ETF: ETF CORP/PA/ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS (Form 10-Q)
MD&A represents an overview of and highlights material changes to our financial condition and consolidated results of operations at and for the three-month periods endedMarch 31, 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 on February 25, 2021. Our results of operations for the three months endedMarch 31, 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) 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, 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, 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 48 -------------------------------------------------------------------------------- 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 ACL changes due to changes in forecasted macroeconomic scenarios commonly referred to as the "current expected credit loss" standard, or CECL. •A failure or disruption in or breach of our operational or security systems or infrastructure, or those of third parties, including as a result of cyber-attacks or campaigns. •The COVID-19 pandemic and the 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, includingU.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 49 -------------------------------------------------------------------------------- measures to the most directly comparable GAAP financial measures are included later in this report under the heading "Reconciliations of Non-GAAP Financial Measures and Key Performance Indicators to GAAP". Management believes charges such as branch consolidation costs and COVID-19 expenses are not organic costs to run our operations and facilities. These charges are considered significant items impacting earnings as they are deemed to be outside of ordinary banking activities. The branch consolidation charges principally represent expenses to satisfy contractual obligations of the closed branches without any useful ongoing benefit to us. These costs are specific to each individual transaction, and may vary significantly based on the size and complexity of the transaction. The COVID-19 expenses represent special company initiatives to support our employees and the communities we serve during an unprecedented time of a pandemic. To provide more meaningful comparisons of net interest margin and efficiency ratio, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets (loans and investments) to make it fully equivalent to interest income earned on taxable investments (this adjustment is not permitted under GAAP). Taxable-equivalent amounts for the 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 first quarter of 2021 was$91.2 million or$0.28 per diluted common share, compared to net income available to common stockholders for the first quarter of 2020 of$45.4 million or$0.14 per diluted common share. On an operating basis, the first quarter of 2021 earnings per diluted common share (non-GAAP) was also$0.28 , compared to the first quarter of 2020 earnings per diluted common share (non-GAAP) of$0.16 , excluding$0.02 for significant items. Non-interest income totaled a record$82.8 million for the three months endedMarch 31, 2021 , up$14.3 million , or 20.8% compared to the first quarter of 2020. Return on average tangible common equity was 14.95% (non-GAAP) for the three months endedMarch 31, 2021 , and total revenue increased on both a linked-quarter and year-over-year basis. We originated$0.9 billion in PPP loans during the first quarter of 2021, and non-interest-bearing deposits reached$9.9 billion , a year-over-year increase of 52.6%, as customer activity is increasing across the footprint with theU.S. economy moving toward reopening. Since the beginning of 2020, we have successfully leveraged our investments in technology and have had a significant amount of loan and deposit applications processed through our digital channels. Compared toMarch 31, 2020 , loans and deposits increased$1.7 billion and$5.6 billion , respectively, resulting in a loan-to-deposit ratio of 84.1% and 96.5% atMarch 31, 2021 and 2020, respectively. We continued to strengthen our capital levels as tangible book value per share (non-GAAP) increased to$8.01 and our CET1 risk-based capital ratio reached an all-time high of 10.0%. Income Statement Highlights (First quarter of 2021 compared to first quarter of 2020, except as noted) •Earnings per diluted common share were$0.28 , compared to$0.14 , in the first quarter of 2020, and$0.22 in the fourth quarter of 2020. •Operating earnings per diluted common share (non-GAAP) was$0.28 , compared to$0.16 , an increase of 75.0%. •Total revenue of$305.7 million , up 1.5%, compared to$301.2 million , and up 1.0% compared to$302.8 million in the fourth quarter of 2020. •Net interest income decreased$9.7 million , or 4.2%, as the lower interest rate environment impacted asset yields. •Net interest margin (FTE) (non-GAAP) declined 39 basis points to 2.75% from 3.14%, reflecting the extended, pandemic-impacted low rate environment, as lower yields on securities, higher cash balances earning an average of 11 basis points and lower loan origination rates drove asset yields lower. However, the growth in average earning assets, reductions in the cost of interest-bearing-deposits, strong growth in non-interest-bearing deposits and the termination of higher-rate FHLB borrowings partially offset the impact of the lower rate environment. On a linked-quarter basis, the net interest margin (FTE) (non-GAAP) decreased 12 basis points to 2.75% as earning asset yields declined 22 basis points and the total cost of funds decreased 9 basis points, with the cost of interest-bearing deposits decreasing 12 basis points. •Record non-interest income of$82.8 million increased$14.3 million , or 20.8%, due primarily to strong contributions from mortgage banking, and our fee-based businesses of insurance, capital markets and wealth management. 50 -------------------------------------------------------------------------------- •The annualized net charge-offs to total average loans ratio was 0.11%, compared to 0.10%, as a result of stable asset quality trends and an improving macroeconomic environment at the beginning of 2021. •Provision for credit losses declined$41.9 million , or 87.6%, as the first quarter of 2020 provision reflected a significant deterioration in the macroeconomic environment driven by the uncertainty caused by the COVID-19 pandemic. •Income tax expense increased$10.7 million , or 97.3%, primarily due to higher pre-tax earnings, as the effective tax rate was 18.9%, compared to 18.8%. •The efficiency ratio (non-GAAP) equaled 58.7%, compared to 59.0%. Balance Sheet Highlights (period-end balances,March 31, 2021 compared toDecember 31, 2020 , unless otherwise indicated) •Growth in total average loans compared to the first quarter of 2020 was$1.9 billion , or 8.3%, reflecting commercial loan growth of$2.7 billion , or 17.8%, partially offset by a$0.7 billion , or 8.3%, decrease in average consumer loans primarily attributable to the sale of$0.5 billion in indirect auto loans inNovember 2020 . PPP loans totaled$2.5 billion atMarch 31, 2021 , reflecting$0.9 billion of originations during the quarter, partially offset by$0.5 billion in SBA loan forgiveness processed. There were no PPP loans outstanding atMarch 31, 2020 . •Total average deposits grew$4.7 billion , or 19.3%, compared to the first quarter of 2020, primarily due to increases in average non-interest-bearing deposits of$2.9 billion , or 46.3%, and interest-bearing demand deposits of$2.3 billion , or 21.0%, partially offset by a decrease in average time deposits of$1.2 billion , or 24.7%. Average deposit growth reflected inflows from the PPP and government stimulus activities, in addition to organic growth in new and existing customer relationships. •The ratio of loans to deposits was 84.1%, compared to 87.4%, as deposit growth outpaced loan growth. Additionally, the funding mix continued to improve with non-interest-bearing deposits totaling 33% of total deposits, compared to 31%. Cash balances increased$1.3 billion to$2.7 billion due primarily to deposits from PPP funding and government stimulus inflows. •Total assets were$38.5 billion , compared to$37.4 billion , an increase of$1.1 billion , or 3.0%, primarily due to the increase in cash and cash equivalents due to significant deposit growth. •The dividend payout ratio for the first quarter of 2021 was 42.8%, compared to 86.2% for the first quarter of 2020. •The ratio of the ACL to total loans and leases decreased to 1.42% from 1.43% atDecember 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 (non-GAAP) equaled 1.57%, compared to 1.56%. The ACL on loans and leases totaled$362 million atMarch 31, 2021 , essentially unchanged from$363 million atDecember 31, 2020 . •Tangible book value per share (non-GAAP) of$8.01 increased 7% fromMarch 31, 2020 , reflecting FNB's continued strategy to build tangible book value per share while optimizing capital deployment. •The CET1 regulatory capital ratio increased to 10.0%, up from 9.1%. 51 -------------------------------------------------------------------------------- TABLE 1 Quarterly Results Summary 1Q21 1Q20 Reported results Net income available to common stockholders (millions)$ 91.2 $ 45.4 Net income per diluted common share 0.28 0.14 Book value per common share (period-end) 15.27 14.67 Pre-provision net revenue (reported) (millions) 120.9 106.3 Common equity tier 1 capital ratio 10.0 % 9.1 % Operating results (non-GAAP) Operating net income available to common stockholders (millions)$ 91.2 $ 53.5 Operating net income per diluted common share 0.28 0.16 Tangible common equity to tangible assets (period-end) 7.06 % 7.36 % Tangible book value per common share (period-end)$ 8.01 $ 7.46 Pre-provision net revenue (operating) (millions)$ 120.9 $ 116.5 Average diluted common shares outstanding (thousands) 324,745 326,045
Significant items affecting earnings(1) (in millions)
Pre-tax COVID-19 expense $ -$ (2.0) After-tax impact of COVID-19 expense - (1.6) Pre-tax branch consolidation costs - (8.3) After-tax impact of branch consolidation costs - (6.5) Total significant items pre-tax $ -$ (10.3) Total significant items after-tax $
–
(1) Favorable (unfavourable) impact on the result
Industry Developments LIBOR TheUnited Kingdom's Financial Conduct Authority (FCA), who is the regulator of LIBOR, announced onMarch 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR afterDecember 31, 2021 . As it pertains toU.S. dollar LIBOR, theFCA will consider the case to require continued publication, on a synthetic basis, of 1-month, 3-month and 6-month LIBOR settings throughJune 30, 2023 . After such date, the LIBOR settings will no longer be representative and representativeness will no longer be restored. It should be noted, however, that 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 creation of safety and soundness risk. The FRB ofNew York has created a working group called the Alternative Reference Rate Committee (ARRC) to assistU.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, is in the process of reviewing 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 other alternative indices as a replacement to LIBOR. The financial impact regarding pricing, valuation and operations of the transition is not yet known. Our transition team will work within the guidelines established by theFCA and ARRC to provide for a smooth transition away from LIBOR. EffectiveOctober 1, 2020 , we finalized the transition of new adjustable rate mortgages away from LIBOR to SOFR. Additionally, effectiveOctober 16, 2020 , we modified our valuation methodology to reflect changes made by central clearinghouses to their discounting methodology and interest calculation of cash margin to SOFR forU.S. dollar cleared interest rate swaps. 52 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months EndedMarch 31, 2021 Compared to the Three Months EndedMarch 31, 2020 Net income available to common stockholders for the first three months of 2021 was$91.2 million or$0.28 per diluted common share, compared to net income available to common stockholders for the first three months of 2020 of$45.4 million or$0.14 per diluted common share. The provision for credit losses totaled$5.9 million , compared to$47.8 million in the first quarter of 2020 with the year-ago quarter level primarily attributable to the COVID-19 impacts on macroeconomic forecasts used in the ACL model under the CECL standard. Non-interest income totaled$82.8 million , increasing$14.3 million , or 20.8%. Non-interest expense totaled$184.9 million , decreasing$10.0 million , or 5.1%. The first three months of 2020 included the impact of branch consolidation costs of$8.3 million and COVID-19 related expenses of$2.0 million . Financial highlights are summarized below: TABLE 2 Three Months Ended March 31, $ % (in thousands, except per share data) 2021 2020 Change Change Net interest income$ 222,923 $ 232,631 $ (9,708) (4.2) % Provision for credit losses 5,911 47,838 (41,927) (87.6) Non-interest income 82,805 68,526 14,279 20.8 Non-interest expense 184,862 194,892 (10,030) (5.1) Income taxes 21,720 11,010 10,710 97.3 Net income 93,235 47,417 45,818 96.6 Less: Preferred stock dividends 2,010 2,010 - -
Net income available to ordinary shareholders
$ 0.28 $ 0.14 $ 0.14 100.0 % Earnings per common share - Diluted 0.28 0.14 0.14 100.0 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 March 31, 2021 2020 Return on average equity 7.62 % 3.91 % Return on average tangible common equity (2) 14.95 7.92 Return on average assets 1.00 0.55 Return on average tangible assets (2) 1.10 0.62 Book value per common share (1)$ 15.27 $ 14.67 Tangible book value per common share (1) (2) 8.01 7.46 Equity to assets (1) 12.93 % 13.81
%
Average equity to average assets 13.19 14.07 Common equity to assets (1) 12.65 13.51 Tangible equity to tangible assets (1) (2) 7.36 7.69
Tangible capital on property, plant and equipment (1) (2) 7.06 7.36 Common Equity Tier 1 capital ratio
10.0 9.1
Dividend payout ratio 42.78 86.24
(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 4
Three Months Ended March 31,
2021 2020
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest-bearing assets: Interest-bearing deposits with banks
0.11 %$ 163,450 $ 1,226
3.02%
Taxable investment securities (1) 4,916,772 21,917 1.78 5,297,596 31,335
2.37
Tax-exempt investment securities (1)(2) 1,127,197 9,721 3.45 1,125,766 10,068 3.58 Loans held for sale 164,374 1,493 3.64 76,457 984 5.15 Loans and leases (2) (3) 25,452,831 220,777 3.51 23,509,124 265,828
4.54
Total interest-earning assets (2) 33,218,516 254,331 3.09 30,172,393 309,441
4.12
Cash and due from banks 369,866 375,106 Allowance for credit losses (369,792) (307,496) Premises and equipment 333,315 335,594 Other assets 4,074,810 4,079,637 Total assets$ 37,626,715 $ 34,655,234 Liabilities Interest-bearing liabilities: Deposits: Interest-bearing demand$ 13,357,111 5,539 0.17$ 11,035,736 25,145 0.92 Savings 3,280,324 172 0.02 2,618,395 1,827 0.28 Certificates and other time 3,516,533 9,534 1.10 4,669,556 22,495
1.94
Total interest-bearing deposits 20,153,968 15,245 0.31 18,323,687 49,467 1.09
Short-term borrowings 1,819,822 7,040 1.57 3,305,058 13,760 1.67
Long-term borrowings 1,093,036 6,264 2.32 1,457,531 10,282 2.84
Total interest-bearing liabilities 23,066,826 28,549 0.50 23,086,276 73,509 1.28
Non-interest-bearing demand 9,213,181 6,296,976
Total deposits and borrowings 32,280,007 0.36 29,383,252 1.01
Other liabilities 385,016 397,515
Total liabilities 32,665,023 29,780,767
Stockholders' equity 4,961,692 4,874,467
Total liabilities and stockholders' equity $ 37,626,715 $ 34,655,234
Net interest-earning assets $ 10,151,690 $ 7,086,117
Net interest income (FTE) (2) 225,782 235,932
Tax-equivalent adjustment (2,859) (3,301)
Net interest income $ 222,923 $ 232,631
Net interest spread 2.59 % 2.84 %
Net interest margin (2) 2.75 % 3.14 %
(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.
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Net Interest Income
Net interest income totaled $222.9 million , decreasing $9.7 million , or 4.2%.
The decrease was primarily caused by the repricing impact on earning asset
yields from lower interest rates and was partially offset by significant
interest-earning asset growth of 10.1%. The net interest margin (FTE) (non-GAAP)
declined 39 basis points to 2.75%.
The following table provides certain information regarding changes in net
interest income on an FTE basis (non-GAAP) attributable to changes in the
average volumes and yields earned on interest-earning assets and the average
volume and rates paid for interest-bearing liabilities for the three months
ended March 31, 2021 , compared to the three months ended March 31, 2020 :
TABLE 5
(in thousands) Volume Rate
Report
Interest Income (1) Interest-bearing deposits with banks$ 383 $ (1,186) $ (803) Securities (2) (3,513) (6,252) (9,765) Loans held for sale 779 (270) 509 Loans and leases (2) 19,256 (64,307) (45,051) Total interest income (2) 16,905 (72,015) (55,110) Interest Expense (1) Deposits: Interest-bearing demand 1,236 (20,842) (19,606) Savings 31 (1,686) (1,655) Certificates and other time (3,906) (9,055) (12,961) Short-term borrowings (4,384) (2,336) (6,720) Long-term borrowings (2,390) (1,628) (4,018) Total interest expense (9,413) (35,547) (44,960) Net change (2)$ 26,318 $ (36,468) $ (10,150) (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$254.3 million for the first three months of 2021, decreased$55.1 million , or 17.8%, from the same period of 2020, resulting from the decrease in benchmark interest rates, partially offset by an increase in interest-earning assets of$3.0 billion . The increase in interest-earning assets was primarily driven by a$1.9 billion , or 8.3%, increase in average total loans due to PPP activity and core origination activity across the footprint. Average commercial loan growth totaled$2.7 billion , or 17.8%, including growth of$1.8 billion , or 33.4%, in commercial and industrial loans. Commercial loan growth was led by strong commercial activity in thePittsburgh ,Cleveland, South Carolina , and Mid-Atlantic regions. Average consumer loans declined$0.7 billion , or 8.3%, was primarily due to the sale of$0.5 billion of indirect auto installment loans inNovember 2020 . 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$379.4 million , or 5.9%, given historically low and unattractive interest rates available for reinvestment purposes. For the first three months of 2021, the yield on average interest-earning assets (non-GAAP) decreased 103 basis points to 3.09%, compared to the first three months of 2020, primarily due the lower interest rate environment. Interest expense of$28.5 million for the first three months of 2021 decreased$45.0 million , or 61.2%, 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$1.8 billion , or 10.0%, which reflects the benefit of organic growth, as well as deposits from PPP funding and government stimulus activities. Average long-term borrowings decreased$364.5 million , or 25.0%, primarily due to a decrease of$530.8 million in long-term FHLB borrowings, partially offset by an increase of$177.1 million in senior debt. During 2020, we utilized excess low-yielding cash to opportunistically terminate$715 million of FHLB borrowings, and in certain instances, their related interest rate swap. The terminated FHLB borrowings had a 2.49% interest rate with a 55 -------------------------------------------------------------------------------- remaining term of 1.6 years. During the first quarter of 2020, we issued$300 million of 2.20% fixed rate senior notes due in 2023. The rate paid on interest-bearing liabilities decreased 78 basis points to 0.50% for the first three months of 2021, compared to the first three months of 2020, due to reduced costs on interest-bearing deposits and lower borrowing costs. Provision for Credit Losses The following table presents information regarding the credit loss expense and net charge-offs: TABLE 6 Three Months Ended March 31, $ % (dollars in thousands) 2021 2020 Change Change Provision for credit losses (on loans and leases)$ 6,065 $ 47,828 $ (41,763) (87.3) % Net loan charge-offs 7,135 5,683 1,452 25.5 Net loan charge-offs (annualized) / total average loans and leases 0.11 %
0.10%
The provision for credit losses on loans and leases for the three months endedMarch 31, 2021 was$6.1 million , a decrease of$41.8 million from the year-ago quarter that reflected COVID-19 related impacts on macroeconomic forecasts used in the ACL model. Net charge-offs were$7.1 million during the three months endedMarch 31, 2021 , compared to$5.7 million during the three months endedMarch 31, 2020 , with both periods reflecting strong asset quality. Non-Interest Income The breakdown of non-interest income for the three months endedMarch 31, 2021 and 2020 is presented in the following table: TABLE 7 Three Months Ended March 31, $ % (dollars in thousands) 2021 2020 Change Change Service charges$ 27,831 $ 30,128 $ (2,297) (7.6) % Trust services 9,083 7,962 1,121 14.1 Insurance commissions and fees 7,185 6,552 633 9.7 Securities commissions and fees 5,618 4,539 1,079 23.8 Capital markets income 7,712 11,113 (3,401) (30.6) Mortgage banking operations 15,733 (1,033) 16,766 n/m Dividends on non-marketable equity securities 2,276 4,678 (2,402) (51.3) Bank owned life insurance 2,948 3,177 (229) (7.2) Net securities gains 41 53 (12) (22.6) Other 4,378 1,357 3,021 222.6 Total non-interest income$ 82,805 $ 68,526 $ 14,279 20.8 % n/m - not meaningful Total non-interest income increased$14.3 million , to$82.8 million for the first three months of 2021, a 20.8% increase from the same period of 2020. The variances in significant individual non-interest income items are further explained in the following paragraphs. Service charges on loans and deposits of$27.8 million for the first three months of 2021 decreased$2.3 million , or 7.6%, due primarily to lower customer transaction volumes in the COVID-19 environment, although volumes have steadily increased since late in the second quarter of 2020. 56 -------------------------------------------------------------------------------- Trust services of$9.1 million for the first three months of 2021 increased$1.1 million , or 14.1%, from the same period of 2020, primarily driven by strong organic revenue production and the market value of assets under management increasing$1.5 billion , or 26.2%, to$7.2 billion atMarch 31, 2021 . Insurance commissions and fees of$7.2 million for the first three months of 2021 increased$0.6 million , or 9.7%, from the same period of 2020, primarily from organic revenue growth due to the benefit of our expanded footprint. Securities commissions and fees increased$1.1 million , or 23.8%, due to strong activity levels across the footprint. Capital markets income of$7.7 million for the first three months of 2021 decreased$3.4 million , or 30.6%, from$11.1 million for the same period of 2020, due to lower customer swap activity compared to record levels in the beginning of 2020 from heightened volatility in the interest rate environment. Mortgage banking operations income of$15.7 million for the first three months of 2021 increased$16.8 million from the same period of 2020 as a result of expanded gain-on-sale margins based on our improved mix of retail originations and strong sold production levels. During the first quarter of 2021, we sold$0.5 billion of residential mortgage loans, a 68.7% increase compared to$0.3 billion for the same period of 2020. During the first three months of 2021, we recognized a$2.5 million favorable interest-rate related valuation adjustment on MSRs, compared to a$7.7 million unfavorable adjustment for the same period of 2020. Additionally, we recorded$2.3 million of higher MSR amortization for the first three months of 2021 due to higher prepayment speeds. Dividends on non-marketable equity securities of$2.3 million for the first three months of 2021 decreased$2.4 million , or 51.3%, 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. Other non-interest income was$4.4 million and$1.4 million for the first three months of 2021 and 2020, respectively. The first three months of 2021 included a$0.9 million increase in gain on sale of SBA loans and a$0.7 million increase inSmall Business Investment Company (SBIC) investment income. Non-Interest Expense The breakdown of non-interest expense for the three months endedMarch 31, 2021 and 2020 is presented in the following table: TABLE 8 Three Months Ended March 31, $ % (dollars in thousands) 2021 2020 Change Change
Salaries and benefits
3.4 % Net occupancy 16,163 21,448 (5,285) (24.6) Equipment 17,030 16,046 984 6.1 Amortization of intangibles 3,050 3,339 (289) (8.7) Outside services 16,929 16,896 33 0.2 FDIC insurance 4,844 5,555 (711) (12.8) Bank shares and franchise taxes 3,779 4,092 (313) (7.6) Other 15,764 23,711 (7,947) (33.5) Total non-interest expense$ 184,862 $ 194,892 $ (10,030) (5.1) % Total non-interest expense of$184.9 million for the first three months of 2021 decreased$10.0 million , a 5.1% decrease from the same period of 2020. On an operating basis, non-interest expense increased$0.2 million , or 0.1%, when excluding significant items of$8.3 million in branch consolidation costs and$2.0 million of expenses associated with COVID-19 in the first three months of 2020. The variances in the individual non-interest expense items are further explained in the following paragraphs. 57 -------------------------------------------------------------------------------- Salaries and employee benefits of$107.3 million for the first three months of 2021 increased$3.5 million or 3.4% from the same period of 2020, primarily related to production-related commissions and incentives corresponding with strong production levels from mortgage banking and our fee-based businesses and our normal annual merit increases. Net occupancy and equipment expense of$33.2 million for the first three months of 2021 decreased$4.3 million , or 11.5%, from$37.5 million from the same period of 2020, primarily due to$7.2 million of branch consolidation costs in the first three months of 2020. On an operating basis, net occupancy and equipment expense increased$2.9 million , or 9.5%, primarily due to expansion in key regions such as the Mid-Atlantic andSouth Carolina and continued digital technology investment in the first three months of 2021.FDIC insurance expense of$4.8 million for the first three months of 2021 decreased$0.7 million , or 12.8%, from the first three months of 2020, primarily due to increased subordinated debt at FNBPA and improved liquidity metrics. Other non-interest expense was$15.8 million and$23.7 million for the first three months of 2021 and 2020, respectively, as the year-ago period included higher levels of community giving. Additional reductions during the first three months of 2021 included business development costs, OREO expense and operational losses, compared to the same period of 2020. The following table presents non-interest expense excluding significant items for the three months endedMarch 31, 2021 and 2020: TABLE 9 Three Months Ended March 31, $ % (dollars in thousands) 2021 2020 Change Change Total non-interest expense, as reported$ 184,862 $ 194,892 $ (10,030) (5.1) %
Significant elements:
Branch consolidations - (8,262) 8,262 COVID-19 expense - (1,962) 1,962 Total non-interest expense, excluding significant items (1)$ 184,862 $ 184,668 $ 194 0.1 % (1) Non-GAAP Income Taxes The following table presents information regarding income tax expense and certain tax rates: TABLE 10 Three Months Ended March 31, (dollars in thousands) 2021 2020 Income tax expense$ 21,720 $ 11,010 Effective tax rate 18.9 % 18.8 % 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 higher in the first quarter of 2021 compared to the year-ago quarter due to significantly higher pre-tax income. 58
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FINANCIAL CONDITION
The following table presents our condensed Consolidated Balance Sheets:
TABLE 11
March 31, December 31, $ %
(dollars in millions) 2021 2020 Change Change
Assets
Cash and cash equivalents $ 2,668 $ 1,383 $ 1,285 92.9 %
Securities 6,209 6,331 (122) (1.9)
Loans held for sale 185 154 31 20.1
Loans and leases, net 25,170 25,096 74 0.3
Goodwill and other intangibles 2,313 2,316 (3) (0.1)
Other assets 1,930 2,074 (144) (6.9)
Total Assets $ 38,475 $ 37,354 $ 1,121 3.0 %
Liabilities and Stockholders' Equity
Deposits $ 30,354 $ 29,122 $ 1,232 4.2 %
Borrowings 2,778 2,899 (121) (4.2)
Other liabilities 369 374 (5) (1.3)
Total Liabilities 33,501 32,395 1,106 3.4
Stockholders' Equity 4,974 4,959 15 0.3
Total Liabilities and Stockholders' Equity $ 38,475 $ 37,354
Cash and cash equivalents increased in 2021 due to continued customer expansion in our footprint, government stimulus programs and the strategic reduction in our investment portfolio, as reinvestment opportunities were less attractive in the low interest rate environment. The investment portfolio allocation shifted as exposure to prepayment sensitive securities was reduced. Lending Activity The loan and lease portfolio consists principally of loans and leases to individuals and small- and medium-sized businesses within our primary markets in seven states and theDistrict of Columbia . Our market coverage spans several major metropolitan areas including:Pittsburgh, Pennsylvania ;Baltimore, Maryland ;Cleveland, Ohio ; andCharlotte ,Raleigh ,Durham and the Piedmont Triad (Winston-Salem ,Greensboro andHigh Point ) inNorth Carolina . Since the inception of the PPP program, we originated$3.6 billion of PPP loans, including$0.9 billion during the first quarter of 2021. 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 byCongress onApril 23, 2020 and signed into law onApril 24, 2020 . The PPP/HCE Act authorized an additional$320 billion of funding for PPP loans. As ofMarch 31, 2021 , we had approximately$2.5 billion of PPP loans outstanding, net of unamortized net deferred fees of$58.6 million , which are included in the commercial and industrial category. During the first quarter of 2021,$0.5 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 toJune 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$58.6 million of net deferred fees to be recognized byMarch 31, 2022 based on expected loan forgiveness activity. OnJune 5, 2020 , 59 -------------------------------------------------------------------------------- the President signed the Paycheck Protection Program Flexibility Act (PPP Flexibility Act) which extended the term for new 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.
Here is a summary of loans and leases:
TABLE 12
March 31, $ %
2021 December 31, 2020 Change Change
(in millions)
Commercial real estate $ 9,799 $ 9,731 $ 68 0.7 %
Commercial and industrial 7,401 7,214 187 2.6
Commercial leases 471 485 (14) (2.9)
Other 25 40 (15) (37.5)
Total commercial loans and leases 17,696 17,470 226 1.3
Direct installment 2,025 2,020 5 0.2
Residential mortgages 3,329 3,433 (104) (3.0)
Indirect installment 1,201 1,218 (17) (1.4)
Consumer lines of credit 1,281 1,318 (37) (2.8)
Total consumer loans 7,836 7,989 (153) (1.9)
Total loans and leases $ 25,532 $ 25,459 $ 73 0.3 %
The commercial and industrial category includes PPP loans totaling $2.5 billion
and $2.2 billion at March 31, 2021 and December 31, 2020 , respectively.
Non-Performing Assets
Following is a summary of non-performing assets:
TABLE 13
March 31, December 31, $ %
(in millions) 2021 2020 Change Change
Commercial real estate $ 78 $ 85 $ (7) (8.2) %
Commercial and industrial 36 44 (8) (18.2)
Commercial leases 2 2 - -
Other - 1 (1) (100.0)
Total commercial loans and leases 116 132 (16) (12.1)
Direct installment 12 11 1 9.1
Residential mortgages 21 18 3 16.7
Indirect installment 2 2 - -
Consumer lines of credit 6 7 (1) (14.3)
Total consumer loans 41 38 3 7.9
Total non-performing loans and leases 157 170 (13) (7.6)
Other real estate owned 9 10 (1) (10.0)
Non-performing assets $ 166 $ 180 $ (14) (7.8) %
Non-performing assets decreased
60 -------------------------------------------------------------------------------- The decrease in non-performing loans was driven by the resolution of a few commercial credits, and the decrease in OREO was largely driven by the sale of properties in both the commercial and residential mortgage categories. As long as the borrower was not experiencing financial difficulties immediately prior to COVID-19, short-term modifications, such as principal and interest deferments, are not being included in TDRs. These modifications will be closely monitored for any change in status. Troubled Debt Restructured Loans
Here is a summary of cumulative and non-cumulative TDRs, by class:
TABLE 14
Non-
(in millions) Accruing Accrual Total
Commercial real estate
Commercial and Industrial 1
1 2 Total commercial loans 5 28 33 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 $ 40 $ 98
Commercial real estate
Commercial and Industrial 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 OnJanuary 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. 61 -------------------------------------------------------------------------------- COVID-19 Impacts on the ACL Beginning inMarch 2020 , the broader economy experienced a significant deterioration in the macroeconomic environment driven by the COVID-19 pandemic resulting in notable adverse changes to forecasted economic variables utilized in our ACL modeling process. Based on these changes, we utilized a third-party pandemic recessionary scenario from the first quarter of 2020 through the third quarter of 2020 for ACL modeling purposes. AtDecember 31, 2020 andMarch 31, 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 ofDecember 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 atMarch 31, 2021 , the macroeconomic variables that we utilized included, but were not limited to: (i) gross domestic product, which reflects growth of 6% in 2021 and 2% in 2022, (ii) the Dow Jones Total Stock Market Index, which remains relatively flat through the R&S forecast period, (iii) unemployment, which averages 5% over the R&S forecast period and (iv) the Volatility Index, which remains stable over the R&S forecast period. The ACL of$362.0 million atMarch 31, 2021 decreased$1.1 million , or 0.3%, fromDecember 31, 2020 due to the improving macroeconomic environment, as noted previously. Our ending ACL coverage ratio atMarch 31, 2021 was 1.42%. Excluding PPP loans that do not carry an ACL due to a 100% government guarantee, the ACL to total loan and leases ratio equaled 1.57%. Total provision for credit losses for the three months endedMarch 31, 2021 was$5.9 million . Net charge-offs were$7.1 million for the three months endedMarch 31, 2021 , compared to$5.7 million for the three months endedMarch 31, 2020 , with the increase primarily due two credits in the commercial and industrial portfolio. The ACL as a percentage of non-performing loans for the total portfolio increased from 213% as ofDecember 31, 2020 to 230% as ofMarch 31, 2021 following the decrease in non-performing loans during the quarter, while the total ACL remained largely unchanged.
Deposits
As a bank holding company, our primary source of funds is deposits. These deposits are provided by businesses, consumers and municipal customers that we serve in our footprint.
Following is a summary of deposits:
TABLE 15
March 31, December 31, $ %
(in millions) 2021 2020 Change Change
Non-interest-bearing demand $ 9,935 $ 9,042 $ 893 9.9 %
Interest-bearing demand 13,684 13,157 527 4.0
Savings 3,351 3,261 90 2.8
Certificates and other time deposits 3,384 3,662 (278) (7.6)
Total deposits $ 30,354 $ 29,122 $ 1,232 4.2 %
Total deposits increased $1.2 billion , or 4.2%, from December 31, 2020 ,
primarily as a result of growth in non-interest-bearing and interest-bearing
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. The deposit
growth helped us eliminate overnight borrowings and reduce other short-term
borrowings.
Capital Resources and Regulatory Matters
The access to, and cost of, funding for new business initiatives, the ability to
engage in expanded business activities, the ability to pay dividends and the
level and nature of regulatory oversight depend, in part, on our capital
position.
The assessment of capital adequacy depends on a number of factors such as
expected organic growth in the Consolidated Balance Sheet, asset quality,
liquidity, earnings performance 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.
62
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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. During the first quarter of 2021, we repurchased 3.0
million shares at a weighted average share price of $11.91 for $36.2 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 in order to maintain our well-capitalized status.
FNB and FNBPA are subject to various regulatory capital requirements
administered by the federal banking agencies (see discussion under "Enhanced
Regulatory Capital Standards"). Quantitative measures established by regulators
to ensure capital adequacy require FNB and FNBPA to maintain minimum amounts and
ratios of total, tier 1 and CET1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and minimum leverage ratio (as defined).
Failure to meet minimum capital requirements could lead to initiation of certain
mandatory, and possibly additional discretionary actions, by regulators that, if
undertaken, could have a direct material effect on our Consolidated Financial
Statements, dividends and future business and corporate strategies. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, FNB and FNBPA must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. FNB's and FNBPA's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
At March 31, 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 final rule
to address the impact of CECL on regulatory capital by allowing BHCs and banks,
including FNB, the option to phase in the day-one impact of CECL over a
three-year period. In March 2020 , the FRB and other U.S. banking agencies issued
an interim 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 interim final rule, we will delay
recognizing the estimated impact of CECL on regulatory capital until after a
two-year deferral period, which for us extends 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 interim final rule, the estimated impact of CECL on
regulatory capital that we will defer and later phase in is calculated as the
entire day-one impact at adoption plus 25% of the subsequent change in the ACL
during the two-year deferral period. During the first quarter of 2021, the total
deferred impact on CET1 capital related to our adoption of CECL was
approximately $66.8 million , or 25 basis points.
In this unprecedented economic and uncertain environment, we frequently run
stress tests for a variety of economic situations, including severely adverse
scenarios that have economic conditions similar to the current conditions. Under
these scenarios, the results of these stress tests indicate that our regulatory
capital ratios would remain above the regulatory requirements and we would be
able to maintain appropriate liquidity levels, demonstrating our expected
ability to continue to support our constituencies under stressful financial
conditions.
63
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Following are the capital amounts and related ratios for FNB and FNBPA:
TABLE 16
Minimum Capital
Well-Capitalized Requirements plus
Capital Conservation
Actual Requirements (1) Buffer
(dollars in millions) Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2021
F.N.B. Corporation
Total capital $ 3,349 12.49 % $ 2,683 10.00 % $ 2,817 10.50 %
Tier 1 capital 2,787 10.39 1,610 6.00 2,280 8.50
Common equity tier 1 2,680 9.99 n/a n/a 1,878 7.00
Leverage 2,787 7.87 n/a n/a 1,416 4.00
Risk-weighted assets 26,827
FNBPA
Total capital 3,494 13.05 % 2,678 10.00 % 2,812 10.50 %
Tier 1 capital 2,978 11.12 2,142 8.00 2,276 8.50
Common equity tier 1 2,898 10.82 1,741 6.50 1,875 7.00
Leverage 2,978 8.43 1,767 5.00 1,414 4.00
Risk-weighted assets 26,779
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 good capitalization 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 Annual Report on Form 10-K as filed with the SEC onFebruary 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. 64 --------------------------------------------------------------------------------
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. Management has utilized various strategies to ensure sufficient cash on hand is available to meet the parent's funding needs. OnFebruary 24, 2020 , we completed a senior debt offering whereby we issued$300.0 million aggregate principal amount of 2.20% senior notes due in 2023. The proceeds from this transaction were used for general corporate purposes and were the primary factor resulting in an increase in our Months of Cash on Hand (MCH) liquidity metric as shown below. Starting inMarch 2020 , management incorporated potential liquidity impacts related to COVID-19 into our daily analysis. Management concluded that our cash levels remain appropriate given the current market environment. Two metrics that are used to gauge the adequacy of the parent company's cash position are the Liquidity Coverage Ratio (LCR) and MCH. The LCR is defined as the sum of cash on hand plus projected cash inflows over the next 12 months divided by projected cash outflows over the next 12 months. The MCH is defined as the number of months of corporate expenses and dividends that can be covered by the cash on hand. The LCR and MCH ratios are presented in the following table: TABLE 17 March 31, December 31, Internal 2021 2020 limit Liquidity coverage ratio 2.5 times 2.7 times > 1 time Months of cash on hand 18.0 months 22.2 months > 12 months Our liquidity position has been positively impacted by our ability to generate growth in relationship-based accounts. Organic growth in low-cost transaction deposits was complemented by management's strategy of deposit gathering efforts focused on attracting new customer relationships and deepening relationships with existing customers, in part through internal lead generation efforts leveraging data analytics capabilities. Total deposits were$30.4 billion atMarch 31, 2021 , an increase of$1.2 billion , or 17.2% annualized, fromDecember 31, 2020 . Total non-interest-bearing demand deposit accounts grew$0.9 billion , or 40.1% annualized, and interest-bearing demand increased by$0.5 billion , or 16.2% annualized. Savings account balances increased$90.1 million , or 11.2% annualized. Time deposits declined$278.5 million , or 30.8% annualized. As mentioned earlier, inflows from PPP and government stimulus checks were a significant factor in the deposit growth. Cash held at the FRB was$2.1 billion atMarch 31, 2021 , an increase of$1.3 billion fromDecember 31, 2020 . FNBPA has significant unused wholesale credit availability sources that include the availability to borrow from the FHLB, the FRB, correspondent bank lines, access to brokered deposits, thePaycheck Protection Program Liquidity Fund (PPPLF) and other channels. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities that could be utilized to meet funding needs. We currently also have excess cash to meet our pledging requirements. The 65 -------------------------------------------------------------------------------- ALCO is currently targeting a 1% guideline level for salable unpledged government and agency securities due to an elevated influx of related deposits, in part related to the PPP. The following table presents certain information relating to FNBPA's credit availability and salable unpledged securities: TABLE 18 March 31, December 31, (dollars in millions) 2021 2020 Unused wholesale credit availability$ 16,302 $ 16,434 Unused wholesale credit availability as a % of FNBPA assets 42.5 % 44.1 % Salable unpledged government and agency securities $
346
Sellable Unpledged Government and Agency Securities as % of FNBPA Assets
0.9 % 1.5 % The PPPLF accounted for$2.5 billion of the unused wholesale credit availability atMarch 31, 2021 . This funding source has been extended toJune 30, 2021 . We also had$2.2 billion , or 5.7% of total assets, in excess cash available to meet our pledging requirements. Another metric for measuring liquidity risk is the liquidity gap analysis. The following liquidity gap analysis as ofMarch 31, 2021 compares the difference between our cash flows from existing earning assets and interest-bearing liabilities over future time intervals. Management seeks to limit the size of the liquidity gaps so that sources and uses of funds are reasonably matched in the normal course of business. A reasonably matched position lays a better foundation for dealing with additional funding needs during a potential liquidity crisis. The twelve-month cumulative gap to total assets ratio was 9.6% as ofMarch 31, 2021 , compared to 8.2% as ofDecember 31, 2020 . Management calculates this ratio at least quarterly and it is reviewed monthly by ALCO. TABLE 19 Within 2-3 4-6 7-12 Total (dollars in millions) 1 Month Months Months Months 1 Year Assets Loans$ 802 $ 1,534 $ 1,772 $ 3,323 $ 7,431 Investments 2,551 230 333 597 3,711 3,353 1,764 2,105 3,920 11,142 Liabilities Non-maturity deposits 528 1,055 1,018 1,723 4,324 Time deposits 294 422 548 1,105 2,369 Borrowings 212 26 137 362 737 1,034 1,503 1,703 3,190 7,430 Period Gap (Assets - Liabilities)$ 2,319 $ 261 $ 402 $ 730 $ 3,712 Cumulative Gap$ 2,319 $ 2,580 $ 2,982 $ 3,712 Cumulative Gap to Total Assets 6.0 % 6.7 % 7.8 %
9.6%
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.
66
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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 March 31, 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 20
Within 2-3 4-6 7-12 Total
(dollars in millions) 1 Month Months Months Months 1 Year
Assets
Loans $ 11,664 $ 1,180 $ 1,126 $ 2,104 $ 16,074
Investments 2,551 242 483 588 3,864
14,215 1,422 1,609 2,692 19,938
Liabilities
Non-maturity deposits 9,492 - - - 9,492
Time deposits 420 421 546 1,100 2,487
Borrowings 1,441 610 12 12 2,075
11,353 1,031 558 1,112 14,054
Off-balance sheet 550 530 (100) (100) 880
Period Gap (assets - liabilities +
off-balance sheet) $ 3,412 $ 921 $ 951 $ 1,480 $ 6,764
Cumulative Gap $ 3,412 $ 4,333 $ 5,284 $ 6,764
Cumulative Gap to Assets 10.0 % 12.6 % 15.4 % 19.7 %
67
-------------------------------------------------------------------------------- The twelve-month cumulative repricing gap to total assets was 19.7% and 19.6% as ofMarch 31, 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 atMarch 31, 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. 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 ofMarch 31, 2021 . Using a static Balance Sheet structure, the measures do not reflect all of management's potential counteractions. The following table presents an analysis of the potential sensitivity of our net interest income and EVE to changes in interest rates using rate shocks: TABLE 21 March 31, December 31, ALCO 2021 2020 Limits Net interest income change (12 months): + 300 basis points 21.1 % 17.9 % n/a + 200 basis points 14.1 12.0 (5.0) % + 100 basis points 6.9 5.9 (5.0) - 100 basis points (1.9) 0.4 (5.0) Economic value of equity: + 300 basis points 7.3 8.8 (25.0) + 200 basis points 5.8 7.1 (15.0) + 100 basis points 3.6 4.5 (10.0) - 100 basis points (6.9) (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 3.6% atMarch 31, 2021 and 3.2% atDecember 31, 2020 . The corresponding metrics for a minus 100 basis point Rate Ramp are (1.3)% and 0.4% atMarch 31, 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-six percent of our net loans and leases are indexed to one-month LIBOR. Further, the yield curve flattened. These factors were the primary drivers of the increase in asset sensitivity off of a lower base net interest income. In this historically low rate environment, our strategy is to remain asset sensitive to benefit from future increases in interest rate. There are multiple factors that influence our interest rate risk position and impact net interest income. These include external factors such as the shape of the yield curve and expectations regarding future interest rates, as well as internal factors regarding product offerings, product mix and pricing of loans and deposits. Management utilizes various tactics to achieve our desired interest rate risk (IRR) position. In response to the change in interest rates, management was proactive in addressing our IRR position. As mentioned earlier, we were successful in growing our transaction deposits which provides funding that is less interest rate-sensitive than short-term time deposits and wholesale 68 -------------------------------------------------------------------------------- borrowings. Also, we were able to lower rates on deposit products and shorten the term of the certificates of deposit volumes. This continues to be an intense focus of management. Further, management took advantage of the interest rate environment to reduce borrowing costs. On the lending side, we regularly sell long-term fixed-rate residential mortgages to the secondary market and have been successful in the origination of consumer and commercial loans with short-term repricing characteristics. In particular, we have made use of interest rate swaps to commercial borrowers (commercial swaps) to manage our IRR position as the commercial swaps effectively increase adjustable-rate loans. Total variable and adjustable-rate loans were 56.0% of total net loans and leases as of bothMarch 31, 2021 andDecember 31, 2020 , with 80.7% of these loans, or 45.3% of total net loans and leases tied to the Prime or one-month LIBOR rates as ofMarch 31, 2021 . As ofMarch 31, 2021 , the commercial swaps totaled$4.9 billion of notional principal, with$294.3 million in original notional swap principal originated during the first three months of 2021. 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 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 69 -------------------------------------------------------------------------------- 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:
•evaluate the quality of the information they receive; •understand the business, investments and financial, accounting, legal, regulatory and strategic considerations and risks facing ETFs; •overseeing and evaluating how senior management assesses risk; and • appropriately assess the quality of our enterprise-wide risk management process.
70
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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 22
Operating net income available to common stockholders
Three Months
Ended
March 31,
(in thousands) 2021 2020
Net income available to common stockholders
COVID-19 expense - 1,962 Tax benefit of COVID-19 expense - (412) Branch consolidation costs - 8,262 Tax benefit of branch consolidation costs - (1,735) Operating net income available to common stockholders (non-GAAP)
The table above shows how operating net income available to common stockholders
(non-GAAP) is derived from amounts reported in our financial statements. We
believe certain charges, such as branch consolidation costs and COVID-19
expenses, are not organic costs to run our operations and facilities. The branch
consolidation charges principally represent expenses to satisfy contractual
obligations of the closed branches without any useful ongoing benefit to us.
These costs are specific to each individual transaction, and may vary
significantly based on the size and complexity of the transaction. The COVID-19
expenses represent special company initiatives to support our front-line
employees and the communities we serve during an unprecedented time of a
pandemic.
TABLE 23
Operating earnings per diluted common share
Three Months Ended
March 31,
2021 2020
Net income per diluted common share
COVID-19 expense - 0.01 Tax benefit of COVID-19 expense - - Branch consolidation costs - 0.03 Tax benefit of branch consolidation costs
– (0.01)
Operating earnings per diluted common share (non-GAAP)
71
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TABLE 24
Return on average tangible common equity
Three Months Ended
March 31,
(dollars in thousands) 2021 2020
Net income available to common stockholders (annualized) $ 369,970 $ 182,625
Amortization of intangibles, net of tax (annualized) 9,773 10,610
Tangible net income available to common shareholders (annualized) (non-GAAP)
$ 379,743 $ 193,235 Average total stockholders' equity$ 4,961,692 $ 4,874,467 Less: Average preferred stockholders' equity (106,882) (106,882) Less: Average intangible assets (1) (2,315,012) (2,327,901) Average tangible common equity (non-GAAP)$ 2,539,798 $ 2,439,684 Return on average tangible common equity (non-GAAP) 14.95 % 7.92 % (1) Excludes loan servicing rights. TABLE 25 Return on average tangible assets Three Months Ended March 31, (dollars in thousands) 2021 2020 Net income (annualized)$ 378,118 $ 190,710 Amortization of intangibles, net of tax (annualized) 9,773 10,610 Tangible net income (annualized) (non-GAAP)$ 387,891 $ 201,320 Average total assets$ 37,626,715 $ 34,655,234 Less: Average intangible assets (1) (2,315,012) (2,327,901) Average tangible assets (non-GAAP)$ 35,311,703 $ 32,327,333 Return on average tangible assets (non-GAAP) 1.10 % 0.62 %
(1) Excluding loan servicing fees.
TABLE 26
Tangible book value per common share
Three Months Ended
March 31 ,
(dollars in thousands, except per share data) 2021
2020
Total stockholders' equity$ 4,973,676 $
4,841,987
Less: Preferred stockholders' equity (106,882)
(106,882)
Less: Intangible assets (1) (2,313,478)
(2,326,371)
Tangible common equity (non-GAAP)$ 2,553,316 $
2,408,734
Ending common shares outstanding 318,696,426
322 674 191
Tangible book value per common share (non-GAAP)
(1) Excluding loan servicing fees.
72
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TABLE 27
Tangible equity to tangible assets (period-end)
Three Months Ended
March 31,
(dollars in thousands) 2021 2020
Total stockholders' equity $ 4,973,676 $ 4,841,987
Less: Intangible assets (1) (2,313,478) (2,326,371)
Tangible equity (non-GAAP) $ 2,660,198 $ 2,515,616
Total assets $ 38,475,371 $ 35,048,746
Less: Intangible assets (1) (2,313,478) (2,326,371)
Tangible assets (non-GAAP) $ 36,161,893 $ 32,722,375
Tangible equity / tangible assets (period-end) (non-GAAP) 7.36 % 7.69 %
(1) Excludes loan servicing rights.
TABLE 28
Tangible common equity / tangible assets (period-end)
Three Months Ended
March 31,
(dollars in thousands) 2021 2020
Total stockholders' equity $ 4,973,676 $ 4,841,987
Less: Preferred stockholders' equity (106,882) (106,882)
Less: Intangible assets (1) (2,313,478) (2,326,371)
Tangible common equity (non-GAAP) $ 2,553,316 $ 2,408,734
Total assets $ 38,475,371 $ 35,048,746
Less: Intangible assets (1) (2,313,478) (2,326,371)
Tangible assets (non-GAAP) $ 36,161,893 $ 32,722,375
Tangible common equity / tangible assets (period-end) (non-GAAP) 7.06 % 7.36 %
(1) Excludes loan servicing rights.
TABLE 29
Allowance for credit losses / loans and leases, excluding PPP loans (period-end)
Three Months Ended
March 31,
(dollars in thousands) 2021
ACL - loans $ 362,037
Loans and leases $ 25,532,163
Less: PPP loans outstanding
(2,487,890)
Loans and leases, excluding PPP loans outstanding (non-GAAP)$ 23,044,273 ACL loans / loans and leases, excluding PPP loans (non-GAAP) 1.57 % 73
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Key Performance Indicators
TABLE 30
Pre-provision net revenue to average tangible common equity
Three Months Ended
March 31,
(dollars in thousands) 2021 2020
Net interest income $ 222,923 $ 232,631
Non-interest income 82,805 68,526
Less: Non-interest expense (184,862) (194,892)
Pre-provision net revenue (as reported) $ 120,866 $ 106,265
Pre-provision net revenue (as reported) (annualized) $ 490,179 $ 427,395
Adjustments:
Add: COVID-19 expense (non-interest expense) - 1,962
Add: Branch consolidation costs (non-interest expense) - 8,262
Pre-provision net revenue (operating) (non-GAAP)
Net income before provision (operating) (annualized) (non-GAAP)
$ 490,179 $ 468,515 Average total shareholders' equity$ 4,961,692 $ 4,874,467 Less: Average preferred shareholders' equity (106,882) (106,882) Less: Average intangible assets (1) (2,315,012) (2,327,901) Average tangible common equity (non-GAAP)
Net income before provision (reported) / average tangible common equity (non-GAAP)
19.30 % 17.52 %
Net income before provision (operating) / average tangible common equity (non-GAAP)
19.30 % 19.20 %
(1) Excluding loan servicing fees.
TABLE 31
Efficiency ratio
Three Months Ended
March 31,
(dollars in thousands) 2021 2020
Non-interest expense $ 184,862 $ 194,892
Less: Amortization of intangibles (3,050) (3,339)
Less: OREO expense (786) (1,647)
Less: COVID-19 expense - (1,962)
Less: Branch consolidation costs - (8,262)
Adjusted non-interest expense $ 181,026 $ 179,682
Net interest income $ 222,923 $ 232,631
Taxable equivalent adjustment 2,859 3,301
Non-interest income 82,805 68,526
Less: Net securities gains (41) (53)
Adjusted net interest income (FTE) + non-interest income $ 308,546 $ 304,405
Efficiency ratio (FTE) (non-GAAP) 58.67 % 59.03 %
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