F.N.B. Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 3, 2023. F.N.B. is a diversified financial services company operating across seven states and Washington, D.C., with 346 branches. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and condition
- Q3 earnings: Net income was $145.3 million, up 5.7% from $137.5 million a year earlier. Net income available to common shareholders was $143.3 million, or $0.40 per diluted share, versus $135.5 million, or $0.38. Reported operating diluted EPS, a non-GAAP measure, was $0.40 versus $0.39.
- Revenue and net interest: Total revenue was $408.1 million, up 7.5% year over year. Net interest income was $326.6 million, up 9.9%; tax-equivalent net interest margin (non-GAAP) was 3.26%, up 7 basis points year over year but down 11 basis points sequentially. The sequential decline reflected deposit and borrowing costs rising faster than earning-asset yields.
- Non-interest income and expense: Q3 non-interest income was $81.6 million, down 1.1%. Non-interest expense was $218.0 million, up 11.8%; the non-GAAP efficiency ratio was 51.72%, compared with 49.39% a year earlier. Higher personnel, occupancy, equipment, technology, FDIC insurance and other costs contributed to expense growth.
- Credit costs and asset quality: Q3 provision for credit losses was $25.9 million, versus $11.2 million. Net charge-offs were $37.7 million, or 0.47% annualized of average loans; excluding the identified $31.9 million commercial loan charge-off, management reported $5.8 million and 0.07% (non-GAAP). At September 30, non-performing loans were $113 million, 0.35% of loans; non-performing assets were $116 million. The loan allowance was $400.6 million, or 1.25% of loans, down from 1.33% at year-end 2022.
- Year-to-date results: For the first nine months, net income was $434.2 million versus $299.6 million; common net income was $428.1 million versus $293.6 million. Diluted EPS was $1.18 versus $0.83. Net interest income increased 26.4% to $992.5 million; provision rose 64.5% to $58.5 million, while non-interest income was nearly flat at $241.2 million and non-interest expense increased 5.6% to $649.9 million.
- Balance sheet and lending: Total assets were $45.5 billion, up 4.1% from December 31, 2022. Loans and leases were $32.2 billion, up 6.3%; residential mortgages rose 21.5% and commercial loans and leases rose 4.4%. Deposits were $34.6 billion, down 0.4% from year-end but up 2.3% from the prior quarter. Non-interest-bearing deposits were $10.7 billion, or about 31% of deposits.
- Funding and liquidity: Short- and long-term borrowings totaled $4.0 billion, up from $2.5 billion at year-end. Cash and cash equivalents were $1.6 billion. Management reported $15.6 billion of unused wholesale credit availability, 78% of deposits FDIC-insured or collateralized, and liquidity coverage of 2.8 times at the parent company. The company had no borrowings under the Federal Reserve Discount Window or Bank Term Funding Program.
- Capital and shareholder returns: CET1 was 10.17%, versus 9.72% a year earlier. Tangible common equity to tangible assets was 7.54% and tangible book value per common share was $9.02 (both non-GAAP); accumulated other comprehensive loss was $382 million, largely reflecting interest-rate-related securities valuation losses. The quarterly common dividend was $0.12 per share.
- Cash flows: For the first nine months, operating cash flow was $443 million, investing cash outflow was $1.724 billion and financing cash inflow was $1.244 billion; cash and cash equivalents declined $37 million.
Material changes versus comparable periods
- Higher market rates and asset growth lifted net interest income, but funding costs rose sharply: Q3 interest expense was $187 million versus $46 million a year earlier. The average cost of interest-bearing liabilities increased to 2.69% from 0.75%.
- Deposit composition shifted toward higher-cost time deposits. At quarter-end, time deposits were $5.8 billion, up 60.4% from year-end, while non-interest-bearing demand deposits were down 10.2%.
- Q3 credit losses were substantially affected by an isolated $31.9 million commercial loan exposure, downgraded after initial indications of alleged fraud and fully charged off in Q3 following further investigation and bankruptcy filings by the borrower and its primary supplier.
- Nine-month 2022 results included significant merger expenses, acquisition-related provision and branch consolidation costs. In 2023, merger costs were $2.2 million for the nine-month period versus $32.8 million in 2022; this affects comparisons of reported and management-defined operating results.
- Unrealized losses on available-for-sale and held-to-maturity securities reflected higher market interest rates. The filing states that 84.6% of the securities were backed or sponsored by the U.S. government and that management did not intend, and was not more likely than not, to be required, to sell the AFS securities before recovery of amortized cost.
Outlook, commentary and risks
- The filing provides no specific earnings, revenue, margin or credit-loss guidance. Management described loan growth as strong, deposit balances as stable, and liquidity and capital as adequate; interim results are not necessarily indicative of full-year performance.
- Management said it intends to manage interest-rate risk toward a more neutral position. Its static model estimated a 4.1% increase in 12-month net interest income under an immediate +100-basis-point shock and a 2.3% increase under a -100-basis-point shock. These are model scenarios, not forecasts, and do not include potential management actions.
- Key risks include deposit competition and migration to higher-yield products, higher funding costs, liquidity stress and potential realized losses if securities must be sold, credit deterioration (including commercial real estate), changing interest rates, economic weakness, cybersecurity and operational events, and evolving banking regulation and FDIC assessments.
- Commercial real estate loans totaled $12.0 billion; $8.5 billion were non-owner-occupied, of which 21.9% represented office space. Management described the office portfolio as primarily mid-sized properties outside major metropolitan business districts.
- Management stated that ordinary-course legal and regulatory matters were not expected, based on current knowledge, to materially adversely affect financial position or liquidity; outcomes remain uncertain and could affect net income in a period. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress of the investigation and any subsequent recovery, litigation or further credit effects from the $31.9 million alleged-fraud loan charge-off.
- Quarterly trends in net interest margin, deposit pricing, time-deposit growth and reliance on wholesale borrowings.
- Commercial real estate exposure and migration in criticized, delinquent and non-performing loans, particularly office loans.
- Liquidity availability and the proportion of deposits insured or collateralized, including whether funding assumptions remain valid under stress.
- How securities-related AOCI losses, changing rates and any regulatory changes to AOCI treatment affect tangible book value and regulatory capital.
- Whether operating results remain strong after distinguishing GAAP results from non-GAAP measures and one-time tax credits, merger items and credit events.