Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A represents an overview of and highlights material changes to our financial condition and consolidated results of operations at and for the three- and nine-month periods ended September 30, 2022 and 2021. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained herein and our 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022. Our results of operations for the nine months ended September 30, 2022 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 the U.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 the U.S. economy in general and regional and local economies within our market area; (iv) inflation concerns; (v) the impacts of tariffs or other trade policies of the U.S. or its global trading partners; and (vi) the sociopolitical environment in the U.S.
• Business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through effective use of systems and controls, third-party insurance, derivatives, and capital management techniques, and to meet evolving regulatory capital and liquidity standards.
• Competition can have an impact on customer acquisition, growth and retention, and on credit spreads, deposit gathering and product pricing, which can affect market share, loans, deposits and revenues. Our ability to anticipate, react quickly and continue to respond to technological changes and COVID-19 challenges can also impact our ability to respond to customer needs and meet competitive demands.
• Business and operating results can also be affected by widespread natural and other disasters, pandemics, including the impact of the COVID-19 pandemic crisis and post-pandemic return to normalcy, global events, including the Ukraine-Russia conflict, dislocations, including shortages of labor, supply chain disruptions and shipping delays, terrorist activities, system failures, security breaches, significant political events, cyber-attacks or international hostilities through impacts on the economy and financial markets generally, or on us or our counterparties specifically.
• Legal, regulatory and accounting developments could have an impact on our ability to operate and grow our businesses, financial condition, results of operations, competitive position, and reputation. Reputational impacts could affect matters such as business generation and retention, liquidity, funding, and the ability to attract and retain talent. These developments could include:
◦ Policies and priorities of the current U.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.
◦ Changes in monetary and fiscal policies, including interest rate policies and strategies of the FOMC.
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◦ 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, enforcement actions or other remedies, including fines, penalties, restitution or alterations in our business practices, and in additional expenses and collateral costs, and may cause reputational harm to FNB.
◦ Results of the regulatory examination and supervision process, including our failure to satisfy requirements imposed by the federal bank regulatory agencies or other governmental agencies.
◦ Business and operating results are affected by our ability to effectively identify and manage risks inherent in our businesses, including, where appropriate, through effective use of policies, processes, systems and controls, third-party insurance, derivatives, and capital and liquidity management techniques.
◦ The impact on our financial condition, results of operations, financial disclosures and future business strategies related to the impact on the ACL due to changes in forecasted macroeconomic conditions as a result of applying the “current expected credit loss” accounting standard, or CECL.
◦ A failure or disruption in or breach of our operational or security systems or infrastructure, or those of third parties, including as a result of cyber-attacks or campaigns.
• The COVID-19 pandemic and the federal, state, and local regulatory and governmental actions implemented in response to COVID-19 have resulted in increased volatility of the financial markets and national and local economic conditions, supply chain challenges, rising inflationary pressures, 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, challenging headwinds for the U.S. economy and labor market and the possible change in commercial and consumer customer fundamentals, expectations and sentiments. As a result of the COVID-19 impact, including uncertainty regarding the potential impact of continuing variant mutations of the virus, U.S. government responsive measures to manage it or provide financial relief, the uncertainty regarding its duration and the success of vaccination efforts, it is possible the pandemic may have a material adverse impact on our business, operations and financial performance.
• We grow our business, in part, through acquisitions and new strategic initiatives. Risks and uncertainties include those presented by the nature of the business acquired and strategic initiative, including in some cases those associated with our entry into new businesses or new geographic or other markets and risks resulting from our unfamiliarity with those new areas, as well as risks and various uncertainties related to the acquisition transactions themselves, regulatory issues, and the integration of the acquired businesses into FNB after closing. Such risks attendant to the pending FNB-UB Bancorp merger include, but are not limited to:
• The possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where FNB and UB Bancorp do business, or as a result of other unexpected factors or events;
• Completion of the transaction is dependent on the satisfaction of customary closing conditions which cannot be assured, and the timing and completion of the transaction is dependent on various factors that cannot be predicted with precision at this point;
• The occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;
• Although bank regulatory approvals and such approvals for the transaction have been obtained, completion of the transaction remains subject to bank regulatory oversight, which may cause additional significant expense or delay the consummation of the merger transaction;
• Potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction;
• The outcome of any legal proceedings that may be instituted against FNB or UB Bancorp;
• Subsequent federal legislative and regulatory actions and reforms affecting the financial institutions’ industry may substantially impact the economic benefits of the proposed merger;
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• Unanticipated challenges or delays in the integration of UB Bancorp’s business into FNB’s and the conversion of UB Bancorp’s technology systems and customer data may significantly increase the expense associated with the transaction; and
• Other factors that may affect future results of FNB and UB Bancorp, including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms.
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 2021 Annual Report on Form 10-K , our subsequent 2022 Quarterly Reports on Form 10-Q (including the risk factors and risk management discussions) and our other 2022 filings with the SEC, which are available on our corporate website at https://www.fnb-online.com/about-us/investor-information/reports-and-filings or the SEC's website at www.sec.gov. 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 our SEC filings.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies is included in the MD&A section of our 2021 Annual Report on Form 10-K filed with the SEC on February 24, 2022 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 since December 31, 2021.
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, 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, the SEC's Regulation G requires: (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. Reconciliations of non-GAAP operating measures to the most directly comparable GAAP financial measures are included later in this report under the heading “Reconciliations of Non-GAAP Financial Measures and Key Performance Indicators to GAAP”.
Management believes items such as merger expenses, initial provision for non-PCD loans acquired and branch consolidation costs are not organic to run our operations and facilities. These items are considered significant items impacting earnings as they are deemed to be outside of ordinary banking activities. The merger expenses and branch consolidation costs principally represent expenses to satisfy contractual obligations of the acquired entity or closed branch 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.
To facilitate peer comparisons of net interest margin and efficiency ratio, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets (loans and investments) to make it fully equivalent to interest income earned on taxable investments (this adjustment is not permitted under GAAP). Taxable-equivalent amounts for the 2022 and 2021 periods were calculated using a federal statutory income tax rate of 21%.
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FINANCIAL SUMMARY
Net income available to common stockholders for the third quarter of 2022 was $135.5 million or $0.38 per diluted common share, compared to net income available to common stockholders for the third quarter of 2021 of $109.5 million or $0.34 per diluted common share. On an operating basis, earnings per diluted common share (non-GAAP) was $0.39 for the third quarter of 2022, excluding $2.1 million (pre-tax) in merger-related significant items, while the third quarter of 2021 was $0.34, excluding $0.9 million of significant items (pre-tax).
During the third quarter, we produced strong financial results that set multiple records, including total revenue of $380 million, operating earnings per share (non-GAAP) of $0.39 and an efficiency ratio (non-GAAP) of 49% as well as a strong return on average tangible common equity (ROATCE) (non-GAAP) of 19%. Ending loans and deposits grew an annualized 10% and 5%, respectively, compared to the prior quarter, and we maintained a strong deposit mix with 35% in non-interest-bearing deposits. Our asset quality continues to perform favorably with a low delinquency rate and 0.04% of net charge-offs. We continue to stay focused on changes to the economic environment and will actively monitor emerging risks to manage through potentially challenging macroeconomic conditions.
Income Statement Highlights (Third quarter of 2022 compared to third quarter of 2021, except as noted)
• Record total revenue of $379.6 million increased $58.3 million, or 18.2%.
• Net interest income increased $64.7 million, or 27.8%, to $297.1 million primarily due to the benefit of growth in earning assets, as well as the rising interest rate environment.
• On a linked-quarter basis net interest income of $297.1 million increased $43.4 million, or 17.1%, from the prior quarter total of $253.7 million, primarily due to growth in average earning assets and benefits from the higher interest rate environment.
• On a linked-quarter basis, the net interest margin (FTE) (non-GAAP) increased 43 basis points to 3.19% as the earning asset yield increased 62 basis points and the cost of funds increased 20 basis points. During the third quarter of 2022, the FOMC raised the target federal funds rate by a total of 150 basis points, bringing the year-to-date increases to 300 basis points.
• The annualized net charge-offs to total average loans ratio was 0.04%, compared to 0.03%, with favorable asset quality performance across the loan portfolio.
• The effective tax rate was 20.7%, compared to 19.7%, with the increase due to higher pre-tax income and state income taxes.
• The efficiency ratio (non-GAAP) was a record 49.4%, a 600 basis point improvement from September 30, 2021, reflecting record revenue and continued disciplined management of expenses.
Balance Sheet Highlights (period-end balances, September 30, 2022 compared to December 31, 2021, unless otherwise
indicated)
• Period-end total loans and leases, increased $4.1 billion, or 16.4%, as compared to September 30, 2021, which includes Howard acquired loans of $1.8 billion as of the January 22, 2022 acquisition date. Consumer loans increased $2.3 billion, or 27.5%, and commercial loans and leases increased $1.8 billion, or 10.8%, which were partially offset by the decline in PPP loans. PPP loans totaled $43.7 million at September 30, 2022, compared to $694.3 million at September 30, 2021.
• On a linked-quarter basis, period-end loans and leases increased $735.7 million, or 10.4% annualized, including an increase of $546.8 million in consumer loans and $188.9 million in commercial loans and leases. Average loans and leases increased $1.2 billion, or 17.3% annualized, linked-quarter with growth of $722.9 million in consumer loans and $463.1 million in commercial loans and leases.
• Total average deposits grew $2.8 billion, or 9.0%, from the same prior-year period, led by increases in average non-interest-bearing deposits of $1.4 billion, or 13.9%, and average interest-bearing demand deposits of $1.0 billion, or 7.3%, partially offset by a decrease in average time deposits of $144.8 million, or 4.7%. Average deposit growth
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reflected organic growth in new and existing customer relationships and includes Howard acquired deposits of $1.8 billion as of the January 22, 2022 acquisition date. On a linked-quarter basis, period-end deposits increased $413.0 million, or 4.9%, annualized.
• The ratio of loans to deposits was 84.9%, compared to 78.7%, as loan growth outpaced deposit growth. Additionally, the funding mix continued to improve with non-interest-bearing deposits growing to 35% of total deposits, compared to 34%.
• Total assets were $42.6 billion, compared to $39.5 billion, an increase of $3.1 billion, or 7.8%, primarily due to organic growth in loans and the Howard acquisition.
• The ratio of the ACL to total loans and leases was 1.34%, compared to 1.38%, directionally consistent with improved credit metrics. The ACL on loans and leases totaled $385 million at September 30, 2022, compared to $344 million with the increase driven by significant loan growth, CECL-related model impacts from a forecasted macroeconomic slowdown and lower prepayment speed assumptions and the initial ACL related to the Howard acquisition.
• Tangible book value per common share (non-GAAP) of $8.02, decreased $0.08, or 1.0%, compared to June 30, 2022. AOCI reduced the tangible book value per common share by $1.08 as of September 30, 2022, primarily due to the impact of higher interest rates on the fair value of AFS securities, compared to a $0.72 reduction as of June 30, 2022, offset by higher pre-tax income.
• The CET1 regulatory capital ratio was 9.7%, consistent with 9.7% at June 30, 2022, benefitting from the strong retained earnings growth in the quarter.
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TABLE 1
Three Months Ended
September 30,
Quarterly Results Summary 2022 2021
Reported results
Net income available to common stockholders (millions) $ 135.5 $ 109.5
Net income per diluted common share 0.38 0.34
Book value per common share (period-end) 15.11 15.65
Common equity tier 1 capital ratio 9.7 % 9.9 %
Operating results (non-GAAP)
Operating net income available to common stockholders (millions) $ 137.2 $ 110.2
Operating net income per diluted common share 0.39 0.34
Average diluted common shares outstanding (thousands) 354,654 322,861
Significant items impacting earnings (1) (millions)
Pre-tax merger-related expenses $ (2.1) $ (0.9)
After-tax impact of merger-related expenses (1.7) (0.7)
Total significant items pre-tax $ (2.1) $ (0.9)
Total significant items after-tax $ (1.7) $ (0.7)
Capital measures (non-GAAP)
Tangible common equity to tangible assets (period-end) 7.02 % 7.24 %
Tangible book value per common share (period-end) $ 8.02 $ 8.42
Nine Months Ended
September 30,
Year-to-Date Results Summary 2022 2021
Reported results
Net income available to common stockholders (millions) $ 293.6 $ 300.1
Net income per diluted common share 0.83 0.93
Operating results (non-GAAP)
Operating net income available to common stockholders (millions) 337.9 302.9
Operating net income per diluted common share 0.96 0.94
Average diluted common shares outstanding (thousands) 352,786 323,636
Significant items impacting earnings (1) (millions)
Pre-tax merger-related expenses $ (32.8) $ (0.9)
After-tax impact of merger-related expenses (25.9) (0.7)
Pre-tax provision expense related to acquisition (19.1) —
After-tax impact of provision expense related to acquisition (15.1) —
Pre-tax branch consolidation costs (4.2) (2.6)
After-tax impact of branch consolidation costs (3.3) (2.1)
Total significant items pre-tax $ (56.1) $ (3.5)
Total significant items after-tax $ (44.3) $ (2.8)
(1) Favorable (unfavorable) impact on earnings
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Industry Developments
INFLATION REDUCTION ACT
On August 16, 2022, the Inflation Reduction Act (IRA) was signed into law. The IRA introduces a 15% corporate alternative minimum tax (AMT) based primarily on consolidated adjusted GAAP net income with a minimum threshold of $1 billion. The corporate AMT provisions are effective for taxable years beginning after December 31, 2022. The details of the computation will be subject to regulations to be issued by the Department of the Treasury. Our current net income levels are well below the $1 billion threshold, but we will monitor regulatory developments and will continue to evaluate the impact, if any, of the corporate AMT.
The IRA imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year, including stock issued to employees.
LIBOR and SOFR
The United Kingdom’s Financial Conduct Authority (FCA), who is the regulator of LIBOR, announced on March 5, 2021 that they will no longer require any panel bank to continue to submit LIBOR after December 31, 2021. As it pertains to U.S. dollar LIBOR, the FCA announced that certain LIBOR tenors will continue to be published through June 30, 2023. Bank regulators, in a joint statement urged banks to stop using LIBOR altogether on new transactions by the end of 2021 to avoid the possible creation of safety and soundness risk. The FRB of New York has created a working group called the Alternative Reference Rate Committee (ARRC) to assist U.S. institutions in transitioning away from LIBOR as a benchmark interest rate. The ARRC has recommended the use of SOFR as a replacement index for LIBOR.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act) was signed into law. The LIBOR Act establishes a uniform national approach for replacing LIBOR in legacy contracts that do not provide for the use of a clearly defined replacement benchmark rate. The LIBOR Act also directs the FRB to issue regulations to implement the legislation addressed by this Act. We are currently evaluating the impact that the LIBOR Act will have on us.
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, reviewed existing contract language for the presence of appropriate fallback rate language, developed and implemented loan fallback rate language for when LIBOR is retired and identified risks associated with the transition. The transition team has chosen SOFR as the primary replacement index for LIBOR but other credit-sensitive indices are available for the benefit of our customers.
Beginning in September 2020, adjustable rate mortgage loans have been originated with SOFR as the underlying index. Their balance as of September 30, 2022 was $869.2 million, an increase of $530.7 million compared to December 31, 2021. We started originating commercial loans utilizing SOFR and other indices in the fourth quarter of 2021. As of September 30, 2022, the balance of commercial loans indexed to SOFR was $3.3 billion, including certain LIBOR loans that transitioned to SOFR during this timeframe.
Our transition team continues to work within the guidelines established by the FCA and ARRC to provide for a smooth transition away from LIBOR. As of September 30, 2022, $8.3 billion of our loan portfolio consisted of loans whose variable rate index is LIBOR, a decline of $2.3 billion as compared to December, 31, 2021. In addition, $646.1 million of LIBOR-based loans will mature prior to the June 30, 2023 conversion date.
Lastly, as of September 30, 2022, we have $76.5 million in TPS and $145.0 million in fixed-to-floating rate other subordinated debt that uses LIBOR as its base index. We are in the process of reviewing the legal contracts to address the LIBOR transition for these debt instruments by the June 30, 2023 conversion date.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
Net income available to common stockholders for the three months ended September 30, 2022 was $135.5 million or $0.38 per diluted common share, compared to $109.5 million or $0.34 per diluted common share for the three months ended September 30, 2021. The results for the third quarter of 2022 reflect record revenue of $379.6 million, an increase of $58.3 million, or 18.2%. Additionally, the provision for credit losses was $11.2 million compared to a provision benefit of $1.8 million primarily due to significant loan growth and CECL-related model impacts from a forecasted macroeconomic slowdown and lower prepayment speed assumptions which result in a longer expected loan life in the third quarter of 2022. Non-interest income declined $6.4 million, or 7.2%, from record levels in the third quarter of 2021 driven by decreases in mortgage banking operations, capital markets and SBA premium income, partially offset by increases in service charges income and dividends on non-marketable equity securities. Non-interest expense for the third quarter of 2022 increased $10.8 million primarily due to occupancy and equipment and outside services.
Financial highlights are summarized below:
TABLE 2
Three Months Ended
September 30, $ %
(in thousands, except per share data) 2022 2021 Change Change
Net interest income $ 297,125 $ 232,406 $ 64,719 27.8 %
Provision for credit losses 11,188 (1,806) 12,994 719.5
Non-interest income 82,464 88,854 (6,390) (7.2)
Non-interest expense 195,057 184,226 10,831 5.9
Income taxes 35,846 27,327 8,519 31.2
Net income 137,498 111,513 25,985 23.3
Less: Preferred stock dividends 2,010 2,010 — —
Net income available to common stockholders $ 135,488 $ 109,503 $ 25,985 23.7 %
Earnings per common share – Basic $ 0.39 $ 0.34 $ 0.05 14.7 %
Earnings per common share – Diluted 0.38 0.34 0.04 11.8
Cash dividends per common share 0.12 0.12 — —
The following table presents selected financial ratios and other relevant data used to analyze our performance:
TABLE 3
Three Months Ended
September 30,
2022 2021
Return on average equity 9.91 % 8.74 %
Return on average tangible common equity (2)
18.84 16.77
Return on average assets 1.30 1.14
Return on average tangible assets (2)
1.41 1.24
Book value per common share (1)
$ 15.11 $ 15.65
Tangible book value per common share (1) (2)
8.02 8.42
Equity to assets (1)
12.69 % 12.95 %
Average equity to average assets 13.10 13.08
Common equity to assets (1)
12.44 12.68
Tangible equity to tangible assets (1) (2)
7.28 7.53
Tangible common equity to tangible assets (1) (2)
7.02 7.24
Common equity tier 1 capital ratio (1)
9.7 9.9
Dividend payout ratio 31.43 35.43
(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 September 30,
2022 2021
(dollars in thousands) Average
Balance Interest
Income/
Expense Yield/
Rate Average
Balance Interest
Income/
Expense Yield/
Rate
Assets
Interest-earning assets:
Interest-bearing deposits with banks $ 1,570,094 $ 8,197 2.07 % $ 3,186,841 $ 1,228 0.15 %
Taxable investment securities (1)
6,245,951 30,662 1.96 5,109,559 20,746 1.62
Tax-exempt investment securities (1)(2)
999,718 8,523 3.41 1,078,906 9,230 3.42
Loans held for sale 158,356 1,778 4.48 257,909 2,381 3.69
Loans and leases (2)(3)
28,431,137 296,470 4.14 24,729,254 224,675 3.61
Total interest-earning assets (2)
37,405,256 345,630 3.67 34,362,469 258,260 2.99
Cash and due from banks 435,258 389,659
Allowance for credit losses (381,120) (362,592)
Premises and equipment 411,306 343,070
Other assets 4,169,232 3,985,793
Total assets $ 42,039,932 $ 38,718,399
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $ 14,905,755 24,044 0.64 $ 13,888,928 4,487 0.13
Savings 3,986,090 2,366 0.24 3,509,325 164 0.02
Certificates and other time 2,966,630 4,725 0.63 3,111,424 5,999 0.76
Total interest-bearing deposits 21,858,475 31,135 0.57 20,509,677 10,650 0.21
Short-term borrowings 1,389,747 6,135 1.75 1,549,353 6,539 1.67
Long-term borrowings 851,432 8,319 3.88 886,637 6,045 2.70
Total interest-bearing liabilities 24,099,654 45,589 0.75 22,945,667 23,234 0.40
Non-interest-bearing demand 11,779,069 10,338,713
Total deposits and borrowings 35,878,723 0.50 33,284,380 0.28
Other liabilities 654,260 370,587
Total liabilities 36,532,983 33,654,967
Stockholders’ equity 5,506,949 5,063,432
Total liabilities and stockholders’ equity $ 42,039,932 $ 38,718,399
Net interest-earning assets $ 13,305,602 $ 11,416,802
Net interest income (FTE) (2)
300,041 235,026
Tax-equivalent adjustment (2,916) (2,620)
Net interest income $ 297,125 $ 232,406
Net interest spread 2.92 % 2.59 %
Net interest margin (2)
3.19 % 2.72 %
(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 on an FTE basis (non-GAAP) increased $65.0 million, or 27.7%, to $300.0 million for the third quarter of 2022. Average earning assets of $37.4 billion increased $3.0 billion, or 8.9%, from 2021. In addition to the growth in average earning assets, net interest income benefited from the repricing impact of the higher interest rate environment on earning asset yields, which was partially offset by the higher cost of interest-bearing deposit accounts. Additionally, PPP net interest income declined $26.3 million, equivalent to 0.23% of net interest margin, from the year-ago quarter as the PPP portfolio winds down. Average interest-bearing liabilities of $24.1 billion increased $1.2 billion, or 5.0%, from 2021, driven by an increase of $1.3 billion in average interest-bearing deposits which included organic growth in new and existing customer relationships, and inflows from the Howard acquisition, partially offset by a decrease in average borrowings of $194.8 million. Our net interest margin FTE (non-GAAP) increased 47 basis points to 3.19%, as the yield on earning assets increased 68 basis points. The total cost of funds increased 22 basis points to 0.50% with a 36 basis-point increase in interest-bearing deposit costs, as well as an increase of 118 basis points in long-term debt cost partially due to the August 2022 offering of $350 million aggregate principal amount of 5.150% fixed rate senior notes due in 2025.
The following table provides certain information regarding changes in net interest income on an FTE basis (non-GAAP) attributable to changes in the average volumes and yields earned on interest-earning assets and the average volume and rates paid for interest-bearing liabilities for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
TABLE 5
(in thousands) Volume Rate Net
Interest Income (1)
Interest-bearing deposits with banks $ (623) $ 7,592 $ 6,969
Securities (2)
4,544 4,665 9,209
Loans held for sale (852) 249 (603)
Loans and leases (2)
32,983 38,812 71,795
Total interest income (2)
36,052 51,318 87,370
Interest Expense (1)
Deposits:
Interest-bearing demand 233 19,324 19,557
Savings 17 2,185 2,202
Certificates and other time (182) (1,092) (1,274)
Short-term borrowings (542) 138 (404)
Long-term borrowings (243) 2,517 2,274
Total interest expense (717) 23,072 22,355
Net change (2)
$ 36,769 $ 28,246 $ 65,015
(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 $345.6 million for the third quarter of 2022, increased $87.4 million, or 33.8%, from the same quarter of 2021, primarily due to the impact of the 2022 interest rate increases by the FOMC and an increase in average earning assets of $3.0 billion. The increase in earning assets was primarily driven by a $3.7 billion, or 15.0%, increase in average loans and leases and an increase in average securities of $1.1 billion. These increases were partially funded by excess cash which decreased $1.6 billion. Commercial loan growth was led by the Cleveland, Pittsburgh and North Carolina markets. Average consumer loans increased $2.1 billion, or 25.9%, with a $1.2 billion increase in residential mortgages and a $601.4 million increase in direct installment loans driven by a combination of strong organic loan origination activity and the Howard acquisition. Average PPP loans declined $1.1 billion, or 94.3%, from the year-ago quarter as the portfolio winds down. Additionally, the net increase in the securities portfolio was a result of management's strategy to deploy excess liquidity into higher yielding securities, as average securities increased 17.1%. The yield on average earning assets (non-
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GAAP) increased 68 basis points to 3.67% for the third quarter of 2022, primarily reflecting the higher yields on variable-rate loans and investment securities.
Interest expense of $45.6 million for the third quarter of 2022 increased $22.4 million, or 96.2%, from the same quarter of 2021, due to an increase in rates paid on average interest-bearing liabilities and growth in average interest-bearing deposits. Average non-interest-bearing deposits increased $1.4 billion, or 13.9%, and average interest-bearing deposits increased $1.3 billion, or 6.6%. The growth in average deposits reflected organic growth in new and existing customer relationships and inflows from the Howard acquisition. Average short-term borrowings decreased $159.6 million, or 10.3%, primarily reflecting decreases of $100.0 million and $65.6 million in short-term FHLB advances and repurchase agreements, respectively. Average long-term borrowings decreased $35.2 million, or 4.0%, primarily reflecting a decrease of $200.0 million in long-term FHLB advances, partially offset by an increase of $140.5 million in senior debt resulting from the issuance of $350 million in 5.150% fixed rate senior notes during the third quarter of 2022 and an increase of $25.3 million in subordinated debt resulting from the Howard acquisition. The rate paid on interest-bearing liabilities increased 35 basis points from 0.40% to 0.75% for the third quarter of 2022, primarily due to the FOMC interest rate actions and partially offset by management's actions taken to reduce the cost of interest-bearing liabilities.
Provision for Credit Losses
Provision for credit losses is determined based on management’s estimates of the appropriate level of ACL needed to absorb probable life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period. The following table presents information regarding the provision for credit loss expense and net charge-offs:
TABLE 6
Three Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Provision for credit losses (on loans and leases) $ 10,069 $ (5,668) $ 15,737 277.6 %
Provision for unfunded loan commitments
1,125 3,847 (2,722) (70.8)
Provision for credit losses $ 11,194 $ (1,821) $ 13,015 714.7 %
Net loan charge-offs 2,812 1,591 1,221 76.7
Net loan charge-offs (annualized) / total average loans and leases 0.04 % 0.03 %
Provision for credit losses was $11.2 million during the third quarter of 2022, an increase of $13.0 million, from the same period of 2021. The third quarter of 2022 is comprised of a $10.1 million provision for loans and leases outstanding and a $1.1 million provision for unfunded loan commitments. The net increase reflects significant loan growth and CECL-related model impacts from a forecasted macroeconomic slowdown and lower prepayment speed assumptions which result in a longer expected loan life in the third quarter of 2022. The third quarter of 2022 also reflected net charge-offs of $2.8 million, or 0.04% annualized of total average loans, compared to net charge-offs of $1.6 million, or 0.03% annualized, in the third quarter of 2021. For additional information relating to the allowance and provision for credit losses, refer to the Allowance for Credit Losses on Loans and Leases section of this Management’s Discussion and Analysis.
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Non-Interest Income
The breakdown of non-interest income for the three months ended September 30, 2022 and 2021 is presented in the following table:
TABLE 7
Three Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Service charges $ 35,954 $ 31,716 $ 4,238 13.4 %
Trust services 9,600 9,471 129 1.4
Insurance commissions and fees 5,790 6,776 (986) (14.6)
Securities commissions and fees 5,747 5,465 282 5.2
Capital markets income 9,605 12,541 (2,936) (23.4)
Mortgage banking operations 5,148 8,245 (3,097) (37.6)
Dividends on non-marketable equity securities 3,258 1,857 1,401 75.4
Bank owned life insurance 2,645 3,279 (634) (19.3)
Net securities gains — 65 (65) (100.0)
Other 4,717 9,439 (4,722) (50.0)
Total non-interest income $ 82,464 $ 88,854 $ (6,390) (7.2) %
Total non-interest income decreased $6.4 million, or 7.2%, to $82.5 million for the third quarter of 2022, compared to a record $88.9 million for the third quarter of 2021. The variances in the individual non-interest income items are explained in the following paragraphs.
Service charges of $36.0 million for the third quarter of 2022 increased $4.2 million, or 13.4%, from the same period of 2021, driven by interchange fees, increases in treasury management services and higher customer activity.
Capital markets income of $9.6 million for the third quarter of 2022 decreased $2.9 million, or 23.4%, from the same period of 2021, as the decline in swap fees from elevated levels in the year-ago quarter was partially offset by increased contributions from international banking and syndications.
Mortgage banking operations income of $5.1 million for the third quarter of 2022 decreased $3.1 million, or 37.6%, from the same period of 2021, as secondary market revenue and mortgage held-for-sale pipelines declined from higher levels given the sharp increase in interest rates in 2022. During the third quarter of 2022, we sold $214.2 million of residential mortgage loans, compared to $395.6 million for the same period of 2021, a decrease of 45.8%.
Dividends on non-marketable equity securities of $3.3 million for the third quarter of 2022 increased $1.4 million, or 75.4%, from the same period of 2021, reflecting an increase in the FRB dividend rate given the higher interest-rate environment.
Other non-interest income was $4.7 million and $9.4 million for the third quarters of 2022 and 2021, respectively, as SBA premium income declined $1.9 million from elevated levels and the year-ago quarter included a $2.2 million recovery on a previously written-off asset.
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Non-Interest Expense
The breakdown of non-interest expense for the three months ended September 30, 2022 and 2021 is presented in the following table:
TABLE 8
Three Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Salaries and employee benefits $ 106,620 $ 104,899 $ 1,721 1.6 %
Net occupancy 15,597 12,913 2,684 20.8
Equipment 19,242 17,664 1,578 8.9
Amortization of intangibles 3,547 3,022 525 17.4
Outside services 19,008 17,839 1,169 6.6
Marketing 3,196 3,760 (564) (15.0)
FDIC insurance 5,221 4,380 841 19.2
Bank shares and franchise taxes 3,991 3,584 407 11.4
Merger-related 2,105 940 1,165 123.9
Other 16,530 15,225 1,305 8.6
Total non-interest expense $ 195,057 $ 184,226 $ 10,831 5.9 %
Total non-interest expense of $195.1 million for the third quarter of 2022 increased $10.8 million, or 5.9%, from the same period of 2021. Non-interest expense increased $9.7 million, or 5.3%, when excluding significant items of $2.1 million and $0.9 million in merger-related expenses in the third quarters of 2022 and 2021, respectively. The variances in the individual non-interest expense items are further explained in the following paragraphs.
Salaries and employee benefits of $106.6 million for the third quarter of 2022 increased $1.7 million, or 1.6%, from the same period of 2021, due primarily to normal annual merit increases and the acquired Howard expense base.
Net occupancy and equipment of $34.8 million for the third quarter of 2022 increased $4.3 million, or 13.9%, from the same period of 2021, primarily from technology-related investments and the acquired Howard expense base.
Outside services of $19.0 million for the third quarter of 2022 increased $1.2 million, or 6.6%, with higher volume-related technology and third-party costs, as well as the acquired Howard expense base.
FDIC insurance of $5.2 million for the third quarter of 2022 increased $0.8 million, or 19.2%, from the same period of 2021, primarily due to loan growth and balance sheet mix shift.
We recorded $2.1 million in merger-related costs in the third quarter of 2022 relating to the the pending UB Bancorp merger and the Howard acquisition, compared to $0.9 million in the third quarter of 2021 related to the Howard acquisition.
Other non-interest expense was $16.5 million and $15.2 million for the third quarters of 2022 and 2021, respectively, as business development expense and other operational costs increased compared to the year-ago period.
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The following table presents non-interest expense excluding significant items for the three months ended September 30, 2022 and 2021:
TABLE 9
Three Months Ended September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Total non-interest expense, as reported $ 195,057 $ 184,226 $ 10,831 5.9 %
Significant items:
Merger-related (2,105) (940) (1,165)
Total non-interest expense, excluding significant items (1)
$ 192,952 $ 183,286 $ 9,666 5.3 %
(1) Non-GAAP
Income Taxes
The following table presents information regarding income tax expense and certain tax rates:
TABLE 10
Three Months Ended
September 30,
(dollars in thousands) 2022 2021
Income tax expense $ 35,846 $ 27,327
Effective tax rate 20.7 % 19.7 %
Statutory federal tax rate 21.0 21.0
Both periods’ tax rates are lower than the federal statutory tax rate 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 and the effective tax rate increased due to higher pre-tax income and state income taxes compared to the year-ago quarter.
Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
Net income available to common stockholders for the first nine months of 2022 was $293.6 million or $0.83 per diluted common share, compared to $300.1 million or $0.93 per diluted common share for the first nine months of 2021. On an operating basis (non-GAAP), net income available to common stockholders for the first nine months of 2022 was $337.9 million, or $0.96, compared to $302.9 million or $0.94 per diluted common share for the first nine months of 2021. The provision for credit losses for the first nine months of 2022 totaled $35.6 million, including $19.1 million of initial provision for non-PCD loans associated with the Howard acquisition, compared to $3.0 million in the first nine months of 2021. Non-interest income totaled $242.9 million, a decrease of $8.5 million, or 3.4%, reflecting reduced contributions from mortgage banking due to the sharp increase in interest rates in 2022 and lower capital markets income from record levels in 2021, partially offset by increased contributions from wealth management and dividends on non-marketable equity securities, as well as higher service charges reflecting increased customer activity. Non-interest expense of $615.3 million, increased $63.7 million, or 11.5%, as the first nine months of 2022 included merger-related costs of $32.8 million and branch consolidation costs of $4.2 million. The first nine months of 2021 included merger-related costs of $0.9 million and branch consolidation costs of $2.6 million.
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Financial highlights are summarized below:
TABLE 11
Nine Months Ended
September 30, $ %
(in thousands, except per share data) 2022 2021 Change Change
Net interest income $ 784,891 $ 683,200 $ 101,691 14.9 %
Provision for credit losses 35,569 2,979 32,590 1,094.0
Non-interest income 242,940 251,431 (8,491) (3.4)
Non-interest expense 615,257 551,588 63,669 11.5
Income taxes 77,367 73,929 3,438 4.7
Net income 299,638 306,135 (6,497) (2.1)
Less: Preferred stock dividends 6,030 6,030 — —
Net income available to common stockholders $ 293,608 $ 300,105 $ (6,497) (2.2) %
Earnings per common share – Basic $ 0.84 $ 0.94 $ (0.10) (10.6) %
Earnings per common share – Diluted 0.83 0.93 (0.10) (10.8)
Cash dividends per common share 0.36 0.36 — —
The following table presents selected financial ratios and other relevant data used to analyze our performance:
TABLE 12
Nine Months Ended
September 30,
2022 2021
Return on average equity 7.33 % 8.17 %
Return on average tangible common equity (2)
13.99 15.87
Return on average assets 0.96 1.07
Return on average tangible assets (2)
1.05 1.16
Book value per common share (1)
$ 15.11 $ 15.65
Tangible book value per common share (1) (2)
8.02 8.42
Equity to assets (1)
12.69 % 12.95 %
Average equity to average assets 13.11 13.07
Common equity to assets (1)
12.44 12.68
Tangible equity to tangible assets (1) (2)
7.28 7.53
Tangible common equity to tangible assets (1) (2)
7.02 7.24
Common equity tier 1 capital ratio (1)
9.7 9.9
Dividend payout ratio 43.55 38.88
(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 13
Nine Months Ended September 30,
2022 2021
(dollars in thousands) Average
Balance Interest
Income/
Expense Yield/
Rate Average
Balance Interest
Income/
Expense Yield/
Rate
Assets
Interest-earning assets:
Interest-bearing deposits with banks $ 2,465,800 $ 14,737 0.80 % $ 2,399,683 $ 2,310 0.13 %
Taxable investment securities (1)
6,083,200 81,359 1.78 5,033,410 63,958 1.69
Tax-exempt investment securities (1)(2)
1,008,438 25,779 3.41 1,100,120 28,337 3.43
Loans held for sale 208,718 6,234 3.99 206,589 5,739 3.70
Loans and leases (2) (3)
27,313,051 757,133 3.70 25,190,510 667,835 3.54
Total interest-earning assets (2)
37,079,207 885,242 3.19 33,930,312 768,179 3.02
Cash and due from banks 427,118 376,276
Allowance for credit losses (372,163) (366,849)
Premises and equipment 396,804 337,262
Other assets 4,155,280 4,017,431
Total assets $ 41,686,246 $ 38,294,432
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $ 14,946,096 37,915 0.34 $ 13,683,402 14,927 0.15
Savings 3,940,100 3,106 0.11 3,394,718 510 0.02
Certificates and other time 2,961,870 12,889 0.58 3,294,084 22,623 0.92
Total interest-bearing deposits 21,848,066 53,910 0.33 20,372,204 38,060 0.25
Short-term borrowings 1,440,034 17,697 1.64 1,688,999 20,255 1.60
Long-term borrowings 758,373 20,574 3.63 977,269 18,443 2.52
Total interest-bearing liabilities 24,046,473 92,181 0.51 23,038,472 76,758 0.45
Non-interest-bearing demand 11,600,639 9,874,148
Total deposits and borrowings 35,647,112 0.35 32,912,620 0.31
Other liabilities 574,336 374,898
Total liabilities 36,221,448 33,287,518
Stockholders’ equity 5,464,798 5,006,914
Total liabilities and stockholders’ equity $ 41,686,246 $ 38,294,432
Net interest-earning assets $ 13,032,734 $ 10,891,840
Net interest income (FTE) (2)
793,061 691,421
Tax-equivalent adjustment (8,170) (8,221)
Net interest income $ 784,891 $ 683,200
Net interest spread 2.68 % 2.57 %
Net interest margin (2)
2.86 % 2.72 %
(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 on an FTE basis (non-GAAP) totaled $793.1 million, increasing $101.6 million, or 14.7%, as the higher interest rate environment benefited earning asset yields given the asset sensitive positioning of the balance sheet. There was growth in earning assets of $3.1 billion, or 9.3%, primarily driven by strong loan growth. The net interest margin (FTE) (non-GAAP) increased 14 basis points to 2.86%, primarily reflecting higher yields on variable-rate loans, investment securities and excess cash balances, partially offset by a 0.13% reduction related to PPP.
The following table provides certain information regarding changes in net interest income on an FTE basis (non-GAAP) attributable to changes in the average volumes and yields earned on interest-earning assets and the average volume and rates paid for interest-bearing liabilities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
TABLE 14
(in thousands) Volume Rate Net
Interest Income (1)
Interest-bearing deposits with banks $ 65 $ 12,362 $ 12,427
Securities (2)
10,772 4,071 14,843
Loans held for sale 339 156 495
Loans and leases (2)
44,665 44,633 89,298
Total interest income (2)
55,841 61,222 117,063
Interest Expense (1)
Deposits:
Interest-bearing demand 981 22,007 22,988
Savings 58 2,538 2,596
Certificates and other time (1,553) (8,181) (9,734)
Short-term borrowings (3,167) 609 (2,558)
Long-term borrowings (4,127) 6,258 2,131
Total interest expense (7,808) 23,231 15,423
Net change (2)
$ 63,649 $ 37,991 $ 101,640
(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 $885.2 million for the first nine months of 2022, increased $117.1 million, or 15.2%, from the same period of 2021, resulting from the 2022 interest rate increases by the FOMC and an increase in earning assets of $3.1 billion. The increase in earning assets was primarily driven by a $2.1 billion, or 8.4%, increase in average loans and an increase in average securities of $958.1 million. Growth in total average commercial loans included $842.4 million, or 8.6%, in commercial real estate, partially offset by a decline of $431.0 million, or 6.3%, in commercial and industrial loans, due to average PPP loans declining $1.7 billion as the portfolio winds down. Commercial origination activity was led by the Cleveland, Pittsburgh and North Carolina markets, as well as acquired Howard loans. Average consumer loans increased $1.6 billion, or 20.5%, with an increase in residential mortgage loans of $958.4 million, or 27.9%, direct home equity installment loans of $552.2 million, or 26.4%, and indirect installment loans of $110.4 million, or 9.1%, driven by a combination of the Howard acquisition and organic loan origination activity. Additionally, the net increase in the securities portfolio was a result of management's strategy to deploy excess liquidity into higher yielding securities, as average securities increased 15.6%. For the first nine months of 2022, the yield on average earning assets (non-GAAP) increased 17 basis points to 3.19%, compared to the first nine months of 2021, reflecting the higher yields on variable-rate loans, investment securities and excess cash balances, partially offset by significant reductions in PPP contributions.
Interest expense of $92.2 million for the first nine months of 2022 increased $15.4 million, or 20.1%, from the same period of 2021, primarily due to the higher interest rate environment and an increase in average interest-bearing deposits. The growth in average deposits reflected inflows from the Howard acquisition and solid organic growth in new and existing customer
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relationships. Average interest-bearing deposits increased $1.5 billion, or 7.2%, which reflects the benefit of solid organic growth in customer relationships and the addition of Howard. Average time deposits declined $332.2 million, or 10.1%, as customer preferences shifted away from higher rate certificates of deposit to lower yielding, more liquid products, however, customers' preferences are beginning to shift back to certificates of deposits as interest rates increase. Average long-term borrowings decreased $218.9 million, or 22.4%, primarily due to a decrease of $285.7 million in long-term FHLB borrowings, partially offset by increases of $47.8 million in senior debt resulting from the issuance of $350 million in 5.150% fixed rate senior notes during August 2022 and $23.4 million in subordinated debt resulting from $25.0 million acquired in the Howard acquisition. The rate paid on interest-bearing liabilities increased 6 basis points to 0.51% for the first nine months of 2022, compared to the first nine months of 2021. Similarly, the cost of interest-bearing deposits increased 8 basis points from 0.25% to 0.33%. These increases were primarily a result of the interest rate actions taken by the FOMC, combined with the issuance of senior debt in August 2022.
Provision for Credit Losses
The following table presents information regarding the provision for credit loss expense and net charge-offs:
TABLE 15
Nine Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Provision for credit losses (on loans and leases) $ 35,294 $ (1,309) $ 36,603 2,796.3 %
Provision for unfunded loan commitments 206 4,275 (4,069) (95.2)
Provision for credit losses $ 35,500 $ 2,966 $ 32,534 1,096.9 %
Net loan charge-offs 4,319 12,548 (8,229) (65.6)
Net loan charge-offs (annualized) / total average loans and leases 0.02 % 0.07 %
Provision for credit losses was $35.5 million for the nine months ended September 30, 2022, an increase of $32.5 million, from the same period of 2021. The year-to-date amount for 2022 is comprised of a $35.3 million provision for loans and leases outstanding and a $0.2 million provision for unfunded loan commitments. The increase reflects $19.1 million of initial provision for non-PCD loans associated with the Howard acquisition and significant growth in loans outstanding, partially offset by favorable asset quality performance across all loan portfolio credit metrics in 2022. Net loan charge-offs were $4.3 million during the nine months ended September 30, 2022, compared to $12.5 million during the nine months ended September 30, 2021, with both periods well below historical levels.
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Non-Interest Income
The breakdown of non-interest income for the nine months ended September 30, 2022 and 2021 is presented in the following table:
TABLE 16
Nine Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Service charges $ 102,162 $ 89,273 $ 12,889 14.4 %
Trust services 29,662 27,836 1,826 6.6
Insurance commissions and fees 19,747 20,188 (441) (2.2)
Securities commissions and fees 17,490 16,830 660 3.9
Capital markets income 25,279 27,265 (1,986) (7.3)
Mortgage banking operations 17,935 31,400 (13,465) (42.9)
Dividends on non-marketable equity securities 8,178 6,516 1,662 25.5
Bank owned life insurance 9,330 10,993 (1,663) (15.1)
Net securities gains 48 193 (145) (75.1)
Other 13,109 20,937 (7,828) (37.4)
Total non-interest income $ 242,940 $ 251,431 $ (8,491) (3.4) %
Total non-interest income decreased $8.5 million, or 3.4%. The variances in significant individual non-interest income items are explained in the following paragraphs.
Service charges of $102.2 million for the first nine months of 2022 increased $12.9 million, or 14.4%, from the same period of 2021, driven by interchange fees, increases in treasury management services and higher customer activity.
Trust services of $29.7 million for the first nine months of 2022 increased $1.8 million, or 6.6%, from the same period of 2021, primarily driven by contributions across the geographic footprint, partially offset by the market value of assets under management decreasing $604.4 million, or 7.7%, to $7.2 billion at September 30, 2022.
Capital markets income of $25.3 million for the first nine months of 2022 decreased $2.0 million, or 7.3%, from the same period of 2021, as swap activity decreased from elevated levels and was partially offset by increases in international banking, syndications and debt capital markets.
Mortgage banking operations income of $17.9 million for the first nine months of 2022 decreased $13.5 million, or 42.9%, from the same period of 2021 as secondary market revenue and mortgage held-for-sale pipelines declined from elevated levels in 2021 due to the sharp increase in interest rates. During the first nine months of 2022, we sold $909.6 million of residential mortgage loans, a 36.7% decrease compared to $1.4 billion for the same period of 2021.
Dividends on non-marketable equity securities of $8.2 million for the first nine months of 2022 increased $1.7 million, or 25.5%, from the same period of 2021, reflecting an increase in FRB dividends given the higher interest-rate environment, partially offset by a decrease in FHLB dividends.
Bank owned life insurance of $9.3 million for the first nine months of 2022 decreased $1.7 million, or 15.1%, from the same period of 2021, due to higher life insurance claims in the 2021 period.
Other non-interest income was $13.1 million and $20.9 million for the first nine months of 2022 and 2021, respectively, as SBA premium income declined $4.1 million from elevated 2021 levels due to the higher interest rate environment and the prior year also included a $2.2 million recovery on a previously written-off other asset.
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Non-Interest Expense
The breakdown of non-interest expense for the nine months ended September 30, 2022 and 2021 is presented in the following table:
TABLE 17
Nine Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Salaries and employee benefits $ 322,679 $ 314,275 $ 8,404 2.7 %
Net occupancy 49,554 45,372 4,182 9.2
Equipment 55,934 51,854 4,080 7.9
Amortization of intangibles 10,323 9,096 1,227 13.5
Outside services 53,306 53,463 (157) (0.3)
Marketing 11,080 10,593 487 4.6
FDIC insurance 15,090 13,432 1,658 12.3
Bank shares and franchise taxes 11,923 10,939 984 9.0
Merger-related 32,761 940 31,821 3,385.2
Other 52,607 41,624 10,983 26.4
Total non-interest expense $ 615,257 $ 551,588 $ 63,669 11.5 %
Total non-interest expense of $615.3 million for the first nine months of 2022 increased $63.7 million, an 11.5% increase from the same period of 2021. On an operating basis, non-interest expense (non-GAAP) increased $30.3 million, or 5.5%, when excluding significant items of $32.8 million in merger-related costs and $4.2 million in branch consolidation costs in the first nine months of 2022, compared to $0.9 million and $2.6 million, respectively, in the first nine months of 2021. The variances in the individual non-interest expense items are further explained in the following paragraphs.
Salaries and employee benefits of $322.7 million for the first nine months of 2022 increased $8.4 million, or 2.7%, from the same period of 2021, due to normal merit increases, higher production-related commissions and incentives and the acquired Howard expense base.
Net occupancy and equipment expense of $105.5 million for the first nine months of 2022 increased $8.3 million, or 8.5%, from the same period of 2021, primarily from technology-related investments and the acquired Howard expense base.
Amortization of intangibles of $10.3 million for the first nine months of 2022 increased $1.2 million, or 13.5%, from the same period of 2021, primarily due to additional core deposit intangibles added as a result of the Howard acquisition.
FDIC insurance of $15.1 million for the first nine months of 2022 increased $1.7 million, or 12.3%, from the same period of 2021, primarily due to loan growth and balance sheet mix shift.
Bank shares and franchise taxes of $11.9 million for the first nine months of 2022 increased $1.0 million, or 9.0%, from the same period of 2021, primarily due to an increase in the bank's capital tax base.
We recorded $32.8 million in merger-related costs for the first nine months of 2022 related to the Howard acquisition which closed on January 22, 2022 and the pending UB Bancorp acquisition, compared to $0.9 million related to the Howard acquisition in the first nine months of 2021.
Other non-interest expense was $52.6 million and $41.6 million for the first nine months of 2022 and 2021, respectively. There was $2.2 million in branch consolidation costs and an increase in business development expense and other operational costs in the first nine months of 2022. Comparatively, we had $0.5 million in branch consolidation costs and a $2.2 million mortgage recourse reserve release in the first nine months of 2021.
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The following table presents non-interest expense excluding significant items for the nine months ended September 30, 2022 and 2021:
TABLE 18
Nine Months Ended
September 30, $ %
(dollars in thousands) 2022 2021 Change Change
Total non-interest expense, as reported $ 615,257 $ 551,588 $ 63,669 11.5 %
Significant items:
Branch consolidations (4,178) (2,644) (1,534)
Merger-related (32,761) (940) (31,821)
Total non-interest expense, excluding significant items (1)
$ 578,318 $ 548,004 $ 30,314 5.5 %
(1) Non-GAAP
Income Taxes
The following table presents information regarding income tax expense and certain tax rates:
TABLE 19
Nine Months Ended
September 30,
(dollars in thousands) 2022 2021
Income tax expense $ 77,367 $ 73,929
Effective tax rate 20.5 % 19.5 %
Statutory federal tax rate 21.0 21.0
Both periods’ tax rates are lower than the federal statutory tax rates of 21% due to tax benefits primarily resulting from tax-exempt income on investments and loans, tax credits and income from BOLI. Income tax expense was higher in 2022 due to increased state income taxes as a result of the Howard acquisition as well as increased FDIC insurance deduction disallowance. The effective tax rate is higher in 2022 for the same reasons.
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FINANCIAL CONDITION
The following table presents our condensed Consolidated Balance Sheets:
TABLE 20
(dollars in millions) September 30,
2022 December 31,
2021 $
Change %
Change
Assets
Cash and cash equivalents $ 2,276 $ 3,493 $ (1,217) (34.8) %
Securities 7,212 6,889 323 4.7
Loans held for sale 149 295 (146) (49.5)
Loans and leases, net 28,395 24,624 3,771 15.3
Goodwill and other intangibles 2,487 2,304 183 7.9
Other assets 2,071 1,908 163 8.5
Total Assets $ 42,590 $ 39,513 $ 3,077 7.8 %
Liabilities and Stockholders’ Equity
Deposits $ 33,893 $ 31,726 $ 2,167 6.8 %
Borrowings 2,454 2,218 236 10.6
Other liabilities 837 419 418 99.8
Total Liabilities 37,184 34,363 2,821 8.2
Stockholders’ Equity 5,406 5,150 256 5.0
Total Liabilities and Stockholders’ Equity $ 42,590 $ 39,513 $ 3,077 7.8 %
The increase in assets and liabilities is primarily due to strong loan and deposit growth as well as the Howard acquisition.
Lending Activity
The loan and lease portfolio consists principally of loans and leases to individuals and small- and medium-sized businesses within our primary markets in seven states and the District of Columbia. Our market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; Washington, D.C.; Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina; and Charleston, South Carolina.
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Following is a summary of loans and leases:
TABLE 21
September 30,
2022 December 31,
2021 $
Change %
Change
(in millions)
Commercial real estate $ 10,841 $ 9,899 $ 942 9.5 %
Commercial and industrial 6,709 5,977 732 12.2
Commercial leases 503 495 8 1.6
Other 127 94 33 35.1
Total commercial loans and leases 18,180 16,465 1,715 10.4
Direct installment 2,797 2,376 421 17.7
Residential mortgages 4,959 3,654 1,305 35.7
Indirect installment 1,529 1,227 302 24.6
Consumer lines of credit 1,315 1,246 69 5.5
Total consumer loans 10,600 8,503 2,097 24.7
Total loans and leases $ 28,780 $ 24,968 $ 3,812 15.3 %
The commercial and industrial growth was led by activity in the Cleveland, Pittsburgh and North Carolina markets while the growth in residential mortgages reflected customer preferences for adjustable-rate mortgages and the continued success of our Physician's First mortgage program, which is a fully digital program that provides a bundled suite of specialized products to meet the personal and professional needs of physicians, dentists, veterinarians and other healthcare professionals.
Non-Performing Assets
Following is a summary of non-performing assets:
TABLE 22
(in millions) September 30,
2022 December 31,
2021 $
Change %
Change
Commercial real estate $ 46 $ 48 $ (2) (4.2) %
Commercial and industrial 11 15 (4) (26.7)
Commercial leases 1 1 — —
Other 1 — 1 —
Total commercial loans and leases 59 64 (5) (7.8)
Direct installment 7 7 — —
Residential mortgages 14 10 4 40.0
Indirect installment 2 2 — —
Consumer lines of credit 6 5 1 20.0
Total consumer loans 29 24 5 20.8
Total non-performing loans and leases 88 88 — —
Other real estate owned 6 8 (2) (25.0)
Non-performing assets $ 94 $ 96 $ (2) (2.1) %
Non-performing assets decreased $1.9 million, from $96.2 million at December 31, 2021 to $94.3 million at September 30, 2022. This reflects a decrease of $0.3 million in non-performing loans and leases and a decrease of $1.6 million in OREO.
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Troubled Debt Restructured Loans
Following is a summary of accruing and non-accrual TDRs, by class:
TABLE 23
(in millions) Accruing Non-
Accrual Total
September 30, 2022
Commercial real estate $ 5 $ 21 $ 26
Commercial and industrial — 1 1
Total commercial loans 5 22 27
Direct installment 20 3 23
Residential mortgages 32 4 36
Consumer lines of credit 6 1 7
Total consumer loans 58 8 66
Total TDRs $ 63 $ 30 $ 93
December 31, 2021
Commercial real estate $ 6 $ 21 $ 27
Commercial and industrial — 1 1
Total commercial loans 6 22 28
Direct installment 21 4 25
Residential mortgages 27 5 32
Consumer lines of credit 6 1 7
Total consumer loans 54 10 64
Total TDRs $ 60 $ 32 $ 92
Allowance for Credit Losses on Loans and Leases
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.
At September 30, 2022 and December 31, 2021, we utilized a third-party consensus macroeconomic forecast reflecting the current and projected macroeconomic environment. For our ACL calculation at September 30, 2022, the macroeconomic variables that we utilized included, but were not limited to: (i) the purchase only Housing Price Index, which reflects growth of 2.3% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which reflects growth of 4.1% over our R&S forecast period, (iii) S&P Volatility, which decreases 5.5% in 2022 and 2.4% in 2023 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historic levels. Macroeconomic variables that we utilized for our ACL calculation as of December 31, 2021 included, but were not limited to: (i) the purchase only Housing Price Index, which reflected growth of 6.3% over our R&S forecast period, (ii) a Commercial Real Estate Price Index, which reflected growth of 13.0% over our R&S forecast period, (iii) S&P Volatility, which increases 15.2% in 2022 and 1.9% in 2023 and (iv) bankruptcies, which increase steadily over the R&S forecast period but average below historical levels.
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Following is a summary of certain ratios related to the ACL and loans and leases:
TABLE 24
Nine Months Ended
September 30,
2022 2021
Net loan charge-offs (annualized) by category to average loans:
Commercial real estate — % 0.02 %
Commercial and industrial — 0.04
Other commercial 0.01 —
Direct installment — 0.01
Indirect installment 0.01 —
Net loan charge-offs (annualized)/average loans 0.02 % 0.07 %
Allowance for credit losses/total loans and leases 1.34 % 1.41 %
Allowance for credit losses/non-performing loans 439.94 % 317.04 %
The ACL on loans and leases of $385.3 million at September 30, 2022 increased $41.1 million, or 11.9%, from December 31, 2021, with the increase primarily driven by significant loan growth, a forecasted macroeconomic slowdown and lower prepayment speed assumptions and the initial ACL related to the Howard acquisition. Our ending ACL coverage ratio at September 30, 2022 was 1.34%, compared to 1.38% at December 31, 2021. Total provision for credit losses for the nine months ended September 30, 2022 was $35.6 million, compared to $3.0 million for the same period in 2021 reflecting $19.1 million of initial provision for non-PCD loans associated with the Howard acquisition in the first quarter of 2022. Net charge-offs were $4.3 million for the nine months ended September 30, 2022, compared to $12.5 million for the first nine months of 2021, with both periods well below historical levels. The ACL as a percentage of non-performing loans for the total portfolio increased from 392% as of December 31, 2021 to 440% as of September 30, 2022.
Deposits
Our primary source of funds is deposits. These deposits are provided by business, consumer and municipal customers who we serve within our footprint.
Following is a summary of deposits:
TABLE 25
(in millions) September 30,
2022 December 31,
2021 $
Change %
Change
Non-interest-bearing demand $ 11,752 $ 10,789 $ 963 8.9 %
Interest-bearing demand 15,251 14,409 842 5.8
Savings 3,991 3,669 322 8.8
Certificates and other time deposits 2,899 2,859 40 1.4
Total deposits $ 33,893 $ 31,726 $ 2,167 6.8 %
Total deposits increased $2.2 billion, or 6.8%, from December 31, 2021, primarily as a result of growth in non-interest-bearing and interest-bearing demand balances due to the Howard acquisition as well as an expansion of customer relationships and higher customer balances. Customer preferences had shifted to more liquid accounts during the low-rate pandemic era, however, customers' preferences are beginning to shift back to certificates of deposits as interest rates increase. The deposit growth helped us eliminate overnight borrowings, reduce higher-cost short-term FHLB borrowings and provide cash to be used for funding loan growth.
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.
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The assessment of capital adequacy depends on a number of factors such as expected organic growth in the Consolidated Balance Sheet, asset quality, liquidity, earnings performance and sustainability, changing competitive conditions, regulatory changes or actions, and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to current operations and to promote public confidence.
We have an effective shelf registration statement filed with the SEC. Pursuant to this registration statement, we may, from time to time, issue and sell in one or more offerings any combination of common stock, preferred stock, debt securities, depositary shares, warrants, stock purchase contracts or units.
On April 18, 2022, we announced that our Board of Directors approved an additional $150 million for the repurchase of our common stock through our existing share repurchase program bringing the total authorization to $300 million. Since inception, we repurchased 11.0 million shares at a weighted average share price of $11.33 for $124.4 million under this repurchase program, with $175.6 million remaining for repurchase. 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. The Inflation Reduction Act of 2022 includes a 1% excise tax on stock repurchases beginning January 1, 2023.
Capital management is a continuous process, with capital plans and stress testing for FNB and FNBPA updated at least annually. These capital plans include assessing the adequacy of expected capital levels assuming various scenarios by projecting capital needs for a forecast period of 2-3 years beyond the current year. From time to time, we issue shares initially acquired by us as treasury stock under our various benefit plans. We may issue additional preferred or common stock to maintain our well-capitalized status.
FNB and FNBPA are subject to various regulatory capital requirements administered by the federal banking agencies (see discussion under “Enhanced Regulatory Capital Standards”). Quantitative measures established by regulators to ensure capital adequacy require FNB and FNBPA to maintain minimum amounts and ratios of total, tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined) and a minimum leverage ratio (as defined). Failure to meet minimum capital requirements could lead to initiation of certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on our Consolidated Financial Statements, dividends and future business and corporate strategies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNB and FNBPA must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. FNB’s and FNBPA’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
At September 30, 2022, the capital levels of both FNB and FNBPA exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered “well-capitalized” for regulatory purposes.
In December 2018, the FRB and other U.S. banking agencies approved a rule to address the impact of CECL on regulatory capital by allowing BHCs and banks, including FNB, the option to phase in the day-one impact of CECL over a three-year period. In March 2020, the FRB and other U.S. banking agencies issued a final rule that became effective on March 31, 2020, and provides BHCs and banks with an alternative option to temporarily delay the impact of CECL, relative to the incurred loss methodology for the ACL, on regulatory capital. We have elected this alternative option instead of the one described in the December 2018 rule. As a result, under the final rule, we delayed recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extended through December 31, 2021. Beginning on January 1, 2022, we were required to phase in 25% of the previously deferred capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Under the final rule, the estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in the ACL during the two-year deferral period. As of September 30, 2022, the total deferred impact on CET1 capital related to our adoption of CECL was approximately $51.6 million, or 15 basis points, which will continue to be reduced by approximately $17.2 million annually.
In this unprecedented economic and uncertain environment, we frequently run stress tests for a variety of economic situations, including severely adverse scenarios that have economic conditions like the current conditions. Under these scenarios, the results of these stress tests indicate that our regulatory capital ratios would remain above the regulatory requirements and we would be able to maintain appropriate liquidity levels, demonstrating our expected ability to continue to support our constituencies under stressful financial conditions.
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Following are the capital amounts and related ratios for FNB and FNBPA:
TABLE 26
Actual Well-Capitalized
Requirements (1)
Minimum Capital
Requirements plus Capital Conservation Buffer
(dollars in millions) Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2022
F.N.B. Corporation
Total capital $ 3,998 11.96 % $ 3,342 10.00 % $ 3,510 10.50 %
Tier 1 capital 3,357 10.04 2,005 6.00 2,841 8.50
Common equity tier 1 3,250 9.72 n/a n/a 2,340 7.00
Leverage 3,357 8.42 n/a n/a 1,594 4.00
Risk-weighted assets 33,424
FNBPA
Total capital 4,160 12.48 % 3,335 10.00 % 3,502 10.50 %
Tier 1 capital 3,497 10.49 2,668 8.00 2,835 8.50
Common equity tier 1 3,417 10.25 2,168 6.50 2,334 7.00
Leverage 3,497 8.79 1,989 5.00 1,591 4.00
Risk-weighted assets 33,348
As of December 31, 2021
F.N.B. Corporation
Total capital $ 3,531 12.18 % $ 2,899 10.00 % $ 3,044 10.50 %
Tier 1 capital 2,984 10.29 1,739 6.00 2,464 8.50
Common equity tier 1 2,877 9.92 n/a n/a 2,029 7.00
Leverage 2,984 7.99 n/a n/a 1,493 4.00
Risk-weighted assets 28,991
FNBPA
Total capital 3,695 12.77 % 2,893 10.00 % 3,038 10.50 %
Tier 1 capital 3,098 10.71 2,314 8.00 2,459 8.50
Common equity tier 1 3,018 10.43 1,880 6.50 2,025 7.00
Leverage 3,098 8.31 1,864 5.00 1,491 4.00
Risk-weighted assets 28,930
(1) Reflects the well-capitalized standard under Regulation Y for F.N.B. Corporation and the prompt corrective action framework for FNBPA.
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 2021 Annual Report on Form 10-K as filed with the SEC on February 24, 2022.
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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 our Treasury Department. 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 available for use to help fund normal business operations, and unused credit availability can be utilized to serve as contingency funding if we would be faced with a liquidity crisis.
The principal sources of the parent company’s liquidity are its strong existing cash resources plus dividends it receives from its subsidiaries. These dividends may be impacted by the parent’s or its subsidiaries’ capital needs, statutory laws and regulations, corporate policies, contractual restrictions, profitability and other factors. In addition, through one of our subsidiaries, we regularly issue subordinated notes, which are guaranteed by FNB. The cash position at September 30, 2022 was $633.9 million, up $338.5 million from year-end, primarily due to the $347.7 million net proceeds from a Senior Debt offering in August, part of which will be used to retire debt in February of 2023 (for additional information, see Note 10, "Borrowings" in the Notes to the Consolidated Financial Statements in this Report). Management has utilized various strategies to ensure sufficient cash on hand is available to meet the parent's funding needs.
Two metrics that are used to gauge the adequacy of the parent company’s cash position are the Liquidity Coverage Ratio (LCR) and Months of Cash on Hand (MCH). The LCR is defined as the sum of cash on hand plus projected cash inflows over the next 12 months divided by projected cash outflows over the next 12 months. The MCH is defined as the number of months of corporate expenses and dividends that can be covered by the cash on hand.
The LCR and MCH ratios are presented in the following table:
TABLE 27
September 30,
2022 December 31,
2021 Internal
Limit
Liquidity coverage ratio 1.6 times 2.4 times > 1 time
Months of cash on hand 13.3 months 16.9 months > 12 months
Management has concluded that our cash levels remain appropriate given the current market environment.
Our liquidity position has been positively impacted by our ability to generate growth in relationship-based accounts. Organic growth in low-cost transaction deposits was complemented by management’s strategy of deposit gathering efforts focused on attracting new customer relationships and deepening relationships with existing customers, in part through internal lead generation efforts leveraging data analytics capabilities. This year we also commenced the roll-out of the new digital eStore kiosks in all FNB branches. Total deposits increased $2.2 billion, or 6.8%, from December 31, 2021, primarily as a result of growth in non-interest-bearing demand balances, expansion of customer relationships as well as interest-bearing demand balances due to the Howard acquisition. We continue to have success growing total non-interest-bearing demand deposit accounts as they rose $1.0 billion, or 8.9%, and now represent 34.7% of total deposits, up from 34.0% as of December 31, 2021. Further, interest-bearing demand deposits increased $842.5 million, or 5.8% and savings account balances increased $322.2 million, or 8.8%. Time deposits increased $40.0 million, or 1.4%. Due to the FOMC increasing interest rates, customer time deposit balances grew in the third quarter, the first quarter of growth in 2022. Our strong liquidity position provided us the flexibility to reduce our FHLB borrowings by $100 million and eliminate Howard's overnight borrowings and retire $200 million of Howard's higher-cost FHLB borrowings.
Our cash balances held at the FRB decreased $1.3 billion from December 31, 2021 to $1.7 billion at September 30, 2022 as cash was deployed primarily to fund loans and investments.
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FNBPA has significant unused wholesale credit availability sources that include the availability to borrow from the FHLB, the FRB, correspondent bank lines, access to brokered deposits and other channels. In addition to credit availability, FNBPA also possesses salable unpledged government and agency securities that could be utilized to meet funding needs. We currently also have excess cash to meet our pledging requirements. At September 30, 2022, we have $2.0 billion of cash and salable unpledged government and agency securities to total assets, or 4.8%. This compares to a policy minimum of 3.0%.
The following table presents certain information relating to FNBPA’s credit availability and salable unpledged securities:
TABLE 28
(dollars in millions) September 30,
2022 December 31,
2021
Unused wholesale credit availability $ 15,893 $ 14,681
Unused wholesale credit availability as a % of FNBPA assets 37.4 % 37.2 %
Salable unpledged government and agency securities $ 306 $ 836
Salable unpledged government and agency securities as a % of FNBPA assets 0.7 % 2.1 %
Cash and salable unpledged government and agency securities as a % of FNBPA assets 4.8 % 9.8 %
The increase in unused wholesale credit availability was due to increased borrowing capacity with the FHLB.
Another metric for measuring liquidity risk is the liquidity gap analysis. The following liquidity gap analysis as of September 30, 2022 compares the difference between our cash flows from existing earning assets and interest-bearing liabilities over future time intervals. Management monitors the size of the liquidity gaps so that sources and uses of funds are reasonably matched in the normal course of business and in relation to implied forward rate expectations. A reasonably matched position lays a better foundation for dealing with additional funding needs during a potential liquidity crisis. A positive gap position means that more assets are repricing over the next 12 months than liabilities, and net interest income would benefit if interest rates were to rise. The twelve-month cumulative gap to total assets ratio was 6.1% as of September 30, 2022, compared to 11.3% as of December 31, 2021. Management calculates this ratio at least quarterly and it is reviewed regularly by ALCO. The change in the twelve-month cumulative gap to total assets is primarily related to the active deployment of cash into loans and securities.
TABLE 29
(dollars in millions) Within
1 Month 2-3
Months 4-6
Months 7-12
Months Total
1 Year
Assets
Loans $ 678 $ 1,321 $ 1,614 $ 3,013 $ 6,626
Investments 1,891 147 224 450 2,712
2,569 1,468 1,838 3,463 9,338
Liabilities
Non-maturity deposits 312 625 938 1,877 3,752
Time deposits 205 426 624 915 2,170
Borrowings 186 18 324 276 804
703 1,069 1,886 3,068 6,726
Period Gap (Assets - Liabilities) $ 1,866 $ 399 $ (48) $ 395 $ 2,612
Cumulative Gap $ 1,866 $ 2,265 $ 2,217 $ 2,612
Cumulative Gap to Total Assets 4.4 % 5.3 % 5.2 % 6.1 %
In addition, the ALCO regularly monitors various liquidity ratios and stress scenarios of our liquidity position. The stress scenarios forecast that adequate funding will be available even under severe conditions. Management believes we have sufficient liquidity available to meet our normal operating and contingency funding cash needs.
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MARKET RISK
Market risk refers to potential losses arising predominately from changes in interest rates, foreign exchange rates, equity prices and commodity prices. We are primarily exposed to interest rate risk inherent in our lending and deposit-taking activities as a financial intermediary. To succeed in this capacity, we offer an extensive variety of financial products to meet the diverse needs of our customers. These products sometimes contribute to interest rate risk for us when product groups do not complement one another. For example, depositors may want short-term deposits, while borrowers may desire long-term loans.
Changes in market interest rates may result in changes in the fair value of our financial instruments, cash flows and net interest income. Subject to its ongoing oversight, the Board of Directors has given ALCO the responsibility for market risk management, which involves devising policy guidelines, risk measures and limits, and managing the amount of interest rate risk and its effect on net interest income and capital. We use derivative financial instruments for interest rate risk management purposes and not for trading or speculative purposes.
Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indices, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products as certain borrowers have the option to prepay their loans, which may be with or without penalty, when rates change, while certain depositors can redeem their certificates of deposit early, which may be with or without penalty, when rates change.
We use an asset/liability model to measure our interest rate risk. Interest rate risk measures we utilize include earnings simulation, EVE and gap analysis. Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVE’s long-term horizon helps identify changes in optionality and longer-term positions. However, EVE’s liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. In these simulations, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The ALCO reviews earnings simulations over multiple years under various interest rate scenarios on a periodic basis. Reviewing these various measures provides us with a comprehensive view of our interest rate risk profile, which provides the basis for balance sheet management strategies.
The following repricing gap analysis as of September 30, 2022 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 30
(dollars in millions) Within
1 Month 2-3
Months 4-6
Months 7-12
Months Total
1 Year
Assets
Loans $ 12,303 $ 950 $ 945 $ 1,756 $ 15,954
Investments 1,901 154 324 440 2,819
14,204 1,104 1,269 2,196 18,773
Liabilities
Non-maturity deposits 10,125 — — — 10,125
Time deposits 331 425 622 911 2,289
Borrowings 692 334 305 37 1,368
11,148 759 927 948 13,782
Off-balance sheet (650) 530 (130) (150) (400)
Period Gap (assets – liabilities + off-balance sheet) $ 2,406 $ 875 $ 212 $ 1,098 $ 4,591
Cumulative Gap $ 2,406 $ 3,281 $ 3,493 $ 4,591
Cumulative Gap to Assets 6.3 % 8.6 % 9.2 % 12.1 %
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The twelve-month cumulative repricing gap to total assets was 12.1% and 21.6% as of September 30, 2022 and December 31, 2021, 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 at September 30, 2022, compared to December 31, 2021, is primarily related to the active deployment of cash into longer duration loans and investment securities as well as lower projected prepayment rates on the loan and security portfolios.
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 of September 30, 2022. Using a static Balance Sheet structure, the measures do not reflect management's potential counteractions.
The following table presents an analysis of the potential sensitivity of our net interest income and EVE to changes in interest rates using rate shocks:
TABLE 31
September 30,
2022 December 31,
2021 ALCO
Limits
Net interest income change (12 months):
+ 300 basis points 9.4 % 21.6 % n/a
+ 200 basis points 6.2 14.4 (5.0) %
+ 100 basis points 3.0 7.0 (5.0)
- 100 basis points (0.4) (2.4) (5.0)
Economic value of equity:
+ 300 basis points (5.4) 6.6 (25.0)
+ 200 basis points (2.4) 5.8 (15.0)
+ 100 basis points (1.0) 3.8 (10.0)
- 100 basis points (3.2) (9.5) (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. The comparative percentages are based on the projected base net interest income at the respective measurement dates. Assuming a static Balance Sheet, a +100 basis point Rate Ramp increases net interest income (12 months) by 1.8% at September 30, 2022 and 3.6% at December 31, 2021. For a +200 basis point Rate Ramp, net interest income (12 months) increases by 3.7% at September 30, 2022 and 7.6% at December 31, 2021. The corresponding metrics for a minus 100 basis point Rate Ramp are 0.02% and (0.5)% at September 30, 2022 and December 31, 2021, respectively. These changes are a direct result of our managing our interest rate exposure to benefit from higher rates and our asset sensitivity.
Forty-nine percent of our net loans and leases are indexed to short-term LIBOR, SOFR and Prime that reprice within the next three months. Our cash position related to increased deposits has also been a significant factor in our asset sensitivity metrics. The deployment of cash into loans and investments, as well as a higher base net interest income due to the increase in the loan indices, are the primary factors of the change in the percentage sensitivity since December. The FOMC has increased the Federal Funds rate by 300 basis points thus far in 2022 and our balance sheet is positioned to benefit from further FOMC increases of the Federal Funds 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.
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Our current interest rate risk (IRR) position is intended to benefit from higher interest rates. Management continues to be proactive in managing the IRR position with the near term objective of having loan and investment cash flows reprice at a faster pace than deposit and borrowing costs during the current higher interest rate environment. 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 59.9% of total net loans and leases as of September 30, 2022 and 61.3% as of December 31, 2021. The acquisition of Howard was the primary driver of the decline of this metric. As of September 30, 2022, the commercial swaps totaled $5.3 billion of notional principal, with $868.7 million in original notional swap principal originated during the first nine months of 2022. As mentioned earlier, we were successful in growing our transaction deposits which provides funding that is less interest rate-sensitive, as evidenced by a lower deposit re-pricing beta, than short-term time deposits and wholesale borrowings. Furthermore, we regularly sell long-term fixed-rate residential mortgages in the secondary market and have been successful in the origination of consumer and commercial loans with short-term repricing characteristics. Further, during 2022, management has adjusted our IRR position by opportunistically deploying excess cash balances into higher yielding loans and securities. We have also made use of derivatives to manage the IRR position, with the most recent transactions being the execution of received fixed / pay floating 1-month LIBOR interest rate swaps that have a remaining life of 2.8 years. For additional information regarding interest rate swaps, see Note 11, "Derivative Instruments and Hedging Activities" in the Notes to the Consolidated Financial Statements in this Report.
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 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 the Risk 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 our Board Risk Committee and Risk Management Council. We use our risk appetite processes to promote appropriate alignment of risk, capital and performance tactics, while also considering risk
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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 our Risk Management Council, approves our risk appetite on an annual basis, or more frequently, as needed to reflect changes in the risk, regulatory, economic and strategic plan environments, with the goal of ensuring that our risk appetite remains consistent with our strategic plans and business operations, regulatory environment and our shareholders' expectations. Reports relating to our risk appetite and strategic plans, and our ongoing monitoring thereof, are regularly presented to our various management level risk oversight and planning committees and periodically reported up through our Board Risk Committee.
As noted above, we have a Risk 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 the Risk 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. Our Chief 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, which all 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:
• Enterprise-Wide Risk Management Department - conducts risk and control assessments across all our business and operational areas to ensure the appropriate risk identification, risk management and reporting of risks enterprise-wide.
• Fraud Risk Department - monitors for internal and external fraud risk across all of our business and operational units.
• Loan Review Department - conducts independent testing of our loan risk ratings to ensure their accuracy, which is instrumental to calculating our ACL.
• Model Risk Management Department - oversees validation and testing of all models used in managing risk across our company.
• Third-Party Risk Management Department - ensures effective risk management and oversight of third-party relationships throughout the vendor life cycle.
• Anti-Money Laundering and Bank Secrecy Act Department - monitors for compliance with money laundering risk and associated regulatory compliance requirements.
• 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.
• Compliance Department - develops policies and procedures and monitors compliance with applicable laws and regulations which govern our business operations.
• Information and Cyber Security Department - maintains a risk assessment of our information and cybersecurity risks and ensures appropriate controls are in place to manage and control such risks, using the National Institute of Standards and Technology framework for improving critical infrastructure by measuring and evaluating the effectiveness of information and cybersecurity controls. This department also oversees our disaster recovery planning and testing efforts to allow us to be capable and ready for business resumption in the event of a disaster.
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 circumstances. 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 our Risk Management Council regularly assess our enterprise-wide risk profile and provide guidance on actions needed to address key and emerging risk issues.
The Board of Directors believes that our enterprise-wide risk management process is effective and enables the Board of Directors to:
• assess the quality of the information they receive;
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• understand the businesses, investments and financial, accounting, legal, regulatory and strategic considerations and the risks that FNB faces;
• oversee and assess how senior management evaluates risk; and
• assess appropriately the quality of our enterprise-wide risk management process.
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 32
Operating net income available to common stockholders
Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2022 2021 2022 2021
Net income available to common stockholders $ 135,488 $ 109,503 $ 293,608 $ 300,105
Merger-related expense 2,105 940 32,761 940
Tax benefit of merger-related expense (442) (197) (6,880) (197)
Provision expense related to acquisition — — 19,127 —
Tax benefit of provision expense related to acquisition — — (4,017) —
Branch consolidation costs — — 4,178 2,644
Tax benefit of branch consolidation costs — — (877) (555)
Operating net income available to common stockholders (non-GAAP) $ 137,151 $ 110,246 $ 337,900 $ 302,937
The table above shows how operating net income available to common stockholders (non-GAAP) is derived from amounts reported in our financial statements. We believe certain charges, such as merger expenses, initial provision for non-PCD loans acquired and branch consolidation costs are not organic costs to run our operations and facilities. The merger expenses and branch consolidation costs principally represent expenses to satisfy contractual obligations of the acquired entity or 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.
TABLE 33
Operating earnings per diluted common share
Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
Net income per diluted common share $ 0.38 $ 0.34 $ 0.83 $ 0.93
Merger-related expense 0.01 — 0.09 —
Tax benefit of merger-related expense — — (0.02) —
Provision expense related to acquisition — — 0.05 —
Tax benefit of provision expense related to acquisition — — (0.01) —
Branch consolidation costs — — 0.01 0.01
Tax benefit of branch consolidation costs — — — —
Operating earnings per diluted common share (non-GAAP) $ 0.39 $ 0.34 $ 0.96 $ 0.94
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TABLE 34
Return on average tangible common equity
Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2022 2021 2022 2021
Net income available to common stockholders (annualized) $ 537,532 $ 434,443 $ 392,552 $ 401,239
Amortization of intangibles, net of tax (annualized) 11,119 9,471 10,903 9,607
Tangible net income available to common stockholders (annualized) (non-GAAP) $ 548,651 $ 443,914 $ 403,455 $ 410,846
Average total stockholders’ equity $ 5,506,949 $ 5,063,432 $ 5,464,798 $ 5,006,914
Less: Average preferred stockholders' equity (106,882) (106,882) (106,882) (106,882)
Less: Average intangible assets (1)
(2,487,434) (2,308,922) (2,474,401) (2,311,940)
Average tangible common equity (non-GAAP) $ 2,912,633 $ 2,647,628 $ 2,883,515 $ 2,588,092
Return on average tangible common equity (non-GAAP) 18.84 % 16.77 % 13.99 % 15.87 %
(1) Excludes loan servicing rights.
TABLE 35
Return on average tangible assets
Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2022 2021 2022 2021
Net income (annualized) $ 545,507 $ 442,414 $ 400,615 $ 409,302
Amortization of intangibles, net of tax (annualized) 11,119 9,471 10,903 9,607
Tangible net income (annualized) (non-GAAP) $ 556,626 $ 451,885 $ 411,518 $ 418,909
Average total assets $ 42,039,932 $ 38,718,399 $ 41,686,246 $ 38,294,432
Less: Average intangible assets (1)
(2,487,434) (2,308,922) (2,474,401) (2,311,940)
Average tangible assets (non-GAAP) $ 39,552,498 $ 36,409,477 $ 39,211,845 $ 35,982,492
Return on average tangible assets (non-GAAP) 1.41 % 1.24 % 1.05 % 1.16 %
(1) Excludes loan servicing rights.
TABLE 36
Tangible book value per common share
September 30, 2022 September 30, 2021
(dollars in thousands, except per share data)
Total stockholders’ equity $ 5,406,485 $ 5,098,407
Less: Preferred stockholders’ equity (106,882) (106,882)
Less: Intangible assets (1)
(2,486,183) (2,307,432)
Tangible common equity (non-GAAP) $ 2,813,420 $ 2,684,093
Ending common shares outstanding 350,756,155 318,921,616
Tangible book value per common share (non-GAAP) $ 8.02 $ 8.42
(1) Excludes loan servicing rights.
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TABLE 37
Tangible equity to tangible assets (period-end)
September 30, 2022 September 30, 2021
(dollars in thousands)
Total stockholders' equity $ 5,406,485 $ 5,098,407
Less: Intangible assets (1)
(2,486,183) (2,307,432)
Tangible equity (non-GAAP) $ 2,920,302 $ 2,790,975
Total assets $ 42,590,050 $ 39,361,110
Less: Intangible assets (1)
(2,486,183) (2,307,432)
Tangible assets (non-GAAP) $ 40,103,867 $ 37,053,678
Tangible equity / tangible assets (period-end) (non-GAAP) 7.28 % 7.53 %
(1) Excludes loan servicing rights.
TABLE 38
Tangible common equity / tangible assets (period-end)
September 30, 2022 September 30, 2021
(dollars in thousands)
Total stockholders' equity $ 5,406,485 $ 5,098,407
Less: Preferred stockholders' equity (106,882) (106,882)
Less: Intangible assets (1)
(2,486,183) (2,307,432)
Tangible common equity (non-GAAP) $ 2,813,420 $ 2,684,093
Total assets $ 42,590,050 $ 39,361,110
Less: Intangible assets (1)
(2,486,183) (2,307,432)
Tangible assets (non-GAAP) $ 40,103,867 $ 37,053,678
Tangible common equity / tangible assets (period-end) (non-GAAP) 7.02 % 7.24 %
(1) Excludes loan servicing rights.
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Key Performance Indicator s
TABLE 39
Efficiency ratio
Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2022 2021 2022 2021
Non-interest expense $ 195,057 $ 184,226 $ 615,257 $ 551,588
Less: Amortization of intangibles (3,547) (3,022) (10,323) (9,096)
Less: OREO expense (485) (781) (1,233) (2,066)
Less: Merger-related expense (2,105) (940) (32,761) (940)
Less: Branch consolidation costs — — (4,178) (2,644)
Adjusted non-interest expense $ 188,920 $ 179,483 $ 566,762 $ 536,842
Net interest income $ 297,125 $ 232,406 $ 784,891 $ 683,200
Taxable equivalent adjustment 2,916 2,620 8,170 8,221
Non-interest income 82,464 88,854 242,940 251,431
Less: Net securities gains — (65) (48) (193)
Adjusted net interest income (FTE) + non-interest income $ 382,505 $ 323,815 $ 1,035,953 $ 942,659
Efficiency ratio (FTE) (non-GAAP) 49.39 % 55.43 % 54.71 % 56.95 %
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided in the Market Risk section of "MD&A," which is included in Item 2 of this Report, and is incorporated herein by reference.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.