F.N.B. Corporation — Q3 2011 Form 10-Q
Business context and period. F.N.B. Corporation is a diversified financial services company headquartered in Pennsylvania, with community banking, consumer finance, wealth management, insurance, leasing and merchant banking businesses. This filing covers the quarter and nine months ended September 30, 2011; income and cash-flow comparisons are with the corresponding 2010 periods, while balance-sheet comparisons are with December 31, 2010. Amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $80.4 | $72.3 | $236.4 | $212.1 |
| Provision for loan losses | $8.6 | $12.3 | $25.4 | $36.5 |
| Non-interest income | $29.6 | $27.8 | $87.3 | $86.5 |
| Non-interest expense | $69.2 | $64.2 | $212.1 | $192.8 |
| Income before taxes | $32.2 | $23.5 | $86.2 | $69.3 |
| Net income | $23.8 | $17.2 | $63.3 | $51.1 |
| Diluted EPS | $0.19 | $0.15 | $0.51 | $0.45 |
- Q3 net income increased about 38%; nine-month net income increased about 24%. Q3 return on average assets/equity was 0.95%/7.79%, versus 0.76%/6.43%; nine-month figures were 0.86%/7.24%, versus 0.77%/6.48%.
- Net interest margin was 3.79% in both the third quarter and first nine months of 2011, compared with 3.78% in the respective 2010 periods. Management attributed higher net interest income principally to growth in earning assets, including the CBI acquisition, and lower funding costs; lower asset yields partly offset these benefits.
- At September 30, total assets were $9,951, total loans net of unearned income were $6,789, deposits were $7,368, and stockholders’ equity was $1,214. At year-end 2010, those amounts were $8,960, $6,088, $6,646 and $1,066, respectively. The acquisition of CBI materially affects these comparisons.
- Cash and cash equivalents were $233, up from $132 at year-end. For the nine months, operating cash flow was $252, investing cash flow was negative $414, and financing cash flow was positive $264; cash increased $101. Loan growth and securities purchases were significant uses of investing cash.
- Deposits and customer repurchase agreements totaled $8,041, up 10.8% from year-end, principally from CBI and organic growth in transaction accounts. Short-term borrowings were $817, long-term debt $223, and junior subordinated debt $204.
- Management reported regulatory capital ratios of 13.3% total capital and 11.6% Tier 1 risk-based capital at the holding company; FNBPA ratios were 11.8% and 10.5%. Both were classified as well-capitalized. The May common-stock offering generated $62.8 million net proceeds.
Material changes, credit quality and notable items
- The January 1 acquisition of Comm Bancorp added $625.6 million of assets, including $445.3 million in loans and $561.8 million in deposits. The preliminary allocation included $38.8 million of goodwill and $4.8 million of core deposit intangible; some acquired fair values remained subject to finalization.
- Non-performing assets declined to $165.8 million from $174.0 million at year-end. Non-performing loans were $125.4 million, down from $135.3 million; the non-performing-loan ratio improved to 1.85% from 2.22%. The allowance for loan losses was $108.8 million, or 1.60% of loans, and covered 86.75% of non-performing loans.
- Credit conditions remained uneven. Management cited continuing weakness and uncertain land valuations in Florida. Florida’s allowance was $20.5 million, or 11.60% of that portfolio, and Florida recorded $3.5 million of Q3 net charge-offs, an annualized 7.74% of average loans. Pennsylvania’s portfolio was described as performing well.
- Available-for-sale collateralized debt obligations had $13.5 million of unrealized losses; total unrealized losses on available-for-sale securities were $15.5 million. Management said it did not intend to sell the affected debt securities and considered full contractual principal and interest collection probable on its trust-preferred securities. It also warned that deterioration beyond assumptions could require further write-downs.
- Q3 non-interest expense included $0.3 million of merger costs; nine-month merger costs were $4.6 million, compared with $0.1 million a year earlier. Q3 occupancy and equipment costs included $0.3 million of flood-related expense in northeastern Pennsylvania. Nine-month results also included $9.2 million of losses from OREO valuation write-downs.
- On June 15, F.N.B. agreed to acquire Parkvale Financial Corporation in a stock transaction valued at approximately $130 million. Completion was expected in Q1 2012, subject to regulatory and shareholder approvals and other closing conditions.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said the slow economic environment continued to challenge borrowers, particularly in Florida, and noted that local markets may lag national economic trends.
- Management described liquidity as strong: parent-company cash was $146.5 million; its liquidity coverage ratio was 3.1 times and months of cash on hand were 20. FNBPA had $3.1 billion of unused wholesale credit availability. These are management assessments, not guarantees of future funding conditions.
- F.N.B. said Parkvale’s completion would put the combined company above $10 billion in assets and subject it to debit interchange fee rules. It estimated potential annual interchange revenue reductions of up to $9 million or more before mitigation; timing depends on the asset threshold and implementation rules.
- Key disclosed risks include credit losses, interest-rate and market changes, liquidity, competition, economic conditions, housing prices, employment, regulatory changes and uncertainty in fair-value estimates. Management’s interest-rate model indicated a modest positive net-interest-income sensitivity to rising rates, but results depend on assumptions and may differ from actual experience.
- Various legal claims were pending or threatened. The company said it had defenses and did not expect aggregate liability to materially affect consolidated financial position, while noting it could not rule out a material effect on results in a future reporting period. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether Parkvale received required approvals and closed as expected, and the final acquisition accounting and integration costs.
- Subsequent trends in Florida commercial real estate, land collateral values, charge-offs, non-performing assets and allowance adequacy.
- Performance and valuation assumptions for trust-preferred and other impaired securities, including any further impairment charges.
- Actual impact and effective date of debit interchange rules following the Parkvale transaction, and progress on revenue mitigation.
- Whether deposit growth, liquidity measures and regulatory capital remain adequate as the loan book and acquisitions grow.
- Whether expense growth—including compensation, merger costs and OREO costs—remains controlled relative to revenue growth.