F.N.B. Corporation — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 27, 2020. FNB is a Pittsburgh-based diversified financial services holding company, with Community Banking, Wealth Management and Insurance segments operating across seven states and Washington, D.C. It reported 369 banking offices.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net interest income | $917.2 million | $932.5 million |
| Net interest margin (FTE, non-GAAP) | 3.17% | 3.39% |
| Non-interest income | $294.3 million | $275.7 million |
| Non-interest expense | $696.1 million | $694.5 million |
| Provision for credit losses | $44.6 million | $61.2 million |
| Net income | $387.2 million | $372.9 million |
| Net income available to common stockholders | $379.2 million | $364.8 million |
| Diluted EPS | $1.16 | $1.12 |
| Operating cash flow | $259 million | $611 million |
| Investing cash flow | $(1.131) billion | $(1.920) billion |
| Financing cash flow | $983 million | $1.318 billion |
- Revenue, measured as net interest income plus non-interest income, was approximately $1.21 billion, up 0.3%. Return on average assets was 1.14%; the non-GAAP efficiency ratio was 54.5%.
- At year-end, total assets were $34.6 billion, net loans $23.1 billion, deposits $24.8 billion, and stockholders’ equity $4.9 billion. Total loans and leases grew 5.1%; deposits grew 5.7%.
- Total borrowings were $4.56 billion, down from $4.76 billion. Short-term borrowings fell to $3.22 billion from $4.13 billion, while long-term borrowings increased to $1.34 billion from $627 million.
- Cash and cash equivalents were $599 million, up from $488 million. The loan-to-deposit ratio was 94.0%. Parent liquidity measures were 2.2x liquidity coverage and 15.2 months of cash on hand, above stated internal limits.
- Capital ratios for FNB were CET1 9.40%, Tier 1 9.79%, total capital 11.81%, and leverage 8.20%. FNB and its bank subsidiary were categorized as well-capitalized.
Changes versus 2018
- Common net income rose 3.9% and diluted EPS increased 3.6%, despite a 1.6% decline in net interest income. Lower credit-loss provision and higher fee income supported earnings.
- FTE net interest margin fell 22 basis points, reflecting the lower-rate environment, higher funding costs, lower acquired-loan cash recoveries, and the 2018 sale of Regency Finance.
- Non-interest income rose 6.8%, led by capital markets income (+55.5%) and mortgage banking income (+44.4%). Non-interest expense was nearly flat.
- Credit metrics were favorable overall: net charge-offs fell to $28.3 million from $56.0 million, or 0.12% of average loans versus 0.26%. Non-performing assets declined to $129 million from $135 million; non-performing loans were 0.44% of loans.
- Net loans grew $1.12 billion and deposits $1.33 billion. Tangible book value per share, a non-GAAP measure, rose 13% to $7.53; tangible common equity to tangible assets increased to 7.58% from 7.05%.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management emphasized loan and deposit growth, fee-business performance, expense discipline, and continued investment in technology, infrastructure and employees. The Federal Reserve cut its target rate by 75 basis points in 2019.
- CECL became effective for FNB on January 1, 2020. Management estimated an approximately $52 million one-time reduction to retained earnings and an opening allowance for credit losses of approximately $300–$310 million, including the acquired-loan gross-up. Management anticipated increased quarterly provision volatility and implementation costs.
- Notable 2019 items included $4.5 million of branch-consolidation costs, $4.3 million of service-charge refunds, and a $3.2 million impairment charge tied to a renewable-energy tax-credit transaction. In 2018, results included a $5.1 million gain on the Regency sale and $6.6 million of branch-consolidation costs.
- FNB issued $120 million of 4.95% fixed-to-floating subordinated notes due 2029 and announced a share-repurchase authorization of up to $150 million through the end of 2020; the filing does not assure how much will be repurchased. Subsequent to year-end, it issued $300 million of 2.20% senior notes due 2023 in February 2020.
- Material risks include credit deterioration and regional economic weakness; sensitivity to interest rates and funding costs; deposit competition and liquidity access; regulatory and compliance changes; cyber and third-party service-provider disruptions; mortgage-market volatility; and the transition away from LIBOR after 2021. The company reported ordinary-course legal proceedings; management did not expect them, in aggregate, to materially affect financial position or liquidity, though a period’s net income could be affected.
- Auditors issued unqualified opinions on the financial statements and internal controls. The allowance for credit losses was identified as a critical audit matter because its qualitative adjustments require significant judgment.
Investor verification priorities
- Check whether deposit growth and reduced wholesale borrowing continue, and monitor the cost and mix of funding as rates change.
- Track net interest margin, loan yields, deposit pricing, and the effects of lower rates and LIBOR transition on earnings and hedges.
- Review CECL adoption against management’s estimated $52 million retained-earnings impact and $300–$310 million opening allowance.
- Examine credit trends in commercial real estate, commercial and industrial, and indirect installment lending, including allowance adequacy and delinquency migration.
- Verify execution and funding of the announced repurchase program, capital ratios, and the impact of subsequent debt issuance.
- Assess recurring fee-income growth and expense trends separately from one-time items; note that selected operating and tangible measures are non-GAAP.