F.N.B. Corporation — Q3 2010 Form 10-Q
Business context and period. F.N.B. Corporation is a diversified financial services company focused on community banking, consumer finance, wealth management and insurance, principally in Pennsylvania and Ohio, with selected consumer finance operations in Tennessee. This unaudited report covers the quarter and nine months ended September 30, 2010; balance-sheet comparisons are to December 31, 2009. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income | $72.3 | $67.8 | $212.1 | $197.3 |
| Provision for loan losses | $12.3 | $16.5 | $36.5 | $40.9 |
| Non-interest income | $27.8 | $23.7 | $86.5 | $80.2 |
| Non-interest expense | $64.2 | $62.3 | $192.8 | $189.6 |
| Net income | $17.2 | $10.3 | $51.1 | $36.6 |
| Net income available to common shareholders | $17.2 | $4.8 | $51.1 | $28.2 |
| Diluted earnings per share | $0.15 | $0.04 | $0.45 | $0.29 |
Prior-period common earnings were reduced by preferred dividends and discount amortization related to the Treasury Capital Purchase Program; the preferred stock was redeemed in September 2009. Q3 return on average assets was 0.76% and return on average equity was 6.43%, versus 0.47% and 3.62%, respectively, in Q3 2009.
- Margins and revenue: Net interest margin was 3.78% for both Q3 and the first nine months of 2010, up from 3.66% and 3.63%, respectively, in the comparable 2009 periods. Management attributed the improvement to lower deposit costs, a more favorable funding mix and growth in earning assets. Q3 non-interest income rose 16.9%, including no net securities impairment charge versus $3.3 million a year earlier.
- Balance sheet: Total assets were $8,993.0 million, up from $8,709.1 million at year-end 2009. Loans were $6,004.6 million, up 2.7%; deposits were $6,597.8 million, up 3.4%. Deposits plus treasury management accounts increased 5.3% to $7,285.0 million.
- Credit quality: Allowance for loan losses was $116.6 million, or 1.94% of loans, versus $104.7 million and 1.80% at year-end. Nine-month net charge-offs declined to $24.5 million from $39.7 million. However, non-performing assets increased to $191.9 million from $171.7 million; non-performing loans were 2.57% of loans versus 2.49%. OREO rose to $32.3 million from $21.4 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $112.5 million, investing cash outflow was $323.2 million and financing cash inflow was $207.2 million. Cash and equivalents ended at $307.0 million, down $3.5 million from year-end. Management reported $3.0 billion in unused wholesale credit availability at FNBPA; the parent reported $76.0 million of cash and a 2.3x liquidity coverage ratio.
- Debt and capital: Short-term borrowings were $817.6 million, up from $669.2 million; long-term debt was $203.3 million, down from $324.9 million; junior subordinated debt was $204.2 million. The company and bank were reported as well-capitalized. At September 30, total risk-based capital ratios were 12.9% for the Corporation and 12.3% for FNBPA; leverage ratios were 8.6% and 8.3%, respectively.
Material changes and notable items
- F.N.B. agreed to acquire Comm Bancorp for approximately $67.7 million in a cash-and-stock transaction. Closing was expected in Q4 2010, subject to regulatory and shareholder approvals and other conditions.
- Florida commercial lending remained a key credit concern. The Florida portfolio allowance was $29.1 million, or 13.64% of that portfolio; the Florida land-related allowance was $18.9 million, or 23.76% of land-related loans. A $20.0 million Florida commercial relationship moved to non-accrual during Q3. Management noted property reappraisals were scheduled for Q4 and that Florida land values had not fully stabilized.
- Trust-preferred securities remained exposed to illiquid markets and potential further credit deterioration. At September 30, total trust-preferred holdings had amortized cost of $37.1 million and fair value of $20.4 million. The company recorded $2.3 million of credit-related securities impairment in earnings for the first nine months, while $7.3 million of non-credit impairment was recognized in other comprehensive income. Management concluded contractual principal and interest remained recoverable, but warned additional write-downs could be required if credit quality worsened.
- Regulation E changes were associated with lower overdraft fees. Management estimated a further $1.2 million revenue reduction during Q4, potentially reducing Q4 earnings by $0.01 per share.
- The company prepaid $59.0 million of higher-cost FHLB advances and recorded a $2.3 million penalty in the first nine months. It also announced that its pension plan would be frozen effective December 31, 2010; management expected approximately $10.3 million of previously unrecognized prior-service credit to reduce Q4 expense.
Outlook, risks and contingencies
No formal earnings guidance was provided. Management described liquidity as strong and its interest-rate position as neutral; its modeled 12-month net interest income sensitivity ranged from a 0.3% decline under a 100-basis-point rate decrease to a 1.2% increase under a 200-basis-point increase. The filing cautions that actual results may differ from estimates and identifies economic conditions, credit quality, interest rates, competition and regulatory changes as risks. The Dodd-Frank Act may affect fee income, funding costs, capital and compliance expenses; the ultimate impact was not yet clear. Legal proceedings were pending, but management did not expect them to materially affect consolidated financial position, while noting future-period operating effects could not be determined.
Important facts for investors to verify
- Whether the Comm Bancorp acquisition closed on the expected terms and timeline, and its effect on capital and earnings.
- Subsequent Florida loan performance, collateral reappraisals, OREO dispositions and required loan-loss provisioning.
- Whether trust-preferred securities cash-flow assumptions and valuations hold, and whether further impairment is recorded.
- Actual overdraft-fee effects and the expected pension-credit benefit in Q4 2010.
- Changes in deposit funding, short-term borrowings, regulatory capital requirements and the costs of Dodd-Frank implementation.