F.N.B. Corporation — FY 2020 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2020; it is not a quarterly filing. Pittsburgh-based FNB is a diversified regional financial services company with Community Banking, Wealth Management and Insurance segments, operating 358 banking offices. At year-end, it reported $37.4 billion in assets, $25.5 billion in loans and leases, and $29.1 billion in deposits.
Financial performance and condition
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net interest income | $922.1 million | $917.2 million |
| Provision for credit losses | $122.8 million | $44.6 million |
| Non-interest income | $294.6 million | $294.3 million |
| Non-interest expense | $750.3 million | $696.1 million |
| Net income available to common stockholders | $278.0 million; diluted EPS $0.85 | $379.2 million; diluted EPS $1.16 |
| Operating net income available to common stockholders (non-GAAP) | $314.0 million; operating diluted EPS $0.96 | $386.1 million; operating diluted EPS $1.18 |
| Net interest margin (FTE, non-GAAP) | 2.91% | 3.17% |
| Efficiency ratio (non-GAAP) | 56.1% | 54.5% |
| Net charge-offs / average loans | $59.8 million; 0.24% | $28.3 million; 0.12% |
Total revenue reached a reported record of approximately $1.2 billion. Return on average assets was 0.78% versus 1.14%; return on average tangible common equity (non-GAAP) was 11.66% versus 16.84%. The effective tax rate was 16.7%, compared with 17.7%.
Balance sheet and funding. Assets grew 7.9% year over year, while loans and leases rose 9.3% to $25.5 billion. Deposits increased 17.5% to $29.1 billion, including $2.7 billion of additional non-interest-bearing deposits. The year-end loan-to-deposit ratio was 87.4%, down from 94.0%. Cash and cash equivalents were $1.38 billion, up from $599 million. Total borrowings fell to $2.90 billion from $4.56 billion; this included $1.80 billion of short-term and $1.10 billion of long-term borrowings. FNB issued $300 million of 2.20% senior notes due 2023 and repaid higher-rate Federal Home Loan Bank borrowings.
Liquidity, capital and cash flow. Management reported parent-company liquidity coverage of 2.7 times and 22.2 months of cash on hand, both above internal limits. Unused wholesale credit availability was $16.4 billion. Regulatory capital ratios included CET1 of 9.84% at FNB and 10.42% at FNBPA; both were classified as well-capitalized. Operating cash flow was $113 million, investing cash flow was negative $1.82 billion, and financing cash flow was positive $2.49 billion. Cash and cash equivalents increased $784 million during the year.
Material changes versus 2019
- Common net income declined 26.7%, primarily reflecting a substantially higher credit-loss provision, lower net interest margin and higher expenses; lower interest expense partly offset reduced interest income.
- The provision for credit losses increased to $122.8 million, reflecting COVID-19-related economic assumptions and adoption of CECL. Year-end allowance for credit losses was $363 million, or 1.43% of loans and leases; excluding government-guaranteed PPP loans, the ratio was 1.56%.
- FNB originated $2.6 billion of PPP loans; approximately $2.2 billion remained outstanding at year-end. Average deposits increased 13.6%, supported by customer balances, PPP and government stimulus inflows.
- Non-performing loans increased to $170 million, or 0.67% of loans, from $103 million, or 0.44%. Management cited COVID-sensitive commercial exposures, particularly hotels and lodging, as contributing factors. Year-end loan deferrals had fallen to $397 million, or 1.7% of loans excluding PPP, from $2.4 billion in June.
- Non-interest income was nearly flat overall: lower service charges were offset by stronger mortgage banking, capital markets, trust and insurance income. Mortgage banking income rose 56.7%.
- Reported non-interest expense rose 7.8%; operating expense excluding identified significant items increased 3.9%. Net interest margin (FTE) contracted 26 basis points as benchmark rates fell.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or financial guidance. Management said results were affected by the pandemic and near-zero interest rates, while highlighting record revenue, deposit growth and a strong capital position. Its outlook remains subject to uncertainty around economic recovery, borrower performance, interest rates and future pandemic developments.
- Significant 2020 items: $25.6 million loss on early debt extinguishment and related hedge termination; $18.7 million of branch consolidation costs; $11.3 million of COVID-19 expenses; and $3.8 million of service-charge refunds, partly offset by a $13.8 million gain on sale of Visa Class B shares. Management reported $45.6 million of net pre-tax significant items.
- Accounting change: FNB adopted CECL on January 1, 2020, recording a $50.6 million reduction to retained earnings. The auditor identified the allowance for credit losses as a critical audit matter, citing judgment in qualitative reserve adjustments.
- Key risks: further COVID-19-related credit deterioration and provision volatility; PPP processing, forgiveness and SBA-guarantee risks; regional economic weakness; interest-rate and LIBOR-transition risks; liquidity and funding pressures; cybersecurity and third-party operational risks; regulatory changes; and potential goodwill impairment. Goodwill was not impaired at year-end, though management noted sensitivity to adverse economic conditions.
- FNB said it had ample liquidity and did not use the Federal Reserve’s PPP liquidity facility. It was working on the LIBOR transition, including moving new adjustable-rate mortgages to SOFR beginning October 2020; the financial impact was not yet known.
- Pending legal matters arose in the ordinary course of business. The company said it did not expect them, after reserves and insurance, to materially affect financial position or liquidity, while noting that an individual period’s earnings could be affected.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How quickly PPP balances are forgiven or repaid, and how much related deferred fee income is recognized.
- Whether loan deferrals, non-accrual loans and charge-offs rise as pandemic support programs expire, especially in hospitality and other vulnerable commercial exposures.
- Whether CECL assumptions and the $363 million allowance adequately reflect future credit losses.
- Whether deposit growth and lower funding costs can sustain margins in a low-rate environment, and how the LIBOR-to-SOFR transition affects contracts and earnings.
- Whether reported operating measures and significant-item adjustments provide a useful view alongside GAAP results, given the decline in both reported and operating earnings.
- Whether capital, liquidity and dividend capacity remain resilient; common dividends were $0.48 per share for the year, and FNB repurchased $38.4 million of shares.