F.N.B. Corporation — Q1 2011 Form 10-Q
Business context and reporting period
F.N.B. Corporation is a diversified financial services company focused on community banking, consumer finance, wealth management and insurance. This unaudited filing covers the three months ended March 31, 2011, with income and cash flow compared with Q1 2010 and balance-sheet figures generally compared with December 31, 2010.
On January 1, 2011, F.N.B. completed its acquisition of Comm Bancorp, Inc. (CBI), adding $625.6 million of assets, including $445.3 million of loans, and $561.8 million of deposits. The $75.5 million transaction involved $17.2 million in cash and 5.94 million F.N.B. shares. The purchase-price allocation remained preliminary; $36.4 million of goodwill and $4.8 million of core deposit intangible were recorded.
Financial performance and position
Unless otherwise noted, amounts below are in millions of dollars.
- Earnings: Net income was $17.2 million, up 7.5% from $16.0 million. Diluted EPS was $0.14, unchanged. Return on average assets was 0.72% versus 0.74%; return on average equity was 6.17% versus 6.19%.
- Revenue and margins: Net interest income was $77.3 million, up from $68.4 million; non-interest income was $28.4 million, down from $30.3 million. Net interest margin increased to 3.81% from 3.74%; net interest spread was 3.66% versus 3.56%. The filing attributes the margin improvement to lower deposit costs and a more favorable funding mix.
- Expenses and credit costs: Non-interest expense was $74.6 million, up 13.9%, including $4.1 million in merger-related costs. Provision for loan losses fell to $8.2 million from $12.0 million. Net charge-offs were $6.7 million, or 0.42% annualized of average loans, versus $7.0 million, or 0.48%.
- Cash flow: Operating activities provided $152.5 million versus $33.6 million. The 2011 amount included a $110.5 million net decrease in trading securities. Investing activities used $139.1 million; financing activities provided $145.0 million. Cash and cash equivalents rose $158.3 million during the quarter to $289.9 million.
- Balance sheet and funding: Total assets were $9.76 billion, up from $8.96 billion at year-end; net loans were $6.45 billion versus $5.98 billion. Deposits were $7.39 billion, up from $6.65 billion. Short-term borrowings were $738.5 million, long-term debt $199.1 million and junior subordinated debt $203.9 million. Stockholders’ equity was $1.13 billion.
- Credit quality: Non-performing loans were $129.7 million, or 1.98% of loans, compared with $135.3 million and 2.22% at year-end. Loans plus OREO totaled $167.8 million; non-performing assets including non-performing investments were $174.0 million. The allowance was $107.6 million, 1.64% of loans and 83.0% of non-performing loans.
- Capital and liquidity: F.N.B. Corporation’s total risk-based capital, Tier 1 risk-based capital and leverage ratios were 12.4%, 10.9% and 8.4%; FNBPA’s were 12.0%, 10.6% and 8.1%. Management reported both as well-capitalized. The parent had $76.4 million in cash, a 1.9x liquidity coverage ratio and 9.8 months of cash on hand. FNBPA had $3.0 billion of unused wholesale credit availability.
Material changes versus comparable periods
- Higher average earning assets, supported by organic growth and CBI, helped lift fully tax-equivalent net interest income 13.1% to $79.2 million. Lower interest expense more than offset lower asset yields.
- Non-interest income declined 6.1%, mainly because Q1 2010 included larger securities-sale gains and higher recoveries on previously acquired impaired loans. No securities impairment losses were recorded in Q1 2011, compared with $1.7 million of net impairment losses in Q1 2010.
- Non-interest expense increased 13.9%, primarily from CBI-related staffing and other costs, higher compensation and merger expenses. The prior-year quarter included a $2.3 million prepayment penalty on borrowings.
- Deposits and customer repurchase agreements totaled $8.0 billion, up 10.0% from year-end, principally reflecting CBI and transaction-account growth. Total loans also increased, partly reflecting the acquired portfolio.
- Credit measures improved overall, but OREO increased to $38.1 million from $32.7 million. Florida remained a material concern: its non-performing-loan ratio was 25.22%, and its allowance equaled 9.69% of loans. Management said Florida land values had not fully stabilized.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management described liquidity as strong and sufficient for normal and contingency needs. Its 12-month cumulative liquidity gap was 1.8% of assets, within its stated internal range of negative 5.0% to positive 5.0%.
- Interest-rate simulations using updated deposit assumptions estimated a 2.5% increase in 12-month net interest income under a 300-basis-point rate increase and a 0.4% increase under a 100-basis-point decrease. These are model scenarios, not forecasts, and depend on assumptions about deposit behavior and other factors.
- Credit risks include Florida commercial real estate and land exposures, borrower conditions and the adequacy of loan-loss estimates. Securities risks include $14.9 million of unrealized losses on available-for-sale securities, including trust-preferred CDOs valued using Level 3 inputs. Management said it did not expect to be required to sell impaired securities before recovery, but warned that worsening credit could require further write-downs.
- Commitments to extend credit were $1.65 billion and standby letters of credit were $109.9 million. Management said many commitments may expire undrawn. Various legal proceedings are pending; the company did not expect them to materially affect consolidated financial position, but could not rule out effects on results in a future period.
- Management cited competition, interest rates, economic conditions, housing prices, employment, consumer behavior, regulation, technology and valuation estimates as factors that could cause results to differ from forward-looking statements. The Dodd-Frank Act’s eventual impact remained uncertain pending further rulemaking.
- Disclosure controls were assessed as effective at a reasonable-assurance level, and no material changes to internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Track CBI integration, final purchase accounting, merger costs and whether acquired assets and deposits contribute as expected.
- Monitor Florida loan performance, land valuations, OREO dispositions and reserve coverage, alongside commercial-loan credit migrations.
- Review trust-preferred securities’ credit performance and Level 3 valuation assumptions, including deferrals, defaults and potential impairment.
- Assess whether net interest margin, deposit mix and modeled interest-rate sensitivity hold as rates and customer behavior change.
- Reconcile operating cash flow with underlying working-capital movements, particularly the large trading-securities contribution, and monitor funding availability and capital ratios.
- Check future filings for legal developments, contingent credit exposures and the final CBI valuation allocation.