F.N.B. Corporation — Q2 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2016. F.N.B. is a diversified financial services company operating in six states; its banking offices are in Pennsylvania, Ohio, Maryland and West Virginia, with consumer finance offices also in Kentucky and Tennessee. Results include Metro Bancorp (acquired February 13) and 17 Fifth Third branches (acquired April 22), from their respective closing dates. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial results and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $154.4 million | $123.8 million | $294.7 million | $245.7 million |
| Non-interest income | $51.4 million | $39.8 million | $97.5 million | $77.9 million |
| Net revenue (net interest plus non-interest income) | $205.8 million | $163.5 million | $392.2 million | $323.6 million |
| Provision for credit losses | $16.6 million | $8.9 million | $28.4 million | $17.0 million |
| Net income | $41.3 million | $40.1 million | $67.4 million | $80.5 million |
| Net income available to common shareholders | $39.3 million | $38.1 million | $63.4 million | $76.5 million |
| Diluted EPS | $0.19 | $0.22 | $0.31 | $0.43 |
| Net interest margin, FTE basis | 3.41% | 3.43% | 3.41% | 3.46% |
Q2 non-interest expense was $129.6 million, up 34.3%; six-month expense was $266.3 million, up 39.3%. The filing reports a Q2 efficiency ratio of 55.4%, compared with 56.0% a year earlier. These and the FTE margin are measures presented by the company; FTE and certain other measures are non-GAAP.
- At June 30, total assets were $21.215 billion, versus $17.558 billion at December 31, 2015; loans and leases were $14.563 billion versus $12.190 billion; deposits were $15.529 billion versus $12.623 billion.
- Cash and cash equivalents were $399.0 million, down from $489.1 million at year-end. Six-month operating cash flow was $99.9 million (prior year $105.2 million); investing cash flow was negative $417.1 million (negative $561.8 million); financing cash flow was positive $227.1 million (positive $406.7 million).
- Short- and long-term borrowings totaled $2.917 billion, compared with $2.690 billion at year-end. Stockholders’ equity was $2.545 billion, compared with $2.096 billion.
- Regulatory capital ratios at June 30: Corporation CET1 9.2%, Tier 1 9.9%, total capital 12.1%, leverage 7.7%; FNBPA CET1 9.7%, Tier 1 10.2%, total capital 11.2%, leverage 8.0%. Management stated both were “well-capitalized.”
Material changes versus comparable periods
- Q2 net interest income grew 24.7% and non-interest income 29.3%, primarily reflecting acquired operations and organic loan, deposit and fee growth. Q2 average loans rose 24.4% year over year; average deposits and customer repurchase agreements rose 27.0%.
- Despite higher Q2 net income, diluted EPS declined from $0.22 to $0.19 as the average diluted share count increased by 20.0%, largely following issuance of 34.0 million shares for Metro. For the first half, net income available to common shareholders declined 17.1% and diluted EPS fell from $0.43 to $0.31.
- Merger and acquisition costs were $10.6 million in Q2 and $35.5 million for the first half, versus $0.4 million in each prior-year comparable period. Excluding these costs, management reported non-GAAP operating diluted EPS of $0.22 for Q2 (versus $0.22) and $0.43 for the first half (versus $0.44).
- FTE net interest margin eased to 3.41% from 3.43% in Q2 and to 3.41% from 3.46% for the first half. Management cited the prolonged low-rate environment and competition for earning assets; increased acquired-loan accretion partly offset pressure.
- Credit costs increased: Q2 provision was up 87.7%, and six-month provision was up 67.1%. Management attributed the increase to originated loan growth, credit migration and a $4.0 million charge-off on one commercial relationship.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management described the company as modestly asset-sensitive and expected rising rates to have a modest positive effect on net interest income; a 100-basis-point increase was modeled to raise 12-month net interest income 1.4%, while a 100-basis-point decrease was modeled to reduce it 2.5%. Actual results may differ from model estimates and assumptions.
- Liquidity indicators were above stated internal thresholds: parent-company liquidity coverage ratio 2.2x (limit greater than 1.0x) and months of cash on hand 14.2 (limit greater than 12). Unused wholesale credit availability was $6.1 billion, and salable unpledged government and agency securities were $1.5 billion. Management said liquidity was sufficient for normal and contingency needs.
- Non-performing assets increased to $138.4 million from $110.8 million at year-end; non-performing loans were $90.0 million, or 0.62% of loans and leases, versus $71.9 million, or 0.59%. Management linked much of the increase in non-accrual loans to a borrower serving the energy sector amid commodity-price pressure; acquired properties also increased OREO.
- On July 20, 2016, after quarter-end, F.N.B. agreed to acquire Yadkin Financial Corporation for approximately $1.4 billion in stock, expecting to issue about 111 million shares. Closing was anticipated in Q1 2017, subject to regulatory and shareholder approvals and other conditions. The filing highlights integration, core-system conversion, retention, competition in a new market, approval and potential dilution risks.
- Other unusual items included a $2.6 million impairment charge on acquired low-income-housing-project assets in the first half and a $2.4 million gain related to redemption of $10.0 million of trust preferred securities. The company said ordinary-course litigation and regulatory matters were not expected to materially harm consolidated financial position or liquidity, though they could materially affect income in a period.
- Principal stated risks include economic and interest-rate conditions, credit quality, regulatory change, operational and cybersecurity exposures, competition, and acquisition execution. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether reported organic growth and acquisition-driven revenue translate into sustainable earnings after integration, and how actual results compare with the company’s non-GAAP operating measures.
- Progress and final purchase-accounting values for Metro and the Fifth Third branches, as well as integration costs, deposit retention and realized benefits.
- Yadkin merger approvals, final terms and share issuance, integration timetable and costs, and the execution and dilution risks described in the filing.
- Developments in the criticized commercial credit, energy-sector exposure, charge-offs, non-performing assets and allowance adequacy.
- Changes in funding costs, net interest margin, liquidity measures and capital ratios as the balance sheet grows and interest rates change.