F.N.B. Corporation — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Unless otherwise noted, financial amounts below are in U.S. dollars.
Business context and reporting period
FNB is a diversified financial services holding company headquartered in Pittsburgh, Pennsylvania, operating community banking, wealth management, insurance and consumer finance businesses. Its footprint spans eight states. At year-end, it had 417 community banking offices and 77 consumer finance offices.
FNB completed its acquisition of Yadkin Financial Corporation on March 11, 2017, expanding into North Carolina and South Carolina. Yadkin contributed approximately $6.8 billion of assets, including $5.1 billion of loans and $5.2 billion of deposits, at acquisition. FNB issued approximately 111.6 million common shares in the transaction and completed core systems conversion during 2017.
Financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $31.4 billion | $21.8 billion |
| Loans and leases, year-end | $21.0 billion | $14.9 billion |
| Deposits, year-end | $22.4 billion | $16.1 billion |
| Net interest income | $846.4 million | $611.5 million |
| Non-interest income | $252.4 million | $201.8 million |
| Net income | $199.2 million | $170.9 million |
| Net income available to common stockholders | $191.2 million | $162.9 million |
| Diluted EPS | $0.63 | $0.78 |
- Revenue and margins: Net interest income plus non-interest income was approximately $1.10 billion. Net interest income rose 38.4%; non-interest income rose 25.1%. Net interest margin on a fully taxable equivalent basis was 3.43%, up from 3.38%.
- Expenses and profitability: Non-interest expense was $681.5 million, including $56.5 million in merger-related costs. The adjusted efficiency ratio was 54.2%, compared with 55.4%. Return on average assets was 0.68%, versus 0.83%; return on average equity was 4.89%, versus 6.84%.
- Cash flow: Operating cash flow was $278.9 million; investing cash flow was negative $1.53 billion; financing cash flow was positive $1.36 billion. Cash and cash equivalents increased $108.0 million to $479.4 million. These cash-flow figures reflect banking and acquisition activity and should not be read as conventional free cash flow.
- Credit quality: Provision for credit losses was $61.1 million, up from $55.8 million. Net charge-offs were $43.8 million, or 0.22% of average loans, versus $39.7 million, or 0.28%. Non-performing assets increased to $138.7 million from $118.4 million, while non-performing assets as a percentage of total assets improved to 0.44% from 0.54%. The allowance for credit losses was $175.4 million, equal to 0.84% of loans and 178.75% of non-performing loans.
- Debt and liquidity: Deposits were $22.4 billion; short- and long-term borrowings totaled approximately $4.35 billion. The loan-to-deposit ratio was 93.7%, compared with 92.7%. Parent-company liquidity coverage was 1.8 times, above its internal minimum of 1.0 times; months of cash on hand was 10.2, below the 12-month internal limit. Management said it was evaluating alternatives and expected to remedy the policy exception in the first half of 2018. FNBPA reported $8.19 billion of unused wholesale credit availability.
- Capital: FNB reported CET1, Tier 1 and total capital ratios of 8.9%, 9.3% and 11.4%, respectively; its leverage ratio was 7.6%. FNB and FNBPA were categorized as well-capitalized under prompt corrective action rules.
- Shareholder returns: Common dividends remained $0.48 per share for the year. The dividend payout ratio rose to 74.61% from 62.43%.
Material changes versus the prior comparable period
- Total assets grew 43.8%, loans and leases 41.0%, and deposits 39.4%, reflecting Yadkin and organic growth. Average loans rose 36.8% and average deposits 32.9%.
- Net income increased 16.6%, but diluted EPS declined 19.2% to $0.63. Average diluted shares outstanding increased 46.2% to 303.9 million, primarily due to shares issued for Yadkin.
- FNB reported non-GAAP operating net income available to common stockholders of $281.2 million and operating diluted EPS of $0.93, compared with $187.7 million and $0.90. These adjusted measures exclude specified merger and tax-reform items; they are not GAAP results.
- Interest expense nearly doubled to $133.9 million, reflecting balance-sheet growth, higher funding costs and a shift in funding mix. The average rate paid on interest-bearing liabilities rose to 0.68% from 0.48%.
- Non-interest expense rose 33.3%, including higher staffing, technology, FDIC insurance and acquisition-related costs. The FDIC insurance expense increase also reflected a larger assessment base and the surcharge applicable to institutions above $10 billion in assets.
- Commercial construction loans increased to $1.17 billion from $597.6 million, primarily due to Yadkin. No industry concentration exceeded 10% of total loans, according to the filing.
Outlook, commentary, risks and unusual items
- Tax reform: The December 2017 Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21% beginning in 2018. FNB recorded a provisional $54.0 million fourth-quarter tax expense to remeasure net deferred tax assets, contributing to a 44.1% effective tax rate for 2017. Management expected the lower future tax rate to benefit earnings and capital, partly offset by limits on certain deductions; some tax accounting remained provisional.
- Acquisition execution: Management described continued organic growth and investment in technology and customer experience. Yadkin integration, anticipated revenue synergies and cost savings remain execution risks; the filing cautions that the acquisition may not be accretive as expected.
- Interest-rate sensitivity: FNB described its position as modestly asset-sensitive. Its model estimated a 3.0% increase in 12-month net interest income under an immediate +300 basis-point shock and a 3.9% decline under a -100 basis-point shock. These are model scenarios, not forecasts, and depend on assumptions about deposits, prepayments and future balance-sheet actions.
- Credit and market risks: Key exposures include borrower repayment ability, commercial real estate and construction lending, regional economic conditions, interest-rate changes, and the valuation and performance of acquired loans. Acquired loans at least 90 days past due and still accruing were $90.0 million; the company considers these performing based on expected cash flows and acquisition-date fair-value accounting.
- Other risks and contingencies: The filing highlights regulatory and compliance costs, cybersecurity and third-party service-provider risks, competition, deposit funding and liquidity, and weather exposure in coastal North Carolina and South Carolina. FNB is involved in ordinary-course legal proceedings; management did not expect the matters, after reserves and insurance, to materially affect financial position or liquidity, though an individual period’s net income could be affected.
- Unusual quarterly pattern: Fourth-quarter 2017 net income available to common stockholders was $22.1 million, compared with $49.3 million in fourth-quarter 2016. The filing reports the annual $54.0 million tax-remeasurement charge and annual merger expenses, but the provided quarterly summary does not clearly allocate those items by quarter.
- Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Yadkin integration delivers the anticipated cost savings, revenue benefits and 2018 EPS accretion, and how recurring expenses compare after merger costs subside.
- How much reported growth is organic versus acquired, and whether the enlarged share count supports durable per-share earnings growth.
- Whether the parent-company months-of-cash measure returned to its 12-month internal limit, and how deposit growth, wholesale funding and borrowing costs evolve.
- Trends in commercial construction and other acquired-loan credit quality, including the $90.0 million of acquired loans at least 90 days past due but still accruing.
- Final tax-reform accounting and the effect of the 21% federal tax rate, FDIC premium deductibility and other tax-law provisions on future effective tax rates.
- Future CECL adoption effects: the filing said the impact was still being assessed and would depend on portfolio composition, credit quality and economic conditions.