F.N.B. Corporation — 2010 Form 10-K
Business context and reporting period
F.N.B. Corporation is a diversified financial services company headquartered in Pennsylvania, with community banking, wealth management, insurance and consumer finance businesses. Its principal markets are Pennsylvania and northeastern Ohio, with consumer finance operations also in Tennessee and Kentucky. This filing covers the fiscal year ended December 31, 2010; amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $74.7 million, or $0.65 per diluted share, versus $41.1 million and $0.32 per diluted share in 2009. Net income available to common shareholders in 2009 was $32.8 million after CPP-related preferred dividends and discount amortization; the preferred stock had been redeemed in 2009.
- Income and margins: GAAP net interest income was $285.0 million, up from $267.0 million. Non-interest income was $116.0 million, up 9.9%; combined net interest and non-interest income was approximately $401.0 million. Fully taxable-equivalent net interest margin rose 10 basis points to 3.77%.
- Credit costs and asset quality: Provision for loan losses declined to $47.3 million from $66.8 million. Net charge-offs fell to $45.9 million, or 0.77% of average loans, from $66.9 million, or 1.15%. The allowance was $106.1 million, 1.74% of loans. Non-performing loans were $135.3 million; non-performing assets were $174.0 million, or 1.94% of assets.
- Balance sheet: Year-end assets were $9.0 billion, net loans $6.0 billion and deposits $6.6 billion. Loans grew 4.1% and deposits 4.2% from year-end 2009. Stockholders’ equity was $1.07 billion.
- Debt and capital: Year-end short-term borrowings were $753.6 million, long-term debt $192.1 million and junior subordinated debt $204.0 million. Corporation regulatory capital ratios were 12.9% total risk-based, 11.4% Tier 1 risk-based and 8.7% leverage; management reported the Corporation and bank as well-capitalized.
- Cash flow and liquidity: Operating cash flow was $163.5 million; investing activities used $510.6 million and financing activities provided $168.1 million. Cash and cash equivalents ended at $131.6 million. Parent-company cash was $91.6 million. Management reported a 2.0x parent liquidity coverage ratio and 12 months of cash on hand; unused wholesale credit availability at the bank was $3.1 billion.
- Shareholder distributions: The common dividend remained $0.12 per quarter ($0.48 for the year). Book value per share was $9.29, versus $9.14 in 2009.
Material changes versus 2009
- Profitability improved as lower funding costs lifted net interest income, non-interest income increased, and provision expense and net charge-offs declined. Interest expense fell 26.8%, while interest income fell 3.6% on a fully taxable-equivalent basis.
- Non-interest expense decreased 1.7% to $251.1 million. The comparison includes a $4.0 million FDIC special assessment in 2009 and a $2.3 million 2010 charge for prepaying higher-cost borrowings.
- Credit indicators improved overall, particularly in Florida: Florida net charge-offs declined to $19.4 million from $43.8 million, and Florida commercial loans fell to $195.3 million from $243.9 million. However, Florida’s non-performing loans remained 28.28% of its portfolio, and OREO increased across the company.
- Deposits and treasury management accounts grew, while long-term debt declined by $132.8 million. Cash and cash equivalents fell by $179.0 million during 2010, in part as loan and securities investments increased.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal earnings or revenue guidance. Management said current capital resources were expected to meet requirements for the foreseeable future and believed liquidity was sufficient for normal and contingency needs. It described economic recovery as gradual and Florida borrowers and real estate values as ongoing challenges.
- Quarterly unusual item: Fourth-quarter results included a $10.5 million pension prior-service credit ($6.9 million after tax) from freezing the Retirement Income Plan effective December 31, 2010. Management expects higher annual 401(k) contributions of approximately $1.0 million following the plan change.
- Acquisition after year-end: On January 1, 2011, F.N.B. completed its acquisition of Comm Bancorp for a stated transaction value of $75.5 million, using cash and 5.94 million F.N.B. shares. Acquired assets were $625.6 million, including $445.3 million in loans, and deposits were $561.8 million. Purchase accounting was not final when the filing was prepared.
- Principal risks: Credit deterioration, especially commercial real estate and the Florida portfolio; uncertainty in collateral values and loan-loss estimates; regional economic weakness; interest-rate and funding pressures; regulatory change under Dodd-Frank, including potential capital and deposit-insurance costs; technology and cybersecurity risks; and dependence of parent liquidity and dividends on subsidiary distributions.
- Securities and legal matters: Pooled trust preferred securities remained exposed to defaults, deferrals and illiquid markets; the filing reported $13.3 million of unrealized losses on pooled securities and identified potential for further impairment. The company reported pending and threatened legal proceedings, but did not expect aggregate liability to materially affect consolidated financial position; future-period earnings effects could not be determined.
- Controls and audit: Management and Ernst & Young concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Florida real estate valuations, non-performing assets and OREO continue to improve, and whether Florida charge-offs remain lower.
- Whether the $106.1 million loan-loss allowance adequately covers portfolio risks, including commercial real estate and consumer credit.
- How much reported 2010 earnings depended on the one-time pension credit and other nonrecurring items.
- The final purchase accounting, integration costs and subsequent contribution to results from the Comm Bancorp acquisition.
- The future effect of Dodd-Frank implementation on regulatory capital, deposit insurance premiums, fee income and compliance costs.
- Whether funding, liquidity and dividend capacity remain resilient as deposits grow and loans expand.