F.N.B. Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. F.N.B. is a diversified financial-services company, headquartered in Pittsburgh, with commercial and consumer banking, wealth management, insurance and consumer finance businesses. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $125.2 | $120.6 | $370.9 | $342.6 |
| Non-interest income | $41.4 | $37.6 | $119.3 | $118.8 |
| Provision for credit losses | $10.8 | $11.2 | $27.8 | $28.6 |
| Non-interest expense | $98.1 | $95.8 | $289.3 | $282.6 |
| Net income | $40.1 | $35.4 | $120.5 | $104.7 |
| Net income available to common | $38.0 | $33.4 | $114.5 | $98.4 |
| Diluted EPS | $0.22 | $0.20 | $0.65 | $0.59 |
- For Q3, common income rose about 14% year over year. Management attributed the improvement mainly to higher net interest income and non-interest income, plus a lower credit provision; increased expenses partly offset gains. For the first nine months, common income rose about 16%.
- Fully tax-equivalent net interest margin was 3.39% for Q3, down from 3.63% a year earlier; for the nine-month period it was 3.43%, versus 3.62%. Management cited loan yields declining faster than deposit rates, competitive and low-rate conditions, and lower acquired-loan accretable-yield benefits. FTE net interest income increased 3.9% in Q3 and 8.2% year to date.
- At September 30, total assets were $16,836; loans and leases were $11,874 gross and $11,737 net of the allowance; deposits were $12,760; total borrowings were $1,830 ($1,287 short-term and $543 long-term); and stockholders’ equity was $2,095. Compared with year-end 2014, assets rose $709, loans rose $627, deposits rose $1,378, and short-term borrowings fell $754.
- Cash and cash equivalents were $258.8 at quarter-end, down $28.6 from year-end. For the nine months, operating cash flow was $184.9, investing cash flow was negative $627.1, and financing cash flow was positive $413.6.
- The allowance for credit losses was $136.2, or 1.15% of loans and leases, versus $125.9 and 1.12% at year-end. Nine-month net charge-offs were $17.5, or 0.20% annualized of average loans and leases, versus $18.8, or 0.25%, in 2014.
- Non-performing loans were $68.5 and other real estate owned was $38.9, for non-performing assets of $107.5, down from $110.0 at year-end. Non-performing loans were 0.58% of total loans and leases; non-performing assets were 0.64% of total assets. Allowance coverage of non-performing loans was 197.17%.
- Regulatory capital ratios at September 30: F.N.B. Corporation total capital 12.2%, Tier 1 10.6%, common equity Tier 1 9.6%, and leverage 8.2%. FNBPA’s corresponding ratios were 11.5%, 10.4%, 9.8%, and 8.1%. Management said both met “well-capitalized” requirements.
Material changes, outlook, and risks
- Growth reflects acquisitions as well as organic expansion. F.N.B. completed its purchase of five Bank of America branches in southeastern Pennsylvania on September 18, acquiring approximately $154.6 of deposits; preliminary purchase accounting included $2.5 of goodwill and $3.1 of core deposit intangibles.
- The company agreed to acquire Metro Bancorp for approximately $474 million, with expected issuance of about 33.6 million F.N.B. shares. Closing was expected in Q1 2016, subject to regulatory and shareholder approvals and other conditions. It also agreed to acquire 17 Fifth Third branches and approximately $383 million in deposits in Pittsburgh, expected to close in Q2 2016 subject to regulatory approval.
- On October 2, 2015, after quarter-end, F.N.B. completed a $100 million offering of 4.875% subordinated notes due 2025, yielding $98.5 million net proceeds. The notes qualify as Tier 2 capital; proceeds are intended for general corporate purposes, potentially including growth, share repurchases, and future acquisitions.
- Management described liquidity as strong. Parent-company liquidity coverage ratio was 1.8x, above its 1.0x internal minimum; months of cash on hand was 14.3, above its 12-month guideline, assuming receipt of the subordinated-note proceeds. FNBPA had $5.4 billion of unused wholesale credit availability. These are management measures and depend on assumptions.
- Management characterized the company as modestly asset-sensitive: its model estimated that an immediate 100-basis-point rate increase would raise 12-month net interest income 1.6%, while a 100-basis-point decline would reduce it 2.5%. Results depend on model assumptions, including deposit repricing and loan prepayments.
- No formal earnings guidance is provided in the supplied filing text. Principal disclosed risks include interest-rate and economic changes, borrower and counterparty credit deterioration, competition, regulatory and capital requirements, acquisition execution and dilution, mortgage repurchase obligations, technology and cybersecurity, and operational risks.
- F.N.B. reported various pending legal proceedings and said it did not currently expect them, in aggregate, to materially adversely affect consolidated financial position; it could not rule out an effect on results in a future period. Disclosure controls were assessed as effective, and no material change in internal controls was reported.
Important facts for investors to verify
- Whether net interest margin stabilizes or continues to contract as asset yields and funding costs change.
- Loan growth, credit migration, allowance adequacy, and trends in non-performing loans and charge-offs.
- Progress, regulatory and shareholder approvals, integration costs, and expected dilution from the Metro transaction; execution and deposit retention for the Fifth Third branch purchase.
- Use of the subordinated-note proceeds, resulting capital and leverage effects, and liquidity measures after the offering.
- Organic deposit growth and funding mix, including the shift of customer sweep balances from repurchase agreements to interest-bearing demand deposits.
- Potential effects of legal proceedings, regulatory changes, and other risks identified in the filing; interim results are not necessarily indicative of full-year results.