FNB CORP quarterly report, Q2 FY2021

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Business context and reporting period

F.N.B. Corporation is a diversified bank holding company operating across seven states and Washington, D.C., with 338 banking offices at June 30, 2021. This Form 10-Q covers the quarter and six months ended June 30, 2021; comparisons below are year over year unless stated otherwise. Amounts are in U.S. dollars.

Financial performance and position

  • Second-quarter earnings: Net income was $101.4 million; net income available to common shareholders was $99.4 million, or $0.31 per diluted share, versus $81.6 million and $0.25 a year earlier. Operating diluted EPS, a non-GAAP measure, was $0.31 versus $0.26.
  • Revenue and margins: Total revenue was $307.6 million, up 0.7%. GAAP net interest income was $227.9 million, essentially unchanged. Tax-equivalent net interest margin was 2.70%, down 18 basis points; lower asset yields and higher cash balances were partly offset by lower funding costs. Non-interest income rose 2.8% to $79.8 million.
  • Credit costs and expenses: The provision for credit losses was a net benefit of $1.1 million, versus $30.2 million of expense in Q2 2020. Net charge-offs were $3.8 million, or 0.06% of average loans, versus $8.5 million, or 0.13%. Non-interest expense rose 3.7% to $182.5 million; the non-GAAP efficiency ratio was 56.8% versus 53.7%.
  • Six-month results: Net income available to common shareholders increased 50.1% to $190.6 million, or $0.59 diluted EPS. Revenue was $613.4 million, comprising $450.8 million net interest income and $162.6 million non-interest income. Provision expense fell to $4.8 million from $78.0 million. Operating cash flow was $300 million; investing cash flow was $384 million and financing cash flow was $877 million. Cash and cash equivalents increased $1.56 billion to $2.94 billion.
  • Balance sheet and liquidity: Total assets were $38.4 billion, up 2.8% from year-end 2020. Loans and leases were $25.1 billion, down 1.4%; deposits were $30.5 billion, up 4.6%. The loan-to-deposit ratio was 82.4%. Total borrowings were $2.54 billion, down from $2.90 billion at year-end. Parent-company liquidity coverage was 2.6x and months of cash on hand were 18.5, both above stated internal minimums. FNBPA reported $15.5 billion in unused wholesale credit availability.
  • Capital and credit quality: The CET1 ratio was 9.9%, versus 9.4% in Q2 2020 and 9.8% at year-end. The loan-and-lease allowance was $356.5 million, or 1.42% of loans; excluding government-guaranteed PPP loans, coverage was 1.51%. Non-performing loans were $128 million, or 0.51% of loans, down from $170 million and 0.67% at year-end. Tangible book value per share, non-GAAP, was $8.20, up 7% year over year.

Material changes versus prior periods

  • Second-quarter earnings benefited substantially from the swing in credit provision from a large prior-year expense to a modest net benefit. Lower interest rates reduced asset yields and six-month net interest income, despite growth in average earning assets and lower funding costs.
  • Deposit growth, including PPP-related and government-stimulus inflows, increased cash and improved the funding mix; non-interest-bearing deposits were 33% of deposits. Commercial and industrial loans declined from year-end partly because PPP balances fell as forgiveness was processed; consumer lending was also affected by the prior sale of indirect auto loans.
  • Fee income was mixed: trust, service-charge and securities commissions increased, while Q2 mortgage banking and capital-markets income declined year over year. Mortgage banking income was higher for the six-month period, including a favorable mortgage-servicing-rights valuation adjustment.
  • Non-GAAP operating measures exclude identified items. Q2 2021 included $2.6 million of branch-consolidation costs; Q2 2020 included $2.0 million of COVID-19 expenses. The first half of 2020 also included $8.3 million of branch-consolidation costs, $4.0 million of COVID-19 expenses and a $4.1 million tax-credit-related impairment.

Outlook, management commentary, 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. Management cited stronger economic conditions, improving credit trends, customer activity and continued focus on expense discipline.
  • On July 12, 2021, after quarter-end, FNB agreed to acquire Howard Bancorp for approximately $418 million in stock, issuing approximately 33.8 million FNB shares. Closing was expected in early 2022, subject to shareholder and regulatory approvals and other conditions. Integration, execution, credit-mark adequacy, possible dilution and failure or delay to close are identified risks.
  • COVID-19 remains a source of economic and credit uncertainty. At quarter-end, $170 million of loans had COVID-related short-term modifications excluded from TDR totals. The ACL depends on forecasts and management estimates, which may change as conditions evolve.
  • Interest-rate risk is material: management’s static model estimated a 15.4% increase in 12-month net interest income under an immediate +200-basis-point shock, while a -100-basis-point shock indicated a 2.3% decline. Results depend on assumptions and do not reflect possible management actions. The filing describes LIBOR transition work; it reports approximately 40% of the loan portfolio with a variable LIBOR index and separately notes 37% indexed to one-month LIBOR.
  • Legal proceedings and regulatory matters arise in the ordinary course. Management does not expect them, after reserves and insurance, to materially affect financial position or liquidity, but acknowledges uncertainty and possible material effects on income in a given period. Disclosure controls were assessed as effective; no materially affecting internal-control changes were reported.

Most important facts for investors to verify

  1. How much of the earnings improvement reflects lower credit provisioning versus sustainable operating performance, and how the allowance responds if economic forecasts worsen.
  2. Whether loan growth, deposit balances and net interest margin remain resilient as PPP forgiveness and stimulus-related balances run off and rates change.
  3. The Howard acquisition’s final terms, approval status, integration costs, expected synergies, credit marks and effect on per-share earnings and capital.
  4. The LIBOR exposure and transition disclosures, including the distinction between the approximately 40% variable-LIBOR measure and the 37% one-month-LIBOR measure.
  5. Non-GAAP reconciliations and unusual items, including the treatment of branch costs and the prior-year tax-credit-related impairment, when comparing reported and operating results.