F.N.B. Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. F.N.B. is a regional bank and diversified financial services company operating across six states. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $99.3 | $93.5 | $289.1 | $278.9 |
| Non-interest income | $32.9 | $34.8 | $103.3 | $99.3 |
| Net revenue (net interest income plus non-interest income) | $132.1 | $128.3 | $392.4 | $378.3 |
| Provision for loan losses | $7.3 | $8.4 | $22.7 | $22.0 |
| Non-interest expense | $83.2 | $77.1 | $246.3 | $242.2 |
| Net income | $31.6 | $30.7 | $89.4 | $81.5 |
| Diluted earnings per share | $0.22 | $0.22 | $0.62 | $0.58 |
| Net interest margin (FTE) | 3.64% | 3.70% | 3.64% | 3.75% |
| Return on average assets / equity | 0.99% / 8.50% | 1.03% / 8.83% | 0.97% / 8.22% | 0.93% / 7.95% |
Q3 net income increased about 3% year over year; nine-month net income increased about 10%. Net interest income grew as loan and deposit volumes expanded and funding costs fell, while the net interest margin narrowed as loan yields fell faster than deposit rates. Q3 non-interest income fell 5.6%, while nine-month non-interest income rose 4.0%. Non-interest expense rose 8.0% in Q3 and 1.7% for the nine-month period.
Financial position, cash flow and capital
- At September 30, total assets were $12.79 billion, up from $12.02 billion at December 31, 2012. Gross loans were $8.84 billion, up from $8.14 billion; deposits were $9.72 billion, up from $9.08 billion. The allowance for loan losses was $110.1 million.
- Cash and cash equivalents were $283.5 million. Short-term borrowings were $1.17 billion, long-term debt $91.8 million and junior subordinated debt $194.2 million. Stockholders’ equity was $1.48 billion.
- For the first nine months, operating cash flow was $264.2 million, investing cash flow was negative $487.3 million, and financing cash flow was positive $267.6 million. Cash increased $44.5 million to $283.5 million; corresponding 2012 cash increase was $158.6 million.
- Liquidity measures included a parent-company liquidity coverage ratio of 2.1 times and 13.1 months of cash on hand. FNBPA reported $4.7 billion of unused wholesale credit availability. Management stated that liquidity was sufficient for normal and contingency needs.
- At September 30, the Corporation’s total capital, Tier 1 capital and leverage ratios were 12.1%, 10.6% and 8.4%, respectively; FNBPA’s were 11.5%, 10.4% and 8.3%. Both were categorized as well-capitalized under applicable standards.
Credit quality and material changes
- Total non-performing assets were $118.6 million, or 0.93% of assets, versus $118.9 million, or 0.99%, at year-end 2012. Non-performing loans were $82.7 million; non-performing loans plus OREO were 1.33% of loans plus OREO.
- Nine-month net charge-offs were $17.0 million, or 0.27% of average loans, compared with $20.0 million, or 0.34%, in 2012. The allowance was 1.25% of total loans and 133.1% of non-performing loans at quarter-end.
- Growth reflected organic lending and the April acquisition of Annapolis Bancorp (ANNB). Management attributed higher operating costs in part to ANNB and technology upgrades. FDIC insurance expense rose due to the expanded asset base and the bank exceeding $10 billion in assets.
- Deposit mix shifted toward relationship-based transaction accounts; time deposits continued to decline. The company paid a quarterly dividend of $0.12 per share, unchanged from 2012.
Outlook, transactions and risks
- The filing provides no specific earnings or revenue guidance. Management described credit performance as solid and liquidity as adequate, while noting that interim results are not necessarily indicative of full-year results.
- On November 1, after quarter-end, the company completed common and preferred stock offerings with combined net proceeds of $151.2 million. It said proceeds would support Basel III readiness and growth.
- PVF Capital acquisition closed October 12, after quarter-end; preliminary acquired assets were $714.1 million, including $500 million of loans and $620 million of deposits. Preliminary purchase accounting included $50.9 million of goodwill and $4.4 million of core deposit intangibles. BCSB acquisition, valued at approximately $79 million, was expected to close in Q1 2014, subject to approvals and other conditions.
- Regulatory changes under Dodd-Frank and Basel III remain material risks. Debit interchange rules took effect for F.N.B. on July 1, 2013; management estimated a potential annual revenue reduction of approximately $9 million and said mitigation efforts were underway. Basel III rules were scheduled to take effect for the Corporation in 2015, with certain provisions phased in through 2019.
- Available-for-sale securities had $33.8 million of gross unrealized losses at September 30, including $10.2 million on collateralized debt obligations. Management reported no 2013 securities impairment losses and concluded it did not expect to be required to sell the debt securities before recovering amortized cost. The pooled trust-preferred securities portfolio relies on Level 3 valuation inputs; management cautioned that weaker credit performance could require additional write-downs.
- Other risks include interest-rate sensitivity, economic and credit deterioration, acquisition integration and dilution, regulatory costs, and legal claims. Management did not expect pending legal proceedings to materially affect consolidated financial position, but said effects on future-period results could not be determined. A PVF shareholder suit was dismissed; a BCSB shareholder suit was voluntarily dismissed. The ANNB-related settlement remained subject to court approval.
Important facts for investors to verify
- Whether loan growth, margin pressure and the reduced cost of deposits continue to support net interest income.
- Subsequent credit trends, particularly TDRs, acquired-loan performance, allowance adequacy and collateralized debt obligation valuations.
- Actual capital and dilution effects of the November offerings and PVF acquisition, plus the final purchase-price allocation and integration costs.
- Progress on the pending BCSB acquisition and the realized impact of interchange limits and Basel III requirements.
- Liquidity and funding trends, including reliance on short-term borrowings, pledged securities and wholesale credit availability.