Business context and reporting period
F.N.B. Corporation’s Form 10-K covers the fiscal year ended December 31, 2014; figures below are annual unless identified as fourth-quarter results. The Pittsburgh-based financial services company operates Community Banking, Wealth Management, Insurance and Consumer Finance businesses. At year-end it had $16.1 billion in assets, 289 banking offices and 73 consumer finance offices.
Growth included the February acquisition of BCSB Bancorp and the September acquisition of OBA Financial Services. The company also completed its PVF acquisition in October 2013; these transactions contributed to year-over-year growth and affect comparability.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $466.3 million | $396.0 million |
| Non-interest income | $158.3 million | $135.8 million |
| Provision for loan losses | $38.6 million | $31.1 million |
| Non-interest expense | $379.3 million | $338.2 million |
| Net income | $144.1 million | $117.8 million |
| Net income available to common stockholders | $135.7 million | $117.8 million |
| Diluted EPS | $0.80 | $0.80 |
| Net interest margin | 3.59% | 3.65% |
| Return on average assets / equity | 0.96% / 7.50% | 0.93% / 7.78% |
- Balance sheet: Year-end assets were $16.13 billion, net loans $11.12 billion, deposits $11.38 billion and stockholders’ equity $2.02 billion. Loans grew 18.3% and deposits 11.6% year over year, with acquisitions and organic growth contributing.
- Credit quality: Net charge-offs were $23.5 million, or 0.23% of average loans, versus $24.7 million, or 0.28%, in 2013. Non-performing loans and OREO totaled $110.0 million, down from $118.1 million; non-performing assets were 0.68% of assets versus 0.88%. The allowance was $125.9 million, or 1.12% of loans, versus $110.8 million, or 1.17%.
- Cash flow: Operating cash flow was $446.8 million; investing cash outflow was $1.74 billion, largely reflecting loan and securities investment; financing cash inflow was $1.36 billion. Cash and cash equivalents ended the year at $287.4 million.
- Debt and liquidity: Short-term borrowings were $2.04 billion, long-term debt $483.2 million and junior subordinated debt $58.2 million. The bank had $4.6 billion of unused wholesale credit availability and $1.1 billion of unpledged government and agency securities. Parent-company liquidity coverage ratio was 2.2x and months of cash on hand 14.2, above internal minimums of 1.0x and 12 months.
- Capital: Corporation total and Tier 1 risk-based capital ratios were 12.4% and 11.1%; leverage ratio was 8.4%. FNBPA was categorized as well-capitalized. Management said it expected to exceed estimated well-capitalized requirements on a fully phased-in basis under new capital rules.
- Cash dividends: Common dividends were $0.48 per share for the year, unchanged from 2013. The company paid $8.4 million in preferred dividends in 2014.
Material changes versus the prior comparable period
- Net income rose 22.3%, but diluted EPS remained $0.80. Preferred dividends and a 14.4% increase in average diluted shares, partly reflecting acquisitions and the 2013 stock offering, reduced the benefit to common shareholders.
- Net interest income increased 17.7%, supported by loan growth and acquired balances. The net interest margin declined six basis points as loan yields fell faster than deposit rates in the low-rate environment.
- Non-interest income rose 16.6%, including a substantial increase in securities gains. Non-interest expense rose 12.1%, primarily from acquisitions, higher staffing and occupancy costs, and regulatory and technology spending.
- 2014 merger costs were $9.6 million, compared with $8.2 million in 2013. The provision for loan losses increased $7.6 million, while the allowance-to-loans ratio declined, in part because acquired loans do not carry an acquisition-date allowance under the applicable accounting rules.
- Short-term borrowings increased $800.4 million, largely due to additional short-term FHLB advances. Total stockholders’ equity increased to $2.02 billion from $1.77 billion.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described liquidity as strong and said rising interest rates were expected to have a modest positive effect on net interest income; the company’s interest-rate simulations showed a 1.1% increase under an immediate 100-basis-point rise and a 2.2% decrease under a 100-basis-point decline.
- The company recorded a $13.8 million gain from selling its pooled trust preferred securities; total net securities gains were $11.7 million after other sale losses. Management said the sale reduced portfolio risk and risk-weighted assets. A $2.7 million one-time gain from a predecessor-bank acquisition overpayment was also included in other income.
- Key risks include commercial real estate and business-credit exposures, consumer credit losses, regional economic weakness, deposit competition and funding costs, interest-rate sensitivity, acquisition integration, regulatory and capital requirements, cybersecurity and third-party operational risks. Commercial/industrial, construction and commercial real estate loans were approximately 56.1% of the loan portfolio; consumer loans were 24.5%.
- Pending and threatened legal proceedings are disclosed. Management did not expect aggregate liability to materially affect consolidated financial position, but could not determine whether claims might materially affect results in a future period.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of loan, deposit and earnings growth is organic versus attributable to BCSB, OBA and prior acquisitions, and whether integration produces expected benefits.
- Whether margin pressure persists and how deposit pricing, short-term FHLB funding and interest-rate changes affect net interest income.
- Credit trends in commercial real estate, consumer lending and troubled debt restructurings, and whether allowance coverage remains adequate as loans grow.
- How recurring earnings compare with reported results after the securities-sale gain, one-time gain and merger costs.
- Capital and liquidity capacity under fully phased-in regulatory standards, including the treatment of trust preferred securities and the company’s ability to sustain dividends.