F.N.B. Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. FNB is a Pittsburgh-based financial holding company with Community Banking, Wealth Management, Insurance and Consumer Finance segments, operating primarily in Pennsylvania, Ohio, Maryland and West Virginia. At year-end it had 324 banking offices and 77 consumer-finance offices.
Financial performance and condition
| Metric | FY 2016 / Dec. 31, 2016 | FY 2015 / Dec. 31, 2015 |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $813.3 million | $660.6 million |
| Net interest income | $611.5 million | $498.2 million |
| Non-interest income | $201.8 million | $162.4 million |
| Provision for credit losses | $55.8 million | $40.4 million |
| Non-interest expense | $511.1 million | $390.5 million |
| Net income | $170.9 million | $159.6 million |
| Net income available to common shareholders | $162.9 million | $151.6 million |
| Diluted EPS | $0.78 | $0.86 |
| Net interest margin, FTE (non-GAAP) | 3.38% | 3.42% |
| Efficiency ratio (non-GAAP) | 55.4% | 56.1% |
- Adjusted earnings: Operating net income available to common shareholders, a non-GAAP measure, was $187.7 million versus $153.7 million; operating diluted EPS was $0.90 versus $0.87. FNB reported $37.4 million of 2016 merger-related costs, compared with $3.0 million in 2015.
- Fourth quarter: Net income was $51.3 million and diluted EPS was $0.23, compared with $39.1 million and $0.21 in fourth-quarter 2015. Common income was $49.3 million versus $37.1 million.
- Growth and balance sheet: Year-end assets rose 24.4% to $21.8 billion; loans and leases rose 22.2% to $14.9 billion; deposits rose 27.3% to $16.1 billion; and stockholders’ equity rose 22.7% to $2.6 billion. Average loans increased 22.4% and average deposits 26.5%, substantially reflecting acquisitions as well as organic growth. The year-end loans-to-deposits ratio was 92.7%, down from 96.6%.
- Credit quality: Net charge-offs increased to $39.7 million from $24.4 million, or 0.28% of average loans versus 0.21%. The provision increased 37.9%. Non-performing loans were $85.9 million; non-performing loans plus OREO were 0.79% of loans, down from 0.91%. The allowance was $158.1 million, or 1.06% of loans, versus $142.0 million, or 1.16%.
- Cash flow: Operating cash flow was $292.7 million, investing cash outflow was $1.260 billion, and financing cash inflow was $849.2 million. Cash and cash equivalents decreased $117.7 million to $371.4 million.
- Debt and liquidity: Short- and long-term borrowings totaled $3.04 billion, up from $2.69 billion. Parent-company cash was approximately $164.6 million. FNB reported a parent liquidity coverage ratio of 2.3 times and 14.9 months of cash on hand, both above internal limits; unused wholesale credit availability was $6.34 billion. These measures do not eliminate funding or liquidity risk.
- Capital: FNB reported CET1, Tier 1 and total capital ratios of 9.2%, 9.9% and 12.0%; FNBPA reported 9.7%, 10.2% and 11.1%. Both were categorized as well-capitalized. Common dividends remained $0.48 per share for the year.
Material changes, outlook and risks
- FNB completed the Metro Bancorp acquisition in February 2016, issuing approximately 34.0 million common shares, and purchased 17 Fifth Third branches in April. These transactions materially expanded assets, loans, deposits and the share count; average diluted shares increased 17.8% to 207.8 million. Revenue and balance-sheet growth therefore includes acquired business.
- Management attributed higher net interest income chiefly to loan and securities growth. The margin narrowed amid a prolonged low-rate environment and competition. Interest expense rose 38.9% as funding balances and rates increased.
- FNB’s provision and charge-offs rose partly because of organic growth, credit migration and a $4.0 million charge-off on one commercial relationship involving alleged falsification of documents and financial information. Commodity-sensitive borrowers also experienced pressure.
- FNB had agreed to acquire Yadkin Financial Corporation, with approximately $7.5 billion in assets, to enter North Carolina. The transaction was expected to close in March 2017, subject to regulatory approvals and closing conditions. FNB expected it to be accretive in the first full year after closing, excluding one-time costs, but identified integration, systems conversion, employee retention, competition, timing and approval risks. Expected issuance was approximately 111.7 million FNB shares.
- Management described liquidity and capital as adequate and its interest-rate position as modestly asset-sensitive; it expected rising rates to have a modest positive effect on net interest income. These are estimates based on models and assumptions, not guaranteed outcomes. No quantified standalone FY 2017 earnings guidance is provided in the supplied filing text.
- Key risks include credit losses and regional economic weakness, deposit competition and funding costs, interest-rate changes, acquisition execution and dilution, regulatory requirements and costs, cybersecurity and third-party service disruptions, and limits on subsidiary dividends and capital distributions. Routine legal and regulatory matters were disclosed; management did not expect them to materially affect consolidated financial position or liquidity, while noting a possible material impact on income in a given period.
- FNB completed its redomestication from Florida to Pennsylvania in August 2016; the filing says this did not change its business or assets. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded financial reporting controls were effective.
Important facts for investors to verify
- Separate acquired from organic growth, and assess integration costs, realized synergies and the effects of the Yadkin transaction, including actual consideration, share issuance and closing outcome.
- Track credit migration, commercial and commodity-related exposures, the $4.0 million relationship charge-off, charge-offs and allowance adequacy as the loan portfolio expands.
- Reconcile GAAP earnings and EPS with management’s non-GAAP operating measures and evaluate whether merger-related and other adjustments are comparable across periods.
- Monitor net interest margin, deposit pricing and mix, wholesale borrowing reliance, liquidity measures and capital ratios against regulatory and internal thresholds.
- Review the full financial statements and notes for acquisition accounting, commitments, legal contingencies, securities valuation and the expected effects of CECL and other pending accounting standards.