F.N.B. Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
F.N.B. Corporation is a diversified financial services company operating across eight states, with banking, wealth management, insurance and consumer finance businesses. This unaudited filing covers the three months ended March 31, 2018; comparisons are generally with Q1 2017 for results and December 31, 2017 for balance-sheet measures. The 2017 Yadkin acquisition materially affects year-over-year comparisons.
Financial performance and condition
- Revenue and earnings: Revenue (net interest income plus non-interest income) was $293.6 million, up from $227.9 million. Net income was $86.8 million and net income available to common stockholders was $84.8 million, or $0.26 per diluted share, versus $23.0 million and $21.0 million, or $0.09 per share, respectively.
- Interest income and margins: Net interest income was $226.1 million, up 30.9%. Net interest margin on a fully taxable-equivalent basis was 3.39%, versus 3.35%. Higher average earning assets, acquisition-related purchase-accounting accretion and a higher-rate environment contributed; funding costs also increased.
- Fees and expenses: Non-interest income rose 22.5% to $67.5 million. Non-interest expense was $171.1 million versus $187.6 million; however, Q1 2017 included $52.7 million of merger-related costs, while Q1 2018 had none. The non-GAAP efficiency ratio improved to 55.8% from 57.2%.
- Credit costs and asset quality: Provision for credit losses was $14.5 million, up from $10.9 million; net charge-offs were $10.6 million, with the annualized ratio unchanged at 0.20%. Non-performing assets were $143.1 million, or 0.45% of assets, versus $138.7 million at year-end. Non-performing loans were $102.1 million; allowance coverage was 175% of non-performing loans.
- Balance sheet and funding: Total assets were $31.65 billion, loans and leases net of allowance were $21.08 billion, and deposits were $22.50 billion at March 31. Loans-to-deposits were 94.5%. Short- and long-term borrowings totaled $4.46 billion. Total stockholders’ equity was $4.43 billion.
- Cash flow: Operating activities provided $210.4 million; investing activities used $481.4 million and financing activities provided $177.8 million. Cash and cash equivalents declined $93.1 million during the quarter to $386.3 million.
- Capital and liquidity: FNB and its bank subsidiary were categorized as well-capitalized. FNB’s total capital ratio was 11.5%, common equity tier 1 was 8.9%, and leverage ratio was 7.6%. The bank reported $8.23 billion of unused wholesale credit availability. Parent-company months of cash on hand were 10.1 months, below its internal limit of more than 12 months; management said it expected to cure the policy exception in 2018.
Material changes versus comparable periods
- Reported earnings increased sharply, but comparison is distorted by the $52.7 million merger charge in Q1 2017. On a non-GAAP operating basis, common earnings were $84.8 million versus $54.4 million, and diluted operating EPS was $0.26 versus $0.23.
- Net interest income and fee income grew, supported in part by the expanded business following the March 2017 Yadkin acquisition. Average diluted shares increased 36.2% year over year, primarily because of shares issued for that acquisition.
- Quarter-end total assets rose 0.7% and deposits 0.4% from year-end; the company also reported year-over-year organic loan growth of 5.4% and deposit growth of 5.5%.
- Accumulated other comprehensive loss widened to $108.7 million from $83.1 million at year-end, primarily reflecting unrealized losses on available-for-sale securities. The allowance for credit losses increased 2.2% to $179.2 million.
Outlook, commentary, risks and unusual items
- Management said it was positioned to build on loan and fee-business growth, with a focus on earnings-per-share growth and improved profitability. The filing provides no quantified full-year earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- The 2018 federal statutory tax rate fell to 21% under the Tax Cuts and Jobs Act; the quarter’s effective tax rate was 19.7%, versus 22.0% in Q1 2017. Management noted tax benefits from tax-exempt income, tax credits and bank-owned life insurance.
- Management described its interest-rate position as modestly asset-sensitive: a parallel +100 basis-point shock was modeled to increase 12-month net interest income by 1.4%, while a -100 basis-point shock was modeled to reduce it by 3.4%. These are model estimates and assume a static balance sheet.
- Key disclosed risks include credit quality, interest rates and capital markets, liquidity, competition, acquisition integration and realization of expected benefits, technology and cybersecurity, third-party systems, regulatory changes and tax or accounting changes. Management stated that ordinary-course legal matters were not expected to have a material adverse effect on financial position or liquidity, though they could affect income in a period.
- Other notable items: there were no Q1 2018 merger-related expenses or securities gains; Q1 2017 included merger expenses and gains on acquired securities. FNB adopted several accounting standards in Q1 without material reported effects; adoption of the expected-credit-loss standard (CECL) in 2020 could materially change credit-loss accounting.
Most important facts for investors to verify
- Whether loan and fee growth can continue and support earnings after separating organic growth from Yadkin acquisition effects and purchase-accounting accretion.
- Whether rising deposit and wholesale funding costs pressure net interest margin, and how actual rate sensitivity compares with the company’s models.
- Whether non-performing loans, criticized commercial credits, charge-offs and the allowance develop as expected.
- How management plans to restore parent-company cash-on-hand months to its internal policy limit, and whether liquidity and deposit trends remain adequate.
- How reported earnings compare with non-GAAP operating results, including the impact of prior-year merger costs, tax reform and the expanded share count.