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FNB > SEC Filings for FNB > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for FNB CORP/FL/


8-Aug-2013

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 six-month periods ended June 30, 2013. 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 2012 Annual Report on Form 10-K filed with the SEC on February 28, 2013. The Corporation's results of operations for the six months ended June 30, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013.

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 for earnings, revenues, expenses, capital levels, liquidity levels, asset levels, asset quality and other matters regarding or affecting the 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.

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.

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


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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.

As demonstrated by the Parkvale and ANNB acquisitions and the pending PVF and BCSB acquisitions, the Corporation grows its business in part by acquiring from time to time other financial services companies, financial services assets and related deposits. These acquisitions often present risks and uncertainties, including, the possibility that the transaction cannot be consummated; regulatory issues; cost, or difficulties, involved in integration and conversion of the acquired businesses after closing; inability to realize expected cost savings, efficiencies and strategic advantages; the extent of credit losses in acquired loan portfolios and extent of deposit attrition; and the potential dilutive effect to current shareholders. In addition, with respect to the April 2013 acquisition of ANNB, the Corporation may experience difficulties in expanding into a new market area, including retention of customers and key personnel of ANNB and its subsidiary, BankAnnapolis.

Competition 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. Industry restructuring in the current environment could also impact the Corporation's business and financial performance through changes in counterparty creditworthiness and performance and the competitive and regulatory landscape. 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 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 the Risk Factors section of the 2012 Annual Report on Form 10-K and 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 2012 Annual Report on Form 10-K filed with the SEC on February 28, 2013 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, 2012.

OVERVIEW

The Corporation, headquartered in Hermitage, Pennsylvania, is a regional diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Pennsylvania; Baltimore, Maryland and Cleveland, Ohio. The Corporation has more than 250 banking offices throughout Pennsylvania, Ohio, West Virginia and Maryland. The Corporation provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, asset based lending, capital markets and lease financing. Consumer banking products and services include deposit products, mortgage lending, consumer lending and a complete suite of mobile and online banking services. Wealth management services include asset management, private banking and insurance. The Corporation also has more than 70 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee.


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RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

Net income for the three months ended June 30, 2013 was $29.2 million or $0.20 per diluted share, compared to net income for the three months ended June 30, 2012 of $29.1 million or $0.21 per diluted share. For the three months ended June 30, 2013, the Corporation's return on average equity was 7.94% and its return on average assets was 0.94%, compared to 8.57% and 1.00%, respectively, for the three months ended June 30, 2012.

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
                                                                      June 30,
                                                              2013                 2012
Return on average tangible equity:
Net income (annualized)                                   $    117,094         $    117,162
Amortization of intangibles, net of tax (annualized)             5,541                6,194

                                                          $    122,635         $    123,356

Average total stockholders' equity                        $  1,473,934         $  1,367,333
Less: Average intangibles                                     (745,458 )           (718,507 )

                                                          $    728,476         $    648,826

Return on average tangible equity                                16.83 %              19.01 %

Return on average tangible assets:
Net income (annualized)                                   $    117,094         $    117,162
Amortization of intangibles, net of tax (annualized)             5,541                6,194

                                                          $    122,635         $    123,356

Average total assets                                      $ 12,470,018         $ 11,734,221
Less: Average intangibles                                     (745,458 )           (718,507 )

                                                          $ 11,724,560         $ 11,015,714

Return on average tangible assets                                 1.05 %               1.12 %


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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 June 30,
                                                        2013                                          2012
                                                        Interest                                      Interest
                                        Average          Income/       Yield/         Average          Income/       Yield/
                                        Balance          Expense        Rate          Balance          Expense        Rate
Assets
Interest earning assets:
Interest bearing deposits with
banks                                 $     39,291      $      18         0.19 %    $     77,073      $      39         0.20 %
Taxable investment securities (1)        2,133,972         10,685         1.95         2,072,052         12,515         2.36
Non-taxable investment securities
(2)                                        162,218          2,223         5.48           183,203          2,579         5.63
Residential mortgage loans held for
sale                                        20,895            203         3.88            16,114            189         4.69
Loans (2) (3)                            8,529,810         96,455         4.53         7,815,733         95,794         4.92

Total interest earning assets (2)       10,886,186        109,584         4.03        10,164,175        111,116         4.39

Cash and due from banks                    175,936                                       178,331
Allowance for loan losses                 (109,156 )                                    (103,618 )
Premises and equipment                     146,036                                       148,335
Other assets                             1,371,016                                     1,346,998

Total Assets                          $ 12,470,018                                  $ 11,734,221

Liabilities
Interest-bearing liabilities:
Deposits:
Interest bearing demand               $  3,829,847          1,433         0.15      $  3,483,658          1,838         0.21
Savings                                  1,385,472            162         0.05         1,202,285            243         0.08
Certificates and other time              2,461,490          5,748         0.94         2,723,223          8,532         1.26
Customer repurchase agreements             755,580            437         0.23           772,595            645         0.33
Other short-term borrowings                224,769            638         1.12           166,502            690         1.64
Long-term debt                              93,273            775         3.33            90,510            889         3.95
Junior subordinated debt                   206,603          1,902         3.69           203,986          1,967         3.88

Total interest-bearing liabilities
(2)                                      8,957,034         11,095         0.50         8,642,759         14,804         0.69

Non-interest bearing demand              1,901,610                                     1,569,047
Other liabilities                          137,440                                       155,082

Total Liabilities                       10,996,084                                    10,366,888
Stockholders' equity                     1,473,934                                     1,367,333

Total Liabilities and Stockholders'
Equity                                $ 12,470,018                                  $ 11,734,221

Excess of interest earning assets
over interest-bearing liabilities     $  1,929,152                                  $  1,521,416

Fully tax-equivalent net interest
income                                                     98,489                                        96,312
Tax-equivalent adjustment                                  (1,743 )                                      (1,831 )

Net interest income                                     $  96,746                                     $  94,481

Net interest spread                                                       3.54 %                                        3.70 %

Net interest margin (2)                                                   3.63 %                                        3.80 %

(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 June 30, 2013, net interest income, which comprised 72.4% of net revenue (net interest income plus non-interest income) compared to 74.2% for the same period in 2012, 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 $2.2 million or 2.3% from $96.3 million for the second quarter of 2012 to $98.5 million for the second quarter of 2013. Average earning assets increased $722.0 million or 7.1% and average interest bearing liabilities increased $314.3 million or 3.6% from 2012 due to the acquisition of ANNB, combined with organic growth in loans and deposits and customer repurchase agreements. The Corporation's net interest margin was 3.63% for the second quarter of 2013 compared to 3.80% for the same period of 2012 as loan yields declined faster than deposit rates primarily as a result of the current low interest rate environment. Additionally, 8 basis points of the narrowing of the net interest margin was attributable to lower accretable yield in the second quarter of 2013 compared to the same period of 2012. 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 June 30, 2013 compared to the three months ended June 30, 2012 (in thousands):

                                                Volume         Rate          Net
     Interest Income
     Interest bearing deposits with banks       $   (18 )    $     (3 )    $    (21 )
     Securities                                    (838 )      (1,348 )      (2,186 )
     Residential mortgage loans held for sale        50           (36 )          14
     Loans                                        8,470        (7,809 )         661

                                                  7,664        (9,196 )      (1,532 )

     Interest Expense
     Deposits:
     Interest bearing demand                        249          (654 )        (405 )
     Savings                                         33          (114 )         (81 )
     Certificates and other time                   (751 )      (2,033 )      (2,784 )
     Customer repurchase agreements                 (14 )        (194 )        (208 )
     Other short-term borrowings                    (11 )         (41 )         (52 )
     Long-term debt                                  27          (141 )        (114 )
     Junior subordinated debt                        26           (91 )         (65 )

                                                   (441 )      (3,268 )      (3,709 )

     Net Change                                 $ 8,105      $ (5,928 )    $  2,177

(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 second quarter of 2013 decreased by $1.5 million or 1.4% from 2012, primarily due to lower yields, partially offset by increased earning assets. During the second quarter of 2013, the Corporation recognized $0.5 million in accretable yield as a result of improved cash flows on acquired portfolios compared to original estimates which compares to $2.5 million for the same period of 2012. The increase in earning assets was primarily driven by a $714.1 million or 9.1% increase in average loans, which included organic growth of $455.1 million or 5.8% and $259.0 million acquired from ANNB. The yield on earning assets decreased 36 basis points from the second quarter of 2012 to 4.03% for the second quarter of 2013, reflecting the decreases in market interest rates and competitive pressure and the above-mentioned changes in accretable yield.


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Interest expense of $11.1 million for the second quarter of 2013 decreased $3.7 million or 25.1% from the same period of 2012 due to lower rates paid, partially offset by growth in interest-bearing liabilities. The rate paid on interest-bearing liabilities decreased 19 basis points to 0.50% for the second quarter of 2013, compared to 0.69% for the second quarter of 2012, reflecting changes in interest rates and a favorable shift in deposit mix to lower-cost transaction deposits and customer repurchase agreements. The growth in average interest-bearing liabilities was primarily attributable to growth in deposits and customer repurchase agreements, which increased by $583.2 million or 6.0% and included organic growth of $224.9 million or 2.3% for the second quarter of 2013 compared to the second quarter of 2012 and $358.3 million acquired from ANNB.

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 $7.9 million during the second quarter of 2013 increased $0.9 million from the same period of 2012, primarily due to an increase of $0.5 million in provision for the acquired portfolio. During the second quarter of 2013, net charge-offs were $7.3 million, or 0.34% (annualized) of average loans, compared to $7.5 million, or 0.38% (annualized) of average loans, for the same period of 2012, reflecting consistent, solid performance in the Corporation's loan portfolio. The ratio of the allowance for loan losses to total loans equaled 1.25% and 1.29% at June 30, 2013 and 2012, respectively, which reflects the Corporation's overall favorable credit quality performance along with the addition of loans acquired in the ANNB acquisition without a corresponding allowance for loan losses. For additional information relating to the allowance and provision for loan losses, refer to the Allowance and Provision for Loan Losses section of this Management's Discussion and Analysis.

Non-Interest Income

Total non-interest income of $36.8 million for the second quarter of 2013 increased $4.0 million or 12.1% from the same period of 2012. This increase was primarily due to increases in service charges, insurance commissions and fees, securities commissions and fees, trust fees, gain on sale of loans, income from BOLI, and other non-interest income, partially offset by a decrease in net securities gains. These variances in non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $18.7 million for the second quarter of 2013 increased $1.1 million or 6.1% from the same period of 2012, primarily reflecting higher fees earned on debit card transactions and other service charges combined with the impact of the additional accounts acquired from ANNB. 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 $4.1 million for the three months ended June 30, 2013 increased $0.2 million or 5.6% from the same period of 2012, reflecting the benefits of revenue-enhancing initiatives generating new customer relationships.

Securities commissions of $2.9 million for the second quarter of 2013 increased $0.8 million or 41.2% from the same period of 2012 primarily due to positive results from new initiatives generating new customer relationships, combined with increased volume and improved market conditions.

Trust fees of $4.2 million for the three months ended June 30, 2013 increased $0.3 million or 8.5% from the same period of 2012, primarily due to additions to the sales team, enhanced sales management processes, including scorecard implementation, as well as improved market conditions. The market value of assets under management increased $271.5 million or 9.4% to $2.9 billion over the same period in 2012 as a result of organic growth and improved market conditions.

Gain on sale of residential mortgage loans of $1.0 million for the second quarter of 2013 increased $0.3 million or 43.9% from the same period of 2012 due to increased origination volume. For the second quarter of 2013, the Corporation sold $80.6 million of residential mortgage loans, compared to $53.5 million for . . .

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