F.N.B. Corporation (NYSE:FNB) Q4 2022 Earnings Call Transcript January 24, 2023
Operator: Good morning, everyone, and welcome to the FNB Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note today’s event is being recorded. At this time, I would now like to turn the floor over to Lisa Heidi (ph), Manager of Investor Relations. Please go ahead.
Lisa Constantine: 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 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 Tuesday, January 31 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 fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB closed strong in 2022, continuing our streak of outstanding performance and is positioned to capitalize on our momentum as we navigate a complex economic landscape in 2020 (ph). FNB’s fourth quarter operating earnings per share totaled a record $0.44, increasing 13% on a linked quarter basis and bringing the full year operating earnings per share to $1.40. The success of this quarter was further highlighted by record revenue, continued strong loan growth, disciplined deposit cost management, and the closing and conversion of the UB Bancorp acquisition in December.
The fourth quarter’s exceptional performance is captured in its strong profitability metrics with operating return on average tangible common equity totaling 22% and the quarterly efficiency ratio below 46%. In the fourth quarter, total revenue grew 10% linked quarter to $416 million with net interest income as the primary driver contributing 13% growth. In addition to benefiting from the Fed rate hikes, our net interest income reflects strong loan growth, favorable funding costs and the strategic steps our team has taken with the asset sensitive position of our balance sheet. Net interest margin significantly expanded quarter-over-quarter from 3.19% to 3.53%. Operating expenses were well managed, increasing 1.5% linked quarter. The revenue growth and disciplined expense management resulted in strong positive operating leverage and an 18% linked quarter increase in pre-provision net revenue.
FNB ended the year with nearly $44 billion in total assets and $30 billion in loans and leases, a 5% increase linked quarter. On an annualized basis, excluding UB Bancorp, period end commercial and consumer loans grew 14% and 6% respectively. Continuing a trend, we have upheld throughout the entire year. We saw strong loan growth in markets spanning our whole footprint. Once again demonstrating the importance of our diverse geographic coverage and presence in both mature and high growth markets. The acquisition of UB Bancorp closed on December 9, 2022 with the systems conversion successfully completed and integrated. With the addition of UB Bancorp’s rich deposit needs, which includes 43% non-interest bearing deposits, we ended the year with the total non-interest bearing deposit mix at 34%.
This result was in line with the end of 2021, despite Fed funds increasing 425 basis points, demonstrating the strength of our deposit franchise. We are pleased with the financial benefits and dedicated employees in UB Bancorp acquisition has brought to us and expect to generate additional revenue as these customers are introduced to FNB’s more robust product set. FNB’s impressive fourth quarter and full year results demonstrate our significant success driving value for our clients, communities, employees and shareholders. I’d like to call out a few of our many accomplishments. FNB achieved operating earnings per share of a $1.40, one of the highest levels in company history, led by record revenue of $1.4 billion. Total loans grew by $5.3 billion year-over-year, 21% through strategic combination of footprint wide organic growth and the completion of two accretive acquisitions, bringing total assets to $44 billion.
Despite the challenging economic environment, we grew total deposits to an all-time record of $35 billion and reported average balance growth in all four quarters of 2022, while also maintaining a favorable deposit mix comprised of 34% non-interest bearing deposits. We currently hold the top five deposit market share in nearly 50% of our MSAs according to data provided by the FDIC. We generated over $1.1 billion of net interest income, up 24% year-over-year, driven by solid loan growth, the favorable deposit mix and the asset sensitive portion of our balance sheet. Our team controlled expenses in a high inflationary period, which contributed to FNB’s full year efficiency ratio of 52%. FNB reported total shareholders’ equity of $5.7 billion and a CET1 ratio of 9.8%.
Our growing capital base provided our company with unprecedented flexibility even after returning $220 million to shareholders with common dividends and our active share repurchase program, which has $175 million remaining. Our strong earnings also resulted in 40% dividend payout ratio and 34% on an operating basis, providing our company more internal capital to support future growth and capital actions. Credit quality remains solid with consistent prudent underwriting standards throughout the footprint, with total delinquencies ending the year at 71 basis points, net charge offs at 6 basis points for the full year and a reserve position of 1.33%. We will maintain our steadfast focus on our disciplined credit culture as we continue to navigate changing economic cycles.
We closed and converted two acquisitions. Howard Bancorp at January and UB Bancorp in December, which have enhanced our market position in Maryland, Washington. D.C. and North Carolina. Driven by our continued investment in FNB’s digital delivery channel and our dedicated mortgage employees, the Physicians First Program comprised 25% of retail mortgage production in 2022 and grew those high value households significantly. We continue to expand our eStore platform, which received over 500,000 interactions in 2022, up 104% year-over-year and introduced online applications for multiple consumer loan and small business deposit products. The success of our digital strategy drove increased adoption across our expanding customer base, including a 17% increase and online applications.
Our consistent performance does not happen without the right culture and the commitment of exceptional people. We focus on fostering a positive productive workplace where engaged employees provide superior service for our clients and attractive returns for our shareholders. Our success in this regard has led to extensive third-party recognition. Since 2011, FNB has received more than 80 prestigious Greenwich Excellence and Best Brand Awards, with 17 in 2022 alone. These results are based on direct feedback from our commercial, middle market and small business banking partners. Additionally, FNB received approximately 50 awards as an employer of choice, including multiple national and regional honors in 2022. Earning a place is one of Newsweek America’s Top Workplaces for Diversity in 2023.
And most recently named to JUST Capital’s list of America’s most JUST Companies for the sixth consecutive year with exceptionally high marks for community development, employee benefits and work life balance. Our board and leadership team are proud of this year’s achievements and we are confident in our company’s continued ability to execute on our strategic plan in 2023. Even in times of economic uncertainty, we are well-positioned given our diversified loan portfolio, investments in technology, strong liquidity position, capital flexibility and strong historical credit performance. I will now turn the call over to Gary to provide additional detail on our asset quality. Gary?
Gary Guerrieri: Thank you, Vince, and good morning, everyone. We ended the year with our credit portfolio well positioned and our asset quality metrics remaining near historically level levels. Our performance for the period reflects total delinquency and ended the year at 71 basis points. NPLs and OREO at 39 basis points, rated asset levels remaining essentially flat quarter-over-quarter, excluding UB Bancorp and full year net charge-offs at 6 basis points. I will cover these GAAP asset quality highlights for the quarter and full year in more detail followed by some insight into our credit strategy. We use to manage the loan portfolio throughout economic cycles. And finally, we’ll provide a brief update on UB Bancorp acquisition that closed during December.
Let’s now walk through our credit results. Total delinquency ended December at 71 basis points, reflecting a 12 basis point linked quarter increase coming off on historically low past due levels in the trailing quarters. NPLs and OREO at 39 basis points were up 7 bps in the quarter with nearly 60% of our NPLs in a contractually current payment status. Net charge-offs from Q4 totaled $11.9 million or 16 basis points on an annualized basis with full year net charge-offs for 2022, totaling $16.2 million to stand at a very solid 6 basis point for the year, consistent with 2021 levels also at 6 basis points. Total provision expense for the quarter stood at $28.5 million, includes $9.4 million of initial provision for non-PCD loans that were acquired from UB Bancorp, with the remainder providing for loan growth, charge offs and updated economic forecasts that reflected a softer macroeconomic environment requiring additional reserve.
Inclusive of the additional Day 1 PCD gross up of $1.8 million. Our ending funded reserves stand at $402 million or a solid 1.33% of loans at year end. Reflecting our strong position relative to our peers, with the funded reserve ticking down 1 basis point compared to the prior quarter. Our NPL coverage position remains strong at 354%. I’d now like to briefly update you on our recently closed UB Bancorp acquisition and the successful conversion of this $650 million portfolio during the fourth quarter. Our credit and lending teams continued to diligently review their loan portfolio as part of our standard post conversion process following an acquisition. The book remains in line with our expectations from due diligence with no material impact to our overall credit, loan risk profile or portfolio concentrations at the close of the year.
We’d like to congratulate the team on closing another successful transaction and will bring additional opportunities to expand our customer base and support our corporate growth objectives in the desirable Carolina of markets. We welcome our new UB Bancorp customers and we look forward to the opportunity to provide our expansive set of banking products and services team as we deepen these relationships. In closing, we had another successful year marked by the continued strength and favorable positioning of our credit portfolio moving into 2023, as well as closing two acquisitions to enhance our presence in attractive markets that will further support our loan growth objectives. Consistent with our proactive and aggressive approach to managing risk, rating credits and positioning potential problem assets, we continue to closely track emerging macroeconomic trends and signs of stress heading into a softer environment.
We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced, well positioned portfolio throughout economic cycle. I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.
Vince Calabrese: Thanks, Gary. Good morning, everyone. Now we’ll focus on the fourth quarter financial results and offer guidance for 2023. The fourth quarter net income available to common shareholders totaled $137.5 million or $0.38 per share. After adjusting for $21.9 million of merger related expenses and $2.8 million of branch consolidation costs, net income reached record levels of $157 million or $0.44 per share. Full year 2022 operating earnings per share also represented one of the company’s highest levels coming in at $1.40. The growth in the balance sheet brought assets to $44 billion with earning assets nearly $39 billion at the end of the year. This was largely driven by the $1.5 billion linked quarter increase in spot loans and leases, which included organic growth of $824 million or 11.4% annualized and the $651 million of UB Bancorp acquired loans as of the December 9 acquisition date.
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C&I and commercial real estate each grew 6.3% linked quarter. Consumer loans increased 3.4%, reflecting portfolio growth and adjustable rate mortgages and the continued success of the Physicians First Mortgage Program. Full year total loan growth was a robust $5.3 billion or 21.2% on a year-over-year spot basis, roughly half of this growth was related to the previously discussed Howard and UB Bancorp acquisitions with the remaining half due to strong organic growth capping-off three sequential quarters of double-digit organic growth across the footprint. Average deposits totaled $33.9 billion for the fourth quarter, increasing $301 million or 1% including UB Bancorp acquired deposits over the last three weeks of the year. When excluding UB Bancorp deposits, average non-interest bearing deposits declined only 1% linked quarter $11.7 billion and we maintained a favorable deposit mix at year end with 34% non-interest bearing deposits, demonstrating the strength and granularity of FNB’s deposit base.
Record quarterly revenue of $415.5 million were driven by record net interest income totaling $334.9 million, a linked quarter increase of $37.8 million or 12.7%. The net interest margin increased 34 basis points to 3.53%, as the earning asset yield increased 62 basis points, while the cost of funds increased 30. The largest driver was increase in yields on loans and leases, which increased 68 basis points. In fact, the December loan origination yield was over 6%, the highest since 2009 and approximately 100 basis points higher than the spot portfolio rate at quarter end. With 59% of the loan portfolio repricing, we expect the portfolio rates continue to increase given the December Federal Reserve rate hike and expected 25 basis point increases in February and March.
The fourth quarter also had record positive operating leverage of 29.1% which we expect to rank in the upper quartile of our peers. On the other side of the balance sheet, deposit costs continue to be a significant focus for our team. Total cumulative deposit betas ended the year at 16.3% below the forecasted 20% by maintaining the previously mentioned favorable non-interest bearing deposit mix and actively managing interest bearing deposit costs. We were able to keep the average interest bearing deposit costs below 1% for the fourth quarter again demonstrating the strength of our customer relationships. We have been able to effectively manage deposit costs, strategic pricing campaigns supported by our data analytics platform. While competitive pressures on deposit pricing continue to rise, we are forecasting a cumulative total deposit beta to be in the low 20s at the end of the first quarter of 2023.
Turning to non-interest income and expense. Non-interest income totaled $80.6 million, a decrease of $1.9 million or 2.2% compared to the prior quarter. Mortgage banking operations income decreased $2.4 million with a decline in mortgages sold in the secondary market and lower gain on sale margins. Insurance commissions and fees decreased $1.3 million reflecting seasonality in the fourth quarter. Capital markets income totaled $10 million with this strong level supported by an increase in syndications and solid contributions from swap fees and international banking. On a full year basis, non-interest income totaled $323.6 million, a 2.1% decrease from 2021 primarily reflecting a significantly lower mortgage banking operations income, which was partially offset by several other fee based businesses, again demonstrating the importance of our diversified business strategy.
On an operating basis, non-interest expense totaled $195.8 million, a 1.5% increase from the third quarter and an increase of 8.3% from the year ago quarter which is primarily driven by the acquired Howard and Union expense basis in occupancy and equipment and outside services. Other non-interest expense increased linked quarter primarily from charitable contributions during the quarter to qualify for Pennsylvania bank shares tax credits. Salaries and employee benefits decreased from the third quarter due to lower medical costs and seasonally lower production and performance related incentives. Excluding significant items totaling $52.3 million in 2022 and $4.4 million in 2021 full year operating non-interest expense increased $45.4 million or 6.2%.
Fourth quarter’s operating pre-provision net revenue totaled a record $219 million, representing an 81% increase from the year ago quarter. On a full year basis, operating pre-provision net revenue was $669.2 million, an increase of 31.7% in 2021. Our capital ratios ended the year at levels that are expected to be at or above peer median. Tangible book value per common share was $8.27 at December 31, an increase of $0.25 per share from September 30, largely from the higher level of earnings and the decreased impact of AOCI by $0.09 per share. CET1 ended the year at a solid 9.8% and the TCE ratio totaled 7.24%. Let’s now look at the 2023 financial objectives, starting with the balance sheet. We expect loans to increase mid-single digits on a year-over-year spot basis.
Total deposits are projected to end 2023 at a similar level as of December 31, 2022, spot balances as customer growth continues alongside active management of deposit rates in an environment with rising deposit betas. Full year net interest income is expected to be between $1.34 billion and $1.4 billion, with the first quarter of 2023 between $335 million and $345 million. Our guidance currently assumes 25 basis point rate increases in both February and March with no additional rate actions projected for the remainder of the year. Full year non-interest income is expected to be between $300 million and $320 million with the first quarter in the mid $70 million range. Full year guidance for non-interest expense on an operating basis is $830 million to $850 million, which assumes an additional $8 million in FDIC deposit insurance costs, reflecting higher assessment rates, it may remain in effect to the deposit insurance fund reserve ratio meets the FDIC’s long-term goal of 2%.
This expense guidance range implies growth of 7% to 10% and full year 2022 operating expense figures. At the midpoint of our guidance, the efficiency ratio would be below 50% for full year 2023. When excluding the FDIC increase in the Union acquired expense base, the 2023 expense range would be 4% to 7% on a year-over-year basis. The first quarter non-interest expense is expected to be between $210 million to $215 million as the compensation expense is higher in the first quarter, largely due to normal seasonal long-term stock compensation and higher payroll taxes at the start of the new year. Full year provision guidance is $65 million to $85 million and is dependent on net loan growth and 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 assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.
Vince Delie: Thanks, Vince. As we start the new year, we remain focused on executing our strategy and serving our stakeholders. We will do this by staying true to our values based culture. And delivering on the financial guidance Vince provided with a focus on generating positive operating leverage and efficiently deploying capital in the most effective way to optimize risk adjusted returns for our shareholders. Before we close today, I want to recognize our dedicated team, who made our performance positive. Every employee contributes to the success of the company, and I strongly believe that we will continue to win at FNB because of our outstanding employees and the excellent culture we have developed together. With that, I’ll turn the call over to the operator for questions. Operator?
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Q&A Session
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Operator: Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. And our first question today comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.
Frank Schiraldi: Good morning.
Vince Delie: Good morning, Frank.
Frank Schiraldi: Just curious you guys talked in the release a little bit about where you saw the strongest growth geographically. And just curious if you can give a little more color there, specifically on the — what percentage of the commercial growth you’re seeing coming out of the Carolina footprint.
Vince Delie: Yeah. I don’t know that we have the specific specifics in our finger tips, but I can tell you just from what we get, the Carolina has had an exceptional year. They contributed throughout the year in all of those areas were big contributors to loan growth. They all exceeded their planned objectives for the year and had a tremendous year in cross-selling. So in addition to eliminating loans that are also able to cross-sell capital markets, products, trust and investment products and insurance throughout that footprint. So they were a significant driver. Pittsburgh has always been a solid market for us given our market share here. The groups in Pittsburgh were this year. And I also want to include our expansion market in Charleston.
The team down there has done an exceptional job over the last two years and the last two years. So those areas have been huge contributors. In the past, the Mid-Atlantic region has been a fairly substantial contributor, but we were able to — through various takeouts, reduce the size of the seating portfolio in that market. So we had a little bit more of a headwind coming into the year. And I will tell you that as we move into next year, the pipelines have softened a little bit kind of globally, but we had two consecutive quarters of pretty solid growth. So we’re down about 15% year-over-year, with the pipeline typically a seasonal low point. And we’re being a little more careful as we move into next year, quite a bit of economic uncertainty and player conservative side.
So very excited about where we sit, though, Frank, in terms of originations because it was barely geographically spread out. We got some assistance from the Midwest and the Northeast with — in some of the slower growth markets because they have a heavier industrial base, and there seems to be a little more activity there to offset some of the declines in CRE opportunities in the Mid-Atlantic region. So it all kind of balanced out. And I think as we’ve said all along, that has been our strategy to have a very longs to grow. Sorry, actual on the portfolio.
Frank Schiraldi: That’s great. Thanks for all the color. And then I just wanted to follow-up on the guide, specifically on fee income. It seems like — I don’t know, even if I can sort of normalize the other line item this quarter, maybe you get the mid-70s number you’re still sort of at — already at sort of the midpoint of that run rate guide for next year. And so just kind of curious if you can provide any puts and takes in terms of where you might see some growth in fees and where we could see some further weakness in 2023.
Vince Calabrese: I could comment, Frank. Just I guess, high level, non-interest income was solid again at $80.6 million for the quarter, down slightly from the third quarter. Mortgage banking income coming down. $2.4 million, there’s kind of normal seasonality there. One thing I did want to point out too is that it’s important, the growth in the balance sheet of adjusted for rate mortgages has been higher. We’ve been portfolioing more loans that we might otherwise have been selling in the past. So the fee revenue is a little bit lower on the mortgage banking side. No capital markets for the quarter, very solid at $10 million. We had a higher contribution compared to the third quarter, partially offsetting that reduced contribution from mortgage and the second consecutive quarter with strong syndication fees.
As you look ahead, some of that revenue sources are lumpy like the syndication fees are always consistently at the same level, they kind of come in lumpy, the swap piece also can be a little bit lumpy. So, us guiding to mid-70s again, which is what we guided to for the fourth quarter is really just kind of a function of that as well as we made some changes to consumer deposit fees that we had announced in November. That’s also kind of rolling through the numbers. So it’s kind of a conservative look, I would say, based on kind of what we know today. But the lumpiness you can’t predict with certainty as far as some of the kind of capital markets component. So that’s why the guide at that kind of mid-70s level.
Unidentified Company Representative: Hey, Frank. So Chris on the Carolinas, over the last three years, the Carolina markets, both and South Carolina produced roughly 40% of our net loan growth.
Frank Schiraldi: Okay. Great. No, I appreciate that. And then if I could just lastly, just you’re getting closer and closer to that 10% CET1 ratio — and just wondering if any sort of strategic changes we can expect when you do reach that level and pass through it? And I guess, specifically wondering about additional capital return if this could trigger greater buyback activity as we move through 2023. Thanks.
Unidentified Company Representative: Yeah. I would just say, we expect to build a 10 in the near term here, given the level of earnings that we’ve been generating really creating that capital flexibility we’ve never had in the past. So we got buybacks. I mean our first and best use of capital, as we’ve said all along, the strategy is the same as to deploy it into loan growth. So depending on how strong the loan growth is or how much it slows down, you’ll have more opportunity to do buybacks. So it’s clearly on the table for 2023. As you know, we remain committed to managing capital in a way to just fully optimize on shareholder value fully aligned with shareholder interest. So we will be looking at that. We’ll be opportunistic as we go through the year.
I think in total, we have about $175 million or so of capacity remaining in our former program. So clearly, as we expect to build past that 10% level, the share buybacks are definitely something we’ll be pursuing and evaluating on a daily basis.
Frank Schiraldi: Great. Okay. Thanks for all the color, guys.
Operator: And our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.
Jared Shaw: Hey, guys. Good morning. How are you?
Vince Delie: Good morning, Jared.