F.N.B. Corporation — Q2 2019 Form 10-Q
Business context and period. F.N.B. Corporation is a diversified financial services company focused on commercial and consumer banking, wealth management, and insurance, operating across seven states and the District of Columbia. This unaudited filing covers the three and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Figures below are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue (net interest income plus non-interest income) | $305.2 | $304.2 | Up 0.3% |
| Net interest income | $230.4 | $239.4 | Down 3.7% |
| Non-interest income | $74.8 | $64.9 | Up 15.3% |
| Provision for credit losses | $11.5 | $15.6 | Down 26.2% |
| Non-interest expense | $175.2 | $183.0 | Down 4.2% |
| Net income | $95.2 | $85.2 | Up 11.7% |
| Net income available to common shareholders | $93.2 | $83.2 | Up 12.0% |
| Diluted EPS | $0.29 | $0.26 | Up 11.5% |
- For the first six months, net income was $189.3 million versus $172.0 million, and diluted EPS was $0.57 versus $0.52. Net interest income fell 1.0%, non-interest income rose 5.9%, and non-interest expense declined 3.7%.
- Q2 fully taxable equivalent (FTE) net interest margin was 3.20%, down 31 basis points year over year; first-half FTE margin was 3.23%, down 22 basis points. The Q2 efficiency ratio was 54.47% on the company’s non-GAAP basis, compared with 55.64%.
- Q2 annualized net charge-offs were 0.16% of average loans, versus 0.34% a year earlier. The allowance for credit losses was $188.2 million, or 0.83% of loans and leases; non-performing assets were $124.8 million, 0.37% of total assets.
Financial position, funding and cash flow
- At June 30, total assets were $33.9 billion, up 2.4% from year-end; loans and leases were $22.5 billion, up 1.8%; deposits were $23.7 billion, up 1.2%. Period-end loans-to-deposits were 95.0%, compared with 94.4% in the prior-year quarter.
- Stockholders’ equity was $4.75 billion. Tangible common equity to tangible assets was 7.32%, up 53 basis points year over year; tangible book value per share was $7.11, up 14% from June 30, 2018.
- Short- and long-term borrowings totaled $5.05 billion, up $293 million from year-end. The company issued $120 million of 4.950% fixed-to-floating subordinated notes due 2029, used in part to retire higher-cost debt and support a $40 million capital infusion to its bank subsidiary.
- For the first half, operating cash flow was negative $87 million, investing cash flow was negative $397 million, and financing cash flow was positive $495 million. Cash and cash equivalents increased $11 million to $499 million.
- Management reported the company and its bank subsidiary were “well-capitalized.” At June 30, F.N.B. Corporation’s total capital ratio was 11.50%, common equity tier 1 ratio 9.06%, and leverage ratio 7.96%. Parent liquidity coverage ratio was 2.2 times and months of cash on hand was 15.0, both above internal limits.
Material changes and management commentary
- Management attributed weaker net interest income and margin primarily to the 2018 sale of Regency Finance, reduced acquired-loan cash recoveries, and higher funding costs amid rate increases and deposit competition. Q2 cash recoveries on acquired loans were $0.6 million, versus $10.2 million a year earlier.
- Average loans grew $1.3 billion, or 6.1%, year over year in Q2; average deposits grew $1.4 billion, or 6.1%. Commercial and consumer loan growth, alongside higher interest expense, shaped results.
- Non-interest income benefited from capital markets activity, up 68.6% in Q2, and mortgage banking, up 28.2%. Mortgage servicing rights recorded a $1.3 million Q2 interest-rate-related valuation adjustment; the first-half adjustment was $2.6 million.
- Reported earnings included $2.9 million of Q2 branch-consolidation costs; the prior-year quarter included $6.6 million of branch costs and a $0.9 million discretionary 401(k) contribution. Management also presents non-GAAP operating results that exclude specified items.
- Management said the credit-loss accounting standard CECL was expected to take effect January 1, 2020. Implementation was underway, but the adoption impact remained dependent on portfolio mix, credit quality, and economic forecasts; the impact on AFS and HTM securities was expected to be immaterial.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Key risks identified include economic and market conditions, interest-rate changes, deposit pricing and competition, credit quality, regulatory and capital requirements, cybersecurity and operational disruptions, and legal or regulatory proceedings. The company described itself as somewhat more asset-sensitive; modeled immediate +100 basis points would raise 12-month net interest income 3.1%, while -100 basis points would reduce it 4.8%. These are model estimates, not forecasts.
- Commitments to extend credit were $8.2 billion and standby letters of credit were $137 million. The company stated many commitments expire undrawn and that 73.5% of commitments to extend credit depended on customer financial condition.
- Routine legal and regulatory matters were described as not expected, based on current knowledge, to materially adversely affect financial position or liquidity; management noted that an outcome could materially affect net income in a particular period. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track whether loan and deposit growth can offset funding-cost pressure and the decline in FTE net interest margin.
- Review credit trends, especially acquired-loan provisions and charge-offs, commercial real estate exposures, and the $188.2 million allowance.
- Assess the composition and cost of borrowings, including the 2019 subordinated-note issuance and the increase in long-term borrowings.
- Monitor CECL implementation, management’s eventual adoption estimate, and related capital effects.
- Reconcile GAAP results with management’s non-GAAP operating measures and the treatment of branch-consolidation costs and mortgage servicing rights valuation adjustments.