Fnb Corp/Pa/ Q4 FY2023 Earnings Call

Good morning, everyone, and welcome to the F.N.B. Corporation Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note today’s event is being recorded. At this time I'd like to turn the floor over to Lisa Hajdu, Manager of Investor Relations. Ma’am, please go ahead.

Thank you. Good morning, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reported files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures are often viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP reporting measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Friday, January 26th, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Thank you, and welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. FNB's fourth quarter net income available to common shareholders was $49 million on a reported basis and $139 million on an operating basis. Full-year 2023's operating performance was highlighted by record revenue of $1.6 billion, record net income available to common shareholders of $569 million, and record earnings per diluted common share of $1.50. Tangible book value per share has increased 15% year-over-year to a record high of $9.47 per share, steadily approaching a $10 milestone. Since 2009, FNB's internal capital generation, representing tangible book value and dividends, has been strong with 10% compounded annual growth. With this strong profitability, full year positive operating leverage totaled 1.5% and is expected to remain in the upper quartile on a pure relative basis. FNB's exceptional financial performance in 2023 was a direct result of the consistent execution of our strategic initiatives. The banking disruption in the first quarter of the year placed a spotlight on the importance of balance sheet resilience, including our deposit base, strong capital and liquidity position, and prudent underwriting standards. It also reinforced the value of our quality customer relationships and comprehensive delivery channels. These attributes have always been integral to FNB's long-term strategy, which has been proven through multiple cycles over the last decade and are ingrained in the foundation upon which FNB operates. Our commitment to maintain a stable deposit base is evidenced in our total deposits, which ended the year at $34.7 billion, unchanged from the prior year even with the elevated competition for customer deposits. The non-interest-bearing deposits to total deposit mix ended the year at 29.4%. While we have seen customer migration away from non-interest-bearing deposits, we continue to substantially outperform our peers in the industry regarding our total deposit costs and overall cost of funds. Our spot deposit costs ended the year below 2%, and this is over 50 basis points better than our peers in the third quarter. Our better-than-peer funding cost and strong liquidity provide balance sheet optionality. Our tangible common equity to tangible assets of 7.8% is the highest level in company history and exceeds the peer median. FNB remains committed to optimally deploy capital in a manner that is fully aligned with our shareholders' interests and best positions FNB for future success. As part of that commitment, FNB recently completed the sale of approximately $650 million of available-for-sale securities, announced the redemption of $110 million of preferred stock, and transferred $355 million of indirect auto loans to held for sale with the sale expected to close in the first quarter. Together, these actions resulted in a capital-neutral transaction that improves forward returns in earnings with expected EPS accretion in the low-single-digits. Our continued ability to meet our client's needs is critical to our performance. FNB has continued to make strategic investments in our delivery team to deepen customer relationships, gain market share, and further outpace our competitors. In June 2023, we introduced the eStore Common application for the majority of our consumer loan products and recently introduced deposit products in December, allowing customers to apply for up to 18 consumer deposit and loan products simultaneously. Our goal for 2024 is to bring small businesses into the fold, with business loans, deposits, and payments included in the Common application in eStore. These additional features further enhance the customer experience and deepen product penetration as customers can apply for multiple loan and deposit products simultaneously in a very streamlined manner, eliminating keystrokes, providing a portal to upload supporting documents, and automating account funding. We also made significant enhancements in our physical delivery channel in 2023. In addition to expanding our footprint with four de novo locations, we entered into a partnership with the Washington Metropolitan Area Transit Authority that establishes FNB as the sole ATM provider with the third largest heavy rail system in the United States. With ATM banking services at every metro station, the partnership will add more than 120 machines to FNB's network in 2024. Our physical delivery channel is approaching 2,000 combined branches, ATMs, and interactive television. Paired with our digital eStore, FNB has significantly enhanced access for our current and future customers for augmenting brand awareness across our footprint. With the success of our eStore and our exceptional bankers, total loans and leases ended the year at a record $32.8 billion, an increase of $2.4 billion since year-end 2022. We are beginning the year from a strong position and will continue to closely monitor the macroeconomic environment, with market-specific trends to manage risk proactively as part of our core credit philosophy. We will remain steadfast in our approach to consistent underwriting and risk management to maintain a balanced, well-positioned portfolio throughout economic cycles. I will now turn the call over to Gary to provide additional information on the fourth quarter's credit performance.

Thank you, Vince, and good morning, everyone. We ended the quarter and year-end period with our asset quality metrics remaining at solid levels. Total delinquency finished the year at 70 basis points, seasonally up 7 basis points from the end of September and down 1 basis point from the prior year-end period. NPLs and OREO decreased 2 basis points from the prior quarter and 5 basis points from the year ago period to end at a very good level at 34 basis points. Criticized loans were down 13 basis points compared to both the prior quarter and year-end with net charge-offs for the quarter and full year at 10 basis points and 22 basis points, respectively. I'll conclude my remarks with an update on our credit risk management strategies and CRE portfolio. Total provision expense for the quarter stood at $13.2 million, providing for loan growth and charge-offs. Additionally, provision expense had a positive benefit from a reduction in criticized loans and NPLs. Our ending funded reserve increased $4.9 million in the quarter and stands at $406 million or a solid 1.25% of loans, reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.39%, and our NPL coverage position remains strong at 418%, inclusive of the unamortized loan discounts. We remain committed to consistent underwriting and credit risk management to maintain a balanced well-positioned portfolio throughout economic cycles. Each quarter, we perform specific in-depth reviews of our portfolios in addition to ongoing full portfolio stress tests. Our stress testing results for this quarter have shown lower forecasted net charge-offs and stable provision, compared to the prior quarter's results, again confirming that our diversified loan portfolio enables us to withstand various economic downturn scenarios. Regarding the non-owner-occupied CRE portfolio, in 2023, we were successful in addressing maturities and the impact of the rising rate environment on the portfolio. In 2024, we will continue with the same strategy monitoring the rate environment and proactively addressing upcoming maturities. At year-end, delinquency and NPLs for the non-owner-occupied CRE portfolio continued to remain very low at 32 basis points and 18 basis points, respectively, which confirms our consistent underwriting and strong sponsorship. In closing, asset quality metrics ended the year at very good levels, and we are well-positioned going into 2024. We continue to generate diversified loan growth in attractive markets in a competitive environment for high-quality borrowers, while maintaining our consistent underwriting standards. We closely monitor macroeconomic trends and the individual markets in our footprint and will continue to manage risk aggressively while maintaining a consistent credit profile across all of our portfolios. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Thanks, Gary, and good morning. Today, I'll focus on the fourth quarter's financial results, provide additional detail on the recent actions taken to further optimize our balance sheet, and offer guidance for 2024. The fourth quarter operating net income available to common shareholders totaled $139 million or $0.38 per share, excluding $114 million of significant items impacting earnings. On a full-year basis, operating earnings totaled a record $1.57 per share and tangible book value totaled $9.47, a 15% increase from December 2022. As part of our ongoing proactive balance sheet management strategy, we took several actions to enhance future profitability and capital positioning. Late in the fourth quarter, we sold approximately $650 million of available-for-sale investment securities, transferred $355 million of indirect auto loans to held for sale, and announced the redemption of $110 million of the Series E preferred stock that was issued ten years ago. The cumulative impact of these balance sheet actions generates incremental earnings and has a tangible book value earn-back period of less than one year versus an earn-back of five years for stock buyback, while retaining capital flexibility in 2024. The sale of investment securities resulted in a realized loss of $67.4 million in the fourth quarter as we sold securities yielding 1.08% on average and reinvested the proceeds into securities with yields approximately 350 basis points higher with similar duration and convexity profiles. We recorded a $16.7 million negative fair value mark in other non-interest expense on the indirect auto loans classified as held for sale at December 31, reflecting changes in interest rates from the time of origination. The sale of these loans is expected to close during the first quarter with the proceeds being used to repay borrowings that have a similar yield to the sold loans. Our year-end loan-to-deposit ratio benefited from approximately 100 basis points. Excluding the $355 million of held-for-sale indirect auto loans, underlying period-end loan growth was 8% since year-end 2022. Fourth quarter loan production reflected high-quality loans across our diverse footprint with quarterly commercial loan growth of $351 million and consumer loan growth of $178 million. The investment portfolio remained essentially flat linked quarter at $7.2 billion, inclusive of the securities portfolio restructuring. There remains a fairly even split between AFS and HTM with 45% in available for sale at the end of the year. The duration of our securities portfolio at December 31 is 4.2 years, similar to the last quarter. Total deposits ended the year at $34.7 billion, a slight increase of $96 million linked quarter. As of December 31, non-interest-bearing deposits comprised 29.4% of total deposits, compared to 30.9% at September 30. Given our granular stable deposit base, we believe we will continue to outperform the industry with a favorable mix of non-interest-bearing deposits to total deposits and lower deposit costs, which meaningfully outperformed the peers as our team remains actively focused on managing deposit mix. With our spot deposit costs ending the year at 1.93%, our cumulative deposit beta totaled 34.3% in line with our expectations discussed last quarter. Fourth quarter's net interest margin was 3.21%, a decline of only 5 basis points, which is better than our expectations discussed last quarter. The yield on earning assets increased 14 basis points to 5.25%, due to higher yields on both loans and investment securities. Total cost of funds increased 21 basis points to 2.14% as the cost of interest-bearing deposits increased 29 basis points to 2.65%. Net interest income totaled $324 million, a slight decrease of $2.6 million from the prior quarter. Turning to non-interest income and expense, operating non-interest income totaled $80.4 million and adjusting for the $67.4 million realized loss on investments securities restructuring. Mortgage banking operations income increased $3.1 million linked quarter, due to improved gain on sale margins aided by the decline in mortgage rates in the fourth quarter. Other non-interest income declined $2.4 million, and small business investment company funds income decreased reflecting normal fluctuations based on the performance of the underlying portfolio companies. Additionally, we broke out our service charges fee income line on the income statement to service charges and a new line item for interchange and card transaction fees, which was previously captured in the service charge line. This will create better transparency into our various revenue streams in non-interest income. Operating non-interest expense of $218.9 million was relatively stable compared to the prior quarter, when adjusting for the fair value mark on the held-for-sale indirect auto loans of $16.7 million and the $29.9 million FDIC special assessment related to replenishment of the deposit insurance fund for the bank failures. The linked quarter increase in outside services of $2.4 million reflects higher third-party cost. Bank shares and franchise taxes declined $2.3 million, reflecting charitable contributions that qualify for Pennsylvania Bancshares tax credits and marketing expenses decreased $1.2 million due to the timing of digital marketing campaigns in the third quarter. The fourth quarter efficiency ratio of 52.5% continues to be in the top quartile of our peers. The efficiency ratio of 51.2% on a full-year basis demonstrates our commitment to effectively managing costs while growing our diverse revenue streams. We ended the year with our capital ratios, some of the strongest levels in recent history. Our CET1 ratio of 10.1%, which includes the impact of the previously discussed balance sheet management items and the FDIC special assessment remains above our stated operating targets. Tangible common equity totaled 7.8% and when excluding the 54 basis point impact of AOCI would equal 8.3%. Tangible book value per common share was $9.47 million at December 31, an increase of $0.45 per share from September 30. AOCI reduced the tangible book value per common share by $0.65 as of year-end, compared to $1.06 last quarter, primarily due to the impact of interest rates on the fair value of available for sale securities. Because of the investment securities that were sold in December were unavailable for sale, the realized loss did not incrementally impact TCE or tangible book value since the market value was already reflected in AOCI. Let's now look at the 2024 guidance for both the first quarter and the full-year, starting with the balance sheet. On a full-year spot basis, we expect loans to grow mid-single-digits as we continue to increase our market share across our diverse geographic footprint. Total projected deposit balances are expected to grow low-single-digits on a year-over-year spot basis. Full-year net interest income is expected to be between $1.295 billion and $1.345 billion, with the first quarter of 2024 between $318 million and $328 million. Our guidance assumes three 25 basis point rate cuts, aligning with the Fed's Dot plot, which we are projecting to occur in May, July, and November 2024. Non-interest income is expected to continue to benefit from our diversified fee-based income strategy, with the full-year results between $325 million and $345 million and the first quarter between $80 million and $85 million. Full-year guidance for non-interest expense is expected to be between $895 million and $915 million, which includes the impact of approximately $6 million of rent expense during the buildout phase of our new headquarters while we still occupy our current office space. Adjusting for this impact, the midpoint of our expense guidance results in a 3.7% increase from 2023 operating expense levels. The first quarter non-interest expense is expected to be between $225 million and $230 million as the compensation expense is higher in the first quarter, largely due to normal seasonal long-term stock compensation and higher payroll taxes at the start of the new year. Full-year provision guidance is $80 million to $100 million and is dependent on net loan growth and charge-off activity. Lastly, the full-year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.

During 2023, FNB completed a number of initiatives that align with our strategic priorities, including introducing the eStore Common application for consumer loans and deposit products, expanding our physical delivery channel, and investing in systems and processes that enable us to streamline operations. We continue to expand our data analytics capability and the use of AI to improve performance. These strategic initiatives have directly contributed to our pure relative outperformance in 2023, amidst the banking industry disruption, with the company generating record operating EPS of $1.57 and strong organic loan growth of $2.4 billion. Deposit balances remain flat with non-interest-bearing deposits comprising 29.4% of total deposits and a top quartile cost of funds. We've completed over $75 million in cost savings over the last five years, excluding acquisition synergies leading to positive operating leverage and an efficiency ratio in the top quartile relative to peers at 51.2%. Operating return on average tangible common equity totaled 18% and tangible book value grew 15% to a record $9.47. Our asset quality continues to be a strength as we ended the year at or near historically low levels. This year's exceptional performance was made possible by our employees. Their commitment to FNB's mission and values drives success for all of our stakeholders. In 2023, our team's efforts were evident as FNB received more than 30 prestigious awards. Multiple independent organizations recognized FNB's financial performance, outstanding culture, and innovative technology, with eStore earning international recognition. We believe that these honors and our performance are a direct result of our engaging and rewarding workplace environment. I am proud of what we've built together. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. And our first question today comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

Good morning, everyone. Let's start by discussing the effect of the balance sheet restructuring on the margin. I appreciate the guidance for 2024, but I would like to understand how you view the impact of the restructuring in the first quarter. Can you help clarify if you expect it to have a 5 or 6 basis point effect in relation to ongoing deposit pressure, and how your assumptions regarding the margin's trajectory have changed over the year?

Yes, I have a few points to make. Firstly, if we examine the fourth quarter, net interest income only decreased by $2.6 million compared to the previous quarter, which is consistent with the earlier period. The NIM compression for this quarter was merely 5 basis points, compared to 11 basis points last quarter. Notably, in November and December, it was at 320 basis points, indicating that this level has stabilized for those months. The restructuring has been fully incorporated into our guidance. Regarding the margin outlook, I still maintain that it likely bottomed out in the first half of the year, with slight improvements expected in the latter half. However, future developments depend heavily on the number of Fed interest rate cuts, which we estimate to be three, making that our assumption in the guidance, considering the benefits of the restructuring. Over time, we will continue to actively pursue demand deposits, where we have seen strong performance in relation to our peers, and changes in that area have remained favorable. Therefore, our NII guidance includes all these factors.

I understand and appreciate that. Another way to ask might be whether you think the deposit pressure in the first quarter offsets the overall compression you're suggesting for that period. Do you believe that more than offsets the balance sheet restructuring, and will that trend continue into the first half or first quarter?

We are not going to provide specific guidance on margins for the quarter. The net interest income already incorporates all factors. We have observed a shift in mix throughout the quarter, with customers increasingly opting for higher rate products. This is a natural trend, as people are wondering when the Federal Reserve will start reducing rates since they have not increased them since July. Therefore, this mix shift continues to be evident. In the first quarter, our demand deposits typically experience seasonal weakness as municipal deposits reach their lowest point before recovering. This does add some pressure on margins, but the restructuring helps to mitigate some of those effects in the first quarter. That is one way to look at it.

Got it. Okay, I guess just lastly, just digging on the balance sheet sensitivity side. Just curious how we should be thinking about, you mentioned bottoming in the middle of the year. I think in the past we've talked about maybe being liability sensitive in the medium term, but maybe asset sensitive in the near term with rate cuts. That's still how we should be thinking about it, perhaps some negative impact early on and then maybe after a few quarters, that's when you start to benefit more from the rate cuts?

Yes, that's the correct way to think about it. The sensitivity to potential additional cuts goes beyond the three we already have in mind, and there are various factors to consider that may influence our actions based on the economic environment. As you mentioned, timing is crucial. In the short term, we will likely see a negative impact, particularly if there are further cuts. However, I believe the effects on deposits will catch up over time. Historically, our deposit beta is around 34%, and during the last upgrade cycle, it peaked at 35%. It's reasonable to assume we could approach that, but it will take some time, likely in the medium term, for deposit rate adjustments to reflect that change. We have been proactive; our certificate of deposit (CD) book has been growing in the short term, particularly in the seven and 13-month categories, with the average maturity of our CD portfolio currently at 10 months. This presents opportunities for repricing in line with future Fed movements. Overall, we remain slightly asset sensitive while aiming for a neutral position, and if you look at our margin path for the year, it reflects a more neutral outlook with the anticipated three cuts incorporated.

Okay, great. Thank you for all the color. Appreciate it.

Sure.

Our next question comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.

Good morning. Just wondering if you could talk a little bit about the dynamics of loan growth versus deposit growth year-on-year. Obviously, your guide has you getting closer to 100% loan to deposit over time. Just trying to think through what might be the main governor on loan growth here. And how you're bringing deposit dollars in the door in what continues to be a pretty competitive environment.

Yes, let me begin and then I can pass it to Vince Calabrese. First, I want to highlight that the initiatives we discussed regarding acquiring new clients are key to driving deposit balances. The ability to open a deposit account alongside a loan application without extra steps is significant for us. We believe this will be advantageous as the field begins to leverage these tools, and as customers engage online and discover this capability, it will enhance our chances of securing more client relationships, especially in terms of deposits. When a loan request is made, we will be able to respond more swiftly when opening the deposit account. This is a strategy we are implementing moving forward. If we examine the engagement with the eStore, which we launched around mid-year, and compare the first six months of 2022 to the same period in 2023, we see that the number of online applications we received has doubled. We have doubled the number of consumer loan applications, and importantly, this is without the deposit account opening feature. Additionally, 30% of those applications came from non-FNB customers, which speaks to the progress in our digital strategy. The next opportunity lies in small business and middle market banking within our treasury management sector. We have made substantial investments in our treasury management capabilities, and we have new product offerings set to launch. We plan to bundle products for small businesses in 2024, likely in the latter half of the year, which will further aid in growing our deposit balances. Historically, we have seen organic deposit growth in the range of 8% to 10%. I believe we have managed to keep pace with organic loan growth in a similar range over time. Our strategic efforts to enter new markets with potential for growth due to population increase and business formation will enable us to continue achieving our goal of funding loan growth with deposit balances from new customers. Vince, do you have any numeric insights to add?

Yes. I would just like to add, Frank, that we don't reach 100% within our guidance. Instead, we are in the range of 95% to 97% as you project it out. Historically, when we've reached 97%, we have taken action, such as selling indirect auto loans this quarter to create more availability. This move improved our loan deposit ratio by 1%. We will manage that level without aiming for 100%. The mid-90s is what’s included in the guidance, and as I mentioned, when we reach 95%, we will assess the environment, the growth rate of loans, and take necessary actions as we have always done.

For us, it's not a question of whether we can fund our balance sheet with deposit growth. We have the ability to do that, and it would just be a matter of margin. So we're working to balance everything out effectively.

Got it.

We’re very confident in good growth. We want to price up, we want to compete with everybody else out there, prices up our CDs and our money market rates, we could bring a lot of money in.

We brought in $1.2 billion in new money.

In the second half of the year, we are focused on managing everything to maintain our profitability. Our goal is to exceed expectations, and we are not aiming to overspend or inflate our balance sheet. We recognize the potential funding limitations we may face. The trade-off we consider is margin. We need to ensure that the loan originations can justify our approach. This is our perspective.

Sure. That's great information. Thanks. Just to follow up, Vince, you mentioned creating some flexibility with the minor sale of the loans. You're focused on optimizing the balance sheet, but I'm curious if you see more opportunities in the near term to do this. Perhaps getting rid of smaller pieces that aren't yielding total returns. Is this a way to maintain the loan-to-deposit ratio in the near term, or do you see this as more of a one-off situation?

Yes. We spent a lot of time during the fourth quarter sizing what we wanted to do as far as the amount of securities and the loans that we would sell. So we don't have any plans to do any additional sales that we're sitting here today. I think we're fine like Vince said, we have the ability to fund and grow the projects we've done in forever. So at this point, I wouldn't say one and done forever, right, because we're always studying the balance sheet, and if there's opportunities, we'll look at it, but there's no plans right now. Like I said, we spent a lot of time sizing it and came up with what we executed on.

If the rate environment enables us to unload loan yielding assets and we get a gain and we can roll that into something else. Sure, we've done that historically, we've sold over a billion dollars over the years. So we'll look selectively, Frank, and we constantly look at the balance sheet. Our objective is to produce the highest returns possible, and we'll look at opportunities to get out, particularly with indirect auto, the limited relationship, right? We'll look at that and we'll trade out of it, or we'll pair it back, right? We've used pricing mechanisms to move the portfolio around, right? And we'll see, it's all a function of what the interest rate environment is, what demand looks like in higher yielding categories, what the risk profile of the balance sheet looks like. We take all of that into consideration and make decisions based on that. But our plan is to manage in the range from a loan to deposit perspective that we have historically. We're not looking to move outside of that.

Yes, I would just say, too, Frank, we don't feel constrained as far as loan growth that we would want to go after. I mean, the mid to high single digits that we've done, we can do that. We've done things like Vince is describing and then, like in the mortgage business, we've adjusted our pricing a little bit there to make more saleable product. So we're kind of reducing the amount of growth that's going on to the balance sheet, which is part of how we manage the balance sheet. So there's a lot of different levers there.

Great. Okay. Thanks for the color.

All right. Thank you.

Our next question comes from Timur Braziler from Wells Fargo. Please go ahead with your question.

Hi, good morning. Maybe starting Vince Delie, you had made a comment, positive operating leverage in '23 look to be in the top quartile in operating leverage going forward. Does that put positive operating leverage on the table for '24? Or is the revenue backdrop challenging enough where that's more likely not going to happen next year?

Yes, I think as we move through this interest rate cycle, it becomes more challenging, obviously, right? Because you're seeing declining revenue and your expense base is pretty much fixed. So we've taken expense out, but it's hard to dig deeper. I think the second half of the year, I certainly would expect us to produce positive operating leverage. So as we move through that inflection point that Vince spoke about earlier, right, margin compression, with the rate cuts, we should be able to move through that and into the second half of the year experience positive operating leverage. If you look at FNB on a full-year basis in 2023, we outperformed others, right, because we produced full-year operating leverage, there was negative operating leverage all over the place, at least based on what I saw. So I think I would expect us to do everything we can to be in a similar position in '24. If that helps.

Okay. That's helpful. Yes, that's helpful. Thank you. And then one for Gary. Just looking at the office maturities in '24, it looks like 20% of that book is maturing. I'm just wondering how much of that maturation is for loans kind of vintage 2019 and earlier. And then as you look at your CRE portfolio, again, looking at the vintages 2019 and earlier, how different are those loans from a credit quality standpoint, just given us how different the world is today versus pre-pandemic?

Yes, generally speaking, we're going to underwrite those things from the origination date in the low to high 60s range. So when you look at those maturities, in addition to that LTV level, which has been very helpful through this cycle so far, they're also underwritten very short. So with maturities of inside of five years, or slightly less in some cases. So a number of those transactions have been renewed over the last year or two. Many of those borrowers right-sized those transactions. It has been our intent to keep those maturities very short, and we'll continue to do that during these times. That all said, we feel as focused as we are on that office space, as is everyone, we feel quite good about the portfolio at this point. We've only had a couple of credits over the last number of years since this space has taken a tough go of it from all of the pandemic issues that we've seen, and we've only had a couple of credits that we've had to deal with from a loss standpoint. So we feel good about the position of it. There is a 20% roll rate in the coming year and we expect to move through that with our sponsors, which have shown the ability to right size, post additional interest reserves to pay down debt, and bring it back to a 120 type of debt service coverage. So we'll continue to do the same thing in '24 that we did in '23.

I'll add on to what Gary said. I think from a prudent underwriting perspective, most of the transactions that we would have underwritten in 2019 would have had long term leases that go out longer than the maturity date. Gary mentioned having a shorter maturity date. What that means is that while cap rates may change and the valuation may change with a lower LTV and a longer lease term, that the debt service coverage remains intact. So it's a lot easier to deal with a devaluation because of the rise in cap rate if you have substantial liquidity and a long-term tenant locked up. So I think that in almost every case, that's what we would look at when we would underwrite these transactions, which gives us a great degree of confidence. I also can tell you that most of the portfolio, the vast majority of the portfolio, sits outside of the urban office scenario. So I think that we have quite a bit of protection in that suburban office and higher growth areas is not as subject to vacancy like you see in the large cities.

Approximately 40% of the portfolio consists of loans under $5 million. If we include loans ranging from $5 million to $10 million, that adds an additional $17 million, bringing the total to nearly 60% of the portfolio being under $10 million. When we expand that range to $15 million, we're looking at 70% of the business. The top 25 credits average just above $30 million, specifically around $31 million. This indicates that the portfolio is quite diverse. We have made careful decisions in maintaining these diversified positions, which has been beneficial in navigating challenging times.

It's geographically diverse too, it's spread across seven states, concentrated in one city, one specific area. Obviously, it's something we watch. There's definitely weakness in urban office. So it's a good question. That helps? Are we good?

That's helpful. Yes. I appreciate the color. Thank you.

Our next question comes from Casey Haire from Jefferies. Please go ahead with your question.

Great, thanks. Good morning, everyone. I wanted to follow up on the NII guide. Vince, it sounds like deposit beta is expected to peak at around 35%. Could you clarify when that is anticipated to occur in relation to your first Fed cut? Also, what does your guidance assume for deposit beta as we move into 2024?

I believe we will see a slight increase. We finished the year at 34.3%. I expect we will increase by another point or two. For the second quarter, we anticipate margins to stabilize after a low point in the first half. As I mentioned in the update, we have now reached 35% twice on the upside. Looking ahead to when the Fed pivots and begins to reduce rates, 35% seems reasonable over the medium term. However, in 2024, depending on the timing of the Fed's cuts, we might realize a portion of that, likely more than half, but we won't achieve the full 35% within that calendar year. We will continue to actively manage our deposit book and pricing. In our weekly pricing committee meetings, we are already discussing when to lower rates, especially as some of our competitors have done so. We will monitor this closely, engage in constant discussions, and take appropriate actions at the right time. It is possible to reach that 35% this year.

Got you. Thank you.

Casey, just logically.

Yes, I understand. Switching to credit, Gary, it seems you expect net charge-offs to decline this year. I'm curious about the loss rate your provision guide anticipates.

Yes. I mean, in terms of the provision guide, at the $80 million to $100 million, naturally that supports loan growth as well as charge-offs. The specific charge-off level that we've got baked into our plans, I mean, that's a number we don't disclose, but I would concur with your thoughts. I mean, we do expect performance there to be stable, to slightly improve.

But I think, Casey, if you look at page nine in our presentation, you can see net charge-offs and average loans for the third quarter of '23 include a one-time event. So I mean, we're...

Yes, fair enough. That was great, okay.

That's what you're seeing in your charge-off.

Yes. Over the last three years, the performance has been 6 basis points, 6 basis points, and 10 basis points in '23, excluding that one item. This indicates solid, steady performance during a significant and somewhat challenging period. We are pleased with the portfolio's position and feel confident as we approach 2024. Of course, we all have some concerns about the direction of the economy and its implications, but we have observed consistent performance and stable results across the portfolio.

Okay, great. And just last one for me. Vince Delie, you mentioned your TCE is at the highest level, I think, in your history, and the CET1 one above 10. How are you guys thinking about what's the share buyback appetite with your capital ratios at current levels?

We have approval from the board to repurchase shares, and we will assess this as we proceed. If we identify opportunities to buy back shares and the returns are reasonable, we will certainly consider it. Our goal is to manage tangible book value levels as well. Therefore, we will keep evaluating this and execute transactions opportunistically when it makes sense. As we move forward, we are also looking at potential economic changes and loan growth, as we want to deploy our capital in the most effective manner. However, if we observe slowness, we won’t just accumulate capital; we will take necessary actions to ensure satisfactory returns. I hope that addresses your question. In short, this option remains on the table, and we will continue to evaluate it as we progress.

Got you. Thanks, guys.

Our next question comes from Michael Perito from KBW. Please go ahead with your question.

Good morning, everyone. I appreciate all the information shared so far. I have one last question for Gary regarding the credit aspect. Discover reported earnings yesterday and noted an increase in consumer activity in areas like lines of credit and auto loans. I'm interested in what you are observing on the consumer side and in terms of credit health, especially since many portfolios outside of mortgages have contracted this year. What kind of growth are you anticipating for 2024, and what factors might contribute to stronger growth in consumer performance? Is it primarily influenced by the macroeconomic environment, pricing, or competitive dynamics? I would appreciate any insights on these topics. Thank you.

Yes. Total delinquency across that all-inclusive portfolio, which is right at about $12 billion, is 89 basis points. So that's all in consumer. The fourth quarter, it's always up a little bit seasonally at the end of the year with the holidays and whatnot. But if you look over a rolling 13-month time frame, it's been from 70 basis points to the low 90s. So we've seen very consistent performance across that portfolio. The underwriting that we do there, I feel very good about. I think it's very prudent and very stable. We're able to generate good loan growth through those portfolios. And when you look at the investment that we've made in the teams there, it's an important part of our business. So as we look forward, we continue to expect good solid growth there. And that being a slightly higher range in this environment, did the higher single-digit range in this environment and expect that portfolio to continue to perform well through the cycle that we're in.

That's helpful. So it sounds like in the mid-single-digit growth guidance, there's some consumer growth baked into that for '24. That's the expectation as you stand today.

Yes.

Including mortgage, we are still anticipating growth when that is excluded. I believe that our investments in digital tools and our wide geographic presence, servicing 60 million consumers, contribute significantly to this confidence. Additionally, the expansion of our ATM delivery channel enhances accessibility to cash and our brand. While I acknowledge that consumers face challenges due to inflation and economic changes, I still feel optimistic about our position for continued growth, even if it's not as strong as in the past. Last year was difficult, but I expect things to stabilize, and in a lower interest rate environment, we should find opportunities to grow that portfolio, which is reflected in our guidance.

Great. Very helpful. Thank you, guys. And for all the other color this morning. Appreciate it.

Okay. Thank you.

Thank you. Take care.

Our next question comes from Russell Gunther from Stephens. Please go ahead with your question.

Hey, good morning, guys. I just wanted to follow up on the balance sheet repositioning and around the tangible book value earned back math. So I get the securities repositioning. I just wanted to confirm that the preferred stock dividend saving is included in that calculation. And then just ask for some additional color on the indirect auto piece. What rate borrowings would be paid down, whether there's any reserve release associated with those loans included in that map? Just trying to get the puts and takes.

Yes, Russell. As you know, the securities repositioning was completed on the available-for-sale portfolio and is already reflected in the tangible book value. Therefore, there is no additional impact from that. There is a slight effect from the loan sale, but considering the overall strong earnings increase from the combined transaction, the earn-back period is less than a year. When you factor in the preferred dividend, it remains beneficial, so that would also be less than a year. The earn-back metric is quite strong. Did I address all your questions?

The auto piece, and what just kind of puts and takes of the savings were there, just the rate of borrowings you'd expect to pay down and whether there's any reserve release associated with those loans that's included in that calculation?

Got you. Yes. No, so the borrowings we talked about paying off at a similar rate as the yield on the loans. So we're talking roughly 5% to 5.5% type yield on those loans. So it'll pay down borrowings at a similar rate. And just as a reminder, that loan sale hasn't closed yet, so we actually haven't seen the capital benefits from that full transaction. So just on a pro forma basis, when the loans do go off the balance sheet, we'd expect CET1 to increase an estimated 10 basis points and TCE to increase roughly 6 basis points as well on top of that.

Okay. Okay, great.

There's no additional income statement impacts, Russell, in the first quarter because with us marking it to the market, that captures everything in the fourth quarter. So really it's just actually executing the sale itself.

Thank you, guys. And then I guess just the last follow up then would be back to the CET1 discussion, pro forma, still north of that 10%. You guys addressed repurchases, but also sensitivity around earn back. So not willing to let capital accrete. Are additional securities repositionings on the table, or how are you thinking about that?

No, I think we spent a lot of time in the fourth quarter sizing what we did. So we don't have any plans to do any additional security sales just to sit here. Remember, during the last few years, I mean, we stayed short del more investment portfolio. We stayed conservative in how we managed that. So the total dollar amount that we did there was kind of the total we're looking to do. We don't have any plans to do anything additionally. And then, you know, from a capital ratio perspective, within our guidance, and in our capital ratios will drift up as you go through the year, which is important. And then to Vince's point earlier, opportunistically that will create an ability to do share buybacks if it makes sense.

Yes. I would like to see tangible book value exceed $10, as that would be a significant milestone for us and likely lead to a higher valuation due to our profitability. We will be carefully managing this situation and making informed decisions based on return expectations.

Understood. Thank you, guys. I appreciate you all taking my question.

Yes. Thank you.

Our next question comes from Manuel Navas from D.A. Davidson and Company. Please go ahead with your question.

Hey, good morning. Just wanted to get a bit of your economic backdrop behind your loan growth guidance and then behind the provisioning guidance.

The economic environment is kind of what the consensus economists would be saying. I mean, it's slowing growth in the second half of the year. We're not making kind of calls on our own. We're kind of looking at what the expectations are from economists throughout the country. And that's kind of what's baked in, I think the GDP, and our plan goes down to like a zero point, but it's still growth, still two on average for the year.

Right. Okay. So if the expectation got…

Sorry. Go ahead.

So that expectation, if it was to worsen, would the provision be above the range?

I think we're very comfortable with the range we have.

Yes, no, we feel very comfortable with the range at this point based on where the economy is today and how the portfolio is positioned.

And then loan growth, the pace has been really strong here to close the year. Is that kind of more front-end loaded as it kind of slows across the back half of the year or is it, you feel pretty good about that mid-single digits kind of staying consistent across the year?

Yes, there is seasonality in originations depending on the portfolio. For the commercial book, growth tends to be stronger from the second to the third quarter, while mortgage banking activity starts to pick up a bit earlier, around the first and second quarters. There are variations among the portfolios, but those serve as good examples. When preparing our plan to provide consensus, we consider both macro and micro factors. We develop our plan from the ground up by surveying our business units, examining historical production capabilities in our markets, and assessing the macroeconomic environment to determine feasibility. We rely on consensus estimates from economists rather than making our own forecasts, and incorporate these into our model. This comprehensive approach informs our projections for provision expense, loan growth, and various segments, allowing us to build a solid foundation. Given the current cycle and our observations, it's challenging to predict, yet we are a bit more optimistic compared to a quarter ago regarding next year, which is reflected in our loan growth guidance. I hope we can exceed expectations. Last quarter, we performed well commercially, and that success is evident in the loan growth experienced in the fourth quarter. However, our pipelines for the future appear relatively flat, so we aren't looking at a sizable pipeline that guarantees achieving a specific percentage growth in that portfolio. Overall, I am confident about our plans based on our current understanding of the economy. I'm not sure if this information is helpful.

That's great. No, no, that's really helpful. No, no, that's great. Can I add, there any kind of regional takeaways from your eStore performance? You have a lot of activity, you have a lot of non-account holders using the e-store. Can you break it down regionally at all? Or is it just great trends in general?

Yes. That's an interesting question. And I just asked our people that question. So I ask the same question internally. It's still relatively new we're trying to figure out how to devise that gets us as granular. Gets as granular as we need to be from an origination perspective. But when they initially looked at it, it's pretty much across the board. Which is interesting. It wasn't in one particular geography. It was spread across a pretty broad geography. So I think anywhere where we have name recognition, branch locations, right? We tend to get more action. Once you move outside of that, we don't advertise a lot so you don't see as much activity. Which is part of the reason why we decided to go with branded ATMs and do the ATM deployment, because our theory was that the more frequently consumers see us, the more likely they are to engage us digitally. That was part of the strategy. So it seems to be working. If you look at where our geographic locations are where we have signage and some recognition, there's more activity digital.

Great.

Now that we've added the deposit products, we will begin advertising in December to increase awareness among consumers regarding our capabilities. Recently, we managed to secure a couple of ad placements during significant sporting events, including the national championship. We ran ads during the playoff game and the Steelers vs. Buffalo Bills game, focusing on local engagement since our customers are connected to these events. Some people even commented on our ads. Additionally, the branding on our buildings in various markets, especially in Pittsburgh, has enhanced our visibility and attracted more prospects. Our headquarters signage has led to increased foot traffic, and our sponsorships with the Penguins, including their away jersey patch, have also contributed to our visibility. This is our approach to building awareness.

That's great. Thank you. Appreciate it.

Ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the floor back over to Vince Delie for any closing remarks.

I want to express my gratitude for the insightful questions and for your interest. Despite the challenges faced this year, FNB has demonstrated strong performance. The key strategies we have implemented over the years were particularly effective during the liquidity crisis earlier this year. You witnessed the impact of our focus on client primacy, the quality of our deposit portfolio, and our credit underwriting. This has been evident, and I am optimistic about entering next year, especially as we look forward to a more favorable economic environment in the latter half of 2024. I also want to acknowledge our employees for their hard work and dedication over the past year. Thank you.

Thank you, everybody. Take care.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.