F.N.B. Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 5, 2023. FNB is a diversified bank and financial services company operating across seven states and Washington, D.C. The unaudited results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $416.0 million | Up 33.2% year over year |
| Net interest income | $336.7 million | $234.1 million; up 43.8% |
| Net interest margin (FTE, non-GAAP) | 3.56% | 2.61%; up 95 basis points |
| Net income | $146.5 million | $53.0 million |
| Net income available to common stockholders | $144.5 million; diluted EPS $0.40 | $51.0 million; diluted EPS $0.15 |
| Operating diluted EPS (non-GAAP) | $0.40 | $0.26 |
| Efficiency ratio (FTE, non-GAAP) | 50.6% | 60.7% |
| Return on average assets | 1.37% | 0.52% |
| Net cash from operating activities | $19 million | $358 million |
Revenue growth primarily reflected higher rates and loan growth. Interest expense increased substantially as deposit costs rose: average interest-bearing deposit cost was 1.50%, versus 0.14% a year earlier. Non-interest income was $79.4 million, up 1.4%. Reported non-interest expense was $219.9 million, down 3.3%, but expense excluding significant items (non-GAAP) rose 11.9% to $217.9 million, reflecting compensation, technology, acquisition-related costs and higher FDIC insurance expense. Q1 2023 included $2.1 million of merger-related expense; Q1 2022 included $28.6 million of merger costs, $19.1 million of acquisition-related initial credit provision and $4.2 million of branch consolidation costs.
Financial position, liquidity and credit
- Assets and loans: Total assets were $44.1 billion, up 1.0% from year-end 2022. Period-end loans and leases were $30.7 billion, up 1.4% quarter over quarter and 14.3% year over year; the year-over-year comparison includes acquired loans.
- Deposits and funding: Deposits were $34.2 billion, down 1.7% from December 31, 2022. Non-interest-bearing deposits were $11.3 billion; time deposits rose 31.5% to $4.7 billion. Borrowings increased to $3.45 billion from $2.47 billion. The loans-to-deposits ratio was 89.7%.
- Liquidity: Cash and cash equivalents were $1.72 billion. Management reported 76% of deposits were FDIC-insured or collateralized and available liquidity covered 170% of uninsured and non-collateralized deposits. Unused wholesale credit availability was $16.1 billion. FNB did not borrow from the Federal Reserve Discount Window or Bank Term Funding Program during the quarter.
- Capital: FNB’s CET1 ratio was 10.04%, up from 9.82% at year-end. Tangible common equity to tangible assets was 7.50% (non-GAAP). The company and bank subsidiary exceeded regulatory capital requirements.
- Credit quality: The loan-and-lease allowance was $403.4 million, or 1.32% of loans, versus 1.33% at year-end. Q1 provision for credit losses was $14.1 million. Net charge-offs were $13.2 million, or 0.18% annualized, compared with $1.9 million and 0.03% a year earlier. Nonperforming loans and leases were $113 million; nonperforming assets were $119 million.
- Securities and equity: Available-for-sale securities had $303 million of gross unrealized losses at quarter-end; held-to-maturity securities had $338 million. Management attributed unrealized losses primarily to higher interest rates and said it did not intend, and was not more likely than not required, to sell the AFS securities before recovery. AOCI loss improved to $315 million from $357 million at year-end.
- Cash flows and shareholder returns: Operating cash flow was $19 million; investing cash flow was negative $317 million and financing cash flow was positive $347 million. Cash increased $49 million to $1.72 billion. FNB repurchased 850,000 shares at an average $13.78 and declared $0.12 per common share in dividends.
Changes, outlook and risks
Compared with Q1 2022, earnings, net interest income and reported profitability improved materially, driven by higher asset yields, a larger earning-asset base and lower merger-related costs. Higher rates also increased funding costs and contributed to customer movement toward time deposits. Mortgage banking income declined 27.2% year over year as higher mortgage rates reduced secondary-market activity. Loan charge-offs increased, though management characterized their level as historically low.
Management said the balance sheet remained stable during the March banking-sector disruption, with deposits declining $226 million, or 0.7%, from March 8 through quarter-end, which it attributed largely to normal customer activity. FNB executed approximately $1.3 billion of wholesale borrowings from March 8 to March 31 as a precaution. Management described liquidity as ample and said the balance sheet could benefit in the near term from further rate increases, while it was managing toward a more neutral interest-rate position as the outlook for additional hikes moderated. The filing provides no specific full-year earnings or revenue guidance.
Key risks include deposit outflows and higher funding costs; losses if securities must be sold while market values are depressed; credit deterioration, including commercial real estate exposure; interest-rate and liquidity risk; potential increases in FDIC assessments or regulatory requirements following bank failures; and legal, regulatory, cyber, operational and macroeconomic risks. FNB reported that its disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter. Management stated that pending legal matters were not expected to have a material adverse effect on financial position or liquidity, although they could affect net income in a given period.
Important facts for investors to verify
- Deposit trends, uninsured and uncollateralized deposit levels, and the cost and availability of replacement funding.
- Whether net interest margin can hold up as deposit pricing adjusts and the interest-rate outlook changes.
- Commercial real estate portfolio concentrations, credit-rating migrations, delinquencies, charge-offs and allowance adequacy.
- Liquidity and capital sensitivity to any securities sales, AOCI treatment changes, or additional regulatory requirements.
- Integration and remaining purchase-accounting valuations for the Union acquisition, and continued expense growth excluding merger items.
- Potential FDIC special assessments and other regulatory costs arising from the banking-sector failures.