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FNB > SEC Filings for FNB > Form 10-Q on 8-Aug-2014All Recent SEC Filings

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Form 10-Q for FNB CORP/FL/


8-Aug-2014

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- and six-month periods ended June 30, 2014. 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 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014. The Corporation's results of operations for the six months ended June 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014.

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.

The impact of federal regulated agencies that have oversight or review of the Corporation's business and securities activities.

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 reversal of the current moderate economic recovery.

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 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, Volcker rule and 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 recent acquisitions and the pending acquisition of OBA, 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.

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.

In addition to recent geopolitical events, customer confidence, business and operating results can also be affected by widespread disasters, dislocations, terrorist activities, cyber-attacks 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 2013 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 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014 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, 2013.

OVERVIEW

The Corporation, headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas, including Pittsburgh, Baltimore, Maryland and Cleveland, Ohio. As of June 30, 2014, the Corporation had 283 banking offices throughout Pennsylvania, Ohio, Maryland and West Virginia. The Corporation provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, FNBPA. Commercial banking solutions include corporate banking, small business banking, investment real estate financing, international banking, business credit, 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 operates Regency, which had 71 consumer finance offices in Pennsylvania, Ohio, Kentucky and Tennessee as of June 30, 2014.


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RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Net income available to common stockholders for the three months ended June 30, 2014 was $32.8 million or $0.20 per diluted common share, compared to net income available to common stockholders for the three months ended June 30, 2013 of $29.2 million or $0.20 per diluted common share. The increase in net income available to common stockholders is a result of an increase of $17.4 million in net interest income, combined with an increase of $2.5 million in non-interest income, partially offset by increases of $2.5 million in the provision for loan losses, $8.5 million in non-interest expense and $2.0 million in preferred stock dividends. The results for the second quarter of 2014 reflect the BCSB and PVF acquisitions that closed on February 15, 2014 and October 12, 2013, respectively, and included a total of $0.8 million in merger costs, primarily relating to the BCSB acquisition. The results for the second quarter of 2013 included $2.9 million in merger costs, primarily relating to the ANNB acquisition that closed on April 6, 2013. Quarterly average diluted common shares outstanding increased 22.0 million shares or 15.1% to 167.9 million shares for the second quarter of 2014, primarily as a result of the BCSB and PVF acquisitions, combined with the common stock offering completed in November 2013.

For the three months ended June 30, 2014, the Corporation's return on average equity was 7.35% and its return on average assets was 0.95%, compared to 7.94% and 0.94%, respectively, for the three months ended June 30, 2013. The Corporation's return on average tangible equity was 13.88% and its return on average tangible assets was 1.05% for the second quarter of 2014, compared to 16.81% and 1.04%, respectively, for the same period of 2013. Average equity was $1.9 billion and $1.5 billion for the second quarter of 2014 and 2013, respectively, while average tangible equity was $1.1 billion and $728.5 million, respectively, for those same periods. Average equity for the second quarter of 2014 reflects the impact of the BCSB and PVF acquisitions, combined with the common and preferred stock offerings completed in November 2013.

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.


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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,
                                                              2014                 2013
Return on average tangible equity:
Net income (annualized)                                   $    139,709         $    117,094
Amortization of intangibles, net of tax (annualized)             6,417                5,400

                                                          $    146,126         $    122,494

Average total stockholders' equity                        $  1,900,751         $  1,473,934
Less: Average intangibles                                     (847,815 )           (745,458 )

                                                          $  1,052,936         $    728,476

Return on average tangible equity                                13.88 %              16.81 %

Return on average tangible assets:
Net income (annualized)                                   $    139,709         $    117,094
Amortization of intangibles, net of tax (annualized)             6,417                5,400

                                                          $    146,126         $    122,494

Average total assets                                      $ 14,710,831         $ 12,470,029
Less: Average intangibles                                     (847,815 )           (745,458 )

                                                          $ 13,863,016         $ 11,724,571

Return on average tangible assets                                 1.05 %               1.04 %


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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,
                                                       2014                                          2013
                                                       Interest                                      Interest
                                       Average          Income/       Yield/         Average          Income/       Yield/
                                       Balance          Expense        Rate          Balance          Expense        Rate
Assets
Interest-earning assets:
Interest bearing deposits with
banks                                $     45,725      $      21         0.18 %    $     39,302      $      18         0.19 %
Taxable investment securities (1)       2,600,855         13,578         2.04         2,133,972         10,685         1.95
Non-taxable investment securities
(2)                                       150,848          1,987         5.27           162,218          2,223         5.48
Residential mortgage loans held
for sale                                    2,751             90        13.08            20,895            203         3.88
Loans (2) (3)                          10,109,083        110,455         4.38         8,529,810         96,455         4.53

Total interest-earning assets (2)      12,909,262        126,131         3.92        10,886,197        109,584         4.03

Cash and due from banks                   193,670                                       175,936
Allowance for loan losses                (113,009 )                                    (109,156 )
Premises and equipment                    164,063                                       146,036
Other assets                            1,556,845                                     1,371,016

Total Assets                         $ 14,710,831                                  $ 12,470,029

Liabilities
Interest-bearing liabilities:
Deposits:
Interest bearing demand              $  4,301,667          1,665         0.16      $  3,829,847          1,433         0.15
Savings                                 1,575,453            182         0.05         1,385,472            162         0.05
Certificates and other time             2,736,294          5,614         0.82         2,461,490          5,748         0.94
Customer repurchase agreements            798,351            439         0.22           755,580            437         0.23
Other short-term borrowings               551,633            870         0.62           224,769            638         1.12
Long-term debt                            266,925          1,136         1.71            93,273            775         3.33
Junior subordinated debt                   58,893            342         2.33           206,603          1,902         3.69

Total interest-bearing liabilities
(2)                                    10,289,216         10,248         0.40         8,957,034         11,095         0.50

Non-interest bearing demand             2,374,516                                     1,901,610
Other liabilities                         146,348                                       137,440

Total Liabilities                      12,810,080                                    10,996,084
Stockholders' equity                    1,900,751                                     1,473,945

Total Liabilities and
Stockholders' Equity                 $ 14,710,831                                  $ 12,470,029

Excess of interest-earning assets
over interest-bearing liabilities    $  2,620,046                                  $  1,929,163

Fully tax-equivalent net interest
income                                                   115,883                                        98,489
Tax-equivalent adjustment                                 (1,691 )                                      (1,743 )

Net interest income                                    $ 114,192                                     $  96,746

Net interest spread                                                      3.52 %                                        3.53 %

Net interest margin (2)                                                  3.60 %                                        3.63 %

(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, 2014, net interest income, which comprised 74.5% of net revenue (net interest income plus non-interest income) compared to 72.5% for the same period in 2013, 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 $17.4 million or 17.7% from $98.5 million for the second quarter of 2013 to $115.9 million for the second quarter of 2014. Average earning assets increased $2.0 billion or 18.6% and average interest-bearing liabilities increased $1.3 billion or 14.9% from 2013 due to the acquisitions of BCSB and PVF, combined with organic growth in loans, deposits and customer repurchase agreements. The Corporation's net interest margin was 3.60% for the second quarter of 2014, compared to 3.63% for the same period of 2013, as loan yields declined faster than deposit rates primarily as a result of the current low interest rate environment. Additionally, 1 basis point of the 3 basis point narrowing of the net interest margin was attributable to lower accretable yield benefit on acquired loans. 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, 2014 compared to the three months ended June 30, 2013 (in thousands):

                                                 Volume         Rate          Net
     Interest Income
     Interest bearing deposits with banks       $      4      $     (1 )    $      3
     Securities                                    2,095           562         2,657
     Residential mortgage loans held for sale       (288 )         175          (113 )
     Loans                                        17,953        (3,953 )      14,000

                                                  19,764        (3,217 )      16,547

     Interest Expense
     Deposits:
     Interest bearing demand                         220            12           232
     Savings                                          23            (3 )          20
     Certificates and other time                     598          (732 )        (134 )
     Customer repurchase agreements                   23           (21 )           2
     Other short-term borrowings                     220            12           232
     Long-term debt                                  885          (524 )         361
     Junior subordinated debt                     (1,028 )        (532 )      (1,560 )

                                                     941        (1,788 )        (847 )

     Net Change                                 $ 18,823      $ (1,429 )    $ 17,394

(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 $126.1 million for the second quarter of 2014, increased $16.5 million or 15.1% from the same quarter of 2013, primarily due to increased earning assets, partially offset by lower yields. During the second quarter of 2014 and 2013, the Corporation recognized a benefit of $0.3 million and $0.5 million, respectively, in accretable yield on acquired loans. The increase in earning assets was primarily driven by a $1.6 billion or 18.5% increase in average loans, including $731.0 million or 8.6% of organic growth, $312.6 million in average loans added in the BCSB acquisition and $535.7 million in average loans added in the PVF acquisition. The yield on earning assets decreased 11 basis points from the second quarter of 2013 to 3.92% for the second quarter of 2014, reflecting the decreases in market interest rates, competitive pressures and the above-mentioned changes in accretable yield benefit on acquired loans.


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Interest expense of $10.2 million for the second quarter of 2014 decreased $0.8 million or 7.6% from the same quarter of 2013 due to lower rates paid, partially offset by growth in interest-bearing liabilities. The rate paid on interest-bearing liabilities decreased 10 basis points to 0.40% for the second quarter of 2014, compared to 0.50% for the second quarter of 2013, 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 average deposits and customer repurchase agreements, which increased by $1.7 billion or 16.7%, including $494.5 million or 4.8% of organic growth, $526.2 million added in the BCSB acquisition and $707.6 million added in the PVF acquisition.

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 $10.4 million during the second quarter of 2014 increased $2.5 million from the same period of 2013, primarily due to increases of $2.3 million in the provision for the originated portfolio and $0.2 million in the provision for the acquired portfolio. During the second quarter of 2014, net charge-offs were $5.9 million, or 0.23% (annualized) of average loans, compared to $7.3 million, or 0.34% (annualized) of average loans, for the same period of 2013, reflecting consistent, solid performance in the Corporation's loan portfolio. The ratio of the allowance for loan losses to total loans equaled 1.13% and 1.25% at June 30, 2014 and 2013, respectively, which reflects the Corporation's overall favorable credit quality performance along with the addition of loans acquired in the BCSB and PVF acquisitions without a corresponding allowance for loan losses in accordance with acquired loan accounting rules. 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 $39.2 million for the second quarter of 2014 increased $2.5 million or 6.8% from the same period of 2013. The variances in significant individual non-interest income items are further explained in the following paragraphs.

Service charges on loans and deposits of $17.4 million for the second quarter of 2014 decreased $1.1 million or 6.0% from the same period of 2013, primarily due . . .

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