F.N.B. Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. F.N.B. is a diversified regional financial services company with Community Banking, Wealth Management, Insurance and Consumer Finance segments, operating mainly in Pennsylvania, Ohio, Maryland and West Virginia, with consumer finance operations also in Tennessee and Kentucky. At year-end it reported 266 banking offices and 72 consumer finance offices.
Financial performance and condition
| Metric | FY 2013 / Dec. 31, 2013 | Comparable period |
|---|---|---|
| Net income | $117.8 million; diluted EPS $0.80 | 2012: $110.4 million; diluted EPS $0.79 |
| Net interest income | $396.0 million GAAP; $403.0 million fully taxable equivalent (FTE) | 2012: $372.9 million GAAP; $380.2 million FTE |
| Net interest margin | 3.65% FTE | 2012: 3.73% |
| Provision for loan losses | $31.1 million | 2012: $31.3 million |
| Non-interest income / expense | $135.8 million / $338.2 million | 2012: $131.3 million / $318.6 million |
| Total assets | $13.56 billion | 2012: $12.02 billion |
| Loans / deposits | $9.51 billion gross loans; $9.40 billion net loans / $10.20 billion deposits | 2012: $8.14 billion gross loans; $8.03 billion net loans / $9.08 billion deposits |
| Cash and cash equivalents | $214.0 million | 2012: $239.0 million |
| Debt at year-end | $1.24 billion short-term borrowings; $143.9 million long-term debt; $75.2 million junior subordinated debt | 2012: $1.08 billion; $89.4 million; $204.0 million, respectively |
| Regulatory capital ratios — Corporation | 12.5% total risk-based; 11.1% Tier 1; 8.8% leverage | 2012: 12.2%; 10.6%; 8.3% |
Net cash provided by operating activities was $386.1 million, compared with $544.0 million in 2012. Investing activities used $644.4 million, including a $683.6 million net increase in loans; financing activities provided $233.3 million. Cash and cash equivalents declined by $25.1 million during 2013.
Credit indicators improved overall: net charge-offs were $24.7 million, or 0.28% of average loans, versus $27.6 million, or 0.35%, in 2012. Non-performing assets were $118.9 million, or 0.88% of assets, broadly level in dollars but down from 0.99% of assets. The allowance was $110.8 million, equal to 1.17% of loans, versus 1.28% in 2012.
Material changes versus 2012
- Net income rose 6.7%, while diluted EPS increased from $0.79 to $0.80. Higher net interest income and non-interest income, and a slightly lower loan-loss provision, were partly offset by higher operating expenses.
- Net interest income increased as average earning assets grew 8.3% and interest expense declined 24.9%. However, the FTE margin narrowed to 3.65% from 3.73%, as loan yields fell faster than deposit costs.
- Gross loans increased 16.8% and deposits rose 12.3%, reflecting both acquisitions and organic growth. The year-end loan balance includes substantial acquired portfolios.
- Non-interest expense rose 6.1%, principally reflecting the acquired businesses, staffing and occupancy costs, technology investment, regulatory compliance and FDIC insurance. Merger-related costs were $8.2 million in 2013 versus $7.4 million in 2012.
- F.N.B. completed acquisitions of Annapolis Bancorp in April and PVF Capital in October 2013. It completed the BCSB Bancorp acquisition in February 2014 for approximately $81.2 million, issuing 6.73 million common shares.
- In November 2013, the company raised $161.3 million net through common and Series E preferred offerings to support growth and prepare for Basel III. It also redeemed $115.0 million and repurchased $15.0 million of trust preferred securities, reducing junior subordinated debt.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management said it expected to exceed estimated well-capitalized requirements under fully phased-in Basel III, while noting that the rules’ effects were still being assessed. The company expected rising rates to have a modest positive effect on net interest income; its modeled 12-month NII change under an immediate +100 basis-point shock was +1.1% at year-end.
- Management described liquidity as strong. The parent-company liquidity coverage ratio was 2.2 times and months of cash on hand was 15.2, both above internal minimums. FNBPA reported $4.8 billion of unused wholesale credit availability.
- Key risks include credit deterioration, especially in commercial real estate and acquired loans; interest-rate and margin pressure; acquisition integration, deposit or customer attrition, and asset-quality uncertainty; regulatory and capital requirements; and technology, cybersecurity and third-party operational risks.
- Debit interchange fee revenue fell $4.4 million in 2013 after the company became subject to the Durbin Amendment cap. A pending court appeal could further reduce permitted interchange fees.
- Unusual items included a $1.9 million gain on a discounted trust-preferred debt extinguishment and a separate $2.2 million debt-extinguishment charge. Goodwill was $764.2 million; management reported no impairment in its 2013 annual test. The filing also disclosed $31.6 million of pooled trust-preferred securities valued using Level 3 inputs and associated valuation uncertainty.
- The ANNB stockholder litigation was settled and finally approved in 2013; a BCSB stockholder lawsuit was voluntarily dismissed in January 2014. The company said other legal proceedings were not expected to materially affect consolidated financial position, although future-period earnings effects could not be determined.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Most important facts for investors to verify
- How much of loan, deposit and earnings growth is organic versus attributable to the ANNB, PVF and BCSB acquisitions, and how integration and customer retention are progressing.
- Whether margin compression continues and whether management’s modestly positive rate-sensitivity expectations are borne out.
- Whether credit quality remains sound as acquired loans season: monitor non-performing loans, TDRs, OREO, charge-offs and allowance coverage.
- Whether the $4.8 billion of stated wholesale capacity and parent liquidity metrics remain available under stress, and how funding mix and short-term borrowings evolve.
- Capital needs and potential dilution, including Basel III implementation, preferred-stock obligations and future acquisition funding.
- Valuation and credit developments in pooled trust-preferred securities, including the Level 3 assumptions and potential further impairment.