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FNB > SEC Filings for FNB > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for FNB CORP/FL/


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis represents an overview of the consolidated results of operations and financial condition of the Corporation and highlights material changes to the financial condition and results of operations at and for the three-month and nine-month periods ended September 30, 2012. This Discussion and Analysis should be read in conjunction with the consolidated financial statements and notes thereto contained herein and the Corporation's consolidated financial statements and notes thereto and Management's Discussion and Analysis included in its 2011 Annual Report on Form 10-K filed with the SEC on February 28, 2012. The Corporation's results of operations for the nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the year ending December 31, 2012.

IMPORTANT CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The Corporation makes statements in this Report, and may from time to time make other statements, regarding its outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset levels, asset quality and other matters regarding or affecting F.N.B. Corporation and its future business and operations that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as "believe," "plan," "expect," "anticipate," "see," "look," "intend," "outlook," "project," "forecast," "estimate," "goal," "will," "should" and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Although the Corporation believes that the assumptions made in connection with the forward-looking statements are reasonable, it cannot assume that its assumptions and expectations are correct.

Forward-looking statements speak only as of the date made. The Corporation does not assume any duty and does not undertake to update forward-looking statements. Actual results or future events could differ, possibly materially, from those anticipated in forward-looking statements, as well as from historical performance.

The Corporation's forward-looking statements are subject to the following principal risks and uncertainties:

The Corporation's businesses, financial results and balance sheet values are affected by business and economic conditions, including the following:

Changes in interest rates and valuations in debt, equity and other financial markets.

Disruptions in the liquidity and other functioning of U.S. and global financial markets.

Actions by the FRB, UST and other government agencies, including those that impact money supply and market interest rates.

Changes in customers', suppliers' and other counterparties' performance and creditworthiness which adversely affect loan utilization rates, delinquencies, defaults and counterparty ability to meet credit and other obligations.

Slowing or failure of the current moderate economic recovery and persistence or worsening levels of unemployment.

Changes in customer preferences and behavior, whether due to changing business and economic conditions, legislative and regulatory initiatives, or other factors.

Legal and regulatory developments could affect the Corporation's ability to operate its businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and ability to attract and retain management. These developments could include:

Changes resulting from legislative and regulatory reforms, including broad-based restructuring of financial industry regulation; changes to laws and regulations involving tax, pension, bankruptcy, consumer protection, and other industry aspects; and changes in accounting policies and principles. The Corporation will continue to be impacted by extensive reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and otherwise growing out of the recent financial crisis, the precise nature, extent and timing of which, and their impact on the Corporation, remains uncertain.


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Changes to regulations governing bank capital and liquidity standards, including due to the Dodd-Frank Act and to Basel III initiatives.

Impact on business and operating results of any costs associated with obtaining rights in intellectual property, the adequacy of the Corporation's intellectual property protection in general and rapid technological developments and changes. The Corporation's ability to anticipate and respond to technological changes can also impact its ability to respond to customer needs and meet competitive demands.

Business and operating results are affected by the Corporation's ability to identify and effectively manage risks inherent in its businesses, including, where appropriate, through effective use of third-party insurance, derivatives, swaps, and capital management techniques, and to meet evolving regulatory capital standards.

Increased competition, whether due to consolidation among financial institutions; realignments or consolidation of branch offices, legal and regulatory developments, industry restructuring or other causes, can have an impact on customer acquisition, growth and retention and on credit spreads and product pricing, which can affect market share, deposits and revenues.

The pending ANNB acquisition presents the following risk factors, among others, that could cause actual results to differ materially from forward-looking statements or historical performance: (i) ability to obtain regulatory approvals and meet closing conditions of the merger transaction, including approval by ANNB shareholders, on the expected terms and schedule;
(ii) delay in closing the ANNB merger; (iii) difficulties experienced by the Corporation in expanding into a new market area, including retention of customers and key personnel of ANNB and its subsidiary, BankAnnapolis;
(iv) difficulties and delays in integrating the Corporation and ANNB businesses or fully realizing costs and other benefits; (v) business disruption following the ANNB merger; (vi) changes in asset quality and credit risk; (vii) inability to sustain revenue and earnings growth; (viii) changes in interest rates and capital markets; (ix) inflation; and (x) customer acceptance of the Corporation's products and services.

Business and operating results can also be affected by widespread disasters, dislocations, terrorist activities or international hostilities through their impacts on the economy and financial markets.

The Corporation provides greater detail regarding some of these factors in its 2011 Annual Report on Form 10-K filed with the SEC on February 28, 2012, including the Risk Factors section of that report, and its subsequent SEC filings. The Corporation's forward-looking statements may also be subject to other risks and uncertainties, including those that may be discussed elsewhere in this Report or in SEC filings, accessible on the SEC's website at www.sec.gov and on the Corporation's website at www.fnbcorporation.com. The Corporation has included these web addresses as inactive textual references only. Information on these websites is not part of this document.

CRITICAL ACCOUNTING POLICIES

A description of the Corporation's critical accounting policies is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Corporation's 2011 Annual Report on Form 10-K filed with the SEC on February 28, 2012 under the heading "Application of Critical Accounting Policies." There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2011.

OVERVIEW

The Corporation is a diversified financial services company headquartered in Hermitage, Pennsylvania. Its primary businesses include community banking, consumer finance, wealth management and insurance. The Corporation also conducts leasing and merchant banking activities. The Corporation operates its community banking business through a full service branch network with offices in Pennsylvania, Ohio and West Virginia. The Corporation operates its wealth management and insurance businesses within the community banking branch network. It also conducts selected consumer finance business in Pennsylvania, Ohio, Tennessee and Kentucky.


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RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Net income for the three months ended September 30, 2012 was $30.7 million or $0.22 per diluted share, compared to net income for the three months ended September 30, 2011 of $23.8 million or $0.19 per diluted share. For the three months ended September 30, 2012, the Corporation's return on average equity was 8.83% and its return on average assets was 1.03%, compared to 7.79% and 0.95%, respectively, for the three months ended September 30, 2011.

In addition to evaluating its results of operations in accordance with GAAP, the Corporation routinely supplements its evaluation with an analysis of certain non-GAAP financial measures, such as return on average tangible equity and return on average tangible assets. The Corporation believes these non-GAAP financial measures provide information useful to investors in understanding the Corporation's operating performance and trends, and facilitate comparisons with the performance of the Corporation's peers. The non-GAAP financial measures used by the Corporation may differ from the non-GAAP financial measures other financial institutions use to measure their results of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Corporation's reported results prepared in accordance with GAAP. The following tables summarize the Corporation's non-GAAP financial measures for the periods indicated derived from amounts reported in the Corporation's financial statements (dollars in thousands):

                                                            Three Months Ended
                                                               September 30,
                                                           2012             2011
Return on average tangible equity:
Net income (annualized)                                $    122,304      $    94,315
Amortization of intangibles, net of tax (annualized)          5,798            4,663

                                                       $    128,102      $    98,978

Average total stockholders' equity                     $  1,385,282      $ 1,210,953
Less: Average intangibles                                  (174,501 )       (601,010 )

                                                       $    670,781      $   609,943

Return on average tangible equity                             19.10 %          16.23 %

Return on average tangible assets:
Net income (annualized)                                $    122,304      $    94,315
Amortization of intangibles, net of tax (annualized)          5,798            4,663

                                                       $    128,102      $    98,978

Average total assets                                   $ 11,842,204      $ 9,971,847
Less: Average intangibles                                  (714,501 )       (601,010 )

                                                       $ 11,127,703      $ 9,370,837

Return on average tangible assets                              1.15 %           1.06 %


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The following table provides information regarding the average balances and yields earned on interest earning assets and the average balances and rates paid on interest-bearing liabilities (dollars in thousands):

                                                                Three Months Ended September 30,
                                                        2012                                         2011
                                                        Interest                                     Interest
                                        Average          Income/       Yield/         Average         Income/       Yield/
                                        Balance          Expense        Rate          Balance         Expense        Rate
Assets
Interest earning assets:
Interest bearing deposits with
banks                                 $     86,501      $      47         0.21 %    $   100,944      $      59         0.23 %
Taxable investment securities (1)        2,067,146         11,471         2.17        1,608,704         10,744         2.62
Non-taxable investment securities
(2)                                        185,614          2,581         5.56          196,233          2,822         5.75
Loans (2) (3)                            7,928,174         95,509         4.80        6,749,727         87,086         5.12

Total interest earning assets (2)       10,267,435        109,608         4.25        8,655,608        100,711         4.62

Cash and due from banks                    182,356                                      180,447
Allowance for loan losses                 (103,757 )                                   (111,647 )
Premises and equipment                     146,313                                      126,365
Other assets                             1,349,857                                    1,121,074

Total Assets                          $ 11,842,204                                  $ 9,971,847

Liabilities
Interest-bearing liabilities:
Deposits:
Interest bearing demand               $  3,489,658          1,764         0.20      $ 2,905,747          2,440         0.36
Savings                                  1,210,670            252         0.08          982,714            416         0.17
Certificates and other time              2,652,713          8,189         1.23        2,256,182         10,221         1.80
Customer repurchase agreements             803,492            575         0.28          617,169            763         0.48
Other short-term borrowings                159,843            607         1.49          157,188            881         2.19
Long-term debt                              90,869            860         3.76          221,206          1,698         3.05
Junior subordinated debt                   203,999          1,978         3.86          203,947          1,881         3.66

Total interest-bearing liabilities
(2)                                      8,611,244         14,225         0.66        7,344,153         18,300         0.99

Non-interest bearing demand              1,677,578                                    1,299,859
Other liabilities                          168,100                                      116,882

Total Liabilities                       10,456,922                                    8,760,894
Stockholders' equity                     1,385,282                                    1,210,953

Total Liabilities and Stockholders'
Equity                                $ 11,842,204                                  $ 9,971,847

Excess of interest earning assets
over interest-bearing liabilities     $  1,656,191                                  $ 1,311,455

Fully tax-equivalent net interest
income                                                     95,383                                       82,411
Tax-equivalent adjustment                                  (1,852 )                                     (2,009 )

Net interest income                                     $  93,531                                    $  80,402

Net interest spread                                                       3.60 %                                       3.64 %

Net interest margin (2)                                                   3.70 %                                       3.79 %

(1) The average balances and yields earned on taxable investment securities are based on historical cost.

(2) The interest income amounts are reflected on a fully taxable equivalent (FTE) basis, a non-GAAP measure, which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. The yields on earning assets and the net interest margin are presented on an FTE and annualized basis. The rates paid on interest-bearing liabilities are also presented on an annualized basis. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

(3) Average balances include non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial.


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Net Interest Income

Net interest income, which is the Corporation's principal source of revenue, is the difference between interest income from earning assets (loans, securities, interest bearing deposits with banks and federal funds sold) and interest expense paid on liabilities (deposits, customer repurchase agreements and short- and long-term borrowings). For the three months ended September 30, 2012, net interest income, which comprised 72.9% of net revenue (net interest income plus non-interest income) compared to 73.1% for the same period in 2011, was affected by the general level of interest rates, changes in interest rates, the shape of the yield curve, the level of non-accrual loans and changes in the amount and mix of interest earning assets and interest-bearing liabilities.

Net interest income, on an FTE basis, increased $13.0 million or 15.7% from $82.4 million for the third quarter of 2011 to $95.4 million for the third quarter of 2012. Average earning assets increased $1.6 billion or 18.6% and average interest bearing liabilities increased $1.3 billion or 17.3% from 2011 due to the acquisition of Parkvale, combined with organic growth in loans, deposits and customer repurchase agreements. The Corporation's net interest margin was 3.70% for the third quarter of 2012 compared to 3.79% for the same period of 2011 as loan yields declined faster than deposit rates primarily reflecting the acquisition of Parkvale as well as the impact of the current low interest rate environment. Details on changes in tax equivalent net interest income attributed to changes in interest earning assets, interest bearing liabilities, yields and cost of funds are set forth in the preceding table.

The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest earning assets and interest-bearing liabilities and changes in the rates for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 (in thousands):

                                               Volume         Rate          Net
       Interest Income
       Interest bearing deposits with banks   $     (7 )    $     (5 )    $    (12 )
       Securities                                2,740        (2,254 )         486
       Loans                                    13,695        (5,272 )       8,423

                                                16,428        (7,531 )       8,897

       Interest Expense
       Deposits:
       Interest bearing demand                     326        (1,002 )        (676 )
       Savings                                      94          (258 )        (164 )
       Certificates and other time               1,582        (3,614 )      (2,032 )
       Customer repurchase agreements              190          (378 )        (188 )
       Other short-term borrowings                 (75 )        (199 )        (274 )
       Long-term debt                           (1,168 )         330          (838 )
       Junior subordinated debt                     -             97            97

                                                   949        (5,024 )      (4,075 )

       Net Change                             $ 15,479      $ (2,507 )    $ 12,972

(1) The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the net size of the rate and volume changes.

(2) Interest income amounts are reflected on an FTE basis which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. The Corporation believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

Interest income, on an FTE basis, of $109.6 million for the third quarter of 2012 increased by $8.9 million or 8.8% from 2011, primarily due to increased earning assets resulting from a combination of organic growth and the Parkvale acquisition, partially offset by lower yields. Additionally, during the third quarter of 2012, the Corporation recognized $1.4 million in additional accretable yield as a result of improved cash flows on acquired portfolios compared to original estimates for both CBI and Parkvale. The increase in earning assets was primarily driven by a $1.2 billion or 17.5% increase in average loans. Loans acquired from Parkvale totaled $922.1 million on the acquisition date. The yield on earning assets decreased 37 basis points from the third quarter of 2011 to 4.25% for the third quarter


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of 2012, reflecting the decreases in market interest rates and competitive pressure along with the Parkvale acquired loans that carried lower yields than the Corporation's existing loan portfolio.

Interest expense of $14.2 million for the third quarter of 2012 decreased $4.1 million or 22.3% from the same period of 2011 due to lower rates paid, partially offset by growth in interest bearing liabilities resulting from a combination of organic growth and the acquisition of Parkvale. The rate paid on interest bearing liabilities decreased 33 basis points to 0.66% during the third quarter of 2012, compared to the third quarter of 2011, reflecting changes in interest rates, the Parkvale acquisition and a favorable shift in mix. The growth in average interest bearing liabilities was primarily attributable to growth in deposits and customer repurchase agreements, which increased by $1.8 billion or 22.0% for the third quarter of 2012 compared to the third quarter of 2011. Deposits acquired from Parkvale totaled $1.5 billion on the acquisition date. This growth was partially offset by a $130.3 million or 58.9% reduction in average long-term debt primarily associated with the prepayment of certain higher-cost borrowings during the fourth quarter of 2011.

Provision for Loan Losses

The provision for loan losses is determined based on management's estimates of the appropriate level of allowance for loan losses needed to absorb probable losses inherent in the existing loan portfolio, after giving consideration to charge-offs and recoveries for the period.

The provision for loan losses of $8.4 million during the third quarter of 2012 decreased slightly from the $8.6 million provision for the same period of 2011. During the third quarter of 2012, net charge-offs were $7.4 million, or 0.37%
(annualized) of average loans, compared to $9.0 million, or 0.53% (annualized)
of average loans, for the same period of 2011, reflecting consistent, solid performance in the Corporation's loan portfolio. Net charge-offs for the third quarter of 2012 included $1.4 million or 3.32% (annualized) of average loans relating to Regency and $7.1 million or 0.37% (annualized) of average loans relating to FNBPA's Pennsylvania portfolio. The Corporation recognized net loan recoveries of $1.1 million during the third quarter of 2012 relating to the Florida loan portfolio. For additional information relating to the allowance and provision for loan losses, refer to the Allowance for Loan Losses section of this Management's Discussion and Analysis.

Non-Interest Income

Total non-interest income of $34.8 million for the third quarter of 2012 increased $5.2 million or 17.5% from the same period of 2011. This increase was primarily due to increases in service charges, insurance commissions and fees, gain on sale of loans, income from BOLI and a gain on the sale of fixed assets. The variances in these and certain other non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $17.7 million for the third quarter of 2012 increased $1.6 million or 10.0% from the same period of 2011, reflecting increases of $0.6 million in income from interchange fees, $0.1 million in overdraft fees and $0.9 million in other service charges due to a combination of higher volume, organic growth and the expanded customer base due to the Parkvale acquisition. For information relating to the impact of the new regulations on the Corporation's income from interchange fees, refer to the Dodd-Frank Wall Street Reform and Consumer Protection Act section of this Management's Discussion and Analysis.

Insurance commissions and fees of $4.6 million for the three months ended September 30, 2012 increased $0.6 million or 14.4% from the same period of 2011, primarily as a result of a one-time premium adjustment relating to Regency.

Securities commissions of $2.1 million for the third quarter of 2012 increased $0.2 million or 13.1% from the same period of 2011 primarily due to positive results from new initiatives, combined with increased volume and the Parkvale acquisition.

Trust fees of $3.8 million for the three months ended September 30, 2012 increased $0.2 million or 6.1% from the same period of 2011. The market value of assets under management increased $440.5 million or 19.5% to $2.7 billion over this same period as a result of organic growth and improved market conditions.

Gain on sale of residential mortgage loans of $1.2 million for the third quarter of 2012 increased $0.5 million or 78.9% from the same period of 2011 due to additional sales volume. For the third quarter of 2012, the Corporation sold $71.0 million of residential mortgage loans, compared to $46.6 million for the same period of 2011, as part of its ongoing strategy of generally selling 30-year residential mortgage loans.


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Income from BOLI of $1.7 million for the three months ended September 30, 2012 increased $0.4 million or 27.7% from the same period of 2011, primarily as a result of the Parkvale acquisition.

Other income of $4.0 million for the third quarter of 2012 increased $1.9 million or 85.3% from the same period of 2011 primarily due to a $1.4 million gain on sale of the former headquarters building of a previously acquired bank. Additionally, the Corporation received $0.1 million more in dividends on non-marketable equity securities and the Corporation recorded a gain of $0.1 million relating to the successful harvesting of a mezzanine financing relationship by its merchant banking subsidiary.

Non-Interest Expense

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