F.N.B. Corporation — First-Quarter 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. F.N.B. Corporation is a regional diversified financial services company operating across six states. Unless otherwise noted, dollar amounts below are in millions.
Key financial results
| Metric | Q1 2014 | Q1 2013 or prior-period date |
|---|---|---|
| Net interest income | $107.8 | $93.1 |
| Non-interest income | $42.1 | $33.6 |
| Net income | $34.5 | $28.5 |
| Net income available to common shareholders | $32.2 | $28.5 |
| Diluted earnings per common share | $0.20 | $0.20 |
| Net interest margin, fully tax-equivalent | 3.62% | 3.66% |
| Return on average assets / equity | 1.00% / 7.65% | 0.96% / 8.20% |
| Operating / investing / financing cash flows | $244.1 / $(447.9) / $236.0 | $27.0 / $(82.3) / $(22.2) |
Net interest income and non-interest income together were $149.9 million. Non-interest expense was $94.2 million, up from $78.8 million; provision for loan losses was $7.0 million, down from $7.5 million. The effective tax rate was 29.1%, versus 29.3%. Common dividends were $0.12 per share, unchanged from the prior-year quarter.
Operating cash flow included a $203.2 million net change in trading securities; therefore, the reported operating cash inflow should not be viewed as a simple proxy for recurring earnings or cash generation.
Financial position, credit and liquidity
- Total assets were $14.48 billion, up from $13.56 billion at year-end. Total loans were $9.94 billion, versus $9.51 billion; deposits were $10.94 billion, versus $10.20 billion.
- Cash and cash equivalents were $246.3 million. Short-term borrowings were $1.22 billion, long-term debt $235.8 million and junior subordinated debt $68.5 million. Total stockholders’ equity was $1.88 billion.
- Non-performing assets were $122.6 million, up from $118.9 million; non-performing loans were $79.4 million. Non-performing assets were 0.85% of total assets, down from 0.88%. The allowance for loan losses was $112.2 million, or 1.13% of total loans; coverage of non-performing loans was 91.5%.
- Management described liquidity as strong. The parent-company liquidity coverage ratio was 2.1 times and months of cash on hand were 12.7, compared with internal minimums of greater than 1.0 times and greater than 12 months, respectively. FNBPA reported $4.9 billion of unused wholesale credit availability.
- At March 31, the Corporation’s regulatory capital ratios were 12.6% total capital to risk-weighted assets, 11.3% Tier 1 risk-based capital and 8.8% leverage. Management said the Corporation and FNBPA met “well-capitalized” requirements.
Material changes and unusual items
- Net income available to common shareholders rose $3.7 million year over year, but diluted EPS remained $0.20, reflecting a larger share base. Quarterly average common shares increased 16.2%, primarily due to acquisitions and the November 2013 stock offering.
- Net interest income increased $14.7 million on a fully tax-equivalent basis, primarily from growth in earning assets, including acquired and organically originated loans. Net interest margin narrowed four basis points as loan yields fell faster than deposit costs; lower acquired-loan accretion also contributed.
- Non-interest income increased $8.5 million, including $9.5 million of net securities gains versus $0.7 million a year earlier. F.N.B. sold its pooled trust preferred securities for $51.5 million of proceeds and recorded a $13.8 million gain; the filing says the sale reduced portfolio risk and risk-weighted assets. This gain is an unusual item and should be distinguished from recurring fee income.
- Non-interest expense increased $15.4 million. Q1 2014 included $5.3 million of merger costs, primarily related to BCSB, and a $1.9 million net charge related to the mutual conclusion of a consulting agreement with a retired executive. Q1 2013 included $0.4 million of merger costs.
- BCSB was acquired on February 15, 2014; its preliminary purchase accounting added approximately $42.3 million of goodwill and $6.6 million of core deposit intangibles. The acquired fair values remained subject to review. PVF and Annapolis Bancorp had been acquired in 2013.
- After quarter-end, on April 8, 2014, F.N.B. announced a definitive agreement to acquire OBA Financial Services for approximately $94 million in stock, subject to approvals and other conditions; closing was expected in Q3 2014.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results. Management reported an asset-sensitive interest-rate position: its model estimated a 3.9% increase in 12-month net interest income under an immediate 300-basis-point rate rise and a 2.7% decline under a 100-basis-point decrease. These are model scenarios, not forecasts; results depend on assumptions about deposit repricing, loan prepayments and future business.
Key risks include interest-rate and market changes, economic and borrower-credit conditions, deposit mix and funding costs, acquisition integration and acquired-loan performance, regulatory changes, competition, cybersecurity and operational disruptions. The company noted that the Dodd-Frank debit interchange cap reduced quarterly interchange revenue by $2.3 million year over year and could reduce annual revenue by approximately $10 million; it was pursuing offsetting revenue and expense measures. Basel III-related capital requirements were scheduled to begin taking effect for the Corporation in 2015, with phased implementation. Legal proceedings were pending; management did not expect a material adverse effect on consolidated financial position based on information available, but could not rule out an effect on results in a future period.
Most important facts for investors to verify
- How much of earnings growth reflects recurring net interest and fee income versus the securities-sale gain and other unusual items.
- Whether acquired BCSB, PVF and Annapolis portfolios meet preliminary credit and valuation assumptions, and whether integration costs or deposit attrition exceed expectations.
- Trends in non-performing loans, OREO, net charge-offs and allowance adequacy as the loan portfolio expands.
- Whether liquidity and capital remain sufficient as acquisitions, funding needs and phased regulatory capital rules affect the balance sheet.
- Progress, approvals, financing and expected integration effects of the proposed OBA acquisition.