F.N.B. Corporation — 2011 Form 10-K Summary
Business context and reporting period
F.N.B. Corporation is a diversified financial services company headquartered in Pennsylvania, with community banking, wealth management, insurance and consumer finance businesses. The fiscal year ended December 31, 2011. At year-end, it reported 234 community banking offices and 66 consumer finance offices.
Comm Bancorp (CBI) was acquired on January 1, 2011, so its results are included for the full year. Parkvale Financial (PFC) was acquired on January 1, 2012, after the reporting period; the acquisition is therefore not included in 2011 results. The company raised $62.8 million net in a May 2011 common-stock offering, with proceeds intended for the PFC acquisition.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $316.5 million | $285.0 million |
| Net interest income, fully taxable equivalent (FTE) | $324.4 million | $291.6 million |
| Net interest margin (FTE) | 3.79% | 3.77% |
| Provision for loan losses | $33.6 million | $47.3 million |
| Non-interest income | $119.9 million | $116.0 million |
| Non-interest expense | $283.7 million | $251.1 million |
| Net income | $87.0 million | $74.7 million |
| Diluted earnings per share | $0.70 | $0.65 |
| Return on average assets / equity | 0.88% / 7.36% | 0.84% / 7.06% |
Net income rose about 16.6%. Management attributed the improvement mainly to higher net interest income and lower loan-loss provision, partly offset by higher expenses. Expense growth included CBI-related costs and $5.0 million of merger expenses; 2010 results benefited from a one-time $10.5 million pension-expense credit.
At December 31, 2011, assets were $9.79 billion, net loans $6.76 billion, deposits $7.29 billion and stockholders’ equity $1.21 billion. Total loans were $6.86 billion, up 12.6% year over year, including $445.3 million acquired with CBI. The allowance for loan losses was $100.7 million, or 1.47% of loans. Net charge-offs were $39.1 million, or 0.58% of average loans, versus $45.9 million, or 0.77%, in 2010.
Cash and cash equivalents were $209.0 million. Operating cash flow was $289.6 million; investing activities used $284.0 million and financing activities provided $71.8 million, resulting in a $77.4 million increase in cash. Year-end borrowings included $851.3 million short-term, $88.0 million long-term and $204.0 million junior subordinated debt. The company reported Tier 1 and total risk-based capital ratios of 11.7% and 13.3%, and a leverage ratio of 9.2%; FNBPA was categorized as well-capitalized.
Parent-company cash was $166.1 million. Management reported a 1.6x parent liquidity coverage ratio, 12.2 months of cash on hand, and $3.4 billion of unused wholesale credit availability at FNBPA.
Material changes versus the prior comparable period
- Net interest income increased $31.5 million, reflecting loan and deposit growth, the full-year CBI contribution and lower funding costs. FTE net interest margin edged up 2 basis points to 3.79%.
- Loan-loss provision fell $13.7 million, while net charge-offs declined; non-performing loans decreased to $106.2 million from $135.3 million.
- Non-performing assets declined to $149.9 million from $174.0 million; non-performing loans were 1.55% of total loans versus 2.22%.
- Non-interest expense increased $32.6 million, or 13.0%, including higher salaries, acquisition-related operating costs and merger expense.
- Long-term debt fell to $88.0 million from $192.1 million, principally following repayment of FHLB advances, including $136.0 million prepaid in 2011. Deposits increased $643.6 million.
- Cash dividends remained $0.48 per share for the year. The 2010 fourth quarter included the one-time pension credit, making quarterly comparisons less representative.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management said current capital resources were expected to meet requirements for the foreseeable future and described liquidity as strong.
- Florida real estate remains a notable credit risk: the filing cites continuing uncertainty in property values. Florida represented 2.2% of total loans, but its non-performing loans were 25.39% of the Florida loan portfolio at year-end; the allowance was 8.40% of Florida loans. Management had stopped originating new Florida loans and continued to reduce exposure.
- Following the PFC acquisition, assets exceeded $10 billion. Management expected debit-card interchange rules to apply from July 1, 2013 and estimated annual interchange revenue could decline by $9 million or more. The filing also identifies potential higher deposit-insurance costs and broader Dodd-Frank and Basel III compliance and capital requirements.
- Investment securities included pooled trust-preferred securities with $13.2 million of unrealized losses; future earnings charges could result if expected cash flows deteriorate. Total non-performing investments were $9.0 million.
- Legal proceedings were pending or threatened. Management did not expect aggregate liability to materially affect consolidated financial position based on information available, but could not rule out an effect on future-period results.
- Other significant items included $3.3 million of 2011 prepayment penalties on higher-cost borrowings, $3.5 million of fourth-quarter gains on securities sales, and a $37.98 million pension-plan underfunding at year-end. Goodwill testing found no impairment.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How PFC’s assets, loans, deposits, integration costs and issued shares affect post-acquisition earnings, capital and dilution.
- Whether Florida loan losses, property values and non-performing assets continue to improve, and whether the allowance remains adequate.
- The sustainability of net interest margin and loan growth amid low rates, competitive pressures and changing deposit costs.
- The realized impact and timing of debit-interchange regulation and changes to FDIC assessments and capital requirements.
- Developments in pooled trust-preferred securities, including deferrals, defaults, valuation assumptions and possible additional impairment.
- Parent liquidity and dividend capacity, including restrictions on subsidiary distributions and debt maturities.