Good morning, everyone. Today, I will focus on the first quarter’s financial results, provide some color on our balance sheet management activities during the banking disruption in March and offer guidance updates for the remainder of 2023.First quarter net income available to common shareholders totalled $144.5 million or $0.40 per share, with record revenue contributions, seasonally higher expenses and continued solid asset quality performance. Total earning assets reached an all-time high, ending the quarter at $39.3 billion with a $352 million quarterly increase driven by loans and leases growing $418 million or 5.6% annualized.Commercial loans increased $222 million or 4.7% annualized driven by the continued success of our strategy to grow high-quality loans across a diverse geographic footprint.
While commercial production was slightly lighter than the fourth quarter, reflecting normal seasonality, attrition approved and loan pipeline increased sequentially after the robust loan production last quarter.Consumer loans increased $196 million linked quarter or 7.3% annualized as growth in residential mortgages of $292 million was partially offset by decreases in average direct home equity instalment loan balances, consumer lines of credit and indirect auto loans.Given the high rate environment, organic growth in residential mortgage reflects customers’ continued preference for adjustable rate mortgages as well as the continued success of our physicians first mortgage program both of which we currently keep in portfolio.Investment portfolio remained stable at $7.3 billion, with 46% classified as available for sale.
When including the fair value marks in our AFS and HTM portfolios, our CET1 ratio is above the peer median calculated on the same basis, and we remain well capitalized.Duration of our securities portfolio at March 31 is 4.5 years, and inclusive of our cash position is 3.9 years. Total deposits ended the quarter at $34.2 billion, a decrease of $580 million linked quarter or 1.7% partly due to normal first quarter seasonality. In fact, since March 8 audits were relatively flat with a slight 0.7% decline due to normal outflows from wholesale and retail customer activity.Vince mentioned earlier, our median consumer deposit balance was $5,000 at the end of March. And looking at the total deposit portfolio, our average account balance is approximately $30,000 which is well below Silicon Valley Bank’s average of $1.1 million and Signature Bank’s $508,000.
We are also lower than our peer median as of year-end.The deposit mix did shift this quarter, with time deposits increasing $1.1 billion as customers move funds out of money market accounts to take advantage of higher CD rates. As of March 31, our mix of non-interest bearing deposits remained strong and 33% of total deposits, down slightly from 34% at year-end, while loan-to-deposit ratio remained at a comfortable level, ending the quarter below 90%.In light of the banking industry disruption, we decided to bolster our on-balance sheet liquidity position by increasing short- and long-term borrowings by about $1 billion in the aggregate, bringing our excess cash position to $1.3 billion at quarter end.Looking at the income statement, record quarterly revenue of $416 million was driven by net interest income totalling $337 million, a linked quarter increase of $1.8 million or 0.5%.
The net interest margin expanded three basis points as the earning asset yield increased 39 basis points with loan yields up 42 basis points while the cost of funds increased 38 basis points.We have been managing deposit costs in this rate environment continues to be a significant focus. Spot interest-bearing deposit costs ended the quarter at 171 with the quarterly average coming in at 150 reflecting the ongoing diligent work by our team. Total cumulative deposit betas ended the quarter at 21.8% within our prior guidance of 22%.Turning to non-interest income and expense. Non-interest income totalled $79.4 million, a slight decrease of 1.5% in the fourth quarter of last year. Wealth Management reached a record $18 million with a quarterly increase of $2.4 million, mostly split between securities, commissions and fees, driven by strong annuity revenue and trust services, primarily from strong organic growth seasonality.Higher production and contingent revenues led to a $3.3 million or 73% linked quarter increase in insurance commissions and fees, while mortgage banking operations income increased $2.1 million linked quarter, reflecting a 5% increase in sold mortgage volume and improved gain on sale margins.Capital markets income decreased $3.2 million due to reduced syndications and swap fees from very strong levels in the fourth quarter of 2022.
Service charges in the quarter decreased $2.9 million, largely reflecting the expected decline in overdraft and nonsufficient fund charges due to our previously announced speed program changes given the current competitive environment.Operating non-interest expense totalled $218 million, an 11% increase from the fourth quarter, largely reflecting normal seasonality combined with the addition of the Union expense base for a full quarter and the impact of the previously announced increase in the FDIC insurance assessment rate.Salaries and employee benefits increased $17 million of which approximately $12 million was related to normal seasonal compensation activity, including $6.7 million of long-term compensation and seasonally higher employer paid payroll factors.
The remaining $5 million increase is primarily from reduced salary deferrals given lower loan origination volumes and the addition of the prior Union expense base. Even with these expense items, the efficiency ratio remained at a favourable level of 50.6%.Our capital ratios ended the quarter at levels that are expected to be at or above peer median. Tangible book value per common share was $8.66 at March 31, an increase of $0.39 per share from 4.7% from December 31, largely from the higher level of earnings and the decreased impact of AOCI, which reduced the current quarter end tangible book value by $0.87 per share compared to $0.99 at year-end.As Vince mentioned, our TCE ratio is one of the highest in company history of 10.5%. To demonstrate the strength of this level, amidst the industry disruption TCE adjusted for our HTM unrealized losses equalled 6.9%, which is 50 basis points higher than our peer median using reported year-end levels.Let’s now look at the 2023 financial objectives, starting with the balance sheet.
On a full year spot basis, we maintained our previous guide for loans to increase mid-single digits year-over-year. Total deposits projected to end 2023 at a similar level as December 31, 2022 spot balances, although we do expect the continued shift in the deposit mix given the current rate environment. Full year net interest income is expected to be between $1.315 billion and $1.365 billion with the second quarter between $325 million to $335 million. Our guidance currently assumes a 25 basis point rate hike in May then flat for the remainder of the year. The modest decrease in guidance from last quarter is largely related to our expectations or higher deposit betas given the current banking industry environment. If rates were to come down this year as the forward curve currently is projecting that could lead to modest upside to our NII forecast.Full year non-interest income is expected to be between $305 million and $320 million, with a slight upward revision reflecting our first quarter beat relative to our previous guidance.
Second quarter is expected to be in the mid-$70 million range with continued benefits from the diversified revenue strategy.Full year guidance for non-interest expense on an operating basis is $835 million to $855 million. Adjustment is to account for the higher first quarter expense levels for the remaining nine months are expected to be consistent with our prior guidance. Second quarter non-interest expense is expected to be between $205 million to $210 million. Full year provision guidance remains $65 million to $85 million and is dependent on net loan growth, potential CECL model-related builds from a softer macroeconomic environment.Lastly, the effective tax rate should be between 20% and 21% for the full year, which does not include any investment tax credit activity that may occur.
With that, I will turn the call back to Vince.Vince Delie Our conservative business practices have positioned FNB to sustain solid performance during turbulence in our industry. We ended the first quarter with a strong capital position and stable deposit base and are confident that we are poised to capitalize on this foundation in the monsoon. FNB’s financial performance is directly correlated to maintaining our superior culture.We are proud of our differentiated culture and the awards we have received for our industry leadership and employee and client experiences. In 2023, FNB was selected as a selling model bank for omnichannel retail delivery for our proprietary of eStore. One of America’s best banks by Forbes, Top Workplace USA by Energage, and a Greenwich excellence award winner for client service for the 12th consecutive year.We also continue to be honoured for our commitment to diversity and inclusion, is one of America’s greatest workplaces for LGBTQ+ a best of the best company by three diversity publication and a Woman’s Choice Award winner for women and millennial.
FNB earned these awards through the hard work and dedication of our employees who share our commitment to our values and mission.Thank you to our team for cultivating an environment that succeeds at creating shareholder value while respecting one another and winning together.
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Question-and-Answer Session Operator [Operator Instructions]
The first question comes from Frank Schiraldi of Piper Sandler. Please go ahead.Frank Schiraldi Good morning. Vince, you mentioned the negative carry or — you mentioned the additional liquidity on the balance sheet. Just wondering what the negative carry is on that, and is that a primary driver of the lower NII guide? Or is it more the mix shift, I guess you now have accelerating a bit into time, it seems?Vince Calabrese Yes, the negative carry, Frank, is really like maybe 10, 15 basis points.
It’s not that significant because we’re earning our excess cash position was still at $1.3 billion. We’re earning $490 million on that. I think the borrowings we took down around 40% or so. It’s not a big negative carry. It’s kind of just a mix shift and start continuing to roll given current deposit rates.Frank Schiraldi Okay. And then just kind of curious, I don’t know if you have this granularity there in front of you. But as you think about the mix shift that’s baked into your guide, what does that sort of assume in terms of non-interest-bearing levels as a percentage of total deposits by the end of the year?Vince Calabrese It comes down slightly between now and the end of the year. That’s the mix. As you know, that’s a big focus in the company, our account acquisition strategy and lending strategy has always revolved around bringing in the operating accounts and those continued efforts continue to bring in new accounts.
And during this disruption period, actually net added accounts.Vince Delie We talk about customer primacy. What we mean by that is we’re the principal operating bank we’re the disbursement bank for consumers and businesses. And if you look at the granularity in the consumer book that we mentioned on the call in the prepared comments, right, there’s — that’s pretty sticky. There’s not a lot of places to go to earn more on $5,000. I don’t know that it is impactful and enough for people to move their money around. And we tend to be — that tends to be their principal operating account for us. So they’re going to keep cash in or the cover items that are presented for payment, and it’s where direct deposit gives credit into. And then on the business side, as we’ve said historically, if you look at the concentration of 17% of the deposits that we have in the commercial segment, a good bit of that is tied directly to services.
So compensating balances where you gain an earnings credit that sits in a non-interest-bearing bucket.And again, tends to be sticky because customers prefer using balances to pay for services versus cash fees. So that’s all embedded into that non-interest DDA category. So we feel pretty good about having a good solid base and at a minimum, we feel will outperform others who may be relying on more transient balances. I think it shows, basically, if you look back historically, you can see it in our performance relative to events in the category.Frank Schiraldi Yes. And then just lastly, as a follow-up, just a question for Gary on credit. In your slide deck, you talked about the average LTVs I think it’s in the office book, specifically in the low 60s.
I’m guessing, I assume that’s largely value at origination of these loans. I’m just wondering as you’ve gone through this in-depth portfolio review what that’s sort of telling you, if you can share what that’s telling you about where value has moved in some of your markets in terms of the underlying property in sort of percentage terms? Thanks.Gary Guerrieri Yes. We’ve updated various appraisals, Frank on properties in that space. We’ve seen reductions generally speaking, in the 15% to high teen range, into the 20s. We did have one that had some leasing issues that got into the 30s. But so far, at this point, that’s the range that we have been experiencing. And that’s pretty much been across the board with the ones that we’ve had to update.Frank Schiraldi Okay.
