F.N.B. Corporation — 2013 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unless otherwise noted, financial amounts below are in millions of dollars. The company is a regional banking and financial services group operating across six states, with community banking, wealth management, insurance and consumer finance businesses.
Financial performance and condition
- Q2 earnings: Net income was $29.2 million, or $0.20 per diluted share, versus $29.1 million and $0.21 a year earlier. Return on average assets was 0.94% (1.00% prior year); return on average equity was 7.94% (8.57%).
- First-half earnings: Net income rose to $57.7 million from $50.7 million; diluted EPS was $0.40 versus $0.36. Return on average assets improved to 0.95% from 0.88%, and return on average equity to 8.07% from 7.50%.
- Net interest: Q2 net interest income was $96.7 million; fully tax-equivalent (FTE) net interest income was $98.5 million, up 2.3% year over year. Q2 net interest margin declined to 3.63% from 3.80%. For the first half, FTE net interest income rose 2.2% to $193.3 million, while margin fell to 3.64% from 3.77%. Management attributed margin pressure chiefly to loan yields declining faster than deposit costs in a low-rate environment.
- Other revenue and expenses: Q2 non-interest income increased 12.1% to $36.8 million, while non-interest expense rose 7.3% to $84.2 million. First-half non-interest income increased 9.1% to $70.4 million; non-interest expense declined 1.3% to $163.0 million. Q2 included a $1.6 million gain from repurchasing and extinguishing $15.0 million of trust preferred debt at a discount, and $2.9 million of merger-related expense.
- Balance sheet at June 30: Total assets were $12.57 billion, up from $12.02 billion at year-end 2012. Loans, net of unearned income, were $8.64 billion versus $8.14 billion; deposits were $9.65 billion versus $9.08 billion. Total stockholders’ equity was $1.47 billion versus $1.40 billion.
- Credit and allowance: The allowance for loan losses was $108.3 million, or 1.25% of loans; it was $104.4 million at year-end and 1.29% of loans at June 30, 2012. Q2 provision was $7.9 million and net charge-offs were $7.3 million, or 0.34% annualized of average loans. Non-performing assets were $122.5 million, 0.97% of assets, versus $118.9 million and 0.99% at year-end. Non-performing loans were $84.5 million, up from $80.9 million.
- Liquidity and funding: Cash and cash equivalents were $230.1 million, down from $239.0 million at year-end. Deposits plus customer repurchase agreements totaled $10.36 billion, up 4.8%; growth in transaction deposits was partly offset by declines in time deposits and repurchase agreements. Management reported $4.3 billion of unused wholesale credit availability. Parent-company cash was $102.4 million; its liquidity coverage ratio was 2.2 times and months of cash on hand was 13.4.
- Debt and capital: Short-term borrowings were $1.03 billion, long-term debt $92.4 million and junior subordinated debt $194.2 million. The company reported regulatory capital ratios of 12.0% total capital to risk-weighted assets, 10.4% Tier 1 risk-based capital and 8.3% leverage; FNBPA’s corresponding ratios were 11.5%, 10.3% and 8.2%. Both were categorized as well-capitalized.
- Cash flow, first half: Operating activities provided $200.9 million, investing activities used $278.7 million and financing activities provided $68.9 million. Cash and equivalents decreased $8.9 million to $230.1 million. Operating cash flow was lower than the prior-year $426.0 million, when trading-securities cash flows were substantially larger.
Material changes and notable developments
- F.N.B. completed its acquisition of Annapolis Bancorp on April 6, 2013, issuing 4.64 million shares. Annapolis brought $434.7 million in assets, including $273.3 million in loans, and $348.3 million in deposits. The preliminary purchase-price allocation included $33.9 million of goodwill and $3.8 million of core deposit intangibles; fair values remained subject to review.
- Loan growth reflected both organic expansion and the acquisition. Average Q2 loans increased 9.1% year over year; management attributed $455.1 million of the increase to organic growth and $259.0 million to Annapolis.
- Interest expense fell as deposit and borrowing rates declined, but asset yields also weakened. Q2 interest-earning asset yield was 4.03%, down from 4.39%; the rate paid on interest-bearing liabilities fell to 0.50% from 0.69%.
- Comprehensive income fell to $14.3 million in Q2 from $31.5 million, and to $41.9 million for the first half from $54.5 million, largely reflecting adverse other comprehensive income, including unrealized securities and derivative losses.
- Management signed agreements to acquire PVF Capital (approximately $782 million in assets; transaction value approximately $106.3 million, expected to close in Q4 2013) and BCSB Bancorp (approximately $640 million in assets; transaction value approximately $79 million, expected to close in Q1 2014). Both remained subject to closing conditions and shareholder approvals; BCSB also awaited regulatory approval.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management said results for the first half are not necessarily indicative of full-year results. It described liquidity as strong and expected rising rates to have a modest positive effect on net interest income, while noting that model results depend on assumptions and may differ from actual outcomes.
- F.N.B. became subject to debit-card interchange fee rules on July 1, 2013, after exceeding $10 billion in assets. Management estimated potential annual revenue reduction of approximately $9 million, based on first-half interchange revenue of $10.8 million, and said it was pursuing mitigation strategies. A July 2013 court decision directed the Federal Reserve to re-evaluate the interchange cap.
- The company identified low interest rates, economic and credit conditions, securities-market valuations, regulatory changes, competition, and acquisition integration as risks. It noted the potential for acquired-loan losses, deposit attrition, integration costs and dilution. Basel III-related capital rules were expected to become effective for the company beginning January 1, 2015, with certain provisions phased in through 2019.
- Available-for-sale securities had $27.2 million of gross unrealized losses at June 30, compared with $14.6 million at year-end 2012. Trust preferred securities and other Level 3 holdings require significant valuation assumptions; management reported no securities impairment losses in the first half, but warned deterioration beyond projections could require write-downs. A 1% change in the discount rate used for Level 3 collateralized debt obligations could change their fair value by approximately $3 million.
- Derivative counterparties may terminate positions or require collateral under specified default, capital or creditworthiness conditions. At June 30, the company had posted $41.1 million of collateral; a breach could require an additional $2.9 million settlement payment beyond collateral already posted.
- The overdraft-fee class action settlement received final court approval in June 2013; the $3.0 million settlement had been accrued and funded. Shareholder litigation related to the pending BCSB and PVF transactions remained unresolved, and the company said potential losses could not yet be estimated. Management did not expect these matters to materially affect financial position or cash flows but could not rule out an effect on future-period results.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Annapolis integration, provisional acquired-asset valuations and expected acquisition benefits develop as planned, and whether PVF and BCSB close on the anticipated terms and schedule.
- How the interchange-fee rules affect revenue after July 1, 2013, and whether management’s mitigation measures offset the estimated annual impact.
- Trends in net interest margin, loan yields, deposit costs and sensitivity to changing interest rates.
- Credit quality, including growth in non-performing loans and OREO, allowance adequacy, acquired-loan performance and any required securities impairments.
- Liquidity and collateral needs under wholesale funding, derivatives and regulatory stress scenarios; also monitor capital treatment of trust preferred securities under new rules.
- Developments in BCSB and PVF shareholder lawsuits and the final settlement administration of the overdraft litigation.