F.N.B. Corporation (NYSE:FNB) Q1 2024 Earnings Call Transcript

F.N.B. Corporation (NYSE:FNB) Q1 2024 Earnings Call Transcript April 18, 2024

F.N.B. Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the FNB First Quarter 2024 Earnings Conference Call. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Lisa Hajdu, Manager of Investor Relations. Ma’am, please go ahead.

Lisa Hajdu: Good morning, and welcome to the conference call. We will now turn it over so that we can hear some of the prepared remarks that we have. Thank you. Good morning, and welcome to our earnings call. This conference call of FNB Corporation and the reports that filed with the Securities and Exchange Commission also 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 25, 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: 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 produced a solid quarter, reporting operating earnings per share of $0.34 and operating net income available to common shareholders totaling $123 million. Our balance sheet resilience, robust fee income generation, strong credit results and continued progress of our clicks-to-bricks strategy were at the forefront this quarter. Our team remains focused on balance sheet management to position FNB for optimal flexibility during the volatile interest rate period. This is evidenced by our tangible common equity ratio ending the first quarter at an all-time high of 8%.

In addition, our company reported solid loan growth of 6% and deposit growth of 2% on a year-over-year basis. Deposit mix remained similar to the prior quarter with a favorable total deposit cost of less than 2%, which is expected to remain superior to peers. Tangible book value per share also reached a record high at $9.64, an 11% increase year-over-year as tangible book value growth remains a key value driver of our strategy. FNB maintained strong levels of liquidity and uninsured and non-collateralized deposit coverage ratio of 162%. Our non-interest income continues to grow, reaching $87.9 million, a near record level. This achievement is the result of our geographic expansion in a decade of strategic investments in our mortgage, wealth management, international banking treasury management and capital markets capabilities, including the launch of loan syndications and the FNB debt capital markets platform.

Our diversified business model has enabled non-interest income to grow 75% from $200 million in 2016 to over $350 million on an annualized basis. We recognize the benefit of having diverse revenue stream, which complement one another during various points of the economic cycle. Looking ahead, we will continue to diversify our non-interest income products and services with plans to further enhance our treasury management, merchant services and payment capabilities. This past decade also included the launch of our clicks-to-bricks strategy. That vision along with our investments in people and infrastructure for data analytics has laid the groundwork for the success of our digital bank today as well as FNB’s increased use of AI in the future. What began with QR code enabled product boxes has evolved into an Omni channel experience with our proprietary eStore.

Paired with our new common application, we can bundle products and streamline the application process, enabling customers to open 30 products with one application, creating efficiencies and significantly reducing the number of keystrokes for our clients. Our strategy offers us the opportunity to align high-value product solutions for our customers based upon need in a bundled manner, which helps retain and attract clients. FNB also leverages our investments in data infrastructure and analytics for driving revenue growth through enhanced lead generation. Our enterprise data warehouse stores over 71 billion records across 41,000 attributes, enabling our data scientists to utilize machine learning more effectively. We developed Opportunity IQ, our proprietary tool that utilizes AI and data aggregation to produce a one-page snapshot of our customers, including the lead score next best product to offer in an overall need.

This at-a-glance insight enables our employees to have elevated conversation and deepen our relationships with data-driven dollars. Leveraging our proprietary data and analytics within our common app, we can improve product penetration through tailored offerings to our customers, to increase their financial well-being and client loyalty to our brand. As we continue to expand our current relationships and gain new households, FNB remains steadfast in our consistent underwriting standards and credit management process. I will now turn the call over to Gary to provide additional information on our credit risk metrics. Gary?

Gary Guerrieri: Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at a solid level. Total delinquency finished the quarter at 64 basis points, down 6 bps from the prior quarter. NPLs in OREO decreased 1 basis point to end at 33 bps, a multiyear level with net charge-offs of 16 basis points. I’ll provide an update on our CRE portfolios and conclude with an overview of our credit risk management strategies and focus around the current environment. Total provision expense for the quarter stood at $13.9 million, providing for loan growth and charge-offs. Our ending funded reserve stands at $406 million or 1.25% of loans, flat compared to the prior quarter, continuing to reflect our strong position relative to our peers.

When including acquired unamortized loan discounts, our reserve stands at 1.36%, and our NPL coverage position remains strong at 425%, inclusive of the discounts. We continue to closely monitor the non-owner-occupied CRE portfolio, and on a monthly basis, review upcoming maturities, largest exposures and analyze overall market performance across our footprint. At quarter end, delinquency and NPLs for the non-owner-occupied CRE portfolio improved slightly and continue to remain very low at 19 and 13 basis points, respectively. Specifically related to the non-owner-occupied office portfolio, our most recent review reflected a 60% weighted average LTV, providing additional protection for potential market declines. Delinquency and NPLs were 3 and 2 basis points, respectively, outperforming the prior quarter.

Net charge-offs for the non-owner-occupied CRE portfolio reflected solid performance for the quarter at 9 basis points, confirming our consistent underwriting and strong sponsorship. We remain focused on credit risk management, along with consistent underwriting, which allows us to maintain a balanced well-positioned portfolio throughout various economic cycles. On a quarterly basis, we continue to perform specific in-depth reviews of our portfolios as well as full portfolio stress tests. Our stress testing results for this quarter have again shown lower net charge-offs and stable provision compared to the prior quarter’s results with our current ACL covering approximately 90% of our projected charge-offs in a severe economic downturn, again confirming that our diversified loan portfolio enables us to withstand various stressed economic scenarios.

In closing, our asset quality metrics ended the quarter at good levels. Our loan portfolio continues to remain stable and benefits from proactive risk management being further enhanced by experienced banking teams and tenured leadership, which have successfully managed through many economic cycles. We continue to seek loan growth through a diversified mix of products and geographies while maintaining our strong core credit philosophy and consistent approach to underwriting through the cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Vince Calabrese: 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. Total loans and leases ended the quarter at $32.6 billion, a 3.3% annualized linked quarter increase driven by growth of $209 million in consumer loans and $53 million in commercial loans and leases. Residential mortgages led consumer loan growth driven by on-balance sheet production this quarter in physicians and jumbo mortgage loans. Total deposits ended the quarter at $34.7 billion, a slight increase of $24 million linked quarter even with the headwind of seasonal deposit outflows. For context, our seasonal deposits peak in mid-November and troughed in mid-February, and balances should continue to build through the next couple of quarters benefiting from normal seasonality and our team’s success driving deeper market penetration on an organic basis.

As of March 31, non-interest-bearing deposits comprised 29% of total deposits, maintaining the same level at year-end. While the deposit mix continues to shift from low interest checking and savings products into higher-yielding CD and money market products, we believe we will continue to outperform the industry in both a mix and deposit cost perspective. Our deposit costs ended the first quarter at 2.04% and leading to a total cumulative deposit beta of 36% since the current interest rate increases began in March of 2022. The first quarter’s net interest margin was 3.18%, a decline of only 3 basis points. A 15 basis point increase in the total yield on earning assets to 5.40% was slightly more than offset by a 19 basis point increase in the total cost of funds to 2.33%.

On a monthly basis, net interest margin was down a modest 1 basis point per month during the first quarter, and March’s net interest margin was 3.17%. Net interest income totaled $319 million, a $5 million decrease from the prior quarter, with over half the difference due to the current quarter having one less day. Turning to non-interest income and expense. Non-interest income totaled a robust $87.9 million with linked quarter growth in nearly every line of business. Wealth management revenues increased 12% compared to the prior quarter, reaching a record $19.6 million through continued strong contributions across the geographic footprint. Mortgage banking operations totaled $7.9 million, the highest quarterly figure since 2021 with our focus on the purchase market driving good production growth.

Several of the lines of business, Vince mentioned, had strong performance this quarter. Our debt capital markets platform, which is part of capital markets, had a record number of bond transactions this quarter and more than double the prior record. Treasury management revenues have gained momentum as we execute on our strategic initiatives, building out the platform with total TM revenues increasing around 19% from the year ago quarter, driving the increase in the service charge line item. Operating non-interest expense totaled $234.1 million, an increase of $15.2 million from the prior quarter after adjusting for $3 million of significant items in the current quarter and $46.6 million last quarter. This quarter’s significant items included $1.2 million of branch consolidation expenses and $4.4 million estimated for the additional FDICs special assessment partially offset by a $2.6 million reduction to the previously estimated loss on the indirect auto loan sale that closed in February.

The largest driver for operating non-interest expense with salaries and employee benefits which increased $15 million, primarily related to normal seasonal long-term compensation expense of $6.9 million, seasonally higher employer payroll taxes, which increased $4.6 million and reduced salary deferrals given seasonally lower loan origination volumes. As previously mentioned, FNB redeemed all of our outstanding Series E perpetual preferred stock on February 15, and paid the final preferred dividend of $2 million on the redemption date. The excess of the redemption value over the carrying value on the preferred stock of $4 million was considered a significant item impacting earnings. FNB continues to actively manage our capital position for ample flexibility to grow the balance sheet and optimize shareholder returns while appropriately managing risk.

Our financial performance and capital management strategy resulted in our TCE ratio reaching 8% and CET1 ratio at 10.2%, both record levels. Tangible book value per common share was $9.64 at March 31, an increase of $0.98 or 11.3% compared to March 31, 2023. AOCI reduced the tangible book value per common share by $0.70 as of quarter end compared to $0.87 for the year ago quarter. Let’s now look at guidance for the second quarter and full year of 2024. We are maintaining our full year balance sheet guidance. We project period ending loans to grow mid-single digits on a full year basis as we increase our market share across our diverse geographic footprint. And total projected deposit balances are expected to grow low single digits on a year-over-year spot basis.

Overall, our projected full year income statement guide is consistent with last quarter with some additional thoughts on where we expect to land within the provided ranges. Our projected full year net interest income is still expected to be between $1.295 billion and $1.345 billion, assuming 225 basis point rate cuts occurring in the latter half of 2024. Our current expectation is to be in the lower half of the full year guide, given those two rate cuts but where we ultimately end up in the range may change due to the fluidity of the rate environment and the number and timing of interest rate cuts that actually occur. Second quarter net interest income is projected between $315 million and $325 million. The non-interest income full year guide remains between $325 million and $345 million.

However, given the strong momentum in the first quarter, we anticipate being in the upper half of that range. The second quarter non-interest income guide is between $80 million and $85 million. Full year guidance for non-interest expense is expected to be between $895 million and $915 million, with the second quarter non-interest expense expected to be between $220 million and $230 million. Full year provision guidance is $80 million to $100 million and is dependent on net loan growth and charge-off activity. Lastly, the full year effective tax rate should be between 21% and 22% which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.

Vince Delie: FNB had a good start to the year. And we are optimistic that as we enter the second half of the year, we have the potential to return to positive operating leverage and benefit from a more favorable interest rate environment as well as a growing pipeline for loans and deposits. Our award-winning client experience is shaped by our digital technology and eStore. And we are proud to appear among some of the nation’s largest banks as a finalist for a Fintech award for innovation and customer experience. Our strategy is consistently supported by third-party recognition. In fact, we received approximately 30 awards for our client service, financial performance and culture during the first quarter alone, with multiple awards received in 2024 for small business and middle market excellence.

These select examples of FNB’s third-party recognition highlights the strength of our business model and financial achievements which led to FNB being named by S&P Global Market Intelligence as one of the top 50 performing U.S. public banks. The ongoing recognition that our company receives is made possible by our engaged teams. We provide an environment where everyone has an opportunity to excel. And as a result, FNB is a top workplace U.S.A. for the fourth consecutive year based upon employee feedback. Our employees’ dedication enables us to serve all of our stakeholders and positions FNB for continued success. I want to thank the team for their outstanding efforts in the first quarter given the difficult operating environment, and I look forward to working together to build on our momentum throughout the year.

Operator: [Operator Instructions] And our first question today comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.

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Q&A Session

Frank Schiraldi : Good morning. Just on the NII, well on the NII guide and also on the loan-to-deposit ratio. I think in the past, you’ve talked about as you get up to 95%, 96% taking some potential actions to help mitigate getting up to 100% loan-to-deposit ratio. And so I know there’s some seasonality on the deposit side. But just curious maybe if you could talk about what some of those actions might be. I know you had the indirect sale — indirect auto sale, which, I guess, helped a bit. But just curious if you could talk about what some of those potential actions might look like? And then also just remind us of what you get on a 25 basis point cut in interest rates? Thanks.

Vince Calabrese: I would say on the loan-to-deposit ratio, Frank, we’ve historically talked about 97% is kind of a level where we’ve taken action. And the action was leveraging our franchise we have to generate deposits. So last time that had happened, we generated close to $1 billion in CDs to kind of bring it back down into the kind of [indiscernible]. You know the 100% is there as a line, but 97% is a line that we would kind of — we got close to that, we kind of manage it down. And there’s a lot of things we can do. I mean, as you know, we have a big focus on generating deposits — demand deposits throughout the company, our traditional commercial businesses, treasury management, small business, it’s a focus throughout the company it’s always been.

So generating additional deposits, bringing in new households, new customer, more of the clients is a key part of it. And then also things like managing the [Technical Difficulty]. We’ve adjusted our pricing strategy kind of midyear last year to create more salable product out of our originations than what we had been before. And now we’re up in the mid-40s for saleable percentage where we were low in the 20s. So that’s another lever we have. In the indirect business, while we did a sale, we also have a lever there as far as how much we want to grow in a point in time depending on kind of what’s the shelf space on the balance sheet.

Vince Delie: There are a whole list of things that we look at both asset and liability. So there’s a — Vince mentioned many of them. I think our pipeline for new production is pretty strong from a deposit perspective. So I don’t think that we’re worried about that. So obviously, in the event that we need to generate deposits, the pricing mechanisms that we did point, but we prefer to grow organically and try to bring in a balanced mix of deposits that are accretive. That is going very well for the company.

Frank Schiraldi: Great. And then just on the NII side. I mean, I guess, you have one less rate cut baked into your expectations now, but guiding towards the lower half of the previous range. Is that just given where you sit in the first quarter and the trends from here? Or I guess I would be — I assume you still pick up a little bit potentially from less rate cuts baked into your guide. So just curious the driver there?

Vince Delie: You answered it pretty well Frank, actually. So the key drivers. I mean, in our guidance in January, we had three cuts. One of them was December. So December falls off, which doesn’t have much of an impact for the full year. So the two cuts we have in the second half of the year in the short term is positive. We’re still in an asset-sensitive position. We’ve been organically moving back towards neutral. So there’s — in the short term, there is a benefit from having that cut. The guide we adjusted in the first quarter, we were at the lower end of our range for net interest income. The timing of our seasonal deposits, average borrowers were a little higher, just potentially the timing of that. But by the end of the quarter, we were back to flat, up a little bit.

So kind of just capturing that first quarter as we look ahead. And there’s — we’ll see the interest environment is very fluid. There’s potential for us to beat that if the loan growth is stronger, that’s kind of what’s baked in there. There’s an opportunity for us to be above that. But just kind of where we sit, how we started the year, we thought it was appropriate to kind of guide. And it’s the bottom half. It’s at the bottom of the range. It’s kind of the lower half of the range is what we had guided to.

Frank Schiraldi: Right. Okay. And then just — so to confirm there, you’d be the third rate cut was late in the year, really didn’t. So going from three to two rate cuts really just doesn’t have an impact given the timing of the rate cuts?

Vince Delie: Right.

Frank Schiraldi: Okay, great. Thank you.

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

Daniel Tamayo: Thanks. Good morning, guys. I guess, first, I just wanted to dig into the office loans. I appreciate the detail you guys gave there. Look like the — and you touched on it in your comments, the delinquency and the NPLs for the office loans came down in the quarter. I guess, first, I was just wondering if there was anything in particular that happened that drove that. There were sales or what? And then just curious on the small increase in the criticized portion of the office loans if there’s any other details you can provide there? Thanks.