F.N.B. CORPORATION 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 nine-month periods endedSeptember 30, 2021 and 2020. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained herein and our 2020 Annual Report on Form 10-K filed with the SEC onFebruary 25, 2021 . Our results of operations for the nine months endedSeptember 30, 2021 are not necessarily indicative of results expected for the full year. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Report may contain 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, economic and political circumstances, including, but not limited to: (i) developments with respect to theU.S. and global financial markets; (ii) actions by the FRB,FDIC , 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 of theU.S. economic environment; (iv) inflation concerns; (v) the impacts of tariffs or other trade policies of theU.S. or its global trading partners; and the sociopolitical environment in theU.S. •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, loans, deposits and revenues. Our ability to anticipate, react quickly 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 ongoing COVID-19 pandemic crisis, dislocations, risks associated with a post-pandemic return to normalcy, including shortages of labor, supply chain disruptions and shipping delays, terrorist activities, system failures, security breaches, significant political events, cyber-attacks 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 a newU.S. presidential administration, including legislative and regulatory reforms, different approaches to supervisory or enforcement priorities, changes affecting oversight of the financial services industry, regulatory obligations or restrictions, consumer protection, taxes, employee benefits, compensation practices, pension, bankruptcy and other industry aspects, and changes in accounting policies and principles. •Changes to regulations or accounting standards governing bank capital requirements, loan loss reserves 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 52 -------------------------------------------------------------------------------- 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. •The impact on our financial condition, results of operations, financial disclosures and future business strategies related to the impact on the ACL due to changes in forecasted macroeconomic conditions as a result of applying the "current expected credit loss" accounting 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 federal, state, and local regulatory and governmental actions implemented in response to COVID-19 have resulted in a deterioration and disruption of the financial markets and national and local economic conditions, increased levels of unemployment and business failures, and the potential to have a material impact on, among other things, our business, financial condition, results of operations, 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 in the future than what we are currently experiencing or expecting, including, but not limited to, a prolonged recovery of theU.S. economy and labor market and the possible change in commercial and consumer customer fundamentals, expectations and sentiments. As a result, the COVID-19 impact, including uncertainty regarding the potential impact of variant mutations of the virus,U.S. government responsive measures to manage it or provide financial relief, the uncertainty regarding its duration and the success of vaccination efforts, it is possible the pandemic may have a material adverse impact on our business, operations and financial performance. The risks identified here are not exclusive or the types of risks we may confront and 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 the Risk Management sections of our 2020 Annual Report on Form 10-K , our subsequent 2021 Quarterly Reports on Form 10-Q (including the risk factors and risk management discussions) and our other 2021 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 ourSEC filings. APPLICATION OF CRITICAL ACCOUNTING POLICIES A description of our critical accounting policies is included in the MD&A section of our 2020 Annual Report on Form 10-K filed with the SEC onFebruary 25, 2021 under the heading "Application of Critical Accounting Policies". There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies sinceDecember 31, 2020 . 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, ACL to loans and leases, excluding PPP loans, 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. 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 53 -------------------------------------------------------------------------------- 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 items such as merger expenses, branch consolidation costs, loss on early debt extinguishment, COVID-19 expenses and gains on sale ofVisa class B shares are not organic to run our operations and facilities. These items are considered significant items impacting earnings as they are deemed to be outside of ordinary banking activities. The merger expenses and branch consolidation charges principally represent expenses to satisfy contractual obligations of the closed operations and 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. Similarly, gains derived from the sale ofVisa class B stock and losses on FHLB debt extinguishment and related hedge terminations are not organic to our operations. The COVID-19 expenses represent special Company initiatives to support our employees and the communities we serve during an unprecedented time of a pandemic. To facilitate peer 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 2021 and 2020 periods were calculated using a federal statutory income tax rate of 21%. FINANCIAL SUMMARY Net income available to common stockholders for the third quarter of 2021 was$109.5 million or$0.34 per diluted common share, compared to net income available to common stockholders for the third quarter of 2020 of$80.8 million or$0.25 per diluted common share. On an operating basis, the third quarter of 2021 earnings per diluted common share (non-GAAP) was also$0.34 , while the third quarter of 2020, was$0.26 , excluding$0.01 for significant items. Total revenue increased to a record of$321.3 million . Our financial results were highlighted by a return on tangible common equity (non-GAAP) of 16.77% and sequential tangible book value per share growth of 11% annualized, to$8.42 . We have executed our strategic plan as demonstrated by our growing diversity of revenue sources and our ability to have two consecutive quarters of high-single digit loan growth, excluding PPP. Income Statement Highlights (Third quarter of 2021 compared to third quarter of 2020, except as noted) •Record total revenue of$321.3 million , an increase of$14.1 million , or 4.6%, led to record operating net income available to common stockholders (non-GAAP) of$110.2 million , an increase of$24.8 million , or 29.0%. •On a linked-quarter basis, operating pre-provision net revenue (non-GAAP) increased$10.2 million , or 8.0%, to a record$138.0 million due to growth in total revenue of$13.6 million , or 4.4%, led by higher non-interest income, partially offset by an increase in non-interest expense of$3.4 million , or 1.9%, largely tied to the revenue growth. •Net interest income increased$5.3 million , or 2.3%, to$232.4 million due to higher PPP loan income and an improved funding mix offsetting lower yields on earnings assets. A$2.6 billion increase in low yielding interest-bearing deposits with banks was a significant contribution to the reduced earning asset yield. •On a linked-quarter basis, the net interest margin (FTE) (non-GAAP) increased 2 basis points to 2.72% as the cost of funds decreased 2 basis points offsetting the earning asset yield decline of 1 basis point. The yield on total loans and leases increased 10 basis points to 3.61% largely due to higher contribution from PPP loans, while the investment portfolio yields declined by 13 basis points largely driven by the impact of higher cash and cash equivalents balances. The cost of funds decrease was led by the cost of interest-bearing deposits improving 3 basis points to 0.21%. •The annualized net charge-offs to total average loans ratio was 0.03%, compared to 0.29%, with favorable asset quality trends across the loan portfolio. •The provision for credit losses was a net benefit of$1.8 million for the third quarter, compared to a net benefit of$1.1 million in the second quarter of 2021 and an expense of$27.2 million in the third quarter of 2020, with the third quarter of 2020 level primarily attributable to the impacts of the pandemic. •Non-interest income was a record$88.9 million , an increase of$8.8 million , or 11.0%, due to strong contributions from capital markets and wealth management, as well as increased SBA premium income and higher service charges driven 54 -------------------------------------------------------------------------------- by increased customer activity, partially offset by lower contributions from mortgage banking given its record levels in the third quarter of 2020. •The effective tax rate was 19.7%, compared to 17.0%, reflecting residual benefits from renewable energy investment tax credits in the third quarter of 2020. •The efficiency ratio (non-GAAP) equaled 55.4%, compared to 55.3%. Balance Sheet Highlights (period-end balances,September 30, 2021 compared toDecember 31, 2020 , unless otherwise indicated) •Period-end total loans and leases, excluding PPP loans, increased$867.6 million , or 3.7%, as commercial loans increased$621.7 million , or 4.1%, and consumer loans increased$246.0 million , or 3.0%, inclusive of the sale of$0.5 billion in indirect auto loans inNovember 2020 , compared toSeptember 30, 2020 . Total period-end loans and leases decreased$972.2 million , or 3.8%, due to a commercial loan decrease of$1.2 billion , or 6.9%, driven by PPP loan forgiveness compared toSeptember 30, 2020 . •On a linked-quarter basis, excluding PPP loans, period-end total loans increased$462.8 million , or 7.8% annualized, with commercial loans and leases increasing$289.3 million , or 7.4% annualized, and consumer loans increasing$173.5 million , or 8.5% annualized. •PPP loans outstanding totaled$0.7 billion atSeptember 30, 2021 , reflecting$2.9 billion in SBA loan forgiveness processed to date. There were$1.6 billion and$2.5 billion of PPP loans outstanding atJune 30, 2021 andSeptember 30, 2020 , respectively. •Total average deposits grew$2.5 billion , or 8.6%, compared to the third quarter of 2020, led by increases in average non-interest-bearing deposits of$1.7 billion , or 19.2%, and average interest-bearing demand deposits of$1.3 billion , or 10.4%, partially offset by a decrease in average time deposits of$1.0 billion , or 25.0%. Average deposit growth reflected inflows from the PPP and government stimulus activities, organic growth in new and existing customer relationships, as well as current customer preferences to maintain larger balances in their deposit accounts than before the pandemic. •The ratio of loans to deposits was 78.6%, compared to 87.4%, as deposit growth outpaced loan growth. Additionally, the deposit funding mix continued to improve with non-interest-bearing deposits totaling 33% of total deposits, compared to 31%. Cash and cash equivalents balances increased$2.7 billion to$4.1 billion due primarily to PPP loan activity and government stimulus inflows. •Total assets were$39.4 billion , compared to$37.4 billion , an increase of$2.0 billion , or 5.4%, primarily due to the increase in cash and cash equivalents due to significant deposit growth, primarily due to the PPP and government stimulus activities. •The dividend payout ratio for the third quarter of 2021 was 35.4%, compared to 48.7% for the third quarter of 2020. •The ratio of the ACL to total loans and leases decreased to 1.41% from 1.43%. Excluding PPP loans that do not carry an ACL due to a 100% government guarantee, the ACL to total loan and leases ratio (non-GAAP) equaled 1.45%, compared to 1.56%. The ACL on loans and leases totaled$349 million atSeptember 30, 2021 , compared to$363 million . •Tangible book value per share (non-GAAP) of$8.42 , increased$0.61 , or 8% fromSeptember 30, 2020 , reflecting our continued strategy to build tangible book value per share while optimizing capital deployment. The CET1 regulatory capital ratio increased to 9.9%, up from 9.8%. 55 --------------------------------------------------------------------------------
TABLE 1
Three Months Ended
September 30,
Quarterly Results Summary 2021 2020
Reported results
Net income available to common stockholders (millions) $ 109.5 $ 80.8
Net income per diluted common share 0.34 0.25
Book value per common share (period-end) 15.65 14.99
Pre-provision net revenue (reported) (millions) 137.0 126.9
Common equity tier 1 capital ratio 9.9 % 9.6 %
Operating results (non-GAAP)
Operating net income available to common stockholders (millions) $ 110.2 $ 85.5
Operating net income per diluted common share 0.34 0.26
Tangible common equity to tangible assets (period-end) 7.24 % 7.19 %
Tangible book value per common share (period-end) $ 8.42 $ 7.81
Pre-provision net revenue (operating) (millions) $ 138.0 $ 132.9
Average diluted common shares outstanding (thousands) 322,861 325,663
Significant items impacting earnings(1) (millions) Pre-tax merger-related expenses
$ (0.9) $ - After-tax impact of merger-related expenses (0.7) - Pre-tax COVID-19 expense - (2.7) After-tax impact of COVID-19 expense - (2.1) Pre-tax gain on sale of Visa class B stock - 13.8 After-tax impact of gain on sale of Visa class B stock - 10.9
Pre-tax loss on FHLB debt extinguishment and related hedge terminations
- (13.3)
After-tax impact of loss on FHLB debt extinguishment and related hedge terminations
- (10.5)
Pre-tax service charge refunds - (3.8)
After-tax impact of service charge refunds - (3.0)
Total significant items pre-tax $ (0.9) $ (6.0)
Total significant items after-tax $
(0.7)
56
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Nine Months Ended
September 30,
Year-to-Date Results Summary 2021 2020
Reported results
Net income available to common stockholders (millions) $ 300.1 $ 207.8
Net income per diluted common share 0.93 0.64
Pre-provision net revenue (reported) (millions) 383.0 362.8
Operating results (non-GAAP) Operating net income available to common stockholders (millions) 302.9
222.1
Operating net income per diluted common share 0.94 0.68
Pre-provision net revenue (operating) (millions) 386.6 385.1
Average diluted common shares outstanding (thousands) 323,636 325,694
Significant items impacting earnings(1) (millions) Pre-tax merger-related expenses
$ (0.9) $ - After-tax impact of merger-related expenses (0.7) - Pre-tax COVID-19 expense - (6.6) After-tax impact of COVID-19 expense - (5.2) Pre-tax gain on sale of Visa class B stock - 13.8 After-tax impact of gain on sale of Visa class B stock - 10.9
Pre-tax loss on FHLB debt extinguishment and related hedge terminations
- (13.3)
After-tax impact of loss on FHLB debt extinguishment and related hedge terminations
- (10.5)
Pre-tax branch consolidation costs (2.6) (8.3)
After-tax impact of branch consolidation costs (2.1) (6.5)
Pre-tax service charge refunds - (3.8)
After-tax impact of service charge refunds - (3.0)
Total significant items pre-tax $ (3.5) $ (18.2)
Total significant items after-tax $ (2.8) $ (14.3)
(1) Favorable (unfavorable) impact on earnings
Industry Developments
LIBOR
The United Kingdom's Financial Conduct Authority (FCA), who is the regulator of
LIBOR, announced on March 5, 2021 that they will no longer require any panel
bank to continue to submit LIBOR after December 31, 2021 . As it pertains to U.S.
dollar LIBOR, the FCA announced that certain LIBOR tenors will continue to be
published through June 30, 2023 . Bank regulators, in a joint statement, have
urged banks to stop using LIBOR altogether on new transactions by the end of
2021 to avoid the possible creation of safety and soundness risk. The FRB of New
York has created a working group called the Alternative Reference Rate Committee
(ARRC) to assist U.S. institutions in transitioning away from LIBOR as a
benchmark interest rate. The ARRC has recommended the use of the Secured
Overnight Financing Rate (SOFR) as a replacement index for LIBOR.
Similarly, we created an internal transition team that is managing our
transition away from LIBOR. This transition team is a cross-functional team
composed of representatives from the commercial, retail and mortgage banking
lines of business, as well as representatives of loan operations, information
technology, legal, finance and other support functions. The transition team has
completed an assessment of tasks needed for the transition, identified contracts
that contain LIBOR language, has reviewed existing contract language for the
presence of appropriate fallback rate language, developed and implemented loan
fallback rate language for when LIBOR is retired and identified risks associated
with the transition. The transition team is considering SOFR and
credit-sensitive alternative indices, that may gain market acceptance, as a
replacement to LIBOR. The selected index, or indices, will be utilized in all
new floating rate agreements no later than December 31, 2021 and we will be able
to accommodate multiple indices for the benefit of our customer base. Our
transition team continues to work within the guidelines established by the FCA
and ARRC to provide for a smooth transition away from LIBOR.
As of September 30, 2021 , approximately $10.1 billion , or 41%, of our loan
portfolio consisted of loans whose variable rate index is LIBOR. Previously, we
finalized the transition to SOFR for all new adjustable rate mortgage
originations which has a balance of approximately $240 million as of September
30, 2021 . Finally, we have approximately $200 million of FNB issued debt that
uses LIBOR as its base index.
57
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Three Months EndedSeptember 30, 2021 Compared to the Three Months EndedSeptember 30, 2020 Net income available to common stockholders for the three months endedSeptember 30, 2021 was$109.5 million or$0.34 per diluted common share, compared to net income available to common stockholders for the three months endedSeptember 30, 2020 of$80.8 million or$0.25 per diluted common share. The results for the third quarter of 2021 reflect record revenue of$321.3 million , an increase of$14.1 million , or 4.6%. Additionally, the provision for credit losses was a net benefit of$1.8 million due to continued improvement in the underlying portfolio credit trends. This compares to provision expense of$27.2 million for the third quarter of 2020, reflecting a recessionary environment under the CECL requirements. Non-interest income for the third quarter of 2021 included record capital markets income of$12.5 million , wealth management revenue of$14.9 million and increased SBA premium income. Non-interest expense for the third quarter of 2021 increased$4.0 million primarily due to higher salaries and employee benefits from higher production and performance-related commissions and incentives. The third quarter of 2021 included merger-related costs of$0.9 million due to the pending Howard acquisition. Financial highlights are summarized below: TABLE 2 Three Months Ended September 30, $ % (in thousands, except per share data) 2021 2020 Change Change Net interest income$ 232,406 $ 227,098 $ 5,308 2.3 % Provision for credit losses (1,806) 27,227 (29,033) (106.6) Non-interest income 88,854 80,038 8,816 11.0 Non-interest expense 184,226 180,209 4,017 2.2 Income taxes 27,327 16,924 10,403 61.5 Net income 111,513 82,776 28,737 34.7 Less: Preferred stock dividends 2,010 2,010 - -
Net income available to common stockholders
$ 0.34 $ 0.25 $ 0.09 36.0 % Earnings per common share - Diluted 0.34 0.25 0.09 36.0 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 September 30, 2021 2020 Return on average equity 8.74 % 6.70 % Return on average tangible common equity (2) 16.77 13.34 Return on average assets 1.14 0.88 Return on average tangible assets (2) 1.24 0.97 Book value per common share (1)$ 15.65 $ 14.99 Tangible book value per common share (1) (2) 8.42 7.81 Equity to assets (1) 12.95 % 13.22
%
Average equity to average assets 13.08 13.12 Common equity to assets (1) 12.68 12.94 Tangible equity to tangible assets (1) (2) 7.53 7.49
Tangible common equity to tangible assets (1) (2) 7.24 7.19 Common equity tier 1 capital ratio (1)
9.9 9.6
Dividend payout ratio 35.43 48.65
(1) Period-end
(2) Non-GAAP
58
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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 September 30,
2021 2020
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
0.15 % $ 543,731 $ 226 0.17 %
Taxable investment securities (1) 5,109,559 20,746 1.62 4,849,384 24,710
2.04
Tax-exempt investment securities (1)(2) 1,078,906 9,230 3.42 1,142,971 10,101 3.54 Loans held for sale 257,909 2,381 3.69 282,917 3,349 4.72 Loans and leases (2)(3) 24,729,254 224,675 3.61 26,063,431 237,063 3.62 Total interest-earning assets (2) 34,362,469 258,260 2.99 32,882,434 275,449 3.34 Cash and due from banks 389,659 369,263 Allowance for credit losses (362,592) (371,199) Premises and equipment 343,070 335,711 Other assets 3,985,793 4,250,497 Total assets$ 38,718,399 $ 37,466,706 Liabilities Interest-bearing liabilities: Deposits: Interest-bearing demand$ 13,888,928 4,487 0.13$ 12,584,154 10,041 0.32 Savings 3,509,325 164 0.02 2,991,381 261 0.03 Certificates and other time 3,111,424 5,999 0.76 4,149,263 17,119
1.64
Total interest-bearing deposits 20,509,677 10,650 0.21 19,724,798 27,421 0.55
Short-term borrowings 1,549,353 6,539 1.67 2,217,640 8,893 1.59
Long-term borrowings 886,637 6,045 2.70 1,526,968 9,019 2.35
Total interest-bearing liabilities 22,945,667 23,234 0.40 23,469,406 45,333 0.77
Non-interest-bearing demand 10,338,713 8,671,940
Total deposits and borrowings 33,284,380 0.28 32,141,346 0.56
Other liabilities 370,587 409,427
Total liabilities 33,654,967 32,550,773
Stockholders' equity 5,063,432 4,915,933
Total liabilities and stockholders' equity $ 38,718,399 $ 37,466,706
Net interest-earning assets $ 11,416,802 $ 9,413,028
Net interest income (FTE) (2) 235,026 230,116
Tax-equivalent adjustment (2,620) (3,018)
Net interest income $ 232,406 $ 227,098
Net interest spread 2.59 % 2.57 %
Net interest margin (2) 2.72 % 2.79 %
(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.
59
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Net Interest Income
Net interest income on an FTE basis (non-GAAP) increased $4.9 million , or 2.1%,
from $230.1 million for the third quarter of 2020 to $235.0 million for the
third quarter of 2021. Average earning assets of $34.4 billion increased $1.5
billion , or 4.5%, from 2020, which included $3.6 billion of PPP loan
originations since program inception in the second quarter of 2020, $2.9 billion
in total PPP loan forgiveness and a $2.6 billion increase in average cash
balances largely due to the continued impact from government stimulus and PPP
activity. The growth in average earning assets was offset by the repricing
impact on earning asset yields from lower interest rates, mitigated by the
improved funding mix with reductions in higher-cost borrowings and the cost of
interest-bearing deposits. Average interest-bearing liabilities of $22.9 billion
decreased $0.5 billion , or 2.2%, from 2020, driven by a decrease in average
borrowings of $1.3 billion partially offset by an increase of $0.8 billion in
average interest-bearing deposits which included deposits for PPP funding and
government stimulus activities, organic growth in new and existing customer
relationships, as well as recent customer preferences to maintain larger deposit
account balances than before the pandemic. Our net interest margin FTE
(non-GAAP) declined 7 basis points to 2.72%, as the yield on earning assets
decreased 35 basis points, primarily reflecting the impact of significant
reductions in short-term benchmark interest rates on variable-rate loans,
significantly lower yields on investment securities and the effect of higher
average cash balances on the mix of earning assets. Partially offsetting the
lower earning asset yields, the total cost of funds improved 28 basis points to
0.28%, compared to 0.56%, due to a 34 basis point reduction in interest-bearing
deposit costs and an improved funding mix, as average non-interest-bearing
deposits increased $1.7 billion , or 19.2%.
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
ended September 30, 2021 , compared to the three months ended September 30, 2020 :
TABLE 5
(in thousands) Volume Rate Net
Interest Income (1)
Interest-bearing deposits with banks $ 1,020 $ (18) $ 1,002
Securities (2) 1,192 (6,027) (4,835)
Loans held for sale 125 (1,093) (968)
Loans and leases (2) (15,895) 3,507 (12,388)
Total interest income (2) (13,558) (3,631) (17,189)
Interest Expense (1)
Deposits:
Interest-bearing demand 445 (5,999) (5,554)
Savings 23 (120) (97)
Certificates and other time (2,522) (8,598) (11,120)
Short-term borrowings (3,042) 688 (2,354)
Long-term borrowings (3,738) 764 (2,974)
Total interest expense (8,834) (13,265) (22,099)
Net change (2) $ (4,724) $ 9,634 $ 4,910
(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 $258.3 million for the third
quarter of 2021, decreased $17.2 million , or 6.2%, from the same quarter of
2020, primarily due to the repricing impact from lower interest rates, partially
offset by increased earning assets of $1.5 billion . The increase in earning
assets was primarily driven by a $2.6 billion increase in average cash and cash
equivalents balances largely due to the continued impact from government
stimulus and PPP loan activity, partially offset by a $1.3 billion , or 5.1%,
decrease in average loans and leases. Average commercial loans declined $1.1
billion , or 6.2%. Excluding the PPP loans, commercial loan origination activity
remained solid led by organic growth in the Pittsburgh , Mid-
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Atlantic (Washington D.C. , northern Virginia and Maryland markets) and Cleveland
regions. Average consumer loans declined $238.8 million , or 2.8%, primarily due
to the sale of $0.5 billion of indirect auto installment loans in November 2020 ,
partially offset by a $229.3 million increase in direct installment loans. Since
PPP inception we originated $3.6 billion of PPP loans and had $2.9 billion in
total PPP loan forgiveness. The yield on average earning assets (non-GAAP)
decreased 35 basis points from 3.34% for the third quarter of 2020 to 2.99% for
the third quarter of 2021, primarily reflecting the impact of significant
reductions in the short-term benchmark interest rates on variable-rate loans,
significantly lower yields on investment securities and the effect of higher
average cash balances on the mix of earning assets.
Interest expense of $23.2 million for the third quarter of 2021 decreased $22.1
million , or 48.7%, from the same quarter of 2020, due to a decrease in rates
paid on average interest-bearing liabilities and growth in average
non-interest-bearing deposits over the same quarter of 2020. Average
non-interest-bearing deposits increased $1.7 billion , or 19.2%, and average
interest-bearing deposits increased $0.8 billion , or 4.0%. The growth in average
deposits reflected inflows from the PPP and government stimulus activities,
organic growth in new and existing customer relationships, as well as recent
customer preferences to maintain larger deposit account balances than before the
pandemic. Average short-term borrowings decreased $668.3 million , or 30.1%,
primarily reflecting decreases of $654.1 million and $36.6 million in short-term
FHLB advances and federal funds purchased, respectively. Average long-term
borrowings decreased $640.3 million , or 41.9%, primarily reflecting a decrease
of $628.9 million in long-term FHLB advances. During 2020, we utilized excess
low-yielding cash to opportunistically terminate $715 million of FHLB
borrowings, and in certain instances, the related interest rate swap. The
terminated FHLB borrowings had a 2.49% interest rate with a remaining term of
1.6 years. The rate paid on interest-bearing liabilities decreased 37 basis
points from 0.77% to 0.40% for the third quarter of 2021, primarily due to the
interest rate actions made by the FOMC and our actions taken to reduce the cost
of interest-bearing liabilities.
Provision for Credit Losses
Provision for credit losses is determined based on management's estimates of the
appropriate level of ACL 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 provision for credit loss expense and net charge-offs:
TABLE 6
Three Months Ended
September 30, $ %
(dollars in thousands) 2021 2020 Change Change
Provision for credit losses (on loans and
leases) $ (5,668) $ 27,233 $ (32,901) (120.8) %
Provision for unfunded loan commitments (1) 3,847 (287) 4,134 (1,440.4)
Net loan charge-offs 1,591 19,256 (17,665) (91.7)
Net loan charge-offs (annualized) / total
average loans and leases 0.03 %
0.29 %
(1) A net benefit of
Provision for credit losses was a net benefit of$1.8 million during the third quarter of 2021, a decrease of$28.8 million , from the same period of 2020. The third quarter of 2021 net benefit is comprised of$5.7 million net benefit on provision for loans and leases outstanding and a$3.8 million provision expense for unfunded loan commitments, driven by an increase in our commercial unfunded loan commitments. The decrease reflects improved credit trends in our portfolio credit metrics, with the year-ago quarter level primarily attributable to the impacts from the pandemic. Net loan charge-offs were$1.6 million , a decrease of$17.7 million , reflecting COVID-19 impacts on certain segments of the loan portfolio in 2020. For additional information relating to the allowance and provision for credit losses, refer to the Allowance for Credit Losses on Loans and Leases section of this Management's Discussion and Analysis. 61 -------------------------------------------------------------------------------- Non-Interest Income The breakdown of non-interest income for the three months endedSeptember 30, 2021 and 2020 is presented in the following table: TABLE 7 Three Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change Service charges$ 31,716 $ 24,296 $ 7,420 30.5 % Trust services 9,471 7,733 1,738 22.5 Insurance commissions and fees 6,776 6,401 375 5.9 Securities commissions and fees 5,465 4,494 971 21.6 Capital markets income 12,541 8,202 4,339 52.9 Mortgage banking operations 8,245 18,831 (10,586) (56.2) Dividends on non-marketable equity securities 1,857 2,496 (639) (25.6) Bank owned life insurance 3,279 3,867 (588) (15.2) Net securities gains 65 112 (47) (42.0) Loss on debt extinguishment - (4,360) 4,360 - Other 9,439 7,966 1,473 18.5 Total non-interest income$ 88,854 $ 80,038 $ 8,816 11.0 % Total non-interest income increased$8.8 million , or 11.0%, to$88.9 million for the third quarter of 2021 compared to$80.0 million for the third quarter of 2020. Excluding significant items, non-interest income increased$5.5 million , or 6.6%. The variances in the individual non-interest income items are explained in the following paragraphs. Service charges on loans and deposits of$31.7 million for the third quarter of 2021 increased$7.4 million , or 30.5%, from the same period of 2020, as the year-ago quarter reflected a low point of customer activity during the pandemic. Trust services of$9.5 million for the third quarter of 2021 increased$1.7 million , or 22.5%, from the same period of 2020. We continued to generate strong organic growth in accounts and services, while the market value of assets under management also increased$1.4 billion , or 20.9%, to$7.8 billion atSeptember 30, 2021 . Securities commissions and fees of$5.5 million for the third quarter of 2021 increased$1.0 million , or 21.6%, from the same period of 2020 due to strong activity levels across the footprint. Capital markets increased$4.3 million , or 52.9%, which included strong swap activity with solid contributions from commercial lending activity, as well as contributions from loan syndications, debt capital markets and international banking. Mortgage banking operations income of$8.2 million for the third quarter of 2021 decreased$10.6 million , or 56.2%, from the same period of 2020, as secondary market revenue and mortgage held-for-sale pipelines normalized from record levels. During the third quarter of 2021, we sold$400.9 million of residential mortgage loans, compared to$478.3 million for the same period of 2020, a decrease of 16.2%. Dividends on non-marketable equity securities of$1.9 million for the third quarter of 2021 decreased$0.6 million , or 25.6%, from the same period of 2020, primarily due to a decrease in the FHLB dividend rate and lower levels of FHLB borrowings given the strong growth in deposits. The early termination of higher-rate long-term FHLB borrowings in the third quarter of 2020 resulted in a loss on debt extinguishment of$4.4 million . Other non-interest income was$9.4 million and$8.0 million for the third quarter of 2021 and 2020, respectively. The third quarter of 2021 included$1.8 million more in SBA premium income,$0.9 million more from improvedSmall Business Investment Company (SBIC) fund performance, a$2.2 million recovery on a previously written-off other asset and various 62 -------------------------------------------------------------------------------- miscellaneous increases. The third quarter of 2020 included a$13.8 million gain on the sale ofVisa class B stock, partially offset by$8.9 million in hedge termination costs related to the early termination of higher-rate long-term FHLB borrowings. TABLE 8 Three Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change Total non-interest income, as reported$ 88,854 $ 80,038 $ 8,816 11.0 %
Significant items:
Gain on sale of Visa class B stock - (13,818) 13,818 Loss on FHLB debt extinguishment and related hedge terminations - 13,316 (13,316) Service charge refunds - 3,780 (3,780) Total non-interest income, excluding significant items(1)$ 88,854 $ 83,316 $ 5,538 6.6 % (1) Non-GAAP Non-Interest Expense The breakdown of non-interest expense for the three months endedSeptember 30, 2021 and 2020 is presented in the following table: TABLE 9 Three Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change
Salaries and employee benefits
4.6 % Net occupancy 12,913 13,837 (924) (6.7) Equipment 17,664 17,005 659 3.9 Amortization of intangibles 3,022 3,339 (317) (9.5) Outside services 17,839 16,676 1,163 7.0 FDIC insurance 4,380 4,064 316 7.8
Bank shares and franchise taxes 3,584 3,778 (194)
(5.1) Merger-related 940 - 940 - Other 18,985 21,245 (2,260) (10.6) Total non-interest expense$ 184,226 $ 180,209 $ 4,017 2.2 % Total non-interest expense of$184.2 million for the third quarter of 2021 increased$4.0 million , or 2.2%, from the same period of 2020. Non-interest expense increased$5.7 million , or 3.2%, when excluding significant items of$0.9 million of merger-related expenses in the third quarter of 2021 and$2.7 million of COVID-19 expenses in the third quarter of 2020. The variances in the individual non-interest expense items are further explained in the following paragraphs. Salaries and employee benefits of$104.9 million for the third quarter of 2021 increased$4.6 million , or 4.6%, from the same period of 2020, primarily related to normal merit increases and higher production and performance-related commissions and incentives corresponding to strong production levels from mortgage banking and our fee-based businesses. Outside services expense of$17.8 million for the third quarter of 2021 increased$1.2 million , or 7.0%, from$16.7 million from the same period of 2020, due to volume-related technology and higher legal costs. Additionally, the third quarter of 2020 included$0.3 million of COVID-19 expenses. We recorded$0.9 million in merger-related costs in the third quarter of 2021 related to the pending Howard acquisition. Other non-interest expense was$19.0 million and$21.2 million for the third quarter of 2021 and 2020, respectively. During the third quarter of 2020, we recorded over$2 million of COVID-19 related expenses. 63 --------------------------------------------------------------------------------
The following table presents non-interest expense excluding significant items
for the three months ended
Three Months Ended September 30, $ %
(dollars in thousands) 2021 2020 Change Change
Total non-interest expense, as reported $ 184,226 $ 180,209 $ 4,017 2.2 %
Significant items:
COVID-19 expense - (2,671) 2,671
Merger-related (940) - (940)
Total non-interest expense, excluding significant items
(1) $ 183,286 $ 177,538 $ 5,748 3.2 %
(1) Non-GAAP
Income Taxes
The following table presents information regarding income tax expense and
certain tax rates:
TABLE 11
Three Months Ended
September 30,
(dollars in thousands) 2021 2020
Income tax expense $ 27,327 $ 16,924
Effective tax rate 19.7 % 17.0 %
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. Income tax expense was lower in
2020 due to lower pre-tax income levels and the residual benefits from renewable
energy investment tax credits recognized last year.
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended
September 30, 2020
Net income available to common stockholders for the first nine months of 2021
was $300.1 million or $0.93 per diluted common share, compared to net income
available to common stockholders for the first nine months of 2020 of $207.8
million or $0.64 per diluted common share. The provision for credit losses for
the first nine months of 2021 totaled $3.0 million , due to continued improvement
in the underlying portfolio credit trends. This compares to $105.2 million in
the first nine months of 2020, due to the COVID-19 related impacts on
macroeconomic forecasts used in the ACL model. Non-interest income totaled
$251.4 million , increasing $25.2 million , or 11.2%, with broad-based
contributions from across our businesses. The first nine months of 2020 included
a loss on FHLB debt extinguishment and related hedge termination costs of $13.3
million and a $13.8 million gain on the sale of the Bank's holdings of Visa
Class B shares, with both being recorded in other non-interest income.
Additionally, we recorded $3.8 million of service charge refunds in the first
nine months of 2020. Non-interest expense totaled $551.6 million , increasing
$0.6 million , or 0.1%, as the first nine months of 2021 included the impact of
merger-related costs of $0.9 million and branch consolidations costs of $2.6
million and the first nine months of 2020 included branch consolidation costs of
$8.3 million and COVID-19 expense of $6.6 million .
64
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Financial highlights are summarized below:
TABLE 12
Nine Months Ended
September 30, $ %
(in thousands, except per share data) 2021 2020 Change Change
Net interest income $ 683,200 $ 687,690 $ (4,490) (0.7) %
Provision for credit losses 2,979 105,242 (102,263) (97.2)
Non-interest income 251,431 226,192 25,239 11.2
Non-interest expense 551,588 551,033 555 0.1
Income taxes 73,929 43,804 30,125 68.8
Net income 306,135 213,803 92,332 43.2
Less: Preferred stock dividends 6,030 6,030 - -
Net income available to common stockholders
$ 0.94 $ 0.64 $ 0.30 46.9 % Earnings per common share - Diluted 0.93 0.64 0.29 45.3 Cash dividends per common share 0.36 0.36 - - The following table presents selected financial ratios and other relevant data used to analyze our performance: TABLE 13 Nine Months Ended September 30, 2021 2020 Return on average equity 8.17 % 5.84 % Return on average tangible common equity (2) 15.87 11.72 Return on average assets 1.07 0.79 Return on average tangible assets (2) 1.16 0.87 Book value per common share (1)$ 15.65 $ 14.99 Tangible book value per common share (1) (2) 8.42 7.81 Equity to assets (1) 12.95 % 13.22 % Average equity to average assets 13.07 13.46 Common equity to assets (1) 12.68 12.94 Tangible equity to tangible assets (1) (2) 7.53 7.49
Tangible common equity to tangible assets (1) (2) 7.24 7.19 Common equity tier 1 capital ratio (1)
9.9 9.6
Dividend payout ratio 38.88 56.66
(1) Period-end
(2) Non-GAAP
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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
Nine Months Ended September 30,
2021 2020
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
0.13 % $ 336,541 $ 1,606 0.64 %
Taxable investment securities (1) 5,033,410 63,958 1.69 5,075,865 83,385
2.19
Tax-exempt investment securities (1)(2) 1,100,120 28,337 3.43 1,128,327 30,179
3.57
Loans held for sale 206,589 5,739 3.70 155,713 5,389
4.62
Loans and leases (2) (3) 25,190,510 667,835 3.54 25,061,913 748,328
3.99
Total interest-earning assets (2) 33,930,312 768,179 3.02 31,758,359 868,887
3.65
Cash and due from banks 376,276 361,171 Allowance for credit losses (366,849) (342,081) Premises and equipment 337,262 334,879 Other assets 4,017,431 4,205,752 Total assets$ 38,294,432 $ 36,318,080 Liabilities Interest-bearing liabilities: Deposits: Interest-bearing demand$ 13,683,402 14,927 0.15$ 11,839,283 49,358 0.56 Savings 3,394,718 510 0.02 2,818,593 2,651 0.13 Certificates and other time 3,294,084 22,623 0.92 4,404,265 59,345
1.80
Total interest-bearing deposits 20,372,204 38,060 0.25 19,062,141 111,354 0.78
Short-term borrowings 1,688,999 20,255 1.60 2,716,076 30,973 1.52
Long-term borrowings 977,269 18,443 2.52 1,538,425 29,400 2.55
Total interest-bearing liabilities 23,038,472 76,758 0.45 23,316,642 171,727 0.98
Non-interest-bearing demand 9,874,148 7,707,562
Total deposits and borrowings 32,912,620 0.31 31,024,204 0.74
Other liabilities 374,898 403,762
Total liabilities 33,287,518 31,427,966
Stockholders' equity 5,006,914 4,890,114
Total liabilities and stockholders' equity $ 38,294,432 $ 36,318,080
Net interest-earning assets $ 10,891,840 $ 8,441,717
Net interest income (FTE) (2) 691,421 697,160
Tax-equivalent adjustment (8,221) (9,470)
Net interest income $ 683,200 $ 687,690
Net interest spread 2.57 % 2.67 %
Net interest margin (2) 2.72 % 2.93 %
(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.
66
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Net Interest Income
Net interest income on an FTE basis (non-GAAP) totaled $691.4 million ,
decreasing $5.7 million , or 0.8%, as the low interest rate environment impacted
earning asset yields. The decrease was partially offset by significant earning
asset growth of $2.2 billion or 6.8%. The net interest margin (FTE) (non-GAAP)
declined 21 basis points to 2.72% reflecting higher average cash balances that
reduced the net interest margin.
The following table provides certain information regarding changes in net
interest income on an FTE basis (non-GAAP) attributable to changes in the
average volumes and yields earned on interest-earning assets and the average
volume and rates paid for interest-bearing liabilities for the nine months ended
September 30, 2021 , compared to the nine months ended September 30, 2020 :
TABLE 15
(in thousands) Volume Rate Net
Interest Income (1) Interest-bearing deposits with banks$ 1,982 $ (1,278) $ 704 Securities (2) (1,551) (19,718) (21,269) Loans held for sale 1,751 (1,401) 350 Loans and leases (2) 3,420 (83,913) (80,493) Total interest income (2) 5,602 (106,310) (100,708) Interest Expense (1) Deposits: Interest-bearing demand 2,379 (36,810) (34,431) Savings 76 (2,217) (2,141) Certificates and other time (9,595) (27,127) (36,722) Short-term borrowings (10,729) 11 (10,718) Long-term borrowings (10,575) (382) (10,957) Total interest expense (28,444) (66,525) (94,969) Net change (2)$ 34,046 $ (39,785) $ (5,739) (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$768.2 million for the first nine months of 2021, decreased$100.7 million , or 11.6%, from the same period of 2020, resulting from the decrease in benchmark interest rates, partially offset by an increase in earning assets of$2.2 billion . The increase in earning assets was primarily driven by a$2.1 billion increase in average cash and cash equivalents and a$128.6 million , or 0.5%, increase in average loans due to solid loan origination activity across the footprint and the net benefit from PPP loans. Growth in average commercial loans totaled$655.9 million , or 4.0%, including growth of$246.5 million , or 3.8%, in commercial and industrial loans and$363.4 million , or 3.8%, in commercial real estate. Commercial growth was led by healthy origination activity in thePittsburgh andHarrisburg, Pennsylvania regions. Total average consumer loans decreased$527.3 million , or 6.2%, with an increase in direct installment balances of$181.8 million , or 9.5%, offset by decreases in indirect installment loans of$552.1 million , or 31.2%, due to the sale of$0.5 billion of indirect auto installment loans inNovember 2020 , as well as decreases in consumer lines of credit of$122.8 million , or 8.8%, and residential mortgage loans of$34.2 million , or 1.0%. Excluding PPP loans, period-end total loans and leases increased$867.6 million , or 3.7%, including growth of$621.7 million in commercial loans and leases and$246.0 million in consumer 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$70.7 million , or 1.1%, given historically low and unattractive interest rates available for reinvestment purposes. For the first nine months of 2021, the yield on average earning assets (non-GAAP) decreased 63 basis points to 3.02%, compared to the first nine months of 2020, reflecting the impact of significant reductions in the short-term benchmark interest rates on variable-rate loans, significantly lower yields on investment securities and the effect of higher average cash balances on the mix of earning assets. 67 -------------------------------------------------------------------------------- Interest expense of$76.8 million for the first nine months of 2021 decreased$95.0 million , or 55.3%, from the same period of 2020, primarily due to a decrease in rates paid, partially offset by an increase in average interest-bearing deposits. Average interest-bearing deposits increased$1.3 billion , or 6.9%, which reflects the benefit of solid organic growth in customer relationships, as well as deposits from PPP funding and government stimulus activities. Average time deposits had a managed decline of$1.1 billion , or 25.2%, as customer preferences continued to shift away from higher rate certificates of deposit to lower yielding, more liquid products. Average long-term borrowings decreased$561.2 million , or 36.5%, primarily due to a decrease of$609.1 million in long-term FHLB borrowings, partially offset by an increase of$59.2 million in senior debt. During 2020, we utilized excess low-yielding cash to opportunistically terminate$715 million of FHLB borrowings, and in certain instances, the related interest rate swap. The terminated FHLB borrowings had a 2.49% interest rate with a remaining term of 1.6 years. The rate paid on interest-bearing liabilities decreased 53 basis points to 0.45% for the first nine months of 2021, compared to the first nine months of 2020, due to the interest rate actions made by theFOMC and our actions taken to reduce the cost of interest-bearing liabilities given the low interest rate environment and strong growth in non-interest-bearing deposits. Provision for Credit Losses The following table presents information regarding the provision for credit loss expense and net charge-offs: TABLE 16 Nine Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change Provision for credit losses (on loans and leases)$ (1,309) $ 105,238 $ (106,547) (101.2) % Provision for unfunded loan commitments (1) 4,275 2,180 2,095 96.1 Net loan charge-offs 12,548 33,428 (20,880) (62.5) Net loan charge-offs (annualized) / total average loans and leases 0.07 % 0.18 % (1) The$2.2 million for the 2020 provision for unfunded loan commitments is included in other non-interest expense on the Consolidated Statements of Income. Provision for credit losses was$3.0 million for the nine months endedSeptember 30, 2021 , a decrease of$104.5 million , from the same period of 2020. This year-to-date amount for 2021 is comprised of a$1.3 million net benefit on provision for loans and leases outstanding and a$4.3 million provision for unfunded loan commitments. The decrease reflects favorable asset quality trends across all loan portfolio credit metrics in 2021 and COVID-19 impacts on certain segments of the loan portfolio in 2020. Net charge-offs were$12.5 million during the nine months endedSeptember 30, 2021 , compared to$33.4 million during the nine months endedSeptember 30, 2020 , reflecting COVID-19 impacts on certain segments of the loan portfolio in 2020. 68 -------------------------------------------------------------------------------- Non-Interest Income The breakdown of non-interest income for the nine months endedSeptember 30, 2021 and 2020 is presented in the following table: TABLE 17 Nine Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change Service charges$ 89,273 $ 78,362 $ 10,911 13.9 % Trust services 27,836 23,045 4,791 20.8 Insurance commissions and fees 20,188 18,788 1,400 7.5 Securities commissions and fees 16,830 12,796 4,034 31.5 Capital markets income 27,265 31,830 (4,565) (14.3) Mortgage banking operations 31,400 34,348 (2,948) (8.6) Dividends on non-marketable equity securities 6,516 9,940 (3,424) (34.4) Bank owned life insurance 10,993 10,968 25 0.2 Net securities gains 193 262 (69) (26.3) Loss on debt extinguishment - (4,360) 4,360 - Other 20,937 10,213 10,724 105.0 Total non-interest income$ 251,431 $ 226,192 $ 25,239 11.2 % Total non-interest income increased$25.2 million , to$251.4 million for the first nine months of 2021, an 11.2% increase from the same period of 2020. Excluding significant items, non-interest income increased$22.0 million , or 9.6%. The variances in significant individual non-interest income items are further explained in the following paragraphs. Service charges on loans and deposits of$89.3 million for the first nine months of 2021 increased$10.9 million , or 13.9%, as the first nine months of 2020 reflected significantly reduced customer activity due to the pandemic. Additionally, during the first nine months of 2020, we recorded$3.8 million of service charge refunds. Trust services of$27.8 million for the first nine months of 2021 increased$4.8 million , or 20.8%, from the same period of 2020, primarily driven by organic revenue production and the market value of assets under management increasing$1.4 billion , or 20.9%, to$7.8 billion atSeptember 30, 2021 . Insurance commissions and fees of$20.2 million for the first nine months of 2021 increased$1.4 million , or 7.5%, from the same period of 2020, primarily from organic revenue growth across our footprint. Securities commissions and fees of$16.8 million for the first nine months of 2021 increased$4.0 million , or 31.5%, due to strong activity levels across the footprint. Capital markets income of$27.3 million for the first nine months of 2021 decreased$4.6 million , or 14.3%, from$31.8 million for the same period of 2020, due to lower customer swap activity compared to the record levels in the beginning of 2020 given heightened volatility in interest rates last year. Mortgage banking operations income of$31.4 million for the first nine months of 2021 decreased$2.9 million , or 8.6%, from the same period of 2020 as secondary market revenue and mortgage held-for-sale pipelines declined from significantly elevated levels in 2020. During the first nine months of 2021, we sold$1.5 billion of residential mortgage loans, a 25.1% increase compared to$1.2 billion for the same period of 2020, however margins on sold production have normalized from significantly elevated levels last year. During the first nine months of 2021, we recognized a$3.8 million favorable interest-rate related valuation adjustment on MSRs, compared to an$7.5 million unfavorable adjustment for the same period of 2020. Dividends on non-marketable equity securities of$6.5 million for the first nine months of 2021 decreased$3.4 million , or 34.4%, from the same period of 2020, primarily due to a decrease in the FHLB dividend rate and lower levels of FHLB borrowings given the strong growth in deposits. 69 -------------------------------------------------------------------------------- The early termination of higher-rate long-term FHLB borrowings in the first nine months of 2020 resulted in a loss on debt extinguishment of$4.4 million . Other non-interest income was$20.9 million and$10.2 million for the first nine months of 2021 and 2020, respectively. The first nine months of 2021 included$4.7 million more in SBA premium income,$3.3 million more from improved SBIC fund performance, a$2.2 million recovery on a previously written-off other asset and various miscellaneous increases. TABLE 18 The following table presents non-interest income excluding significant items for the nine months ofSeptember 30, 2021 and 2020: Nine Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change Total non-interest income, as reported$ 251,431 $ 226,192 $ 25,239 11.2 %
Significant items:
Gain on sale of Visa class B stock - (13,818) 13,818 Loss on FHLB debt extinguishment and related hedge terminations - 13,316 (13,316) Service charge refunds - 3,780 (3,780) Total non-interest income, excluding significant items(1)$ 251,431 $ 229,470 $ 21,961 9.6 % (1) Non-GAAP Non-Interest Expense The breakdown of non-interest expense for the nine months endedSeptember 30, 2021 and 2020 is presented in the following table: TABLE 19 Nine Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change
Salaries and employee benefits
5.4 % Net occupancy 45,372 48,879 (3,507) (7.2) Equipment 51,854 48,661 3,193 6.6 Amortization of intangibles 9,096 10,021 (925) (9.2) Outside services 53,463 50,572 2,891 5.7 FDIC insurance 13,432 14,990 (1,558) (10.4)
Bank shares and franchise taxes 10,939 11,899 (960)
(8.1)
Merger-related 940 - 940 -
Other 52,217 67,949 (15,732) (23.2)
Total non-interest expense $ 551,588 $ 551,033 $ 555 0.1 %
Total non-interest expense of $551.6 million for the first nine months of 2021
increased $0.6 million , a 0.1% increase from the same period of 2020. On an
operating basis, non-interest expense increased $11.9 million , or 2.2%, when
excluding significant items of $0.9 million in merger-related costs and $2.6
million in branch consolidations in the first nine months of 2021 compared to
$8.3 million in branch consolidation costs and $6.6 million of expenses
associated with COVID-19 in the first nine months of 2020. The variances in the
individual non-interest expense items are further explained in the following
paragraphs.
Salaries and employee benefits of $314.3 million for the first nine months of
2021 increased $16.2 million , or 5.4%, from the same period of 2020, primarily
related to normal merit increases and higher production and performance-related
commissions and incentives corresponding to strong production levels from
mortgage banking and our fee-based businesses.
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Net occupancy and equipment expense of $97.2 million for the first nine months
of 2021 was essentially flat from the same period of 2020. On an operating
basis, net occupancy and equipment expense increased $5.1 million , or 5.6%,
primarily due to expansion in key regions such as the Mid-Atlantic and South
Carolina and continued digital technology investment in the first nine months of
2021.
Outside services expense of $53.5 million for the first nine months of 2021
increased $2.9 million , or 5.7%, from $50.6 million from the same period of
2020, due to various minor increases related to third-party technology
providers, legal costs and other consulting engagements.
FDIC insurance expense of $13.4 million for the first nine months of 2021
decreased $1.6 million , or 10.4%, from the first nine months of 2020, primarily
due to increased subordinated debt at FNBPA and improved liquidity metrics.
We recorded $0.9 million in merger-related costs for the first nine months of
2021 related to the pending Howard acquisition.
Other non-interest expense was $52.2 million and $67.9 million for the first
nine months of 2021 and 2020, respectively, as the year-ago period included $4.3
million of COVID-19 related expenses and 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 same year-ago period as
a benefit to income taxes. The COVID-19 related expenses 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.
During the first nine months of 2021 and 2020, we recorded $0.5 million and $0.9
million , respectively, in branch consolidation costs in other non-interest
expense.
The following table presents non-interest expense excluding significant items
for the nine months ended September 30, 2021 and 2020:
TABLE 20
Nine Months Ended
September 30, $ %
(dollars in thousands) 2021 2020 Change Change
Total non-interest expense, as reported $ 551,588 $ 551,033 $ 555 0.1 %
Significant items:
Branch consolidations (2,644) (8,262) 5,618
COVID-19 expense - (6,622) 6,622
Merger-related (940) - (940)
Total non-interest expense, excluding significant items
(1) $ 548,004 $ 536,149 $ 11,855 2.2 %
(1) Non-GAAP
Income Taxes
The following table presents information regarding income tax expense and
certain tax rates:
TABLE 21
Nine Months Ended
September 30,
(dollars in thousands) 2021 2020
Income tax expense $ 73,929 $ 43,804
Effective tax rate 19.5 % 17.0 %
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. Income tax expense was lower in
2020 due to lower pre-tax income levels and the residual benefits from renewable
energy investment tax credits recognized last year.
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--------------------------------------------------------------------------------FINANCIAL CONDITION The following table presents our condensed Consolidated Balance Sheets: TABLE 22
September 30, December 31, $ %
(dollars in millions) 2021 2020 Change Change
Assets
Cash and cash equivalents$ 4,110 $ 1,383 $ 2,727 197.2 % Securities 6,410 6,331 79 1.2 Loans held for sale 253 154 99 64.3 Loans and leases, net 24,367 25,096 (729) (2.9) Goodwill and other intangibles 2,307 2,316 (9) (0.4) Other assets 1,914 2,074 (160) (7.7) Total Assets$ 39,361 $ 37,354 $ 2,007 5.4 % Liabilities and Stockholders' Equity Deposits$ 31,444 $ 29,122 $ 2,322 8.0 % Borrowings 2,449 2,899 (450) (15.5) Other liabilities 370 374 (4) (1.1) Total Liabilities 34,263 32,395 1,868 5.8 Stockholders' Equity 5,098 4,959 139 2.8
Total Liabilities and Stockholders' Equity
37,354 $ 2,007 5.4 %
Cash and cash equivalents increased in 2021 primarily due to deposit growth of
$2.3 billion from continued customer expansion in our footprint and government
stimulus programs including PPP.
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 the District of Columbia . Our market coverage spans several
major metropolitan areas including: Pittsburgh, Pennsylvania ; Baltimore,
Maryland ; Cleveland, Ohio ; and Charlotte , Raleigh , Durham and the Piedmont Triad
(Winston-Salem , Greensboro and High Point ) in North Carolina . Since the
inception of the PPP, we originated $3.6 billion of PPP loans, including $1.0
billion during the first nine months of 2021, of which $0.7 billion is
outstanding.
Paycheck Protection Program
The CARES Act included an allocation of $349 billion for loans to be issued by
financial institutions through the SBA, utilizing the PPP. The Paycheck
Protection Program and Health Care Enhancement Act (PPP/HCE Act) was passed by
Congress on April 23, 2020 and signed into law on April 24, 2020 . The PPP/HCE
Act authorized an additional $320 billion of funding for PPP loans. As of
September 30, 2021 , we had approximately $0.7 billion of PPP loans remaining
outstanding, net of unamortized net deferred fees of $20.4 million , which are
included in the commercial and industrial category. During the first nine months
of 2021, $2.9 billion of PPP loan balances were forgiven by the SBA.
PPP loans are forgivable, in whole or in part, if the proceeds are used for
payroll and other permitted purposes in accordance with the requirements of the
PPP. Loans closed prior to June 5, 2020 , carry a fixed rate of 1.00% and a term
of two years, if not forgiven, in whole or in part. Payments are deferred until
after a forgiveness determination is made, if submitted within ten months of the
end of the loan forgiveness Covered Period. The loans are 100% guaranteed by the
SBA, which provides a reduced risk of loss to us on these loans. The SBA pays
the originating bank a processing fee ranging from 1% to 5%, based on the size
of the loan. This fee is recognized in interest income over the contractual life
of the loan under the effective yield method, adjusted for expected prepayments
on these pools of homogenous loans. We expect most of the remaining $20.4
million of net deferred fees to be recognized by March 31, 2022 based on
expected loan forgiveness activity. On June 5, 2020 , the President signed the
Paycheck Protection Program Flexibility Act (PPP Flexibility Act) which extended
the term for new
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PPP loans to 5 years and permitted a lender to extend a 2-year PPP loan up to a
5-year term by mutual agreement of the lender and borrower. The PPP Flexibility
Act also gives the borrower the option of 24 weeks to distribute the funds, and
a borrower can remain eligible for loan forgiveness by using at least 60% of the
funds for payroll costs. The SBA announced that lenders will have 60 days to
review PPP loan forgiveness applications and that the SBA will remit the
forgiveness payments within 90 days of receipt of approved forgiveness
applications.
Following is a summary of loans and leases:
TABLE 23
September 30, December 31, $ %
2021 2020 Change Change
(in millions)
Commercial real estate $ 9,871 $ 9,731 $ 140 1.4 %
Commercial and industrial 5,960 7,214 (1,254) (17.4)
Commercial leases 489 485 4 0.8
Other 81 40 41 102.5
Total commercial loans and leases 16,401 17,470 (1,069) (6.1)
Direct installment 2,250 2,020 230 11.4
Residential mortgages 3,588 3,433 155 4.5
Indirect installment 1,230 1,218 12 1.0
Consumer lines of credit 1,247 1,318 (71) (5.4)
Total consumer loans 8,315 7,989 326 4.1
Total loans and leases $ 24,716 $ 25,459 $ (743) (2.9) %
The commercial and industrial category includes PPP loans totaling $0.7 billion
and $2.2 billion at September 30, 2021 and December 31, 2020 , respectively.
Non-Performing Assets
Following is a summary of non-performing assets:
TABLE 24
September 30, December 31, $ %
(in millions) 2021 2020 Change Change
Commercial real estate $ 55 $ 85 $ (30) (35.3) %
Commercial and industrial 23 44 (21) (47.7)
Commercial leases 1 2 (1) (50.0)
Other 1 1 - -
Total commercial loans and leases 80 132 (52) (39.4)
Direct installment 8 11 (3) (27.3)
Residential mortgages 14 18 (4) (22.2)
Indirect installment 2 2 - -
Consumer lines of credit 6 7 (1) (14.3)
Total consumer loans 30 38 (8) (21.1)
Total non-performing loans and leases 110 170 (60) (35.3)
Other real estate owned 8 10 (2) (20.0)
Non-performing assets $ 118 $ 180 $ (62) (34.4) %
Non-performing assets decreased
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decrease in non-performing loans was driven by the resolution of several
commercial credits, and the decrease in OREO was largely driven by the sale of
residential mortgage properties.
If 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 TDRs. These modifications will be closely monitored
for any change in status.
Troubled Debt Restructured Loans
Following is a summary of accruing and non-accrual TDRs, by class:
TABLE 25
Non-
(in millions) Accruing Accrual Total
1 1 2
Total commercial loans 6 24 30
Direct installment 22 4 26
Residential mortgages 25 6 31
Consumer lines of credit 5 1 6
Total consumer loans 52 11 63
Total TDRs $ 58 $ 35 $ 93
1 3 4
Total commercial loans 5 21 26
Direct installment 23 4 27
Residential mortgages 24 7 31
Consumer lines of credit 6 1 7
Total consumer loans 53 12 65
Total TDRs $ 58 $ 33 $ 91
Allowance for Credit Losses on Loans and Leases
On January 1, 2020 , we adopted CECL which changed how we calculate the ACL as
more fully described in Note 1, "Summary of Significant Accounting Policies" of
our 2020 Annual Report on Form 10-K . The CECL model takes into consideration
the expected credit losses over the life of the loan at the time the loan is
originated compared to the incurred loss model under the prior standard. 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 default mean calculated using an expanded
period to include a prior recessionary period.
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COVID-19 Impacts on the ACL
Beginning in March 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 utilized a third-party
pandemic recessionary scenario from the first quarter of 2020 through the third
quarter of 2020 for ACL modeling purposes. At December 31, 2020 and
September 30, 2021 , we utilized a third-party consensus macroeconomic forecast
due to the improving macroeconomic environment. Macroeconomic variables that we
utilized from this scenario for our ACL calculation as of December 31, 2020
included, but were not limited to: (i) gross domestic product, which reflects
growth of 4% in 2021, (ii) the Dow Jones Total Stock Market Index, which grows
steadily throughout the R&S forecast period, (iii) unemployment, which steadily
declines and averages 6% over the R&S forecast period and (iv) the Volatility
Index, which remains stable over the R&S forecast period. For our ACL
calculation at September 30, 2021 , the macroeconomic variables that we utilized
included, but were not limited to: (i) the purchase only Housing Price Index,
which reflects growth of 6.1% over our R&S forecast period, (ii) a Commercial
Real Estate Price Index, which reflects growth of 9.5% over our R&S forecast
period, (iii) S&P Volatility, which increases 7.7% in 2022 before declining 2.7%
in 2023 and (iv) bankruptcies, which increase steadily over the R&S forecast
period but average below historic levels. While we have not changed our ACL
modeling methodology, we continually assess our key macroeconomic variables and
their correlation to our historical and expected portfolio performance. During
the quarter, we changed certain macroeconomic variables used for ACL modeling
purposes as the new variables better correlate to our historical performance
over the economic cycles.
The ACL of $349.3 million at September 30, 2021 decreased $13.9 million , or
3.8%, from December 31, 2020 due to the improving credit metrics partially
offset by commercial loan growth excluding PPP. Our ending ACL coverage ratio at
September 30, 2021 was 1.41%, compared to 1.43% at December 31, 2020 . Excluding
PPP loans that do not carry an ACL due to a 100% government guarantee, the ACL
to total loan and leases ratio equaled 1.45% at September 30, 2021 and 1.56% at
December 31, 2020 . Total provision for credit losses for the nine months ended
September 30, 2021 was $3.0 million . Net charge-offs were $12.5 million for the
nine months ended September 30, 2021 , compared to $33.4 million for the nine
months ended September 30, 2020 , reflecting COVID-19 impacts on certain segments
of the loan portfolio. The ACL as a percentage of non-performing loans for the
total portfolio increased from 213% as of December 31, 2020 to 317% as of
September 30, 2021 following the decrease in non-performing loans during the
quarter, while the total ACL decreased $13.9 million , as noted above.
Deposits
As a bank holding company, our primary source of funds is deposits. These
deposits are provided by business, consumer and municipal customers who we serve
within our footprint.
Following is a summary of deposits:
TABLE 26
September 30, December 31, $ %
(in millions) 2021 2020 Change Change
Non-interest-bearing demand $ 10,502 $ 9,042 $ 1,460 16.1 %
Interest-bearing demand 14,360 13,157 1,203 9.1
Savings 3,537 3,261 276 8.5
Certificates and other time deposits 3,045 3,662 (617) (16.8)
Total deposits $ 31,444 $ 29,122 $ 2,322 8.0 %
Total deposits increased $2.3 billion , or 8.0%, from December 31, 2020 ,
primarily as a result of growth in non-interest-bearing and interest-bearing
demand balances due to an expansion of customer relationships and higher
customer balances, which were aided by inflows from the PPP and government
stimulus activity. Customer preferences continued to shift away from higher rate
certificates of deposit to lower yielding, more liquid products, and to maintain
larger deposit account balances than before the pandemic. The deposit growth
helped us eliminate overnight borrowings and reduce higher-cost short-term FHLB
borrowings and their related swaps.
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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 and sustainability, 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 the SEC . 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. On
February 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 used the net proceeds
from the sale of the notes for general corporate purposes, which included
investments at the holding company level, capital to support the growth of
FNBPA, repurchase of our common shares and refinancing of outstanding
indebtedness.
On September 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. There is no guarantee
as to the exact number of shares that will be repurchased and we may discontinue
purchases at any time. Since inception, we repurchased 7.6 million shares at a
weighted average share price of $10.69 for $81.6 million under this repurchase
program.
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 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 CET1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and a 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.
At September 30, 2021 , 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.
In December 2018 , the FRB and other U.S. banking agencies approved a 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. In March 2020 , the FRB and other U.S. banking agencies issued
a final rule that became effective on March 31, 2020 , and provides BHCs and
banks with an alternative option to temporarily delay the impact of CECL,
relative to the incurred loss methodology for the ACL, on regulatory capital. We
have elected this alternative option instead of the one described in the
December 2018 rule. As a result, under the 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 through December 31, 2021 . Beginning on
January 1, 2022 , we will be required to phase in 25% of the previously deferred
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 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. As of September 30, 2021 , the total deferred impact on CET1
capital related to our adoption of CECL was approximately $68.6 million , or 24
basis points.
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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 like 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.
Following are the capital amounts and related ratios for FNB and FNBPA:
TABLE 27
Minimum Capital
Well-Capitalized Requirements plusCapital Conservation
Actual Requirements (1) Buffer
(dollars in millions) Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2021
F.N.B. Corporation
Total capital $ 3,486 12.24 % $ 2,848 10.00 % $ 2,990 10.50 %
Tier 1 capital 2,920 10.25 1,709 6.00 2,420 8.50
Common equity tier 1 2,813 9.88 n/a n/a 1,993 7.00
Leverage 2,920 8.00 n/a n/a 1,460 4.00
Risk-weighted assets 28,475
FNBPA
Total capital 3,636 12.80 % 2,841 10.00 % 2,983 10.50 %
Tier 1 capital 3,114 10.96 2,273 8.00 2,415 8.50
Common equity tier 1 3,034 10.68 1,847 6.50 1,989 7.00
Leverage 3,114 8.54 1,823 5.00 1,458 4.00
Risk-weighted assets 28,410
As of December 31, 2020
F.N.B. Corporation
Total capital $ 3,324 12.33 % $ 2,695 10.00 % $ 2,830 10.50 %
Tier 1 capital 2,759 10.24 1,617 6.00 2,291 8.50
Common equity tier 1 2,652 9.84 n/a n/a 1,886 7.00
Leverage 2,759 7.83 n/a n/a 1,410 4.00
Risk-weighted assets 26,948
FNBPA
Total capital 3,400 12.64 % 2,690 10.00 % 2,825 10.50 %
Tier 1 capital 2,882 10.71 2,152 8.00 2,287 8.50
Common equity tier 1 2,802 10.42 1,749 6.50 1,883 7.00
Leverage 2,882 8.19 1,760 5.00 1,408 4.00
Risk-weighted assets 26,902
(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 2020
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Annual Report on Form 10-K as filed with the SEC on February 25, 2021 .
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.
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 ALCO 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. The cash position atSeptember 30, 2021 was$296.8 million , down$82.8 million from year-end, due primarily to$43.2 million in share repurchases. Management has utilized various strategies to ensure sufficient cash on hand is available to meet the parent's funding needs. Two metrics that are used to gauge the adequacy of the parent company's cash position are the Liquidity Coverage Ratio (LCR) and Months of Cash on Hand (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 September 30, December 31, Internal 2021 2020 Limit Liquidity coverage ratio 2.5 times 2.7 times > 1 time Months of cash on hand 17.6 months 22.2 months > 12 months Management has concluded that our cash levels remain appropriate given the current market environment. 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 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. We have also increased customer deposit relationships due to the success of our PPP. Total deposits were$31.4 billion atSeptember 30, 2021 , an increase of$2.3 billion , or 10.7% annualized, fromDecember 31, 2020 . Total non-interest-bearing demand deposit accounts grew$1.5 billion , or 21.6% annualized, and interest-bearing demand deposits increased$1.2 billion , or 12.2% annualized. Savings account balances increased$275.5 million , or 11.3% annualized. Time deposits declined$617.2 million , or 22.5% annualized, as customer preferences continued to shift away from higher rate certificates of deposit to lower yielding, more liquid products, and to maintain larger balances in their deposit accounts than before the pandemic. As mentioned earlier, inflows from PPP and government stimulus checks were a significant factor in the deposit growth. 78 -------------------------------------------------------------------------------- As a result of the strong deposit activity, our cash balances held at the FRB increased$2.7 billion from year-end to$3.5 billion atSeptember 30, 2021 . FNBPA has significant unused wholesale credit availability sources that include the availability to borrow from the FHLB, the FRB, correspondent bank lines, access to brokered deposits and other channels. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities that could be utilized to meet funding needs. We currently also have excess cash to meet our pledging requirements. The ALCO is currently targeting a 1% guideline level for salable unpledged government and agency securities to total assets and a minimum of 3% of total assets level for cash plus salable unpledged government and agency securities. The following table presents certain information relating to FNBPA's credit availability and salable unpledged securities: TABLE 29 September 30, December 31, (dollars in millions) 2021 2020 Unused wholesale credit availability$ 13,896 $ 16,434 Unused wholesale credit availability as a % of FNBPA assets 35.4 % 44.1 % Salable unpledged government and agency securities $
285
0.7 % 1.5 %
Cash and salable unpledged government and agency securities as a % of FNBPA assets
9.8 % 3.8 %
The decrease in unused wholesale credit availability was due to the expiration
of the Paycheck Protection Program Liquidity Facility (PPPLF) as the FRB ceased
lending money under this program, effective July 30, 2021 . We had no borrowings
under this facility. Our strong cash position would also be available to meet
our pledging requirements.
Another metric for measuring liquidity risk is the liquidity gap analysis. The
following liquidity gap analysis as of September 30, 2021 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 was 12.5% as of September 30, 2021 , compared to 8.2% as of
December 31, 2020 . 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 $ 685 $ 1,422 $ 1,647 $ 2,933 $ 6,687
Investments 3,816 262 413 741 5,232
4,501 1,684 2,060 3,674 11,919
Liabilities
Non-maturity deposits 329 659 1,178 2,221 4,387
Time deposits 218 484 687 819 2,208
Borrowings 11 221 130 61 423
558 1,364 1,995 3,101 7,018
Period Gap (Assets - Liabilities) $ 3,943 $ 320 $ 65 $ 573 $ 4,901
Cumulative Gap $ 3,943 $ 4,263 $ 4,328 $ 4,901
Cumulative Gap to Total Assets 10.0 % 10.8 % 11.0 % 12.5 %
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.
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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 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 indices, 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 of September 30, 2021 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 $ 12,024 $ 1,086 $ 884 $ 1,746 $ 15,740
Investments 3,818 269 544 732 5,363
15,842 1,355 1,428 2,478 21,103
Liabilities
Non-maturity deposits 9,951 - - - 9,951
Time deposits 346 483 685 815 2,329
Borrowings 850 607 6 13 1,476
11,147 1,090 691 828 13,756
Off-balance sheet 450 530 (100) - 880
Period Gap (assets - liabilities +
off-balance sheet) $ 5,145 $ 795 $ 637 $ 1,650 $ 8,227
Cumulative Gap $ 5,145 $ 5,940 $ 6,577 $ 8,227
Cumulative Gap to Assets 14.7 % 16.9 % 18.7 % 23.4 %
80-------------------------------------------------------------------------------- The twelve-month cumulative repricing gap to total assets was 23.4% and 19.6% as ofSeptember 30, 2021 andDecember 31, 2020 , 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 atSeptember 30, 2021 , compared toDecember 31, 2020 , is primarily related to growth in deposits. As mentioned earlier, inflows from PPP and government stimulus checks were a significant factor of growth in non-interest-bearing balances. We are also using this opportunity to expand customer relationships. Customer preferences continued to shift away from higher rate certificates of deposit to lower yielding, more liquid products, and to maintain larger balances in their deposit accounts than before the pandemic. The deposit growth helped us eliminate overnight borrowings and reduce other short-term borrowings. 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 compared to the net interest income and EVE that was calculated assuming market rates as ofSeptember 30, 2021 . Using a static Balance Sheet structure, the measures do not reflect 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 September 30, December 31, ALCO 2021 2020 Limits Net interest income change (12 months): + 300 basis points 23.9 % 17.9 % n/a + 200 basis points 15.8 12.0 (5.0) % + 100 basis points 7.5 5.9 (5.0) - 100 basis points (2.4) 0.4 (5.0) Economic value of equity: + 300 basis points 8.9 8.8 (25.0) + 200 basis points 7.4 7.1 (15.0) + 100 basis points 4.5 4.5 (10.0) - 100 basis points (9.1) (9.4) (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 3.9% atSeptember 30, 2021 and 3.2% atDecember 31, 2020 . The corresponding metrics for a minus 100 basis point Rate Ramp are (0.8)% and 0.4% atSeptember 30, 2021 andDecember 31, 2020 , respectively. Deposit rate assumptions are floored at zero in the negative scenarios. The FRB's rapid and large downward interest rate moves inMarch 2020 as a response to the COVID-19 pandemic lowered all market interest rates, specifically 1-month LIBOR. Thirty-nine percent of our net loans and leases are indexed to one-month LIBOR. Our increased cash position related to increased deposits has also been a significant factor in our metrics. Assuming no replacement, the estimated impact of available cash in the +200-shock scenario above accounts for 8.3% of the 15.8% total asset sensitivity. These factors were the primary drivers of the increase in asset sensitivity. In this historically low rate environment, our strategy is to remain asset sensitive to benefit from future increases in interest rates. 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. 81 -------------------------------------------------------------------------------- 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 average maturity of the certificates of deposit volumes. This continues to be an intense focus of management. Further, management took advantage of the interest rate environment to reduce borrowing costs. Management has reduced the level of wholesale borrowings by approximately$500 million this year. On the lending side, we regularly sell long-term fixed-rate residential mortgages in 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 60.2% of total net loans and leases as ofSeptember 30, 2021 and 56.0% as ofDecember 31, 2020 . As ofSeptember 30, 2021 , the commercial swaps totaled$5.3 billion of notional principal, with$970.6 million in original notional swap principal originated during the first nine months of 2021. This quarter, we executed$500 million 4-year receive fixed/pay floating 1-month LIBOR interest rate swaps as a hedge to additional asset sensitivity. For additional information regarding interest rate swaps, see Note 10, "Derivative Instruments and Hedging Activities" in the Notes to the Consolidated Financial Statements in this Report. The investment portfolio is also used, in part, to manage our IRR position. 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 shareholder 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 82 -------------------------------------------------------------------------------- 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: 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 cybersecurity 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 cybersecurity 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 crises and circumstances which include rapid deployment of our Crisis Management Team, Incident Management Team and Business Continuity Coordinators to activate our plans for various types 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, 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.
83
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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 Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net income available to common stockholders $ 109,503 $ 80,766 $ 300,105 $ 207,773
Merger-related expense 940 - 940 -
Tax benefit of merger-related expense (197) - (197) -
COVID-19 expense - 2,671 - 6,622
Tax benefit of COVID-19 expense - (561) - (1,391)
Gain on sale of Visa class B stock - (13,818) - (13,818)
Tax expense of gain on sale of Visa class B stock - 2,902 - 2,902
Loss on FHLB debt extinguishment and related hedge terminations
- 13,316 - 13,316
Tax benefit of loss on FHLB debt extinguishment and
related hedge terminations - (2,796) - (2,796)
Branch consolidation costs - - 2,644 8,262
Tax benefit of branch consolidation costs - - (555) (1,735)
Service charge refunds - 3,780 - 3,780
Tax benefit of service charge refunds - (794) - (794)
Operating net income available to common stockholders (non-GAAP)
$ 110,246 $
85,466
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 merger expenses, branch consolidation costs, service charge refunds and COVID-19 expenses, are not organic costs to run our operations and facilities. The merger expenses and 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. Similarly, gains derived from the sale ofVisa class B stock and losses on FHLB debt extinguishment and related hedge terminations are not organic to our operations. 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. 84 -------------------------------------------------------------------------------- TABLE 34 Operating earnings per diluted common share Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net income per diluted common share$ 0.34 $ 0.25 $ 0.93 $ 0.64 Merger-related expense - - - - Tax benefit of merger-related expense - - - - COVID-19 expense - 0.01 - 0.02 Tax benefit of COVID-19 expense - - - - Gain on sale of Visa class B stock - (0.04) - (0.04) Tax expense of gain on sale of Visa class B stock - 0.01 - 0.01
Loss on FHLB debt extinguishment and related hedge terminations
- 0.04 - 0.04
Tax benefit of loss on FHLB debt extinguishment and related
hedge terminations - (0.01) - (0.01)
Branch consolidation costs - - 0.01 0.03
Tax benefit of branch consolidation costs - - - (0.01)
Service charge refunds - 0.01 - 0.01
Tax benefit of service charge refunds - - - -
Operating earnings per diluted common share (non-GAAP)
$ 0.26 $ 0.94 $ 0.68 TABLE 35 Return on average tangible common equity Three Months Ended Nine Months Ended September 30, September 30, (dollars in thousands) 2021 2020 2021 2020 Net income available to common stockholders (annualized)$ 434,443 $ 321,307 $ 401,239 $ 277,536 Amortization of intangibles, net of tax (annualized) 9,471 10,495 9,607 10,575 Tangible net income available to common stockholders (annualized) (non-GAAP)$ 443,914 $ 331,802 $ 410,846 $ 288,111 Average total stockholders' equity$ 5,063,432 $
4,915,933
(106,882) (106,882) (106,882)
Less: Average intangible assets (1) (2,308,922)
(2,321,352) (2,311,940) (2,324,638)
Average tangible common equity (non-GAAP)
16.77 % 13.34 % 15.87 % 11.72 %
(1) Excludes loan servicing rights.
85
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TABLE 36
Return on average tangible assets
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Net income (annualized) $ 442,414 $
329,305
9,471 10,495 9,607 10,575
Tangible net income (annualized) (non-GAAP)
$ 38,718,399 $
37,466,706
(2,308,922) (2,321,352) (2,311,940) (2,324,638)
Average tangible assets (non-GAAP) $ 36,409,477 $
35,145,354
1.24 % 0.97 % 1.16 % 0.87 %
(1) Excludes loan servicing rights.
TABLE 37
Tangible book value per common share
September
30,
2021 2020
(dollars in thousands, except per share data)
Total stockholders' equity $ 5,098,407 $ 4,951,059
Less: Preferred stockholders' equity (106,882) (106,882)
Less: Intangible assets (1) (2,307,432) (2,319,689)
Tangible common equity (non-GAAP) $ 2,684,093 $ 2,524,488
Ending common shares outstanding 318,921,616 323,212,398
Tangible book value per common share (non-GAAP)$ 8.42
(1) Excludes loan servicing rights.
TABLE 38
Tangible equity to tangible assets (period-end)
September 30, 2021 September 30, 2020
(dollars in thousands)
Total stockholders' equity $ 5,098,407 $ 4,951,059
Less: Intangible assets (1) (2,307,432) (2,319,689)
Tangible equity (non-GAAP) $ 2,790,975 $ 2,631,370
Total assets $ 39,361,110 $ 37,440,672
Less: Intangible assets (1) (2,307,432) (2,319,689)
Tangible assets (non-GAAP) $ 37,053,678 $ 35,120,983
Tangible equity / tangible assets (period-end) (non-GAAP) 7.53 % 7.49 %
(1) Excludes loan servicing rights.
86
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TABLE 39
Tangible common equity / tangible assets (period-end)
September 30, 2021 September 30, 2020
(dollars in thousands)
Total stockholders' equity $ 5,098,407 $ 4,951,059
Less: Preferred stockholders' equity (106,882) (106,882)
Less: Intangible assets (1) (2,307,432) (2,319,689)
Tangible common equity (non-GAAP) $ 2,684,093 $ 2,524,488
Total assets $ 39,361,110 $ 37,440,672
Less: Intangible assets (1) (2,307,432) (2,319,689)
Tangible assets (non-GAAP) $ 37,053,678 $ 35,120,983
Tangible common equity / tangible assets (period-end) (non-GAAP) 7.24 % 7.19 %
(1) Excludes loan servicing rights.
TABLE 40
Allowance for credit losses / loans and leases, excluding PPP loans (period-end)
(dollars in thousands) September 30, 2021 December 31, 2020
ACL - loans $ 349,250 $ 363,107
Loans and leases $ 24,716,335 $ 25,458,645
Less: PPP loans outstanding (694,326) (2,158,452)
Loans and leases, excluding PPP loans outstanding (non-GAAP)
1.45 % 1.56 %
87
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Key Performance Indicators
TABLE 41
Pre-provision net revenue to average tangible common equity
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Net interest income $ 232,406 $ 227,098 $ 683,200 $ 687,690
Non-interest income 88,854 80,038 251,431 226,192
Less: Non-interest expense (184,226) (180,209) (551,588) (551,033)
Pre-provision net revenue (as reported) $ 137,034 $ 126,927 $ 383,043 $ 362,849
Pre-provision net revenue (as reported)
(annualized) $ 543,669 $ 504,948 $ 512,127 $ 484,681
Adjustments:
Add: Service charge refunds (non-interest
income) - 3,780 - 3,780
Less: Gain on sale of Visa class B stock
(non-interest income) - (13,818) - (13,818)
Add: Loss on FHLB debt extinguishment and
related hedge terminations (non-interest
income) - 13,316 - 13,316
Less: Gain on sale of subsidiary (non-interest
income) - - - -
Add: Merger-related expense (non-interest
expense) 940 - 940 -
Add: COVID-19 expense (non-interest expense) - 2,671 - 6,622
Add: Branch consolidation costs (non-interest
expense) - - 2,644 8,262
Add: Tax credit-related impairment project
(non-interest expense) - - - 4,101
Pre-provision net revenue (operating)
(non-GAAP) $ 137,974 $ 132,876 $ 386,627 $ 385,112
Pre-provision net revenue (operating)
(annualized)
(non-GAAP) $ 547,399 $ 528,614 $ 516,919 $ 514,419
Average total shareholders' equity $ 5,063,432 $
4,915,933
(106,882) (106,882) (106,882)
Less: Average intangible assets (1) (2,308,922)
(2,321,352) (2,311,940) (2,324,638)
Average tangible common equity (non-GAAP)
20.53 % 20.30 % 19.79 % 19.71 %
Pre-provision net revenue (operating) /
average tangible common equity (non-GAAP) 20.68 % 21.25 % 19.97 % 20.92 %
(1) Excludes loan servicing rights.
88
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TABLE 42
Efficiency ratio
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Non-interest expense $ 184,226 $ 180,209 $ 551,588 $ 551,033
Less: Amortization of intangibles (3,022) (3,339) (9,096) (10,021)
Less: OREO expense (781) (1,061) (2,066) (3,347)
Less: Merger-related expense (940) - (940) -
Less: COVID-19 expense - (2,671) - (6,622)
Less: Branch consolidation costs - - (2,644) (8,262)
Less: Tax credit-related project impairment - - - (4,101)
Adjusted non-interest expense $ 179,483 $ 173,138 $ 536,842 $ 518,680
Net interest income $ 232,406 $ 227,098 $ 683,200 $ 687,690
Taxable equivalent adjustment 2,620 3,018 8,221 9,470
Non-interest income 88,854 80,038 251,431 226,192
Less: Net securities gains (65) (112) (193) (262)
Less: Gain on sale of Visa class B stock - (13,818) - (13,818)
Add: Loss on FHLB debt extinguishment and related
hedge terminations - 13,316 - 13,316
Add: Service charge refunds - 3,780 - 3,780
Adjusted net interest income (FTE) + non-interest
income $ 323,815 $ 313,320 $ 942,659 $ 926,368
Efficiency ratio (FTE) (non-GAAP) 55.43 % 55.26 % 56.95 % 55.99 %
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