FNB - F.N.B. Delivering Where It Counts

Summary

• F.N.B. posted good third quarter results, with a solid $0.04 beat at the pre-provision profit line, led by strong rate leverage that drove net interest income.
• Loan growth was okay, with F.N.B. largely keeping base in C&I lending, but deposit performance was stronger than many peers and should be a competitive differentiator next year.
• F.N.B. is targeting attractive opportunities in North Carolina and the Mid-Atlantic with a service-driven model, and the shares look more than 10% undervalued today.

When I last wrote on F.N.B. ( FNB ) in March of this year, I liked what I thought was an investment story starting to inflect toward growth, with F.N.B. poised to leverage above-average asset sensitivity and loan growth, as well as organic growth opportunities in its core Mid-Atlantic and North Carolina markets. I saw beat-and-raise quarters as a gating driver for the stock, and those beats have started coming through, driving the shares up about 10% since my last update against a roughly 8% drop for regional banks in general.

I'm still bullish on these shares. I like the mix of organic growth opportunities driven by lending and deposit market share gains and branch expansion in markets like Baltimore and Washington, D.C., as well as the tuck-in M&A opportunities across its footprint. The shares aren't quite as undervalued as they used to be, and I'm a little concerned about slowing core growth in 2024, but I think the risk/reward balance here is still pretty favorable.

A Good Beat

I thought F.N.B.'s third quarter results were both pretty positive and pretty clean, with a nice pre-provision profit beat of about $0.04 per share and not much to worry about in the details.

Revenue rose 19% year over year and 13% quarter over quarter, with year-over-year comparisons impacted by the Howard Bancorp acquisition. Net interest income rose 28% yoy and 17% qoq, better than I expected, as the bank did really well on net interest margin (up 47bp yoy and 43bp qoq to 3.19%). Earnings asset growth, up 9% yoy and flattish qoq, was more lackluster, but not bad in the broader context of what many regional banks have reported.

Fee-based income fell 5% yoy and was basically flat sequentially in core terms. Capital markets and mortgage banking were both noticeably weaker, while service charge growth partially offset this.

Core expenses rose 5% yoy and 1% qoq, which was basically in line, but a beat on an efficiency ratio basis given the revenue beat. Pre-provision profits rose 38% yoy and 29% qoq. Provision expense was a little higher than I'd expected, taking back about a penny of the pre-provision beat, but this too is an emerging trend from this reporting cycle.

Reported tangible book value per share declined 5% yoy and 1% qoq, while ex-AOCI TBVPS rose 6% yoy and declined 1% qoq. As a reminder, higher rates are leading to mark-to-market hits to tangible book value for most banks now.

Decent Loan Performance, With Surprisingly Good Deposit Performance

F.N.B. did pretty well on loan growth, in a quarter where reported results have definitely been mixed for many banks so far. On an adjusted basis, end-of-period loans rose almost 3% quarter over quarter, a little weaker than the average for smaller commercial banks this quarter, but the 4.4% growth in average loan balances was a little better than the average. C&I lending grew about 3% on an adjusted end-of-period basis, which was likewise a little weak relative to average, but consumer lending was notably stronger.

Loan yields were strong in the quarter, improving 54bp yoy and 60bp qoq to 4.14%.

I was more impressed with F.N.B.'s deposit performance. Deposits rose 1.2% sequentially (on an EOP basis), beating the slightly negative average for the large small commercial bank category. Non-interest-bearing deposits were actually up slightly in the quarter, which definitely stands out against many comparable banks. Total deposit costs did more than double from the year-ago and quarter-ago levels, but the absolute increase still wasn't bad on a comparable basis, and F.N.B.'s deposit costs are still quite low relative to many peers.

Holding on to low-cost deposits is going to be increasingly important in the quarters to come. Deposit betas are already trending higher than expected across the sector (as I predicted earlier this year), and sticky low-cost deposits can be an important competitive driver. F.N.B. is helping its cause by investing in consumer service, specifically by making its online/digital banking offerings very competitive with larger banks and much more appealing than many small community banks can afford.

A Reasonable Tuck-In Deal

F.N.B. management is expecting to close its acquisition of UB Bancorp ( UBNC ) in December of this year. This isn't a particularly large deal ($117M deal value at the time of the announcement), but it adds $1 billion of attractive deposits (40% NIB, 11bp deposit cost) centered primarily in the Raleigh-Durham market. As you might expect for a small commercial bank, UB's loan book is significantly skewed to commercial real estate (49% CRE), and the branch count is modest, and with a third of those branches within three miles of existing F.N.B. branches, the robust 45% cost savings target seems doable.

Paying 1.54x tangible book (and 1.32x TBV excluding AOCI) is not a robust premium, particularly when factoring in the cost savings, and likewise, the deposit premium looked quite low relative to other comparable deals. Given the opportunity to acquire attractive deposits and further strengthen the bank's position in the growing Raleigh-Durham MSA, then, I like this deal - it's not thesis-changing, but it's a nice add-in for the business.

The Outlook

Rate leverage is going to help banks less from here, and rising deposit betas represent a meaningful risk to the sector. F.N.B.'s loan/deposit ratio is okay now at around 85%, and it will definitely help the bank's growth prospects if it can continue to hang on to those low-cost deposits. I do still like the bank's loan growth prospects, though that's tempered somewhat by weakening business confidence and a softer economic outlook for 2023.

A big unknown in modeling F.N.B. is how active the bank will continue to be on the M&A front. With total assets closing in on $43B, I wouldn't be too surprised if management looked to make additional tuck-in deals to cross that $50B threshold, and North Carolina, South Carolina, Virginia, and Maryland could all make sense as geographic targets. I still expect mid-single-digit long-term core earnings growth from F.N.B., with M&A pushing the growth rate into the high single digits.

The Bottom Line

Between discounted core earnings, ROTCE-driven P/TBV, and P/E, I believe F.N.B. is still undervalued. Strong execution in growing banking markets could drive double-digit total annualized returns from here for long-term shareholders, while shorter-term metrics still suggest at least a 10% upside from here. A strong outlook for pre-provision profit growth, helped by M&A, should help F.N.B. participate in an eventual bank stock rally, and I do believe F.N.B. can be an outperformer in this next phase of the cycle.

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