FNB CORP quarterly report, Q2 FY2017

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F.N.B. Corporation — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017; filed August 4, 2017. FNB is a diversified regional financial services company. Results include Yadkin Financial Corporation (YDKN) from its March 11, 2017 acquisition, which expanded the company into North Carolina markets. Unless noted otherwise, amounts below are in U.S. dollars.

Financial performance and condition

  • Q2 revenue and earnings: Revenue—net interest income plus non-interest income—was $284.5 million, versus $205.8 million in Q2 2016. Net income was $74.4 million, and net income available to common stockholders was $72.4 million, or $0.22 per diluted share, versus $39.3 million, or $0.19, a year earlier. Operating earnings per diluted share, a non-GAAP measure excluding specified merger-related items, were $0.23 versus $0.22.
  • First-half results: Net interest income was $391.2 million versus $294.7 million; non-interest income was $121.2 million versus $97.5 million. Net income available to common stockholders was $93.4 million versus $63.4 million, or $0.33 versus $0.31 per diluted share. First-half operating earnings per diluted share were $0.45 versus $0.42.
  • Interest income and margins: Q2 net interest margin was 3.42% on a fully taxable-equivalent basis, compared with 3.41% a year earlier; first-half margin was 3.39% versus 3.41%. Management attributed Q2 margin improvement partly to 2017 rate increases, while the first-half comparison reflected a prolonged low-rate environment and competition for earning assets.
  • Expenses and efficiency: Q2 non-interest expense rose 26.3% to $163.7 million; excluding merger expense it was $162.4 million. The non-GAAP efficiency ratio improved to 54.3% from 55.4%. First-half merger expense was $54.1 million, versus $35.5 million, principally related to YDKN integration.
  • Balance sheet and funding: At June 30, total assets were $30.8 billion, loans and leases net of allowance were $20.4 billion, deposits were $21.1 billion, and stockholders’ equity was $4.4 billion. These increased from December 31, 2016, substantially reflecting YDKN. Borrowings totaled $5.1 billion, including $4.4 billion short-term and $656.9 million long-term. The reported loan-to-deposit ratio was 97.5%, versus 92.7%.
  • Cash flow: For the six months, operating activities used $85.9 million, compared with $99.9 million provided in the first half of 2016. Investing activities used $580.7 million; financing activities provided $817.7 million, including increased short-term borrowings. Cash and cash equivalents ended the period at $522.6 million, up $151.2 million from year-end.
  • Credit quality: The allowance for credit losses was $165.7 million, or 0.81% of loans and leases. Non-performing loans were $114.8 million and non-performing assets were $160.5 million, up from $85.9 million and $118.4 million, respectively, at year-end. Management attributed the rise in non-accrual loans mainly to several commercial and industrial borrowers and the increase in other real estate owned partly to YDKN. The allowance-to-non-performing-loan ratio declined to 144.35% from 183.99%.
  • Capital: FNB and its bank subsidiary were categorized as well-capitalized. At June 30, FNB’s total capital ratio was 11.5%, common equity tier 1 ratio 9.0%, and leverage ratio 7.6%; the bank subsidiary’s respective ratios were 10.8%, 9.8%, and 8.2%.

Material changes and unusual items

  • YDKN added approximately $6.8 billion of assets, $5.1 billion of loans, and $5.2 billion of deposits at acquisition. FNB issued about 111.6 million common shares; Q2 average diluted shares increased 53.5% year over year. This dilution moderated per-share growth relative to growth in net income.
  • YDKN purchase accounting added approximately $1.2 billion of goodwill and $55.7 million of core deposit intangibles. Loan, premises, and other acquired-asset valuations remained subject to review and potential measurement-period adjustments.
  • First-half merger-related expenses were $54.1 million, including professional services, severance, charitable contributions, and systems conversion. Management reported no significant income-statement effect from the Q2 acquisition-valuation adjustments.
  • Mortgage banking income benefited from adoption of the fair value option for residential mortgage loans held for sale in 2017. First-half net securities gains included sales of acquired YDKN securities to align the portfolio with FNB’s investment profile.

Liquidity, outlook, and risks

  • Parent-company liquidity coverage ratio was 1.8 times, above the internal minimum of 1.0 times. Months of cash on hand was 10.5 months, below the internal 12-month limit after the YDKN acquisition. Management said alternatives were under evaluation and expected the policy exception to be cured by December 31, 2017.
  • FNBPA reported $7.1 billion of unused wholesale credit availability and $2.3 billion of salable unpledged government and agency securities. Management said liquidity was sufficient for normal and contingency needs.
  • No formal earnings guidance is provided in the supplied filing text. Management highlighted organic loan and relationship-deposit growth, fee-business performance, and expanded lending opportunities, while cautioning that interim results are not necessarily indicative of full-year results.
  • Key stated risks include integration and realization of expected benefits from acquisitions; credit deterioration or insufficient acquired-loan credit marks; competition and execution in new North Carolina and South Carolina markets; regional real-estate weakness and severe weather; SBA program, servicing, guarantee, and secondary-market risks; interest-rate and funding-cost changes; cybersecurity and technology risks; and regulatory, legal, and economic uncertainty. The company reported that pending legal matters were not expected, based on current knowledge, to materially affect financial position or liquidity, though they could affect income in a period.

Important facts for investors to verify

  1. Track YDKN integration costs, realized synergies, final purchase-accounting valuations, and any further adjustments to acquired-loan marks or goodwill.
  2. Assess whether loan growth and earnings persist after separating acquisition effects, and monitor share-count dilution and tangible book value per share, reported at $6.00 versus $6.40 a year earlier.
  3. Monitor the increase in non-accrual commercial loans, non-performing assets, net charge-offs, and allowance coverage, including acquired-portfolio performance.
  4. Verify that parent months of cash on hand returns to policy compliance by the stated year-end target, and watch reliance on short-term borrowings and the loan-to-deposit ratio.
  5. Review the stated non-GAAP measures alongside GAAP results; the filing’s operating earnings and efficiency measures exclude specified items and are not substitutes for GAAP figures.