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Text: Today I'll provide third quarter highlights and an update to our strategic initiatives.
Gary will discuss asset quality and Vince will cover the financials.
Third quarter operating earnings per share of $0.26 reflects strong fundamental performance as we continue to have success across many business units, despite a challenging operating environment and provision expense totaling $27 million.
This quarter's performance reflects growth in average loans and deposits of 2% and 4% respectively, as well as continued strength in our fee-based businesses with strong contributions from capital markets activity and record mortgage banking income of $19 million.
On a linked-quarter basis, tangible book value per share increased $0.18 to $7.81, as we continue our commitment to paying an attractive dividend by declaring our quarterly common dividend of $0.12 last week.
In addition, our CET1 and TCE ratios increased meaningfully.
And after adjusting for the indirect loan sale CET1 improves almost 20 basis points to the strongest level in the Company's history.
Our bolstered capital base should provide us with increased flexibility to deploy capital in the best interest of the shareholders.
Return on tangible common equity was again peer leading at 14% and the efficiency ratio equaled 55%.
These results illustrate the resiliency of FNB's business model and are truly remarkable given the challenges presented and unique circumstances the industry is facing, amid the global pandemic.
I'm extremely proud of our team for going above and beyond to support our customers in this challenging macroeconomic environment.
Their hard work was critical to providing timely assistance to our impacted customers through the Paycheck Protection Program, by offering loan deferral options and consumer relief, as well as other programs to help clients manage their finances during these difficult times.
Customer feedback has been overwhelmingly positive, and we are encouraged by the low-single digit level of second loan deferral requests as a percentage of total loan as of October 15th, 2020.
Lower demand for second deferral request is indicative of the quality of our customer base, our consistent approach to credit risk management, and FNB's dedication to disciplined underwriting standards throughout various business cycles.
Our bankers and credit teams will continue to actively evaluate and work with COVID-19 impacted borrowers as they manage through their pandemic related disruption.
Earlier in the third quarter, our organization was recognized as a 2020 Standout Commercial Bank by Greenwich Associates, with FNB being one of only 10 banks in the country to be recognized for its response to the COVID-19 pandemic.
If you look at the credit metrics on FNB's COVID-19 sensitive sectors, we are favorably positioned to peers on a relative basis.
Our disciplined approach to underwriting and portfolio management ensures granularity, diversification and appropriate credit structure within our loan portfolio.
On the deposit side, organic growth and government programs have resulted in increased liquidity in our customer base.
Looking at the recent FDIC data compared to 2019, FNB has successfully gained share and fortified top market share position in Pittsburgh, Baltimore, Cleveland, Charlotte, Raleigh and the Piedmont Triad, with our largest market, Pittsburgh, surpassing the $8 billion mark in total deposits.
Additionally, as of June 30 2020, FNB ranked in the top 10 in retail deposit market share across seven major MSAs, and when looking at our footprint in total, FNB has a top 10 market share in more than 80% of the 53 markets categorized by the FDIC.
Compared to June 2019, FNB continued to gain market share as total deposits increased nearly $5 billion or over 20% overall.
If you look back over the last six months, we've added thousands of new households and more than $4 billion in total deposits.
Diving deeper by examining the regional market share trends, FNB has five MSAs with greater than a $1 billion in deposits and 16 MSAs with greater than $500 million in deposits.
These market positions reflect successful execution of our deposit gathering strategy centered on attracting low cost deposits through household acquisition and deepening commercial relationships, thereby enabling FNB to eliminate our overnight borrowing position.
The surge in core deposits have strengthened our overall funding mix as the loan-to-deposit ratio further improved to 89.1%.
We continue to be absolutely focused on generating non-interest bearing and transaction deposit growth, given the impacts of the expected lower for longer interest rate environment.
To complement our deposit gathering strategy, we are focused on supporting our customers and expanding our relationships as their primary capital provider with value-added products and services, while staying true to our credit culture.
Looking ahead to the fourth quarter, we are encouraged by the current position of the balance sheet with ample liquidity to support growth opportunities and an expanded capital base.
Additionally, with our PPP efforts, we've added more than 5,000 prospects for non-customer PPP lending to pursue as long-term relationships.
Given our success and the quality of our bankers, we have firmly established ourselves as a formidable competitor across our seven state footprint, providing competitive financial products and services supported by technology, investment and the best personnel.
During the third quarter, our credit portfolio continued to perform in a satisfactory manner as we continue to work through this challenging economic environment.
Our key credit metrics have held up well with some slight increases noted during the quarter related to the COVID environment that is largely tied to borrowers in the hardest hit industries, which we have built loan loss reserves for accordingly.
I will now walk you through our results for the third quarter followed by an update on our loan deferrals and some of the proactive steps we are taking to manage the book.
Let's now discuss some key highlights.
During the third quarter, delinquency came in at a good level of 1.07%, an increase of 15 bps over the prior quarter that was predominantly COVID related tied to mortgage forbearances, while the commercial portfolio remained relatively level with the prior quarter.
When excluding PPP loan volume, delinquency would have ended the quarter at 1.18%.
The level of NPLs and OREO totaled 76 basis points, a 4 basis point increase linked-quarter, while the non-GAAP level excluding PPP loans stands at 85 bps.
This slight migration is attributable to some COVID impacted credits that were placed on non-accrual during the quarter, which is in line with our proactive risk management measures that we have in place to help identify potential pockets of softness.
Of our total non-performing loans at September 30th, 50% continue to pay on a current basis.
Net charge-offs came in at $19.3 million for the quarter, or 29 basis points annualized with the increase largely due to write downs taken against a few COVID impacted credits that were already showing weakness entering the pandemic.
On a year-to-date basis, our GAAP net charge-offs stood at 18 basis points through the end of the third quarter.
Provision expense totaled $27 million, which includes additional build for COVID related credit migration, driven by the hotel and restaurant portfolios, bringing our total ending reserve to 1.45%.
When excluding PPP loan volume, the non-GAAP ACL stands at 1.61%, a 7 basis point linked-quarter increase.
Our NPL coverage remains favorable at 210% at quarter-end, which reflects the reserve build for the COVID driven credit migration during the quarter.
When including the acquired unamortized loan discounts, our reserve position excluding PPP loan volume is 1.87%.
We continue to conduct a series of scenario analyses and stress test models under our existing allowance and DFAST frameworks as we work through this COVID impacted environment.
Under the final 2020 severely adverse DFAST scenario, the current reserve position, inclusive of unamortized loan discounts, would cover 77% of stressed losses, which does not include losses already incurred year-to-date.
As it relates to our borrowers requesting payment deferral 3.4% of our total loan portfolio, excluding PPP balances were under a COVID related deferment plan at quarter-end with remaining first requests representing 1.4% of the portfolio, and 2% being second deferrals.
As of October 16th, total deferrals have further declined by approximately $100 million to stand at 2.9%.
We continue to carefully monitor the credit portfolio as the pandemic evolves and borrowers work to overcome the uncertainty and challenging conditions that many currently face.
Our exposure to highly sensitive industries remains low at 3.5% of the total portfolio, which includes all borrowers operating in the travel and leisure, food services, and energy space with deferrals granted to these borrowers totaling 29%, driven primarily by the hotel portfolio as we continue to work through these hardest hit sectors.
During the quarter, we conducted another thorough deep dive credit review of our commercial borrowers operating in these economically sensitive industries, which was led by our seasoned and experienced credit officer team.
Our portfolio review covered over 80% of our existing credit exposure in COVID sensitive portfolios, including travel and leisure, food services and retail related C&I and IRE.
As part of our review process, we assess the adequacy of cash flow, strength of the sponsors backing the deals, the collateral position and direct feedback from borrowers about their expected short and long-term outlooks.
This level of review has helped us to quickly identify potential credit deterioration and take appropriate action as we did during Q3 to better position us for the quarters ahead should this challenging economic environment continue.
In closing, we are pleased with the position of our portfolio entering the final quarter of 2020 relative to where we are in this COVID impacted economic environment.
Our credit metrics have held up well and continue to trend at satisfactory levels as we remain focused on proactively identifying risk in the portfolio and aggressively working through it.
The experience and depth of our credit and lending teams have been paramount to our success, and I would like to recognize these groups for their tireless efforts each and every day as we work through these challenging conditions.
Now I'll discuss our financial results and review the recent actions taken that have enhanced our overall balance sheet positioning, reduced interest rate risk and boosted capital levels.
As noted on Slide 4, third quarter operating earnings per share totaled $0.26, consistent with the prior quarter.
The level of PPNR remains solid and we continue to proactively manage our overall reserve position with provision expense totaling $27 million.
We feel good about the strength of the balance sheet and our current level of reserves based on what we know today after a comprehensive review of our loan portfolio.
Additionally, the quarter's results reflect the continued execution of our strategies focused on prudent risk management, supported by our recent actions.
For example, during the third quarter, we took proactive measures to strengthen capital and reduce credit risk.
We signed an agreement to sell $508 million of lower FICO indirect auto loans, closing Q4 with the proceeds being used to pay down a similar amount of high cost federal home loan bank borrowings, of which $415 million with a rate of 2.59% was prepaid this quarter for breakage fee of $13.5 million.
We also sold Visa Class B shares at a $13.8 million gain to fully mitigate the capital impact for the FHLB breakage costs.
Resulting transactions should add roughly 17 basis points to CET1, improve credit risk and be neutral to run rate earnings.
We continue to strengthen risk-based capital levels with our CET1 ratio increasing to 9.6% at the end of the quarter.
As I just noted, the pro forma CET1 ratio would increase by another 17 basis points after considering the impact of the upcoming loan sale.
The pro forma CET1 ratio marks the highest level in our history and will be in line with peer median levels from the most recent filings.
Our improved capital levels give us additional flexibility that is important at this stage of the economic cycle.
Looking at our TCE ratio, we ended September comfortably above 7%, increasing to 7.2%, which translates into 7.7% when excluding PPP loans.
On the expense front, we are progressing well toward achieving our 2020 cost savings goal, reducing run rate expenses via optimizing our branch network and reducing operational costs through ongoing vendor contract renegotiations.
On the revenue front, we are leveraging our new geographies to drive market share gains and fee-based businesses, notably mortgage banking, capital markets, wealth and insurance to offset net interest margin pressure in the current low rate environment.
Let's now shift to the balance sheet.
Limiting [Phonetic] spot balances, total loans were relatively flat compared to the prior quarter, excluding the transfer of $508 million of indirect auto loans to held for sale.
Looking ahead, it's important to focus on the position of the balance sheet after the loan sale and excluding PPP.
We remain focused on driving organic growth as the $2.5 billion in PPP loans enter the forgiveness process and those balances wind down in the future.
Compared to the second quarter, average deposits increased 4%, primarily due to 6% growth in interest bearing deposits and 7% growth in non-interest-bearing deposits.
It was partially offset by 6% planned decrease in time deposits.
As Vince noted, core deposit growth generated by building on our commercial and consumer relationships remains a focus for us, as we eliminated our overnight borrowing position and have ample liquidity to fund future growth objectives.
Let's now look at non-interest income and expense.
Non-interest income reached a record $80 million, increasing 3% linked-quarter, primarily due to significant growth in mortgage banking as well as strong contributions from wealth, insurance, and capital markets.
Mortgage banking income increased $2.3 million as sold production increased 9% from the prior quarter with sizable contributions from the Mid-Atlantic and Pittsburgh regions and a meaningful improvement in gain on sale margins.
Wealth management and insurance revenues each increased 10%.
These segments benefiting from increased organic commercial growth and greater activity in the Mid-Atlantic and Carolina regions.
Capital markets revenue, while down from a record level last quarter, was again at a very good level at $8.2 million with these products continuing to remain an attractive option for borrowers, given the environment.
Termination of $415 million of higher rate Federal Home Loan Bank borrowings resulted in a loss on debt extinguishment and related hedge termination costs of $13.3 million reported in other non-interest income.
Offsetting these charges was the $13.8 million gain on the sale of the bank's holdings of Visa Class B shares also reported in other non-interest income.
Turning to Slide 9, non-interest expense totaled $180.2 million, an increase of $4.3 million or 2.4%, which included $2.7 million of COVID-19 expenses in the third quarter compared to $2 million in the second quarter.
Excluding these COVID-19 related expenses, non-interest expense increased $3.6 million or 1.9%, primarily related to higher salaries and employee benefit expense; higher production related commissions; lower loan origination salary deferrals, given the significant PPP loan originations in the prior quarter; and an extra operating day in the third quarter.
FDIC insurance decreased $1.3 million due primarily to a lower FDIC assessment rate from improved liquidity metrics.
The efficiency ratio equaled 55.3% compared to 53.7% which is reflective of the higher production related expenses, noted previously.
Looking at revenue, net interest income totaled $227 million, stable compared to the second quarter as loan and deposit growth mostly offset lower asset yield on variable rate loans tied to the short end of the curve.
The net interest margin decreased 9 basis points to 2.79% as the total yield on earning assets declined 20 basis points to 3.34%, reflecting lower yields on fixed-rate loans originated at lower rates given the interest rate environment and the impact of a 19 basis point decline in one month LIBOR.
The benefit of our efforts to optimize funding cost was evident in a 17 basis point reduction in the cost of interest bearing deposits which helped to reduce our total cost of funds to 56 basis points, down from 67 basis points.
We're very pleased with the performance of our fee-based businesses as they have supported revenue growth amid the current low interest rate environment, demonstrating the importance of having diversification.
Turning to our fourth quarter outlook, we expect period-end loans to be generally flat at September 30th, assuming no forgiveness of PPP loans, given the current timing expectations for the SBA for process requests.
While we expect deposits to decline from third quarter levels, that's based on an expectation that customers increase their deployment of funds received through the government programs, we do expect to see continued organic growth in transaction deposits.
I'll note that our assumptions do not include any further government stimulus programs or actions.
We expect fourth quarter net interest income to be down slightly from third quarter, inclusive of the impact of the loan sale.
We are not assuming any PPP forgiveness in the fourth quarter.
Absent the loan sale, we would have expected net interest income in the fourth quarter to be flattish.
We expect continued strong contributions from fee-based businesses with a similar level in capital markets and some reduction from record levels of mortgage banking.
We expect service charges to increase, continuing to rebound, given recent transaction volume trends.
Looking at fee income overall, we expect total non-interest income to be in the mid to high $70 million range.
We expect expenses to be stable to up slightly from the third quarter excluding COVID-19 expenses of $2.7 million.
We expect the effective tax rate to be around 17% for the full year of 2020.
Lastly, we are in -- we are currently in the early stages of budgeting for 2021.
Similar to 2019 and 2020, we will, again, seek to have meaningful cost saving initiatives, building on consecutive years of taking $20 million out of our overall cost structure to support strategic investments and manage the impact of the low interest rate environment.
It's taking considerable effort to bring our efficiency ratio down from over 60% in the past to the low-to-mid 50% levels we have been operating at currently.
In addition to the scale gain from prior acquisitions, we have consolidated close to 95 branches in the past five years, which is about 25% of our current branch network.
We have always been disciplined managers of costs, and it will be an important driver to return us to a position of generating positive operating leverage and mitigate growth and expenses in 2021.
We will share more details when we provide 2021 detailed guidance in January.
Overall, we are pleased with the performance of the quarter in a very challenging environment.
Next, Vince will give an update on some of our strategic initiatives in 2020.
Now, I'd like to focus on our progress regarding key strategic initiatives, since our last call.
In our Consumer Bank, we continue to focus on optimizing our delivery channels.
The deployment of our new website has translated into higher digital adoption through increased website traffic, increased mobile deposits, and exponential growth in the number of online appointments.
In the current environment, customer activity trends continue to shift toward digital channels with mobile enrollment up 40% compared to 2019 averages.
In fact, we have seen both monthly average mobile and online users increase by 50,000 each compared with the 2019 average levels.
Regarding website traffic, monthly visitors are up nearly 70%.
Looking at our physical delivery channel, we continue to execute our established Ready program to optimize our branch network, which included more than 60 consolidation since May of 2018 making FNB one of the more active banks for branch consolidation.
We will continue to thoroughly evaluate additional consolidation opportunities as well as select de novo expansion across our footprint as consumer behaviors evolve.
We recently announced plans to develop additional de novo locations, which will enhance our retail strategy and support our corporate banking efforts in these attractive new markets.
For example, our Charleston branches are performing exceptionally well with nearly $50 million of deposit growth compared to 2019 and these branches are currently ranked among the upper quartile for performance compared to FNB's entire retail network.
This consumer growth works in tandem with our successful corporate banking efforts, as the Charleston region has grown nicely with our South Carolina commercial loan balances approaching $200 million at the end of September.
We recently brought the Wholesale Bank and respective credit teams back into the offices on a rotational basis as we remain steadfast in supporting our customers while building momentum to carry into the next year.
Given the impact from the government stimulus programs, customers have increased liquidity with lower commercial line utilization rate, a more normal environment offers upside moving into 2021.
Our model is built on local decision-making and high touch relationship-based approach, coupled with consistent investment in technology.
This has served us well during the pandemic where our local bankers are in the market and working closely with our customers.
As we built out certain high value fee-based businesses such as treasury management and capital market we've embedded local specialists across all markets to support our commercial banker's efforts.
During this pandemic where travel, physical mobility, and face-to-face interaction is limited, having well informed decision makers directly located in our markets enables FNB to best support our customers.
Together with our efforts in the wholesale bank, FNB has also benefited from our long-term consumer strategy Clicks-to-Bricks, by investing heavily in our digital platform.
One key element necessary for FNB to continue to deliver attractive returns for our shareholders is our commitment to our employees.
I'm pleased to share that FNB was included for a tenth consecutive year as a Greater Pittsburgh Area top workplace by the Pittsburgh Post-Gazette, signifying the strength of our culture with a decade of excellence and consistency.
These results benefit our shareholders and we would like to recognize the hard work and dedication of all of our employees who have made these results possible.

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q3 non-gaap earnings per share $0.26 excluding items.

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