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F.N.B. Corporation’s (FNB - Snapshot Report) third-quarter 2013 operating earnings came in at 22 cents per share, beating the Zacks Consensus Estimate and the year-ago earnings by a penny.

Results were driven by top-line growth, partially offset by higher operating expenses. Further, growth in loans and deposit balances and an improved asset quality were the other highlights for the quarter. However, a drop in non interest income and deteriorating profitability ratios were the headwinds.

Considering after-tax charges for merger-related costs and other non-operating items, net income stood at $31.6 million, up from $30.7 million in the year-ago quarter.

Performance in Detail

FNB’s total revenue came in at $142.6 million, almost in line with the prior-year quarter but surpassed the Zacks Consensus Estimate of $132.0 million.

Taxable-equivalent net interest income rose 5.9 % year over year to $101.0 million. The rise was mainly attributable to higher interest income and a decline in interest expense. However, net interest margin declined 6 basis points from the prior-year quarter to 3.64%.

Non-interest income decreased 5.6% from the prior-year quarter to $32.9 million. The decline was mainly due to a fall in customer service charges, partially offset by increase in securities commissions and fees and trust income.
 
Non-interest expense increased 8.0% year over year to $83.2 million. Merger related costs, additional operating costs related to the ANNB acquisition and elevated FDIC insurance expense were attributable to the increased net interest expense.

The efficiency ratio rose to 59.72% from 57.40% recorded in the prior-year quarter. The rise indicates deterioration in profitability.

Asset Quality

Asset quality exhibited an improvement during the reported quarter with nonperforming assets decreasing 2.3% on a year-over-year basis to $118.6 million.

Annualized net charge offs as a percentage of total average loans came in at 0.25, down from 0.37% in the year-ago period.

Likewise, provision for credit losses declined 13.6% from the prior-year quarter to $7.3 million. However, allowance for loan losses increased 7.1% year over year to $110 million.

Loans and Deposits

FNB’s total loans as of Sep 30, 2013 were $8.6 billion, rising 10.7% from the previous-year quarter. All the loan portfolios performed well in the quarter.

As of Sep 30, 2013, total deposits advanced 6.5% year over year to $9.7 billion. The increase was primarily due to the higher level of non-interest-bearing demand deposits.

Capital Ratios

FNB’s capital ratios remained strong in the quarter. As of Sep 30, 2013, the leverage ratio rose to 8.42% from 8.24% in the year-ago quarter. Ratio of tangible equity to tangible assets was 6.09% up from 6.01% in the prior-year quarter.     

Profitability Ratios

FNB’s profitability ratios deteriorated during the third quarter. The return on average assets was 0.99% compared with 1.03% as of Jun 30, 2012.

As of Sep 30, 2013, return on average equity came in at 8.50%, down from 8.83% as of Jun 30, 2012. Book value per common share was $10.20, up from $9.98 at the end of the the year-ago period.

Other Developments

On Oct 3, Moody’s Investor Services (MCO - Analyst Report) rated FNB for the first time and conferred an issuer rating of Baa3 to the bank. Alongside, its banking subsidiary, First National Bank of Pennsylvania received a Baa2 rating owing to long-term deposits and other senior obligations.

On Oct 12, FNB completed the acquisition of PVF Capital Corp. Consequently, the company now operates a total of 29 banking offices in Ohio.

Our Viewpoint

FNB’s consistent organic growth, improving credit quality and a strong balance sheet are impressive. However, mounting expenses, the prevailing low interest rate environment and a stringent regulatory landscape remain major near-term concerns.

FNB currently carries a Zacks Rank #4 (Sell).  

Among better performing banks, Community Trust Bank Corp Inc (CTBI - Snapshot Report) and SY Bancorp Inc. (SYBT - Snapshot Report)  carrying a Zacks Rank #1 (Strong Buy) are worth considering. While Community Trust came out with its third-quarter earnings of 81 cents per share, SY Bancorp is expected to report on Oct 23.

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