F.N.B. Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unless otherwise noted, financial amounts below are in millions of dollars. F.N.B. is a diversified bank and financial-services company operating in six states; it reported 284 banking offices and four business segments: Community Banking, Wealth Management, Insurance, and Consumer Finance.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $123.8 | $114.2 | $245.7 | $222.0 |
| Provision for credit losses | $8.9 | $10.4 | $17.0 | $17.4 |
| Non-interest income | $39.8 | $39.2 | $77.9 | $81.3 |
| Non-interest expense | $96.5 | $92.6 | $191.2 | $186.8 |
| Net income | $40.1 | $34.8 | $80.5 | $69.4 |
| Net income available to common shareholders | $38.1 | $32.8 | $76.5 | $65.0 |
| Diluted earnings per common share | $0.22 | $0.20 | $0.43 | $0.39 |
- Q2 return on average assets was 0.98% (0.95% prior year) and return on average equity was 7.79% (7.35%). Six-month figures were 1.00% and 7.90%, respectively, versus 0.97% and 7.50%.
- Fully taxable-equivalent net interest margin was 3.43% in Q2, down from 3.60%; the six-month margin was 3.46%, versus 3.61%. Management attributed the decline primarily to loan yields falling faster than deposit rates in the low-rate environment.
- Common dividends were $0.12 per share in Q2 and $0.24 per share for the first half, unchanged from the comparable 2014 periods.
Financial position, liquidity, and capital
- At June 30, total assets were $16.60 billion, up from $16.13 billion at year-end 2014. Total loans and leases were $11.63 billion, compared with $11.25 billion; deposits were $12.36 billion, compared with $11.38 billion.
- Cash and cash equivalents were $237.5 million, down from $287.4 million at December 31. First-half cash flows were $105.2 million provided by operations, $561.8 million used in investing, and $406.7 million provided by financing, resulting in a $49.9 million cash decrease.
- Short-term borrowings were $1.51 billion and long-term borrowings were $542.6 million, for total borrowings of approximately $2.05 billion, down from $2.58 billion at year-end. The decline in short-term borrowings largely reflected lower repurchase-agreement balances.
- Management described liquidity as strong. Parent-company cash was $130.2 million; its liquidity coverage ratio was 2.2 times against a 1.0-times internal minimum, and months of cash on hand were 14.4 against a 12-month minimum. FNBPA reported $4.8 billion of unused wholesale credit availability.
- F.N.B. Corporation reported regulatory capital ratios of 12.2% total capital, 10.6% Tier 1, 9.6% common equity Tier 1, and 8.2% leverage. FNBPA’s corresponding reported ratios included 11.5%, 10.5%, 9.8%, and 8.1%. Management said both were well-capitalized.
Material changes and asset quality
- Q2 net income available to common shareholders rose 16% year over year. Management cited higher net interest income, lower credit-loss provision, and modestly higher non-interest income, partly offset by higher expenses. The quarter included the full-quarter contribution of the September 2014 OBA acquisition.
- For the first half, common income rose to $76.5 million from $65.0 million. Net interest income increased $23.7 million, while non-interest income fell $3.3 million, principally because the prior-year period included a $10.2 million net securities gain. Non-interest expense increased $4.4 million.
- Average loans and leases grew year over year, reflecting organic growth and acquired balances. Management said organic loan growth was $1.1 billion in both the Q2 and first-half comparisons described in the filing. Average diluted shares increased 5.1% in Q2 and 6.1% for the first half, primarily due to acquisitions.
- Non-performing assets were $108.5 million, or 0.65% of total assets, versus $110.0 million, or 0.68%, at year-end. Non-performing loans were $68.3 million, or 0.59% of loans and leases. The allowance for credit losses was $131.1 million, or 1.13% of loans and leases; net charge-offs were $11.8 million, or 0.21% annualized, for the first half.
- Q2 net charge-offs were $6.2 million, or 0.22% annualized. Management said the lower provision reflected lower acquired-loan net charge-offs and favorable acquired-loan cash-flow re-estimation; provision on originated loans supported portfolio growth.
Outlook, transactions, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It expected rising rates to benefit net interest income modestly: an immediate 100-basis-point increase modeled a 1.2% increase, while a 100-basis-point decrease modeled a 2.2% decline over 12 months. These are model estimates, not forecasts.
- On May 27, 2015, F.N.B. agreed to acquire about $280 million of deposits and five Bank of America branches in southeastern Pennsylvania; closing was expected in Q3 2015. On August 4, after quarter-end, it agreed to acquire Metro Bancorp in a transaction valued at approximately $474 million, subject to approvals and other conditions, with completion expected in Q1 2016.
- Management identified sensitivity to interest rates, economic conditions, borrower credit quality, regulation, competition, technology and cybersecurity, and acquisition integration as key risks. It noted limited remaining scope to reduce deposit costs further. Legal proceedings were pending; management did not expect aggregate liability to materially affect financial position, but could not rule out an effect on results in a future period.
- Unusual comparisons include the $10.2 million prior-year first-half securities gain from selling pooled trust-preferred securities; 2015 merger-related expense was $0.4 million for the half, versus $6.2 million in 2014. The 2015 first-half results also included $1.2 million of insurance-processing adjustments in other expense.
Important facts for investors to verify
- Whether the announced Metro Bancorp and Bank of America transactions closed as expected, and their eventual effects on capital, funding, expenses, and shareholder dilution.
- Whether loan growth and acquired-loan accretion can offset continued pressure on net interest margin and funding costs.
- Trends in non-performing loans, charge-offs, acquired-loan cash-flow estimates, and allowance coverage as the portfolio expands.
- The sustainability of earnings growth after accounting for acquisition effects, increased operating expenses, and the prior-year securities-gain comparison.
- Regulatory capital and liquidity headroom under applicable requirements and stressed conditions.