F.N.B. Corporation — Q2 2023 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2023. FNB is a diversified financial services company operating across seven states and Washington, D.C., with commercial and consumer banking, wealth management, and insurance businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
- Q2 earnings: Net income was $142.4 million and net income available to common shareholders was $140.4 million, or $0.39 per diluted share, versus $109.1 million and $107.1 million, or $0.30 per diluted share, in Q2 2022. Revenue was $409.6 million. Operating diluted EPS, a non-GAAP measure, was $0.39 versus $0.31.
- First-half earnings: Net income available to common shareholders was $284.9 million, or $0.78 per diluted share, compared with $158.1 million, or $0.45, in the first half of 2022. Operating diluted EPS was $0.79 versus $0.57.
- Net interest income and margin: Q2 net interest income increased 29.8% year over year to $329.2 million. FTE net interest margin, a non-GAAP measure, was 3.37%, up 61 basis points year over year but down 19 basis points sequentially. First-half net interest income was $665.9 million, up 36.5%; FTE margin was 3.46%, up 77 basis points.
- Other income and expenses: Q2 non-interest income declined 2.2% to $80.3 million; non-interest expense rose 9.9% to $212.0 million. The non-GAAP efficiency ratio improved to 50.0% from 55.2%. First-half non-interest income was essentially flat at $159.7 million; expense rose 2.8% as reported, but 11.5% excluding specified significant items.
- Credit costs and asset quality: Q2 provision for credit losses was $18.5 million versus $6.4 million a year earlier. Net charge-offs were $8.7 million, or 0.11% annualized of average loans, versus net recoveries in Q2 2022. First-half net charge-offs were $21.9 million, or 0.14%, versus $1.5 million. The allowance for loan and lease losses was $412.7 million, 1.32% of loans; nonperforming loans were $143 million, 0.45% of loans, and nonperforming assets were $147.8 million.
- Balance sheet and funding: Total assets were $44.8 billion, up 2.4% from year-end 2022. Loans and leases were $31.4 billion, up 3.6%; deposits were $33.8 billion, down 2.7%. Time deposits rose 47.7% from year-end while non-interest-bearing deposits fell 8.4%. The loan-to-deposit ratio was 92.7%. Borrowings increased to $4.4 billion from $2.5 billion at year-end, including increased FHLB funding.
- Liquidity and capital: Cash and cash equivalents were $1.7 billion. Management reported unused wholesale credit availability of $15.3 billion and cash plus salable unpledged government and agency securities equal to 4.9% of bank assets. Approximately 77% of deposits were FDIC-insured or collateralized, according to the financial highlights; another MD&A passage reports approximately 76%. CET1 was 10.1% at the holding company and 10.46% at the bank subsidiary; management said both entities exceeded regulatory requirements. Tangible book value per common share, non-GAAP, was $8.79, versus $8.10 a year earlier.
- Cash flow and debt: For the first half, operating cash flow was $149 million, investing cash flow was negative $953 million, and financing cash flow was positive $834 million; cash increased $30 million to $1.704 billion. Total borrowings at June 30 included $2.391 billion short-term and $1.981 billion long-term.
Material changes versus comparable periods
- Earnings and net interest income rose substantially year over year, principally from higher asset yields, loan growth, and the higher-rate environment. Funding costs also increased sharply: Q2 interest expense was $155 million versus $26 million a year earlier, and management cited rising deposit costs, migration into time deposits, and greater borrowings.
- Sequentially, Q2 net interest income declined $7.4 million, and FTE net interest margin fell 19 basis points, as deposit and borrowing costs rose faster than earning-asset yields.
- Nonperforming assets rose from $119.5 million at December 31, 2022, primarily after a single $32 million commercial and industrial loan was downgraded to nonperforming in Q2. FNB established a $13 million specific reserve for that loan.
- Unrealized losses remained material in the securities portfolio: AFS securities had $343 million of gross unrealized losses at June 30, while HTM securities had a fair value of $3.587 billion versus $3.988 billion amortized cost. Management attributed losses principally to higher interest rates and said it did not intend, and was not likely required, to sell AFS securities before recovery.
- Q2 included $0.2 million of merger-related expense, compared with $2.0 million in Q2 2022. First-half 2022 also included acquisition-related provision and branch consolidation costs. The Union acquisition accounting remained preliminary, including loan valuation and deferred-tax assessments.
Outlook, management commentary, and risks
- The filing gives no specific quantitative earnings or full-year guidance and cautions that interim results are not necessarily indicative of full-year performance. Management said it intended to manage interest-rate exposure toward a more neutral position amid market expectations, while reporting modeled positive net-interest-income sensitivity to rate increases.
- Management described deposits as stable and granular, with an average customer account balance of about $29,000. FNB did not participate in the Federal Reserve Bank Term Funding Program and reported no Discount Window or BTFP borrowings. It stated that available liquidity could cover an estimated 1.9 times uninsured and non-collateralized deposits.
- Key risks include deposit outflows and competition for funding; higher funding costs; interest-rate, liquidity, and securities valuation risk; economic weakness and commercial real estate price declines; credit deterioration; higher FDIC assessments and potential regulatory changes following bank failures; cybersecurity and operational disruptions; and litigation, regulatory, and compliance matters.
- The ACL forecast assumed declines over its reasonable-and-supportable forecast period of 5.4% in the purchase-only housing price index and 8.9% in the commercial real estate price index. FNB’s CRE portfolio included $8.2 billion of non-owner-occupied loans, 22% of which represented office space.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect on financial position or liquidity, while noting that they could materially affect net income in a particular period. Disclosure controls were assessed as effective; no material changes to internal controls were reported.
Important facts for investors to verify
- Track deposit balances and mix, deposit pricing, borrowing levels, and liquidity coverage as funding costs continue to pressure margin.
- Monitor performance, collateral, and reserve adequacy for the downgraded $32 million commercial and industrial credit, along with nonperforming loans, charge-offs, and the allowance.
- Assess CRE and office exposure, including borrower concentration, property types, and sensitivity to the assumed CRE price decline.
- Reconcile the reported insured-or-collateralized deposit share (approximately 77% in the highlights and 76% in the liquidity discussion) and confirm how management defines uninsured and non-collateralized deposits.
- Evaluate the consequences of unrealized securities losses for liquidity and regulatory capital, and follow any changes to deposit insurance assessments or banking regulation.
- Review the remaining Union acquisition valuation work and compare reported results with non-GAAP operating measures, including their stated adjustments.