F.N.B. Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily against December 31, 2018. Unless otherwise stated, amounts are in U.S. dollars. F.N.B. is a diversified banking and financial services company operating across seven states and the District of Columbia.
Financial performance
| Metric | Q1 2019 | Prior comparable period / change |
|---|---|---|
| Total revenue | $296.0 million | Up 0.8% year over year |
| Net interest income | $230.6 million | Up 2.0% year over year |
| Net interest margin, FTE (non-GAAP) | 3.26% | Down 13 basis points from 3.39% |
| Net income | $94.1 million | Up 8.5% from $86.8 million |
| Net income available to common shareholders | $92.1 million | Up 8.7% from $84.8 million |
| Diluted EPS | $0.28 | Up from $0.26 |
| Operating diluted EPS (non-GAAP) | $0.29 | Up from $0.26; excludes branch-consolidation costs |
| Non-interest income / expense | $65.4 million / $165.7 million | Down 3.1% / down 3.1% year over year |
| Net charge-offs | $7.6 million; 0.14% annualized | Down from $10.6 million and 0.20% |
Net interest income benefited from loan and securities growth and higher asset yields, but funding costs rose substantially: interest expense increased 70.3% year over year, and the average rate on interest-bearing liabilities rose to 1.44% from 0.89%. Management attributed margin pressure primarily to the sale of Regency, prior benchmark-rate increases and deposit-price competition; incremental purchase-accounting accretion partly offset the decline. The efficiency ratio (non-GAAP) improved to 53.45% from 55.78%.
Financial position, liquidity and capital
- At March 31, total assets were $33.7 billion, up 1.8% from year-end; net loans and leases were $22.4 billion, up 2.1%; deposits were $23.9 billion, up 1.8%.
- Short- and long-term borrowings totaled $4.8 billion. The quarter-end loans-to-deposits ratio was 94.7%, versus 94.4% at year-end.
- Cash and cash equivalents were $497 million. The parent-company liquidity coverage ratio was 2.0 times and months of cash on hand were 14.7, both above stated internal limits. FNBPA reported $9.6 billion of unused wholesale credit availability.
- F.N.B. Corporation’s common equity tier 1 ratio was 9.04% and total capital ratio was 11.65%; management reported both FNB and FNBPA as well-capitalized.
- Operating cash flow was $17 million, compared with $210 million in Q1 2018; investing activities used $428 million and financing activities provided $420 million. Cash increased $9 million during the quarter.
Material changes and unusual items
- Average loans grew $1.2 billion, or 5.8%, year over year, led by commercial and consumer lending. Average deposits grew $1.2 billion, or 5.6%; period-end deposits increased $428 million from year-end, including growth in time deposits.
- Non-interest income declined $2.1 million. Mortgage banking income fell 29.4%, including a $1.3 million interest-rate-related mortgage-servicing-rights valuation adjustment; capital markets income rose 15.8%.
- Reported results included $1.6 million of branch-consolidation costs, including a $1.2 million fixed-asset loss. Management reported operating diluted EPS of $0.29 excluding these costs.
- The company issued $120 million of 4.950% fixed-to-floating subordinated notes due 2029 and used proceeds in part to retire higher-rate debt. Long-term borrowings ended at $673 million, versus $627 million at year-end.
- Adoption of the lease standard recorded $116 million of right-of-use assets and $126 million of lease liabilities at adoption; the filing says the change did not materially affect earnings or cash flows. CECL was scheduled for adoption January 1, 2020; implementation and parallel testing were underway, and the eventual impact was not yet quantified.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management described the company as slightly asset-sensitive and estimated that an immediate parallel 100-basis-point rate increase would raise modeled 12-month net interest income by 2.0%, while a 100-basis-point decrease would reduce it by 3.6%. These are scenario estimates based on a static balance sheet and assumptions, not forecasts. Management stated that liquidity was sufficient for normal and contingency needs.
Key disclosed risks include credit deterioration and higher-than-expected losses; interest-rate, deposit-cost and funding pressures; regional economic conditions and competition; execution of growth, expense and technology initiatives; cybersecurity, fraud and third-party/vendor risks; regulatory and legal matters; liquidity; and the transition away from LIBOR. Management said pending legal and regulatory matters were not expected, based on current knowledge, to materially adversely affect financial position or liquidity, though an individual period’s net income could be affected. The filing reports no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further deterioration in net interest margin as funding costs rise.
- Whether credit quality remains stable: non-performing assets were $132 million, or 0.39% of assets, and the allowance was $186 million, or 0.82% of loans and leases.
- How much of reported earnings and expense improvement reflects recurring performance versus the branch consolidations, Regency divestiture, purchase-accounting accretion and debt-retirement items.
- The eventual CECL adoption effect on credit-loss allowances, retained earnings and regulatory capital; management had not yet quantified it.
- Whether liquidity and capital remain adequate as loans grow and wholesale funding, deposit competition and debt maturities evolve.