F.N.B. Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. F.N.B. is a diversified bank and financial services company operating across eight states. The quarter includes Yadkin Financial Corporation (Yadkin) from its March 11, 2017 acquisition date; most balance-sheet growth versus December 31, 2016 reflects that acquisition.
Financial performance and position
- Revenue and earnings: Net interest income plus non-interest income was $227.9 million, up from $186.4 million in Q1 2016. Net income was $23.0 million versus $26.1 million; income available to common shareholders was $21.0 million versus $24.1 million. Basic and diluted EPS were $0.09 versus $0.12. The common dividend remained $0.12 per share.
- Adjusted performance: Management-reported non-GAAP operating income available to common shareholders was $54.4 million versus $40.7 million; operating diluted EPS was $0.23 versus $0.21. These measures exclude merger-related items and specified securities gains; they are not GAAP results.
- Interest income and margins: Net interest income rose 23.1% to $172.8 million. FTE net interest margin was 3.35%, down from 3.40%; excluding purchase-accounting impact, it was 3.28% versus 3.33%. Management attributed margin pressure to low rates and asset competition.
- Fees, costs and efficiency: Non-interest income increased 19.7% to $55.1 million. Non-interest expense increased 37.3% to $187.6 million, including $52.7 million of merger expense versus $24.9 million a year earlier. The non-GAAP efficiency ratio was 57.2% versus 56.4%.
- Credit: Provision for credit losses was $10.9 million, down from $11.8 million; net charge-offs rose to $8.1 million from $6.0 million. The allowance for credit losses was $160.8 million. Non-performing loans were $105.4 million, and non-performing assets were $155.5 million, up from $118.4 million at year-end. Management cited acquired Yadkin problem assets and several commercial borrowers in commodity-related industries. The allowance equaled 152.58% of non-performing loans, down from 183.99% at year-end.
- Cash flow: Operating cash flow was $18.6 million, compared with $93.9 million in Q1 2016; investing cash flow was an outflow of $268.0 million, versus an inflow of $44.9 million; financing cash flow was an inflow of $328.4 million, versus an outflow of $282.0 million. Cash and cash equivalents ended at $450.4 million, up $79.0 million during the quarter.
- Balance sheet and funding: Assets were $30.2 billion, up 38.2% from year-end; net loans and leases were $20.0 billion, up 35.8%; deposits were $21.3 billion, up 32.7%. Total borrowings were $4.28 billion, including $3.59 billion short-term and $696.2 million long-term. The loans-to-deposits ratio was 94.6%, versus 92.7% at year-end.
- Capital and liquidity: Stockholders’ equity was $4.36 billion. F.N.B. reported regulatory CET1 of 8.9% and total capital of 11.5%; its bank subsidiary reported CET1 of 9.8% and total capital of 10.8%. Management said both were well-capitalized. The liquidity coverage ratio was 1.8 times; months of cash on hand was 10.2 months, below the company’s internal limit of more than 12 months. Unused wholesale credit availability was $6.56 billion, and salable unpledged government and agency securities were $2.07 billion.
Material changes and unusual items
- F.N.B. completed the $1.8 billion Yadkin acquisition, issuing approximately 111.6 million common shares. Preliminary acquired values included $6.8 billion of assets, $5.1 billion of loans and $5.2 billion of deposits. The initial purchase-price allocation recorded $1.2 billion of goodwill and $55.7 million of core deposit intangibles; valuations remained subject to adjustment.
- Yadkin-related integration and other merger costs drove much of the increase in reported expenses. Q1 2017 merger expense included $25.6 million in professional services, $17.1 million in severance and benefits, and $5.6 million in charitable contributions. The filing also reports $2.6 million of net securities gains, primarily from sales of acquired Yadkin securities.
- Reported earnings per share declined despite higher revenue, reflecting elevated merger costs and a larger share count after the acquisition. Tangible book value per common share was $5.86 at March 31, 2017, versus $6.36 at March 31, 2016.
- Beginning January 1, 2017, F.N.B. elected fair-value accounting for future residential mortgage loans held for sale; fair-value changes are recorded in mortgage banking income. The filing reports no material effect from newly adopted stock-compensation guidance.
Outlook, commentary and risks
- No specific earnings or financial guidance is provided. Management described commercial lending opportunities as strong, including opportunities in the expanded footprint, and cited continued organic loan and deposit growth.
- Management characterized the interest-rate position as modestly asset-sensitive; its model indicated a modest positive effect on net interest income from rising rates. The filing cautions that modeled results depend on assumptions and may differ from actual experience.
- Management said liquidity remained strong overall but was evaluating alternatives to bring months of cash on hand back within its internal limit.
- Acquisition-related risks include integration execution, retention of customers and personnel, competitive conditions in North Carolina and South Carolina, and the possibility that Yadkin loan credit marks may prove inadequate. The acquired markets also carry stated real-estate, weather and agricultural risks.
- Additional disclosed risks include credit deterioration, interest-rate and market changes, deposit behavior, cybersecurity and technology, regulatory developments, and the ability to realize expected acquisition benefits. Management said ordinary-course legal matters were not expected to materially affect financial position or liquidity, though they could materially affect earnings in a particular period.
- Management stated that disclosure controls were effective at quarter-end and that no material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Track final Yadkin purchase-accounting valuations, acquired-loan performance, credit marks and any subsequent allowance or goodwill adjustments.
- Assess the timing, total cost and realized benefits of Yadkin integration, and compare GAAP earnings with management’s non-GAAP operating measures.
- Monitor non-performing loans, charge-offs, allowance coverage and exposure to commodity-related borrowers and acquired North Carolina real estate.
- Review liquidity remediation plans given months of cash on hand below the stated internal threshold, alongside borrowing reliance and deposit trends.
- Evaluate acquisition-related dilution, tangible book value per share, capital ratios and the sustainability of the $0.12 quarterly common dividend.