MD&A represents an overview of and highlights material changes to our financial condition and consolidated results of operations at and for the three- and six-month periods endedJune 30, 2020 and 2019. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained herein and our 2019 Annual Report on Form 10-K filed with the SEC onFebruary 27, 2020 . Our results of operations for the six months endedJune 30, 2020 are not necessarily indicative of results expected for the full year. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION We make statements in this Report and may from time-to-time make other statements regarding our outlook for earnings, revenues, expenses, tax rates, capital and liquidity levels and ratios, asset quality levels, financial position and other matters regarding or affecting our current or future business and operations. These statements can be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve various assumptions, risks and uncertainties which can change over time. Actual results or future events may be different from those anticipated in our forward-looking statements and may not align with historical performance and events. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance upon such statements. Forward-looking statements are typically identified by words such as "believe," "plan," "expect," "anticipate," "intend," "outlook," "estimate," "forecast," "will," "should," "project," "goal," and other similar words and expressions. We do not assume any duty to update forward-looking statements, except as required by federal securities laws. Our forward-looking statements are subject to the following principal risks and uncertainties: •Our business, financial results and balance sheet values are affected by business and economic circumstances, including, but not limited to: (i) developments with respect to theU.S. and global financial markets; (ii) actions by the FRB, UST, OCC and other governmental agencies, especially those that impact money supply, market interest rates or otherwise affect business activities of the financial services industry; (iii) a slowing ofU.S. economic environment; and (iv) the impacts of tariffs or other trade policies of theU.S. or its global trading partners. •Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards. •Competition can have an impact on customer acquisition, growth and retention, and on credit spreads, deposit gathering and product pricing, which can affect market share, deposits and revenues. Our ability to anticipate and continue to respond to technological changes and COVID-19 challenges can also impact our ability to respond to customer needs and meet competitive demands. •Business and operating results can also be affected by widespread natural and other disasters, pandemics, including the COVID-19 pandemic crisis, dislocations, terrorist activities, system failures, security breaches, significant political events, cyberattacks or international hostilities through impacts on the economy and financial markets generally, or on us or our counterparties specifically. •Legal, regulatory and accounting developments could have an impact on our ability to operate and grow our businesses, financial condition, results of operations, competitive position, and reputation. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and the ability to attract and retain management. These developments could include: •Changes resulting from aU.S. presidential administration or legislative and regulatory reforms, including changes affecting oversight of the financial services industry, consumer protection, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles. •Changes to regulations governing bank capital and liquidity standards. •Unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries. These matters may result in monetary judgments or settlements or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to FNB. •Results of the regulatory examination and supervision process, including our failure to satisfy requirements imposed by the federal bank regulatory agencies or other governmental agencies. 58 -------------------------------------------------------------------------------- •The impact on our financial condition, results of operations, financial disclosures and future business strategies related to the implementation of the new FASB ASU 2016-13 Financial Instruments - Credit Losses commonly referred to as the "current expected credit loss" standard, or CECL. •A failure or disruption in or breach of our operational or security systems or infrastructure, or those of third parties, including as a result of cyber-attacks or campaigns. •The COVID-19 pandemic and the regulatory and governmental actions implemented in response to COVID-19 have resulted in significant deterioration and disruption in financial markets, national and local economic conditions and record levels of unemployment and could have a material impact on, among other things, our business, financial condition, results of operations or liquidity, or on our management, employees, customers and critical vendors and suppliers. In view of the many unknowns associated with the COVID-19 pandemic, our forward-looking statements continue to be subject to various conditions that may be substantially different than what we are currently expecting, including, but not limited to, a weakenedU.S. economic recovery, deterioration of commercial and consumer customer fundamentals and sentiments, impairment of the recovery of theU.S. labor market. As a result, the COVID-19 outbreaks and its consequences, including responsive measures to manage it, may possibly have a material adverse impact on our business, operations and financial performance. The risks identified here are not exclusive. Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to, the risk factors and other uncertainties described under Item 1A. Risk Factors and Risk Management sections of our 2019 Annual Report on Form 10-K (including the MD&A section), our subsequent 2020 Quarterly Reports on Form 10-Q (including the risk factors and risk management discussions) and our other subsequent filings with theSEC , which are available on our corporate website at https://www.fnb-online.com/about-us/investor-relations-shareholder-services. More specifically, our forward-looking statements may be subject to the evolving risks and uncertainties related to the COVID-19 pandemic and its macro-economic impact and the resulting governmental, business and societal responses to it. We have included our web address as an inactive textual reference only. Information on our website is not part of this Report. APPLICATION OF CRITICAL ACCOUNTING POLICIES A description of our critical accounting policies is included in the MD&A section of our 2019 Annual Report on Form 10-K filed with the SEC onFebruary 27, 2020 under the heading "Application of Critical Accounting Policies". OnJanuary 1, 2020 , we adopted CECL. Under the CECL methodology, the ACL represents the expected lifetime credit losses on loans and leases that we don't expect to collect. Additionally, see our critical accounting policy on goodwill and other intangible assets. Allowance for Credit Losses The ACL is a valuation account that is deducted from the loans and leases amortized cost basis resulting in the net amount expected to be collected. We charge off loans against the ACL in accordance with our policies or if a loss confirming event occurs. Expected recoveries do not exceed the aggregate of the amounts previously charged-off and expected to be charged-off. The model used to calculate the ACL is dependent on the portfolio composition and credit quality, as well as historical experience, current conditions and forecasts of economic conditions and interest rates. Specifically, the following considerations are incorporated into the ACL calculation: a third-party macroeconomic forecast scenario; a 24-month R&S forecast period for macroeconomic factors with a reversion to the historical mean on a straight-line basis over a 12-month period; and the historical through-the-cycle mean calculated using an expanded period to include a prior recessionary period. Adjustments to historical loss information, where applicable, are made for differences in current loan-specific risk characteristics such as differences in lending policies and procedures, underwriting standards, experience and depth of relevant personnel, the quality of our credit review function, concentrations of credit, external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters and other relevant factors. Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a R&S forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a R&S forecast can be made, the model reverts over 12 months on a straight-line basis back to the historical rates of default and severity of loss over the remaining life of the loans. Determining the appropriateness of the ACL is complex and requires significant management judgment about the effect of matters that are inherently uncertain. Due to those significant management judgments and the factors included in the calculation, significant changes to the ACL level could occur in future periods. 59 -------------------------------------------------------------------------------- See Note 1, "Summary of Significant Accounting Policies" and the Financial Condition, Allowance for Credit Losses section later in this MD&A for further allowance for credit losses information.Goodwill and Other Intangible Assets As a result of acquisitions, we have recorded goodwill and other identifiable intangible assets on our Consolidated Balance Sheets.Goodwill represents the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. Our recorded goodwill relates to value inherent in our Community Banking, Wealth Management and Insurance segments. The value of goodwill and other identifiable intangibles is dependent upon our ability to provide high quality, cost-effective services in the face of competition. As such, these values are supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or our inability to deliver cost-effective services over sustained periods can lead to impairment in value, which could result in additional expense and adversely impact earnings in future periods.Goodwill and other intangibles are subject to impairment testing at the reporting unit level, which must be conducted at least annually. We perform impairment testing during the fourth quarter of each year, or more frequently if impairment indicators exist. We also continue to monitor other intangibles for impairment and to evaluate carrying amounts, as necessary. In connection with the preparation of the second quarter 2020 financial statements, we concluded that it was more likely than not that the fair value of our Community Banking reporting unit was below its carrying amount due to a sustained decline in bank stock valuations, which was primarily attributable to the systemic near-term uncertainty of COVID-19 and its full impact on the global economy causing an unprecedented shock in interest rates and equity valuations. Therefore, we performed an interim quantitative assessment of our Community Banking reporting unit as ofJune 30, 2020 . Based on the results of the interim quantitative impairment assessments, there were no impairments for the periods presented. Although not impaired, the fair value of our Community Banking reporting unit declined since the last interim quantitative assessment atMarch 31, 2020 . TheJune 30, 2020 interim quantitative assessment for our Community Banking reporting unit, with$2.2 billion of allocated goodwill, resulted in an excess fair value over its carrying amount of less than 5%. As margins for fair value over carrying amount decline, the risk of future impairment increases if any assumptions, estimates, or market factors change in the future. We expect COVID-19 will continue to have a significant impact during the remainder of 2020 resulting in lower revenue growth and compressed net interest margins. Given the uncertainty related to the severity and length of the pandemic, and the impact across the financial services industry, we may be required to record impairment in the future. Any impairment charge would not affect our capital ratios, tangible common equity or liquidity position. Determining fair values of each reporting unit, of its individual assets and liabilities, and also of other identifiable intangible assets requires considering market information that is publicly available, as well as the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Inputs and assumptions used in estimating fair value include projected future cash flows, discount rates reflecting the risk inherent in future cash flows, long-term growth rates and an evaluation of market comparables and recent transactions. See Note 1, "Summary of Significant Accounting Policies" and Note 7, "Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements for further discussion of accounting for goodwill and other intangible assets. USE OF NON-GAAP FINANCIAL MEASURES AND KEY PERFORMANCE INDICATORS To supplement our Consolidated Financial Statements presented in accordance with GAAP, we use certain non-GAAP financial measures, such as operating net income available to common stockholders, operating earnings per diluted common share, return on average tangible common equity, return on average tangible assets, tangible book value per common share, the ratio of tangible equity to tangible assets, the ratio of tangible common equity to tangible assets, allowance for credit losses to loans and leases, excluding PPP, pre-provision net revenue to average tangible common equity, efficiency ratio and net interest margin (FTE) to provide information useful to investors in understanding our operating performance and trends, and to facilitate comparisons with the performance of our peers. Management uses these measures internally to assess and better understand our underlying business performance and trends related to core business activities. The non-GAAP financial measures and key performance indicators we use may differ from the non-GAAP financial measures and key performance indicators other financial institutions use to assess their performance and trends. 60 -------------------------------------------------------------------------------- These non-GAAP financial measures should be viewed as supplemental in nature, and not as a substitute for or superior to, our reported results prepared in accordance with GAAP. When non-GAAP financial measures are disclosed, theSEC's Regulation G requires: (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. Reconciliations of non-GAAP operating measures to the most directly comparable GAAP financial measures are included later in this report under the heading "Reconciliations of Non-GAAP Financial Measures and Key Performance Indicators to GAAP". Management believes charges such as branch consolidation costs and COVID-19 expenses are not organic costs to run our operations and facilities. These charges are considered significant items impacting earnings as they are deemed to be outside of ordinary banking activities. The branch consolidation charges principally represent expenses to satisfy contractual obligations of the closed branches without any useful ongoing benefit to us. These costs are specific to each individual transaction, and may vary significantly based on the size and complexity of the transaction. The COVID-19 expenses represent special Company initiatives to support our front-line employees and the communities we serve during an unprecedented time of a pandemic. To provide more meaningful comparisons of net interest margin and efficiency ratio, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets (loans and investments) to make it fully equivalent to interest income earned on taxable investments (this adjustment is not permitted under GAAP). Taxable-equivalent amounts for the 2020 and 2019 periods were calculated using a federal statutory income tax rate of 21%. FINANCIAL SUMMARY Net income available to common stockholders for the second quarter of 2020 was$81.6 million or$0.25 per diluted common share, compared to net income available to common stockholders for the second quarter of 2019 of$93.2 million or$0.29 per diluted common share. The results for the second quarter of 2020 reflect the impact of$2.6 billion of loans originated through the PPP, as well as expenses related to COVID-19 of$2.0 million and an estimated$17.1 million of incremental provision for credit losses due to the COVID-19 related impacts on our ACL modeling results. The COVID-19 pandemic continued to have a significant impact on our second quarter financial results, as presented in the preceding paragraph, as well as our overall operations. Our previous and ongoing investments in technology and digital platforms enabled us to quickly meet customers' needs in the pandemic environment. The technology, as well as other measures such as our business continuity planning, helped us protect the health and safety of our employees who were there for our customers when they needed us most. In this unprecedented and uncertain economic environment, we frequently run stress tests for a variety of economic situations, including severely adverse scenarios that have economic conditions similar to the current conditions. Under these scenarios, the results of these stress tests indicate that our regulatory capital ratios would remain above the regulatory requirements and we would be able to maintain appropriate liquidity levels, demonstrating our expected ability to continue to support our constituencies under stressful financial conditions. See the Industry Developments section of this MD&A for more detailed information on COVID-19 impacts to our business activities and results of operations. Income Statement Highlights (Second quarter of 2020 compared to second quarter of 2019, except as noted) •Total revenue of$305.6 million , compared to$305.2 million , up 0.1%.
•Net income available to common stockholders was
•Earnings per diluted common share were$0.25 , compared to$0.29 , down 13.8%. •Net interest margin (FTE) (non-GAAP) declined 32 basis points to 2.88% from 3.20%, driven by the impact ofFOMC interest rate actions. TheFOMC lowered its target rate by 2.25% betweenJuly 2019 andMarch 2020 including lowering the target Fed Funds rate range to 0.00% to 0.25% onMarch 16, 2020 , largely attributable to the impact of COVID-19. •Non-interest income increased$2.8 million , or 3.7%, led by an$8.9 million , or 117.4%, increase in mortgage banking income and a$2.6 million , or 26.8%, increase in capital markets. Service charges decreased$8.1 million , or 25.4%, largely due to significantly lower transaction volumes in the COVID-19 environment. However, customer transaction volumes began to increase late in the quarter. 61 -------------------------------------------------------------------------------- •Provision for credit losses of$30.2 million exceeded net charge-offs of$8.5 million and reflected COVID-19 related impacts on our ACL modeling results. •The annualized net charge-offs to total average loans ratio improved 3 basis points to 0.13%, compared to 0.16%. •Income tax expense decreased$7.5 million , or 32.0%, and the effective tax rate was 16.0%, compared to 19.7%, primarily due to renewable energy investment tax credits recognized during the second quarter of 2020. •The efficiency ratio (non-GAAP) improved 73 basis points to 53.74%, compared to 54.47%. •Return on average tangible common equity ratio (non-GAAP) was 13.84%, compared to 16.84%. Balance Sheet Highlights (period-end balances,June 30, 2020 compared toDecember 31, 2019 , unless otherwise indicated) •Total assets were$37.7 billion , compared to$34.6 billion , an increase of$3.1 billion , or 9.0%, primarily due to the origination of$2.6 billion of PPP loans. •Growth in total average loans compared to the second quarter of 2019 was$2.8 billion , or 12.5%, with average commercial loan growth of$2.8 billion , or 19.5%, primarily from PPP loan activity, and average consumer loan growth of$59.1 million , or 0.7%. •Total average deposits grew$3.4 billion , or 14.3%, compared to the second quarter of 2019, primarily due to inflows from the PPP and government stimulus checks, in addition to organic growth in customer relationships. This includes an increase in average non-interest-bearing deposits of$2.1 billion , or 34.2%, and an increase in interest-bearing demand deposits of$2.1 billion , or 21.4%, partially offset by a decrease in average time deposits of$1.1 billion , or 19.7%, largely from a managed decline in brokered CD balances. •The ratio of loans to deposits was 92.1%, compared to 94.0%, as deposit growth outpaced loan growth. •Additionally, the dividend payout ratio for the second quarter of 2020 was 48.14%, compared to 42.19%. •The ratio of the ACL to total loans and leases increased to 1.40% from 0.84% atDecember 31, 2019 , representing the impact of CECL adoption and an estimated$55 million of incremental provision for credit losses due to the COVID-19 related impacts on our ACL modeling results in the first six months of 2020. Excluding PPP loans that do not carry an ACL due to a 100% government guarantee, the ACL loans to total loan and leases ratio (non-GAAP) equaled 1.54%, or an impact of 14 basis points. •Tangible book value per share (non-GAAP) of$7.63 increased 7% fromJune 30, 2019 . •The ratio of tangible common equity to tangible assets (non-GAAP) decreased 35 basis points to 6.97%, with net PPP loan balances impacting theJune 30, 2020 TCE ratio by 52 basis points. TheJune 30, 2020 metric also includes the Day 1 CECL adoption impact of$50.6 million , or 14 basis points, as well as incremental provision for credit losses related to the estimated impact of COVID-19 on our ACL modeling results. 62 --------------------------------------------------------------------------------
TABLE 1 Quarterly Results Summary 2Q20 2Q19 Reported results Net income available to common stockholders (millions)$ 81.6 $ 93.2 Net income per diluted common share 0.25 0.29 Book value per common share (period-end) 14.82 14.30 Pre-provision net revenue (reported) (millions) 129.7 130.0 Operating results (non-GAAP) Operating net income available to common stockholders (millions) 83.2 95.4 Operating net income per diluted common share 0.26 0.29 Tangible common equity to tangible assets (period-end) 6.97 % 7.32 % Tangible book value per common share (period-end)$ 7.63 $ 7.11 Pre-provision net revenue (operating) (millions)$ 135.7 $ 132.9 Average Diluted Common Shares Outstanding (thousands) 325,153 325,949
Significant items impacting earnings1 (millions)
Pre-tax COVID-19 expense$ (2.0) $ - After-tax impact of COVID-19 expense (1.6) - Pre-tax branch consolidation costs - (2.9) After-tax impact of branch consolidation costs - (2.3)
Other unusual or outsized items impacting earnings1 (millions) Pre-tax estimated provision for COVID - impacted ACL modeling results
(17.1) - After-tax impact of estimated provision for COVID - impacted ACL modeling results (13.5) - Pre-tax MSR impairment (0.3) (1.3) After-tax MSR impairment (0.3) (1.0) Total significant, unusual or outsized items pre-tax$ (19.4) $ (4.2) Total significant, unusual or outsized items after-tax
63 -------------------------------------------------------------------------------- Year-to-Date Results Summary 2020 2019 Reported results Net income available to common stockholders (millions)$ 127.0 $ 185.3 Net income per diluted common share 0.39 0.57 Pre-provision net revenue (reported) (millions) 235.9 260.2 Operating results (non-GAAP) Operating net income available to common stockholders (millions) 136.7 188.9 Operating net income per diluted common share 0.42 0.58 Pre-provision net revenue (operating) (millions) 252.2 264.8 Average Diluted Common Shares Outstanding (thousands) 325,716 325,697
Significant items impacting earnings1 (millions)
Pre-tax COVID-19 expense$ (4.0) $ - After-tax impact of COVID-19 expense (3.1) - Pre-tax branch consolidation costs (8.3) (4.5) After-tax impact of branch consolidation costs (6.5) (3.6)
Other unusual or outsized items impacting earnings1 (millions) Pre-tax estimated provision for COVID - impacted ACL modeling results
(55.0) -
After-tax impact of estimated provision for COVID - impacted ACL modeling results
(43.4) - Pre-tax MSR impairment (8.0) (2.6) After-tax MSR impairment (6.3) (2.1)
Pre-tax change in retirement vesting of certain new 2020 stock grants
(5.6) -
After-tax change in retirement vesting of certain new 2020 stock grants
(4.4) - Total significant, unusual or outsized items pre-tax$ (80.9) $ (7.1) Total significant, unusual or outsized items after-tax$ (63.7) $ (5.7) (1) Favorable (unfavorable) impact on earnings Industry Developments COVID-19 The COVID-19 pandemic has had an immense human and economic impact on the global economy. OnMarch 22, 2020 , the UST announced that financial institution employees are part of the critical infrastructure workforce and stated that these employees have a "special responsibility to maintain your normal work schedule." As a result, financial institutions were confronted with the challenge of protecting the health and safety of their employees, while also ensuring that critical financial services such as providing consumer access to banking and lending services, maintaining core systems and the integrity and security of data, continuing the processing of payments and services, such as payment, clearing and settlement services, wholesale funding, insurance services and capital markets activities, for the duration of the pandemic crisis period. Our crisis and risk management processes were critical to our preparedness for the COVID-19 pandemic since we had the necessary plans in place and had conducted a pandemic emergency event scenario (involving key management and operations employees) in the fourth quarter of 2019 to test the efficacy of our pandemic response plans and to improve these plans. We are well-positioned to continue to provide critical financial services to our customers through multiple channels such as interactive teller machines, automated teller machines, our mobile application, and our interactive website. We adjusted our physical retail locations by focusing on "drive up" services and closed our lobbies, reverting to "by appointment only" practices, while maintaining appropriate health, sanitization, social distancing and other safety protocols consistent with theCenters for Disease Control and Prevention (CDC ) and state guidelines. Starting in July, we re-opened the majority of our branch lobbies to customers, adhering to stringent safety measures including social distancing and cleaning protocols. We leveraged our information technology infrastructure by making accommodations to give employees the ability to work remotely where appropriate. Our executive and senior management worked rotating schedules or from remote offices or home in order to mitigate the risk of wide-spread occurrence of the COVID-19 contagion among this group. With respect to our other employees, approximately half of our workforce worked remotely. We will continue to actively monitor case levels and consider guidance from government agencies to determine when we activate further "return-to-work" schedules. Our remote 64 -------------------------------------------------------------------------------- and rotational working arrangements and implementation ofCDC health and safety protocols have not impaired our ability to continue to operate our business. We do rely on some third parties for certain services such as armored cars for cash exchanges. At this time, we have not experienced a disruption in our core data processor system provider. To protect our customers and communities from economic disruption, we: •developed a formal loan deferral program and other measures to support customers who may be enduring financial hardships; and •actively participated in the SBA PPP which, authorized financial institutions to make federally guaranteed loans that are eligible to be forgiven to qualifying small businesses and nonprofits on the terms set forth in the CARES Act and related regulations. We continue to evaluate other COVID-19 related FRB and federal government relief and stimulus programs to determine their suitability for our customers and communities. COVID-19 has had a significant impact on the provision for credit losses for the first half of 2020 after the adoption of CECL. The uncertainty in the market, a significant increase in unemployment, and adverse economic forecasts all point to the volatility of the expected additional losses in the loan portfolio. We would expect inherent volatility in the COVID-19 impact on our provision for credit losses for the duration of the current COVID-19 pandemic environment and immediate periods following the mitigation of the pandemic crisis. The federal banking regulators have offered certain measures to assist financial institutions during this time. Some of these that impact us are as follows: •As part of Section 4013 of the CARES Act and in accordance with federal bank regulatory interagency guidance, financial institutions have been granted temporary relief from reporting TDRs caused by COVID-19. To be eligible for TDR relief, a loan modification must be due to impacts from COVID-19, not more than 30 days past due as ofDecember 31, 2019 and executed betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after the end of the national emergency. Interagency guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and will not criticize financial institutions for working with borrowers in a safe and sound manner. Loan modification programs are considered positive actions that can mitigate adverse effects on borrowers due to COVID-19. Institutions generally do not need to categorize COVID-19-related loan modifications as TDRs if the loan modifications are short-term in nature and are made on a good faith basis in response to COVID-19 to borrowers who were current at the time the modification program was implemented. For borrowers who were current prior to COVID-19 that have requested and been granted a concession while experiencing a hardship during the pandemic, we will not be including those modifications as past due or a TDR at the time of the concession. As ofJune 30, 2020 , approximately$2.4 billion , or 10%, of our loan portfolio was approved during the initial deferment request window. Over 98% of the$2.4 billion of loans in deferment were current and in good standing atDecember 31, 2019 . •The regulatory agencies have agreed to allow an option to delay the effects of CECL on regulatory capital by two years for those financial institutions that adopt in 2020. This delay will be followed by a three-year transition period of 75%, 50%, and 25% respectively. We adopted CECL inJanuary 2020 and have elected this option. •The FRB initiated a facility to provide liquidity to financial institutions participating and funding loans for the PPP. The non-recourse loans are available to institutions eligible to make PPP loans, with the SBA-guaranteed loans pledged as collateral to the FRB. Financial institutions can also pledge PPP loans to the discount window. Each liquidity option is set at different rates and terms. PPP loans pledged to the PPPLF may be excluded from leverage ratio calculations. Strong core deposit growth has satisfied our liquidity needs during the second quarter, but the PPPLF remains a liquidity option. As we look ahead and move into the next phase of COVID-19 recovery, we will continue to focus our response on four key pillars in an effort to meet the needs of each of our constituents. The pillars are: employee protection and assistance; operational response and preparedness; customer and community support; and risk management and actions taken to preserve shareholder value given the extreme challenges presented. 65 --------------------------------------------------------------------------------
LIBOR
TheUnited Kingdom's Financial Conduct Authority (FCA), who is the regulator of LIBOR, expects LIBOR to cease to exist by the end of 2021. The FRB ofNew York has created a working group called the Alternative Reference Rate Committee (ARRC) that will helpU.S. institutions transition away from using LIBOR as a benchmark interest rate. Similarly, we created an internal working group that is managing our transition away from LIBOR. This working group is a cross-functional team composed of representatives from the commercial, retail and mortgage banking lines of business, loan operations, information technology, legal, finance and other support functions. The committee has completed an assessment of tasks needed for the transition, identified contracts that contain LIBOR language, is in process of reviewing existing contract language, developed loan fallback language for when LIBOR ceases to exist and identified risks associated with the transition. The financial impact regarding pricing, valuation and operations of the transition is not yet known. Our transition team will work within the guidelines established by theFCA and ARRC to allow a smooth transition away from LIBOR. 66 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months EndedJune 30, 2020 Compared to the Three Months EndedJune 30, 2019 Net income available to common stockholders for the three months endedJune 30, 2020 was$81.6 million or$0.25 per diluted common share, compared to net income available to common stockholders for the three months endedJune 30, 2019 of$93.2 million or$0.29 per diluted common share. The results for the second quarter of 2020 reflect a provision for credit losses of$30.2 million , including an estimated$17.1 million of incremental provision due to the COVID-19 related impacts on our ACL modeling results, and COVID-19 related expenses of$2.0 million . The second quarter of 2019 included$2.9 million in branch consolidation costs. Financial highlights are summarized below: TABLE 2 Three Months Ended June 30, $ % (in thousands, except per share data) 2020 2019 Change Change Net interest income$ 227,961 $ 230,407 $ (2,446) (1.1) % Provision for credit losses 30,177 11,478 18,699 162.9 Non-interest income 77,628 74,840 2,788 3.7 Non-interest expense 175,932 175,237 695 0.4 Income taxes 15,870 23,345 (7,475) (32.0) Net income 83,610 95,187 (11,577) (12.2) Less: Preferred stock dividends 2,010 2,010 - -
Net income available to common stockholders
(12.4) % Earnings per common share - Basic$ 0.25 $ 0.29 $ (0.04) (13.8) % Earnings per common share - Diluted 0.25 0.29 (0.04) (13.8) Cash dividends per common share 0.12 0.12 - - The following table presents selected financial ratios and other relevant data used to analyze our performance: TABLE 3 Three Months Ended June 30, 2020 2019 Return on average equity 6.89 % 8.09 % Return on average tangible common equity (2) 13.84 16.84 Return on average assets 0.91 1.13 Return on average tangible assets (2) 1.01 1.25 Book value per common share (1)$ 14.82 $ 14.30 Tangible book value per common share (1) (2) 7.63 7.11 Equity to assets (1) 12.98 % 14.02
%
Average equity to average assets 13.25 14.00 Common equity to assets (1) 12.70 13.70 Tangible equity to tangible assets (1) (2) 7.27 7.66 Tangible common equity to tangible assets (1) (2) 6.97 7.32 Dividend payout ratio 48.14 42.19 (1) Period-end (2) Non-GAAP 67
-------------------------------------------------------------------------------- The following table provides information regarding the average balances and yields earned on interest-earning assets (non-GAAP) and the average balances and rates paid on interest-bearing liabilities: TABLE 4 Three Months Ended June 30, 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning assets: Interest-bearing deposits with banks$ 300,164 $ 154 0.21 %$ 66,324 $ 988
5.97 %
Taxable investment securities (1) 5,083,104 27,340 2.15 5,296,831 31,740
2.40
Tax-exempt investment securities (1)(2) 1,115,976 10,010 3.59 1,121,655 10,062 3.59 Loans held for sale 106,368 1,055 3.97 89,671 1,063 4.75 Loans and leases (2)(3) 25,602,178 245,438 3.85 22,759,878 275,921 4.86 Total interest-earning assets (2) 32,207,790 283,997 3.54 29,334,359 319,774 4.37 Cash and due from banks 339,054 365,824 Allowance for credit losses (347,227) (190,182) Premises and equipment 333,322 329,381 Other assets 4,286,739 3,891,734 Total assets$ 36,819,678 $ 33,731,116 Liabilities Interest-bearing liabilities: Deposits: Interest-bearing demand$ 11,889,774 14,172 0.48$ 9,794,796 25,132 1.03 Savings 2,844,104 564 0.08 2,519,657 2,163 0.34 Certificates and other time 4,396,779 19,731 1.80 5,472,936 27,122
1.99
Total interest-bearing deposits 19,130,657 34,467 0.72 17,787,389 54,417 1.23 Short-term borrowings 2,631,009 8,319 1.27 3,716,627 22,140 2.37 Long-term borrowings 1,630,902 10,099 2.49 1,082,384 9,270 3.44 Total interest-bearing liabilities 23,392,568 52,885 0.91 22,586,400 85,827 1.52 Non-interest-bearing demand 8,143,171 6,069,106 Total deposits and borrowings 31,535,739 0.67 28,655,506 1.20 Other liabilities 404,280 354,885 Total liabilities 31,940,019 29,010,391 Stockholders' equity 4,879,659 4,720,725 Total liabilities and stockholders' equity$ 36,819,678 $ 33,731,116 Net interest-earning assets$ 8,815,222 $ 6,747,959 Net interest income (FTE) (2) 231,112 233,947 Tax-equivalent adjustment (3,151) (3,540) Net interest income$ 227,961 $ 230,407 Net interest spread 2.63 % 2.85 % Net interest margin (2) 2.88 % 3.20 % (1)The average balances and yields earned on securities are based on historical cost. (2)The interest income amounts are reflected on an FTE basis (non-GAAP), which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 21%. The yield on earning assets and the net interest margin are presented on an FTE basis. We believe 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 and leases consist of average total loans less average unearned income. 68 -------------------------------------------------------------------------------- Net Interest Income Net interest income on an FTE basis (non-GAAP) decreased$2.8 million , or 1.2%, from$233.9 million for the second quarter of 2019 to$231.1 million for the second quarter of 2020. Average interest-earning assets of$32.2 billion increased$2.9 billion , or 9.8%, from 2019, due to solid origination activity across our footprint and the benefit from PPP activity. Average interest-bearing liabilities of$23.4 billion increased$0.8 billion , or 3.6%, from 2019, driven by deposits for PPP funding and government stimulus funding, as well as solid organic growth in customer relationships, partially offset by reduced levels of borrowings. Our net interest margin FTE (non-GAAP) was 2.88% for the second quarter of 2020, compared to 3.20% for the same period of 2019, reflecting a 32 basis point decrease primarily due to actions taken by theFOMC , which lowered its target Fed Funds rate to 0-0.25% from 2.25%-2.50% betweenJuly 2019 andMarch 2020 . The following table provides certain information regarding changes in net interest income on an FTE basis (non-GAAP) attributable to changes in the average volumes and yields earned on interest-earning assets and the average volume and rates paid for interest-bearing liabilities for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 : TABLE 5 (in thousands) Volume Rate
Net
Interest Income (1) Interest-bearing deposits with banks$ 120 $ (954) $ (834) Securities (2) (1,117) (3,335) (4,452) Loans held for sale 169 (177) (8) Loans and leases (2) 27,797 (58,280) (30,483) Total interest income (2) 26,969 (62,746) (35,777) Interest Expense (1) Deposits: Interest-bearing demand 3,576 (14,536) (10,960) Savings 150 (1,749) (1,599) Certificates and other time (5,210) (2,181) (7,391) Short-term borrowings (99) (13,722) (13,821) Long-term borrowings 3,236 (2,407) 829 Total interest expense 1,653 (34,595) (32,942) Net change (2)$ 25,316 $ (28,151) $ (2,835) (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 (non-GAAP) which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 21%. We believe 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 (non-GAAP) of$284.0 million for the second quarter of 2020, increased$35.8 million or 11.2% from the same quarter of 2019, primarily due to increased interest-earning assets of$2.9 billion . The increase in interest-earning assets was primarily driven by a$2.8 billion , or 12.5%, increase in average loans and leases, which included$2.6 billion of PPP commercial loans originated during the second quarter of 2020. Average commercial loan growth totaled$2.8 billion , or 19.5%. Excluding the PPP loans, commercial loan origination activity remained solid with organic growth in thePennsylvania ,Cleveland , North andSouth Carolina , and Mid-Atlantic (Greater Baltimore-Washington D.C. markets) regions. Average consumer loan growth was$59.1 million , or 0.7%, with growth in residential mortgage loans of$190.6 million , or 5.8%, and direct installment loans of$165.4 million , or 9.5%, partially offset by declines in consumer lending heavily impacted by COVID-19 as indirect auto loans decreased$162.1 million , or 8.3%, and consumer lines of credit decreased$134.8 million , or 8.8%. Additionally, average securities decreased$219.4 million , or 3.4%, due to higher loan growth in 2020 and less attractive reinvestment yields. The yield on average interest-earning assets (non-GAAP) decreased 83 basis points from 4.37% for the second quarter of 2019 to 3.54% for the second quarter of 2020, reflecting lower interest rates in a COVID-19 environment. 69 -------------------------------------------------------------------------------- Interest expense of$52.9 million for the second quarter of 2020 decreased$32.9 million , or 38.4%, from the same quarter of 2019, due to a decrease in rates paid on average interest-bearing liabilities and growth in average interest-bearing deposits over the same quarter of 2019. Average interest-bearing deposits increased$1.3 billion , or 7.6%, and average non-interest-bearing deposits increased$2.1 billion , or 34.2%. The growth in non-interest-bearing deposits and interest-bearing deposits was driven by deposits for PPP funding and government stimulus activities, as well as solid organic growth in customer relationships. Average short-term borrowings decreased$1.1 billion , or 29.2%, primarily as a result of a decrease of$1.5 billion in federal funds purchased, partially offset by increases of$348.5 million in short-term FHLB advances and$80.8 million in customer repurchase accounts. Average long-term borrowings increased$548.5 million , or 50.7%, primarily resulting from increases of$256.5 million in long-term FHLB advances and$298.1 million in subordinated debt. The funding of both fixed and adjustable borrowings was opportunistically transacted to take advantage of the lower interest rate environment and add liquidity to support loan growth. The rate paid on interest-bearing liabilities decreased 61 basis points from 1.52% to 0.91% for the second quarter of 2020, primarily due to the interest rate actions made by theFOMC . Provision for Credit Losses Provision for credit losses is determined based on management's estimates of the appropriate level of allowance for credit losses needed to absorb probable life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period. The following table presents information regarding the credit loss expense and net charge-offs: TABLE 6 Three Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change
Provision for credit losses (on loans and leases)
162.9 % Net loan charge-offs 8,489 9,021 (532) (5.9) Net loan charge-offs (annualized) / total average loans and leases 0.13 % 0.16 % Provision for credit losses of$30.2 million during the second quarter of 2020 increased 162.9% from the same period of 2019, driven by an estimated$17.1 million of incremental provision due to the COVID-19 related impacts on our ACL modeling results. Net loan charge-offs were$8.5 million , a decrease of$0.5 million . For additional information relating to the allowance and provision for credit losses, refer to the Allowance for Credit Losses section of this Management's Discussion and Analysis. Non-Interest Income The breakdown of non-interest income for the three months endedJune 30, 2020 and 2019 is presented in the following table: TABLE 7 Three Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change Service charges$ 23,938 $ 32,068 $ (8,130) (25.4) % Trust services 7,350 7,018 332 4.7 Insurance commissions and fees 5,835 4,411 1,424 32.3 Securities commissions and fees 3,763 4,671 (908) (19.4) Capital markets income 12,515 9,867 2,648 26.8 Mortgage banking operations 16,550 7,613 8,937 117.4 Dividends on non-marketable equity securities 2,766 4,135 (1,369) (33.1) Bank owned life insurance 3,924 3,103 821 26.5 Net securities gains 97 - 97 - Other 890 1,954 (1,064) (54.5) Total non-interest income$ 77,628 $ 74,840 $ 2,788 3.7 % 70
-------------------------------------------------------------------------------- Total non-interest income increased$2.8 million , to$77.6 million for the second quarter of 2020, a 3.7% increase from the same period of 2019. Excluding significant, unusual or outsized items, non-interest income increased$1.3 million , or 1.7%. The variances in the individual non-interest income items are further explained in the following paragraphs. Service charges on loans and deposits of$23.9 million for the second quarter of 2020 decreased$8.1 million , or 25.4%, from the same period of 2019, primarily due to noticeably lower transaction volumes given COVID-19, although customer transaction volume began to increase late in the quarter. Trust services of$7.4 million for the second quarter of 2020 increased$0.3 million , or 4.7%, from the same period of 2019, primarily driven by strong organic revenue production, partially offset by market valuation impacts. We continued to generate strong organic growth in accounts and services, while the market value of assets under management decreased$4.4 million , or 0.1%, to$6.1 billion atJune 30, 2020 . Insurance commissions and fees of$5.8 million for the second quarter of 2020 increased$1.4 million , or 32.3%, from the same period of 2019, primarily due to the benefit of new business in North andSouth Carolina , as well as organic growth in commercial lines. Securities commissions and fees of$3.8 million for the second quarter of 2020 decreased$0.9 million , or 19.4%, from the same period of 2019, primarily as a result of lower activity due to COVID-19. Capital markets income of$12.5 million for the second quarter of 2020 increased$2.6 million , or 26.8%, from the same period of 2019, reflecting record customer-related interest-rate derivative activity across our footprint. Mortgage banking operations income of$16.6 million for the second quarter of 2020 increased$8.9 million , or 117.4%, from the same period of 2019, primarily due to increased saleable volume and expanding margins. During the second quarter of 2020, we sold$437.7 million of residential mortgage loans, compared to$334.6 million for the same period of 2019, an increase of 30.8%. Additionally, the mortgage banking results included a$0.3 million unfavorable interest rate-related valuation adjustment on MSRs in the second quarter of 2020 compared to an unfavorable$1.3 million valuation adjustment in the second quarter of 2019. Dividends on non-marketable equity securities of$2.8 million for the second quarter of 2020 decreased$1.4 million , or 33.1%, from the same period of 2019, primarily due to a decrease in the FHLB dividend rate and lower levels of FHLB borrowings given the strong growth in deposits. BOLI income of$3.9 million for the second quarter of 2020 increased$0.8 million , or 26.5%, from the same period of 2019, primarily due to life insurance claims. Other non-interest income was$0.9 million and$2.0 million for the second quarter of 2020 and 2019, respectively. The second quarter of 2019 included losses on fixed assets related to branch consolidations of$0.5 million . The following table presents non-interest income excluding significant, unusual or outsized items for the three months endedJune 30, 2019 : TABLE 8 Three Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change
Total non-interest income, as reported
$ 2,788 3.7 %
Significant item:
Loss on fixed assets related to branch consolidations - 546 (546) MSR impairment 334 1,255 (921) Total non-interest income, excluding significant item and other unusual or outsized items(1)$ 77,962 $ 76,641 $ 1,321 1.7 % (1) Non-GAAP 71
-------------------------------------------------------------------------------- Non-Interest Expense The breakdown of non-interest expense for the three months endedJune 30, 2020 and 2019 is presented in the following table: TABLE 9 Three Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change
Salaries and employee benefits
(0.3) % Net occupancy 13,594 15,593 (1,999) (12.8) Equipment 15,610 15,473 137 0.9 Amortization of intangibles 3,343 3,479 (136) (3.9) Outside services 17,000 16,110 890 5.5 FDIC insurance 5,371 6,013 (642) (10.7) Bank shares and franchise taxes 4,029 3,130 899 28.7 Other 22,993 21,150 1,843 8.7 Total non-interest expense$ 175,932 $ 175,237 $ 695 0.4 % Total non-interest expense of$175.9 million for the second quarter of 2020 increased$0.7 million , or 0.4%, from the same period of 2019. Non-interest expense increased$1.0 million , or 0.6%, when excluding$2.0 million of COVID-19 expenses in the second quarter of 2020 and$2.3 million of branch consolidation costs in the second quarter of 2019. In the second quarter of 2020, we also recognized an impairment of$4.1 million from a renewable energy investment tax credit transaction, while the related renewable energy investment tax credits were recognized during the quarter as a benefit to income taxes. The variances in the individual non-interest expense items are further explained in the following paragraphs. Salaries and employee benefits of$94.0 million for the second quarter of 2020 decreased$0.3 million , or 0.3%, from the same period of 2019, as higher production-related commissions were more than offset by higher production-related salary deferrals from loan origination activities. Additionally, we recorded$0.6 million in COVID-19 expenses during the second quarter of 2020. Net occupancy and equipment expense of$29.2 million for the second quarter of 2020 decreased$1.9 million , or 6.0%, from$31.1 million from the same period of 2019, primarily due to branch consolidation costs of$2.2 million included in the second quarter of 2019. Outside services expense of$17.0 million for the second quarter of 2020 increased$0.9 million , or 5.5%, from the same period of 2019, primarily due to increases in check card fees and data processing fees of$0.5 million and$0.4 million , respectively.FDIC insurance of$5.4 million for the second quarter of 2020 decreased$0.6 million , or 10.7%, from the same period of 2019. Subordinated debt issued by FNBPA allows for an expense reduction through the use of an Unsecured Debt Adjustment (UDA) in theFDIC calculator. Bank shares and franchise taxes of$4.0 million for the second quarter of 2020 increased$0.9 million , or 28.7%, from the same period of 2019, primarily due to capital base increases. Other non-interest expense was$23.0 million and$21.2 million for the second quarter of 2020 and 2019, respectively. During the second quarter of 2020, we recorded an impairment charge of$4.1 million from a renewable energy investment tax credit transaction. The related renewable energy investment tax credits were recognized during the quarter as a benefit to income taxes. These items were partially offset by decreases in several other items in other non-interest expense, including marketing, business development expenses and miscellaneous losses, which were somewhat impacted by the COVID-19 operating environment. 72 -------------------------------------------------------------------------------- The following table presents non-interest expense excluding significant, unusual or outsized items for the six months endedJune 30, 2020 and 2019: TABLE 10 Three Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change Total non-interest expense, as reported$ 175,932 $ 175,237 $ 695 0.4 %
Significant items and other unusual or outsized items:
Branch consolidations - (2,325) 2,325 COVID-19 expense (1,989) - (1,989)
Total non-interest expense, excluding significant items and other unusual or outsized items (1)
$ 173,943 $ 172,912 $ 1,031 0.6 % (1) Non-GAAP Income Taxes The following table presents information regarding income tax expense and certain tax rates: TABLE 11 Three Months Ended June 30, (dollars in thousands) 2020 2019 Income tax expense$ 15,870 $ 23,345 Effective tax rate 16.0 % 19.7 % Statutory federal tax rate 21.0 21.0 Both periods' tax rates are lower than the federal statutory tax rates of 21% due to tax benefits primarily resulting from tax-exempt income on investments and loans, tax credits and income from BOLI. The lower effective tax rate in 2020 is due to lower pre-tax income levels and the impact from renewable energy investment tax credits realized in the second quarter of 2020. Six Months EndedJune 30, 2020 Compared to the Six Months EndedJune 30, 2019 Net income available to common stockholders for the first six months of 2020 was$93.2 million or$0.39 per diluted common share, compared to net income available to common stockholders for the first six months of 2019 of$185.3 million or$0.57 per diluted common share. The results for the first six months of 2020 reflect a provision for credit losses of$78.0 million , including an estimated$55.0 million of incremental provision due to the COVID-19 related impacts on our ACL modeling results. Additionally, our first six months of 2020 results included branch consolidation costs of$8.3 million , MSR impairment of$8.0 million , retirement vesting changes for certain 2020 stock grants of$5.6 million , and COVID-19 related expenses of$4.0 million . The results for the first six months of 2019 included branch consolidation costs of$4.5 million and MSR impairment of$2.6 million . These significant, unusual, or outsized items totaled$64 million , negatively impacting earnings by$0.20 per share. The major categories of the Consolidated Statements of Income and their respective impact to the increase (decrease) in net income are presented in the following table: 73 --------------------------------------------------------------------------------
TABLE 12 Six Months Ended June 30, $ % (in thousands, except per share data) 2020 2019 Change Change Net interest income$ 460,592 $ 461,000 $ (408) (0.1) % Provision for credit losses 78,015 25,107 52,908 210.7 Non-interest income 146,154 140,225 5,929 4.2 Non-interest expense 370,824 340,979 29,845 8.8 Income taxes 26,880 45,825 (18,945) (41.3) Net income 131,027 189,314 (58,287) (30.8) Less: Preferred stock dividends 4,020 4,020 - -
Net income available to common stockholders
$ (58,287) (31.5) % Earnings per common share - Basic$ 0.39 $ 0.57 $ (0.18) (31.6) % Earnings per common share - Diluted 0.39 0.57 (0.18) (31.6) Cash dividends per common share 0.24 0.24 - - The following table presents selected financial ratios and other relevant data used to analyze our performance: TABLE 13 Six Months Ended June 30, 2020 2019 Return on average equity 5.40 % 8.15 %
Return on average tangible common equity (2) 10.89 17.11 Return on average assets
0.74 1.14 Return on average tangible assets (2) 0.82 1.26 Book value per common share (1)$ 14.82 $ 14.30 Tangible book value per common share (1) (2) 7.63 7.11 Equity to assets (1) 12.98 % 14.02 % Average equity to average assets 13.65 13.96 Common equity to assets (1) 12.70 13.70 Tangible equity to tangible assets (1) (2) 7.27 7.66 Tangible common equity to tangible assets (1) (2) 6.97 7.32 Dividend payout ratio 61.76 42.37 (1) Period-end (2) Non-GAAP 74
-------------------------------------------------------------------------------- The following table provides information regarding the average balances and yields earned on interest-earning assets (non-GAAP) and the average balances and rates paid on interest-bearing liabilities: TABLE 14 Six Months Ended June 30, 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate Balance Expense Rate Assets
Interest-earning assets:
Interest-bearing deposits with banks
1.20 %$ 60,279 $ 1,450
4.85 %
Taxable investment securities (1) 5,190,350 58,675 2.26 5,370,269 64,590
2.41
Tax-exempt investment securities (1)(2) 1,120,871 20,078 3.58 1,115,212 19,981 3.58 Loans held for sale 91,413 2,040 4.47 61,469 1,571 5.13 Loans and leases (2) (3) 24,555,651 511,265 4.18 22,570,742 546,071 4.87 Total interest-earning assets (2) 31,190,092 593,438 3.82 29,177,971 633,663 4.37 Cash and due from banks 357,080 371,703 Allowance for credit losses (327,361) (186,850) Premises and equipment 334,458 330,711 Other assets 4,183,187 3,877,715 Total assets$ 35,737,456 $ 33,571,250 Liabilities Interest-bearing liabilities: Deposits: Interest-bearing demand$ 11,462,755 39,316 0.69$ 9,723,662 48,695 1.01 Savings 2,731,250 2,391 0.18 2,514,929 4,233 0.34 Certificates and other time 4,533,167 42,226 1.87 5,410,633 51,866
1.93
Total interest-bearing deposits 18,727,172 83,933 0.90 17,649,224 104,794 1.20 Short-term borrowings 2,968,033 22,080 1.49 4,012,589 47,950 2.39 Long-term borrowings 1,544,217 20,381 2.65 873,185 12,800 2.96 Total interest-bearing liabilities 23,239,422 126,394 1.09 22,534,998 165,544 1.48 Non-interest-bearing demand 7,220,074 5,981,427 Total deposits and borrowings 30,459,496 0.83 28,516,425 1.17 Other liabilities 400,897 368,152 Total liabilities 30,860,393 28,884,577 Stockholders' equity 4,877,063 4,686,673 Total liabilities and stockholders' equity$ 35,737,456 $ 33,571,250 Net interest-earning assets$ 7,950,670 $ 6,642,973 Net interest income (FTE) (2) 467,044 468,119 Tax-equivalent adjustment (6,452) (7,119) Net interest income$ 460,592 $ 461,000 Net interest spread 2.73 % 2.89 % Net interest margin (2) 3.01 % 3.23 % (1)The average balances and yields earned on securities are based on historical cost. (2)The interest income amounts are reflected on an FTE basis (non-GAAP), which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 21%. The yield on earning assets and the net interest margin are presented on an FTE basis. We believe 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 and leases consist of average total loans less average unearned income. 75 -------------------------------------------------------------------------------- Net Interest Income Net interest income totaled$460.6 million , increasing$0.4 million , or 0.1%. The net interest margin (FTE) (non-GAAP) declined 22 basis points to 3.01%, primarily due to the impact of lower interest rates as year-to-date average 1-month LIBOR declined to 0.90% from 2.47% for the first half of 2019. The following table provides certain information regarding changes in net interest income on an FTE basis (non-GAAP) attributable to changes in the average volumes and yields earned on interest-earning assets and the average volume and rates paid for interest-bearing liabilities for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 : TABLE 15 (in thousands) Volume Rate
Net
Interest Income (1) Interest-bearing deposits with banks$ 965 $ (1,035) $ (70) Securities (2) (1,502) (4,316) (5,818) Loans held for sale 634 (165) 469 Loans and leases (2) 38,590 (73,396) (34,806) Total interest income (2) 38,687 (78,912) (40,225) Interest Expense (1) Deposits: Interest-bearing demand 8,511 (17,890) (9,379) Savings 639 (2,481) (1,842) Certificates and other time (8,261) (1,379) (9,640) Short-term borrowings (10,085) (15,785) (25,870) Long-term borrowings 8,473 (892) 7,581 Total interest expense (723) (38,427) (39,150) Net change (2)$ 39,410 $ (40,485) $ (1,075) (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 (non-GAAP) which adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 21%. We believe 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 (non-GAAP) of$593.4 million for the first six months of 2020, decreased$40.2 million , or 6.3%, from the same period of 2019, resulting from the decrease in benchmark interest rates, partially offset by an increase in interest-earning assets of$2.0 billion . The increase in interest-earning assets was primarily driven by a$2.0 billion , or 8.8%, increase in average total loans due to PPP activity and solid origination activity across the footprint. Average commercial loan growth totaled$1.9 billion , or 13.3%, including growth of$1.4 billion , or 28.9%, in commercial and industrial loans. Commercial loan growth was led by strong commercial activity in thePennsylvania ,North Carolina , and Mid-Atlantic regions. Average consumer loan growth of$112.7 million , or 1.3%, was led by increases in residential mortgage loans of$214.7 million , or 6.7%, and direct installment balances of$132.1 million , or 7.5%, partially offset by a decline of$129.9 million , or 8.4%, in consumer credit lines and$104.1 million , or 5.3%, in indirect installment loans. Additionally, the net reduction in the securities portfolio was a result of management's strategy to deploy excess liquidity into higher yielding loans, as average securities decreased$174.3 million , or 2.7%. For the first six months of 2020, the yield on average interest-earning assets (non-GAAP) decreased 55 basis points to 3.82%, compared to the first six months of 2019, primarily due to actions taken to reduce the cost of interest-bearing deposits given the low interest rate environment. Interest expense of$126.4 million for the first six months of 2020 decreased$39.2 million , or 23.6%, from the same period of 2019 primarily due to a decrease in rates paid, partially offset by an increase in average interest-bearing deposits and borrowings. Average interest-bearing deposits increased$1.1 billion , or 6.1%, which reflects the benefit of organic growth, as well as deposits for PPP funding and government stimulus activities. Average long-term borrowings increased$671.0 million , or 76.8%, which reflects increases of$467.1 million in long-term FHLB borrowings,$209.7 million in senior debt and$17.9 million in subordinated debt, partially offset by a decrease of$24.9 million in junior subordinated debt. The funding of both 76 -------------------------------------------------------------------------------- fixed and adjustable longer-term borrowings was opportunistically transacted to take advantage of the lower interest rate environment and add liquidity to support loan growth. During the first quarter of 2020, we issued$300 million of 2.20% fixed rate senior notes due in 2023. During the first quarter of 2019, we issued$120.0 million of 4.950% fixed-to-floating rate subordinated notes due in 2029. We used part of the proceeds from the 2019 issuance to redeem higher-rate debt including$78.0 million in junior subordinated debt and$25.0 million in other subordinated debt. The rate paid on interest-bearing liabilities decreased 39 basis points to 1.09% for the first six months of 2020, compared to the first six months of 2019 due to reduced costs on interest-bearing deposits and lower borrowing costs. Provision for Credit Losses The following table presents information regarding the provision for credit losses and net charge-offs: TABLE 16 Six Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change Provision for credit losses (on loans and leases)$ 78,005 $ 25,107 $ 52,898 210.7 % Net loan charge-offs 14,172 16,600 (2,428) (14.6) Net loan charge-offs (annualized) / total average loans and leases 0.12 % 0.15 % Provision for credit losses for the six months endedJune 30, 2020 was$78.0 million , an increase of$52.9 million from the year-ago quarter, and included an estimated$55.0 million of incremental provision due to COVID-19 related impacts on our ACL modeling results. Net charge-offs of$14.2 million during the six months endedJune 30, 2020 , compared to$16.6 million during the six months endedJune 30, 2019 . Non-Interest Income The breakdown of non-interest income for the six months endedJune 30, 2020 and 2019 is presented in the following table: TABLE 17 Six Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change Service charges$ 54,066 $ 62,285 $ (8,219) (13.2) % Trust services 15,312 13,802 1,510 10.9 Insurance commissions and fees 12,387 9,308 3,079 33.1 Securities commissions and fees 8,302 9,016 (714) (7.9) Capital markets income 23,628 15,903 7,725 48.6 Mortgage banking operations 15,517 11,518 3,999 34.7 Dividends on non-marketable equity securities 7,444 9,158 (1,714) (18.7) Bank owned life insurance 7,101 5,944 1,157 19.5 Net securities gains 150 - 150 - Other 2,247 3,291 (1,044) (31.7) Total non-interest income$ 146,154 $ 140,225 $ 5,929 4.2 % Total non-interest income increased$5.9 million , to$146.2 million for the first six months of 2020, a 4.2% increase from the same period of 2019. Excluding significant, unusual or outsized items, non-interest income increased$9.6 million , or 6.7%. The variances in significant individual non-interest income items are further explained in the following paragraphs. Service charges on loans and deposits of$54.1 million for the first six months of 2020 decreased$8.2 million , or 13.2%, as there were noticeably lower customer transaction volumes in the COVID-19 environment, although volumes began to increase late in the second quarter of 2020. 77 -------------------------------------------------------------------------------- Trust services of$15.3 million for the first six months of 2020 increased$1.5 million , or 10.9%, from the same period of 2019, primarily driven by strong organic revenue production even though the market value of assets under management decreased$4.4 million , or 0.1%, to$6.1 billion atJune 30, 2020 . Insurance commissions and fees of$12.4 million for the first six months of 2020 increased$3.1 million , or 33.1%, from the same period of 2019, primarily due to new business in the Carolina regions of our footprint, as well as organic growth in commercial lines. Securities commissions and fees of$8.3 million for the first six months of 2020 decreased$0.7 million , or 7.9%, from the same period of 2019, primarily as a result of lower activity due to COVID-19. Capital markets income of$23.6 million for the first six months of 2020 increased$7.7 million , or 48.6%, from$15.9 million for the same period of 2019. The significant increase was primarily due to record customer-related interest rate derivative activity for the first six months of 2020 in a volatile rate environment. Mortgage banking operations income of$15.5 million for the first six months of 2020 increased$4.0 million , or 34.7%, from the same period of 2019, due to increased saleable volume and expanding margins. During the first six months of 2020, we sold$697.6 million of residential mortgage loans, a 32.0% increase compared to$528.6 million , excluding the$110.1 million portfolio bulk sale, for the same period of 2019. The higher origination and secondary marketing revenues were partially offset by$5.4 million higher MSR impairment related to unfavorable interest-rate valuation adjustments and$4.6 million of higher MSR amortization due to higher prepayment speeds. Dividends on equity securities of$7.4 million for the first six months of 2020 decreased$1.7 million , or 18.7%, from the same period of 2019, primarily due to a decrease in the FHLB dividend rate and lower levels of FHLB borrowings given the strong growth in deposits. Income from BOLI of$7.1 million for the first six months of 2020 increased$1.2 million , or 19.5%, primarily due to life insurance claims. Other non-interest income was$2.2 million and$3.3 million for the first six months of 2020 and 2019, respectively. During the first six months of 2019, we recognized$1.3 million in net gains on equity investments, compared to a net loss of$0.6 million for the first six months of 2020. The following table presents non-interest income excluding significant, and other unusual or outsized items for the six months endedJune 30, 2020 and 2019: TABLE 18 Six Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change
Total non-interest income, as reported
4.2 % Significant items and other unusual or outsized items: Loss on fixed assets related to branch consolidations - 1,722 (1,722) MSR impairment 8,007 2,600 5,407 Total non-interest income, excluding significant items and other unusual or outsized items(1)$ 154,161 $ 144,547 $ 9,614 6.7 % (1) Non-GAAP 78
-------------------------------------------------------------------------------- Non-Interest Expense The breakdown of non-interest expense for the six months endedJune 30, 2020 and 2019 is presented in the following table: TABLE 19 Six Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change
Salaries and employee benefits
6.6 % Net occupancy 35,042 30,658 4,384 14.3 Equipment 31,656 30,298 1,358 4.5 Amortization of intangibles 6,682 6,958 (276) (4.0) Outside services 33,896 30,855 3,041 9.9 FDIC insurance 10,926 11,963 (1,037) (8.7) Bank shares and franchise taxes 8,121 6,597 1,524 23.1 Other 46,704 38,077 8,627 22.7 Total non-interest expense$ 370,824 $ 340,979 $ 29,845 8.8 % Total non-interest expense of$370.8 million for the first six months of 2020 increased$29.8 million , an 8.8% increase from the same period of 2019. Non-interest expense increased$14.8 million , or 4.4%, when excluding significant, unusual or outsized items, including$4.0 million of expenses associated with COVID-19,$8.3 million of branch consolidation costs, and$5.6 million of retirement vesting changes for certain 2020 stock awards, compared to$2.8 million of branch consolidation costs in the first six months of 2019. The variances in the individual non-interest expense items are further explained in the following paragraphs. Salaries and employee benefits of$197.8 million for the first six months of 2020 increased$12.2 million or 6.6% from the same period of 2019, primarily related to production-related commissions, normal merit increases and stock-based compensation. We made a change to long-term stock-based compensation vesting that resulted in accelerated grant date expense recognition for certain 2020 awards, with full expense recognition on grant date instead of recognizing the same expense amount over a 36-month vesting period. These awards are not released until the three-year service period is complete or the specified performance criteria is met over the three-year period. Additionally, we recorded$1.5 million relating to COVID-19 expenses. Net occupancy and equipment expense of$66.7 million for the first six months of 2020 increased$5.7 million , or 9.4%, from$61.0 million from the same period of 2019, primarily due to$8.3 million of branch consolidation costs, compared to$2.2 million in the first six months of 2019. Outside services expense of$33.9 million for the first six months of 2020 increased$3.0 million , or 9.9%, from the first six months of 2019, primarily due to increases in data processing costs.FDIC insurance expense of$10.9 million for the first six months of 2020 decreased$1.0 million , or 8.7%, from the first six months of 2019, primarily due to increased subordinated debt at FNBPA. Bank shares and franchise taxes of$8.1 million for the first six months of 2020 increased$1.5 million , or 23.1%, from the first six months of 2019, primarily due to the capital base increase and higher tax credits in 2019. Other non-interest expense was$46.7 million and$38.1 million for the first six months of 2020 and 2019, respectively. During the first six months of 2020, we recorded$8.3 million more in loan-related expenses, including an impairment charge of$4.1 million from a renewable energy investment tax credit transaction. The related renewable energy investment tax credits were recognized during the 2020 period as a benefit to income taxes. The first six months of 2020 also included$2.1 million in COVID-19-related expenses which included a$1.0 million contribution to our foundation for relief assistance to our communities, benefiting food banks and providing funding for essential medical supplies. These items were partially offset by decreases in several other items in other non-interest expense, including marketing and business development expenses, which were somewhat impacted by the COVID-19 operating environment. 79 -------------------------------------------------------------------------------- The following table presents non-interest expense excluding significant, unusual or outsized items for the six months endedJune 30, 2020 and 2019: TABLE 20 Six Months Ended June 30, $ % (dollars in thousands) 2020 2019 Change Change Total non-interest expense, as reported$ 370,824 $ 340,979 $ 29,845 8.8 %
Significant items and other unusual or outsized items:
Branch consolidations (8,262) (2,783) (5,479) COVID-19 expense (3,951) - (3,951)
Retirement vesting changes for certain 2020 stock grants - salaries and benefits
(5,579) - (5,579)
Total non-interest expense, excluding significant items and other unusual or outsized items (1)
$ 353,032 $ 338,196 $ 14,836 4.4 % (1) Non-GAAP Income Taxes The following table presents information regarding income tax expense and certain tax rates: TABLE 21 Six Months Ended June 30, (dollars in thousands) 2020 2019 Income tax expense$ 26,880 $ 45,825 Effective tax rate 17.0 % 19.5 % Statutory federal tax rate 21.0 21.0 Both periods' tax rates are lower than the federal statutory tax rates of 21% due to tax benefits primarily resulting from tax-exempt income on investments and loans, tax credits and income from BOLI. The lower effective tax rate in the first six months of 2020 compared to 2019 was primarily due to lower pretax income levels and renewable energy investment tax credits realized in the second quarter of 2020. 80
-------------------------------------------------------------------------------- FINANCIAL CONDITION The following table presents our condensed Consolidated Balance Sheets: TABLE 22 June 30, December 31, $ % (dollars in millions) 2020 2019 Change Change Assets Cash and cash equivalents$ 931 $ 599 $ 332 55.4 % Securities 6,351 6,564 (213) (3.2) Loans held for sale 108 51 57 111.8 Loans and leases, net 25,797 23,093 2,704 11.7 Goodwill and other intangibles 2,323 2,329 (6) (0.3) Other assets 2,211 1,979 232 11.7 Total Assets$ 37,721 $ 34,615 $ 3,106 9.0 % Liabilities and Stockholders' Equity Deposits$ 28,395 $ 24,786 $ 3,609 14.6 % Borrowings 4,041 4,556 (515) (11.3) Other liabilities 388 390 (2) (0.5) Total liabilities 32,824 29,732 3,092 10.4 Stockholders' equity 4,897 4,883 14 0.3
Total Liabilities and Stockholders' Equity
9.0 % Lending Activity The loan and lease portfolio consists principally of loans and leases to individuals and small- and medium-sized businesses within our primary markets in seven states and theDistrict of Columbia . Our market coverage spans several major metropolitan areas including:Pittsburgh, Pennsylvania ;Baltimore, Maryland ;Cleveland, Ohio ; andCharlotte ,Raleigh ,Durham and the Piedmont Triad (Winston-Salem ,Greensboro andHigh Point ) inNorth Carolina . In the second quarter of 2020, we originated$2.6 billion of PPP loans.
Following is a summary of loans and leases:
TABLE 23 June 30, $ % 2020 December 31, 2019 Change Change (in millions) Commercial real estate$ 9,305 $ 8,960$ 345 3.9 % Commercial and industrial 7,709 5,308 2,401 45.2 Commercial leases 497 432 65 15.0 Other 40 21 19 90.5 Total commercial loans and leases 17,551 14,721 2,830 19.2 Direct installment 1,947 1,821 126 6.9 Residential mortgages 3,520 3,374 146 4.3 Indirect installment 1,767 1,922 (155) (8.1) Consumer lines of credit 1,377 1,451 (74) (5.1) Total consumer loans 8,611 8,568 43 0.5 Total loans and leases$ 26,162 $ 23,289$ 2,873 12.3 % 81
-------------------------------------------------------------------------------- Non-Performing Assets Following is a summary of non-performing assets: TABLE 24 June 30, $ % (in millions) 2020 December 31, 2019 Change Change Commercial real estate$ 77 $ 32$ 45 140.6 % Commercial and industrial 58 29 29 100.0 Commercial leases 3 1 2 200.0 Other 1 1 - - Total commercial loans and leases 139 63 76 120.6 Direct installment 10 13 (3) (23.1) Residential mortgages 13 17 (4) (23.5) Indirect installment 2 3 (1) (33.3) Consumer lines of credit 6 7 (1) (14.3) Total consumer loans 31 40 (9) (22.5) Total non-performing loans and leases 170 103 67 65.0 Other real estate owned 21 26 (5) (19.2) Non-performing assets$ 191 $ 129$ 62 48.1 % Non-performing assets increased$62.0 million , from$128.6 million atDecember 31, 2019 to$190.5 million atJune 30, 2020 . This reflects an increase of$67.2 million in non-performing loans and leases and a decrease of$5.2 million in OREO. Prior to the adoption of CECL, acquired PCD loans were excluded from our non-performing disclosures. PCD loans that meet the definition of non-accrual are now included in the disclosures and resulted in a$54 million increase in non-accrual loans in the first six months of 2020 compared toDecember 31, 2019 . The decrease in OREO was largely driven by the sale of multiple pieces of real estate. During the first quarter and into the second quarter of 2020, we've seen significant macroeconomic changes due to the COVID-19 pandemic. Stay-at-home orders and non-essential business closures in many of our markets temporarily suspended the income generation of some of our borrowers. Government stimulus and support programs generated through the CARES Act, such as the PPP, began to assist our borrowers through the difficult financial disruptions. We offered short-term modifications to our customers to assist them through this period. The programs our customers have taken advantage of are: •Existing customers who were current prior to the start of the pandemic, can elect to defer loan principal and interest payments or interest payments for up to 90 days without late fees but will continue to accrue interest. As ofJune 30, 2020 , approximately 5,800 commercial customers have elected this option. •Mortgage and consumer loan customers have up to a 90-day payment deferral option, depending on their loan type. As ofJune 30, 2020 , approximately 8,900 of these customers have elected this option. •SBA disaster relief assistance, including the PPP. The loan deferral programs can be extended for up to an additional 90 days on an individual basis. Most of the deferrals for our borrowers have expired inJuly 2020 . We are currently working with customers on deferral to determine if they will resume normal payments or require an additional deferment. As long as the borrower was not experiencing financial difficulties immediately prior to COVID-19, short-term modifications, such as principal and interest deferments, are not being included in non-performing loans or TDRs. These modifications will be closely monitored for any future deterioration and included in the tables as the probability of collection deteriorates. As ofJune 30, 2020 , we had$2.4 billion in loans that have been granted short-term modifications as a result of financial disruptions associated with the COVID-19 pandemic. 82 -------------------------------------------------------------------------------- Troubled Debt Restructured Loans Following is a summary of accruing and non-accrual TDRs, by class: TABLE 25 Non- (in millions) Accruing Accrual Total
4 5 Total commercial loans 6 22 28 Direct installment 24 5 29 Residential mortgages 26 6 32 Consumer lines of credit 7 1 8 Total consumer loans 57 12 69 Total TDRs$ 63 $ 34 $ 97
3 4 Total commercial loans 4 8 12 Direct installment 18 3 21 Residential mortgages 14 3 17 Consumer lines of credit 5 1 6 Total consumer loans 37 7 44 Total TDRs$ 41 $ 15 $ 56 Allowance for Credit Losses OnJanuary 1, 2020 , we adopted CECL which changed how we calculate the ACL as more fully described in Note 1 to the Notes to Consolidated Financial Statements (unaudited). This expected credit loss model takes into consideration the expected losses over the life of the loan at the time the loan is originated compared to the incurred loss model under the prior standard. At the time of the adoption, we recorded a one-time cumulative-effect adjustment of$50.6 million as a reduction to Retained Earnings. The ACL balance increased by$105 million and included a "gross-up" to PCI loan balances and the ACL of$50 million . Included in the CECL adoption impact was an increase of$10 million to our AULC. The model used to calculate the ACL is dependent on the portfolio composition and credit quality, as well as historical experience, current conditions and forecasts of economic conditions and interest rates. Specifically, the following considerations are incorporated into the ACL calculation: •a third-party macroeconomic forecast scenario; •a 24-month R&S forecast period for macroeconomic factors with a reversion to the historical mean on a straight-line basis over a 12-month period; and •the historical through the cycle mean calculated using an expanded period to include a prior recessionary period. COVID-19 Impacts Starting inMarch 2020 , the broader economy experienced a significant deterioration in the macroeconomic environment driven by the COVID-19 pandemic resulting in notable adverse changes to forecasted economic variables utilized in our ACL modeling process. Based on these changes, we are utilizing a third-party pandemic recessionary macroeconomic forecast scenario for ACL modeling purposes. This scenario captures forecasted macroeconomic variables as ofJune 11, 2020 to ensure our ACL calculation considers the most recently available macroeconomic data in a quickly evolving environment at quarter-end. Macroeconomic variables that we utilized from this scenario include but are not limited to: (i) GDP, which reflects a contraction of up to 12.0% from the beginning of 2020 with average annual increases not occurring until mid-2021, (ii) the 83 -------------------------------------------------------------------------------- Dow Jones Industrial Average, which remains below peak levels throughout the R&S period, (iii) unemployment, which averages 11% over the R&S period and (iv) the Volatility Index, which remains elevated in 2020 before declining to pre-pandemic levels in 2021. The ACL of$365.0 million atJune 30, 2020 increased$169.1 million , or 86.3%, fromDecember 31, 2019 and reflects the immediate Day 1 CECL adoption increase to the ACL of$105.3 million onJanuary 1, 2020 . Our ending ACL coverage ratio atJune 30, 2020 was 1.40%. Excluding PPP loans that do not carry an ACL due to a 100% government guarantee, the ACL to total loan and leases ratio equaled 1.54%, or an impact of 14 basis points. As ofJune 30, 2020 , total loans in deferral related to the COVID-19 pandemic totaled$2.4 billion . Over 98% of the$2.4 billion of loans in deferment were current and in good standing atDecember 31, 2019 . Total provision for credit losses for the six months endedJune 30, 2020 was$78.0 million and included an estimated$55 million of incremental provision due to COVID-19 related impacts on our ACL modeling results. Net charge-offs were$14.2 million during the six months endedJune 30, 2020 , compared to$16.6 million during the six months endedJune 30, 2019 , with the decrease primarily due to lower commercial charge-offs. The ACL as a percentage of non-performing loans for the total portfolio increased from 190% as ofDecember 31, 2019 to 215% as ofJune 30, 2020 , as provision exceeded charge-offs and included ACL reserve build, while the level of non-performing loans increased.
Deposits
As a bank holding company, our primary source of funds is deposits. These deposits are provided by businesses, municipalities and individuals located within the markets served by our Community Banking subsidiary. Following is a summary of deposits: TABLE 26 June 30, $ % (in millions) 2020 December 31, 2019 Change Change Non-interest-bearing demand$ 8,650 $ 6,384$ 2,266 35.5 % Interest-bearing demand 12,510 11,049 1,461 13.2 Savings 2,969 2,625 344 13.1 Certificates and other time deposits 4,266 4,728 (462) (9.8) Total deposits$ 28,395 $ 24,786$ 3,609 14.6 % Total deposits increased$3.6 billion , or 14.6%, fromDecember 31, 2019 , primarily as a result of growth in transaction deposits (including non-interest-bearing demand, interest-bearing demand and savings) that reflects the inflow of funds from the PPP and government stimulus activity, in addition to organic growth in customer relationships. This growth was partially offset by a managed decline of$462.0 million , or 9.8%, in time deposits. Generating growth in relationship-based transaction deposits remains a key focus for us and will help us manage to lower levels of short-term borrowings. Capital Resources and Regulatory Matters The access to, and cost of, funding for new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends and the level and nature of regulatory oversight depend, in part, on our capital position. The assessment of capital adequacy depends on a number of factors such as expected organic growth in the Consolidated Balance Sheet, asset quality, liquidity, earnings performance, changing competitive conditions, regulatory changes or actions, and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to current operations and to promote public confidence. We have an effective shelf registration statement filed with theSEC . Pursuant to this registration statement, we may, from time to time, issue and sell in one or more offerings any combination of common stock, preferred stock, debt securities, depositary shares, warrants, stock purchase contracts or units. OnFebruary 14, 2019 , we completed an offering of$120.0 million 4.950% fixed-to-floating rate subordinated notes due in 2029 under this registration statement. The subordinated notes are treated as tier 2 capital for regulatory capital purposes. The net proceeds of the debt offering after deducting underwriting discounts and commissions and offering expenses were$118.2 million . We used the net proceeds from the sale of the subordinated notes to redeem higher-rate long-term borrowings and for general corporate purposes. 84 -------------------------------------------------------------------------------- OnFebruary 24, 2020 , we completed an offering of$300.0 million of 2.20% fixed rate senior notes due in 2023 under this registration statement. The net proceeds of the debt offering after deducting underwriting discounts and commissions and offering expenses were$297.9 million . We will use the net proceeds from the sale of the notes for general corporate purposes, which may include investments at the holding company level, capital to support the growth of FNBPA, repurchase of our common shares and refinancing of outstanding indebtedness. OnSeptember 23, 2019 , we announced that our Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of$150 million of our common stock. The repurchases will be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. The purchases will be funded from available working capital. The repurchase program is expected to continue through the end of 2020, although we have temporarily suspended repurchase activity due to COVID-19 and the uncertainty in macroeconomic conditions. There is no guarantee as to the exact number of shares that will be repurchased and we may discontinue purchases at any time. Capital management is a continuous process, with capital plans and stress testing for FNB and FNBPA updated at least annually. These capital plans include assessing the adequacy of expected capital levels assuming various scenarios by projecting capital needs for a forecast period of 2-3 years beyond the current year. From time to time, we issue shares initially acquired by us as treasury stock under our various benefit plans. We may issue additional preferred or common stock in order to maintain our well-capitalized status. FNB and FNBPA are subject to various regulatory capital requirements administered by the federal banking agencies (see discussion under "Enhanced Regulatory Capital Standards"). Quantitative measures established by regulators to ensure capital adequacy require FNB and FNBPA to maintain minimum amounts and ratios of total, tier 1 and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and minimum leverage ratio (as defined). Failure to meet minimum capital requirements could lead to initiation of certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on our Consolidated Financial Statements, dividends and future business and corporate strategies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNB and FNBPA must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. FNB's and FNBPA's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. AtJune 30, 2020 , the capital levels of both FNB and FNBPA exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered "well-capitalized" for regulatory purposes. InDecember 2018 , the FRB and otherU.S. banking agencies approved a final rule to address the impact of CECL on regulatory capital by allowing BHCs and banks, including FNB, the option to phase in the day-one impact of CECL over a three-year period. InMarch 2020 , the FRB and otherU.S. banking agencies issued an interim final rule that became effective onMarch 31, 2020 , and that provides BHCs and banks with an alternative option to temporarily delay the estimate of the impact of CECL, relative to the incurred loss methodology for estimating the ACL, on regulatory capital. We have elected this alternative option instead of the one described in theDecember 2018 rule. As a result, under the interim final rule, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends throughDecember 31, 2021 . Beginning onJanuary 1, 2022 , we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Under the interim final rule, the estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in the ACL during the two-year deferral period. During the first and second quarter of 2020, the total deferred impact on Common Equity Tier 1 capital related to our adoption of CECL was approximately$61.5 million and$67.3 million , respectively. In this unprecedented economic and uncertain environment, we frequently run stress tests for a variety of economic situations, including severely adverse scenarios that have economic conditions similar to the current conditions. Under these scenarios, the results of these stress tests indicate that our regulatory capital ratios would remain above the regulatory requirements and we would be able to maintain appropriate liquidity levels, demonstrating our expected ability to continue to support our constituencies under stressful financial conditions. 85 -------------------------------------------------------------------------------- Following are the capital amounts and related ratios for FNB and FNBPA: TABLE 27 Well-Capitalized Minimum Capital Actual Requirements (1) Requirements plus Capital Conservation Buffer (dollars in millions) Amount Ratio Amount Ratio Amount Ratio As of June 30, 2020 F.N.B. Corporation Total capital$ 3,280 11.91 %$ 2,754 10.00 %$ 2,892 10.50 % Tier 1 capital 2,688 9.76 1,653 6.00 2,341 8.50 Common equity tier 1 2,582 9.37 n/a n/a 1,928 7.00 Leverage 2,688 7.78 n/a n/a 1,382 4.00 Risk-weighted assets 27,542 FNBPA Total capital 3,367 12.25 % 2,749 10.00 % 2,886 10.50 % Tier 1 capital 2,919 10.62 2,199 8.00 2,337 8.50 Common equity tier 1 2,839 10.33 1,787 6.50 1,924 7.00 Leverage 2,919 8.47 1,724 5.00 1,379 4.00 Risk-weighted assets 27,490 As ofDecember 31, 2019 F.N.B. Corporation Total capital$ 3,174 11.81 %$ 2,687 10.00 %$ 2,821 10.50 % Tier 1 capital 2,632 9.79 1,612 6.00 2,284 8.50 Common equity tier 1 2,525 9.40 n/a n/a 1,881 7.00 Leverage 2,632 8.20 n/a n/a 1,283 4.00 Risk-weighted assets 26,866 FNBPA Total capital 3,039 11.34 % 2,681 10.00 % 2,815 10.50 % Tier 1 capital 2,841 10.60 2,144 8.00 2,279 8.50 Common equity tier 1 2,761 10.30 1,742 6.50 1,876 7.00 Leverage 2,841 8.87 1,601 5.00 1,281 4.00 Risk-weighted assets 26,806
(1) Reflects the well-capitalized standard under Regulation Y for
In accordance with Basel III Capital Rules, the minimum capital requirements plus capital conservation buffer, which are presented for each period above, represent the minimum requirements needed to avoid limitations on distributions of dividends and certain discretionary bonus payments. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) The Dodd-Frank Act broadly affects the financial services industry by establishing a framework for systemic risk oversight, creating a resolution authority for institutions determined to be systemically important, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and containing numerous other provisions aimed at strengthening the sound operation of the financial services sector that significantly change the system of regulatory oversight as described in more detail under Part I, Item 1, "Business - Government Supervision and Regulation" included in our 2019 Annual Report on Form 10-K as filed with the SEC onFebruary 27, 2020 . Certain aspects of the Dodd-Frank Act remain subject to regulatory rulemaking and amendments to such previously promulgated rules, thereby making it difficult to anticipate with certainty the impact to us or the financial services industry resulting from this rulemaking process. 86 --------------------------------------------------------------------------------
LIQUIDITY
Our goal in liquidity management is to satisfy the cash flow requirements of customers and the operating cash needs of FNB with cost-effective funding. Our Board of Directors has established an Asset/Liability Management Policy to guide management in achieving and maintaining earnings performance consistent with long-term goals, while maintaining acceptable levels of interest rate risk, a "well-capitalized" Balance Sheet and adequate levels of liquidity. Our Board of Directors has also established Liquidity and Contingency Funding Policies to guide management in addressing the ability to identify, measure, monitor and control both normal and stressed liquidity conditions. These policies designate our Asset/Liability Committee as the body responsible for meeting these objectives. The ALCO, which is comprised of members of executive management, reviews liquidity on a continuous basis and approves significant changes in strategies that affect Balance Sheet or cash flow positions. Liquidity is centrally managed daily by ourTreasury Department . FNBPA generates liquidity from its normal business operations. Liquidity sources from assets include payments from loans and investments, as well as the ability to securitize, pledge or sell loans, investment securities and other assets. Liquidity sources from liabilities are generated primarily through the banking offices of FNBPA in the form of deposits and customer repurchase agreements. FNB also has access to reliable and cost-effective wholesale sources of liquidity. Short- and long-term funds are used to help fund normal business operations, and unused credit availability can be utilized to serve as contingency funding if we would be faced with a liquidity crisis. The principal sources of the parent company's liquidity are its strong existing cash resources plus dividends it receives from its subsidiaries. These dividends may be impacted by the parent's or its subsidiaries' capital needs, statutory laws and regulations, corporate policies, contractual restrictions, profitability and other factors. In addition, through one of our subsidiaries, we regularly issue subordinated notes, which are guaranteed by FNB. Management has utilized various strategies to ensure sufficient cash on hand is available to meet the parent's funding needs. OnFebruary 24, 2020 , we completed a senior debt offering whereby we issued$300.0 million aggregate principal amount of 2.20% senior notes due in 2023. The proceeds from this transaction are for general corporate purposes and were the primary factor resulting in an increase in our Months of Cash on Hand (MCH) liquidity metric as shown below. Starting inMarch 2020 , management incorporated potential liquidity impacts related to COVID-19 into our daily analysis. Management concluded that our cash levels remain appropriate given the current market environment. Two metrics that are used to gauge the adequacy of the parent company's cash position are the LCR and MCH. The LCR is defined as the sum of cash on hand plus projected cash inflows over the next 12 months divided by projected cash outflows over the next 12 months. The MCH is defined as the number of months of corporate expenses and dividends that can be covered by the cash on hand. The LCR and MCH ratios are presented in the following table: TABLE 28 June 30, Internal 2020 December 31, 2019 limit Liquidity coverage ratio 2.6 times 2.2 times > 1 time Months of cash on hand 19.2 months 15.2 months > 12 months Our liquidity position has been positively impacted by our ability to generate growth in relationship-based accounts. Organic growth in low-cost transaction deposits was complemented by management's strategy of heightened deposit gathering efforts focused on attracting new customer relationships and deepening relationships with existing customers, in part through internal lead generation efforts leveraging data analytics capabilities. Total deposits were$28.4 billion atJune 30, 2020 , an increase of$3.6 billion , or 29.3% annualized, fromDecember 31, 2019 . Total non-interest-bearing demand deposit accounts grew by$2.3 billion , or 71.4% annualized, and interest-bearing demand increased by$1.5 billion , or 26.6% annualized. Savings account balances increased$344.1 million , or 26.4% annualized. Time deposits declined$462.3 million , or 19.7% annualized. As mentioned earlier, inflows from PPP and government stimulus checks were a significant factor in the deposit growth during the second quarter. FNBPA has significant unused wholesale credit availability sources that include the availability to borrow from the FHLB, the FRB, correspondent bank lines, access to brokered deposits, the PPPLF and multiple other channels. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities that could be utilized to meet funding needs. The ALCO minimum guideline level for salable unpledged government and agency securities is 3.0%. 87 -------------------------------------------------------------------------------- The following table presents certain information relating to FNBPA's credit availability and salable unpledged securities: TABLE 29 June 30, December 31, (dollars in millions) 2020 2019 Unused wholesale credit availability$ 15,694 $ 11,154 Unused wholesale credit availability as a % of FNBPA assets 41.7 % 32.3 % Salable unpledged government and agency securities $
1,255
3.3 % 5.2 % The PPPLF accounted for$2.5 billion of the increase in availability sinceDecember 31, 2019 . This funding source terminates onSeptember 30, 2020 . Another metric for measuring liquidity risk is the liquidity gap analysis. The following liquidity gap analysis as ofJune 30, 2020 compares the difference between our cash flows from existing earning assets and interest-bearing liabilities over future time intervals. Management seeks to limit the size of the liquidity gaps so that sources and uses of funds are reasonably matched in the normal course of business. A reasonably matched position lays a better foundation for dealing with additional funding needs during a potential liquidity crisis. The twelve-month cumulative gap to total assets ratio improved to 2.2% as ofJune 30, 2020 from (0.3)% as ofDecember 31, 2019 . Management calculates this ratio at least quarterly and it is reviewed monthly by ALCO. TABLE 30 Within 2-3 4-6 7-12 Total (dollars in millions) 1 Month Months Months Months 1 Year Assets Loans$ 758 $ 1,419 $ 1,828 $ 3,360 $ 7,365 Investments 956 257 345 625 2,183 1,714 1,676 2,173 3,985 9,548 Liabilities Non-maturity deposits 584 1,167 996 1,573 4,320 Time deposits 215 497 1,003 1,321 3,036 Borrowings 572 212 180 409 1,373 1,371 1,876 2,179 3,303 8,729 Period Gap (Assets - Liabilities)$ 343 $ (200) $ (6) $ 682 $ 819 Cumulative Gap$ 343 $ 143 $ 137 $ 819 Cumulative Gap to Total Assets 0.9 % 0.4 % 0.4 %
2.2 %
In addition, the ALCO regularly monitors various liquidity ratios and stress scenarios of our liquidity position. The stress scenarios forecast that adequate funding will be available even under severe conditions. Management believes we have sufficient liquidity available to meet our normal operating and contingency funding cash needs. MARKET RISK Market risk refers to potential losses arising predominately from changes in interest rates, foreign exchange rates, equity prices and commodity prices. We are primarily exposed to interest rate risk inherent in our lending and deposit-taking activities as a financial intermediary. To succeed in this capacity, we offer an extensive variety of financial products to meet the diverse needs of our customers. These products sometimes contribute to interest rate risk for us when product groups do not complement one another. For example, depositors may want short-term deposits, while borrowers may desire long-term loans. Changes in market interest rates may result in changes in the fair value of our financial instruments, cash flows and net interest income. Subject to its ongoing oversight, the Board of Directors has given ALCO the responsibility for market risk management, which involves devising policy guidelines, risk measures and limits, and managing the amount of interest rate risk 88 -------------------------------------------------------------------------------- and its effect on net interest income and capital. We use derivative financial instruments for interest rate risk management purposes and not for trading or speculative purposes. Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from "embedded options" within asset and liability products as certain borrowers have the option to prepay their loans, which may be with or without penalty, when rates fall, while certain depositors can redeem their certificates of deposit early, which may be with or without penalty, when rates rise. We use an asset/liability model to measure our interest rate risk. Interest rate risk measures we utilize include earnings simulation, EVE and gap analysis. Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVE's long-term horizon helps identify changes in optionality and longer-term positions. However, EVE's liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. In these simulations, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The ALCO reviews earnings simulations over multiple years under various interest rate scenarios on a periodic basis. Reviewing these various measures provides us with a comprehensive view of our interest rate risk profile, which provides the basis for balance sheet management strategies. The following repricing gap analysis as ofJune 30, 2020 compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. Management utilizes the repricing gap analysis as a diagnostic tool in managing net interest income and EVE risk measures. TABLE 31 Within 2-3 4-6 7-12 Total (dollars in millions) 1 Month Months Months Months 1 Year Assets Loans$ 11,211 $ 1,246 $ 1,303 $ 2,421 $ 16,181 Investments 966 262 481 615 2,324 12,177 1,508 1,784 3,036 18,505 Liabilities Non-maturity deposits 8,403 - - - 8,403 Time deposits 325 497 1,001 1,316 3,139 Borrowings 1,915 1,274 60 19 3,268 10,643 1,771 1,061 1,335 14,810 Off-balance sheet 300 1,005 (50) (50) 1,205 Period Gap (assets - liabilities + off-balance sheet)$ 1,834 $ 742 $ 673 $ 1,651 $ 4,900 Cumulative Gap$ 1,834 $ 2,576 $ 3,249 $ 4,900 Cumulative Gap to Assets 5.5 % 7.8 % 9.8 % 14.8 % The twelve-month cumulative repricing gap to total assets was 14.8% and 7.0% as ofJune 30, 2020 andDecember 31, 2019 , respectively. The positive cumulative gap positions indicate that we have a greater amount of repricing earning assets than repricing interest-bearing liabilities over the subsequent twelve months. If interest rates increase as modeled, net interest income will increase and, conversely, if interest rates decrease as modeled, net interest income will decrease. The change in the cumulative repricing gap atJune 30, 2020 compared toDecember 31, 2019 , is primarily related to growth and changes in the mix of loans, deposits and borrowings. Strong commercial and industrial loan growth, a portion of which was swapped to adjustable rates and the increased cash flow from the loan and investment portfolios, were partially offset by growth in and repricing of certain interest-bearing non-maturity deposit balances and the funding of FHLB advances. The funding of both fixed and adjustable borrowings was opportunistically transacted to take advantage of the lower interest rate environment and add liquidity to support loan growth. 89 -------------------------------------------------------------------------------- The allocation of non-maturity deposits and customer repurchase agreements to the one-month maturity category above is based on the estimated sensitivity of each product to changes in market rates. For example, if a product's rate is estimated to increase by 50% as much as the market rates, then 50% of the account balance was placed in this category. Utilizing net interest income simulations, the following net interest income metrics were calculated using rate shocks which move market rates in an immediate and parallel fashion. The variance percentages represent the change between the net interest income and EVE calculated under the particular rate scenario versus the net interest income and EVE that was calculated assuming market rates as ofJune 30, 2020 . Using a static Balance Sheet structure, the measures do not reflect all of management's potential counteractions. The following table presents an analysis of the potential sensitivity of our net interest income and EVE to changes in interest rates using rate shocks: TABLE 32 June 30, ALCO 2020 December 31, 2019 Limits Net interest income change (12 months): + 300 basis points 15.4 % 6.5 % n/a + 200 basis points 10.3 4.6 (5.0) % + 100 basis points 5.0 2.5 (5.0) - 100 basis points 0.8 (4.1) (5.0) Economic value of equity: + 300 basis points 8.2 (2.0) (25.0) + 200 basis points 6.8 (0.5) (15.0) + 100 basis points 4.2 0.2 (10.0) - 100 basis points (8.2) (3.8) (10.0) We also model rate scenarios which move all rates gradually over twelve months (Rate Ramps) and model scenarios that gradually change the shape of the yield curve. Assuming a static Balance Sheet, a +100 basis point Rate Ramp increases net interest income (12 months) by 2.5% atJune 30, 2020 and 1.5% atDecember 31, 2019 . The corresponding metrics for a -100 basis point Rate Ramp are 0.4% and (2.0)% atJune 30, 2020 andDecember 31, 2019 , respectively. Our strategy is generally to manage to a neutral interest rate risk position. Consistent with prior quarters, we desired to remain slightly asset-sensitive. There are multiple factors that influence our interest rate risk position and impact Net Interest Income. These include external factors such as the shape of the yield curve and expectations regarding future interest rates, as well as internal factors regarding product offerings, product mix and pricing of loans and deposits. Management utilizes various tactics to achieve our desired interest rate risk (IRR) position. In response to the change in interest rates, management was proactive in addressing our IRR position. As mentioned earlier, we were successful in growing our transaction deposits which provides funding that is less interest rate-sensitive than short-term time deposits and wholesale borrowings. Also, we were able to lower rates on deposit products and shorten the term of the certificates of deposit volumes. This continues to be an intense focus of management. Further, during the first six months of 2020, management took advantage of the interest rate environment to reduce borrowing costs. On the lending side, we regularly sell long-term fixed-rate residential mortgages to the secondary market and have been successful in the origination of consumer and commercial loans with short-term repricing characteristics. In particular, we have made use of interest rate swaps to commercial borrowers (commercial swaps) to manage our IRR position as the commercial swaps effectively increase adjustable-rate loans. Total variable and adjustable-rate loans were 53.4% and 59.1% of total loans as ofJune 30, 2020 andDecember 31, 2019 , respectively, with 78.9% of these loans, or 42.1% of total loans, tied to the Prime or one-month LIBOR rates. As ofJune 30, 2020 , the commercial swaps totaled$4.3 billion of notional principal, with$858.8 million in original notional swap principal originated during the first six months of 2020. For additional information regarding interest rate swaps, see Note 11 in this Report. The investment portfolio is also used, in part, to manage our IRR position. These purchases are predominately fixed rate in nature in which we seek to minimize prepayment risk. 90 -------------------------------------------------------------------------------- We recognize that all asset/liability models have some inherent shortcomings. Asset/liability models require certain assumptions to be made, such as prepayment rates on interest-earning assets and repricing impact on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our experience, business plans, economic and market trends and available industry data. While management believes that its methodology for developing such assumptions is reasonable, there can be no assurance that modeled results will be achieved. Furthermore, the metrics are based upon the Balance Sheet structure as of the valuation date and do not reflect the planned growth or management actions that could be taken. RISK MANAGEMENT As a financial institution, we take on a certain amount of risk in every business decision, transaction and activity. Our Board of Directors and senior management have identified seven major categories of risk: credit risk, market risk, liquidity risk, reputational risk, operational risk, legal and compliance risk and strategic risk. In its oversight role of our risk management function, the Board of Directors focuses on the strategies, analyses and conclusions of management relating to identifying, understanding and managing risks so as to optimize total stockholder value, while balancing prudent business and safety and soundness considerations. The Board of Directors adopted a risk appetite statement that defines acceptable risk levels and limits under which we seek to operate in order to optimize returns. As such, the board monitors a series of KRIs, or Key Risk Indicators, for various business lines, operational units, and risk categories, providing insight into how our performance aligns with our stated risk appetite. These results are reviewed periodically by the Board of Directors and senior management to ensure adherence to our risk appetite statement, and where appropriate, adjustments are made to applicable business strategies and tactics where risks are approaching stated tolerances or for emerging risks. We support our risk management process through a governance structure involving our Board of Directors and senior management. The joint Risk Committee of our Board of Directors and the FNBPA Board of Directors helps ensure that business decisions are executed within appropriate risk tolerances. The Risk Committee has oversight responsibilities with respect to the following: •identification, measurement, assessment and monitoring of enterprise-wide risk; •development of appropriate and meaningful risk metrics to use in connection with the oversight of our businesses and strategies; •review and assessment of our policies and practices to manage our credit, market, liquidity, legal, regulatory and operating risk (including technology, operational, compliance and fiduciary risks); and •identification and implementation of risk management best practices. The Risk Committee serves as the primary point of contact between our Board of Directors and theRisk Management Council , which is the senior management level committee responsible for risk management. Risk appetite is an integral element of our business and capital planning processes through ourBoard Risk Committee andRisk Management Council . We use our risk appetite processes to promote appropriate alignment of risk, capital and performance tactics, while also considering risk capacity and appetite constraints from both financial and non-financial risks. Our top-down risk appetite process serves as a limit for undue risk-taking for bottom-up planning from our various business functions. Our Board Risk Committee, in collaboration with ourRisk Management Council , approves our risk appetite on an annual basis, or more frequently, as needed to reflect changes in the risk, regulatory, economic and strategic plan environments, with the goal of ensuring that our risk appetite remains consistent with our strategic plans and business operations, regulatory environment and our shareholders' expectations. Reports relating to our risk appetite and strategic plans, and our ongoing monitoring thereof, are regularly presented to our various management level risk oversight and planning committees and periodically reported up through our Board Risk Committee. As noted above, we have aRisk Management Council comprised of senior management. The purpose of this committee is to provide regular oversight of specific areas of risk with respect to the level of risk and risk management structure. Management has also established an Operational Risk Committee that is responsible for identifying, evaluating and monitoring operational risks across FNB, evaluating and approving appropriate remediation efforts to address identified operational risks and providing periodic reports concerning operational risks to theRisk Management Council .The Risk Management Council reports on a regular basis to the Risk Committee of our Board of Directors regarding our enterprise-wide risk profile and other significant risk management issues. OurChief Risk Officer is responsible for the design and implementation of our enterprise-wide risk management strategy and framework through the multiple second line of defense areas, including the following departments: 91 -------------------------------------------------------------------------------- Enterprise-Wide Risk Management, Fraud Risk, Loan Review, Model Risk Management, Third-Party Risk Management, Anti-Money Laundering and Bank Secrecy Act, Community Reinvestment Act, Appraisal Review, Compliance and Information and Cyber Security. All second line of defense departments report to the Chief Risk Officer to ensure the coordinated and consistent implementation of risk management initiatives and strategies on a day-to-day basis. OurEnterprise-Wide Risk Management Department conducts risk and control assessments across all of our business and operational areas to ensure the appropriate risk identification, risk management and reporting of risks enterprise-wide.The Fraud Risk Department monitors for internal and external fraud risk across all of our business and operational units.The Loan Review Department conducts independent testing of our loan risk ratings to ensure their accuracy, which is instrumental to calculating our ACL. OurModel Risk Management Department oversees validation and testing of all models used in managing risk across our company. OurThird-Party Risk Management Department ensures effective risk management and oversight of third-party relationships throughout the vendor life cycle.The Anti-Money Laundering and Bank Secrecy Act Department monitors for compliance with money laundering risk and associated regulatory compliance requirements. OurCommunity Reinvestment Department monitors for compliance with the requirements of the Community Reinvestment Act.The Appraisal Review Department facilitates independent ordering and review of real estate appraisals obtained for determining the value of real estate pledged as collateral for loans to customers. OurCompliance Department is responsible for developing policies and procedures and monitoring compliance with applicable laws and regulations which govern our business operations. OurInformation and Cyber Security Department is responsible for maintaining a risk assessment of our information and cyber security risks and ensuring appropriate controls are in place to manage and control such risks, through the use of theNational Institute of Standards and Technology framework for improving critical infrastructure by measuring and evaluating the effectiveness of information and cyber security controls. As discussed in more detail under the COVID-19 section of this Report, we have in place various business and emergency continuity plans to respond to different crisis and circumstances which include rapid deployment of our Crisis Management Team, Incident Management Team and Business Continuity Coordinators to activate the our plans for various type of emergency circumstance. Further, our audit function performs an independent assessment of our internal controls environment and plays an integral role in testing the operation of the internal controls systems and reporting findings to management and our Audit Committee. Each of the Risk, Audit and Credit Risk and CRA Committees of our Board of Directors regularly report on risk-related matters to the full Board of Directors. In addition, both the Risk Committee of our Board of Directors and ourRisk Management Council regularly assess our enterprise-wide risk profile and provide guidance on actions needed to address key and emerging risk issues. The Board of Directors believes that our enterprise-wide risk management process is effective and enables the Board of Directors to:
•assess the quality of the information they receive; •understand the businesses, investments and financial, accounting, legal, regulatory and strategic considerations and the risks that FNB faces; •oversee and assess how senior management evaluates risk; and •assess appropriately the quality of our enterprise-wide risk management process.
92 -------------------------------------------------------------------------------- RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES AND KEY PERFORMANCE INDICATORS TO GAAP Reconciliations of non-GAAP operating measures and key performance indicators discussed in this Report to the most directly comparable GAAP financial measures are included in the following tables. TABLE 33 Operating Net Income Available to Common Stockholders Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2020 2019 2020 2019 Net income available to common stockholders$ 81,600 $
93,177
COVID-19 expense 1,989 - 3,951 - Tax benefit of COVID-19 expense (418) - (830) - Branch consolidation costs - 2,871 8,262 4,505 Tax benefit of branch consolidation costs - (603) (1,735) (946)
Operating net income available to common stockholders (non-GAAP)
$ 83,171 $
95,445
The table above shows how operating net income available to common stockholders (non-GAAP) is derived from amounts reported in our financial statements. We believe certain charges, such as branch consolidation costs and COVID-19 expense, are not organic costs to run our operations and facilities. The branch consolidation charges principally represent expenses to satisfy contractual obligations of the closed branches without any useful ongoing benefit to us. These costs are specific to each individual transaction, and may vary significantly based on the size and complexity of the transaction. The COVID-19 expenses represent special Company initiatives to support our front-line employees and the communities we serve during an unprecedented time of a pandemic. TABLE 34 Operating Earnings per Diluted Common Share Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income per diluted common share$ 0.25
COVID-19 expense 0.01 - 0.01 - Tax benefit of COVID-19 expense - - - - Branch consolidation costs - 0.01 0.03 0.01 Tax benefit of branch consolidation costs - - (0.01) -
Operating earnings per diluted common share (non-GAAP)
93 -------------------------------------------------------------------------------- TABLE 35 Return on Average Tangible Common Equity Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Net income available to common stockholders (annualized)$ 328,193 $
373,733
10,623 11,024 10,615 11,085 Tangible net income available to common stockholders (annualized) (non-GAAP)$ 338,816 $
384,757
$ 4,879,659 $
4,720,725
(106,882) (106,882) (106,882) Less: Average intangible assets (1) (2,324,696) (2,329,625) (2,326,299) (2,330,619)
Average tangible common equity (non-GAAP)
13.84 % 16.84 % 10.89 % 17.11 % (1) Excludes loan servicing rights. TABLE 36 Return on Average Tangible Assets Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Net income (annualized)$ 336,278 $
381,796
10,623 11,024 10,615 11,085
Tangible net income (annualized) (non-GAAP)
$ 36,819,678 $
33,731,116
(2,324,696) (2,329,625) (2,326,299) (2,330,619) Average tangible assets (non-GAAP)$ 34,494,982 $
31,401,491
1.01 % 1.25 % 0.82 % 1.26 %
(1) Excludes loan servicing rights.
TABLE 37 Tangible Book Value per Common Share Three Months
Ended
June 30 , (dollars in thousands, except per share data) 2020
2019
Total stockholders' equity$ 4,896,827 $
4,753,189
Less: Preferred stockholders' equity (106,882)
(106,882)
Less: Intangible assets (1) (2,323,028)
(2,336,071)
Tangible common equity (non-GAAP)$ 2,466,917 $
2,310,236
Ending common shares outstanding 323,205,925
324,807,131
Tangible book value per common share (non-GAAP)
7.11
(1) Excludes loan servicing rights.
94 -------------------------------------------------------------------------------- TABLE 38 Tangible equity to tangible assets (period-end) Three Months Ended June 30, (dollars in thousands) 2020 2019 Total stockholders' equity$ 4,896,827 $ 4,753,189 Less: Intangible assets (1) (2,323,028) (2,336,071) Tangible equity (non-GAAP)$ 2,573,799 $ 2,417,118 Total assets$ 37,720,827 $ 33,903,440 Less: Intangible assets (1) (2,323,028) (2,336,071) Tangible assets (non-GAAP)$ 35,397,799 $ 31,567,369 Tangible equity / tangible assets (period-end) (non-GAAP) 7.27 % 7.66 % (1) Excludes loan servicing rights. TABLE 39 Tangible common equity / tangible assets (period-end) Three Months Ended June 30, (dollars in thousands) 2020 2019 Total stockholders' equity$ 4,896,827 $ 4,753,189 Less: Preferred stockholders' equity (106,882) (106,882) Less: Intangible assets (1) (2,323,028) (2,336,071) Tangible common equity (non-GAAP)$ 2,466,917 $ 2,310,236 Total assets$ 37,720,827 $ 33,903,440 Less: Intangible assets (1) (2,323,028) (2,336,071) Tangible assets (non-GAAP)$ 35,397,799 $ 31,567,369 Tangible common equity / tangible assets (period-end) (non-GAAP) 6.97 % 7.32 % (1) Excludes loan servicing rights. TABLE 40 Allowance for credit losses / loans and leases, excluding PPP loans (period-end) Three Months Ended June 30, (dollars in thousands) 2020 ACL - loans $ 364,993 Loans and leases$ 26,161,982 Less: PPP loans outstanding
(2,480,772)
Loans and leases, excluding PPP loans outstanding (non-GAAP)$ 23,681,210 ACL loans / loans and leases, excluding PPP loans (non-GAAP) 1.54 % 95
-------------------------------------------------------------------------------- Key Performance Indicators TABLE 41 Pre-provision net revenue to average tangible common equity Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Net interest income$ 227,961 $
230,407
77,628 74,840 146,154 140,225 Less: Non-interest expense (175,932) (175,237) (370,824) (340,979)
Pre-provision net revenue (as reported)
$ 521,478 $ 521,469 $ 474,436 $ 524,805 Adjustments: Add: Branch consolidation costs (non-interest income) $ - $
546 $ - $ 1,722
Add: COVID-19 expense (non-interest expense) 1,989 - 3,951 - Add: Branch consolidation costs (non-interest expense) - 2,325 8,262 2,783 Add: Tax credit-related impairment project (non-interest expense) 4,101 - 4,101 - Pre-provision net revenue (operating) (non-GAAP)$ 135,747 $ 132,881 $ 252,236 $ 264,751 Pre-provision net revenue (operating) (annualized) (non-GAAP)$ 545,972 $
532,984
$ 4,879,659 $
4,720,725
(106,882) (106,882) (106,882) Less: Average intangible assets (1) (2,324,696) (2,329,625) (2,326,299) (2,330,619)
Average tangible common equity (non-GAAP)
21.30 % 22.83 % 19.41 % 23.33 % Pre-provision net revenue (operating) / average tangible common equity (non-GAAP) 22.30 % 23.33 % 20.76 % 23.74 %
(1) Excludes loan servicing rights.
96 --------------------------------------------------------------------------------
TABLE 42 Efficiency ratio Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Non-interest expense$ 175,932 $
175,237
(3,343) (3,479) (6,682) (6,958) Less: OREO expense (639) (954) (2,286) (2,023) Less: COVID-19 expense (1,989) - (3,951) - Less: Branch consolidation costs - (2,325) (8,262) (2,783) Less: Tax credit-related project impairment (4,101) - (4,101) - Adjusted non-interest expense$ 165,860 $ 168,479 $ 345,542 $ 329,215 Net interest income$ 227,961 $ 230,407 $ 460,592 $ 461,000 Taxable equivalent adjustment 3,151 3,540 6,452 7,119 Non-interest income 77,628 74,840 146,154 140,225 Less: Net securities gains (97) - (150) - Add: Branch consolidation costs - 546 - 1,722 Adjusted net interest income (FTE) + non-interest income$ 308,643 $
309,333
53.74 % 54.47 % 56.36 % 53.96 %
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