F.N.B. Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 4, 2022. F.N.B. is a diversified regional financial services company operating across seven states and Washington, D.C. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and results
F.N.B. completed its acquisition of Howard Bancorp on January 22, 2022, adding approximately $1.8 billion of loans and $1.8 billion of deposits at acquisition. The filing reports three segments: Community Banking, Wealth Management and Insurance.
- Q3 2022: Net interest income was $297.1 million, up 27.8% year over year. Non-interest income was $82.5 million, down 7.2%; total revenue was $379.6 million, up 18.2%.
- Net income available to common stockholders was $135.5 million, or $0.38 per diluted share, versus $109.5 million, or $0.34, in Q3 2021. Operating diluted EPS, a non-GAAP measure excluding merger expenses, was $0.39 versus $0.34.
- Q3 net interest margin was 3.19% on a fully taxable-equivalent (FTE), non-GAAP basis, versus 2.72% a year earlier. Management attributed the increase mainly to higher rates and earning-asset growth.
- Q3 non-interest expense was $195.1 million, up 5.9%. The non-GAAP efficiency ratio was 49.4%, compared with 55.4% a year earlier.
- First nine months: Net interest income was $784.9 million, up 14.9%; non-interest income was $242.9 million, down 3.4%; and net income available to common stockholders was $293.6 million, down 2.2%. Diluted EPS was $0.83 versus $0.93. Operating diluted EPS, excluding identified significant items, was $0.96 versus $0.94.
Financial position, credit and liquidity
- At September 30, total assets were $42.6 billion, up 7.8% from December 31, 2021. Loans and leases were $28.8 billion, up 15.3%; deposits were $33.9 billion, up 6.8%.
- Non-interest-bearing deposits were $11.8 billion, 34.7% of deposits. The loan-to-deposit ratio was 84.9%. Management said loan growth outpaced deposit growth.
- The allowance for credit losses on loans and leases was $385.3 million, or 1.34% of loans, versus $344.3 million and 1.38% at year-end 2021. Nine-month provision expense was $35.5 million, including $19.1 million of initial provision on acquired non-PCD Howard loans. Net charge-offs were $4.3 million, or 0.02% annualized, versus $12.5 million, or 0.07%, in the prior-year period.
- Non-performing loans and leases were $88 million; non-performing assets were $94 million. The non-performing loan ratio was 0.30%, compared with 0.35% at year-end 2021.
- Cash and cash equivalents were $2.276 billion, down from $3.493 billion at year-end. For the nine months, operating cash flow was $1.041 billion, investing cash flow was negative $2.413 billion and financing cash flow was positive $155 million.
- Total borrowings were $2.454 billion: $1.395 billion short term and $1.059 billion long term. F.N.B. issued $350 million of 5.150% senior notes due 2025 in Q3; proceeds were for general corporate purposes, including possible repayment of $300 million of 2.200% notes due February 2023.
- F.N.B.’s CET1 ratio was 9.72%; management reported that F.N.B. and its bank subsidiary exceeded regulatory minimums and were well capitalized. The parent liquidity coverage ratio was 1.6x and months of cash on hand were 13.3, above internal limits of greater than 1.0x and greater than 12 months, respectively.
Material changes, outlook and risks
- Rising rates supported revenue and margin, but increased deposit and borrowing costs. Mortgage banking income fell 42.9% for the first nine months, reflecting lower mortgage activity and loan-sale pipelines as rates rose. Service charges increased 14.4% year over year for the same period.
- Reported nine-month expenses included $32.8 million of merger-related costs and $4.2 million of branch consolidation costs; reported credit provision also included the $19.1 million acquired-loan provision. These items materially affect comparisons with 2021.
- Accumulated other comprehensive loss was $378 million, compared with $62 million at year-end 2021, largely reflecting unrealized securities losses as market interest rates increased. Management stated it did not intend to sell AFS securities and did not expect to be required to sell them before recovery of amortized cost.
- F.N.B. had agreed to acquire UB Bancorp for approximately $119 million, with completion expected in late 2022. Regulatory clearances and shareholder approval had been received, but closing remained subject to conditions. Management expected the deal to be accretive in the first full calendar year after closing, excluding one-time charges; this was based on preliminary estimates.
- Management described the balance sheet as positioned to benefit from higher rates, while noting that actual outcomes depend on deposit pricing and behavior, loan repricing, prepayments and other assumptions. The filing identifies recession and inflation risks, credit deterioration, competition, cyber and operational risks, regulatory and legal uncertainty, and acquisition integration and execution risks.
- The filing reported no legal matter expected to have a material adverse effect on financial position or liquidity based on information then available, while acknowledging that legal outcomes are uncertain and could affect net income in a period. It also disclosed a November 3, 2022 CEO retention life-insurance agreement, including annual premiums of $182,450 subject to its terms.
Important facts for investors to verify
- Track whether net interest margin gains persist as deposit costs rise and the balance sheet reprices.
- Review deposit retention, deposit mix, loan-to-deposit levels and liquidity as loan growth continues.
- Monitor credit quality, allowance assumptions and provision trends, especially under weaker economic conditions.
- Assess the effects of securities-related AOCI losses on tangible book value and capital, and distinguish unrealized market losses from credit losses.
- Verify UB Bancorp closing, integration costs, realized synergies and the timing of expected earnings accretion.
- Reconcile GAAP results with management’s non-GAAP operating measures and one-time-item adjustments.