F.N.B. Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. FNB is a diversified financial services company operating in six states through banking, wealth management, insurance and consumer finance businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue (net interest income plus non-interest income) | $291.4 million | $210.7 million | $803.7 million | $602.9 million |
| Net interest income | $225.2 million | $157.5 million | $616.4 million | $452.2 million |
| Provision for credit losses | $16.8 million | $14.6 million | $44.4 million | $43.0 million |
| Net income | $77.7 million | $52.2 million | $175.1 million | $119.6 million |
| Net income available to common stockholders | $75.7 million | $50.2 million | $169.0 million | $113.6 million |
| Diluted EPS | $0.23 | $0.24 | $0.57 | $0.55 |
| Net interest margin, FTE (non-GAAP) | 3.44% | 3.36% | 3.41% | 3.39% |
- Q3 common net income increased 50.9%, but diluted EPS fell 4.2%, principally reflecting the 53.4% increase in average diluted shares following the Yadkin acquisition. Nine-month diluted EPS rose 3.6%.
- Q3 non-interest income was $66.2 million, up 24.3%; non-interest expense was $163.7 million, up 35.3%. The adjusted efficiency ratio was 53.15%, versus 54.38% a year earlier. Nine-month adjusted efficiency ratio was 54.68%, versus 55.36%.
- At September 30, total assets were $31.1 billion, loans net of allowance were $20.6 billion, deposits were $21.9 billion, and stockholders’ equity was $4.4 billion. Compared with year-end 2016, these increased 42.5%, 40.1%, 36.5% and 72.5%, respectively, substantially reflecting Yadkin.
- Cash and cash equivalents were $515.3 million. For the first nine months, operating cash flow was $125.3 million, investing cash flow was negative $1.09 billion, and financing cash flow was positive $1.11 billion; cash increased $143.9 million.
- Borrowings totaled $4.53 billion: $3.87 billion short-term and $658.8 million long-term. The loan-to-deposit ratio was 94.9%, versus 92.7% at year-end 2016.
Material changes and management commentary
- FNB completed its $1.8 billion acquisition of Yadkin Financial Corporation on March 11, 2017, issuing approximately 111.6 million common shares. Yadkin contributed an estimated $6.8 billion of assets, including $5.1 billion of loans and $5.2 billion of deposits, at acquisition. Its results are included from the closing date.
- Management attributed growth in interest income and fees to the enlarged footprint, organic loan and deposit growth, and acquisition-related purchase accounting accretion. Q3 organic loan growth was also supported by commercial lending, indirect auto and residential mortgages. Management described deposit gathering and relationship-based transaction deposits as priorities.
- Nine-month merger-related expense was $55.5 million, primarily for Yadkin integration, compared with $35.8 million in the prior-year period. Management reported that core systems conversion was completed during Q1; additional integration and cost-savings execution remain relevant to results.
- Credit quality indicators were mixed: non-performing assets rose to $147.0 million from $118.4 million at year-end, with non-accrual loans increasing mainly due to several commercial and industrial borrowers. The non-performing-loan ratio was 0.54%; allowance for credit losses was $170.0 million, equal to 152.43% of non-performing loans. The originated-portfolio delinquency ratio was 0.91%, compared with 1.04% a year earlier.
- FNB and its bank subsidiary were categorized as well-capitalized. At September 30, FNB’s total capital ratio was 11.5%, common equity tier 1 ratio 9.0%, and leverage ratio 7.6%; management stated stress-test ratios remained above well-capitalized levels under the severely adverse scenario.
Liquidity, outlook and risks
- Management said liquidity was sufficient for normal and contingency needs. Unused wholesale credit availability was $7.87 billion, and salable unpledged government and agency securities were $1.85 billion.
- The parent-company months-of-cash-on-hand measure was 10.6 months, below FNB’s internal limit of more than 12 months, following Yadkin’s acquisition and increased projected dividends. Management said alternatives were under review and expected to cure the policy exception by December 31, 2017. The liquidity coverage ratio was 1.9 times, against an internal minimum above 1.0 times.
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Forward-looking risks include credit deterioration, interest-rate and funding-cost changes, competition, regulatory actions, technology and operational risks, and execution of Yadkin integration and expansion into North and South Carolina.
- Yadkin’s acquired loan valuations and related purchase-accounting accretion remained subject to review and possible measurement-period adjustments. The filing also identifies risks around the acquired SBA lending business, including SBA program changes, preferred-lender status, loan-sale markets and potential losses on guaranteed loans if servicing or origination requirements are not met.
- Legal matters arise in the ordinary course; management did not expect them, individually or in aggregate after reserves and insurance, to materially affect financial position or liquidity, though they could affect income in a particular period.
Important facts for investors to verify
- Track whether Yadkin integration delivers expected operating efficiencies and whether further merger costs or purchase-accounting valuation changes arise.
- Monitor the parent-company cash-on-hand policy exception and whether management brings the measure above its 12-month internal limit by year-end 2017.
- Assess commercial credit trends, non-accrual migration, acquired-loan performance, allowance adequacy and the impact of adopting the expected-credit-loss standard.
- Review deposit pricing, short-term wholesale funding levels, loan-to-deposit ratio and sensitivity of net interest income to interest-rate movements.
- Consider dilution from acquisition-related share issuance: average diluted shares rose materially, and tangible book value per common share was $6.12 versus $6.53 a year earlier.