F.N.B. Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 26, 2019. The filing also reports fourth-quarter results. FNB is a Pittsburgh-based financial services holding company operating in seven states and the District of Columbia, with Community Banking, Wealth Management and Insurance segments and 396 banking offices.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $932.5 million | $846.4 million |
| Provision for credit losses | $61.2 million | $61.1 million |
| Non-interest income | $275.7 million | $252.4 million |
| Non-interest expense | $694.5 million | $681.5 million |
| Net income | $372.9 million | $199.2 million |
| Net income available to common shareholders | $364.8 million | $191.2 million |
| Diluted earnings per share | $1.12 | $0.63 |
| Cash dividends per common share | $0.48 | $0.48 |
- Management reported record revenue of approximately $1.2 billion, up 9.9%. Net interest income increased 10.2%; non-interest income increased 9.2%.
- Net interest margin (FTE, non-GAAP) was 3.39%, down 4 basis points. Average earning-asset yield rose 27 basis points to 4.23%, while the rate paid on interest-bearing liabilities increased 42 basis points to 1.10%.
- Return on average assets was 1.16% (0.68% in 2017); return on average equity was 8.30% (4.89%). The non-GAAP efficiency ratio increased to 54.82% from 54.25%.
- Cash flow from operations was $611 million; investing activities used $1.920 billion and financing activities provided $1.318 billion. Cash and cash equivalents ended the year at $488 million, up $9 million.
- At year-end, total assets were $33.1 billion, net loans and leases $22.0 billion, deposits $23.5 billion, borrowings $4.8 billion, and stockholders’ equity $4.6 billion. The loans-to-deposits ratio was 94.4%.
- Capital ratios for FNB were CET1 9.19%, Tier 1 9.62%, total capital 11.54%, and leverage 7.87%. FNB and its bank subsidiary were categorized as well-capitalized.
- Asset quality: net charge-offs were 0.26% of average loans versus 0.22%; allowance for credit losses was $180 million, or 0.81% of loans, versus 0.84%. Non-performing assets were $135 million, 0.41% of assets, compared with $139 million and 0.44%.
Changes, significant transactions and unusual items
- Net income available to common shareholders increased 90.8%, with the comparison affected by 2017 merger costs and the $54.0 million deferred-tax-asset remeasurement following the Tax Cuts and Jobs Act (TCJA). The 2018 effective tax rate was 17.6%, versus 44.1% in 2017; the federal statutory rate fell to 21% in 2018.
- FNB sold Regency Finance on August 31, 2018 for $142 million cash, recognizing a $5.1 million gain. The sale reduced direct installment loans by $131.9 million, included a $7.1 million pre-sale fair-value net charge-off with no provision impact, and involved a $1.8 million goodwill write-off. Management cited liquidity, credit-profile improvement and strategic focus as objectives.
- Total assets rose 5.4%; year-end loans and leases rose 5.5%, while deposits rose 4.7%. Average loans increased 10.6% and average deposits 11.6%, partly reflecting the expanded southeastern footprint following the 2017 Yadkin acquisition.
- Reported non-interest expense rose 1.9%, but excluding specified significant items it rose 10.5%, principally reflecting expanded operations in North and South Carolina, staffing, technology and infrastructure investment. 2017 included $56.5 million of merger-related expense.
- In 2018, FNB recorded $6.6 million of branch-consolidation costs and a $0.9 million discretionary 401(k) contribution; reported non-interest income also included the Regency gain and a $3.7 million fixed-asset loss related to branch consolidations.
- Fourth-quarter 2018 net income was $100 million and diluted EPS was $0.30, compared with $24 million and $0.07 in fourth-quarter 2017.
Liquidity, outlook and risks
- Parent-company cash was $254.4 million at year-end, up from $165.7 million, with the Regency sale a principal driver. Parent liquidity coverage ratio was 2.1 times and months of cash on hand 14.4, above internal limits of greater than 1 times and greater than 12 months.
- FNBPA reported $9.659 billion of unused wholesale credit availability and $2.424 billion of salable unpledged government and agency securities. Management stated that liquidity was adequate for normal operations and contingency needs.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management described continued focus on organic growth, deposit gathering, expense management, and investment in technology, infrastructure and employees. It characterized the interest-rate position as modestly asset-sensitive: an immediate +100 basis-point shock was modeled to increase 12-month net interest income 1.4%; results are model-based and depend on assumptions.
- Key risks include credit losses and regional economic weakness; deposit competition and funding costs; interest-rate and market sensitivity; acquisition integration and growth execution; cybersecurity, vendor and operational failures; regulatory and compliance costs; and changes in tax, accounting and banking rules.
- FNB has significant LIBOR-linked loans, deposits, derivatives and other contracts and was assessing the transition to alternative reference rates. CECL was scheduled for adoption January 1, 2020; management was implementing models and expected a one-time allowance adjustment, transition and ongoing costs, and possible capital effects, but the amount was not clear in the filing text.
- Legal proceedings arise in the ordinary course. Management said current accruals were not material to consolidated financial position, but outcomes are uncertain and could materially affect net income in a particular period.
- Auditors issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Reconcile the filing’s non-GAAP operating net income figures: the financial summary text gives $374.7 million for 2018 and $289.2 million for 2017, while the detailed reconciliation reports $366.7 million and $281.2 million. The filing reports operating diluted EPS of $1.13 and $0.93, respectively.
- Assess how much of the year-over-year earnings improvement reflects recurring performance versus the 2017 TCJA deferred-tax charge, merger costs, 2018 sale gain and other adjustments.
- Review trends in loan growth, net charge-offs and criticized commercial credits, including acquired-loan cash-flow assumptions and the allowance’s adequacy ahead of CECL adoption.
- Monitor deposit mix and pricing, rising funding costs, short-term borrowings, and the 94.4% loans-to-deposits ratio; assess whether reported liquidity sources remain available under stress.
- Evaluate the sustainability of margin and earnings under rate changes, purchase-accounting accretion, and the LIBOR transition; compare modeled sensitivities with actual outcomes.
- Review the stated legal contingencies and the filing’s inconsistent non-GAAP operating-income disclosures against the detailed financial statements and reconciliations.