F.N.B. Corporation — Second Quarter 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. F.N.B. is a diversified financial services company operating across eight states, with 404 banking offices and a consumer-finance subsidiary, Regency. Unless stated otherwise, figures are in U.S. dollars.
Financial performance and condition
- Second-quarter earnings: Net income was $85.2 million and net income available to common shareholders was $83.2 million, or $0.26 per diluted share, versus $74.4 million and $72.4 million, or $0.22 per share, in Q2 2017. Management’s non-GAAP operating net income was $89.1 million, or $0.27 per diluted share, compared with $73.3 million, or $0.23.
- Revenue and margin: Total revenue was approximately $304.2 million, up 6.9% year over year. Net interest income rose 9.6% to $239.4 million; non-interest income declined 1.8% to $64.9 million. Net interest margin (FTE, non-GAAP) increased to 3.51% from 3.42%. The efficiency ratio (FTE, non-GAAP) worsened to 55.64% from 54.26%.
- Six-month results: Net income was $172.0 million and common net income was $167.9 million, or $0.52 per diluted share, compared with $97.4 million and $93.4 million, or $0.33, in 2017. Net interest income increased 19.0% to $465.5 million; non-interest income increased 9.2% to $132.4 million. The comparison includes substantial 2017 merger costs and the effects of the Yadkin acquisition.
- Credit costs and asset quality: Q2 provision for credit losses was $15.6 million, down 7.2% year over year, while net charge-offs rose 54.0% to $18.2 million; the annualized charge-off ratio increased to 0.34% from 0.23%, primarily due to sales of underperforming/non-performing commercial loans. Six-month provision was $30.0 million and net charge-offs were $28.9 million. Non-performing assets were $132.8 million, or 0.41% of assets, at June 30; non-performing loans were 0.43% of loans. The allowance was $176.6 million, or 0.82% of loans and leases.
- Balance sheet, funding and capital: Total assets were $32.3 billion, up 2.7% from year-end 2017. Net loans and leases were $21.5 billion, up 3.2%; deposits were $22.5 billion, up 0.6%. Short- and long-term borrowings totaled $5.0 billion, up 14.2%; short-term borrowings increased $655.8 million. The period-end loan-to-deposit ratio was 96.1%, versus 93.7% at year-end. Stockholders’ equity was $4.47 billion; FNB’s CET1 ratio was 9.0% and it reported that FNB and its bank subsidiary remained “well-capitalized.”
- Cash flow and liquidity: For the first six months, operating cash flow was $349.3 million, investing cash outflow was $1.08 billion and financing cash inflow was $684.3 million; cash and equivalents declined $45.7 million to $433.7 million. The parent-company liquidity coverage ratio was 1.8x, while months of cash on hand was 9.9 months, below the company’s 12-month internal limit. Management expected the planned Regency sale to help address this exception. FNBPA reported $7.56 billion of unused wholesale credit availability.
Material changes and unusual items
- Second-quarter 2018 results included $6.6 million of branch-consolidation costs and a $0.9 million discretionary 401(k) contribution following tax reform. Branch-related items included $3.7 million in fixed-asset losses recorded against non-interest income and approximately $2.9 million in non-interest expense. These adjustments underpin management’s non-GAAP operating results.
- First-half 2017 included $54.1 million of merger-related expense and $2.6 million of merger-related securities gains; neither was recorded in the first half of 2018. Year-over-year growth also reflects the March 2017 Yadkin acquisition and the larger share count resulting from that transaction.
- The federal statutory corporate tax rate fell to 21% in 2018 from 35% in 2017. The six-month effective tax rate was 19.5%, versus 27.0%.
- Accumulated other comprehensive loss widened to $115.9 million from $83.1 million at year-end, with the decline primarily reflecting unrealized losses on available-for-sale securities.
Outlook, commentary and risks
- Management cited loan and deposit growth, a higher-rate environment and purchase-accounting accretion as contributors to net interest income and margin. It described the company as positioned to build on operating trends, but the filing provides no specific numerical earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- FNB announced a definitive agreement to sell 100% of Regency to Mariner Finance. Closing was expected in the second half of 2018, subject to regulatory approvals and customary conditions. Management cited strategic repositioning, an improved consumer-loan risk profile and additional liquidity as expected benefits.
- Key disclosed risks include credit quality and loan growth, rising funding costs and interest-rate sensitivity, deposit competition and liquidity, execution of the Regency sale, technology and cybersecurity, third-party service-provider disruptions, regulatory and legal matters, and the ability to realize benefits from acquisitions and divestitures. Management said modeled results depend on assumptions and may differ from actual experience.
- Commitments to extend credit totaled $7.22 billion and standby letters of credit $137.1 million. Management stated that ordinary-course legal and regulatory matters were not expected to materially affect financial position or liquidity, while acknowledging that they could affect net income in a given period.
Important facts for investors to verify
- Whether loan growth, purchase-accounting accretion and asset yields can continue to offset higher deposit and borrowing costs.
- What drove elevated charge-offs and whether the improvement in delinquency and non-performing asset measures persists.
- Regency sale timing, proceeds and realized liquidity benefits, and whether parent-company cash-on-hand returns to its internal limit.
- How branch consolidation, employee and technology costs affect future operating leverage and efficiency.
- The sensitivity of securities values, net interest income and economic value of equity to rate changes, and the effect of CECL adoption, which was scheduled for January 1, 2020 and could materially affect credit-loss accounting and regulatory capital.