F.N.B. Corporation — Q3 2020 Form 10-Q
Business context and reporting period. This quarterly report covers the three and nine months ended September 30, 2020. F.N.B. is a diversified bank holding company operating across seven states and the District of Columbia, with commercial banking, consumer banking, wealth management and insurance businesses. Results reflect the COVID-19 pandemic, lower interest rates, CECL adoption and substantial PPP lending.
Financial performance and condition
| Metric | Q3 2020 | Comparable period / change |
|---|---|---|
| Total revenue | $307.1 million | $309.8 million in Q3 2019; down 0.9% |
| Net income available to common shareholders | $80.8 million | $100.7 million; down 19.8% |
| Diluted EPS | $0.25 | $0.31; down 19.4% |
| Net interest income | $227.1 million | $229.8 million; down 1.2% |
| Net interest margin, FTE (non-GAAP) | 2.79% | 3.17%; down 38 basis points |
| Provision for credit losses | $27.2 million | $11.9 million |
| Net charge-offs | $19.3 million; 0.29% annualized | $6.4 million; 0.11% annualized |
| Non-interest income | $80.0 million | Essentially unchanged |
| Non-interest expense | $180.2 million | $177.8 million; up 1.4% |
For the first nine months of 2020, net income available to common shareholders was $207.8 million and diluted EPS was $0.64, versus $286.0 million and $0.88 in 2019. Net interest income was $687.7 million, down 0.5%; provision for credit losses rose to $105.2 million from $37.0 million. Nine-month FTE net interest margin was 2.93%, versus 3.21%.
Balance sheet at September 30, 2020: Assets were $37.4 billion, up 8.2% from year-end 2019. Loans and leases were $25.7 billion, up 10.3%; deposits were $28.8 billion, up 16.3%. Cash and cash equivalents were $900 million. Total borrowings were $3.30 billion, down from $4.56 billion. Shareholders’ equity was $4.95 billion.
Loan growth included approximately $2.5 billion of PPP loans outstanding. Commercial and industrial loans increased $2.24 billion from year-end, while indirect installment loans fell $703 million. A $508 million indirect-auto loan portfolio was transferred to held-for-sale in September, with a sale expected in Q4. Deposit growth was driven partly by PPP and government-stimulus inflows and partly by customer relationship growth; time deposits declined $703 million.
Cash flow and liquidity: For the nine months, operating cash flow was negative $81 million, investing cash flow was negative $2.27 billion and financing cash flow was positive $2.66 billion. Cash increased $301 million to $900 million. The company reported parent-company liquidity coverage of 2.6 times and 19 months of cash on hand, both above internal limits of more than 1.0 times and 12 months. Unused wholesale credit availability was $16.4 billion. The loan-to-deposit ratio was 89.1%, compared with 94.0% at year-end.
Capital and asset quality: F.N.B. Corporation’s CET1 ratio was 9.61% and FNBPA’s was 10.55%; both entities exceeded applicable well-capitalized requirements. The allowance for credit losses was $373 million, or 1.45% of loans and leases (1.61% excluding PPP loans). Non-performing loans were $178 million, or 0.69% of loans, versus $103 million and 0.44% at year-end; non-performing assets were $198 million. Management attributed part of the increase in non-accrual loans to CECL transition treatment of acquired loans.
Material changes versus prior periods
- Lower market rates reduced asset yields and NIM, while lower deposit and borrowing costs partly offset the effect. Average earning assets grew 12.2% year over year in Q3, including PPP-related balances.
- Credit costs increased amid pandemic uncertainty: Q3 provision more than doubled year over year, and net charge-offs rose. Management cited commercial exposures including lodging, hotels, restaurants and retail investment real estate.
- Mortgage banking income rose 93.1% year over year in Q3 to a record $18.8 million, supported by volume and margins. Service charges fell 26.7%, reflecting lower transaction volumes and $3.8 million of refunds.
- Reported Q3 non-interest income included a $13.8 million gain on the sale of Visa Class B shares, offset by $13.3 million of FHLB debt extinguishment and related hedge termination costs. Q3 expenses included $2.7 million of COVID-19 costs.
- CECL adoption on January 1, 2020 increased the allowance by approximately $105 million, including a roughly $50 million PCD loan allowance gross-up, and reduced retained earnings by $50.6 million. F.N.B. elected the regulatory-capital transition relief.
- The Community Banking reporting unit’s fair value exceeded carrying value by less than 5% in the September interim goodwill test; no impairment was recorded. Management warned that the cushion was narrow and future impairment remained possible.
Outlook, commentary and risks
Management provided no specific numerical earnings or financial guidance in the supplied filing text. It expected COVID-19 to continue affecting results during the remainder of 2020, including revenue growth and net interest margins, and anticipated volatility in credit-loss provisions while the pandemic and recovery remained uncertain. Management described its operating model and liquidity as resilient, noted continued deposit and loan growth, and said the quarterly dividend was sustained.
At September 30, $792 million of loans, excluding PPP, had short-term COVID-related modifications, including $464 million of second deferrals. These modifications were not classified as TDRs when borrowers met the applicable pre-pandemic criteria. The filing cautions that borrower conditions may deteriorate as relief expires and that economic recovery, unemployment, stimulus measures and the pandemic’s duration remain uncertain.
Other notable risks include potential PPP-related litigation or SBA guarantee disputes; credit deterioration and further allowance increases; interest-rate sensitivity and the transition away from LIBOR, whose financial impact was not yet known; and possible goodwill impairment. Management stated that ordinary-course legal matters were not expected, based on its current assessment, to materially affect financial position or liquidity, though they could materially affect earnings in a period. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether PPP forgiveness, borrower repayment capacity and the large deferred-loan pool develop as expected, and whether SBA guarantees remain enforceable.
- How credit quality, non-performing loans, charge-offs and the CECL allowance evolve as deferrals expire and economic forecasts change.
- Whether deposit balances remain stable as PPP and stimulus-related inflows normalize, and whether reported liquidity remains available under stress.
- Whether margin pressure, loan yields and deposit costs change materially, including the impact of LIBOR transition and interest-rate movements.
- Whether the narrow goodwill valuation cushion results in an impairment in the fourth-quarter annual assessment.
- The effect of one-time Q3 items on comparisons: Visa share-sale gain, FHLB debt and hedge termination costs, service-charge refunds and COVID-19 expenses; distinguish GAAP results from management’s non-GAAP operating measures.