FNB CORP quarterly report, Q3 FY2016

F.N.B. Corporation — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016; filed November 7, 2016. F.N.B. is a diversified regional financial-services company headquartered in Pittsburgh, operating banking, wealth management, insurance and consumer-finance businesses. It reported 331 banking offices and 77 Regency consumer-finance offices.

Financial performance and condition

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Net interest income	$157.5 million	$125.2 million	$452.2 million	$370.9 million
Non-interest income	$53.2 million	$41.4 million	$150.7 million	$119.3 million
Net income	$52.2 million	$40.1 million	$119.6 million	$120.5 million
Net income available to common	$50.2 million	$38.0 million	$113.6 million	$114.5 million
Diluted EPS	$0.24	$0.22	$0.55	$0.65

Revenue: Net interest income plus non-interest income was $210.7 million in Q3, up 27.0% year over year, and $602.9 million year to date, up 23.3%. Growth reflected acquisitions and organic lending and deposit growth.
Margins and efficiency: Q3 net interest margin was 3.36%, versus 3.39%; year-to-date margin was 3.39%, versus 3.43%. The non-GAAP efficiency ratio improved to 54.38% from 55.59% in Q3; year-to-date it was 55.36% versus 56.05%.
Expenses and credit costs: Q3 non-interest expense was $121.1 million, up 23.3%; nine-month expense was $387.3 million, up 33.9%, including $35.8 million of merger-related costs. Provision for credit losses was $14.6 million in Q3 and $43.0 million year to date, up 35.8% and 55.0%, respectively.
Cash flows: For the first nine months, operating activities provided $189.9 million, investing activities used $791.6 million and financing activities provided $557.9 million. Cash and cash equivalents declined $43.9 million to $445.3 million. These bank cash-flow figures include substantial loan, securities and acquisition activity and are not a measure of free cash flow.
Balance sheet at September 30: Total assets were $21.58 billion, up 22.9% from year-end 2015; net loans were $14.62 billion, up 21.3%; deposits were $15.98 billion, up 26.6%. Total borrowings were $2.82 billion, comprising $2.24 billion short-term and $587.5 million long-term. The loan-to-deposit ratio was 92.5%, compared with 96.6% at December 31, 2015.
Credit quality: Non-performing assets were $136.0 million, versus $110.8 million at year-end; non-performing loans were $95.5 million, up 32.7%. The NPL-to-loan ratio rose to 0.65% from 0.59%. The allowance was $156.9 million, or 1.06% of loans, compared with $142.0 million, or 1.15%, at year-end. Year-to-date net charge-offs rose 60.8% to $28.2 million.
Capital and liquidity: Management said the company and bank subsidiary met “well-capitalized” requirements. At September 30, the company’s CET1 ratio was 9.1% and leverage ratio 7.6%; FNBPA’s were 9.6% and 7.9%. Parent-company liquidity coverage ratio was 2.2x and months of cash on hand 14.4, both above internal limits. Unused wholesale credit availability was $6.5 billion.
Dividends: Common dividends were $0.12 per share for Q3 and $0.36 per share for the nine-month period, unchanged from the comparable 2015 periods.

Material changes and notable items

F.N.B. completed its $404.0 million Metro Bancorp acquisition in February 2016, issuing approximately 34.0 million shares, and purchased 17 Fifth Third branches in April. These transactions materially increased assets, loans, deposits, expenses and the diluted share count.
Q3 common earnings increased 31.8% year over year, while nine-month common earnings declined 0.8%; nine-month diluted EPS fell 15.4%, partly reflecting the higher share count and $35.8 million of acquisition-related costs. Management’s non-GAAP operating diluted EPS was $0.67 for the first nine months, versus $0.66.
Management attributed lower margins to the prolonged low-rate environment and competition for earning assets. It noted limited opportunity to further reduce funding costs. Loan growth, including acquired balances, supported interest income; average loans grew 24.5% year over year in Q3.
Management cited a $4.0 million charge-off related to one commercial borrower alleged to have falsified documents and financial information. It also recorded a $2.6 million impairment charge on acquired low-income-housing assets during the first nine months.
On July 20, 2016, F.N.B. agreed to acquire Yadkin Financial Corporation for approximately $1.3 billion in stock, with expected issuance of about 111.4 million F.N.B. shares. Closing was expected in Q1 2017, subject to regulatory and shareholder approvals and other conditions. The filing describes integration, systems-conversion, retention, market-entry and potential dilution risks.
The company redomesticated from Florida to Pennsylvania on August 30, 2016; it stated that this did not change its business, assets, liabilities, management or securities trading.

Outlook, risks and contingencies

The filing provides no specific earnings or full-year financial guidance and cautions that interim results are not necessarily indicative of full-year results.
Management described liquidity as strong and its interest-rate position as modestly asset-sensitive; its simulation indicated a 4.9% increase in 12-month net interest income under an immediate 300-basis-point rate increase. Results depend on modeling assumptions and actual outcomes may differ.
Key stated risks include credit quality and economic conditions, interest rates and funding costs, competition, regulatory changes, cybersecurity and technology, and the ability to integrate acquisitions and realize expected benefits.
F.N.B. said ordinary-course litigation and regulatory matters were not expected, individually or collectively after reserves and insurance, to materially harm consolidated financial position or liquidity, although they could materially affect net income in a period. The filing does not quantify a clear maximum potential loss.

Important facts for investors to verify

Track whether non-performing commercial and industrial loans, criticized assets and charge-offs stabilize, and whether the allowance remains adequate as lending expands.
Separate organic growth from Metro and branch-acquisition contributions; assess whether revenue gains translate into sustainable earnings after integration and operating costs.
Monitor deposit pricing, borrowing mix and net interest margin in a changing rate environment; review the assumptions behind the company’s rate-sensitivity analysis.
Confirm Yadkin’s regulatory and shareholder approvals, closing timetable, final consideration and integration costs, including conversion of multiple core systems.
Review capital ratios and liquidity after planned acquisitions and capital actions, and compare management’s non-GAAP operating measures with GAAP results.