F.N.B. Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The filing was signed May 6, 2016. Financial amounts below are in millions of dollars unless stated otherwise. F.N.B. is a diversified financial services company operating across six states; the quarter includes Metro Bancorp (METR) results from its February 13 acquisition.
Key financial results and position
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $186.4 | Up from $160.1 in Q1 2015 |
| Net interest income | $140.4 | Up from $121.9 in Q1 2015 |
| Non-interest income | $46.0 | Up from $38.2 in Q1 2015 |
| Net income | $26.1 | Down from $40.3 in Q1 2015 |
| Net income available to common; diluted EPS | $24.1; $0.12 | Versus $38.3; $0.22 in Q1 2015 |
| Net interest margin, fully taxable equivalent | 3.40% | Down from 3.48% in Q1 2015 |
| Operating cash flow | $93.9 | Versus $66.3 in Q1 2015 |
| Cash and cash equivalents | $345.9 | Down from $489.1 at December 31, 2015 |
| Total assets | $20,324.5 | Up from $17,557.7 at December 31, 2015 |
| Loans and leases, before allowance | $14,165.6 | Up from $12,190.4 at December 31, 2015 |
| Deposits | $15,390.5 | Up from $12,623.5 at December 31, 2015 |
| Short- and long-term borrowings | $2,221.3 combined | Short-term borrowings declined; long-term borrowings increased from year-end |
| Total stockholders’ equity | $2,518.0 | Up from $2,096.2 at December 31, 2015 |
Net cash decreased $143.2 during the quarter. The reported efficiency ratio was 56.4%, which management said was consistent with Q1 2015. Return on average assets was 0.56%, compared with 1.01% a year earlier. The common dividend was $0.12 per share, unchanged from Q1 2015.
Material changes and drivers
- METR acquisition drove much of the balance-sheet expansion: acquired assets were valued at $2.8 billion, including $1.9 billion of loans and $2.3 billion of deposits. F.N.B. issued approximately 34.0 million common shares as consideration.
- Management reported average loan growth of 17.4% and average deposits and customer repurchase agreements growth of 17.2% year over year, including acquired balances. It also reported 8.8% organic average loan growth.
- Net income fell despite higher revenue, primarily as non-interest expense rose $42.0 million and provision for credit losses increased $3.6 million. Expenses included $24.9 million of merger and acquisition costs; average diluted shares rose 10.8% to 194.9 million.
- Net interest income increased with growth in earning assets, but the FTE margin declined eight basis points amid low rates and competitive pressure. Interest expense rose 34.5%, reflecting liability growth and higher funding costs.
- Non-interest income grew 20.6%, largely reflecting a larger customer base and acquired operations. The quarter also included a $2.4 million gain on redemption of $10.0 million of trust preferred securities.
Credit, liquidity, capital, and risk
- The allowance for credit losses was $147.8 million, or 1.04% of loans and leases; quarterly provision was $11.8 million and net charge-offs were $6.0 million, or 0.18% annualized of average loans and leases.
- Non-performing assets increased to $135.0 million from $110.8 million at year-end. Non-performing loans were $84.5 million, or 0.60% of total loans and leases. Management attributed higher non-accrual loans primarily to one energy-sector borrower and higher OREO partly to acquired METR properties.
- Energy and metals exposures were 1.3% and 2.3% of the overall portfolio, respectively; management said it was monitoring these exposures. The filing reports a 0.93% delinquency ratio for the originated portfolio.
- Management described liquidity as strong. The parent-company liquidity coverage ratio was 2.2 times, above its 1.0-times internal minimum; months of cash on hand was 14, above its 12-month minimum. FNBPA reported $6.6 billion of unused wholesale credit availability. The loan-to-deposit-and-customer-repurchase-agreement ratio was 90.3% at quarter-end.
- F.N.B. and FNBPA were classified as well-capitalized. The corporation’s common equity tier 1 ratio was 9.6% and leverage ratio 8.5%; FNBPA’s corresponding ratios were 10.1% and 8.9%.
- Interest-rate sensitivity modeling indicated a modestly asset-sensitive position: a parallel 100-basis-point increase was estimated to raise 12-month net interest income 2.3%, while a 100-basis-point decline was estimated to reduce it 2.9%. These are model estimates, not forecasts.
Outlook, commentary, and contingencies
Management highlighted commercial lending opportunities, continued organic growth, fee-based business performance, and investments in customer-facing technology. It stated that excluding non-operating items, primarily merger-related costs, Q1 diluted EPS would have been $0.21. The filing does not provide a clear quantitative full-year earnings or revenue guidance; management cautions that interim results are not necessarily indicative of full-year performance.
F.N.B. completed its purchase of 17 Fifth Third branches on April 22, 2016, after quarter-end, acquiring approximately $99.5 million of loans and $302 million of deposits. The METR and Fifth Third purchase accounting valuations were preliminary and subject to review. Management identified acquisition integration, cost savings, acquired-credit performance, deposit retention, dilution, interest rates, economic conditions, regulation, competition, technology and cybersecurity among the risks. It said routine legal and regulatory matters were not expected to materially affect consolidated financial position or liquidity, while acknowledging possible material effects on net income in a given period. A $2.6 million impairment charge on acquired low-income housing project assets was also recorded in Q1.
Important facts for investors to verify
- How much of future earnings growth offsets the $24.9 million merger-cost impact, and whether expected METR integration benefits are realized.
- Whether acquired-loan credit performance, the allowance, non-performing assets, and the energy-related exposure improve or deteriorate.
- Whether margin pressure persists as funding costs and market rates change, and how actual results compare with interest-rate sensitivity models.
- Whether organic loan and low-cost deposit growth continues, and whether liquidity and capital remain adequate after acquisition integration.
- The final purchase-price allocations and any subsequent adjustments for METR and the post-quarter Fifth Third branch transaction.