F.N.B. Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are generally with December 31, 2019. F.N.B. is a diversified bank holding company operating across seven states and the District of Columbia.
Financial performance
| Metric | Q1 2020 | Q1 2019 or prior-period comparator |
|---|---|---|
| Net interest income | $232.6 million | $230.6 million; up 0.9% |
| Net interest margin, FTE (non-GAAP) | 3.14% | 3.26% |
| Provision for credit losses | $47.8 million | $13.6 million |
| Non-interest income | $68.5 million | $65.4 million; up 4.8% |
| Non-interest expense | $194.9 million | $165.7 million; up 17.6% |
| Net income | $47.4 million | $94.1 million |
| Net income available to common shareholders | $45.4 million | $92.1 million |
| Diluted EPS | $0.14 | $0.28 |
| Net cash from operating activities | $(205) million | $17 million |
| Cash and cash equivalents, at period end | $564 million | $599 million at Dec. 31, 2019 |
Total revenue was $301.2 million, up 1.7% year over year. Higher net interest income and non-interest income were more than offset in earnings by increased credit-loss provision and operating expense. The lower margin reflected repricing of variable-rate loans after interest-rate cuts, partly offset by lower funding costs and acquired-loan discount accretion. Capital markets income rose 84.1%, while mortgage banking operations moved to a $1.0 million loss, including a $7.7 million mortgage servicing rights impairment.
Balance sheet, credit, and liquidity
- Assets and lending: Total assets were $35.0 billion, up 1.3% from year-end. Loans and leases were $23.9 billion, up 2.5%; commercial loans and leases rose 3.7%. Period-end deposits were $24.7 billion, essentially flat versus year-end.
- Credit reserves and quality: The allowance for credit losses was $343.3 million, or 1.44% of loans and leases, versus 0.84% at year-end. The $47.8 million quarterly provision included about $37.9 million for COVID-19-related macroeconomic deterioration. Net charge-offs were $5.7 million, down from $7.6 million a year earlier. Non-performing assets rose to $153.8 million from $128.6 million; the company attributed $54 million of the increase in non-accrual loans to acquired loans newly included after CECL adoption. COVID-related deferrals for qualifying borrowers were not included as past due or TDRs in the reported data.
- Funding and debt: Total borrowings were $5.1 billion, up $520 million from year-end; long-term borrowings included $298 million carrying value of newly issued senior notes. The company issued $300 million of 2.20% senior notes due 2023 during the quarter. It reported $8.1 billion of available FHLB credit, of which $3.0 billion was utilized.
- Liquidity: Parent-company liquidity coverage ratio was 1.8x, above its internal minimum of 1.0x; months of cash on hand were 16.2, above the 12-month internal limit. The bank reported $12.0 billion of unused wholesale credit availability. These are management-defined measures; liquidity conditions and funding needs may change.
- Capital: F.N.B. Corporation’s CET1 ratio was 9.11% and FNBPA’s was 10.02% at quarter-end; both exceeded applicable minimums. The company elected temporary regulatory-capital relief for CECL. Stockholders’ equity was $4.8 billion, down $41 million from year-end.
Material changes and unusual items
- On January 1, 2020, F.N.B. adopted CECL, recording a $50.6 million reduction to retained earnings and a $105.3 million increase in the loan-loss allowance at adoption. The quarter-end allowance also reflected the COVID-19 forecast scenario.
- Reported earnings included $61.5 million of pre-tax significant, unusual, or outsized items: $37.9 million of COVID-related credit provision, $8.3 million of branch-consolidation costs, $7.7 million of MSR impairment, $5.6 million of accelerated stock-compensation expense from changed retirement vesting, and $2.0 million of COVID-related expense. The filing estimates these items reduced earnings by $0.15 per share. Management’s operating net income measure, which excludes only COVID expense and branch-consolidation costs, was $53.5 million versus $93.4 million a year earlier; it is non-GAAP and is not adjusted for all the items listed above.
- Common-stock repurchases totaled $25 million during the quarter, at an average $10.60 per share. Repurchases were subsequently suspended because of COVID-19 uncertainty; $125 million remained under the authorization at quarter-end.
- Goodwill testing found no impairment, but the Community Banking reporting unit’s fair value exceeded carrying value by less than 10%, increasing sensitivity to future assumptions and market conditions.
Outlook, commentary, and principal risks
- The filing provides no specific full-year earnings or revenue guidance and cautions that first-quarter results are not necessarily indicative of full-year results. Management expects credit-provision volatility during the pandemic and its immediate aftermath.
- Management said stress tests under severely adverse scenarios indicated regulatory capital would remain above requirements and liquidity would remain appropriate. This is management’s assessment, not a guarantee of future performance.
- As of May 5, 2020, F.N.B. had processed more than 18,000 Paycheck Protection Program applications, at various funding stages, totaling approximately $2.6 billion. This subsequent-event figure is not a March 31 balance-sheet amount. PPP participation carries operational, litigation, and potential SBA-guaranty risks if origination or servicing requirements are not met.
- As of April 28, approximately 4,000 commercial customers and 6,000 mortgage and consumer customers had elected payment-deferral options. The filing states these arrangements were excluded from past-due and TDR reporting when borrowers were current before the pandemic and met applicable guidance.
- Key risks include the duration and economic effects of COVID-19, borrower credit deterioration and collateral declines, further rate changes and pressure on net interest income, uncertain PPP rules and execution, possible goodwill impairment, legal or regulatory proceedings, and the transition away from LIBOR after 2021.
- Management reported disclosure controls were effective as of quarter-end and no material change in internal control over financial reporting occurred during the quarter. Legal proceedings were described as ordinary-course matters; management did not expect them, in aggregate, to materially affect financial position or liquidity, while acknowledging possible period-specific earnings effects.
Important facts for investors to verify
- Whether the COVID-19 recessionary assumptions used in the CECL model remain appropriate, and how subsequent forecasts affect provision expense and reserve coverage.
- Actual performance of deferred or modified loans, including how many borrowers resume payments and how those loans are ultimately classified.
- PPP funding, forgiveness, fee recognition, operational costs, and any borrower litigation or SBA-guaranty disputes.
- Deposit stability, commercial line utilization, borrowing levels, and liquidity after the quarter-end surge in customer needs.
- Whether the Community Banking goodwill valuation cushion narrows further, and whether MSR values recover or incur additional impairment.
- Future net interest margin, non-interest expense, and capital trends, particularly after repurchases were suspended and while CECL regulatory-capital effects are deferred.