F.N.B. Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

F.N.B. Corporation is a diversified financial services company, providing commercial banking, wealth management, and insurance services throughout its Mid-Atlantic and Southeast footprint.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

F.N.B. Corporation (FNB), headquartered in Pittsburgh, Pennsylvania, operates as a regional bank holding company, offering a range of financial products and services. Its core business segments include:

  • Community Banking: This segment provides a variety of banking services such as business, commercial, mortgage lending, consumer products and services, including traditional deposit accounts, loan options, credit card products, leasing, and wealth management. FNB’s largest segment is their community banking division.

  • Wealth Management: This division offers wealth management and fiduciary services, brokerage and asset management solutions to both individuals and institutions. These include financial planning, estate planning, retirement planning, and portfolio management.

  • Insurance: This segment provides insurance products to commercial clients and individuals

The company serves customers through its extensive branch network, ATMs, and digital banking channels. FNB is focused on delivering relationship-driven service to meet the needs of its diverse client base.

Industry and Competitive Landscape

The banking industry is highly competitive and subject to many influences that could directly impact the results of FNB. It faces competition from other banks, credit unions, and non-bank financial service providers, including online-only banks.

  • Interest Rate Environment: As a lender, FNB’s performance is heavily influenced by prevailing interest rates, which is dictated by the Federal Reserve. Rising rates may increase loan yields, but they can also reduce loan demand and increase funding costs.

  • Regulatory Oversight: As a bank, it is heavily regulated and scrutinized, and changes in regulations can significantly alter the operating environment and cost structure. For example, the effects of Dodd-Frank can still be felt today.

  • Technological Disruption: The banking industry is undergoing a period of rapid technological change with the rise of online-only banks, fintech companies, and mobile payments. FNB will have to invest in tech to ensure its future viability and protect its market share.

  • Competition for Deposits: Banks compete heavily to raise low-cost deposits.

Financial Analysis

FNB’s financial performance is closely watched by investors, and the most recent reports are crucial to understanding its current state.

Recent Performance:

Key recent figures from Q3 2024, are as follows: FNB reported an increase in net interest income (NII) of 2.7% YoY, driven by higher yields, and total revenue increased by 3.1% YoY. However, adjusted core earnings per share were 0.33 compared to 0.37 the previous year, due to higher funding costs, a credit provision expense, and other expenses. Also net income fell by $4 million due to one-time items.

Highlights for this quarter are:

  • Strong loan growth, driven mostly by commercial lending.
  • Net interest income increase, driven by higher yields.
  • Decrease in allowance for loan losses, indicating decreased concerns about credit risk.

Profitability:

  • Core operations have proven to be very profitable for a longer period of time
  • Net interest income was up 2.7% YoY, reflecting an increase in earning yields

  • Noninterest income increased significantly due to solid business growth

  • However the company’s profitability is also influenced by the rate and pace of federal reserve rate increases

Return on Invested Capital (ROIC):

  • Return on tangible common equity was 10.1% in the most recent quarter, which does show adequate profitability.

Growth:

  • The bank has seen steady loan growth, particularly in commercial real estate.
  • New client relationships have increased, in both existing and new markets.
  • FNB is also focused on technology, as it expects more and more of its clients to prefer a mobile and online approach to banking.

Capital Structure:

  • FNB appears well capitalized with a Tier 1 ratio of 10%.
  • Tier 1 ratios have been very steady across the last 3 years.
  • The recent acquisitions have not changed FNB’s leverage or capital structure to any major degree.

Asset Quality:

  • Non performing assets decreased in the recent quarterly report

Key Financial Metrics

  • Net Interest Income (NII): A key metric that reflects the difference between interest income generated from assets and the interest expense paid on liabilities. FNB continues to show slight growth in Net interest income.
  • Return on Average Assets (ROA): A measure of profitability showing how effectively a company uses its assets to generate profits.
  • Return on Average Equity (ROE): A key metric used to measure the company’s profitability from shareholders’ investments.
  • Net Interest Margin (NIM) This metric reflects the difference between the earnings made on assets and liabilities.
  • Net charge-offs: These figures are still relatively low and are expected to decrease.

Moat Assessment

FNB has some elements of a moat, but lacks others.

A “moat” is a company’s sustainable competitive advantage that makes it difficult for other companies to steal their customers and profitability. A “wide” moat means very sustainable and a “narrow” means limited sustainability. Here is a breakdown:

  • Switching Costs (Narrow): FNB does benefit from somewhat high switching costs. As customers move their accounts to FNB, they do not switch frequently due to the time and effort required. However, it’s still quite easy for consumers to switch to other banks with similar or better offerings. This results in a “narrow” moat designation, in that switching costs are not high enough to lock customers into their current banking relationships for a long time.
  • Scale (Minor/Moderate): FNB’s local presence gives the company an advantage, because customers want to be able to have a local bank branch. Because it operates in multiple regions, it does have some advantage of scale over smaller banks, and is able to keep its cost low due to its established branch network. However, it is not particularly large compared to the biggest financial institutions in the US, thereby preventing it from having a major advantage over others.
  • Intangible Assets (None): The company’s brand is not a strong differentiator, and it does not rely heavily on patents, or other regulatory licenses to provide an advantage.

Overall, FNB has a Narrow Moat (2/5), because the company is not well diversified enough, or is not dominant in any particular industry or region and its moat is easily eroded by the intense competition in banking.

Risks to the Moat and Business Resilience

FNB, like all financial institutions, faces a variety of risks:

  • Interest Rate Risk (High): FNB’s profitability is highly correlated with the interest rate environment, and future volatility in rates could lead to reduced margins or losses.
  • Credit Risk (Medium): Although FNB attempts to manage risk through credit quality standards, defaults by its consumers and lenders are a substantial risk. The most recent results show that provision for credit losses is slightly rising and these should be watched.
  • Regulatory Risk (High): Changes in regulations, whether by the OCC, CFPB, FDIC, or Federal Reserve, can severely impact the business by introducing costs or limiting opportunities for business operations. In addition, the uncertainty around regulatory standards that have been set for FNB to qualify for “well capitalized” status add extra risk. Also the effects of Dodd-Frank are still relevant.
  • Technological Disruption Risk (High): Newer Fintech companies and online banking platforms could attract away market share from older regional banks and this may pose an existential threat to FNB, if they do not adapt.
  • Economic Conditions (Medium): Macroeconomic issues such as GDP, inflation, and the employment rate significantly affect the financial services industry, and thus, impact FNB’s ability to generate revenue and manage credit. For example, inflation could decrease the value of some of its assets.
  • Cyber Risk: Banks are increasingly targeted by cyber attacks and breaches, and these could result in significant expenses for the company, along with the loss of sensitive customer data and trust.

Business Resilience: Despite these risks, FNB shows some business resilience through:

  • Well-Established History: FNB has been operating for over 100 years, suggesting it has some resilience.
  • Diversification: FNB’s diversification through community banking, wealth management, and insurance, provides some buffer against the risks in each of those sectors.
  • Customer relationships: The bank prides itself on offering personalized services to customers, thereby creating some resilience through the good will that FNB earns.

However, the risks associated with regulation and technological disruption are very significant, which prevents its business from being labeled as highly resilient.

Understandability

FNB is a bank, which is a very complex business, and although it appears straightforward on the surface, requires specialized knowledge to assess. This earns it a rating of 2/5 for understandability due to:

  • The core operations require understanding various accounting standards that are specific to banking, such as ALLL.
  • The company structure is complex, particularly when including FNB’s various subsidiaries and branches.
  • Although the company provides information for investors to understand its financials, it may be difficult for a layperson to fully grasp these intricacies.

Balance Sheet Health

FNB has a relatively healthy balance sheet, earning a rating of 4/5. Its main strengths and weaknesses include:

  • Strong Liquidity: FNB has more than adequate liquid assets, in order to cover all of its short-term debt and obligations, and still have ample resources for reinvestment and potential acquisitions.
  • Reasonable leverage: Although the company relies on debt, their debt to total capitalization is still moderate.
  • Adequate Capital: The bank’s Tier 1 capital is above regulatory minimums, implying it is well-capitalized to meet financial challenges.

Recent Concerns and Management Commentary

During the Q3 earnings call, managements addressed the recent concerns about:

  • High Rates Management has acknowledged the effects of higher rates on customer borrowing, and are aware of the concerns of the customers about continued tightening. They intend to use “disciplined pricing” in order to both maintain net interest income and keep their clients’ interest in their deposits.
  • Regional Bank Concerns: Many regional banks have been facing heavy scrutiny in the recent past due to events that led to the collapse of several regional banks in the US. Although management acknowledges that these concerns have resulted in lower valuations across the board, they assure the investors that their capital structure and liquidity are very safe.
  • Mergers: Management has alluded that mergers will continue to be considered if they can lead to growth.

The company has generally remained consistent in all of its statements, highlighting continued growth through its core businesses, maintaining solid credit quality, and remaining well-capitalized.

This report provides a detailed analysis of FNB Corporation, but note that further in depth analysis is recommended before making a potential investment decision.