F.N.B. Corporation (NYSE:FNB) Q4 2023 Earnings Call Transcript

F.N.B. Corporation (NYSE:FNB) Q4 2023 Earnings Call Transcript January 19, 2024

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Operator: Good morning, everyone, and welcome to the F.N.B. Corporation Fourth Quarter 2023 Earnings Conference 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 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: 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 contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures are often viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP reporting 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, January 26th, 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’s fourth quarter net income available to common shareholders was $49 million on a reported basis and $139 million on an operating basis. Full-year 2023’s operating performance was highlighted by record revenue of $1.6 billion, record net income available to common shareholders of $569 million, and record earnings per diluted common share of $1.50. Tangible book value per share has increased 15% year-over-year to a record high of $9.47 per share, steadily approaching a $10 milestone. Since 2009, FNB’s internal capital generation, representing tangible book value and dividends, has been strong with 10% compounded annual growth.

With this strong profitability, full year positive operating leverage totaled 1.5% and is expected to remain in the upper quartile on a pure relative basis. FNB’s exceptional financial performance in 2023 was a direct result of the consistent execution of our strategic initiatives. The banking disruption in the first quarter of the year placed a spotlight on the importance of balance sheet resilience, including our deposit base, strong capital and liquidity position, and prudent underwriting standards. It also reinforced the value of our quality customer relationships and comprehensive delivery channels. These attributes have always been integral to FNB’s long-term strategy, which has been proven through multiple cycles over the last decade and are ingrained in the foundation upon which FNB operates.

Our commitment to maintain a stable deposit base is evidenced in our total deposits, which ended the year at $34.7 billion, unchanged from the prior year even with the elevated competition for customer deposits. The non-interest-bearing deposits to total deposit mix ended the year at 29.4%. While we have seen customer migration away from non-interest-bearing deposits, we continue to substantially outperform our peers in the industry and our total deposit costs and overall cost of funds. Our spot deposit costs ended the year below 2%, and is over 50 basis points better than our peers in the third quarter. Our better-than-peer funding cost and strong liquidity provide balance sheet optionality. Our tangible common equity to tangible assets of 7.8% is the highest level in the company history and exceeds the peer median.

FNB remains committed to optimally deploy capital in a manner that is fully aligned with our shareholders’ interests and best positions FNB for future success. As part of that commitment, FNB recently completed the sale of approximately $650 million of available-for-sale securities, announced the redemption of $110 million of preferred stock, and transferred $355 million of indirect auto loans to held for sale with the sale expected to close in the first quarter. Together, these actions resulted in a capital-neutral transaction that improves forward returns in earnings with expected EPS accretion in the low-single-digits. Our continued ability to meet our client’s needs is critical to our performance. FNB has continued to make strategic investments in our delivery team to deepen customer relationships, gain market share and further outpace our competitors.

In June 2023, we introduced the eStore Common application for the majority of our consumer loan products and recently introduced deposit products in December, allowing customers to apply for up to 18 consumer deposit and loan products simultaneously. Our goal for 2024 is to bring small businesses into the fold, with business loans, deposits, and payments included in the Common application in eStore. These additional features further enhance the customer experience and deepen product penetration as customers can apply for multiple loan and deposit products simultaneously in a very streamlined manner, eliminating keystrokes, providing a portal to upload supporting documents, and automating account funding. We also made significant enhancements in our physical delivery channel in 2023.

In addition to expanding our footprint with four de novo locations, we entered into a partnership with the Washington Metropolitan Area Transit Authority, that establishes FNB as the sole ATM provider with the third largest heavy rail system in the United States. With ATM banking services at every metro station, the partnership will add more than 120 machines to FNB’s network in 2024. Our physical delivery channel is approaching 2,000 combined branches, ATMs, and interactive television. Paired with our digital eStore, FNB has significantly enhanced access for our current and future customers for augmenting brand awareness across our footprint. With the success of our eStore and our exceptional bankers, total loans and leases ended the year at a record $32.8 billion, an increase of $2.4 billion since year-end 2022.

We are beginning the year from a strong position and will continue to closely monitor the macroeconomic environment, with market-specific trends to manage risk proactively as part of our core credit philosophy. We will remain steadfast in our approach to consistent underwriting and risk management to maintain a balanced, well-positioned portfolio throughout economic cycles. I will now turn the call over to Gary to provide additional information on the fourth quarter’s credit performance. Gary?

Gary Guerrieri: Thank you, Vince, and good morning, everyone. We ended the quarter and year-end period with our asset quality metrics remaining at solid levels. Total delinquency finished the year at 70 basis points, seasonally up 7 basis points from the end of September and down 1 basis point from the prior year-end period. NPLs and OREO decreased 2 basis points from the prior quarter and 5 bps from the year ago period to end at a very good level at 34 bps. Criticized loans were down 13 basis points compared to both the prior quarter and year-end with net charge-offs for the quarter and full year at 10 basis points and 22 basis points, respectively. I’ll conclude my remarks with an update on our credit risk management strategies and CRE portfolio.

Total provision expense for the quarter stood at $13.2 million, providing for loan growth and charge-offs. Additionally, provision expense had a positive benefit from a reduction in criticized loans and NPLs. Our ending funded reserve increased $4.9 million in the quarter and stands at $406 million or a solid 1.25% of loans, reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.39% and our NPL coverage position remains strong at 418%, inclusive of the unamortized loan discounts. We remain committed to consistent underwriting and credit risk management to maintain a balanced well-positioned portfolio throughout economic cycles. Each quarter, we performed specific in-depth reviews of our portfolios in addition to ongoing full portfolio stress test.

Our stress testing results for this quarter have shown lower forecasted net charge-offs and stable provision, compared to the prior quarter’s results, again confirming that our diversified loan portfolio enables us to withstand various economic downturn scenarios. Regarding the non-owner-occupied CRE portfolio, in 2023, we were successful in addressing maturities and the impact of the rising rate environment on the portfolio. In 2024, we will continue with the same strategy monitoring the rate environment and proactively addressing upcoming maturities. At year-end, delinquency and NPLs for the non-owner-occupied CRE portfolio continued to remain very low at 32 basis points and 18 basis points respectively, which confirms our consistent underwriting and strong sponsorship.

In closing, asset quality metrics ended the year at very good levels, and we are well-positioned going into 2024. We continue to generate diversified loan growth in attractive markets in a competitive environment for high-quality borrowers, while maintaining our consistent underwriting standards. We closely monitor macroeconomic trends and the individual markets in our footprint and will continue to manage risk aggressively, while maintaining a consistent credit profile across all of our portfolios. 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’ll focus on the fourth quarter’s financial results, provide additional detail on the recent actions taken to further optimize our balance sheet, and offer guidance for 2024. Fourth quarter operating net income available to common shareholders totaled $139 million or $0.38 per share, excluding $114 million of significant items impacting earnings. On a full-year basis, operating earnings totaled a record $1.57 per share and tangible book value totaled $9.47, 15% increase from December 2022. As part of our ongoing proactive balance sheet management strategy, we took several actions to enhance future profitability and capital positioning. Late in the fourth quarter, we sold approximately $650 million of available-for-sale investment securities, transferred $355 million of indirect auto loans to held for sale, and announced the redemption of $110 million of the Series E preferred stock that was issued ten years ago.

The cumulative impact of these balance sheet actions generates incremental earnings and has a tangible book value earn-back period of less than one year versus an earn-back of five years for stock buyback, while retaining capital flexibility in 2024. The sale of investment securities resulted in a realized loss of $67.4 million in the fourth quarter as we sold securities yielding 1.08% on average and reinvested the proceeds into securities with yields approximately 350 basis points higher with similar duration and convexity profiles. We recorded a $16.7 million negative fair value mark in other non-interest expense on the indirect auto loans classified as held for sale at December 31, reflecting changes in interest rates from the time of origination.

The sale of these loans is expected to close during the first quarter with the proceeds being used to repay borrowings that have a similar yield to the sold loans. Our year-end loan-to-deposit ratio benefited by approximately 100 basis points. Excluding the $355 million of held-for-sale indirect auto loans, underlying period-end loan growth was 8% since year end 2022. Fourth quarter loan production reflected high quality loans across our diverse footprint with quarterly commercial loan growth of $351 million and consumer loan growth of $178 million. Investment portfolio remained essentially flat linked quarter at $7.2 billion inclusive of the securities portfolio restructuring. There remains a fairly even split between AFS and HTM with 45% in available for sale at the end of the year.

The duration of our securities portfolio at December 31 is 4.2 years, similar to last quarter. Total deposits ended the year at $34.7 billion, a slight increase of $96 million linked quarter. As of December 31, non-interest-bearing deposits comprised 29.4% of total deposits, compared to 30.9% at September 30. Given our granular stable deposit base, we believe we will continue to outperform the industry with a favorable mix of non-interest-bearing deposits to total deposits and lower deposit costs, which meaningfully outperformed the peers as our team remains actively focused on managing deposit mix. With our spot deposit costs ending the year at 1.93%, our cumulative deposit beta totaled 34.3% in line with our expectations discussed last quarter.

Fourth quarter’s net interest margin was 3.21%, a decline of only 5 basis points, which is better than our expectations discussed last quarter. The yield on earning assets increased 14 basis points to 5.25%, due to higher yields on both loans and investment securities. Total cost of funds increased 21 basis points to 2.14% as the cost of interest-bearing deposits increased 29 basis points to 2.65%. Net interest income totaled $324 million, a slight decrease of $2.6 million from the prior quarter. Turning to non-interest income and expense, operating non-interest income totaled $80.4 million and adjusting for the $67.4 million realized loss on investments securities restructuring. Mortgage banking operations income increased $3.1 million linked quarter, due to improved gain on sale margins aided by the decline in mortgage rates in the fourth quarter.

Other non-interest income declined $2.4 million, and small business investment company funds income decreased reflecting normal fluctuations based on the performance of the underlying portfolio companies. Additionally, we broke out our service charges fee income line on the income statement and to service charges and a new line item for interchange and card transaction fees, which was previously captured in the service charge line. This will create better transparency into our various revenue streams in non-interest income. Operating non-interest expense of $218.9 million was relatively stable, compared to the prior quarter, when adjusting for the fair value mark on the held for sale indirect auto loans of $16.7 million and the $29.9 million FDIC special assessment related to replenishment of the deposit insurance fund for the bank failures.

The linked quarter increase in outside services of $2.4 million reflects higher third-party cost. Bank shares and franchise taxes declined $2.3 million, reflecting charitable contributions that qualify for Pennsylvania Bancshares tax credits and marketing expenses decreased $1.2 million, due to the timing of digital marketing campaigns in the third quarter. The fourth quarter efficiency ratio of 52.5% continues to be in the top quartile of our peers. The efficiency ratio of 51.2% on a full-year basis demonstrates our commitment to effectively managing costs, while growing our diverse revenue streams. We ended the year with our capital ratios, some of the strongest levels in recent history. Our CET1 ratio of 10.1%, which includes the impact of the previously discussed balance sheet management items and the FDIC special assessment remains above our stated operating targets.

Tangible common equity totaled 7.8% and when excluding the 54 basis point impact of AOCI would equal 8.3%. Tangible book value per common share was $9.47 million at December 31, an increase of $0.45 per share from September 30. AOCI reduced the tangible book value per common share by $0.65 as of year-end, compared to $1.06 last quarter, primarily due to the impact of interest rates on the fair value of available for sale securities. Because of the investment securities that were sold in December were unavailable for sale, the realized loss did not incrementally impact TCE or tangible book value since the market value was already reflected in AOCI. Let’s now look at the 2024 guidance for both the first quarter and the full-year, starting with the balance sheet.

On a full-year spot basis, we expect loans to grow mid-single-digits as we continue to increase our market share across our diverse geographic footprint. Total projected deposit balances are expected to grow low-single-digits on a year-over-year spot basis. Full-year net interest income is expected to be between $1.295 billion and $1.345 billion, with the first quarter of 2024 between $318 million and $328 million. Our guidance assumes three 25 basis point rate cuts, aligning with the Fed’s Dot plot, which we are projecting to occur in May, July, and November 2024. Non-interest income is expected to continue to benefit from our diversified fee-based income strategy, with the full-year results between $325 million and $345 million and the first quarter between $80 million and $85 million.

Full-year guidance for non-interest expense is expected to be between $895 million and $915 million, which includes the impact of approximately $6 million of rent expense during the buildout phase of our new headquarters, while we still occupy our current office space. Adjusting for this impact, the midpoint of our expense guidance results in a 3.7% increase from 2023 operating expense levels. The first quarter non-interest expense is expected to be between $225 million and $230 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 $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: During 2023, FNB completed a number of initiatives that align with our strategic priorities, including introducing the eStore Common application for consumer loans and deposit products, expanding our physical delivery channel, and investing in systems and processes that enable us to streamline operations. We continue to expand our data analytics capability and the use of AI to improve performance. These strategic initiatives have directly contributed to our pure relative outperformance in 2023, amidst the banking industry disruption, with the company generating record operating EPS of $1.57 and strong organic loan growth of $2.4 billion. Deposit balances remain flat with non-interest-bearing deposits comprising 29.4% of total deposits and a top quartile cost of funds.

We’ve completed over $75 million in cost savings over the last five years, excluding acquisition synergies leading to positive operating leverage and an efficiency ratio in the top quartile relative to peers at 51.2%. Operating return on average tangible common equity totaled 18% and tangible book value grew 15% to a record $9.47. Our asset quality continues to be a strength as we ended the year at or near historically low levels. This year’s exceptional performance was made possible by our employees. Their commitment to FNB’s mission and values drive success for all of our stakeholders. In 2023, our team’s efforts were evident as FNB received more than 30 prestigious awards. Multiple independent organizations recognized FNB’s financial performance, outstanding culture, and innovative technology, with eStore earning international [Technical Difficulty].

We believe that these honors and our performance are a direct result of our engaging and rewarding workplace environment. I am proud of what we’ve built together. Thank you.

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Q&A Session

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

Daniel Tamayo: Good morning, guys. Maybe we start on the impact of the balance sheet restructuring on the margin. I appreciate the guidance for 2024. But just as we think about the impact on — in the first quarter, curious if you can walk through how you’re thinking about the impact of the restructuring, looking at it as a 5 basis point or 6 basis point impact relative to kind of just continued deposit pressure, and then how that — the path of the margin is moved throughout the year in your assumptions?

Vince Calabrese: Yes, I would say a couple of things. You know, first of all, if we look at the fourth quarter — and then I’ll get to go forward. Net interest income only declined $2.6 million linked quarter, which was the same as the prior quarter. You know, the NIM compression for the quarter was only 5 basis points, last quarter was 11 basis points. In fact, November and December were at 320 basis points. So the level kind of stabilized there, at least for those two months. You know, the restructuring is fully baked into our guidance that we provided. I think as far as the path with the margin here, I would still say what we said last quarter, that probably bottomed somewhere in the first-half of the year and then kind of some slight improvement from there as far as when you get into the second-half of the year.

But there’s a lot to happen with the Fed cuts. I mean, we have three fed cuts in ours, whether it’s three, four, or five, the three felt most reasonable to us, that’s what’s baked into our guidance, with the benefit of the restructuring. And as we have over time, we’ll continue to actively go after the demand deposits We’re going to focus here. I think our percentage of total deposits has performed very well relative to the peers and the changes in that bucket have also stacked up very well. So the NII guide kind of has everything baked into it, Danny.

Daniel Tamayo: No, I understand and I appreciate that. I guess another way of asking maybe, do you think the deposit pressure in the first quarter offsets the — I mean, it sounds like you’re saying we still maybe get more compression in the first quarter on an overall basis. So you think that offsets — more than offsets the balance sheet restructuring and that just continues in the first-half or in the first quarter?

Vince Calabrese: Well, we’re not going to guide — we’re not going to specifically comment on margin for the quarter, right? You know, the net interest income has all of that baked in. The mix shift that has happened during the quarter, we’ve continued to see customers going after higher rate products, that’s natural. People are sitting here feeling like, okay, the Fed is at the top, they haven’t raised rates since July, when are they going to start to cut? So there’s definitely been some of that mix shift still occurring. In the first quarter, our demand deposit, that’s usually our weakest quarter seasonally, because the municipal deposits bottom and then filled up. So all of that does put some pressure on the margin and then the restructuring helps to offset some of those impacts in the first quarter. Probably one way that I could comment on that.

Daniel Tamayo: Got it. Okay, I guess just lastly, just digging on the balance sheet sensitivity side. Just curious how we should be thinking about, you mentioned bottoming in the middle of the year. I think in the past we’ve talked about maybe being liability sensitive in the medium term, but maybe asset sensitive in the near term with rate cuts. That’s still how we should be thinking about it, perhaps some negative impact early on and then maybe after a few quarters, that’s when you start to benefit more from the rate cuts?

Vince Calabrese: Yes, no, that’s the right way to think about it. You know, the sensitivity, whether we get additional cuts beyond the three, as you know, there’s a lot of moving parts to this question and there’s actions we may take depending on the economic environment. So — but as you described, the time frame is key, right? In the short run, you have a negative impact, particularly from the cuts or an additional cut. And then I think the deposit lags will catch up over time. I mean, historically, if you look at our beta today, right, we’re around 34%. In the last upgrade cycle, we kind of maxed out at 35%, it seems reasonable to assume that, but that would take kind of more in the medium term, longer term to catch back up, probably the medium term with deposit rate lags to catch up and have that benefit.

And as you know, we’ve taken a lot of actions. I mean, the CD book has been growing in the shorter term, seven and 13 months type area. Our total average maturity of the CD portfolio right now is 10 months. So there’s opportunities there to reprice that as we go forward, kind of, sync up with the timing of when the Fed would move. But yes, I think that’s — we’re still slightly asset sensitive and really philosophically managing to neutral. And then we think that if you look at our margin path for the year, it shows kind of more of neutral with the expected three cuts that we have baked in.

Daniel Tamayo: Okay, great. Thank you for all the color. Appreciate it.

Vince Calabrese: Sure.

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

Frank Schiraldi: Good morning. Just wondering if you could talk a little bit about the dynamics of loan growth versus deposit growth year-on-year. Obviously, your guide has you getting closer to 100% loan to deposit over time. Just trying to think through what might be the main governor on loan growth here. And how you’re bringing deposit dollars in the door in what continues to be a, you know, pretty competitive environment.