F.N.B. Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; balance-sheet comparisons are to December 31, 2010. Dollar amounts are in millions unless noted. F.N.B. is a diversified financial services company, with community banking as its largest business. Results include Comm Bancorp, acquired January 1, 2011, from that date onward.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $78.7 | $71.5 | $156.0 | $139.9 |
| Provision for loan losses | $8.6 | $12.2 | $16.8 | $24.2 |
| Non-interest income | $29.3 | $28.4 | $57.7 | $58.7 |
| Non-interest expense | $68.4 | $63.1 | $142.9 | $128.5 |
| Net income | $22.4 | $17.9 | $39.5 | $33.9 |
| Diluted earnings per share | $0.18 | $0.16 | $0.32 | $0.30 |
| Net interest margin | 3.78% | 3.81% | 3.79% | 3.77% |
- Q2 return on average assets/equity was 0.91%/7.69%, versus 0.81%/6.83% a year earlier. For the first half, the respective measures were 0.82%/6.94%, versus 0.78%/6.51%.
- At June 30, total assets were $9,857, loans net of unearned income were $6,703, deposits were $7,397, and stockholders’ equity was $1,203. Versus year-end 2010, assets increased $897, loans $614, and deposits $751; the acquisition contributed to growth.
- Cash and cash equivalents were $189. For the first half, operating cash flow was $201, investing cash flow was $(358), financing cash flow was $214, and cash increased $58. Operating cash flow included a $110 million decrease in trading securities.
- Short-term borrowings were $728, long-term debt $221, and junior subordinated debt $204. Total deposits and customer repurchase agreements were $7,960, up $702 from year-end.
- The allowance for loan losses was $109, or 1.63% of loans; allowance coverage of non-performing loans was 85.84%. First-half net charge-offs were $13.7, or 0.42% annualized of average loans.
- Regulatory capital ratios remained above well-capitalized thresholds: the Corporation’s total capital, Tier 1 capital, and leverage ratios were 13.3%, 11.6%, and 9.0%; FNBPA’s were 11.8%, 10.5%, and 8.1%.
Material changes versus comparable periods
- Q2 net income rose from $17.9 million to $22.4 million, supported by higher net interest income and a lower loan-loss provision. For the first half, net income rose from $33.9 million to $39.5 million.
- Net interest income grew with higher average earning assets, including CBI, and lower funding costs. The Q2 net interest margin edged down 3 basis points year over year as loan yields declined and liquidity increased; the first-half margin rose 2 basis points.
- Q2 non-interest expense increased 8.4%, mainly from compensation and acquisition-related costs. First-half expense increased 11.2%, including $4.3 million of merger costs and higher OREO expenses. First-half non-interest income declined 1.8%, including lower securities-sale gains and fewer recoveries on acquired impaired loans.
- Credit measures improved overall from year-end: non-performing loans fell to $127.2 million from $135.3 million, and non-performing assets to $169.6 million from $174.0 million. Florida remained a notable concentration: its non-performing loans were 24.91% of that portfolio, and its allowance was 11.11% of loans.
Outlook, commentary, risks and unusual items
- No specific earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. It described liquidity as strong and reported parent cash of $141.5 million, a liquidity coverage ratio of 2.4x, and 18 months of cash on hand, above stated policy guidelines.
- F.N.B. completed its $75.5 million CBI acquisition on January 1, recording preliminary goodwill of $38.7 million. Valuations remained subject to finalization. A June agreement to acquire Parkvale Financial Corporation, valued at approximately $130 million, was expected to close in Q1 2012, subject to approvals and other conditions.
- The May public offering of 6.04 million shares generated $62.8 million in net proceeds, retained at the parent in part to support flexibility for the pending acquisition. The quarterly dividend was $0.12 per share.
- Management reported no first-half 2011 securities impairment charges, compared with $2.3 million in the first half of 2010. However, available-for-sale trust preferred and other debt securities had $13.6 million of unrealized losses; trust preferred securities are exposed to illiquid markets, defaults and deferrals. Management judged contractual recovery probable but noted further impairment could result if credit quality worsens.
- Management said the slow economic recovery continued to challenge borrowers, particularly in Florida, where land valuations had not fully stabilized. It also identified interest-rate, credit, liquidity, economic, regulatory, housing and employment risks. After the Parkvale merger, the combined company was expected to exceed $10 billion in assets and become subject to debit interchange fee rules; F.N.B. estimated potential annual revenue reductions of up to $8 million or more before mitigation.
- Legal proceedings were ongoing; management did not anticipate a material adverse effect on consolidated financial position based on information available, but could not rule out effects on results in a future period. Disclosure controls were reported effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether CBI integration, purchase accounting and the pending Parkvale transaction meet expected timelines and economics, and how acquisition funding affects capital.
- Whether Florida commercial real estate and land credit quality, collateral values, OREO costs and loan-loss reserves continue to improve; review acquired-loan credit marks and reserve coverage.
- Whether trust preferred securities and other illiquid investments recover as modeled, given Level 3 valuation inputs, unrealized losses and market uncertainty.
- How the margin responds to changing rates and liquidity, and whether the disclosed interchange-fee exposure and other regulatory changes affect future revenue.
- Whether expense growth, earnings trends and liquidity remain sustainable; the filing provides no specific full-year earnings guidance.