F.N.B. Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. F.N.B. is a diversified financial services company focused on community banking, consumer finance, wealth management, insurance, leasing and merchant banking. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2013 | Comparison |
|---|---|---|
| Net interest income | $93.1 | Up 2.4% from $90.9 in Q1 2012 |
| Non-interest income | $33.7 | Up 6.1% from $31.7 |
| Net income | $28.5 | Up 32.2% from $21.6 |
| Diluted earnings per share | $0.20 | Compared with $0.15 |
| Net interest margin (fully tax-equivalent) | 3.66% | Down from 3.74% |
| Net charge-offs / average loans | 0.21% | Compared with 0.27% |
Net interest income increased as lower funding costs more than offset lower asset yields; average earning assets grew 5.0%. Management attributed margin compression to loan yields falling faster than deposit rates in the low-rate environment. Non-interest expense fell 9.0% to $78.9 million, mainly reflecting lower merger-related costs: $0.4 million in Q1 2013 versus $7.0 million in Q1 2012, when Parkvale acquisition costs were recorded. Return on average assets was 0.96% and return on average equity was 8.20%, versus 0.75% and 6.42%, respectively.
At March 31, total assets were $12.0 billion, net loans $8.10 billion, deposits $9.21 billion and stockholders’ equity $1.41 billion. The allowance for loan losses was $107.7 million, or 1.31% of loans. Nonperforming assets were $118.4 million, or 0.99% of assets; nonperforming loans were 1.00% of loans. Total liabilities included $945.0 million of short-term borrowings, $91.7 million of long-term debt and $204.0 million of junior subordinated debt.
Operating cash flow was $27.0 million, investing cash outflow $82.3 million and financing cash outflow $22.2 million. Cash and cash equivalents ended the quarter at $161.6 million, down from $239.0 million at year-end 2012. Management reported parent-company cash of $112.6 million and $4.4 billion of unused wholesale credit availability. Parent liquidity coverage was 2.3 times, above its 1.0-times internal guideline. The Corporation and its bank subsidiary were classified as well-capitalized; reported total risk-based capital ratios were 12.3% and 11.7%, respectively.
Material changes and notable developments
- Loans rose to $8.21 billion before the allowance, up from $8.14 billion at year-end; deposits increased to $9.21 billion from $9.08 billion. Growth in transaction deposits was partly offset by planned reductions in time deposits.
- Nonperforming loans and other real estate owned increased to $118.0 million from $116.1 million at year-end, primarily because of higher troubled debt restructurings and OREO. Nonperforming loans were 1.00% of total loans versus 0.99% at year-end.
- On April 6, 2013, after quarter-end, F.N.B. completed its acquisition of Annapolis Bancorp for approximately $56.3 million, issuing 4.64 million shares and paying $0.6 million cash consideration. Preliminary allocation estimates included $33.3 million of goodwill and $4.4 million of core deposit intangibles.
- A separate announced acquisition of PVF Capital, valued at approximately $106.3 million, was pending at filing and expected to close in Q4 2013, subject to approvals and other conditions.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance and cautions that quarterly results are not necessarily indicative of full-year results. Management described liquidity as strong and anticipated a modest benefit to net interest income if rates rise; modeled net interest income increased 1.7% under a 100-basis-point rate increase and declined 1.5% under a 100-basis-point decrease.
- Because assets exceeded $10 billion at year-end 2012, the Corporation expected to become subject to debit interchange fee rules on July 1, 2013. Management estimated a potential annual revenue reduction of $9 million and said it was pursuing mitigation measures.
- Investment risks include trust-preferred securities with $30.8 million fair value and $12.8 million of unrealized losses. Management expected contractual principal and interest collection, but noted that deterioration beyond projections could require further write-downs. Level 3 valuations are sensitive to assumptions; a one-percentage-point change in discount rates could alter the fair value of these obligations by about $3 million.
- Legal matters include a proposed $3.0 million overdraft-litigation settlement, funded in February 2013 and awaiting final court approval, and a settlement in principle of Annapolis shareholder litigation, also subject to court approval. Management did not expect other pending claims to materially affect consolidated financial position, but could not rule out effects on future-period results.
- Principal stated risks include economic and interest-rate changes, credit deterioration, regulation and capital requirements, competition, acquisition integration and dilution, and operational or technology risks. Management reported effective disclosure controls and no material quarterly change in internal controls over financial reporting.
Investor verification priorities
- Track net interest margin, deposit pricing and the effect of any rate changes on earnings.
- Review credit trends, especially commercial real estate, construction lending, troubled restructurings, allowance adequacy and acquired-loan performance.
- Assess the completed Annapolis acquisition’s integration, share dilution, provisional purchase accounting and realized synergies; monitor the pending PVF transaction and approvals.
- Test management’s mitigation plans against the expected debit interchange revenue reduction beginning July 2013.
- Monitor trust-preferred security performance, Level 3 valuation assumptions and any change in expected credit losses.
- Confirm final court approval and ultimate costs of the overdraft and Annapolis shareholder settlements.