F.N.B. Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. F.N.B. Corporation is a diversified financial services company focused on community banking, consumer finance, wealth management and insurance. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $93.5 | $80.4 | $278.9 | $236.4 |
| Provision for loan losses | $8.4 | $8.6 | $22.0 | $25.4 |
| Non-interest income | $34.8 | $29.6 | $99.3 | $87.3 |
| Non-interest expense | $77.1 | $69.2 | $242.2 | $212.1 |
| Net income | $30.7 | $23.8 | $81.5 | $63.3 |
| Diluted earnings per share | $0.22 | $0.19 | $0.58 | $0.51 |
- Third-quarter net interest income on a fully tax-equivalent basis was $95.4 million, up 15.7%; net interest margin was 3.70%, down from 3.79%. For the nine months, FTE net interest income rose 17.4% to $284.5 million and margin eased to 3.75% from 3.79%.
- Q3 return on average assets was 1.03% and return on average equity 8.83%; nine-month figures were 0.93% and 7.95%, respectively. These improved from the comparable 2011 periods.
- Average earning assets and loans expanded, reflecting organic growth and the January 2012 Parkvale acquisition. Management said acquired loans generally yielded less than F.N.B.’s existing loans; lower market rates also pressured asset yields.
- Quarterly net charge-offs were $7.4 million, or 0.37% annualized of average loans, versus $9.0 million and 0.53% a year earlier. Nine-month net charge-offs were $20.0 million, or 0.34% annualized, versus $22.7 million and 0.46%.
Financial position, liquidity and capital
- At September 30, total assets were $12.0 billion, net loans $7.9 billion, deposits $9.1 billion and stockholders’ equity $1.4 billion. At December 31, 2011, these were $9.8 billion, $6.8 billion, $7.3 billion and $1.2 billion, respectively. The step-up chiefly reflects Parkvale and is not a like-for-like growth comparison.
- Cash and cash equivalents were $367.6 million at quarter-end. Nine-month cash from operating activities was $479.9 million, investing cash use was $594.6 million and financing cash provided was $273.3 million. Operating cash flow included a large positive change in trading securities.
- Short-term borrowings were $1.02 billion, long-term debt $90.5 million and junior subordinated debt $204.0 million at September 30. Deposits and customer repurchase agreements totaled $10.0 billion, up 26.1% since year-end, mainly due to Parkvale and growth in transaction accounts.
- Management characterized liquidity as strong: parent-company cash was $108.3 million; its liquidity coverage ratio was 2.4 times (internal minimum 1.0) and months of cash on hand 15.3 (internal minimum 3). FNBPA reported $4.2 billion of unused wholesale credit availability.
- F.N.B. Corporation and its bank subsidiary were categorized as well-capitalized. At September 30, total risk-based capital ratios were 12.2% and 11.7%, Tier 1 risk-based ratios 10.6% and 10.5%, and leverage ratios 8.2% and 8.0%, respectively.
Material changes and asset quality
- Parkvale Financial was acquired January 1, 2012. Its acquisition added approximately $1.8 billion of assets and $1.5 billion of deposits; F.N.B. issued 12.2 million shares. Preliminary purchase accounting recorded $108.2 million of goodwill and $16.0 million of core deposit intangible; valuations remained under review, with management expecting to finalize the allocation in Q4. Nine-month Parkvale merger and integration costs were $7.4 million.
- Non-performing assets declined to $121.3 million from $149.9 million at year-end; non-performing loans were $82.9 million and OREO $35.6 million. Non-performing loans were 1.04% of loans, versus 1.55% at year-end. The allowance for loan losses was $102.7 million, 1.29% of loans and 123.84% of non-performing loans.
- Florida commercial real estate remained a concentrated credit concern: its $71.9 million loan balance had non-performing loans equal to 19.44% of that portfolio and non-performing loans plus OREO equal to 36.85%. Management cited paydowns as a key reason for lower Florida non-accrual loans.
- The securities portfolio included trust-preferred securities with $29.3 million fair value and $14.9 million of unrealized losses. Management said it expected to collect contractual principal and interest, but noted secondary-market illiquidity and the possibility of further write-downs if credit quality worsened. A $119,000 securities impairment was recognized in the first nine months.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results. Management described the rate position as asset-sensitive, with rising rates expected to have a modest positive effect on net interest income; modeled results depend on assumptions and may differ from actual outcomes.
- F.N.B. announced an agreement on October 22 to acquire Annapolis Bancorp, with approximately $437 million in assets, in a transaction valued at about $51 million. Closing was expected in Q2 2013, subject to regulatory and shareholder approvals and other conditions.
- F.N.B. expected to exceed $10 billion in assets on December 31, 2012, making it subject to debit-card interchange-fee rules from July 1, 2013. The filing estimated potential annual revenue reduction of $9 million absent mitigation, against $16.1 million of debit interchange revenue in the first nine months of 2012.
- Key risks include economic and credit conditions, interest-rate and market movements, regulatory changes including Basel III and Dodd-Frank, competitive pressures, acquisition execution and integration, and the bank’s Florida real estate exposure.
- Two overdraft-fee class actions had reached an agreement in principle for a $3.0 million settlement fund, subject to court approval. The amount was accrued in October 2012, after the reporting date. The company said other pending legal matters were not expected to materially affect its financial position, while future operating effects could not be determined.
- Other notable items included a $1.4 million gain on sale of a former headquarters building and a one-time insurance-premium adjustment that supported quarterly non-interest income.
Most important facts for investors to verify
- How much reported growth and earnings improvement reflects Parkvale versus organic performance, and whether purchase accounting valuations or integration costs will change.
- Whether the decline in non-performing assets continues, particularly in Florida commercial real estate, and whether allowance levels remain adequate.
- Performance and valuation assumptions for trust-preferred securities and other Level 3 assets, including sensitivity to defaults, discount rates and market liquidity.
- Management’s mitigation plan for the expected interchange-fee revenue reduction and the effect of the $10 billion asset threshold.
- Final court approval and accounting treatment of the overdraft litigation settlement, and progress and terms of the proposed Annapolis acquisition.
- Future net interest margin trends, deposit pricing and funding mix, and the effect of changing rates on earnings and economic value of equity.