F.N.B. Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. FNB is a diversified financial services company operating in six states, with commercial and consumer banking, wealth management and insurance businesses. It had 397 banking offices at quarter-end.
Financial results and position
| Metric | Q3 2018 | Comparable period / change |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $309.6 million | Up 6.3% year over year |
| Net income available to common shareholders | $98.8 million; diluted EPS $0.30 | $75.7 million; diluted EPS $0.23 |
| Net interest income | $234.8 million | Up 4.2% year over year |
| Non-interest income | $74.8 million | Up 13.1%; includes $5.1 million Regency sale gain |
| Provision for credit losses | $16.0 million | Down 4.7% year over year |
| Net interest margin, FTE (non-GAAP) | 3.36% | 3.44% a year earlier |
| Efficiency ratio (non-GAAP) | 53.7% | 53.1% a year earlier |
- For the first nine months, net income was $272.7 million versus $175.1 million; diluted EPS was $0.82 versus $0.57. Net interest income rose 13.6% to $700.2 million, and non-interest income rose 10.6% to $207.2 million.
- Q3 operating net income available to common shareholders, a non-GAAP measure excluding the Regency gain, was $94.7 million, or $0.29 per diluted share, versus $76.6 million, or $0.24, in Q3 2017.
- At September 30, total assets were $32.6 billion, up 3.8% from year-end 2017. Net loans and leases were $21.7 billion, up 4.0%; deposits were $23.5 billion, up 4.9%. The loans-to-deposits ratio was 92.9%.
- Borrowings totaled $4.31 billion, comprising $3.68 billion short-term and $627 million long-term. Stockholders’ equity was $4.52 billion. FNB and its bank subsidiary were categorized as well-capitalized; common equity tier 1 ratios were 9.1% and 9.8%, respectively.
- Cash and cash equivalents were $437.9 million, down $41.6 million from year-end. Nine-month cash flows were $516.8 million from operating activities, negative $1.51 billion from investing activities, and positive $950.9 million from financing activities.
- Credit quality remained broadly stable: non-performing loans were 0.47% of loans, unchanged from year-end; non-performing assets were 0.42% of assets versus 0.44%. The allowance for credit losses was $177.9 million, or 0.81% of loans and leases, versus 0.84% at year-end.
Material changes and unusual items
- FNB sold Regency Finance Company on August 31, 2018, for $142 million in cash, recognizing a $5.1 million gain. The sale removed $131.9 million of direct installment loans and ended the consumer finance segment’s operations under FNB. The company said the transaction was intended to improve the consumer portfolio’s credit profile, add liquidity and exit a non-core business. A $7.1 million mark-to-fair-value charge-off on Regency loans was included in Q3 net charge-offs, with no related provision expense.
- Q3 net charge-offs were $14.7 million, or 0.27% annualized of average loans, compared with $12.5 million, or 0.24%, a year earlier. The Regency mark accounted for 13 basis points of the Q3 ratio. Nine-month charge-offs also reflected sales of non-performing loans.
- Net interest margin declined year over year in Q3. Management attributed pressure to the lower fully taxable equivalent adjustment following tax reform and the reduced margin contribution from Regency. Interest expense rose 64.6% in Q3 as deposit and borrowing costs increased.
- Nine-month 2018 results included the Regency gain, branch-consolidation items and a discretionary $0.9 million 401(k) contribution. The first nine months of 2017 included $55.5 million of merger-related expense and $2.6 million of merger-related securities gains, affecting comparisons. The lower 2018 effective tax rate also reflects the federal statutory rate reduction to 21% and tax-exempt income and credits.
- Available-for-sale securities had $103.9 million of gross unrealized losses at quarter-end, versus $39.8 million at year-end; management attributed temporary securities losses generally to higher interest rates and reported no securities OTTI losses for the nine-month period.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management described the balance sheet as modestly asset-sensitive: its model estimates a 1.3% increase in 12-month net interest income under an immediate 100-basis-point rate increase and a 3.2% decline under a 100-basis-point decrease. Results depend on assumptions and do not include all possible management actions.
- Liquidity measures improved following the Regency sale: parent-company liquidity coverage ratio was 2.3 times and months of cash on hand were 16.5, both above stated internal limits. FNBPA reported $9.87 billion in unused wholesale credit availability and $2.28 billion in salable unpledged government and agency securities. Management said liquidity was sufficient for normal and contingency needs.
- Key stated risks include credit quality, changing interest rates and market conditions, deposit competition and funding costs, execution of strategic initiatives and acquisitions or divestitures, technology and cybersecurity incidents, third-party service disruptions, regulatory changes, and litigation. Management said pending legal matters were not expected to materially affect consolidated financial position or liquidity, while acknowledging possible effects on net income in a period.
- FNB expects to adopt CECL in 2020 and said implementation could materially affect credit-loss accounting and regulatory capital; the effect will depend on portfolio, credit quality and economic forecasts at adoption. Lease accounting changes were also being assessed.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring earnings and fee growth from the Regency gain, branch-consolidation items, tax effects and other non-GAAP adjustments.
- Track deposit pricing, time-deposit growth, funding mix and whether rising funding costs continue to outpace asset-yield gains.
- Assess loan growth and credit trends by portfolio, including commercial loan migration, charge-offs, acquired loans and allowance adequacy.
- Confirm the liquidity and capital position after the Regency sale and monitor reliance on wholesale funding and short-term borrowings.
- Review interest-rate sensitivity assumptions and the potential effects of CECL implementation on reserves and regulatory capital.