F.N.B. Corporation — Q2 2020 Form 10-Q
Business context and reporting period
F.N.B. Corporation is a diversified bank holding company headquartered in Pittsburgh, serving seven states and the District of Columbia through commercial banking, consumer banking, wealth management and insurance businesses. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2020 | Prior comparable period / balance |
|---|---|---|
| Total revenue | $305.6 million | $305.2 million in Q2 2019; up 0.1% |
| Net interest income, GAAP | $228.0 million | $230.4 million; down 1.1% |
| Net interest margin, FTE, non-GAAP | 2.88% | 3.20%; down 32 basis points |
| Net income / income available to common shareholders | $83.6 million / $81.6 million | $95.2 million / $93.2 million |
| Diluted earnings per common share | $0.25 | $0.29 |
| Provision for credit losses | $30.2 million | $11.5 million |
| Non-interest income / expense | $77.6 million / $175.9 million | $74.8 million / $175.2 million |
| Net charge-offs; annualized ratio | $8.5 million; 0.13% | $9.0 million; 0.16% |
- For the first six months, net income available to common shareholders was $127.0 million, versus $185.3 million; diluted EPS was $0.39 versus $0.57. Net interest income was essentially flat at $460.6 million, while provision expense rose to $78.0 million from $25.1 million.
- At June 30, total assets were $37.7 billion, up 9.0% from year-end 2019. Loans and leases were $26.2 billion, up 12.3%, including approximately $2.5 billion of PPP loans. Deposits were $28.4 billion, up 14.6%; cash and cash equivalents were $931 million.
- Total borrowings were $4.0 billion, down from $4.6 billion at year-end. The company issued $300 million of 2.20% senior notes due 2023 in February 2020. Stockholders’ equity was $4.9 billion.
- Six-month cash flows were negative $158 million from operating activities and negative $2.5 billion from investing activities, offset by $3.0 billion of financing cash flows. Cash and cash equivalents increased $332 million to $931 million.
- The allowance for credit losses was $365 million, or 1.40% of loans and leases (1.54% excluding PPP loans). Non-performing loans were $170 million, or 0.65% of loans, versus $81 million and 0.44% at year-end; the filing attributes part of the increase to CECL-related treatment of acquired loans. Non-performing assets totaled $191 million.
- At June 30, regulatory capital ratios exceeded applicable well-capitalized requirements: F.N.B. Corporation’s CET1 ratio was 9.37% and FNBPA’s was 10.33%. Parent liquidity measures were 2.6 times for the liquidity coverage ratio and 19.2 months of cash on hand.
Material changes and drivers
- Q2 common earnings fell 12.4% year over year, despite nearly unchanged revenue. Lower net interest income and higher credit-loss provisioning weighed on results. Lower income taxes partly offset these effects.
- The Federal Reserve’s rate cuts contributed to margin compression. Q2 FTE net interest income was $231.1 million, down 1.2% year over year, while average earning assets rose 9.8%; the yield on average earning assets declined to 3.54% from 4.37%.
- Non-interest income increased 3.7% in Q2. Mortgage banking income rose 117.4% and capital markets income rose 26.8%; service charges fell 25.4%, primarily reflecting lower customer transaction volumes amid COVID-19.
- Credit-loss provision reflected both CECL adoption and the pandemic-related deterioration in economic forecasts. The company adopted CECL on January 1, 2020, recording a $50.6 million reduction to retained earnings; the allowance increased by approximately $105 million at adoption. Q2 provision included an estimated $17.1 million attributable to COVID-19 modeling impacts; the six-month amount was $55 million.
- About $2.4 billion of loans had received short-term COVID-19 modifications by June 30, approximately 10% of the portfolio; over 98% had been current and in good standing at December 31, 2019. These modifications were excluded from reported past-due and TDR measures under applicable relief provisions.
- Unusual or significant six-month items included $8.3 million in branch consolidation costs, $8.0 million of MSR impairment, $5.6 million from changes in stock-award retirement vesting, and $4.0 million of COVID-19 expenses. A $4.1 million renewable-energy tax-credit investment impairment was recognized in Q2, alongside related tax credits.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management expected COVID-19 to continue affecting results during the remainder of 2020, with lower revenue growth and compressed net interest margins; it emphasized uncertainty about the pandemic’s duration and economic recovery.
- Management cited recessionary forecast assumptions in its credit model, including GDP contraction of up to 12% from early 2020 and average unemployment of 11% over the reasonable-and-supportable forecast period. Management warned that provision expense may remain volatile as the pandemic evolves.
- The Community Banking reporting unit’s June 30 goodwill test found fair value less than 5% above carrying value; no impairment was recorded. Management said further deterioration in assumptions or market factors could lead to future impairment.
- PPP loans carry an SBA guarantee, but the filing identifies potential loss, litigation and reputational exposure if SBA rules or lender processing requirements are found unmet. The $2.5 billion PPPLF funding source was scheduled to terminate September 30, 2020.
- The company reported $9.0 billion in commitments to extend credit and $162 million in standby letters of credit. It stated that ordinary-course legal matters were not expected, based on current information, to materially affect financial position or liquidity, though a given period’s net income could be affected.
- The company temporarily suspended share repurchases because of COVID-19 and macroeconomic uncertainty. It elected the regulatory option to defer CECL capital effects; the deferred CET1 impact was approximately $67 million at Q2-end. Management said stress tests indicated capital and liquidity would remain above requirements under modeled severe scenarios.
Important facts for investors to verify
- Whether borrowers whose COVID-19 payment deferrals expired in July resumed payments or required extensions, and how subsequent loan performance affected delinquencies, non-accruals and credit reserves.
- Whether the recessionary assumptions underlying the $365 million allowance remain appropriate, and how much future provision expense reflects economic changes versus CECL model revisions.
- PPP forgiveness progress, servicing compliance and the continued enforceability of SBA guarantees; also confirm liquidity plans following the scheduled PPPLF termination.
- Whether the Community Banking goodwill valuation cushion remains positive, given its less-than-5% headroom at June 30.
- The sustainability of net interest margin, fee income and deposit growth, alongside capital ratios, liquidity availability and any resumption of share repurchases or changes to dividends.