F.N.B. Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; compared with the corresponding 2009 periods unless otherwise noted. F.N.B. is a diversified financial services company focused on community banking, consumer finance, wealth management and insurance. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net interest income | $71.5 | $65.3 | $139.9 | $129.4 |
| Non-interest income | $28.4 | $28.5 | $58.7 | $56.6 |
| Provision for loan losses | $12.2 | $13.9 | $24.2 | $24.4 |
| Non-interest expense | $63.1 | $66.3 | $128.5 | $127.2 |
| Net income | $17.9 | $10.6 | $33.9 | $26.2 |
| Net income available to common stockholders | $17.9 | $9.1 | $33.9 | $23.4 |
| Diluted earnings per common share | $0.16 | $0.10 | $0.30 | $0.26 |
| Net interest margin, fully taxable-equivalent basis | 3.81% | 3.60% | 3.77% | 3.62% |
- Balance sheet at June 30: Total assets were $8.83 billion, up from $8.71 billion at December 31, 2009. Loans were $5.97 billion, up 2.0%; deposits were $6.53 billion, up 2.4%; and stockholders’ equity was $1.06 billion, versus $1.04 billion at year-end.
- Credit costs and asset quality: The allowance for loan losses was $114.0 million, or 1.91% of loans, compared with $104.7 million and 1.79% at year-end. Six-month net charge-offs were $14.8 million (0.51% annualized of average loans), down from $29.8 million (1.03%) in 2009. Non-performing assets rose to $177.3 million, or 2.01% of assets, from $171.7 million, or 1.97%, at year-end.
- Cash flow: For the first six months, operating activities provided $80.5 million; investing activities used $267.1 million; and financing activities provided $76.9 million. Cash and cash equivalents fell $109.7 million to $200.9 million.
- Debt and liquidity: At June 30, short-term borrowings were $735.4 million, long-term debt $205.8 million and junior subordinated debt $204.4 million. Deposits plus treasury management accounts totaled $7.14 billion, up $224.2 million from year-end. Management reported $3.1 billion of unused wholesale credit availability and stated that liquidity was sufficient for normal and contingency needs.
- Capital: The company and its bank subsidiary were categorized as well-capitalized. F.N.B. Corporation’s total risk-based capital ratio was 12.8%, Tier 1 risk-based ratio 11.3%, and leverage ratio 8.6% at June 30. The common dividend was $0.12 per share per quarter.
Material changes and management commentary
- Q2 net income increased 69% from Q2 2009; six-month net income increased 29%. The comparison of common earnings also reflects that preferred-stock dividends and discount amortization reduced 2009 common earnings; the Treasury CPP preferred stock had been redeemed in September 2009.
- Net interest income improved as funding costs declined faster than asset yields. For Q2, the average rate paid on interest-bearing liabilities fell to 1.37% from 1.95%; management also cited growth in earning assets and a more favorable funding mix. Average earning-asset yield declined to 5.00% from 5.30%.
- Q2 provision declined year over year, and charge-offs improved, particularly in Florida. However, management said the slow economic environment remained challenging, especially in Florida. Florida non-performing loans were 27.70% of that region’s loans, and the Florida allowance was $26.9 million, or 11.65% of regional loans.
- Non-interest income was essentially flat in Q2. For the first half, it rose 3.7%, supported in part by $2.4 million of securities-sale gains and higher recoveries on previously acquired impaired loans. First-half non-interest expense increased 1.0%; a $2.3 million prepayment penalty on higher-cost FHLB advances contributed to other expense. The company prepaid $59 million of FHLB advances during the half.
- The company recorded $2.3 million of credit-related securities impairment losses in earnings for the first half, including losses on pooled trust-preferred securities; a further $7.2 million of non-credit impairment was recognized in other comprehensive income. Management uses Level 3 estimates for certain illiquid trust-preferred securities and warned that further write-downs could be required if credit performance worsens.
Outlook, risks and contingencies
- The filing gives no specific full-year earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Management estimated Regulation E changes would reduce overdraft-fee revenue by about $1.7 million in the second half of 2010, potentially lowering earnings by $0.01 per share.
- Management said annual appraisals for most Florida land-related loans were scheduled for Q4 2010 and that Florida land values had not stabilized. It had added $8.0 million to the Florida land-related allowance in 2010 and said further adjustments might be necessary.
- Regulatory changes, including the Dodd-Frank Act signed July 21, 2010, may reduce revenue and increase expenses; the company was evaluating its response. Forward-looking results are also subject to economic conditions, competition, interest-rate sensitivity, and regulatory and legislative changes.
- Legal proceedings were pending or threatened. The company did not expect aggregate liability to materially affect consolidated financial position based on information then available, but could not rule out a material effect on results in a future period.
- Derivative counterparties may terminate positions or require collateral under specified default, capital-status or creditworthiness conditions. The company reported $17.6 million of collateral posted; an additional $11.6 million could be payable upon a breach, beyond collateral already posted.
Important facts for investors to verify
- Whether upcoming Florida land appraisals lead to additional loan-loss provision, charge-offs or OREO write-downs.
- Trends in Florida and Pennsylvania non-performing loans, restructured loans and the adequacy of the $114.0 million allowance.
- Performance and valuation assumptions for trust-preferred and other impaired securities, including the potential for further OTTI.
- Actual impact of Regulation E and other regulatory changes on fee income, expenses and earnings.
- Liquidity and collateral availability as pledged securities rose and cash declined, together with the terms and capacity of wholesale funding sources.