F.N.B. Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. F.N.B. is a diversified financial services company centered on community banking, with consumer finance, wealth management, insurance and other activities. Amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $21.6 million, up 25.7% from $17.2 million in Q1 2011. Diluted EPS was $0.15 versus $0.14; the quarterly dividend remained $0.12 per share. Return on average assets was 0.75% and return on average equity was 6.42%.
- Revenue and margin: Net interest income was $90.9 million, up 17.6%; fully tax-equivalent net interest income was $92.8 million, up 17.1%. Net interest margin narrowed to 3.74% from 3.81%, as loan yields fell faster than deposit costs. Non-interest income rose 11.7% to $31.7 million.
- Credit costs and expenses: Provision for loan losses declined to $6.6 million from $8.2 million. Non-interest expense increased 16.2% to $86.7 million, including $7.0 million in Parkvale merger and integration costs (versus $4.1 million of CBI-related costs in Q1 2011). Pre-tax income was $29.4 million, up 28.3%.
- Loans and credit quality: Loans, net of unearned income, were $7.80 billion; the allowance for loan losses was $102.1 million, or 1.31% of loans. Net charge-offs were $5.1 million, or 0.27% annualized of average loans. Non-performing loans were $109.8 million (1.41% of loans), and non-performing assets were $150.3 million (1.28% of assets). Florida remained a notable risk: non-performing loans were 28.79% of that market’s loans, and management cautioned that Florida land values might decline further.
- Cash flow: Operating cash flow was $365.8 million, investing cash flow was negative $394.7 million, and financing cash flow was $84.7 million. Cash and cash equivalents ended the quarter at $264.7 million. Operating cash flow included a $332.0 million cash-flow effect from trading securities; management said there were no trading securities on the balance sheet at quarter-end.
- Balance sheet, funding and capital: Total assets were $11.73 billion, deposits $9.06 billion, short-term borrowings $877.8 million, long-term debt $90.3 million, junior subordinated debt $204.0 million, and stockholders’ equity $1.35 billion. Parent-company cash was $97.7 million. Management reported $3.9 billion of unused wholesale credit availability and characterized liquidity as strong. F.N.B. and its bank subsidiary were categorized as well-capitalized; the Corporation’s total risk-based capital ratio was 12.0%, Tier 1 ratio 10.5%, and leverage ratio 8.1%.
Material changes and significant transaction
- F.N.B. completed its acquisition of Parkvale Financial Corporation on January 1, 2012. Parkvale brought approximately $1.82 billion of assets, including $937.4 million of loans, and $1.51 billion of deposits at acquisition. F.N.B. issued 12.16 million shares; the preliminary allocation included $101.5 million of goodwill and $15.0 million of core deposit intangible. Valuations remained provisional and under review.
- Parkvale contributed substantially to quarter-over-quarter balance-sheet growth and year-over-year growth in average earning assets, deposits and expenses; reported comparisons therefore do not represent purely organic growth. F.N.B. also repaid Parkvale’s $31.8 million of Treasury CPP preferred stock. The related warrant converted into a warrant for up to 819,640 F.N.B. shares at $5.81 per share.
- Deposits increased to $9.06 billion from $7.29 billion at year-end, while loans rose to $7.80 billion from $6.86 billion. Securities available for sale increased to $1.10 billion from $640.6 million and held-to-maturity securities to $1.18 billion from $917.2 million.
- Allowance methodology changed in Q1: the minimum threshold for individual commercial-loan impairment review became $500, and commercial loss-rate analysis began using a full three-year migration period. Management said these changes slightly increased the allowance.
Outlook, risks and contingencies
- No specific earnings or full-year financial guidance is provided. Management’s stated assumptions included a modest economic expansion continuing in 2012 and interest rates remaining very low; interim results were cautioned not to necessarily indicate full-year results.
- F.N.B. expected total assets to exceed $10 billion on December 31, 2012, which would make it subject to debit-card interchange fee rules beginning July 1, 2013. Management estimated a potential $9.0 million annual revenue reduction absent mitigation; debit interchange fee revenue was $5.3 million in Q1 2012.
- Key risks include economic weakness, interest-rate and market changes, credit deterioration, liquidity and regulatory changes, and execution or credit risks from integrating Parkvale. Management noted the continuing challenge of the slow Florida economy and uncertainty around land valuations.
- The securities portfolio included $31.98 million of trust-preferred securities at fair value with $14.89 million of unrealized losses. Management reported no Q1 securities impairment charges and concluded contractual principal and interest on its trust-preferred holdings were expected to be collected, while warning that worse-than-projected credit performance could require further write-downs. A non-agency mortgage security sale resulted in a $0.23 million net loss.
- Legal proceedings were pending or threatened. The company did not expect them to materially affect consolidated financial position based on information then available, but could not rule out an effect on results in a future period. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Parkvale integration costs, provisional purchase accounting and acquired-loan performance develop as expected.
- Trends in Florida non-performing loans, land collateral values, OREO and allowance coverage.
- Whether net interest margin stabilizes as low rates and acquired adjustable-rate loans affect asset yields and funding costs.
- Progress on mitigation of the expected interchange-fee impact and the timing of crossing the $10 billion asset threshold.
- The quality and repeatability of reported cash flows, especially the large trading-securities effect in operating cash flow.
- Potential losses or valuation changes in trust-preferred and non-agency mortgage securities, and any developments in legal proceedings.